What changed in this filing

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Item 1A. Risk Factors

2023-02-16 compared with 2022-02-17 · 70 added, 40 removed, 203 unchanged (35% of the section changed)

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If any of the following risks occur, our business, results of operations, or financial condition could be negatively impacted.

Risks Relating to the COVID-19 Pandemic

The COVID-19 pandemic has had, and may continue to have, an adverse impact on our business.

We have continued to closely monitor the impact of the COVID-19 pandemic on our business, including how it has impacted our customers, employees, supply chain and distribution network.

While our business was adversely affected by the COVID-19 pandemic in 2020, we have seen recovery over the course of 2021.

The scope and duration of the pandemic continue to be uncertain, and evolving factors such as the level and timing of vaccine distribution across the world and the extent of any resurgences of the virus or emergence of new variants could impact the stability of the economic recovery and growth.

The COVID-19 pandemic could negatively impact our business, results of operations, financial position or cash flows in a number of ways in the future, including but not limited to:

• disruptions to our facilities, including shutdowns or slowdowns as a result of facility closures, reductions in operating hours or labor shortages;

• disruptions in our supply chain and our ability to obtain raw materials, packaging and other sourced materials due to labor shortages, governmental restrictions or the failure of our suppliers, distributors or manufacturers to meet their obligations to us;

• increases in raw material and commodity costs;

• the inability of a significant portion of our workforce, including our management team, to work as a result of illness or government restrictions;

and reduced liquidity of customers, which could negatively impact the collectability of outstanding receivables and our cash flows.

The extent to which our business, results of operations, financial position or cash flows may ultimately be adversely impacted by the COVID-19 pandemic will depend largely on these future developments, which are highly uncertain and cannot be accurately predicted.

The impact of COVID-19 may also exacerbate other risks discussed below, any of which could have a material effect on us.

This situation is changing rapidly and additional impacts may arise that we are not aware of currently.

Risks Relating to Economic Conditions

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A substantial number of our customers are in the semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center end markets.

Each of these end markets is cyclical in nature, influenced by a combination of factors which could have a negative impact on our business, including, among other things, periods of economic growth or recession, strength or weakness of the U.S.

dollar, the strength of the semiconductor, automotive electronics, and oil and gas industries, the rate of construction of telecommunications infrastructure equipment, and government spending on defense.

Also, in times when growth rates in our markets are lower, or negative, there may be temporary inventory adjustments by our customers that may negatively affect our business .

Risks Relating to the COVID-19 Pandemic

The COVID-19 pandemic has had, and may continue to have, an adverse impact on our business.

The worldwide spread of the COVID-19 virus resulted in a global slowdown of economic activity which could continue to impact demand for a broad variety of goods and services, including from the Company’s customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time.

New and potentially more contagious variants of the virus have emerged over the course of the pandemic, along with a surge in cases in several regions across the globe, including Europe and Asia, resulting in renewed shutdown, mandatory quarantines and shelter in place orders in certain regions.

These events have led, at times, to slowdowns in our operations, including the temporary shutdown of the Company's Shanghai facility in the first half of 2022 .

Through continued economic challenges, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures.

As normal business operations resume, we continue to practice enhanced sanitation procedures, health checks and social distancing protocols, however, none of these measures can completely eliminate the risk of exposure or spread of COVID-19.

There could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts.

Further, the lingering impacts of the COVID-19 pandemic may continue to adversely affect the economies and financial markets in many countries.

Any prolonged disruption of manufacturing or shipment of our products caused by the COVID-19 pandemic or any future pandemics could materially and adversely affect our results of operations and financial conditions.

Surges in infection rate, new shutdowns or quarantines, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner.

Further, ongoing supply chain constraints and inflationary pressure could have a negative impact on our results.

Risks Relating to Our Business and Operations

Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate, and our annual performance will be affected by the fluctuations.

Because we experience seasonal fluctuations in certain end-market sales, our quarterly results will fluctuate, and our annual performance will be affected by the fluctuations.

We expect seasonal patterns to continue, which may cause our quarterly results to fluctuate.

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The markets for our products are experiencing rapid changes in technology.

We operate in markets characterized by rapidly changing technology and evolving customer specifications and industry standards.

New products may quickly render an existing product obsolete and unmarketable.

We operate in markets driven by rapidly changing technology and evolving customer specifications and industry standards.

Next-generation solutions may quickly render an existing product obsolete and unmarketable.

For example, for many years thermal and mechanical performance have been at the forefront of device packaging for wireless communications infrastructure devices.

In recent years, a tremendous effort has been put into developing simpler packaging solutions comprised of copper and other similar components.

Our growth and future results of operations depend in part upon our ability to enhance existing products and introduce newly developed products on a timely basis that conform to prevailing and evolving industry standards, meet or exceed technological advances in the marketplace, meet changing customer specifications, achieve market acceptance, and respond to our competitors’ products.

In recent years, a tremendous effort has been put into developing disruptive thermal spreading materials which requires newer technology that replaces the traditional approach of building package.

Our growth and future results of operations depend in part upon our ability to enhance existing products and processes which introduce newly developed products on a timely basis that conform to prevailing and evolving industry standards, meet or exceed technological advances in the marketplace, meet changing customer specifications, achieve market acceptance, and respond to our competitors’ products.

The process of developing new products can be technologically challenging and requires the accurate anticipation of technological and market trends.

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The availability and prices of some raw materials we use in our manufacturing operations fluctuate, and increases in raw material costs can adversely affect our operating results and our financial condition.

We manufacture advanced engineered materials using various precious and non-precious metals, including beryllium, tantalum, aluminum, cobalt, copper, gold, nickel, palladium, platinum, ruthenium, silver, and tin.

The availability of, and prices for, these raw materials are volatile and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute metals, the U.S.

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and foreign competitors, anticipated or perceived shortages, and other factors.

Precious metal prices have fluctuated significantly in recent years and the inflationary impact of the COVID-19 pandemic has added to the volatility.

Higher prices can cause adjustments to

our inventory carrying values, whether as a result of quantity discrepancies, normal manufacturing losses, differences in scrap rates, theft or other factors, which could have a negative impact on our profitability and cash flows.

Prices for precious metal and certain non-precious metals including tantalum, nickel, iridium, rhodium, niobium, hafnium and tungsten have fluctuated significantly in recent years.

Additionally, geopolitical instability and the inflationary environment

have added to the volatility.

Higher prices can cause adjustments to our inventory carrying values, whether as a result of quantity discrepancies, normal manufacturing losses, differences in scrap rates, theft or other factors, which could have a negative impact on our profitability and cash flows.

Also, the price of our products will generally increase in tandem with rising metal prices, as a result of changes in precious metal prices that are passed through to our customers, which could deter them from purchasing our products and adversely affect our net sales and operating profit.

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The owners of the precious metals and copper charge a fee that fluctuates based on the market price of those metals and other factors.

A significant increase in the market price or the consignment fee of precious metals and/or copper could increase our financing costs, which would increase our operating costs.

A significant increase in the market price or the consignment fee of precious metals and/or copper would increase our costs, negatively impacting our operating profit.

We are not dependent on any one supplier for our primary raw materials, but the business could be impacted by supply constraints.

If, in the future, we are unable to obtain sufficient amounts of metals on a timely basis, we may not be able to obtain metals from alternate sources at competitive prices.

In addition, interruptions or reductions in our supply of metals could make it difficult to satisfy our customers’ delivery requirements, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Utilizing precious metals in the manufacturing process creates challenges in physical inventory valuations that may impact earnings.

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Higher precious metal prices may magnify the value of any potential inventory long or short.

Because we maintain a significant inventory of precious metals, we may experience losses due to employee error or theft.

Because we maintain a significant inventory of precious metals, we may experience losses due to theft or employee error.

Because we manufacture products that contain precious metals, we maintain a significant amount of precious metals at certain of our manufacturing facilities.

Accordingly, we are subject to the risk of precious metal shortages resulting from employee error or theft.

In the past, we have had precious metal shortages resulting from employee error and theft, which could reoccur in the future.

In the past, we have had precious metal shortages resulting from theft and employee error, which could reoccur in the future.

While we maintain controls to prevent theft, including physical security measures, if our controls do not operate effectively or are designed ineffectively, our profitability could be adversely affected, including any charges that we might incur as a result of the shortage of our inventory and by costs associated with increased security, preventative measures, and insurance.

Additionally, while we maintain insurance to cover the theft of our inventory, such coverage may not sufficiently cover any loss.

Access to consigned metals may restrict our operations

We use gold and other precious metals in the production of some of our products.

We obtain most precious metals from consignors under consignment agreements.

The consignors retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment.

Because we do not control the consigned inventory, we may not be able to access the inventory to meet our forecasted needs, which could adversely impact our results of operations.

We have a limited number of manufacturing facilities, and damage to those facilities, or to critical pieces of equipment in these facilities, could interrupt our operations, increase our costs of doing business, and impair our ability to deliver our products on a timely basis.

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Additionally, our Reading, Pennsylvania and Tucson, Arizona manufacturing facilities are dependent on materials produced by our Elmore, Ohio manufacturing facility, and our Wheatfield, New York manufacturing facility is dependent on our Buffalo, New York manufacturing facility.

The destruction or closure of our mine, any of our manufacturing facilities, or to critical pieces of equipment within these facilities for a significant period of time as a result of harsh weather (including that caused by climate change), fire, explosion, act of war or terrorism, or other natural disaster or unexpected event may interrupt our manufacturing capabilities, increase our capital expenditures and our costs of doing business, and impair our ability to deliver our products on a timely basis.

capabilities, increase our capital expenditures and our costs of doing business, and impair our ability to deliver our products on a timely basis.

In addition, many of our manufacturing facilities depend on one source for electric power and natural gas, which could be interrupted due to equipment failures, terrorism, or another cause.

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The Company has taken steps to protect our computer systems however there is always a risk of undetected successful intrusions.

Intrusions could pose a risk of undetected data loss or theft that could later be used to harm the Company.

In addition, we could be subject to legal claims or proceedings and/or liability under laws that protect the privacy of personal information and regulatory penalties if confidential information relating to customers, suppliers, employees, or other parties is misappropriated from our computer systems.

The Company requires employees to complete information security training programs multiple times a year to reinforce the importance of protecting company information and assets.

Materion has not experienced a known information security breach to our systems, however intrusions could pose a risk of undetected data loss or theft that could later be used to harm the Company.

There have been no financial penalties or settlements associated with an information security breach within the last three years.

Similar security threats exist with respect to the IT systems of our lenders, suppliers, consultants, advisers, and other third parties with whom we conduct business.

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For retiree health accounting purposes, we have used a graded assumption schedule to assume the rate at which health care costs will increase.

We cannot predict whether changing market or economic conditions, regulatory changes, or other factors will further increase our retiree health care expenses or obligations, diverting funds we would otherwise apply elsewhere.

We cannot predict whether changing

market or economic conditions, regulatory changes, or other factors will further increase our retiree health care expenses or obligations, diverting funds we would otherwise apply elsewhere.

Unexpected events and natural disasters at our mine or manufacturing facilities could increase the cost of operating our business.

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Any of these events could increase our cost of operations.

Tax increases and changes in tax rules may adversely affect our financial results

As a company conducting business on a global basis with material operations throughout the United States, we are exposed, both directly and indirectly, to the effects of changes in U.S., state, local, and foreign tax rules.

Taxes for financial reporting purposes and cash tax liabilities in the future may be adversely affected by changes in such tax rules.

Such changes may put us at a competitive disadvantage compared to some of our major competitors, to the extent we are unable to pass the tax costs through to our customers.

The Biden administration has announced in 2021 and 2022, and in certain cases has enacted, a number of tax proposals to fund new government investments in infrastructure, healthcare, and education, among other things.

Certain of these proposals involve an increase in the domestic corporate tax rate, which if implemented could have a material impact on our future results of operations and cash flows.

Economic and geopolitical instability including as a result of military conflict could have a material adverse effect on our operating results, financial condition, and cash flows

Geopolitical conflict may have a global impact on our operations, customers, or suppliers.

Conflicts may result in various sanctions, including asset freezes and prohibitions on transactions.

These sanctions could have a larger impact that expands into other geographies where we do business, including our supply chain, business partners, and customers in those markets, which could result in lost sales, supply shortages, commodity price fluctuations, increased manufacturing costs, transportation logistics challenges, customer credit and liquidity issues, and lost efficiencies.

Risks Related to Legal, Compliance and Regulatory Matters

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• fluctuations in currency exchange rates;

• disruptions in our business or the businesses of our suppliers or customers due to cyber security incidents, public health concerns (including viral outbreaks, such as COVID-19) or natural disasters.

Any of these risks could have an adverse effect on our international operations by reducing the demand for our products or reducing the prices at which we can sell our products, which could result in an adverse effect on our business, financial position, results of operations, or cash flows.

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If exposed to respirable beryllium fumes, dusts, or powder, some individuals may demonstrate an allergic reaction and may later develop a chronic lung disease known as chronic beryllium disease (CBD).

Some people who are diagnosed with CBD do not develop clinical symptoms at all.

In others, the disease can lead to scarring and damage of lung tissue, causing clinical symptoms that include shortness of breath, wheezing, and coughing.

Severe cases of CBD can cause disability or death.

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The health risks associated with beryllium have resulted in product liability claims, employee, and third-party lawsuits.

As of December 31, 2021, we had two CBD cases outstanding.

As of December 31, 2022, we had one CBD case outstanding.

The increased levels of scrutiny by federal, state, foreign, and international regulatory authorities could lead to regulatory decisions relating to the approval or prohibition of the use of beryllium-containing materials for various uses.

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In addition, adverse media coverage relating to our beryllium-containing products could damage our reputation or cause a decrease in demand for beryllium-containing products, which could adversely affect our profitability.

Our bertrandite ore mining and beryllium-related manufacturing operations and some of our customers’ businesses are subject to extensive health and safety regulations that impose, and will continue to impose, significant costs and liabilities,

and future regulation could increase those costs and liabilities, or effectively prohibit production or use of beryllium-containing products.

We, as well as our customers, are subject to laws regulating worker exposure to beryllium.

Additionally we, as well as our customers, are subject to laws regulating worker exposure to beryllium.

OSHA has published a new standard for workplace exposure to beryllium that, among other things, lowered the permissible exposure by a factor of ten and established new requirements for respiratory protection, personal protective clothing and equipment, medical surveillance, hazard communication, and recordkeeping.

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These environmental laws and regulations could also require us to acquire costly equipment, obtain additional financial assurance, or incur other significant expenses in connection with our business, which would increase our costs of production.

Expectations relating to environmental, social and governance considerations expose us to potential liabilities, increased costs and other adverse effects on our business.

Many governments, regulators, investors, employees, customers and other stakeholders are increasingly focused on environmental, social and governance considerations relating to businesses, including climate change and greenhouse gas emissions, human capital and diversity, equity and inclusion.

The Company is committed to ensuring that our organization’s governance and operations are fully aligned with environmentally and socially responsible practices.

We make statements about our environmental, social and governance goals and initiatives through information provided on our website and other communications.

Responding to these environmental, social and governance considerations and implementation of these goals and initiatives involves risks and uncertainties, requires investments, which could be material, and are impacted by factors that may be outside our control.

In addition, some stakeholders may disagree with our goals and initiatives and the focus of stakeholders may change and evolve over time.

Stakeholders also may have very different views on where environmental, social and governance focus should be placed, including differing views of regulators in various jurisdictions in which we operate.

Any failure, or perceived failure, by us to achieve our goals, further our initiatives, adhere to our public statements, comply with federal, state or international environmental, social and governance laws and regulations, or meet evolving and varied stakeholder expectations and standards could result in legal and regulatory proceedings against us and materially adversely affect our business, reputation, results of operations, financial condition and stock price.

Risks Related to Our Debt

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Our assets and cash flow may be insufficient to fully repay borrowings under all of our outstanding debt instruments if some or all of these instruments are accelerated upon an event of default, in which case we may be required to seek legal protection from our creditors.

The terms of our indebtedness may restrict our operations, including our ability to pursue our growth and acquisition strategies.

The terms and amount of our indebtedness may restrict our operations, including our ability to pursue our growth and acquisition strategies.

The terms of our credit facilities contain a number of restrictive covenants, including restrictions in our ability to, among other things, borrow and make investments, acquire other businesses, and consign additional precious metals.

These covenants could adversely affect our business by limiting our ability to plan for or react to market conditions or to meet our capital needs, as well as adversely affect our ability to pursue our growth and acquisition strategies, and other strategic initiatives.

Adverse business conditions could impact our ability to generate cash and service our indebtedness.

Our ability to pay interest on our debt and to satisfy our other debt obligations depends in part upon our future financial and operating performance and that of our subsidiaries, and upon our ability to renew or refinance borrowings.

Prevailing economic conditions and financial, business, competitive, legislative, regulatory and other factors, many of which are beyond our control, affect our ability to make these payments.

While we believe that cash flow from our current level of operations, available cash and available borrowings under our revolving credit facility provide adequate sources of liquidity, a significant drop in operating cash flow resulting from economic conditions, competition or other uncertainties beyond our control could create the need for alternative sources of liquidity.

If we are unable to generate sufficient cash flow to meet our debt service obligations, we will have to pursue one or more alternatives, such as reducing or delaying capital or other expenditures, refinancing debt, selling assets, or raising equity capital.

Risks Related to the Execution of Our Strategy

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In addition, there may be liabilities that we fail, or are unable, to discover in the course of performing due diligence investigations on the assets or companies we have already acquired or may acquire in the future.

We cannot assure that rights to indemnification by the sellers of these assets or companies to us, even if obtained, or applicable representation and warranty insurance, will be enforceable, collectible, or sufficient in amount, scope, or duration to fully offset the possible liabilities associated with the business or property acquired.

associated with the business or property acquired.

Any such liabilities, individually or in the aggregate, could have a materially adverse effect on our business, financial condition, and results of operations.

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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-K

Item 1A. Risk Factors