What changed in this filing

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Item 1. Financial Statements

2022-08-03 compared with 2022-04-28 · 233 added, 115 removed, 525 unchanged (40% of the section changed)

2 unchanged sentences

Consolidated Statements of Income

First Quarter Ended

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

Second Quarter Ended Six Months Ended

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

Net sales $ 445,295 $ 370,999 $ 894,340 $ 725,385

21 unchanged sentences

Consolidated Statements of Comprehensive Income

First Quarter Ended

April 1, April 2,

Second Quarter Ended Six Months Ended

July 1, July 2, July 1, July 2,

(Thousands) 2022 2021 2022 2021

Net income $ 23,255 $ 17,868 $ 37,274 $ 34,635

Other comprehensive (loss) income:

Other comprehensive income (loss):

Foreign currency translation adjustment ( 6,343 ) 3,193 ( 8,390 ) ( 5,664 )

1 unchanged sentence

Pension and post-employment benefit adjustment, net of tax 16 83 ( 224 ) 247

Other comprehensive loss ( 17 ) ( 7,448 )

Other comprehensive income (loss) ( 4,433 ) 3,003 ( 4,450 ) ( 4,445 )

Comprehensive income $ 18,822 $ 20,871 $ 32,824 $ 30,190

2 unchanged sentences

Consolidated Balance Sheets

April 1, Dec.

(Thousands) 2022 2021

35 unchanged sentences

Common stock (no par value;

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

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

281,296 271,978

Retained earnings 725,918 693,756

7 unchanged sentences

Consolidated Statements of Cash Flows

Three Months Ended

April 1, April 2,

Six Months Ended

July 1, July 2,

(Thousands) 2022 2021

5 unchanged sentences

Stock-based compensation expense (non-cash) 3,694 3,512

Deferred income tax (benefit) expense 401 382

Deferred income tax expense (benefit) 1,966 367

Changes in assets and liabilities:

6 unchanged sentences

Interest and taxes payable

( 1,765 ) 2,868

Unearned income due to customer prepayments 13,059 8,043

Other-net 3,913 ( 126 )

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

Net cash provided by operating activities 21,415 44,065

Cash flows from investing activities:

1 unchanged sentence

Proceeds from sale of property, plant, and equipment 105 603

Payments for acquisition, net of cash acquired ( 2,971 ) —

Net cash used in investing activities ( 40,596 ) ( 57,109 )

1 unchanged sentence

Proceeds from borrowings under revolving credit agreement, net 52,794 22,500

Proceeds from issuance of long-term debt 2,059 —

Repayment of long-term debt ( 7,177 ) ( 1,654 )

16 unchanged sentences

Comprehensive

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

Net income — — — 23,255 — — — 23,255

Other comprehensive income — — — — — ( 4,433 ) — ( 4,433 )

Cash dividends declared ($ 0.125 per share)

— — — ( 2,592 ) — — — ( 2,592 )

Stock-based compensation activity 13 13 2,671 — ( 676 ) — — 1,995

Payments of withholding taxes for stock-based compensation awards ( 1 ) ( 1 ) — — ( 95 ) — — ( 95 )

Directors’ deferred compensation — — 36 — ( 36 ) — 60 60

Balance at July 1, 2022 20,523 ( 6,625 ) $ 281,296 $ 725,918 $ ( 218,356 ) $ ( 44,619 ) $ 4,915 $ 749,154

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

Net income — — — 17,868 — — — 17,868

Other comprehensive income — — — — — 3,003 — 3,003

Cash dividends declared ($ 0.120 per share)

— — — ( 2,453 ) — — — ( 2,453 )

Stock-based compensation activity 25 25 3,215 ( 32 ) ( 1,144 ) — — 2,039

Payments of withholding taxes for stock-based compensation awards ( 2 ) ( 2 ) — — ( 183 ) — — ( 183 )

Directors’ deferred compensation 1 1 50 — ( 682 ) — 723 91

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

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

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 ($ 0.245 per share)

— — — ( 5,112 ) — — — ( 5,112 )

Stock-based compensation activity 108 108 9,243 — ( 5,549 ) — — 3,694

1 unchanged sentence

Directors’ deferred compensation 1 1 75 — ( 75 ) — 120 120

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

Balance at July 1, 2022 20,523 ( 6,625 ) $ 281,296 $ 725,918 $ ( 218,356 ) $ ( 44,619 ) $ 4,915 $ 749,154

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 ($ 0.235 per share)

— — — ( 4,791 ) — — — ( 4,791 )

Stock-based compensation activity 152 152 9,474 ( 51 ) ( 5,911 ) — — 3,512

1 unchanged sentence

Directors’ deferred compensation 3 3 $ 89 $ — $ ( 735 ) $ — $ 827 $ 181

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

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

See notes to these consolidated financial statements.

29 unchanged sentences

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note B — Acquisition

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 $ 398.9 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.

During the six months ended July 1, 2022, acquisition-related inventory step-up expense was $ 7.5 million and classified in Cost of Sales and transaction and integration costs were $ 2.6 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.

3 unchanged sentences

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

The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the HCS-Electronic Materials Acquisition Date).

The primary areas of accounting for the HCS Acquisition that are not yet finalized relate to the fair value of contingencies, income tax accruals, and the impact on residual goodwill.

The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques.

While we believe that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, we will evaluate any additional information prior to finalization of the fair value.

During the measurement period, we will adjust preliminary valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the HCS Acquisition Date that, if known, would have resulted in revised values for these items as of that date.

The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.

During the period subsequent to the HCS-Electronic Materials acquisition, we made certain measurement period adjustments to the acquired assets and liabilities assumed due to clarification of information utilized to determine fair value during the measurement period.

Additionally, we paid a working capital true-up of approximately $ 3.0 million during the second quarter of 2022 which increased the total purchase price.

The preliminary purchase price allocation for the acquisition including these measurement period adjustments is as follows:

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Initial Allocation of Consideration Measurement Period Adjustments Updated Allocation

Cash and cash equivalents $ 3,685 $ — $ 3,685

19 unchanged sentences

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.

9 unchanged sentences

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Value at Acquisition Useful Life

3 unchanged sentences

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.

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials in the second quarter of 2022 consolidated statements are $ 43.6 million and $ 7.6 million, respectively.

Full year revenue and income before taxes total $ 86.9 million and $ 6.0 million, respectively.

Income before taxes includes the purchase accounting inventory step-up expense recorded in the first quarter of 2022.

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

Three months ended Six months ended

July 2, 2021 July 2, 2021

Net Sales $ 409,202 $ 794,586

4 unchanged sentences

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.

The pro forma income (loss) before taxes for the second quarter ended and six months ended July 2, 2021 includes approximately $ 4.3 million and $ 7.2 million, respectively, of additional interest expense related to committed financing to fund the acquisition and acquisition-related intangible asset amortization expense of $ 2.0 million and $ 4.0 million, respectively, as if the acquisition occurred on January 1, 2020.

Note C — Segment Reporting

2 unchanged sentences

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.

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

The Company has the following reportable segments:

4 unchanged sentences

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The Other reportable segment includes unallocated corporate costs and assets.

4 unchanged sentences

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

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 second quarter of 2022 and 2021:

(Thousands) Second Quarter 2022 Second Quarter 2021 First Six Months Ended 2022 First Six Months Ended 2021

Performance Materials (1)

3 unchanged sentences

Precision Optics 29,435 32,591 58,013 68,190

Other — — — —

Net sales 445,295 370,999 894,340 725,385

9 unchanged sentences

Net income $ 23,255 $ 17,868 $ 37,274 $ 34,635

(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.

(1) Excludes inter-segment sales of $ 0.2 million for the second quarter of 2022 and $ 0.5 million for the first six months of 2022 for Performance Materials and $ 2.7 million for the second quarter of 2022 and $ 8.2 million for the first six months of 2022 for Electronic Materials.

Also excludes inter-segment sales of $ 3.2 million for the second quarter of 2021 and $ 5.9 million for the first six months of 2021 for Electronic 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:

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

First Quarter 2022

Second Quarter 2022

Semiconductor $ 2,446 $ 213,742 $ 1,530 $ — $ 217,718

7 unchanged sentences

Total $ 154,889 $ 260,971 $ 29,435 $ — $ 445,295

First Quarter 2021

Second Quarter 2021

Semiconductor $ 1,806 $ 166,968 $ 563 $ — $ 169,337

7 unchanged sentences

Total $ 125,294 $ 213,114 $ 32,591 $ — $ 370,999

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

First Six Months 2022

Semiconductor $ 4,246 $ 428,664 $ 2,857 $ — $ 435,767

Industrial 82,520 27,823 16,041 — 126,384

Aerospace and defense 51,299 3,898 8,812 — 64,009

Consumer electronics 29,215 605 11,126 — 40,946

Automotive 47,091 3,122 5,026 — 55,239

Energy 20,778 54,481 — — 75,259

Telecom and data center 32,303 65 — — 32,368

Other 37,068 13,149 14,151 — 64,368

Total $ 304,520 $ 531,807 $ 58,013 $ — $ 894,340

First Six Months 2021

Semiconductor $ 2,803 $ 322,029 $ 1,034 $ — $ 325,866

Industrial 54,294 23,277 15,009 — 92,580

Aerospace and defense 41,092 3,058 12,173 — 56,323

Consumer electronics 20,766 431 16,424 — 37,621

Automotive 49,273 3,426 4,300 — 56,999

Energy 9,017 51,406 — — 60,423

Telecom and data center 24,368 109 — — 24,477

Other 37,824 14,022 19,250 — 71,096

Total $ 239,437 $ 417,758 $ 68,190 $ — $ 725,385

Note D — Revenue Recognition

4 unchanged sentences

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 April 1, 2022.

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

After considering the practical expedient at July 1, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 76.3 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) April 1, 2022 December 31, 2021 $ change % change

(Thousands) July 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 related to our receivables were immaterial during the first quarter of 2022.

Impairment losses (bad debt) incurred related to our receivables were immaterial during the second 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 $ 4.5 million of the December 31, 2021 unearned amounts as revenue during the first three months of 2022.

The Company recognized approximately $ 5.6 million of the December 31, 2021 unearned amounts as revenue during the first six 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 first quarter of 2022 and 2021 is summarized as follows:

First Quarter Ended

April 1, April 2,

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

Second Quarter Ended Six Months Ended

July 1, July 2, July 1, July 2,

(Thousands) 2022 2021 2022 2021

2 unchanged sentences

Foreign currency (gain) loss 28 ( 33 ) ( 305 ) 1,216

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

Net loss (gain) on disposal of fixed assets 29 24 18 ( 364 )

Other items ( 99 ) 734 ( 24 ) 1,024

1 unchanged sentence

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.

The Company's effective tax rate for the second quarter of 2022 and 2021 was 17.9 % and 15.5 %, respectively, and 17.8 % and 16.3 % in the first six months of 2022 and 2021, respectively.

The effective tax rate for each period in 2022 and 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 first six months of 2022 included a net discrete income tax benefit of $ 0.4 million, primarily related to excess tax benefits from stock-based compensation awards.

The effective tax rate for the first six months of 2021 included a net discrete income tax benefit of $ 0.5 million, primarily related to excess tax benefits from stock-based compensation awards.

Materion Corporation and Subsidiaries

2 unchanged sentences

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

First Quarter Ended

April 1, April 2,

Second Quarter Ended Six Months Ended

July 1, July 2, July 1, July 2,

(Thousands, except per share amounts) 2022 2021 2022 2021

Numerator for basic and diluted EPS:

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

Net income $ 23,255 $ 17,868 $ 37,274 $ 34,635

Denominator for basic EPS:

9 unchanged sentences

Diluted EPS $ 1.12 $ 0.87 $ 1.80 $ 1.68

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.

Adjusted weighted-average shares outstanding - diluted exclude securities totaling 119,744 and 52,709 for the quarters ended July 1, 2022 and July 2, 2021, respectively, and 79,949 and 64,478 for the six months ended July 1, 2022 and July 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.

1 unchanged sentence

Inventories on the Consolidated Balance Sheets are summarized as follows:

April 1, December 31,

July 1, December 31,

(Thousands) 2022 2021

3 unchanged sentences

Inventories, net $ 422,376 $ 361,115

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 $ 485.5 million and $ 480.2 million as of April 1, 2022 and December 31, 2021, respectively.

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 market price movements and to reduce its working capital investment.

The notional value of off-balance sheet precious metals and copper was $ 415.0 million and $ 480.2 million as of July 1, 2022 and December 31, 2021, respectively.

Materion Corporation and Subsidiaries

1 unchanged sentence

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.

In 2020, the Company 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 improvements and procure the equipment necessary to supply the customer with the desired product.

The Company owns, operates and maintains the equipment that is being used to manufacture product for the customer.

Revenue will be recognized as the Company fulfills purchase orders and ships the commercial product to the customer, as product delivery is considered the satisfaction of the performance obligation.

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

As of July 1, 2022, the Company has received approximately $ 13.1 million in prepayments under the terms of this agreement.

As of July 1, 2022 and December 31, 2021, $ 84.6 million and $ 72.6 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets.

The prepayments will remain in Unearned income until commercial purchase orders are received for product serviced out of the equipment, at which time a portion of the purchase order value related to prepayments will be reclassified to Unearned revenue.

As of July 1, 2022 $ 1.0 million of the prepayments are classified as Unearned revenue.

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 following is a summary of the net periodic benefit cost for the second quarter and first six months ended July 1, 2022 and July 2, 2021, respectively, 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.

2 unchanged sentences

Pension Benefits Other Benefits

First Quarter Ended First Quarter Ended

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

Second Quarter Ended Second Quarter Ended

July 1, July 2, July 1, July 2,

(Thousands) 2022 2021 2022 2021

Components of net periodic benefit (income) cost

Components of net periodic benefit (credit) cost

Service cost $ 292 $ 436 $ 20 $ 20

1 unchanged sentence

Expected return on plan assets ( 2,378 ) ( 2,474 ) — —

Amortization of prior service cost (benefit) ( 20 ) ( 21 ) ( 374 ) ( 374 )

Amortization of prior service (benefit) cost ( 18 ) ( 21 ) ( 374 ) ( 374 )

Amortization of net loss (gain) 420 577 ( 68 ) ( 69 )

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.

Net periodic benefit (credit) cost $ ( 471 ) $ ( 434 ) $ ( 383 ) $ ( 394 )

Settlements — — — —

Total net benefit (credit) cost $ ( 471 ) $ ( 434 ) $ ( 383 ) $ ( 394 )

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Pension Benefits Other Benefits

Six Months Ended Six Months Ended

July 1, July 2, July 1, July 2,

(Thousands) 2022 2021 2022 2021

Components of net periodic benefit (credit) cost

Service cost $ 610 $ 874 $ 42 $ 40

Interest cost 2,436 2,096 78 58

Expected return on plan assets ( 4,778 ) ( 4,948 ) — —

Amortization of prior service (benefit) cost ( 38 ) ( 42 ) ( 748 ) ( 748 )

Amortization of net loss (gain) 850 1,154 ( 136 ) ( 138 )

Net periodic benefit (credit) cost $ ( 920 ) $ ( 866 ) $ ( 764 ) $ ( 788 )

Settlements — — — —

Total net benefit (credit) cost $ ( 920 ) $ ( 866 ) $ ( 764 ) $ ( 788 )

The Company did no t make any contributions to its domestic defined benefit plan in the second quarter or first six months 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.

2 unchanged sentences

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:

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

Gains and Losses on Cash Flow Hedges

(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 )

Balance at April 1, 2022

$ 2,451 $ 2,485 $ ( 246 ) $ — $ 4,690 $ ( 39,942 ) $ ( 4,934 ) $ ( 40,186 )

Other comprehensive income (loss) before reclassifications 1,117 756 467 — 2,340 — ( 6,343 ) ( 4,003 )

3 unchanged sentences

Net current period other comprehensive (loss) income after tax 775 765 354 — 1,894 16 ( 6,343 ) ( 4,433 )

Balance at July 1, 2022

$ 3,226 $ 3,250 $ 108 $ — $ 6,584 $ ( 39,926 ) $ ( 11,277 ) $ ( 44,619 )

Balance at April 2, 2021

$ 1,462 $ — $ 320 $ 280 $ 2,062 $ ( 43,309 ) $ ( 4,840 ) $ ( 46,087 )

Other comprehensive (loss) income before reclassifications 183 — ( 239 ) 1,145 1,089 — 3,193 4,282

Amounts reclassified from accumulated other comprehensive income (loss) — — 65 ( 1,507 ) ( 1,442 ) 77 — ( 1,365 )

Net current period other comprehensive (loss) income before tax 183 — ( 174 ) ( 362 ) ( 353 ) 77 3,193 2,917

Deferred taxes 42 ( 40 ) ( 82 ) ( 80 ) ( 6 ) — ( 86 )

Net current period other comprehensive (loss) income after tax 141 — ( 134 ) ( 280 ) ( 273 ) 83 3,193 3,003

Balance at July 2, 2021

$ 1,603 $ — $ 186 $ — $ 1,789 $ ( 43,226 ) $ ( 1,647 ) $ ( 43,084 )

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Gains and Losses on Cash Flow Hedges

(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 )

Other comprehensive income (loss) before reclassifications 1,270 3,868 ( 53 ) — 5,085 — ( 8,390 ) ( 3,305 )

Amounts reclassified from accumulated other comprehensive income (loss) ( 130 ) 353 99 — 322 ( 1,011 ) — ( 689 )

Net current period other comprehensive (loss) income before tax 1,140 4,221 46 — 5,407 ( 1,011 ) ( 8,390 ) ( 3,994 )

Deferred taxes 262 971 10 — 1,243 ( 787 ) — 456

Net current period other comprehensive (loss) income after tax 878 3,250 36 — 4,164 ( 224 ) ( 8,390 ) ( 4,450 )

Balance at July 1, 2022

$ 3,226 $ 3,250 $ 108 $ — $ 6,584 $ ( 39,926 ) $ ( 11,277 ) $ ( 44,619 )

Balance at December 31, 2020

$ 519 $ — $ ( 170 ) $ 468 $ 817 $ ( 43,473 ) $ 4,017 $ ( 38,639 )

Other comprehensive (loss) income before reclassifications 1,268 — 502 2,436 4,206 — ( 5,664 ) ( 1,458 )

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Net current period other comprehensive (loss) income after tax 1,084 — 356 ( 468 ) 972 247 ( 5,664 ) ( 4,445 )

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).

Balance at July 2, 2021

$ 1,603 $ — $ 186 $ — $ 1,789 $ ( 43,226 ) $ ( 1,647 ) $ ( 43,084 )

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.

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.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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.

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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.

Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 2.0 million and $ 3.8 million in the second quarter and first six months of 2022, respectively, compared to $ 2.2 million and $ 3.8 million, respectively, in the same periods of 2021.

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

The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the six months ended July 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:

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Expected term (in years) 4.4

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

The Company granted 59,599 stock-settled restricted stock units (RSUs) to certain employees during the first six months 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 $ 80.95 for stock-settled RSUs granted to employees during the three months ended April 1, 2022.

The weighted-average fair value per share was $ 80.87 for stock-settled RSUs granted to employees during the six months ended July 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 Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first six months 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 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.

At July 1, 2022, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $ 15.2 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note M — Fair Value of Financial Instruments

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Notes to Consolidated Financial Statements

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:

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

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

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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 carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of July 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.

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Contracts are typically held to maturity.

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

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.

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.

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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

July 1, 2022 December 31, 2021

(Thousands) Notional

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

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

Other-net included less than $ 0.1 million of foreign currency losses in the second quarter of 2022 and $ 0.7 million of foreign currency gains related to derivatives in the first six months of 2022, compared to $ 0.4 million of foreign currency losses and $ 1.2 million of foreign currency gains in the second quarter and first six months of 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 balance sheet classification as of July 1, 2022 and December 31, 2021:

(Thousands) Notional

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Total $ 38,575 $ 1,349 $ 2 $ 24 $ 8

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

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

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

We expect to reclassify $ 3.7 million of net gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions.

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

Refer to Note K for further details related to OCI.

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

Second Quarter Ended

(Thousands) July 1, 2022 July 2, 2021

Hedging relationship Line item

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Total $ 120 $ ( 1,442 )

Six Months Ended

(Thousands) July 1, 2022 July 2, 2021

Hedging relationship Line item

Foreign currency forward contracts Net sales $ ( 130 ) $ 140

Precious metal swaps Cost of sales 99 ( 39 )

Interest rate swap Interest expense - net 353 —

Copper swaps Cost of sales — ( 3,041 )

Total $ 322 $ ( 2,940 )

Note O — Contingencies

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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 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.

One beryllium case was outstanding as of July 1, 2022.

The Company does not expect the resolution of this open matter to have a material impact on the consolidated financial statements.

As previously reported, a settlement agreement had been reached in one case, and the case was dismissed during the second quarter.

Other Litigation.

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To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

On October 14, 2020, Garett Lucyk, et al.

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(collectively, the Company).

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.

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.

Plaintiff filed a motion for conditional certification, which the Company opposed.

The motion has been fully briefed, and the parties are awaiting a decision from the court.

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

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

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.

The undiscounted reserve balance was $ 4.3 million and $ 4.8 million at July 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.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note P — Debt

(Thousands) April 1, 2022 December 31, 2021

(Thousands) July 1, 2022 December 31, 2021

Borrowings under Credit Agreement $ 205,091 $ 152,296

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Long-term debt $ 481,965 $ 434,388

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.

As of July 1, 2022 and December 31, 2021, the Company had $ 205.1 million outstanding at an average interest rate of 3.56 % 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 July 1, 2022 was $ 124.0 million.

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

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.

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

The balance outstanding on the term loan facility as of July 1, 2022 and December 31, 2021 wa s $ 292.5 million and $ 300.0 million, respectively.

At July 1, 2022 and December 31, 2021, there was $ 46.4 million and $ 46.3 million, respectively, 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