Item 1. Financial Statements
Item 1. Financial Statements
Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
First Quarter Ended
(Thousands, except per share amounts) March 31, 2023 April 1, 2022
Net sales $ 442,526 $ 449,045
Cost of sales 351,190 373,754
Gross margin 91,336 75,291
Selling, general, and administrative expense 40,336 41,662
Research and development expense 7,621 7,074
Restructuring expense (income) 664 1,076
Other—net 5,775 5,873
Operating profit 36,940 19,606
Other non-operating income—net ( 730 ) ( 1,169 )
Interest expense—net 7,502 3,735
Income before income taxes 30,168 17,040
Income tax expense 4,580 3,021
Net income $ 25,588 $ 14,019
Basic earnings per share:
Net income per share of common stock $ 1.24 $ 0.69
Diluted earnings per share:
Net income per share of common stock $ 1.23 $ 0.68
Weighted-average number of shares of common stock outstanding:
Basic 20,566 20,464
Diluted 20,887 20,724
See notes to these consolidated financial statements.
2
Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
First Quarter Ended
March 31, April 1,
(Thousands) 2023 2022
Net income $ 25,588 $ 14,019
Other comprehensive (loss) income:
Foreign currency translation adjustment 2,689 ( 2,047 )
Derivative and hedging activity, net of tax ( 2,339 ) 2,270
Pension and post-employment benefit adjustment, net of tax ( 67 ) ( 240 )
Other comprehensive loss 283 ( 17 )
Comprehensive income $ 25,871 $ 14,002
See notes to these consolidated financial statements.
3
Materion Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
March 31, Dec. 31,
(Thousands) 2023 2022
Assets
Current assets
Cash and cash equivalents $ 15,243 $ 13,101
Accounts receivable, net 207,998 215,211
Inventories, net 434,485 423,080
Prepaid and other current assets 42,128 39,056
Total current assets 699,854 690,448
Deferred income taxes 3,335 3,265
Property, plant, and equipment 1,198,350 1,209,205
Less allowances for depreciation, depletion, and amortization ( 728,788 ) ( 760,440 )
Property, plant, and equipment, net 469,562 448,765
Operating lease, right-of-use assets 62,352 64,249
Intangible assets, net 140,430 143,219
Other assets 22,183 22,535
Goodwill 320,268 319,498
Total Assets $ 1,717,984 $ 1,691,979
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt $ 27,727 $ 21,105
Accounts payable 126,866 107,899
Salaries and wages 22,077 35,543
Other liabilities and accrued items 44,186 54,993
Income taxes 4,669 3,928
Unearned revenue 20,292 15,496
Total current liabilities 245,817 238,964
Other long-term liabilities 14,255 12,181
Operating lease liabilities 57,424 59,055
Finance lease liabilities 14,068 13,876
Retirement and post-employment benefits 20,738 20,422
Unearned income 109,883 107,736
Long-term income taxes 812 665
Deferred income taxes 27,511 28,214
Long-term debt 405,482 410,876
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)
— —
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at March 31 and December 31)
297,802 288,100
Retained earnings 792,421 769,418
Common stock in treasury ( 231,906 ) ( 220,864 )
Accumulated other comprehensive loss ( 41,626 ) ( 41,909 )
Other equity 5,303 5,245
Total shareholders' equity 821,994 799,990
Total Liabilities and Shareholders’ Equity $ 1,717,984 $ 1,691,979
See the notes to these consolidated financial statements.
4
Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31, April 1,
(Thousands) 2023 2022
Cash flows from operating activities:
Net income $ 25,588 $ 14,019
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization 15,092 13,179
Amortization of deferred financing costs in interest expense 424 511
Stock-based compensation expense (non-cash) 2,250 1,699
Deferred income tax (benefit) expense ( 52 ) 401
Changes in assets and liabilities:
Accounts receivable
7,538 ( 15,045 )
Inventory ( 12,081 ) ( 28,129 )
Prepaid and other current assets ( 2,865 ) ( 5 )
Accounts payable and accrued expenses ( 1,904 ) ( 4,177 )
Unearned revenue 254 ( 343 )
Interest and taxes payable
657 1,874
Unearned income due to customer prepayments 7,724 —
Other-net ( 4,520 ) 1,712
Net cash (used in) provided by operating activities 38,105 ( 14,304 )
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment ( 30,014 ) ( 18,977 )
Proceeds from sale of property, plant, and equipment 212 11
Net cash used in investing activities ( 29,802 ) ( 18,966 )
Cash flows from financing activities:
Proceeds from borrowings under revolving credit agreement, net 4,600 49,067
Repayment of debt ( 3,907 ) ( 3,839 )
Principal payments under finance lease obligations ( 799 ) ( 686 )
Cash dividends paid ( 2,571 ) ( 2,520 )
Payments of withholding taxes for stock-based compensation awards ( 3,614 ) ( 2,717 )
Net cash provided by financing activities ( 6,291 ) 39,305
Effects of exchange rate changes 130 ( 260 )
Net change in cash and cash equivalents 2,142 5,775
Cash and cash equivalents at beginning of period 13,101 14,462
Cash and cash equivalents at end of period $ 15,243 $ 20,237
See notes to these consolidated financial statements.
5
Materion Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Unaudited)
Common Shares Shareholders' Equity
(Thousands, except per share amounts) Common Shares Common Shares Held in Treasury Common
Stock Retained
Earnings Common
Stock in
Treasury Accumulated Other
Comprehensive
Loss Other
Equity Total
Balance at December 31, 2022 20,543 ( 6,605 ) $ 288,100 $ 769,418 $ ( 220,864 ) $ ( 41,909 ) $ 5,245 $ 799,990
Net income — — — 25,588 — — — 25,588
Other comprehensive loss — — — — — 283 — 283
Cash dividends declared ($ 0.125 per share)
— — — ( 2,571 ) — — — ( 2,571 )
Stock-based compensation activity 98 98 9,675 ( 14 ) ( 7,411 ) — — 2,250
Payments of withholding taxes for stock-based compensation awards ( 33 ) ( 33 ) — — ( 3,614 ) — — ( 3,614 )
Directors’ deferred compensation 1 1 27 — ( 17 ) — 58 68
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
Net income — — — 14,019 — — — 14,019
Other comprehensive loss — — — — — ( 17 ) — ( 17 )
Cash dividends declared ($ 0.12 per share)
— — — ( 2,520 ) — — — ( 2,520 )
Stock-based compensation activity 95 95 6,572 — ( 4,873 ) — — 1,699
Payments of withholding taxes for stock-based compensation awards ( 33 ) ( 33 ) — — ( 2,717 ) — — ( 2,717 )
Directors’ deferred compensation 1 1 39 — ( 39 ) — 60 60
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.
6
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note A — Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2022 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
New Pronouncements Adopted:
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This guidance is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2024. 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.
Note B — Segment Reporting
The Company has the following reportable segments: Performance Materials, Electronic Materials, Precision Optics, and Other. The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's chief operating decision maker, in determining how to allocate the Company’s resources and evaluate performance.
Performance Materials provides advanced engineered solutions comprised of beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes.
Electronic Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Optics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.
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:
7
(Thousands) Three months ended March 31, 2023 Three months ended April 1, 2022
Net sales:
Performance Materials (1)
187,014 149,630
Electronic Materials (1)
228,820 270,836
Precision Optics 26,692 28,579
Other — —
Net sales $ 442,526 $ 449,045
Segment EBITDA:
Performance Materials 42,770 24,792
Electronic Materials 13,955 12,148
Precision Optics 2,692 2,191
Other ( 6,655 ) ( 5,177 )
Total Segment EBITDA $ 52,762 $ 33,954
Income tax expense 4,580 3,021
Interest expense - net 7,502 3,735
Depreciation, depletion and amortization 15,092 13,179
Net income $ 25,588 $ 14,019
(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.
The following table disaggregates revenue for each segment by end market for the first quarter of 2023 and 2022:
8
(Thousands) Performance Materials Electronic Materials Precision Optics Other Total
First Quarter 2023
End Market
Semiconductor $ 2,590 $ 180,616 $ 911 $ — $ 184,117
Industrial 38,674 12,969 8,733 — 60,376
Aerospace and defense 30,358 2,077 4,648 — 37,083
Consumer electronics 9,356 187 3,255 — 12,798
Automotive 25,493 1,501 2,608 — 29,602
Energy 13,468 24,951 — — 38,419
Telecom and data center 16,126 13 — — 16,139
Other 50,949 6,506 6,537 — 63,992
Total $ 187,014 $ 228,820 $ 26,692 $ — $ 442,526
First Quarter 2022
End Market
Semiconductor $ 1,800 $ 214,922 $ 1,327 $ — $ 218,049
Industrial 40,069 15,866 8,434 — 64,369
Aerospace and defense 23,684 2,614 5,145 — 31,443
Consumer electronics 13,002 325 5,312 — 18,639
Automotive 22,235 1,657 2,464 — 26,356
Energy 10,849 29,119 — — 39,968
Telecom and data center 16,081 45 — — 16,126
Other 21,910 6,288 5,897 — 34,095
Total $ 149,630 $ 270,836 $ 28,579 $ — $ 449,045
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. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. 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 a product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.
Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at March 31, 2023. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. 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 March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 70.1 million.
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Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Contract Balances : The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:
(Thousands) March 31, 2023 December 31, 2022 $ change % change
Accounts receivable, trade
$ 208,633 $ 215,726 $ ( 7,093 ) ( 3 ) %
Unbilled receivables
13,919 10,765 3,154 29 %
Unearned revenue
20,292 15,496 4,796 31 %
Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred related to our receivables were immaterial during the first three months of 2023.
Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are generally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables.
Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. 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 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
Amortization of intangible assets $ 3,121 $ 3,131
Metal consignment fees 2,929 3,011
Foreign currency (gain) loss ( 208 ) ( 333 )
Net (gain) loss on disposal of fixed assets 5 ( 11 )
Other items ( 72 ) 75
Total $ 5,775 $ 5,873
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
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Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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. U.S. 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:
First Quarter Ended
March 31, April 1,
(Thousands, except per share amounts) 2023 2022
Numerator for basic and diluted EPS:
Net income (loss) $ 25,588 $ 14,019
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding 20,566 20,464
Effect of dilutive securities:
Stock appreciation rights 103 97
Restricted stock units 105 106
Performance-based restricted stock units 113 57
Diluted potential common shares 321 260
Denominator for diluted EPS:
Adjusted weighted-average shares outstanding 20,887 20,724
Basic EPS $ 1.24 $ 0.69
Diluted EPS $ 1.23 $ 0.68
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.
11
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note G — Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
March 31, December 31,
(Thousands) 2023 2022
Raw materials and supplies $ 116,404 $ 113,694
Work in process 250,920 249,105
Finished goods 67,161 60,281
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 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. 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 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 March 31, 2023 $ 5.1 million of the prepayments are classified as Unearned revenue.
12
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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
First Quarter Ended First Quarter Ended
March 31, April 1, March 31, April 1,
(Thousands) 2023 2022 2023 2022
Components of net periodic benefit (income) cost
Service cost $ 222 $ 318 $ 13 $ 22
Interest cost 1,973 1,223 68 39
Expected return on plan assets ( 2,439 ) ( 2,400 ) — —
Amortization of prior service cost (benefit) ( 23 ) ( 20 ) ( 139 ) ( 374 )
Amortization of net loss (gain) ( 81 ) 430 ( 95 ) ( 68 )
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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Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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 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 )
Other comprehensive income (loss) before reclassifications ( 67 ) ( 1,703 ) ( 475 ) ( 2,245 ) — 2,689 444
Amounts reclassified from accumulated other comprehensive income (loss) ( 35 ) ( 782 ) 25 ( 792 ) ( 338 ) — ( 1,130 )
Net current period other comprehensive (loss) income before tax ( 102 ) ( 2,485 ) ( 450 ) ( 3,037 ) ( 338 ) 2,689 ( 686 )
Deferred taxes ( 24 ) ( 571 ) ( 103 ) ( 698 ) ( 271 ) — ( 969 )
Net current period other comprehensive (loss) income after tax ( 78 ) ( 1,914 ) ( 347 ) ( 2,339 ) ( 67 ) 2,689 283
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 )
Other comprehensive (loss) income before reclassifications 153 3,112 ( 520 ) 2,745 — ( 2,047 ) 698
Amounts reclassified from accumulated other comprehensive income (loss) ( 19 ) 115 107 203 ( 1,000 ) — ( 797 )
Net current period other comprehensive (loss) income before tax 134 3,227 ( 413 ) 2,948 ( 1,000 ) ( 2,047 ) ( 99 )
Deferred taxes 31 742 ( 95 ) 678 ( 760 ) — ( 82 )
Net current period other comprehensive (loss) income after tax 103 2,485 ( 318 ) 2,270 ( 240 ) ( 2,047 ) ( 17 )
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 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 I for additional details on pension and post-employment expenses.
14
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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:
Risk-free interest rate 4.27 %
Dividend yield 0.44 %
Volatility 39.0 %
Expected term (in years) 4.5
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 $ 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 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 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. A hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:
Level 1 — Quoted market prices in active markets for identical assets and liabilities;
Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and
Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect
those that a market participant would use.
15
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
2023 2022 2023 2022 2023 2022 2023 2022
Financial Assets
Deferred compensation investments $ 3,860 $ 3,001 $ 3,860 $ 3,001 $ — $ — $ — $ —
Foreign currency forward contracts 385 1,291 — — 385 1,291 — —
Interest rate swap 7,175 7,863 — — 7,175 7,863 — —
Precious metal swaps 131 118 — — 131 118 — —
Total $ 11,551 $ 12,273 $ 3,860 $ 3,001 $ 7,691 $ 9,272 $ — $ —
Financial Liabilities
Deferred compensation liability $ 3,860 $ 3,001 $ 3,860 $ 3,001 $ — $ — $ — $ —
Foreign currency forward contracts 741 1,757 — — 741 1,757 — —
Interest rate swap 1,797 — — — 1,797 — —
Precious metal swaps 874 411 — — 874 411 — —
Total $ 7,272 $ 5,169 $ 3,860 $ 3,001 $ 3,412 $ 2,168 $ — $ —
The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies, 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 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. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.
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. 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 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. The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. 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
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Notes to Consolidated Financial Statements
(Unaudited)
the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.
The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.
The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and nature of instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.
Precious Metals. 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 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 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. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.
The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. 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 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
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Notes to Consolidated Financial Statements
(Unaudited)
price to be paid when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned by the Company.
The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.
All derivatives are recorded on the balance sheet at fair value. If a derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The 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 March 31, 2023 and December 31, 2022:
March 31, 2023
December 31, 2022
(Thousands) Notional
Amount Fair
Value Notional
Amount Fair
Value
Foreign currency forward contracts
Prepaid and other current assets $ 13,277 $ 156 $ 12,242 $ 791
Other liabilities and accrued items 18,054 201 17,061 1,048
These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. 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.
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Notes to Consolidated Financial Statements
(Unaudited)
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
Fair Value
(Thousands) Notional
Amount Prepaid and other current assets Other assets Other liabilities and accrued items Other long-term liabilities
Foreign currency forward contracts - yen $ 2,063 $ 98 $ — $ 49 $ —
Foreign currency forward contracts - euro 17,129 131 — 491 —
Precious metal swaps 8,486 131 — 874 —
Interest rate swap 200,000 3,725 3,450 — 1,797
Total $ 227,678 $ 4,085 $ 3,450 $ 1,414 $ 1,797
December 31, 2022
Fair Value
Notional
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
Foreign currency forward contracts - euro 25,712 355 — 472 137
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
All of the contracts summarized above were designated and effective as cash flow hedges. 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
Foreign currency forward contracts Net sales $ ( 35 ) $ ( 19 )
Precious metal swaps Cost of sales 25 107
Interest rate swap Interest expense - net ( 782 ) 115
Total $ ( 792 ) $ 203
Note N — Contingencies
Legal Proceedings . 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
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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. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al. , case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. 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 Court preliminarily approved the settlement on March 30, 2023 and set a final approval hearing for July 2023.
Environmental Proceedings. The Company has an active environmental compliance program and records reserves for the probable cost of identified environmental remediation projects. The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the difference between actual and estimated costs, and other factors. The reserves may also be affected by rulings and negotiations with regulatory agencies. The undiscounted reserve balance was $ 4.4 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 O — Debt
(Thousands) March 31, 2023
December 31, 2022
Borrowings under Credit Agreement $ 145,155 $ 143,250
Borrowings under the Term Loan Facility 281,250 285,000
Foreign debt 10,366 7,541
Total debt outstanding 436,771 435,791
Current portion of long-term debt ( 27,727 ) ( 21,105 )
Gross long-term debt 409,044 414,686
Unamortized deferred financing fees ( 3,562 ) ( 3,810 )
Long-term debt $ 405,482 $ 410,876
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 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.
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Notes to Consolidated Financial Statements
(Unaudited)