What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-04-28 compared with 2021-11-02 · 268 added, 362 removed, 372 unchanged (63% of the section changed)

2 unchanged sentences

Consolidated Statements of Income

Third Quarter Ended Nine Months Ended

(Thousands, except per share amounts) October 1, 2021 September 25, 2020* October 1, 2021 September 25, 2020*

First Quarter Ended

(Thousands, except per share amounts) April 1, 2022 April 2, 2021

Net sales $ 449,045 $ 354,386

3 unchanged sentences

Research and development expense 7,074 6,206

Goodwill impairment charges — — — 9,053

Asset impairment charges — — — 1,713

Restructuring (income) expense — 2,593 ( 378 ) 7,144

Restructuring expense (income) 1,076 ( 378 )

Other—net 5,873 4,474

Operating profit (loss) 21,160 ( 616 ) 61,601 1,387

Operating profit 19,606 19,718

Other non-operating income—net ( 1,169 ) ( 1,276 )

Interest expense—net 3,735 761

Income (Loss) before income taxes 21,578 ( 874 ) 62,953 1,419

Income tax expense (benefit) 3,422 ( 6,345 ) 10,162 ( 5,977 )

Income before income taxes 17,040 20,233

Income tax expense 3,021 3,466

Net income $ 14,019 $ 16,767

6 unchanged sentences

Diluted 20,724 20,628

* Amounts for the periods ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

1 unchanged sentence

Consolidated Statements of Comprehensive Income

Third Quarter Ended Nine Months Ended

October 1, September 25, October 1, September 25,

First Quarter Ended

April 1, April 2,

(Thousands) 2022 2021

4 unchanged sentences

Pension and post-employment benefit adjustment, net of tax ( 240 ) 164

Other comprehensive (loss) income ( 1,469 ) 2,790 ( 5,914 ) 2,681

Other comprehensive loss ( 17 ) ( 7,448 )

Comprehensive income $ 14,002 $ 9,319

See notes to these consolidated financial statements.

1 unchanged sentence

Consolidated Balance Sheets

October 1, Dec.

April 1, Dec.

(Thousands) 2022 2021

28 unchanged sentences

Unearned income 96,971 97,962

Long-term income taxes 1,205 1,190

Deferred income taxes 27,564 27,216

2 unchanged sentences

Serial preferred stock (no par value;

5,000 authorized shares, no ne issued)

5,000 authorized shares, none issued) — —

Common stock (no par value;

60,000 authorized shares, issued shares of 27,148 at both October 1 st and December 31 st )

269,716 258,642

60,000 authorized shares, issued shares of 27,148 at April 1 and December 31) 278,589 271,978

Retained earnings 705,255 693,756

7 unchanged sentences

Consolidated Statements of Cash Flows

Nine Months Ended

October 1, September 25,

Three Months Ended

April 1, April 2,

(Thousands) 2022 2021

5 unchanged sentences

Stock-based compensation expense (non-cash) 1,699 1,473

Deferred income tax benefit ( 263 ) ( 5,981 )

Impairment charges — 10,766

Changes in assets and liabilities, net of acquired assets and liabilities:

Deferred income tax (benefit) expense 401 382

Changes in assets and liabilities:

Accounts receivable

2 unchanged sentences

Prepaid and other current assets ( 5 ) ( 2,107 )

Accounts payable 14,863 6,281

Accrued expenses 20,451 ( 16,040 )

Accounts payable and accrued expenses ( 4,177 ) 19,224

Unearned revenue ( 343 ) 932

Interest and taxes payable

( 1,504 ) 143

Unearned income due to customer prepayments — 5,890

Other-net 1,712 ( 140 )

Net cash provided by operating activities 40,518 79,444

Net cash (used in) provided by operating activities ( 14,304 ) 15,450

Cash flows from investing activities:

Payments for acquisition, net of cash acquired — ( 130,715 )

Payments for purchase of property, plant, and equipment ( 18,977 ) ( 31,250 )

Proceeds from settlement of currency exchange contract — 3,249

Proceeds from sale of property, plant, and equipment 11 575

5 unchanged sentences

Cash dividends paid ( 2,520 ) ( 2,338 )

Repurchase of common stock — ( 6,766 )

Payments of withholding taxes for stock-based compensation awards ( 2,717 ) ( 2,838 )

4 unchanged sentences

Cash and cash equivalents at end of period $ 20,237 $ 18,934

* Amounts for the period ended September 25, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

7 unchanged sentences

Comprehensive

Equity Total*

Balance at July 2, 2021 20,438 ( 6,710 ) $ 268,205 $ 660,851 $ ( 208,854 ) $ ( 43,084 ) $ 4,583 $ 681,701

Net income — — — 18,156 — — — 18,156

Other comprehensive income — — — — — ( 1,469 ) — ( 1,469 )

Cash dividends declared ($ 0.12 per share)

— — — ( 2,452 ) — — — ( 2,452 )

Stock-based compensation activity — — 1,458 ( 28 ) ( 18 ) — — 1,412

Payments of withholding taxes for stock-based compensation awards — — — — ( 12 ) — — ( 12 )

Directors’ deferred compensation 1 1 53 — ( 68 ) — 107 92

Balance at October 1, 2021 20,439 ( 6,709 ) $ 269,716 $ 676,527 $ ( 208,952 ) $ ( 44,553 ) $ 4,690 $ 697,428

Balance at June 26, 2020 20,322 ( 6,826 ) $ 256,756 $ 622,219 $ ( 198,726 ) $ ( 45,571 ) $ 3,678 $ 638,356

Net income — — — 5,471 — — — 5,471

Other comprehensive income — — — — — 2,790 — 2,790

Cash dividends declared ($ 0.115 per share)

— — — ( 2,338 ) — — — ( 2,338 )

Stock-based compensation activity 7 7 235 19 ( 231 ) — — 23

Payments of withholding taxes for stock-based compensation awards ( 3 ) ( 3 ) — — ( 187 ) — — ( 187 )

Directors’ deferred compensation 1 1 28 — ( 41 ) — 70 57

Balance at September 25, 2020 20,327 ( 6,821 ) $ 257,019 $ 625,371 $ ( 199,185 ) $ ( 42,781 ) $ 3,748 $ 644,172

Common Shares Shareholders' Equity

(Thousands, except per share amounts) Common Shares Common Shares Held in Treasury Common

Stock Retained

Earnings* Common

Treasury Accumulated Other

Comprehensive

Equity Total*

Balance at December 31, 2021 20,448 ( 6,700 ) $ 271,978 $ 693,756 $ ( 209,920 ) $ ( 40,169 ) $ 4,795 $ 720,440

2 unchanged sentences

Cash dividends declared ($0.12 per share) — — — ( 2,520 ) — — — ( 2,520 )

— — — ( 7,243 ) — — — ( 7,243 )

Stock-based compensation activity 95 95 6,572 — ( 4,873 ) — — 1,699

1 unchanged sentence

Directors’ deferred compensation 1 1 39 — ( 39 ) — 60 60

Balance at October 1, 2021 20,439 ( 6,709 ) $ 269,716 $ 676,527 $ ( 208,952 ) $ ( 44,553 ) $ 4,690 $ 697,428

Balance at April 1, 2022 20,511 ( 6,637 ) $ 278,589 $ 705,255 $ ( 217,549 ) $ ( 40,186 ) $ 4,855 $ 730,964

Balance at December 31, 2020 20,328 ( 6,820 ) $ 258,642 $ 631,058 $ ( 199,187 ) $ ( 38,639 ) $ 3,756 $ 655,630

2 unchanged sentences

Cash dividends declared ($0.115 per share) — — — ( 2,338 ) — — — ( 2,338 )

— — — ( 6,920 ) — — — ( 6,920 )

Stock-based compensation activity 127 127 6,259 ( 19 ) ( 4,767 ) — — 1,473

Payments of withholding taxes for stock-based compensation awards ( 43 ) ( 43 ) — — ( 2,838 ) — — ( 2,838 )

Repurchase of shares ( 158 ) ( 158 ) — — ( 6,766 ) — — ( 6,766 )

Directors’ deferred compensation 2 2 39 — ( 53 ) — 104 90

Balance at September 25, 2020 20,327 ( 6,821 ) $ 257,019 $ 625,371 $ ( 199,185 ) $ ( 42,781 ) $ 3,748 $ 644,172

Balance at April 2, 2021 20,414 ( 6,734 ) $ 264,940 $ 645,468 $ ( 206,845 ) $ ( 46,087 ) $ 3,860 $ 661,336

See notes to these consolidated financial statements.

5 unchanged sentences

All adjustments were of a normal and recurring nature.

Certain amounts in prior periods have been reclassified to conform to the 2021 consolidated financial statement presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2021 Annual Report on Form 10-K.

5 unchanged sentences

Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

Change in Accounting Principle:

During the fourth quarter of 2020, the Company elected to change its method for valuing its inventories at locations that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.

The Company believes that the FIFO method is preferable as it improves comparability with its most similar peers, it more closely resembles the physical flow of its inventory (i.e., it provides better matching of revenues and expenses), and it results in uniformity across a significant majority of the Company’s inventory.

The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied.

As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheet as of September 25, 2020 and the consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three and nine months ended September 25, 2020 were adjusted as necessary.

For further information, refer to the Company's 2020 Annual Report on Form 10-K.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements:

Consolidated Statement of Income

(Thousands except per share amounts)

Third Quarter Ended Nine Months Ended

September 25, 2020 September 25, 2020

Selected Items As Reported As Adjusted Adjustment As Reported As Adjusted Adjustment

Cost of sales $ 240,531 $ 241,860 $ 1,329 $ 696,280 $ 699,749 $ 3,469

Gross margin 46,640 45,311 ( 1,329 ) 140,305 136,836 ( 3,469 )

Operating profit (loss) 713 ( 616 ) ( 1,329 ) 4,856 1,387 ( 3,469 )

Income (Loss) before income taxes 455 ( 874 ) ( 1,329 ) 4,888 1,419 ( 3,469 )

Income tax benefit ( 6,041 ) ( 6,345 ) ( 304 ) ( 5,183 ) ( 5,977 ) ( 794 )

Net income 6,496 5,471 ( 1,025 ) 10,071 7,396 ( 2,675 )

Basic earnings per share:

Net income per share of common stock $ 0.32 $ 0.27 $ ( 0.05 ) $ 0.50 $ 0.36 $ ( 0.14 )

Diluted earnings per share:

Net income per share of common stock $ 0.32 $ 0.27 $ ( 0.05 ) $ 0.49 $ 0.36 $ ( 0.13 )

Consolidated Statement of Comprehensive Income

Third Quarter Ended Nine Months Ended

September 25, 2020 September 25, 2020

Selected Items As Reported As Adjusted Adjustment As Reported As Adjusted Adjustment

Net income $ 6,496 $ 5,471 $ ( 1,025 ) $ 10,071 $ 7,396 $ ( 2,675 )

Comprehensive income 9,286 8,261 ( 1,025 ) 12,752 10,077 ( 2,675 )

Consolidated Statement of Cash Flows

Nine Months Ended

September 25, 2020

Selected Items As Reported As Adjusted Adjustment

Net income $ 10,071 $ 7,396 $ ( 2,675 )

Deferred income tax benefit ( 5,187 ) ( 5,981 ) ( 794 )

Increase in inventory ( 9,883 ) ( 6,414 ) 3,469

The amounts reflected in Note B of the consolidated financial statements are the results of a preliminary purchase price allocation and will be updated upon completion of the final valuation.

The Company is required to complete the purchase price allocation within 12 months of the acquisition date.

If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.

New Pronouncements Adopted:

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items.

The amendments in this update also simplify the accounting for income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.

The Company adopted the standard on January 1, 2021.

The adoption did not materially impact the Company's financial statements or disclosures.

New Accounting Guidance Issued and Not Yet Adopted:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This guidance is intended

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

to provide temporary optional expedients and exceptions to the U.S.

This guidance is intended to provide temporary optional expedients and exceptions to the U.S.

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates.

This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022.

The Company is currently assessing which of its various contracts will require an update for a new reference rate, and will determine the timing for implementation of this guidance at the completion of that analysis.

The Company has applied this guidance in accounting for the interest rate swap discussed in Note N.

Any additional reference rate reform impacts will be accounted for in accordance with ASU 2020-04.

New Accounting Guidance Issued and Not Yet Adopted:

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) .

ASU 2021-10 is intended to increase transparency related to governmental assistance by requiring entities to disclose the types of government assistance, the entity's accounting for government assistance, and the effect of government assistance on an entity's financial statements.

This new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021.

The Company is in the process of evaluating the impact of the guidance on its annual disclosures.

No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

Note B — Acquisition

Business acquisitions have been accounted for using the acquisition method, with acquired assets and assumed liabilities recognized at their respective fair values as of the acquisition date.

The cost in excess of the net assets of the business acquired is included in goodwill.

On July 17, 2020, the Company completed the acquisition of Optics Balzers AG (Optics Balzers), an industry leader in thin film optical coatings.

The purchase price for Optics Balzers was $ 136.1 million, including the assumption of $ 22.5 million of debt.

The transaction was funded with cash on hand.

Based on the fair value of assets acquired and liabilities assumed, goodwill of $ 70.8 million and identifiable intangible assets of $ 49.3 million were recorded.

Goodwill associated with this acquisition is not tax deductible.

This acquisition is being reported in the Company's Precision Optics segment and the results of Optics Balzers are not material to the Company's Consolidated Financial Statements.

No material measurement period adjustments have been recorded during the third quarter or first nine months of 2021, and as of October 1, 2021, the purchase price allocation is complete.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On November 1, 2021, the Company acquired the industry-leading electronic materials business of H.C.

Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $ 395.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism.

During the first quarter of 2022, acquisition-related inventory step-up expense was $ 7.5 million and classified in Cost of Sales and transaction and integration costs were $ 2.1 million and classified in Selling, General and Administrative expenses in the accompanying consolidated statements of income.

The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $ 300 million five-year term loan pursuant to a delayed draw term loan facility executed in October 2021 and $ 103 million of borrowings under its amended revolving credit facility.

The maturity date on the revolving credit facility was also extended to October 2026.

The interest rate for the term loan is based on LIBOR plus a tiered credit spread that is indexed to the Company's quarterly leverage ratio.

This acquired business operates within the Performance Materials and Electronic Materials segments, and the results of operations are included as of the date of acquisition.

The combination of Materion and HCS-Electronic Materials enhances the Company's position as the leading supplier to the high growth semiconductor industry.

No adjustments to the preliminary purchase price allocation were made during the first quarter of 2022.

The preliminary purchase price allocation for the acquisition is as follows:

(Thousands) November 1, 2021

Cash and cash equivalents $ 3,685

Accounts receivable 28,352

Inventories 70,681

Prepaid and other current assets 660

Property, plant, and equipment 44,681

Operating lease, right-of-use assets 6,120

Intangible assets 107,800

Other long-term assets 4,528

Goodwill 178,181

Total assets acquired $ 444,688

Accounts payable $ 12,139

Salaries and wages 2,516

Other liabilities and accrued items 28

Income taxes 2,183

Other long-term liabilities 5,543

Operating lease liabilities 6,042

Deferred income taxes 20,300

Total liabilities assumed $ 48,751

Net assets acquired $ 395,937

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date.

The Company engaged specialists to assist in the valuation of inventories, property, plant, and equipment, and intangible assets.

The estimates in the purchase price allocation are based on available information and will be revised during the measurement period, not to exceed 12 months, as additional information becomes available on tax-related items, and as additional analyses are performed.

During the measurement period for the acquisition, we will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date.

The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

In determining the fair value of the amounts above, inventory is fair valued based on the comparative sales method for work in process and finished goods at the selling price less cost to dispose and remaining manufacturing effort.

The remaining working capital accounts' carrying values approximate fair value.

For property, plant and equipment and intangible asset values, the Company utilized various forms of the income, cost and market approaches depending on the asset being valued.

The Company used a relief from royalty method under the income approach to value its trade names and the developed technology and the multi-period excess earnings method under the income approach to value customer relationships.

The significant assumptions used to estimate the fair value of these intangible assets included the discount rate and certain assumptions that form the basis of forecasted future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships).

Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions and are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company.

As part of the acquisition, the Company recorded approximately $ 178.2 million of goodwill allocated between its Electronic Materials and Performance Materials segments based on the relative fair values.

Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired and primarily attributable to the synergies expected to arise after the acquisition dates.

The goodwill is not expected to be deductible for U.S.

tax purposes.

The following table reports the intangible assets by asset category as of the closing date:

(Thousands) Value at Acquisition Useful Life

Customer relationships $ 50,200 13 years

Technology 35,300 13 years

Trade name 22,300 15 years

Total $ 107,800

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials in the first quarter of 2022 consolidated statements are $ 43.1 million and ($ 1.6 ) million, respectively, and include three months of the purchase accounting inventory step-up expense.

Had the HCS-Electronic Materials acquisition occurred as of the beginning of fiscal 2020, the Company's sales and income (loss) before taxes would have been as follows:

Three months ended

April 2, 2021

Net Sales $ 385,384

Profit income (loss) before taxes $ 18,997

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the acquisition occurred on January 1, 2020.

These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results.

The transaction accounting adjustments and other adjustments are based on available information and assumptions that the Company’s management believes are reasonable.

Such adjustments are estimates and actual experience may differ from expectations.

The pro forma income (loss) before taxes includes approximately $ 2.9 million of additional interest expense related to committed financing to fund the acquisition and acquisition-related intangible asset amortization expense of $ 2.0 million as if the transaction occurred on January 1, 2020.

Note C — Segment Reporting

The Company changed two segment names during the first quarter of 2022:

Performance Alloys and Composites became Performance Materials, and Advanced Materials became Electronic Materials.

The Company believes these names better represent the markets served and the advanced next - generation product solutions provided to our customers.

Other than the name changes, there were no changes in the composition or structure of the Company's reportable segments in the first quarter of 2022.

The Company has the following reportable segments:

Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other.

Performance Materials, Electronic Materials, Precision Optics, and Other.

The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's chief operating decision maker, in determining how to allocate the Company’s resources and evaluate performance.

Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, and beryllia ceramics.

Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature, and braze materials.

Performance Materials provides advanced engineered solutions comprised of beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes.

Electronic Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.

Precision Optics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.

The Other reportable segment includes unallocated corporate costs and assets.

(Thousands) Performance

Composites Advanced Materials Precision Optics Other Total

Third Quarter 2021

Net sales $ 136,096 $ 220,723 $ 31,209 $ — $ 388,028

Intersegment sales

Beginning with the first quarter of 2022, the Company began using earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) as the main operating income metric used by management to measure the financial performance of the Company and each segment.

The Company made this change because recent acquisitions have resulted in increased purchase accounting amortization expense, which in turn has affected the comparability of results across periods and when compared to other companies.

Management believes EBITDA is useful to investors as it better represents the Company's performance excluding the effect of the recent acquisition of significant intangible assets that are now being amortized.

EBITDA is not a measurement of financial performance under U.S.

Although the Company uses EBITDA to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S.

The below table presents financial information for each segment and a reconciliation of EBITDA to Net Income (the most directly comparable GAAP financial measure) for the first quarter of 2022 and 2021:

(Thousands) Three months ended April 1, 2022 Three months ended April 2, 2021

Performance Materials (1)

149,630 114,143

Operating profit (loss) 20,928 9,281 3,329 ( 12,378 ) 21,160

Third Quarter 2020

Net sales $ 91,203 $ 165,582 $ 30,386 $ — $ 287,171

Intersegment sales — 6,602 — — 6,602

Operating (loss) profit ( 437 ) 5,749 1,421 ( 7,349 ) ( 616 )

First Nine Months 2021

Net sales $ 375,533 $ 638,481 $ 99,399 $ — $ 1,113,413

Intersegment sales

Electronic Materials (1)

270,836 204,644

Operating profit (loss) 51,733 26,547 10,513 ( 27,192 ) 61,601

First Nine Months 2020

Precision Optics 28,579 35,599

Net sales $ 449,045 $ 354,386

Intersegment sales 2 24,790 — — 24,792

Operating profit (loss) 9,910 15,452 ( 6,080 ) ( 17,895 ) 1,387

The following table disaggregates revenue for each segment by end market for the third quarter and first nine months of 2021 and 2020:

(Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total

Third Quarter 2021

Semiconductor $ 3,163 $ 173,689 $ 630 $ — $ 177,482

Industrial 31,521 10,479 8,296 — 50,296

Aerospace and defense 19,129 1,622 5,652 — 26,403

Consumer electronics 9,717 530 7,788 — 18,035

Automotive 28,922 1,719 2,571 — 33,212

Energy 7,524 27,081 — — 34,605

Telecom and data center 14,980 31 — — 15,011

Other 21,140 5,572 6,272 — 32,984

Total $ 136,096 $ 220,723 $ 31,209 $ — $ 388,028

Third Quarter 2020

Semiconductor $ 983 $ 131,380 $ 1,008 $ — $ 133,371

Industrial 21,630 9,967 4,976 — 36,573

Aerospace and defense 14,740 1,687 4,867 — 21,294

Consumer electronics 11,074 78 6,550 — 17,702

Automotive 14,077 1,477 1,059 — 16,613

Energy 5,825 16,693 — — 22,518

Telecom and data center 10,452 500 — — 10,952

Segment EBITDA:

Performance Materials 24,792 16,792

Electronic Materials 12,148 10,930

Precision Optics 2,191 7,471

Other ( 5,177 ) ( 5,600 )

Total $ 91,203 $ 165,582 $ 30,386 $ — $ 287,171

(Thousands) Performance Alloys and Composites Advanced Materials Precision Optics Other Total

First Nine Months 2021

Total Segment EBITDA 33,954 29,593

Income tax expense 3,021 3,466

Interest expense - net 3,735 761

Depreciation, depletion and amortization 13,179 8,599

Net income 14,019 16,767

(1) Excludes inter-segment sales of $ 5.5 million for the first quarter of 2022 and $ 2.7 million for the first quarter of 2021 for Electronic Materials and $ 0.3 million for the first quarter of 2022 for Performance Materials.

Inter-segment sales are eliminated in consolidation.

The following table disaggregates revenue for each segment by end market for the first quarter of 2022 and 2021:

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

First Quarter 2022

Semiconductor $ 1,800 $ 214,922 $ 1,327 $ — $ 218,049

7 unchanged sentences

Total $ 149,630 $ 270,836 $ 28,579 $ — $ 449,045

First Nine Months 2020

First Quarter 2021

Semiconductor $ 997 $ 155,061 $ 471 $ — $ 156,529

7 unchanged sentences

Total $ 114,143 $ 204,644 $ 35,599 $ — $ 354,386

Intersegment sales are eliminated in consolidation.

Note D — Revenue Recognition

2 unchanged sentences

The Company generally recognizes revenue in an amount that reflects the consideration to which it expects to be entitled upon satisfaction of a performance obligation by transferring control over a product to the customer.

Control over the product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.

Control over a product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.

Transaction Price Allocated to Future Performance Obligations:

Accounting Standards Codification 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at October 1, 2021.

Remaining performance obligations include non-cancelable purchase orders and customer contracts.

1 unchanged sentence

As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at October 1, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 81.0 million.

After considering the practical expedient at April 1, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 76.5 million.

Materion Corporation and Subsidiaries

2 unchanged sentences

The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:

(Thousands) October 1, 2021 December 31, 2020 $ change % change

(Thousands) April 1, 2022 December 31, 2021 $ change % change

Accounts receivable, trade

6 unchanged sentences

The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded.

Impairment losses (bad debt) incurred relating to our receivables were immaterial during the first nine months of 2021.

Impairment losses (bad debt) incurred related to our receivables were immaterial during the first quarter of 2022.

Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed.

2 unchanged sentences

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations.

The Company recognized approximately $ 5.6 million of the December 31, 2020 unearned amounts as revenue during the first nine months of 2021.

The Company recognized approximately $ 4.5 million of the December 31, 2021 unearned amounts as revenue during the first three months of 2022.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less.

1 unchanged sentence

Note E — Other-net

Other-net for the third quarter and first nine months of 2021 and 2020 is summarized as follows:

Third Quarter Ended Nine Months Ended

October 1, September 25, October 1, September 25,

Other-net for the first quarter of 2022 and 2021 is summarized as follows:

First Quarter Ended

April 1, April 2,

(Thousands) 2022 2021

Metal consignment fees $ 2,243 $ 2,317 $ 6,857 $ 6,583

Amortization of intangible assets $ 3,131 $ 1,173

Foreign currency loss (gain) 380 ( 1,029 ) 1,596 ( 3,577 )

Net loss (gain) on disposal of fixed assets 81 19 ( 283 ) 74

Metal consignment fees 3,011 $ 2,150

Foreign currency (gain) loss ( 333 ) 1,249

Net (gain) loss on disposal of fixed assets ( 11 ) ( 388 )

Other items 75 290

Total $ 5,873 $ 4,474

Note F — Restructuring

During 2020, the Company determined it would close its Large Area Coatings (LAC) business (a reporting unit in the Precision Optics segment).

The closure was substantially completed by the end of the first quarter of 2021.

Income of $ 0.4 million was recorded in the first quarter of 2021, primarily related to lower than previously estimated facility closure costs that were recorded in 2020.

Remaining severance payments are immaterial and reflected in Salaries and wages in the Consolidated Balance Sheet as of October 1, 2021.

Any additional costs related to the closure of this business are expected to be immaterial.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

In addition, during 2020, the Company initiated a restructuring plan in its Performance Alloys and Composites segment to close its Warren, Michigan and Fremont, California locations.

Costs associated with the plan totaled $ 2.2 million and $ 6.8 million in the third quarter and first nine months of 2020, respectively.

In the third quarter of 2020, these costs included $ 0.4 million of severance and $ 1.6 million of facility and other related costs.

Included in restructuring charges for the first nine months of 2020 was $ 1.8 million of severance associated with approximately 60 employees and $ 4.4 million of facility and other related costs.

Note G — Income Taxes

The Company's effective tax rate for the third quarter of 2021 and 2020 was 15.9 % and 726.0 %, respectively, and 16.1 % and ( 421.2 )% in the first nine months of 2021 and 2020, respectively.

The effective tax rate for each period in 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction.

The effective tax rate for the third quarter of 2020 was higher than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on a loss for the period.

The effective tax rate for the first nine months of 2020 was lower than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on income for the period.

The effective tax rate for the first nine months of 2021 included a net discrete income tax benefit of $ 0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments recorded.

The effective tax rate for the first nine months of 2020 included a net discrete income tax benefit of $ 3.8 million, primarily related to the release of a valuation allowance.

Given the Company’s recent history of foreign earnings, management believes that there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance recorded against the deferred tax assets held by its German subsidiaries will be reversed.

The reversal would result in an income tax benefit for the quarterly and annual period in which the Company releases the valuation allowance.

However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company actually achieves.

On March 11, 2021, President Biden signed the American Rescue Plan (the Rescue Plan) into law.

The Rescue Plan, among other things, extends and enhances a number of current-law tax incentives for businesses.

While the Company continues to examine the impacts the Rescue Plan may have on its business, it does not expect it will have a material impact to its consolidated financial statements.

Note F — Income Taxes

The Company's effective tax rate for the first quarter of 2022 and 2021 was 17.7 % and 17.1 %, respectively.

The effective tax rate for the first quarter of 2022 was lower than the statutory tax rate primarily due to the impact of percentage depletion and research and development credits.

The effective tax rate for the first three months of 2022 included a net discrete income tax benefit of $ 0.1 million, primarily related to excess tax benefits from stock-based compensation awards.

The effective tax rate for the first quarter of 2021 included a net discrete income tax benefit of $ 0.3 million, primarily related to excess tax benefits from stock-based compensation awards.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note H — Earnings Per Share (EPS)

Note G — Earnings Per Share (EPS)

The following table sets forth the computation of basic and diluted EPS:

Third Quarter Ended Nine Months Ended

October 1, September 25, October 1, September 25,

First Quarter Ended

April 1, April 2,

(Thousands, except per share amounts) 2022 2021

Numerator for basic and diluted EPS:

Net income $ 18,156 $ 5,471 $ 52,791 $ 7,396

Net income (loss) $ 14,019 $ 16,767

Denominator for basic EPS:

9 unchanged sentences

Diluted EPS $ 0.68 $ 0.81

Adjusted weighted-average shares outstanding - diluted exclude securities totaling 55,598 and 114,335 for the quarters ended October 1, 2021 and September 25, 2020, respectively and 56,319 and 164,447 for the nine months ended October 1, 2021 and September 25, 2020, respectively.

Adjusted weighted-average shares outstanding - diluted exclude securities totaling 117,390 and 63,627 for the quarters ended April 1, 2022 and April 2, 2021, respectively.

These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.

Note I — Inventories

Note H — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:

October 1, December 31,

April 1, December 31,

(Thousands) 2022 2021

4 unchanged sentences

The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce its exposure to metal price movements and to reduce its working capital investment.

The notional value of off-balance sheet precious metals and copper was $ 452.9 million and $ 400.0 million as of October 1, 2021 and December 31, 2020, respectively.

Amounts for the year ended December 31, 2020 have been revised to reflect a $ 44.6 million reclassification out of work in process and into finished goods inventory.

The notional value of off-balance sheet precious metals and copper was $ 485.5 million and $ 480.2 million as of April 1, 2022 and December 31, 2021, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note J — Customer Prepayments

The Company entered into investment and master supply agreements with a customer to procure equipment to manufacture product for the customer.

The customer is providing prepayments to the Company in the amount of approximately $ 70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer.

The Company will own the equipment and be responsible for operating and maintenance costs.

The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement.

Accordingly, as of October 1, 2021 and December 31, 2020, $ 67.9 million and $ 58.8 million, respectively, of prepayments were classified as Unearned income in the Consolidated Balance Sheet, of which $ 1.0 million and $ 9.0 million, respectively, was received during the third quarter and first nine months of 2021.

Note K — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit credit for the third quarter and first nine months of 2021 and 2020 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.

Pension Benefits Other Benefits

Third Quarter Ended Third Quarter Ended

October 1, September 25, October 1, September 25,

(Thousands) 2021 2020 2021 2020

Components of net periodic benefit (credit) cost

Service cost $ — $ — $ 20 $ 14

Interest cost 986 1,215 29 53

Expected return on plan assets ( 2,234 ) ( 2,206 ) — —

Amortization of prior service cost (benefit) — — ( 374 ) ( 374 )

Amortization of net loss (gain) 418 284 ( 69 ) ( 83 )

Total net benefit (credit) cost $ ( 830 ) $ ( 707 ) $ ( 394 ) $ ( 390 )

Note I — Customer Prepayments

The Company had previously entered into an investment agreement and a master supply agreement with a customer to procure equipment to manufacture product for the customer.

The customer provided prepayments to the Company to fund the necessary infrastructure and procure the equipment necessary to supply the customer with the desired product.

The Company will own, operate and maintain the equipment in order to produce and provide product to the customer.

Revenue will be recognized when the Company receives and fulfills purchase orders, including shipment of the commercial product to the customer as the product delivery is considered the fulfillment of the performance obligation.

To date there have been no purchase orders received from the customer for the commercial product out of these assets.

Accordingly, as of April 1, 2022 and December 31, 2021, $ 72.6 million of prepayments are classified as Unearned income in the Consolidated Balance Sheet.

During the second quarter of 2022, the Company entered into an investment agreement amendment with the customer to procure additional equipment to manufacture product for the customer.

No prepayments under this amendment were received as of April 1, 2022.

As of April 28, 2022 the Company has received approximately $ 4 million in prepayments.

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the first quarter of 2022 and 2021 for the pension plans as shown below.

The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, Liechtenstein, England, and the U.S.

supplemental retirement plans.

The Other Benefits column includes the domestic retiree medical and life insurance plan.

Pension Benefits Other Benefits

Nine Months Ended Nine Months Ended

October 1, September 25, October 1, September 25,

First Quarter Ended First Quarter Ended

April 1, April 2, April 1, April 2,

(Thousands) 2022 2021 2022 2021

Components of net periodic benefit (credit) cost

Components of net periodic benefit (income) cost

Service cost $ 318 $ 438 $ 22 $ 20

3 unchanged sentences

Amortization of net loss (gain) 430 577 ( 68 ) ( 69 )

Net periodic benefit (credit) cost $ ( 2,490 ) $ ( 2,120 ) $ ( 1,182 ) $ ( 1,167 )

Settlements — 94 — —

Total net benefit (credit) cost $ ( 2,490 ) $ ( 2,026 ) $ ( 1,182 ) $ ( 1,167 )

The Company did no t make any contributions to its domestic defined benefit plan in the third quarter or first nine months of 2021 or 2020.

The Company reports the service cost component of net periodic benefit credit in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit credit in Other non-operating (income) expense.

In May 2019, the Company's Board of Directors approved changes to the U.S.

defined benefit pension plan.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

froze the pay and service amounts used to calculate pension benefits for active participants in the pension plan as of January 1, 2020.

Note L — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the third quarter and first nine months of 2021 and 2020 are as follows:

Gains and Losses on Cash Flow Hedges

(Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total

Balance at July 2, 2021 $ 1,603 $ 186 $ — $ 1,789 $ ( 43,226 ) $ ( 1,647 ) $ ( 43,084 )

Other comprehensive income (loss) before reclassifications 625 30 8 663 — ( 2,029 ) ( 1,366 )

Amounts reclassified from accumulated other comprehensive income (loss) ( 2 ) ( 83 ) ( 8 ) ( 93 ) 114 — 21

Net current period other comprehensive (loss) income before tax 623 ( 53 ) — 570 114 ( 2,029 ) ( 1,345 )

Deferred taxes 143 ( 12 ) — 131 ( 7 ) — 124

Net current period other comprehensive (loss) income after tax 480 ( 41 ) — 439 121 ( 2,029 ) ( 1,469 )

Balance at October 1, 2021 $ 2,083 $ 145 $ — $ 2,228 $ ( 43,105 ) $ ( 3,676 ) $ ( 44,553 )

Balance at June 26, 2020 $ 1,065 $ ( 779 ) $ 104 $ 390 $ ( 41,241 ) $ ( 4,720 ) $ ( 45,571 )

Other comprehensive (loss) income before reclassifications ( 520 ) ( 617 ) 182 ( 955 ) — 3,076 2,121

Amounts reclassified from accumulated other comprehensive income (loss) 191 710 ( 353 ) 548 ( 11 ) — 537

Net current period other comprehensive (loss) income before tax ( 329 ) 93 ( 171 ) ( 407 ) ( 11 ) 3,076 2,658

Deferred taxes ( 76 ) 22 ( 38 ) ( 92 ) ( 40 ) — ( 132 )

Net current period other comprehensive (loss) income after tax ( 253 ) 71 ( 133 ) ( 315 ) 29 3,076 2,790

Balance at September 25, 2020 $ 812 $ ( 708 ) $ ( 29 ) $ 75 $ ( 41,212 ) $ ( 1,644 ) $ ( 42,781 )

Total net benefit (income) cost $ ( 449 ) $ ( 432 ) $ ( 381 ) $ ( 394 )

The Company did not make any contributions to its defined benefit plan in the first quarter of 2022 or 2021.

The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating (income) expense.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note K — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the first quarter of 2022 and 2021 are as follows:

Gains and Losses on Cash Flow Hedges

(Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total

(Thousands) Foreign Currency Interest Rate Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total

Balance at December 31, 2021 $ 2,348 $ — $ 72 $ — $ 2,420 $ ( 39,702 ) $ ( 2,887 ) $ ( 40,169 )

4 unchanged sentences

Net current period other comprehensive (loss) income after tax 103 2,485 ( 318 ) — 2,270 ( 240 ) ( 2,047 ) ( 17 )

Balance at October 1, 2021 $ 2,083 $ 145 $ — $ 2,228 $ ( 43,105 ) $ ( 3,676 ) $ ( 44,553 )

Balance at April 1, 2022 $ 2,451 $ 2,485 $ ( 246 ) $ — $ 4,690 $ ( 39,942 ) $ ( 4,934 ) $ ( 40,186 )

Balance at December 31, 2020 $ 519 $ — $ ( 170 ) $ 468 $ 817 $ ( 43,473 ) $ 4,017 $ ( 38,639 )

4 unchanged sentences

Net current period other comprehensive (loss) income after tax 943 490 ( 188 ) 1,245 164 ( 8,857 ) ( 7,448 )

Balance at September 25, 2020 $ 812 $ ( 708 ) $ ( 29 ) $ 75 $ ( 41,212 ) $ ( 1,644 ) $ ( 42,781 )

Reclassifications from accumulated other comprehensive income (loss) of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income.

Balance at April 2, 2021 $ 1,462 $ 320 $ 280 $ 2,062 $ ( 43,309 ) $ ( 4,840 ) $ ( 46,087 )

Reclassifications from accumulated other comprehensive income (loss) of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income (Loss).

Reclassifications from accumulated other comprehensive income (loss) of gains and losses on precious metal and copper cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income.

Refer to Note O for additional details on cash flow hedges.

Reclassifications from accumulated other comprehensive income (loss) of gains and losses on the interest rate cash flow hedge is recorded in Interest expense in the Consolidated Statements of Income.

Refer to Note N for additional details on cash flow hedges.

Reclassifications from accumulated other comprehensive income (loss) for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense.

Refer to Note K for additional details on pension and post-employment expenses.

Refer to Note J for additional details on pension and post-employment expenses.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note M — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 1.5 million and $ 5.3 million in the third quarter and first nine months of 2021, respectively, compared to less than $ 0.1 million and $ 4.1 million, respectively, in the same periods of 2020.

The Company granted 52,709 stock appreciation rights (SARs) to certain employees during the first nine months of 2021.

The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the nine months ended October 1, 2021 were $ 68.82 and $ 20.66 , respectively.

Note L — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 1.8 million and $ 1.6 million in the first quarter of 2022 and 2021, respectively.

The Company granted 45,016 stock appreciation rights (SARs) to certain employees during the first quarter of 2022.

The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the three months ended April 1, 2022 were $ 80.85 and $ 25.87 , respectively.

The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:

3 unchanged sentences

Expected term (in years) 4.4

The Company granted 59,818 stock-settled restricted stock units (RSUs) to certain employees and 9,904 to non-employee directors during the first nine months of 2021.

The Company granted 54,293 stock-settled restricted stock units (RSUs) to certain employees during the first quarter of 2022.

The Company measures the fair value of stock-settled RSUs based on the closing market price of a share of Materion common stock on the date of the grant.

The weighted-average fair value per share was $ 68.62 and $ 75.77 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the nine months ended October 1, 2021.

RSUs are generally expensed over the vesting period of three years for employees and one year for non-employee directors.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first nine months of 2021.

The weighted-average fair value per share was $ 80.95 for stock-settled RSUs granted to employees during the three months ended April 1, 2022.

RSUs are generally expensed over the vesting period of three years for employees.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first quarter of 2022.

The weighted-average fair value of the stock-settled PRSUs was $ 97.79 per share and will be expensed over the vesting period of three years .

The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and its total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At October 1, 2021, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $ 10.9 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note N — Fair Value of Financial Instruments

At April 1, 2022, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $ 16.1 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note M — Fair Value of Financial Instruments

The Company measures and records financial instruments at fair value.

7 unchanged sentences

Notes to Consolidated Financial Statements

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of October 1, 2021 and December 31, 2020:

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of April 1, 2022 and December 31, 2021:

(Thousands) Total Carrying Value in the Consolidated Balance Sheets Quoted Prices

5 unchanged sentences

Foreign currency forward contracts 2,885 3,368 — — 2,885 3,368 — —

Interest rate swap 3,227 — — — 3,227 — — —

Precious metal swaps — 116 — — — 116 — —

Copper swaps — 632 — — — 632 — —

Total $ 9,787 $ 7,910 $ 3,675 $ 4,426 $ 6,112 $ 3,484 $ — $ —

3 unchanged sentences

Precious metal swaps 321 24 — — 321 24 — —

Copper swaps — 27 — — — 27 — —

Total $ 4,476 $ 4,586 $ 3,675 $ 4,426 $ 801 $ 160 $ — $ —

The Company uses a market approach to value the assets and liabilities for financial instruments in the table above.

Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals.

The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of October 1, 2021 and December 31, 2020.

Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies, metals, and interest rates.

The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of April 1, 2022 and December 31, 2021.

The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets.

1 unchanged sentence

Deferred compensation liabilities are primarily presented in Other long-term liabilities.

Note O — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper exposures.

Note N — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge exposure to movements in interest rates associated with borrowings, foreign currency exposures, and precious metal and copper exposures.

The objectives and strategies for using derivatives in these areas are as follows:

Interest Rate.

On March 4, 2022, the Company entered into a $ 100.0 million interest rate swap to hedge the interest rate risk on the Credit Agreement described in Note P.

The swap hedges the change in 1-month LIBOR from March 4, 2022 to November 2, 2026.

The purpose of this hedge is to manage the risk of changes in the monthly interest payments attributable to changes in the benchmark interest rate.

Foreign Currency.

5 unchanged sentences

The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement.

The Company may from time to time choose to hedge with options or a tandem of options, known as a collar.

These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized.

Unlike a forward contract, a premium is paid for an option;

collars, which are a combination of a put and call option, may have a net premium but

The Company may from time to time choose to hedge with options or

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

can be structured to be cash neutral.

a tandem of options, known as a collar.

These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized.

Unlike a forward contract, a premium is paid for an option;

collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral.

The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.

The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors.

A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and instruments to use to hedge exposures.

Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed.

2 unchanged sentences

The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements.

When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price.

The price paid by the Company forms the basis for the price charged to the customer.

When a product containing precious metal is fabricated and delivered to the customer, the metal content is purchased out of consignment based on the current market price.

The price paid by the Company for the precious metal forms the basis for the price charged to the customer for the metal content in the product.

This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit.

The consigned metal is owned by financial institutions that charge the Company a financing fee based upon the current value of the metal on hand.

In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment.

Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal.

The consigned metal is owned by financial institutions that charge the Company consignment fees based upon the value of the metal as it fluctuates while on consignment.

Each financial institution retains title to its consigned precious metal until it is purchased by the Company, and it is the Company’s typical practice to purchase metal out of consignment only after a product containing that metal has been purchased by one of our customers.

In certain instances, a customer may want to fix the price for the precious metal at the time the sales order is placed rather than at the time of shipment.

Setting the sales price at a different date than when the material would be purchased out of consignment potentially creates an exposure to movements in the market price of the metal.

Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal.

5 unchanged sentences

The customer may also want to fix the price for a set period of time.

The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal.

The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine.

The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be refined and purchased, thereby reducing the exposure to adverse movements in the price of the metal.

The Company may also enter into hedges to mitigate the risk relating to the prices of the metals that we process or refine.

In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment.

The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure.

The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure in these instances.

The Company may, from time to time, elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors.

These purchases are typically held for a short duration.

A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.

The Company also uses copper in its production processes.

When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions.

While over time the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period.

To mitigate this impact, the Company hedges a portion of this pricing risk.

These purchases are infrequent and, when made are typically held for a short duration.

A forward contract will be secured at the time of the purchase to fix the price to be paid when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned by the Company.

The Company will only enter into a derivative contract if there is an underlying identified exposure.

Contracts are typically held to maturity.

The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes.

The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.

The Company does not engage in derivative trading activities and does not use derivatives for speculative

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.

All derivatives are recorded on the balance sheet at fair value.

If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings.

If a derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) and reclassified into income in the same period or periods during which the hedged transaction affects earnings.

The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately.

1 unchanged sentence

The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position).

The fair values will also be classified as short-term or long-term depending upon their maturity dates.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of October 1, 2021 and December 31, 2020:

October 1, 2021 December 31, 2020

The derivative assets and liabilities are classified as short-term or long-term depending upon the contract maturity date.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and the balance sheet classification as of April 1, 2022 and December 31, 2021:

April 1, 2022

December 31, 2021

(Thousands) Notional

1 unchanged sentence

Foreign currency forward contracts

Prepaid expenses $ 58,289 $ 914 $ 62,012 $ 107

Prepaid and other current assets $ 91,615 $ 1,350 $ 55,063 $ 2,132

Other liabilities and accrued items 18,474 307 9,425 128

These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans.

Other-net included $ 0.7 million of foreign currency gains in the third quarter of 2021 and $ 0.5 million of foreign currency losses related to derivatives in the first nine months of 2021, compared to $ 0.4 million and $ 2.7 million of foreign currency gains in the third quarter and first nine months of 2020, respectively.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of October 1, 2021 and December 31, 2020:

October 1, 2021 December 31, 2020

Other-net included $ 0.7 million and $ 1.6 million of foreign currency gains related to derivatives in the first quarter of 2022 and 2021, respectively.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and the balance sheet classification as of April 1, 2022 and December 31, 2021:

April 1, 2022

(Thousands) Notional

Value Notional

Prepaid expenses

Foreign currency forward contracts - yen $ 4,786 $ 109 $ — $ —

Foreign currency forward contracts - euro 27,028 720 — —

Precious metal swaps 4,447 225 2,155 127

Copper swaps — — 6,225 632

Total 36,261 1,054 8,380 759

Amount Prepaid and other current assets Other assets Other liabilities and accrued items Other long-term liabilities

Foreign currency forward contracts - yen $ 4,303 $ 275 $ 22 $ 6 $ —

1 unchanged sentence

Precious metal swaps 6,869 — — 298 23

Interest rate swap 100,000 120 3,107 — —

Total 142,371 1,633 3,129 385 109

Other liabilities and accrued items

December 31, 2021

Amount Prepaid and other current assets Other assets Other liabilities and accrued items Other long-term liabilities

Foreign currency forward contracts - yen 3,907 131 2 — —

1 unchanged sentence

Precious metal swaps 6,256 116 — 24 —

Copper swaps — — 2,445 27

Total 38,575 1,349 2 24 8

Total $ 42,172 $ 1,071 $ 36,068 $ 765

All of the contracts summarized above were designated and effective as cash flow hedges.

We expect to reclassify $ 1.2 million of gains into earnings in the next 12 months contemporaneously with the earnings effects of the related

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

All of these contracts were designated and effective as cash flow hedges.

The Company expects to relieve substantially the entire balance in OCI as of October 1, 2021 to the Consolidated Statements of Income within the next 15-months.

Refer to Note L for additional OCI details.

The following table summarizes the pre-tax amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of the third quarter and first nine months of 2021 and 2020:

Third Quarter Ended

(Thousands) October 2, 2021 September 25, 2020

Hedging relationship Line item

Foreign currency forward contracts Net sales $ ( 2 ) $ 191

Precious metal swaps Cost of sales ( 83 ) 710

Copper swaps Cost of sales ( 8 ) ( 353 )

Total $ ( 93 ) $ 548

Nine Months Ended

(Thousands) October 1, 2021 September 25, 2020

forecasted transactions.

At April 1, 2022, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years.

Refer to Note K for additional OCI details.

The following table summarizes the amounts reclassified from accumulated other comprehensive income related to the Company’s outstanding derivatives designated as cash flow hedges and associated income statement classification as of the first quarter of 2022 and 2021:

First Quarter Ended

(Thousands) April 1, 2022

April 2, 2021

Hedging relationship Line item

1 unchanged sentence

Precious metal swaps Cost of sales 107 ( 104 )

Interest rate swap Interest expense - net 115 —

Copper swaps Cost of sales — ( 1,534 )

Total $ 203 $ ( 1,498 )

Note P — Contingencies

Note O — Contingencies

Legal Proceedings .

For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims , refer to Note T "Contingencies and Commitments" in the Company's 2021 Annual Report on Form 10-K.

Two beryllium cases were outstanding as of October 1, 2021.

Two beryllium cases were outstanding as of April 1, 2022;

however, a settlement agreement has been reached in one of those cases, and the Company is awaiting the filing of the dismissal.

The Company does not expect the resolution of these matters to have a material impact on the consolidated financial statements.

8 unchanged sentences

(collectively, the Company).

Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law.

The case is currently in the preliminary stages.

The Company believes that it has substantive defenses and intends to vigorously defend this suit.

Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, amoung other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law.

The case remains in the preliminary stages while the parties have explored a negotiated resolution.

The Company believes that it has substantive defenses and intends to vigorously defend this suit, absent a negotiated resolution.

Environmental Proceedings.

The Company has an active environmental compliance program and records reserves for the probable cost of identified environmental remediation projects.

The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

difference between actual and estimated costs, and other factors.

The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the difference between actual and estimated costs, and other factors.

The reserves may also be affected by rulings and negotiations with regulatory agencies.

The undiscounted reserve balance was $ 4.9 million and $ 5.5 million at October 1, 2021 and December 31, 2020, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet.

The undiscounted reserve balance was $ 4.4 million and $ 4.8 million at April 1, 2022 and December 31, 2021, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet.

Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Note Q — Debt

(Thousands) October 1, 2021 December 31, 2020

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note P — Debt

(Thousands) April 1, 2022 December 31, 2021

Borrowings under Credit Agreement $ 201,363 $ 152,296

Borrowings under the Term Loan Facility 296,250 300,000

Foreign debt 2,112 2,252

Fixed rate industrial development revenue bonds — 1,322

Total debt outstanding 499,725 454,548

Current portion of long-term debt ( 15,351 ) ( 15,359 )

Gross long-term debt 484,374 439,189

Unamortized deferred financing fees ( 4,553 ) ( 4,801 )

Long-term debt $ 479,821 $ 434,388

As of October 1, 2021 and December 31, 2020, the Company had $ 77.0 million and $ 34.0 million, respectively, outstanding against its revolving credit facility (Credit Agreement) with average interest rates of 1.51 % and 1.65 % at October 1, 2021 and December 31, 2020, respectively.

The remaining borrowing capacity under the revolving credit facility as of October 1, 2021 and December 31, 2020 wa s $ 319.4 million and $ 245.8 million, respectively.

As of April 1, 2022 and December 31, 2021, the Company had $ 201.4 million outstanding at an average interest rate of 2.55 % and $ 152.3 million outstanding at an average interest rate of 2.12 %, respectively, under its revolving credit facility.

The available borrowing capacity under the revolving credit facility as of April 1, 2022 was $ 127.4 million.

The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2026.

The Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio.

The Company was in compliance with all of its debt covenants as of October 1, 2021.

At October 1, 2021 and December 31, 2020, there was $ 47.3 million and $ 48.1 million outstanding against the letters of credit sub-facility, respectively.

Note R — Subsequent Event

On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire the industry-leading electronic materials business of H.C.

Starck (HCS) for a purchase price of approximately $ 380 million in cash, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism.

Acquisition-related transaction and integration costs totaled $ 5.3 million in the third quarter of 2021.

These costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income.

On November 1, 2021, the Company completed the acquisition.

The Company financed the purchase price for the HCS acquisition with a new $ 300 million five-year term loan pursuant to a delayed draw term loan facility entered during October 2021 and $ 103 million of borrowings under its amended revolving credit facility, which was also extended to expire five years in October 2026.

The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.

The amended and restated credit agreement governing the revolving credit facility (Credit Agreement) includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio.

We were in compliance with all of our debt covenants as of April 1, 2022.

The balance outstanding on the term loan facility as of April 1, 2022 and December 31, 2021 wa s $ 296.3 million and $ 300.0 million, respectively.

At both April 1, 2022 and December 31, 2021, there was $ 46.3 million outstanding against the letters of credit sub-facility.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements