What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-16 compared with 2022-02-17 · 240 added, 275 removed, 1222 unchanged (30% of the section changed)

18 unchanged sentences

In making this assessment, it used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria) in Internal Control - Integrated Framework (2013).

The Company completed the acquisition of HCS-Electronic Materials on November 1, 2021.

As permitted by SEC guidance, the scope of our evaluation of internal control over financial reporting as of December 31, 2021 did not include the internal control over financial reporting of HCS-Electronic Materials.

The results of HCS-Electronic Materials are included in our consolidated financial statements from the date of acquisition and constituted 28% of total assets as of December 31, 2021 and less than 1% of both net sales and net income for the year then ended.

Based on our assessment we believe that, as of December 31, 2022, the Company’s internal control over financial reporting is effective.

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At December 31, 2022, the notional value of the Company’s off-balance sheet precious metals was $373.1 million.

As discussed in Note J to the consolidated financial statements, the Company uses estimates to measure the precious metal content within various refinement streams which can vary over time based upon the input materials, yield rates, and other process parameters.

As discussed in Note I to the consolidated financial statements, the Company uses estimates to measure the precious metal content within various refinement streams which can vary over time based upon the input materials, yield rates, and other process parameters.

Auditing the reconciliation of precious metals consignment inventory is complex due to the highly detailed nature of the inventory reconciliation and the amount of information that is obtained from third parties.

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We assessed the historical accuracy of management’s estimates, which are based on assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volume of solutions and other materials within the refinery, data from their refine vendors, and other factors and assessed the historical accuracy of management’s analysis to evaluate the assumptions that were most significant to the calculated weight of the precious metal inventory.

Accounting for Business Combinations

Precision Optics Goodwill Impairment Evaluation

Description of the matter

During 2021, the Company completed its acquisition of HCS-Electronic Materials for a purchase price of $395.9 million in cash, on a cash-free, debt-free basis, as disclosed in Note B to the consolidated financial statements.

The transaction was accounted for as a business combination.

Auditing the Company's accounting for its acquisition of HCS-Electronic Materials was complex due to the significant estimation required by management and its specialists to determine the fair value of the acquired intangible assets, specifically trade names, developed technology and customer relationships.

The significant estimation was primarily due to the subjectivity of the assumptions used by management to measure the fair value of these intangible assets and the sensitivity of the respective fair value to the significant underlying assumptions.

The Company used a relief from royalty method under the income approach to value its tradenames and 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 future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships).

These assumptions relate to the future performance of the acquired businesses, are forward-looking and could be affected by future economic and market conditions.

At December 31, 2022, the Company had goodwill of $319.5 million, of which, $86.7 million related to the Precision Optics reporting unit.

As discussed in Notes A and M to the consolidated financial statements, due to recent acquisitions, the Company elected to perform a quantitative annual impairment assessment of its Precision Optics reporting unit’s goodwill as of October 1, 2022, and concluded that there was no impairment, but the estimated fair value of the Precision Optics reporting unit exceeded the carrying value by less than 10%.

Auditing the Company’s Precision Optics reporting unit’s goodwill impairment assessment was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit.

In particular, the fair value estimate was sensitive to significant assumptions, such as the discount rate, revenue growth rates, terminal growth rate and EBITDA margins, which are affected by expectations about future market or economic conditions.

How we addressed the matter in our audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the recognition and measurement of these intangible assets that address the risks of material misstatement.

Our tests included controls over the valuation models and underlying assumptions, as described above, used to develop such estimates.

To test the estimated fair value of these intangible assets, we performed audit procedures that included, among others, evaluating the methods and significant assumptions used by the Company, as described above, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates.

We also utilized our specialists to review the valuation methodology, discount rates and royalty rates.

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s Precision Optics reporting unit goodwill impairment process, including controls over the significant assumptions discussed above.

We also tested management’s controls over the completeness and accuracy of the underlying data used in its analysis.

To test the estimated fair value of the Company’s Precision Optics reporting unit, our audit procedures included, among others, assessing fair value methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis.

For example, we compared the significant assumptions used by management to current industry and economic trends, recent historical performance, and other relevant factors.

We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in fair value that would result from changes in the assumptions.

In addition, we involved our valuation specialists to assist with our evaluation of the methodology and significant assumptions used by the Company in the determination of the fair value for the Company’s Precision Optics reporting unit.

/s/ Ernst & Young LLP

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In our opinion, Materion Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of HCS-Electronic Materials, which is included in the 2021 consolidated financial statements of the Company and constituted 28% of total assets as of December 31, 2021 and less than 1% of both net sales and net income for the year then ended.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of HCS-Electronic Materials.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Materion Corporation and subsidiaries as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 16, 2023 expressed an unqualified opinion thereon.

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Materion Corporation and Subsidiaries

Years Ended December 31, 2021, 2020, and 2019

Years Ended December 31, 2022, 2021, & 2020

Consolidated Statements of Income

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Research and development expense 28,977 26,575 20,283

Goodwill impairment charges (Note N)

— 9,053 11,560

Asset impairment charges (Note N)

— 1,419 2,581

Restructuring (income) expense (Note E)

( 438 ) 11,237 785

Other — net (Note F)

Goodwill impairment charges (Note M)

Asset impairment charges (Note M)

Restructuring expense (income) 1,573 ( 438 ) 11,237

Other — net (Note E)

24,237 16,737 8,463

Operating profit 119,755 77,111 8,215

Other non-operating (income) expense — net (Note P)

Other non-operating (income) expense — net (Note O)

( 5,250 ) ( 5,115 ) ( 3,939 )

Interest expense — net (Note G)

Interest expense — net (Note F)

21,905 4,901 3,879

Income before income taxes 103,100 77,325 8,275

Income tax expense (benefit) (Note H)

Income tax expense (benefit) (Note G)

17,110 4,851 ( 7,187 )

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( 526 ) 3,771 ( 2,127 )

Other comprehensive income ( 1,530 ) 6,823 12,772

Other comprehensive income (loss) ( 1,740 ) ( 1,530 ) 6,823

Comprehensive income $ 84,250 $ 70,944 $ 22,285

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Amortization of pension and post-retirement costs ( 146 ) 437 ( 151 )

(Gain) loss on sale of property, plant, and equipment ( 282 ) 466 344

Loss (gain) on sale of property, plant, and equipment 14 ( 282 ) 466

Deferred income tax (benefit) expense 1,733 ( 12,957 ) ( 9,850 )

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Increase (decrease) in unearned income due to customer prepayments 21,942 13,752 54,103

Domestic pension plan contributions — — ( 4,500 )

Other — net ( 261 ) 2,894 378

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Payments for purchase of property, plant, and equipment ( 77,608 ) ( 102,910 ) ( 67,274 )

Payments for mine development — — ( 2,277 )

Proceeds from settlement of currency exchange contract — — 3,249

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Cash flows from financing activities:

Proceeds from borrowings under revolving credit agreement, net 118,297 34,000 —

Proceeds from term loan 300,000 — —

Repayment of long-term debt ( 2,054 ) ( 20,634 ) ( 823 )

Proceeds from (repayments of) borrowings under revolving credit agreement, net ( 9,046 ) 118,297 34,000

Proceeds from issuance of debt 9,276 300,000 —

Repayment of debt ( 19,299 ) ( 2,054 ) ( 20,634 )

Principal payments under finance lease obligations ( 2,736 ) ( 2,819 ) ( 2,213 )

18 unchanged sentences

215,211 213,819

Inventories, net (Notes A and J)

Inventories, net (Notes A and I)

423,080 361,115

1 unchanged sentence

Total current assets 690,448 627,252

Deferred income taxes (Notes A and H)

Property, plant, and equipment (Notes A and K)

Deferred income taxes (Notes A and G)

Property, plant, and equipment (Notes A and J)

1,209,205 1,132,223

1 unchanged sentence

Property, plant, and equipment — net 448,765 408,975

Operating lease, right-of-use asset (Note M)

Operating lease, right-of-use asset (Note L)

64,249 63,096

Intangible assets (Notes A and N)

Intangible assets (Notes A and M)

143,219 156,736

Other assets (Note P)

Other assets (Note O)

22,535 27,369

Goodwill (Notes A and N)

Goodwill (Notes A and M)

319,498 318,620

2 unchanged sentences

Current liabilities

Short-term debt (Note O)

Short-term debt (Note N)

$ 21,105 $ 15,359

2 unchanged sentences

Other liabilities and accrued items 54,993 53,388

Income taxes (Notes A and H)

Income taxes (Notes A and G)

Unearned revenue (Note D)

1 unchanged sentence

Other long-term liabilities 12,181 14,954

Operating lease liabilities (Note M)

Operating lease liabilities (Note L)

59,055 57,099

Finance lease liabilities (Note M)

Finance lease liabilities (Note L)

13,876 16,327

Retirement and post-employment benefits (Note P)

Retirement and post-employment benefits (Note O)

20,422 33,394

Unearned income (Notes A and L)

Unearned income (Notes A and K)

107,736 97,962

Long-term income taxes (Notes A and H)

Deferred income taxes (Notes A and H)

Long-term income taxes (Notes A and G)

Deferred income taxes (Notes A and G)

28,214 27,216

Long-term debt (Note O)

Long-term debt (Note N)

410,876 434,388

8 unchanged sentences

( 220,864 ) ( 209,920 )

Accumulated other comprehensive loss (Note Q)

Accumulated other comprehensive loss (Note P)

( 41,909 ) ( 40,169 )

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Other comprehensive income — — — — — ( 1,530 ) — ( 1,530 )

Net pension curtailments and settlements — — — — — 94 — 94

Cash dividends declared ($ 0.475 per share)

2 unchanged sentences

Payments for withholding taxes for stock-based compensation awards ( 49 ) 49 — — ( 3,318 ) — — ( 3,318 )

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

Directors’ deferred compensation 5 ( 5 ) 194 — ( 869 ) — 1,039 364

16 unchanged sentences

The Company has four reportable segments:

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

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

Other includes unallocated corporate costs.

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

The amounts reflected in Note B are the results of the preliminary purchase price allocation for the HCS-Electronic Materials acquisition 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.

See Note B for further discussion of the acquisition of HCS-Electronic Materials which was completed on November 1, 2021.

Use of Estimates:

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Additionally, the allowance is based upon identified delinquent accounts, customer payment patterns, and other analyses of historical data and trends.

Accounts receivable were net of an allowance for credit losses of $ 0.5 million at both December 31, 2021 and 2020.

Accounts receivable were net of an allowance for credit losses of $ 0.6 million and $ 0.5 million at December 31, 2022 and December 31, 2021, respectively.

The change in the allowance for credit losses includes expense and net write-offs, neither of which were material.

The Company extends credit to customers based upon their financial condition, and collateral is not generally required.

Inventories are stated at lower of cost or net realizable value.

Inventories are stated at net realizable value.

The associated inventory reserve was $ 0.4 million and $ 0.3 million at December 31, 2022 and 2021, respectively.

All of the Company's inventories, except for its bertrandite ore mine which values inventory using a weighted average cost method, including raw materials, manufacturing supplies inventory as well as international (outside the U.S.) inventories, have been valued using the first-in, first-out (FIFO) method as of December 31, 2022 and 2021.

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Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise.

The Company conducts its annual goodwill and indefinite-lived intangible asset impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances.

For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis of impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment ("step one") where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach).

The Company conducts its annual goodwill impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances.

For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis of impairment of goodwill is necessary or a quantitative assessment ("step one") where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach).

Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment.

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Long-Lived Asset Impairment:

Management performs impairment tests of long-lived assets, including property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed.

of the asset has changed.

Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

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Also included in Unearned Income as of December 31, 2022 and 2021, are $ 85.9 million and $ 72.6 million, respectively, of customer prepayments.

See Note L for additional discussion.

See Note K for additional discussion.

Advertising Costs:

The Company expenses all advertising costs as incurred.

Advertising costs were $ 0.3 million in 2021, $ 0.3 million in 2020, and $ 0.7 million in 2019.

Advertising costs were $ 0.3 million in 2022, 2021, and 2020.

Stock-based Compensation:

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The portion of the PRSU awards that are valued based on the Company's total shareholder return as compared to peers is valued using Monte Carlo simulations, which incorporates assumptions regarding the expected volatility, the expected correlation, and the risk-free interest rate.

See Note R for additional information about stock-based compensation.

See Note Q for additional information about stock-based compensation.

Capitalized Interest:

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New Pronouncements Adopted:

In November 2020, the Securities Exchange Commission (SEC) issued the SEC Final Rule Release No.

33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information , which simplifies Management’s Discussion and Analysis (MD&A) and certain financial disclosure requirements in SEC regulation S-K.

The final rule eliminates Regulation S-K, Item 301, “Selected Financial Data”, simplifies Regulation S-

K, Item 302, “Supplementary Financial Information”, and amends certain aspects of Regulation S-K, Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The Company adopted the standard on December 31, 2021.

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

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

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This is an exception to the recognition and measurement principle in ASC 805 which generally requires an acquirer to recognize and measure the assets it acquires and the liabilities it assumes at fair value on the acquisition date.

For public entities, the guidance is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted.

public entities, the guidance is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted.

The Company has early adopted this guidance and has applied it to the accounting for contract assets and contract liabilities acquired as part of the HCS-Electronic Materials (as defined in Note B) acquisition.

New Accounting Guidance Issued and Not Yet Adopted:

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

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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 does not expect the transition away from LIBOR to have a material impact on interest expense or on the financial statements.

The guidance is available immediately and the Company has applied this guidance in accounting for the interest rate swap as discussed in Note R.

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

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.

Reclassifications

Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

T hese reclassifications had no impact on the Company’s financial position, results of operations, or cash flows.

Note B — Acquisition

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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.

Acquisition-related transaction and integration costs totaled $ 11.8 million in 2021.

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

Acquisition-related inventory step-up expense during the fourth quarter of 2021 was $ 5.0 M and are recorded in cost of sales in the Consolidated Statements of Income.

In 2022, acquisition-related inventory step-up expense was $ 7.5 million and classified in Cost of Sales and transaction and integration costs were $ 4.2 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 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.

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

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.

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

(Thousands) November 1, 2021

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.

As of November 1 2022, the purchase price allocation was final.

The following table sets forth cumulative measurement period changes since the acquisition date, as well as the initial allocation of the estimated fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of HCS-Electronic Materials, with the excess recorded to goodwill:

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

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

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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.

The purchase price allocation is preliminary as a result of the proximity of the acquisition date to December 31, 2021, and as a result, no elements of the purchase price allocation have been finalized.

During the measurement period for each 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.

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.

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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.

The Company's consolidated financial statements include the results of operations of HCS-Electronic Materials from the acquisition date through December 31, 2021.

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

As part of the acquisition, the Company recorded approximately $ 181.3 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.

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Total $ 107,800

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials since the acquisition date in the consolidated statements are $ 26.7 million and ($ 2.8 ) million, respectively and include two 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:

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Additionally, the 2020 pro forma income (loss) before taxes includes approximately $ 10 million of additional interest expense related to committed financing to fund the acquisition, annual acquisition-related intangible asset amortization expense of $ 8.2 million, and transaction expenses of $ 5.5 million as if it occurred on January 1, 2020.

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 $ 70.6 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 2021, and as of October 1, 2021, the purchase price allocation is complete.

Note C — Segment Reporting and Geographic Information

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 2022.

The Company has the following operating segments:

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

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

The Company’s operating 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.

The segments are determined based on several factors, including the availability of discrete financial information and the Company’s organizational and management structure.

Performance Alloys and Composites 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.

Advanced Materials produces advanced chemicals, microelectronics 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.

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, microelectronics 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.

Financial information for reportable segments was as follows:

(Thousands) Performance

Composites Advanced Materials Precision Optics Other Total

Net sales $ 511,874 $ 866,816 $ 131,954 $ — $ 1,510,644

Intersegment sales 172 13,880 — — 14,052

Operating profit (loss) 67,908 35,330 14,185 ( 40,312 ) 77,111

Depreciation, depletion, and amortization 21,685 9,602 10,883 1,967 44,137

Expenditures for long-lived assets 82,987 10,780 7,523 1,620 102,910

Total assets 636,182 653,595 252,711 64,991 1,607,479

Net sales $ 394,195 $ 670,867 $ 111,212 $ — $ 1,176,274

Intersegment sales 6 35,912 — — 35,918

Operating profit (loss) 13,597 22,120 ( 4,382 ) ( 23,120 ) 8,215

Depreciation, depletion, and amortization 25,782 8,061 6,564 1,977 42,384

Expenditures for long-lived assets 53,841 9,003 908 3,522 67,274

Total assets 477,892 251,637 268,004 60,327 1,057,860

Net sales $ 500,201 $ 573,763 $ 111,460 $ — $ 1,185,424

Intersegment sales 38 70,047 — — 70,085

Operating profit (loss) 73,815 25,124 ( 3,550 ) ( 24,843 ) 70,546

Depreciation, depletion, and amortization 24,437 8,955 5,695 2,029 41,116

Expenditures for long-lived assets 15,520 7,572 1,045 2,391 26,528

Total assets 442,885 214,961 78,981 161,603 898,430

Intersegment sales are eliminated in consolidation.

The primary measure used in evaluating segment performance is operating profit.

Segment assets are evaluated based upon a return on invested capital metric, which includes inventory, accounts receivable, and property, plant, and equipment.

A reconciliation of total segment operating profit to total consolidated income before income taxes is as follows:

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 2022 and 2021:

(Thousands) 2022 2021

Total operating profit for reportable segments $ 77,111 $ 8,215 $ 70,546

Other non-operating (income) expense - net ( 5,115 ) ( 3,939 ) 3,431

Performance Materials (1)

$ 671,525 $ 511,874

Electronic Materials (1)

$ 971,902 866,816

Precision Optics 113,682 131,954

Net sales 1,757,109 1,510,644

Segment EBITDA:

Performance Materials $ 125,227 89,028

Electronic Materials 67,806 $ 44,852

Precision Optics 13,753 25,854

Other ( 28,345 ) ( 33,371 )

Total Segment EBITDA 178,441 126,363

Income tax expense 17,110 4,851

Interest expense - net 21,905 4,901

Income before income taxes $ 77,325 $ 8,275 $ 65,536

Depreciation, depletion and amortization 53,436 44,137

Net income $ 85,990 $ 72,474

(1) Excludes inter-segment sales of $ 0.7 million for Performance Materials and $ 14.0 million for Electronic Materials for 2022 and $ 0.2 million for Performance Materials and $ 13.9 million for Electronic Materials for 2021.

Inter-segment sales are eliminated in consolidation.

Other geographic information includes the following:

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The following table disaggregates revenue for each segment by end market for 2022 and 2021:

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

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

Semiconductor $ 8,666 $ 784,517 $ 5,107 $ — $ 798,290

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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 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.

Shipping and Handling Costs :

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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 December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximate ly $ 81.9 million .

After considering the practical expedient, at December 31, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximate l y $ 63.9 million.

Contract Costs :

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The Company does not include extended payment terms in its contracts with customers.

Note E — Restructuring

During 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) business (a reporting unit within the Precision Optics segment) and determined that it met the criteria to be classified as held for sale.

The Company recorded a goodwill impairment charge of $ 9.1 million in the first quarter of 2020 to write-off the remaining balance of goodwill for the LAC reporting unit.

In addition, the Company estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value.

Based on this review, the Company recorded an additional $ 1.4 million asset impairment loss.

During the third quarter of 2020, the Company concluded that it intended to close its LAC business and, as a result, only a portion of the fixed assets of the LAC business are classified as held for sale.

At December 31, 2020, fixed assets totaling $ 0.2 million were classified as held for sale and reflected within Prepaid and other current assets in the Consolidated Balance Sheet, and these assets were disposed of in early 2021.

In 2021, the Company resolved the remaining restructuring items that held over from 2020 and as a result reversed $ 0.4 million of accruals that were on the balance sheet at the end of 2020.

Costs associated with the closure of the LAC business totaled $ 1.7 million in 2020 and included $ 0.7 million of severance associated with approximately 20 employees and $ 1.0 million of facility and other related costs.

Remaining severance payments of $ 0.6 million and facility costs of $ 1.0 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items, respectively, in the Consolidated Balance Sheet.

All remaining severance payments were paid in 2021.

In addition, in 2020, the Company completed additional cost reduction actions in order to align costs with commensurate business levels in its Precision Optics segment.

These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reductions.

Costs associated with these actions totaled $ 0.4 million and included severance associated with approximately 28 employees and other related costs, all of which was paid during 2020.

Also, in 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 $ 8.8 million in 2020 and included $ 2.1 million of severance associated with approximately 63 employees, and $ 5.3 million of facility and other related costs.

Remaining severance payments of $ 0.5 million and facility costs of $ 0.5 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items in the Consolidated Balance Sheet as of December 31, 2020.

The Company does not expect to incur any additional costs associated with these initiatives.

Remaining severance payments as of December 31, 2021 were immaterial.

In 2019, the Company initiated a restructuring plan in its LAC business to reduce headcount, idle certain machinery and equipment, and exit a facility in Windsor, Connecticut.

Costs associated with this plan also included severance and related costs for 19 employees, all of which was paid out by the end of 2020.

In addition, in 2019, the Company completed cost reduction actions in order to align costs with commensurate business levels.

These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction.

Costs associated with these actions were in the Other segment and included severance associated with seven employees and other related costs.

All severance payments were paid by the end of 2020.

Costs associated with cost reduction actions in 2018 were in the Advanced Materials segment and included severance associated with approximately forty employees and other related costs.

Remaining severance payments as of December 31, 2021 are immaterial.

These costs are presented in the Company's segment results as follows:

(Thousands) 2021 2020 2019

Performance Alloys and Composites $ — $ 8,763 $ —

Advanced Materials — — —

Precision Optics ( 438 ) 2,052 328

Other — 422 457

Total $ ( 438 ) $ 11,237 $ 785

Note F — Other-net

Note E — Other-net

Other-net is summarized for 2022, 2021, and 2020 as follows:

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Net (gain) loss on disposal of fixed assets 14 ( 282 ) 466

Rental income — — ( 87 )

Other items 290 168 ( 398 )

Total other-net $ 24,237 $ 16,737 $ 8,463

Note G — Interest Expense-net

Note F — Interest Expense-net

The following chart summarizes the interest incurred, capitalized, and paid in 2022, 2021, and 2020:

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The increase in interest expense in 2022 versus 2021 was driven by increased borrowings under our revolving credit facility and new term loan during 2021 primarily to finance the acquisition of HCS-Electronic Materials.

The increase in interest expense in 2020 compared to 2019 was driven by increased borrowings under our revolving credit facility during 2020 primarily to finance the acquisition of Optics Balzers.

Amortization of deferred financing costs within interest expense was $ 1.7 million in 2022, $ 1.0 million in 2021, and $ 0.8 million in 2020.

Note H — Income Taxes

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

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

The Company has examined the impact of the Rescue Plan on its business and has determined it does not have a material impact to its consolidated financial statements.

Note G — Income Taxes

On August 9, 2022, President Biden signed the CHIPS and Science Act (CHIPS Act) into law.

The CHIPS Act provides incentives, beginning in 2023, for manufacturing semiconductors and certain tooling equipment used in the semiconductor manufacturing process.

On August 16, 2022, President Biden also signed the Inflation Reduction Act of 2022 (IRA) into law.

The IRA, among other provisions, includes a new corporate alternative minimum tax on certain large corporations, an excise tax on stock buybacks, and tax credits for certain critical minerals.

The Company does not expect to be an applicable corporation subject to the alternative minimum tax based on our reported GAAP earnings the past three years.

The CHIPS Act and the IRA did not have an impact to our consolidated financial statements for the year ended December 31, 2022.

We continue to examine the impacts the CHIPS Act and the IRA may have on the Company in 2023 and subsequent years.

Income (loss) before income taxes and income tax expense (benefit) are comprised of the following:

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Non-deductible goodwill impairment — — 7.1

Tax Cuts and Jobs Act impact — — 2.3

Research and development tax credit ( 2.0 ) ( 1.2 ) ( 16.4 )

Foreign tax credit — — ( 0.3 )

Impact of foreign operations 0.6 0.3 ( 5.3 )

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Environmental reserves 1,321 1,358

Inventory 6,118 —

Research expenditures 7,069 —

Revenue recognition 7,878 5,027

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Mine development — ( 917 )

Pensions ( 400 ) —

Unrealized gains

( 1,940 ) ( 663 )

Total deferred tax liabilities ( 89,824 ) ( 75,119 )

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The Company intends to maintain a valuation allowance on these deferred tax assets until a realization event occurs to support reversal of all or a portion of the allowance.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As of December 31, 2021, the Company came out of a three year cumulative loss in Germany in the fourth quarter due to improving profitability.

Management determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes are realizable and released the related $ 6.9 million valuation allowance on deferred tax assets in Germany, resulting in an income tax benefit for this amount.

At December 31, 2022, for income tax purposes, the Company had foreign net operating loss carryforwards of $ 21.2 million that do not expire, and $ 3.2 million that expire in calendar years 2023 through 2027.

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federal examinations for years before 2019, state and local examinations for years before 2018, and foreign examinations for tax years before 2017.

We operate under a tax holiday in Malaysia, which is effective through July 31, 2022 and may be extended if certain additional requirements are satisfied.

We operate under a tax holiday in Malaysia, which was extended and is effective through July 31, 2027.

The tax holiday is conditional upon our meeting certain employment, sales, and investment thresholds.

The impact of this tax holiday decreased foreign taxes by $ 0.4 million and $ 0.5 million in 2021 and 2020, respectively.

The benefit of the tax holiday on net income per share (diluted) was $ 0.02 and $ 0.03 in 2021 and 2020, respectively.

The impact of this holiday decreased foreign taxes by $ 3.0 million in 2022.

A reconciliation of the Company’s unrecognized tax benefits for the year-to-date periods ended December 31, 2022 and 2021 is as follows:

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No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations as of December 31, 2022.

The amount of such unrepatriated earnings totaled $ 102.3 million as of

December 31, 2021.

The amount of such unrepatriated earnings totaled $ 105.4 million as of December 31, 2022.

It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.

Note I — Earnings Per Share

Note H — Earnings Per Share

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

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Equity awards covering shares of common stock totaling 56,636 in 2022, 55,598 in 2021, and 166,255 in 2020 were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.

Note J — Inventories, net

Note I — Inventories, net

Inventories in the Consolidated Balance Sheets are summarized as follows:

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Inventories, net 423,080 361,115

Inventory balances are presented net of an excess and obsolete reserve totaling $ 19.8 million and $ 23.9 million at December 31, 2022 and December 31, 2021, respectively.

The Company takes and records the results of a physical inventory count of its precious metals on a quarterly basis.

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The notional value of off-balance sheet precious metals and copper was $ 373.1 million as of December 31, 2022 versus $ 480.2 million as of December 31, 2021.

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.

Note K — Property, Plant, and Equipment

Note J — Property, Plant, and Equipment

Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows:

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Department of Defense (DoD), in previous periods, for reimbursement of the DoD's share of the cost of equipment.

This amount was recorded in property, plant, and equipment and the reimbursements are reflected in Unearned income on the Consolidated Balance Sheets.

This amount was recorded in property, plant, and equipment and the reimbursements

are reflected in Unearned income on the Consolidated Balance Sheets.

The equipment was placed in service during 2012, and its full cost is being depreciated in accordance with Company policy.

The unearned income liability is being reduced ratably with the depreciation expense recorded over the life of the equipment.

Unearned income was reduced b y $ 4.3 million in both 2021 and 2020 a nd $ 4.4 million in 2019 and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.

We recorded depreciation and depletion expense of $ 31.4 million i n 2021, $ 30.9 million in 2020, and $ 30.3 million in 2019.

Unearned income was reduced by $ 4.4 million in 2022 and $ 4.3 million in both 2021 and 2020 and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.

The unamortized unearned income balance was $ 15.3 million and $ 19.7 million at December 31, 2022 and December 31, 2021, respectively.

We recorded depreciation and depletion expense of $ 35.2 million in 2022, $ 31.4 million in 2021, and $ 30.9 million in 2020.

Depreciation, depletion, and amortization as shown on the Consolidated Statement of Cash Flows is net of the reduction in the unearned income liability in 2022, 2021, and 2020.

The net carrying value of capitalized so ftware w as $ 5.4 million and $ 5.0 million at December 31, 2021 and December 31, 2020, respectively.

Depreciation expense related to software was $ 1.8 million , $ 1.8 million, and $ 2.4 million in 2021 , 2020 , and 2019, respectively.

Note L — 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 provided prepayments to the Company 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 the product is sold and delivered to the customer in connection with a master supply agreement.

Accordingly, as of December 31, 2021 and 2020, $ 72.6 million and $ 58.8 million, respectively, of prepayments are classified as Unearned income in the Consolidated Balance Sheet and the liabilities are expected to be settled as commercial shipments are made.

Note M — Leasing Arrangements

The net c arrying value of capitalize d software was $ 4.6 million and $ 5.4 million at December 31, 2022 and December 31, 2021, respectively.

Depreciation expense related to software was $ 1.8 million in 2022, 2021, and 2020, respectively.

As of December 31, 2022 and December 31, 2021 capital expenditures in accounts payable was $ 12.1 million and $ 2.1 million, respectively.

Note K — Customer 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 December 31, 2022, the Company has received approximately $ 21.9 million in prepayments under the terms of this amended agreement.

As of December 31, 2022 and 2021, $ 85.9 million and $ 72.6 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheet.

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 December 31, 2022 $ 4.5 million of the prepayments are classified as Unearned revenue.

No amounts of the prepayments were classified as short-term unearned revenue as of December 31, 2021

Note L — Leasing Arrangements

The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years.

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Finance leases — —

Note N — Intangible Assets and Goodwill

Note M — Intangible Assets and Goodwill

Intangible Assets

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(Thousands) Expense

Intangible assets also includes deferred financing costs relating to the Company's revolving credit and consignments lines of $ 3.6 million and $ 2.0 million at December 31, 2021 and 2020 , respectively.

Intangible assets also includes deferred costs relating to the Company's revolving credit and consignments lines of $ 3.6 million and $ 3.6 million at December 31, 2022 and 2021 , respectively.

In 2021, the Company acquired HCS-Electronic Materials for a total purchase price of $ 398.9 million, and recorded goodwill of $ 181.3 million.

Goodwill of $ 154.3 million and $ 23.9 million associated with the HCS-Electronic Materials acquisition was allocated to the Advanced Materials and Performance Alloys and Composites segments, respectively.

Goodwill of $ 157.0 million and $ 24.3 million associated with the HCS-Electronic Materials acquisition was allocated to the Electronic Materials and Performance Materials segments, respectively.

The balance of goodwill at December 31, 2022 and 2021 was $ 319.5 million and $ 318.6 million, respectively.

A summary of changes in goodwill by reportable segment is as follows:

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

(Thousands) Performance Materials Electronic Materials Precision Optics Total

Balance at December 31, 2020 $ 1,899 $ 50,527 $ 92,490 $ 144,916

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Balance at December 31, 2022 $ 26,157 206,670 $ 86,671 $ 319,498

In 2019, the Company recorded a $ 11.6 million goodwill impairment charge to record an initial impairment charge for the LAC reporting unit that was determined to have a fair value below the carrying value of the assets for the reporting unit.

In 2020, the Company recorded a $ 9.1 million goodwill impairment charge to write-off the remaining balance of goodwill for the LAC reporting unit which was closed as of December 31, 2020.

The results of the Company's 2021 , 2020 , and 2019 annual goodwill impairment assessments indicated that no other goodwill impairment existed.

There were no accumulated impairment losses in 2021, compared to $ 20.6 million at December 31, 2020 , all of which related to the LAC reporting unit.

Note O — Debt

Due to recent acquisitions, the Company elected to perform a quantitative annual impairment assessment of its reporting units' goodwill as of October 1, 2022 and determined that the estimated fair values for each of its reporting units exceeded their carrying values, therefore no impairment charges were necessary.

The estimated fair value of the Company's Precision Optics reporting unit exceeded the carrying value by less than 10%.

Management believes the future sales growth and EBITDA margins in the long range plan, terminal growth rate and the discount rate used in the valuations requires significant use of judgment.

If any of our reporting units do not meet our long range plan estimates or our discount rate increase significantly, we could be required to perform an interim goodwill impairment analysis or recognize charges in future periods.

Any impairment charges that the Company may take in the future could be material to its consolidated results of operations and financial condition.

The assumptions used for the reporting units with fair values exceeding carrying values of less than 10% are more sensitive to future performance and will be monitored accordingly.

The results of the Company's 2022 and 2021 annual goodwill impairment assessments indicated that no goodwill impairment existed.

The Company's accumulated goodwill impairment losses were $ 20.6 million as of December 31, 2022, 2021 and 2020.

Accumulated impairment losses were from the closure of the LAC reporting unit which was closed as of December 31, 2020.

Note N — Debt

Long-term debt in the Consolidated Balance Sheets is summarized as follows:

(Thousands) 2022 2021

Borrowings under Credit Agreement with average interest rate of 2.12 % at December 31, 2021

Borrowings under Credit Agreement with average interest rate of 6.08 % at December 31, 2022 and 2.12 % at December 31, 2021

$ 143,250 $ 152,296

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Foreign debt 7,541 2,252

Fixed rate industrial development revenue bonds — 1,322

Total long-term debt outstanding 435,791 454,548

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Maturities on long-term debt instruments as of December 31, 2022 are as follows:

2022 $ 15,359

2028 and thereafter 265

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On November 1, 2021, Materion borrowed the full $ 300 million available under the delayed draw term loan facility and used the proceeds to pay a portion of the purchase price of the HCS-Electronic Materials acquisition.

The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives.

The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives.

Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property, precious metals, copper and certain other assets.

The Credit Agreement allows the Company to borrow money at a premium over LIBOR or prime rate and at varying maturities.

In January 2023, we amended the Credit Agreement to transition U.S.

dollar denominated borrowings from LIBOR to the Secured Overnight Financial Rate (SOFR) for both the revolving credit agreement and the term loan and to increase the cap on precious metals facilities from $ 600 million to $ 615 million.

The Credit Agreement allows the Company to borrow money at a premium over SOFR, following the January 2023 amendment, or prime rate and at varying maturities.

The premium resets quarterly according to the terms and conditions available under the agreement.

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The available borrowings under the individual existing credit lines totaled $ 185.3 million as of December 31, 2022.

Note P — Pensions and Other Post-Employment Benefits

Note O — Pensions and Other Post-Employment Benefits

The obligation and funded status of the Company’s pension and other post-employment benefit plans are shown below.

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Benefit payments from fund ( 6,175 ) ( 5,399 ) — —

Expenses paid from assets ( 313 ) ( 234 ) — —

Foreign currency exchange rate changes and other ( 1,799 ) ( 1,039 ) — —

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Net amount recognized $ ( 3,436 ) $ ( 8,439 ) $ ( 5,505 ) $ ( 7,514 )

The benefit obligation decreased in 2021 due to actuarial gains that were driven by increases in the discount rate as well as participant census data updates.

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

defined benefit pension plan.

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

The Company recognized a non-cash pretax pension curtailment charge of $ 3.3 million associated with the plan amendment in 2019.

The benefit obligation decreased in 2022 due to actuarial gains that were driven by increases in the discount rate.

The following amounts are included within accumulated other comprehensive loss at December 31, 2022 :

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Total net benefit (credit) cost $ ( 2,393 ) $ ( 1,711 ) $ ( 924 ) $ ( 1,535 ) $ ( 1,576 ) $ ( 1,557 )

In 2019, net benefit cost includes a $ 3.3 million curtailment charge related to the freeze of our U.S.

defined benefit plan effective January 1, 2020.

Components of net periodic benefit cost, other than service cost, are included in Other non-operating (income) expense in the Consolidated Statements of Income.

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OCI at end of year $ 42,422 $ 42,382 $ 48,673 $ ( 6,129 ) $ ( 6,098 ) $ ( 7,525 )

In determining the projected benefit obligation and the net benefit cost, as of a December 31 measurement date, the Company used the following weighted-average assumptions:

In determining the projected benefit obligation and the net benefit cost, as of a December 31 measurement date, the Company used the following assumptions:

Pension Benefits Other Benefits

2022 2021 2020 2022 2021 2020

Weighted-average assumptions used to determine benefit obligations at fiscal year end

Assumptions used to determine benefit obligations at fiscal year end

Discount rate 2.16 % - 5.54 %

0.22 % - 3.02 %

0.03 % - 2.76 %

5.52 % 2.90 % 2.45 %

Rate of compensation increase 1.75 % - 3.00 %

Weighted-average assumptions used to determine net cost for the fiscal year

1.50 % - 3.00 %

3.50 % 3.00 % 3.00 %

Assumptions used to determine net cost for the fiscal year

Discount rate 0.22 % - 3.02 %

Expected long-term return on plan assets 5.44 % 5.70 % 6.06 % N/A N/A N/A

0.03 % - 2.76 %

0.21 % - 3.48 %

2.90 % 2.45 % 3.20 %

Expected long-term return on plan assets 1.20 % - 5.25 %

1.20 % - 5.75 %

1.80 % - 6.00 %

Rate of compensation increase 1.50 % - 3.00 %

1.50 % - 3.00 %

3.00 % 3.00 % 3.00 %

Discount Rate.

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The rate of compensation increase assumption is no longer applicable for the domestic defined benefit due to the Company freezing the plan effective January 1, 2020.

The rate of compensation assumption for the domestic retiree medical plan was 3.0 % in both 2021 and 2020.

The rate of compensation assumption to determine the benefit obligation and net cost for the domestic retiree medical plan was 3.5 % in 2022 and 3.0 % in both 2022 and 2021.

Assumptions for the defined benefit pension plans in Germany, Liechtenstein, and England are determined separately from the U.S.

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The Company has some investments that are valued using net asset value (NAV) as the practical expedient and have not been classified in the fair value hierarchy.

Refer to Note S for definitions of the fair value hierarchy.

Refer to Note R for definitions of the fair value hierarchy.

December 31, 2022

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(d) Certain assets that are measured at fair value using the NAV practical expedient have not been classified in the fair value hierarchy.

multi-strategy funds which combine a range of different credit, equity, and macro-orientated ideas and dynamically allocate funds across asset classes.

(e) Pooled investment fund consists of various investment types including equity investments covering a range of geographies and including investment managers that hold long and short positions, property investments, and other multi-strategy funds which combine a range of different credit, equity, and macro-orientated ideas and dynamically allocate funds across asset classes.

(f) Includes a fund that invests in a broad portfolio of hedge funds.

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Derivatives may be used to hedge an existing security or as a risk reduction strategy.

Current asset allocation guidelines are to invest 10 % to 40 % in equity securities, 60 % to 90 % in fixed income securities and cash, and up to 20 % in alternative securities.

Current asset allocation guidelines are to invest 0 % to 40 % in equity securities, 60 % to

90 % in fixed income securities and cash, and up to 20 % in alternative securities.

Management reviews the asset allocation on a quarterly or more frequent basis and makes revisions as deemed necessary.

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The Company’s annual defined contribution expense, including the expense for the enhanced defined contribution plan, was $ 13.1 million in 2022, $ 9.9 million in 2021, and $ 9.8 million in 2020.

Note Q — Accumulated Other Comprehensive (Loss) Income

Note P — Accumulated Other Comprehensive (Loss) Income

Changes in the components of accumulated other comprehensive (loss) income, including amounts reclassified out, for 2022, 2021, and 2020, and the balances in accumulated other comprehensive (loss) income as of December 31, 2022, 2021, and 2020 are as follows:

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On Cash Flow Hedges Pension and Post- Employment Benefits Foreign Currency Translation

(Thousands) Foreign Currency Precious Metals Copper Total Total

(Thousands) Foreign Currency Interest Rate Precious Metals Copper Total Total

Balance at December 31, 2019 $ 1,324 $ — $ ( 452 ) $ 25 $ 897 $ ( 41,346 ) $ ( 5,013 ) $ ( 45,462 )

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Reclassifications of gains and losses on foreign currency cash flow hedges from accumulated other comprehensive income are recorded in Net sales in the Consolidated Statements of Income while gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income.

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

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

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

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

Note R — Stock-based Compensation

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

Note Q — Stock-based Compensation

The Company maintains two stock incentive plans (the 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan) that have been approved by its shareholders.

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Stock-based compensation expense relating to SARs was $ 0.9 million in each of the last three years.

The total intrinsic value of stock options exercised during 2022, 2021 and 2020 was $ 2.1 million, $ 1.6 million and $ 0.5 million, respectively.

The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions:

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The fair market value of the RSUs is determined on the date of the grant and is amortized over the vesting period.

The vesting period is typically three years unless the recipient is retirement eligible and continued vesting is approved by the Board of Directors.

With the exception of the 2022 annual employee grant, the vesting period is typically three years unless the recipient is retirement eligible and continued vesting is approved by the Board of Directors.

The 2022 annual employee grant vests in three equal annual installments on the anniversary of the grant date.

The fair value of RSUs settled in stock is based on the closing stock price on the date of grant.

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The unamortized compensation cost on the outstanding RSUs was $ 5.5 million as of December 31, 2022 and is expected to be recognized over a weighted-average period of 23 months.

The total fair value of shares that vested during 2021 was $ 2.0 million, compared to $ 1.2 million in both 2020 and 2019.

The total fair value of shares that vested during 2022 was $ 2.8 million, compared to $ 2.0 million in 2021 and $ 1.2 million in 2020.

The following table summarizes the stock-settled RSU activity during 2022:

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The weighted-average grant date fair value of these RSUs was $ 81.59 , $ 75.77 , and $ 48.42 in 2022, 2021, and 2020, respectively.

The Company recognized $ 0.8 million of expense related to these awards in 2021, compared to $ 0.7 million of expense in both 2020, and 2019.

The Company recognized $ 0.9 million of expense related to these awards in 2022, compared to $ 0.8 million of expense in 2021 and $ 0.7 million of expense in 2020.

At December 31, 2022, $ 0.3 million of expense with respect to non-vested RSU awards granted to the Board of Directors has yet to be recognized and will be amortized into expense over a weighted-average period of approximately four months .

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At December 31, 2022, shareholders’ equity included 0.1 million shares related to this plan.

Note S — Fair Value Information and Derivative Financial Instruments

Note R — Fair Value Information and Derivative Financial Instruments

The Company measures and records financial instruments at fair value.

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Foreign currency forward contracts 1,291 — 1,291 —

Interest rate swap 7,863 7,863

Precious metal swaps 118 — 118 —

Copper swaps — — — —

Total $ 12,273 $ 3,001 $ 9,272 $ —

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Foreign currency forward contracts 1,757 — 1,757 —

Interest rate swap — —

Precious metal swaps 411 — 411 —

Copper swaps — — — —

Total $ 5,169 $ 3,001 $ 2,168 $ —

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Precious metal swaps 116 — 116 —

Copper swaps 632 — 632 —

Total $ 7,730 $ 4,246 $ 3,484 $ —

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Precious metal swaps 24 — 24 —

Copper swaps 27 — 27 —

Total $ 4,406 $ 4,246 $ 160 $ —

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

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

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

Due to the nature of fair value calculations for variable-rate debt, the carrying value of the Company's long-term variable-rate debt is a reasonable estimate of its fair value.

As noted in Note R, the Company entered into a $ 100.0 million interest rate swap to hedge the interest rate risk on the fixed rate portion of the Credit Agreement.

The fair value of the interest rate swap asset was $ 7.9 million as of December 31, 2022, and was determined using level 2 inputs.

The total of the outstanding amount on the fixed rate debt and the fair value of the interest rate swap approximates the total fair value of the fixed rate debt as of December 31, 2022.

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

The Company uses derivative contracts to hedge portions of its foreign currency exposures and may also use derivatives to hedge a portion of its precious metal and interest expense fluctuations.

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.

In February 2023 we amended the terms of the interest rate swap to hedge the change in 1-month

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.

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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 that changes in prices could have on the Company's margins and operating profit.

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

Each precious metal consignor 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.

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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 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 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 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 consignment line limitations or other factors.

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 also uses copper in its production processes.

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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 at December 31, 2022 and 2021:

December 31, 2021 December 31, 2020

December 31, 2022

(Thousands) Notional

Value Notional

Prepaid expenses

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

Foreign currency forward contracts - yen $ 2,985 $ 145 $ — $ 74 $ 26

1 unchanged sentence

Precious metal swaps 8,758 118 — 411 —

Copper swaps — — 6,225 632

35,129 1,349 8,380 759

Foreign currency forward contracts - yen 143 2 — —

Other liabilities and accrued items

Interest rate swap 100,000 3,114 4,749 — —

Total $ 137,455 $ 3,732 $ 4,749 $ 957 $ 163

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

2,160 24 27,688 1,524

Other long-term liabilities

Foreign currency forward contracts - euro 1,143 8 — —

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

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Precious metal swaps Cost of sales ( 126 ) ( 193 )

Interest rate swap Interest expense - net ( 250 ) —

Copper swaps Cost of sales — ( 3,049 )

1 unchanged sentence

The derivative activity in the table above is reflected in cash flows from operating activities.

Note T — Contingencies and Commitments

Note S — Contingencies and Commitments

Beryllium Cases

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Defense and indemnity costs were less than or equal to the deductible in both 2022 and 2021.

As of December 31, 2021, the Company was a defendant in two beryllium litigation cases, both of which were outstanding as of December 31, 2020.

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

As of December 31, 2022, the Company was a defendant in one beryllium litigation cases, which was also outstanding as of December 31, 2021.

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

During 2022, one beryllium litigation case was resolved.

Although it is not possible to predict the outcome of any pending litigation, the Company provides for costs related to litigation matters when a loss is probable, and the amount is reasonably estimable.

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The Company has an active program for environmental compliance that includes the identification of environmental projects and estimating the impact on the Company’s financial performance and available resources.

Environmental expenditures that relate to current operations, such as wastewater treatment and control of airborne emissions, are either expensed or capitalized as appropriate.

Environmental expenditures that

relate to current operations, such as wastewater treatment and control of airborne emissions, are either expensed or capitalized as appropriate.

The Company records reserves for the probable costs for identified environmental remediation projects.

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Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges that he and other similarly situated employees 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 explore a negotiated resolution.

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

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

On August 2, 2022, the Court conditionally certified a class of employees at the Company’s Elmore facility only and rejected certification of a class across the Company’s other facilities.

In November 2022, the parties reached a settlement for an immaterial amount.

The settlement is pending court approval.

At December 31, 2022, the Company had outstanding letters of credit totaling $ 46.5 million related to workers’ compensation, consigned precious metal guarantees, environmental remediation issues, and other matters.

2 unchanged sentences

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 8. Financial Statements and Supplementary Data