What changed in this filing

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Item 1. Financial Statements

2023-05-03 compared with 2022-11-02 · 156 added, 343 removed, 422 unchanged (54% of the section changed)

2 unchanged sentences

Consolidated Statements of Income

Third Quarter Ended Nine Months Ended

(Thousands, except per share amounts) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021

First Quarter Ended

(Thousands, except per share amounts) March 31, 2023 April 1, 2022

Net sales $ 442,526 $ 449,045

21 unchanged sentences

Consolidated Statements of Comprehensive Income

Third Quarter Ended Nine Months Ended

September 30, October 1, September 30, October 1,

First Quarter Ended

March 31, April 1,

(Thousands) 2023 2022

Net income $ 25,588 $ 14,019

Other comprehensive income (loss):

Other comprehensive (loss) income:

Foreign currency translation adjustment 2,689 ( 2,047 )

6 unchanged sentences

Consolidated Balance Sheets

September 30, Dec.

March 31, Dec.

(Thousands) 2023 2022

35 unchanged sentences

Common stock (no par value;

60,000 authorized shares, issued shares of 27,148 at both September 30 th and December 31 st )

60,000 authorized shares, issued shares of 27,148 at March 31 and December 31)

297,802 288,100

8 unchanged sentences

Consolidated Statements of Cash Flows

Nine Months Ended

September 30, October 1,

Three Months Ended

March 31, April 1,

(Thousands) 2023 2022

5 unchanged sentences

Stock-based compensation expense (non-cash) 2,250 1,699

Deferred income tax expense (benefit) 1,825 ( 263 )

Deferred income tax (benefit) expense ( 52 ) 401

Changes in assets and liabilities:

6 unchanged sentences

Interest and taxes payable

( 1,741 ) ( 1,504 )

Unearned income due to customer prepayments 7,724 —

Other-net ( 4,520 ) 1,712

Net cash provided by operating activities 34,204 40,518

Net cash (used in) provided by operating activities 38,105 ( 14,304 )

Cash flows from investing activities:

1 unchanged sentence

Proceeds from sale of property, plant, and equipment 212 11

Payments for acquisition ( 2,971 ) —

Net cash used in investing activities ( 29,802 ) ( 18,966 )

1 unchanged sentence

Proceeds from borrowings under revolving credit agreement, net 4,600 49,067

Proceeds from issuance of debt 6,643 —

Repayment of long-term debt ( 11,761 ) ( 1,803 )

Repayment of debt ( 3,907 ) ( 3,839 )

Principal payments under finance lease obligations ( 799 ) ( 686 )

15 unchanged sentences

Comprehensive

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

Net income — — — 19,952 — — — 19,952

Other comprehensive income — — — — — ( 1,961 ) — ( 1,961 )

Cash dividends declared ($ 0.125 per share)

— — — ( 2,557 ) — — — ( 2,557 )

Stock-based compensation activity 6 6 2,695 ( 30 ) ( 392 ) — — 2,273

Payments of withholding taxes for stock-based compensation awards ( 2 ) ( 2 ) — — ( 244 ) — — ( 244 )

Directors’ deferred compensation 1 1 33 — ( 227 ) — 254 60

Balance at September 30, 2022 20,528 ( 6,620 ) $ 284,024 $ 743,283 $ ( 219,219 ) $ ( 46,580 ) $ 5,169 $ 766,677

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

Net income — — — 18,156 — — — 18,156

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

Cash dividends declared ($ 0.120 per share)

— — — ( 2,452 ) — — — ( 2,452 )

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

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

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

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

Common Shares Shareholders' Equity

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

Stock Retained

Earnings Common

Treasury Accumulated Other

Comprehensive

Balance at December 31, 2022 20,543 ( 6,605 ) $ 288,100 $ 769,418 $ ( 220,864 ) $ ( 41,909 ) $ 5,245 $ 799,990

6 unchanged sentences

Directors’ deferred compensation 1 1 27 — ( 17 ) — 58 68

Balance at September 30, 2022 20,528 ( 6,620 ) $ 284,024 $ 743,283 $ ( 219,219 ) $ ( 46,580 ) $ 5,169 $ 766,677

Balance at March 31, 2023 20,609 ( 6,539 ) $ 297,802 $ 792,421 $ ( 231,906 ) $ ( 41,626 ) $ 5,303 $ 821,994

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

6 unchanged sentences

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

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

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

See notes to these consolidated financial statements.

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The interim period results are not necessarily indicative of the results to be expected for the full year.

Business Combinations:

The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values.

Any intangible assets acquired in a business combination are recognized and reported apart from goodwill.

Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination.

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

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

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

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

New Pronouncements Adopted:

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This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2024.

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

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

New Accounting Guidance Issued and Not Yet Adopted:

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

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

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

The Company is in the process of evaluating the impact of the guidance on its annual disclosures, but do not expect material impact to our disclosures at this time.

The Company has applied this guidance in accounting for the interest rate swaps discussed in Note M.

Any additional reference rate reform impacts will be accounted for in accordance with ASU 2020-04 and ASU 2022-06.

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.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note B — Acquisition

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

Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $ 398.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism.

During the nine months ended September 30, 2022, acquisition-related inventory step-up expense was $ 7.5 million and classified in Cost of Sales and transaction and integration costs were $ 3.3 million and classified in Selling, General and Administrative expenses in the accompanying consolidated statements of income.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Accounts receivable 28,352 ( 132 ) 28,220

Inventories 70,681 — 70,681

Prepaid and other current assets 660 ( 355 ) 305

Property, plant, and equipment 44,681 355 45,036

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

Intangible assets 107,800 — 107,800

Other long-term assets 4,528 — 4,528

Goodwill 178,181 4,010 182,191

Total assets acquired $ 444,688 $ 3,878 $ 448,566

Accounts payable $ 12,139 $ — $ 12,139

Salaries and wages 2,516 625 3,141

Other liabilities and accrued items 28 — 28

Income taxes 2,183 79 2,262

Other long-term liabilities 5,543 215 5,758

Operating lease liabilities 6,042 — 6,042

Deferred income taxes 20,300 — 20,300

Total liabilities assumed $ 48,751 $ 919 $ 49,670

Net assets acquired $ 395,937 $ 2,959 $ 398,896

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

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

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

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

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

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

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

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

As part of the acquisition, the Company recorded approximately $ 182.2 million of goodwill allocated between its Electronic Materials and Performance Materials segments based on the relative fair values.

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

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

tax purposes.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Value at Acquisition Useful Life

Customer relationships $ 50,200 13 years

Technology 35,300 13 years

Trade name 22,300 15 years

Total $ 107,800

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials in the third quarter of 2022 consolidated statements are $ 49.2 million and $ 4.4 million, respectively.

For the nine months ended September 30, 2022, revenue and income before taxes total $ 135.7 million and $ 10.5 million, respectively.

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

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

Three months ended Nine months ended

October 1, 2021 October 1, 2021

Net Sales $ 428,864 $ 1,223,450

Income before taxes $ 23,022 $ 65,926

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

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

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

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

The pro forma income before taxes for the third quarter ended and nine months ended October 1, 2021 includes approximately $ 2.5 million and $ 8.1 million, respectively, of additional interest expense related to committed financing to fund the acquisition and acquisition-related intangible asset amortization expense of $ 2.0 million and $ 6.0 million, respectively, as if the acquisition occurred on January 1, 2020.

Note C — Segment Reporting

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

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

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

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

Note B — Segment Reporting

The Company has the following reportable segments:

4 unchanged sentences

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The Other reportable segment includes unallocated corporate costs and assets.

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

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

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

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

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

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

(Thousands) Third Quarter 2022 Third Quarter 2021 First Nine Months 2022 First Nine Months 2021

The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization ("EBITDA").

The below table presents financial information for each segment and a reconciliation of EBITDA to Net Income (the most directly comparable GAAP financial measure) for the first quarter of 2023 and 2022:

(Thousands) Three months ended March 31, 2023 Three months ended April 1, 2022

Performance Materials (1)

3 unchanged sentences

Precision Optics 26,692 28,579

Other — — — —

Net sales $ 442,526 $ 449,045

9 unchanged sentences

Net income $ 25,588 $ 14,019

(1) Excludes inter-segment sales of $ 0.2 million for the third quarter of 2022 and $ 0.6 million for the first nine months of 2022 for Performance Materials and $ 3.8 million for the third quarter of 2022 and $ 12.1 million for the first nine months of 2022 for Electronic Materials.

(1) Excludes inter-segment sales of $ 3.1 million for the first quarter of 2023 and $ 5.5 million for the first quarter of 2022 for Electronic Materials and $ 0.3 million for the first quarter of 2022 for Performance Materials.

Inter-segment sales are eliminated in consolidation.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

Third Quarter 2022

Semiconductor $ 2,410 $ 185,223 $ 1,151 $ — $ 188,784

Industrial 44,667 9,383 7,564 — 61,614

Aerospace and defense 28,262 1,243 3,532 — 33,037

Consumer electronics 9,607 364 6,799 — 16,770

Automotive 24,802 1,863 2,268 — 28,933

Energy 15,854 25,220 — — 41,074

Telecom and data center 15,412 42 — — 15,454

Other 28,343 7,503 6,679 — 42,525

Total $ 169,357 $ 230,841 $ 27,993 $ — $ 428,191

Third Quarter 2021

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

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

Aerospace and defense 19,129 1,622 5,653 — 26,404

Consumer electronics 9,717 530 7,789 — 18,036

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

Energy 7,524 27,081 — — 34,605

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

Other 21,140 5,572 6,270 — 32,982

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table disaggregates revenue for each segment by end market for the first quarter of 2023 and 2022:

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

First Nine Months 2022

First Quarter 2023

Semiconductor $ 2,590 $ 180,616 $ 911 $ — $ 184,117

7 unchanged sentences

Total $ 187,014 $ 228,820 $ 26,692 $ — $ 442,526

First Nine Months 2021

First Quarter 2022

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

7 unchanged sentences

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

Note D — Revenue Recognition

Note C — Revenue Recognition

Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets.

3 unchanged sentences

Transaction Price Allocated to Future Performance Obligations:

Accounting Standards Codification 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at September 30, 2022.

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

1 unchanged sentence

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

After considering the practical expedient at September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 69.4 million.

After considering the practical expedient at March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 70.1 million.

Materion Corporation and Subsidiaries

2 unchanged sentences

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

(Thousands) September 30, 2022

December 31, 2021

$ change % change

(Thousands) March 31, 2023 December 31, 2022 $ change % change

Accounts receivable, trade

6 unchanged sentences

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

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

Impairment losses (bad debt) incurred related to our receivables were immaterial during the first three months of 2023.

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

2 unchanged sentences

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

The Company recognized approximately $ 7.2 million of the December 31, 2021 unearned amounts as revenue during the first nine months of 2022.

The Company recognized approximately $ 7.5 million of the December 31, 2022 unearned amounts as revenue during the first three months of 2023.

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

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

Note E — Other-net

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

Third Quarter Ended Nine Months Ended

September 30, October 1, September 30, October 1,

Note D — Other-net

Other-net for the first quarter of 2023 and 2022 is summarized as follows:

First Quarter Ended

March 31, April 1,

(Thousands) 2023 2022

2 unchanged sentences

Foreign currency (gain) loss ( 208 ) ( 333 )

Net loss (gain) on disposal of fixed assets ( 1 ) 81 17 ( 283 )

Net (gain) loss on disposal of fixed assets 5 ( 11 )

Other items ( 72 ) 75

Total $ 5,775 $ 5,873

Note F — Income Taxes

The Company's effective tax rate for the third quarter of 2022 and 2021 was 18.2 % and 15.9 %, respectively, and 18.0 % and 16.1 % in the first nine months of 2022 and 2021, respectively.

The effective tax rate for each period in 2022 and 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction.

The effective tax rate for the first nine months of 2022 and 2021 included a net discrete income tax benefit of $ 0.9 million for each period, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments recorded.

On August 9, 2022, President Biden signed the CHIPS and Science Act (the 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

Note E — Income Taxes

The Company's effective tax rate for the first quarter of 2023 and 2022 was 15.2 % and 17.7 %, respectively.

The effective tax rate for the first quarter of 2023 was lower than the statutory tax rate primarily due to the impact of percentage depletion, the foreign derived intangible income deduction, and research and development credits.

The effective tax rate for the first quarter of 2023 included a net discrete income tax benefit of $ 0.5 million, primarily related to excess tax benefits from stock-based compensation awards.

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

Government Tax Credits

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 Company does not expect the CHIPS Act or the IRA to have a material impact to our consolidated financial statements for the year ending 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.

Note G — Earnings Per Share (EPS)

On August 16, 2022, President Biden 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 and new or enhanced federal energy and manufacturing tax credits effective for tax years beginning in 2023.

The Company is not subject to the minimum tax as our average annual book profits over the prior three-year period were less than $1 billion.

The IRA introduced a new advanced manufacturing production credit (“production credit”), which provides an annual cash benefit for a portion of production costs for the sale of certain minerals produced in the U.S.

and sold by a taxpayer during the year.

The IRA affords the Company eligibility to a production credit beginning in 2023, for which the Company expects to recognize cash savings of approximately $ 8 million for the year ending December 31, 2023.

The issuance of guidance and interpretation as to the eligibility for, calculation of, and methods for claiming the production credit remain pending.

We will continue to monitor developments related to the production credit from the IRS and US Treasury Department and evaluate the potential impact to the Company’s production credit.

The Company will finalize the expected annual production credit impact as further guidance is issued.

The production credit is recorded as a reduction in cost of goods sold as the applicable items are produced and sold.

GAAP does not address the accounting for government grants received by a business entity that are outside the scope of ASC 740.

Our accounting policy is to analogize to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, under IFRS Accounting Standards, under which we recognize the benefit of tax credits accounted for by applying IAS 20 in pretax income on a systematic basis in line with its recognition of the expenses that the grant is intended to compensate.

Note F — Earnings Per Share (EPS)

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

Third Quarter Ended Nine Months Ended

September 30, October 1, September 30, October 1,

First Quarter Ended

March 31, April 1,

(Thousands, except per share amounts) 2023 2022

Numerator for basic and diluted EPS:

Net income $ 19,952 $ 18,156 $ 57,226 $ 52,791

Net income (loss) $ 25,588 $ 14,019

Denominator for basic EPS:

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Diluted EPS $ 1.23 $ 0.68

Adjusted weighted-average shares outstanding - diluted exclude securities totaling 45,016 and 55,598 for the quarters ended September 30, 2022 and October 1, 2021, respectively, and 54,680 and 56,319 for the nine months ended September 30, 2022 and October 1, 2021, respectively.

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

Note H — Inventories

Adjusted weighted-average shares outstanding - diluted exclude securities totaling 17,902 and 117,390 for the quarters ended March 31, 2023 and April 1, 2022, respectively.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note G — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:

September 30, December 31,

March 31, December 31,

(Thousands) 2023 2022

3 unchanged sentences

Inventories, net $ 434,485 $ 423,080

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

The notional value of off-balance sheet precious metals and copper was $ 354.2 million and $ 480.2 million as of September 30, 2022 and December 31, 2021, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note I — Customer Prepayments

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

The notional value of off-balance sheet precious metals and copper was $ 367.5 million and $ 373.1 million as of March 31, 2023 and December 31, 2022, respectively.

Note H — 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.

3 unchanged sentences

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 September 30, 2022, the Company has received approximately $ 17.5 million in prepayments under the terms of this amended agreement.

As of September 30, 2022 and December 31, 2021, $ 88.2 million and $ 72.6 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets.

As of March 31, 2023, the Company has received approximately $ 29.7 million in prepayments under the terms of this amended agreement, of which $ 7.7 million was received during the first quarter of 2023.

As of March 31, 2023 and December 31, 2022, $ 89.0 million and $ 85.9 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets.

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

As of September 30, 2022 $ 1.0 million of the prepayments are classified as Unearned revenue.

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the third quarter and first nine months ended September 30, 2022 and October 1, 2021, respectively, for the pension plans as shown below.

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

supplemental retirement plans.

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

Pension Benefits Other Benefits

Third Quarter Ended Third Quarter Ended

September 30, October 1, September 30, October 1,

(Thousands) 2022 2021 2022 2021

Components of net periodic benefit (credit) cost

Service cost $ 281 $ 410 $ 21 $ 20

Interest cost 1,203 1,045 39 29

Expected return on plan assets ( 2,380 ) ( 2,459 ) — —

Amortization of prior service (benefit) cost ( 19 ) ( 18 ) ( 374 ) ( 374 )

Amortization of net loss (gain) 410 565 ( 68 ) ( 69 )

Net periodic benefit (credit) cost $ ( 505 ) $ ( 457 ) $ ( 382 ) $ ( 394 )

Settlements — — — —

Total net benefit (credit) cost $ ( 505 ) $ ( 457 ) $ ( 382 ) $ ( 394 )

As of March 31, 2023 $ 5.1 million of the prepayments are classified as Unearned revenue.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note I — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the first quarter of 2023 and 2022 for the pension plans as shown below.

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

supplemental retirement plans.

The Other Benefits columns include the domestic retiree medical and life insurance plan.

Pension Benefits Other Benefits

Nine Months Ended Nine Months Ended

September 30, October 1, September 30, October 1,

First Quarter Ended First Quarter Ended

March 31, April 1, March 31, April 1,

(Thousands) 2023 2022 2023 2022

Components of net periodic benefit (credit) cost

Components of net periodic benefit (income) cost

Service cost $ 222 $ 318 $ 13 $ 22

1 unchanged sentence

Expected return on plan assets ( 2,439 ) ( 2,400 ) — —

Amortization of prior service (benefit) cost ( 57 ) ( 60 ) ( 1,122 ) ( 1,122 )

Amortization of prior service cost (benefit) ( 23 ) ( 20 ) ( 139 ) ( 374 )

Amortization of net loss (gain) ( 81 ) 430 ( 95 ) ( 68 )

Net periodic benefit (credit) cost $ ( 1,425 ) $ ( 1,323 ) $ ( 1,146 ) $ ( 1,182 )

Settlements — — — —

Total net benefit (credit) cost $ ( 1,425 ) $ ( 1,323 ) $ ( 1,146 ) $ ( 1,182 )

The Company did no t make any contributions to its domestic defined benefit plan in the third quarter or first nine months of 2022 or 2021.

Total net benefit (income) cost $ ( 348 ) $ ( 449 ) $ ( 153 ) $ ( 381 )

The Company did not make any contributions to its defined benefit plan in the first quarter of 2023 or 2022.

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

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Notes to Consolidated Financial Statements

Note K — Accumulated Other Comprehensive Income (Loss)

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

Gains and Losses on Cash Flow Hedges

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

Balance at July 1, 2022

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

Other comprehensive income (loss) before reclassifications 837 4,360 441 — 5,638 — ( 6,094 ) ( 456 )

Amounts reclassified from accumulated other comprehensive income (loss) ( 41 ) ( 115 ) ( 126 ) — ( 282 ) ( 18 ) — ( 300 )

Net current period other comprehensive (loss) income before tax 796 4,245 315 — 5,356 ( 18 ) ( 6,094 ) ( 756 )

Deferred taxes 183 976 72 — 1,231 ( 26 ) — 1,205

Net current period other comprehensive (loss) income after tax 613 3,269 243 — 4,125 8 ( 6,094 ) ( 1,961 )

Balance at September 30, 2022

$ 3,839 $ 6,519 $ 351 $ — $ 10,709 $ ( 39,918 ) $ ( 17,371 ) $ ( 46,580 )

Balance at July 2, 2021

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

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

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

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

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

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

Balance at October 1, 2021

$ 2,083 $ — $ 145 $ — $ 2,228 $ ( 43,105 ) $ ( 3,676 ) $ ( 44,553 )

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note J — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the first quarter of 2023 and 2022 are as follows:

Gains and Losses on Cash Flow Hedges

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

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

Balance at December 31, 2022 $ 1,243 $ 6,055 $ ( 223 ) $ 7,075 $ ( 40,228 ) $ ( 8,756 ) $ ( 41,909 )

$ 2,348 $ — $ 72 $ — $ 2,420 $ ( 39,702 ) $ ( 2,887 ) $ ( 40,169 )

Other comprehensive income (loss) before reclassifications ( 67 ) ( 1,703 ) ( 475 ) ( 2,245 ) — 2,689 444

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Net current period other comprehensive (loss) income after tax ( 78 ) ( 1,914 ) ( 347 ) ( 2,339 ) ( 67 ) 2,689 283

Balance at September 30, 2022

$ 3,839 $ 6,519 $ 351 $ — $ 10,709 $ ( 39,918 ) $ ( 17,371 ) $ ( 46,580 )

Balance at March 31, 2023 $ 1,165 $ 4,141 $ ( 570 ) $ 4,736 $ ( 40,295 ) $ ( 6,067 ) $ ( 41,626 )

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

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

Other comprehensive (loss) income before reclassifications 153 3,112 ( 520 ) 2,745 — ( 2,047 ) 698

3 unchanged sentences

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

Balance at October 1, 2021

$ 2,083 $ — $ 145 $ — $ 2,228 $ ( 43,105 ) $ ( 3,676 ) $ ( 44,553 )

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

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

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

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

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note L — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 2.2 million and $ 6.0 million in the third quarter and first nine months of 2022, respectively, compared to $ 1.5 million and $ 5.3 million, respectively, in the same periods of 2021.

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

The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the nine months ended September 30, 2022 were $ 80.85 and $ 25.87 , respectively.

Note K — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 2.4 million and $ 1.8 million in the first quarter of 2023 and 2022, respectively.

The Company granted 47,084 SARs to certain employees during the first quarter of 2023.

The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the three months ended March 31, 2023 were $ 113.28 and $ 42.27 , respectively.

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

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Expected term (in years) 4.5

The Company granted 61,145 stock-settled restricted stock units (RSUs) to certain employees during the first nine months of 2022.

The Company granted 47,759 stock-settled RSUs to certain employees during the first quarter of 2023.

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

The weighted-average fair value per share was $ 80.88 for stock-settled RSUs granted to employees during the nine months ended September, 2022.

The weighted-average fair value per share was $ 113.05 for stock-settled RSUs granted to employees during the three months ended March 31, 2023.

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

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

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first quarter of 2023.

The weighted-average fair value of the stock-settled PRSUs was $ 154.97 per share and will be expensed over the vesting period of three years .

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

At September 30, 2022, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $ 13.0 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note M — Fair Value of Financial Instruments

At March 31, 2023, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $ 22.2 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note L — Fair Value of Financial Instruments

The Company measures and records financial instruments at fair value.

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Notes to Consolidated Financial Statements

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021:

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:

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

11 unchanged sentences

Foreign currency forward contracts 741 1,757 — — 741 1,757 — —

Interest rate swap 1,797 — — — 1,797 — —

Precious metal swaps 874 411 — — 874 411 — —

2 unchanged sentences

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

The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of September 30, 2022 and December 31, 2021.

The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of March 31, 2023 and December 31, 2022.

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

1 unchanged sentence

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

Note N — Derivative Instruments and Hedging Activity

Note M — Derivative Instruments and Hedging Activity

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

1 unchanged sentence

Interest Rate.

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

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

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

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 O.

The swap hedges the change in 1-month Secured Overnight Financial Rate (SOFR) from March 4, 2022 to November 2, 2026.

On March 21, 2023, the Company entered into two $ 50.0 million interest rate swaps to hedge the interest rate risk on the Credit Agreement described in Note O.

The swaps hedge the change in 1-month USD-SOFR.

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

Foreign Currency.

2 unchanged sentences

The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements.

Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts.

Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S.

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

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

Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

a tandem of options, known as a collar.

the hedge contracts.

Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S.

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

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

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

10 unchanged sentences

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

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

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

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

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 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.

11 unchanged sentences

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

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

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.

A forward contract will be secured at the time of the purchase to fix the

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

price to be paid when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned by the Company.

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

2 unchanged sentences

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

4 unchanged sentences

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

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and the balance sheet classification as of September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

March 31, 2023

December 31, 2022

(Thousands) Notional

4 unchanged sentences

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

Other-net included less than $ 0.1 million of foreign currency losses in the third quarter of 2022 and $ 0.7 million of foreign currency gains related to derivatives in the first nine months of 2022, compared to $ 0.4 million of foreign currency losses and $ 2.7 million of foreign currency gains in the third quarter and first nine months of 2021, respectively.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of September 30, 2022 and December 31, 2021:

September 30, 2022

Other-net included $ 0.2 million and $ 0.7 million of foreign currency losses and gains related to derivatives in the first quarter of 2023 and 2022, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and the balance sheet classification as of March 31, 2023 and December 31, 2022:

March 31, 2023

(Thousands) Notional

10 unchanged sentences

Precious metal swaps 8,758 118 — 411 —

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

We expect to reclassify $ 6.2 million of net gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions.

At September 30, 2022, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years .

Refer to Note K for further details related to OCI.

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

Third Quarter Ended

(Thousands) September 30, 2022 October 1, 2021

Hedging relationship Line item

Foreign currency forward contracts Net sales $ ( 41 ) $ ( 2 )

Precious metal swaps Cost of sales ( 126 ) ( 83 )

Interest rate swap Interest expense - net ( 115 ) —

Copper swaps Cost of sales — ( 8 )

Total $ ( 282 ) $ ( 93 )

Nine Months Ended

(Thousands) September 30, 2022 October 1, 2021

We expect to reclassify $ 2.7 million of gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions.

At March 31, 2023, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years .

Refer to Note J for additional OCI details.

The following table summarizes the amounts reclassified from accumulated other comprehensive income related to the Company’s outstanding derivatives designated as cash flow hedges and associated income statement classification as of the first quarter of 2023 and 2022:

First Quarter Ended

(Thousands) March 31, 2023

April 1, 2022

Hedging relationship Line item

2 unchanged sentences

Interest rate swap Interest expense - net ( 782 ) 115

Copper swaps Cost of sales — ( 3,049 )

Total $ ( 792 ) $ 203

Note O — Contingencies

Note N — Contingencies

Legal Proceedings .

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

One beryllium case was outstanding as of September 30, 2022.

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

For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims , refer to Note S "Contingencies and Commitments" in the Company's 2022 Annual Report on Form 10-K.

One beryllium case was outstanding as of March 31, 2023.

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

Other Litigation.

The Company is party to several pending legal proceedings and claims arising in the normal course of business.

The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

The Company records a liability when it is both probable that a liability has been incurred and the amount of the

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

loss can be reasonably estimated.

In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters.

7 unchanged sentences

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.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The Court preliminarily approved the settlement on March 30, 2023 and set a final approval hearing for July 2023.

Environmental Proceedings.

2 unchanged sentences

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

The undiscounted reserve balance was $ 4.3 million and $ 4.8 million at September 30, 2022 and December 31, 2021, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet.

The undiscounted reserve balance was $ 4.4 million and $ 4.5 million at March 31, 2023 and December 31, 2022, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet.

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

Note P — Debt

(Thousands) September 30, 2022 December 31, 2021

Note O — Debt

(Thousands) March 31, 2023

December 31, 2022

Borrowings under Credit Agreement $ 145,155 $ 143,250

6 unchanged sentences

Long-term debt $ 405,482 $ 410,876

As of September 30, 2022 and December 31, 2021, the Company had $ 201.4 million outstanding at an average interest rate of 4.74 % and $ 152.3 million outstanding at an average interest rate of 2.12 %, respectively, under its revolving credit facility.

The available borrowing capacity under the revolving credit facility as of September 30, 2022 was $ 127.2 million.

As of March 31, 2023 and December 31, 2022, the Company had $ 145.2 million outstanding at an average interest rate of 6.42 % and $ 143.3 million outstanding at an average interest rate of 6.08 %, respectively, under its revolving credit facility.

The available borrowing capacity under the revolving credit facility as of March 31, 2023 was $ 186.8 million.

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

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

We were in compliance with all of our debt covenants as of September 30, 2022.

The balance outstanding on the term loan facility as of September 30, 2022 and December 31, 2021 wa s $ 288.8 million and $ 300.0 million, respectively.

At September 30, 2022 and December 31, 2021, there was $ 46.4 million and $ 46.3 million, respectively, outstanding against the letters of credit sub-facility.

We were in compliance with all of our debt covenants as of March 31, 2023.

The balance outstanding on the term loan facility as of March 31, 2023 and December 31, 2022 was $ 281.3 million and $ 285.0 million, respectively.

At both March 31, 2023 and December 31, 2022, there was $ 46.5 million outstanding against the letters of credit sub-facility.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

What changed 10-Q

Item 1. Financial Statements