What changed in this filing

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Item 1. Financial Statements

2023-08-02 compared with 2023-05-03 · 235 added, 125 removed, 453 unchanged (44% of the section changed)

2 unchanged sentences

Consolidated Statements of Income

First Quarter Ended

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

Second Quarter Ended Six Months Ended

(Thousands, except per share amounts) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022

Net sales $ 398,551 $ 445,295 $ 841,076 $ 894,340

21 unchanged sentences

Consolidated Statements of Comprehensive Income

First Quarter Ended

March 31, April 1,

Second Quarter Ended Six Months Ended

June 30, July 1, June 30, July 1,

(Thousands) 2023 2022 2023 2022

Net income $ 24,082 $ 23,255 $ 49,670 $ 37,274

Other comprehensive (loss) income:

Other comprehensive income (loss):

Foreign currency translation adjustment ( 743 ) ( 6,343 ) 1,946 ( 8,390 )

1 unchanged sentence

Pension and post-employment benefit adjustment, net of tax ( 254 ) 16 ( 321 ) ( 224 )

Other comprehensive loss 283 ( 17 )

Other comprehensive income (loss) 2,183 ( 4,433 ) 2,466 ( 4,450 )

Comprehensive income 26,265 $ 18,822 $ 52,136 $ 32,824

2 unchanged sentences

Consolidated Balance Sheets

March 31, Dec.

June 30, Dec.

(Thousands) 2023 2022

35 unchanged sentences

Common stock (no par value;

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

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

303,390 288,100

8 unchanged sentences

Consolidated Statements of Cash Flows

Three Months Ended

March 31, April 1,

Six Months Ended

June 30, July 1,

(Thousands) 2023 2022

5 unchanged sentences

Stock-based compensation expense (non-cash) 5,042 3,694

Deferred income tax (benefit) expense ( 52 ) 401

Deferred income tax expense (benefit) ( 166 ) 1,966

Changes in assets and liabilities:

6 unchanged sentences

Interest and taxes payable

( 1,441 ) ( 1,765 )

Unearned income due to customer prepayments 15,061 13,059

Other-net ( 1,783 ) 3,913

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

Net cash provided by operating activities 70,522 21,415

Cash flows from investing activities:

Payments for purchase of property, plant, and equipment ( 59,469 ) ( 37,730 )

Payments for mine development ( 3,617 ) —

Proceeds from sale of property, plant, and equipment 409 105

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

Net cash used in investing activities ( 62,677 ) ( 40,596 )

Cash flows from financing activities:

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

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

Proceeds from borrowings under credit facilities, net 15,151 54,853

Repayment of long-term debt ( 7,743 ) ( 7,177 )

Principal payments under finance lease obligations ( 1,117 ) ( 1,334 )

1 unchanged sentence

Payments of withholding taxes for stock-based compensation awards ( 4,872 ) ( 2,812 )

Net cash provided by financing activities ( 6,291 ) 39,305

Net cash (used in)/provided by financing activities ( 3,835 ) 38,418

Effects of exchange rate changes ( 537 ) ( 1,524 )

11 unchanged sentences

Comprehensive

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

Net income — — — 24,082 — — — 24,082

Other comprehensive income — — — — — 2,183 — 2,183

Cash dividends declared ($ 0.130 per share)

— — — ( 2,683 ) — — — ( 2,683 )

Stock-based compensation activity 40 40 5,567 ( 27 ) ( 2,748 ) — — 2,792

Payments of withholding taxes for stock-based compensation awards ( 12 ) ( 12 ) — — ( 1,258 ) — — ( 1,258 )

Directors’ deferred compensation — — 21 — ( 511 ) — 503 13

Balance at June 30, 2023 20,637 ( 6,511 ) $ 303,390 $ 813,793 $ ( 236,423 ) $ ( 39,443 ) $ 5,806 $ 847,123

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

Net income — — — 23,255 — — — 23,255

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

Cash dividends declared ($ 0.125 per share)

— — — ( 2,592 ) — — — ( 2,592 )

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

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

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

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

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 48 — ( 528 ) — 561 81

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

Balance at June 30, 2023 20,637 ( 6,511 ) $ 303,390 $ 813,793 $ ( 236,423 ) $ ( 39,443 ) $ 5,806 $ 847,123

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 75 — ( 75 ) — 120 120

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

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

See notes to these consolidated financial statements.

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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 swaps discussed in Note M.

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

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

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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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Second Quarter 2023 Second Quarter 2022 First Six Months Ended 2023 First Six Months Ended 2022

Performance Materials (1)

3 unchanged sentences

Precision Optics 25,050 29,435 51,742 58,013

Other — — — —

Net sales 398,551 445,295 841,076 894,340

9 unchanged sentences

Net income $ 24,082 $ 23,255 $ 49,670 $ 37,274

(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.

(1) Excludes inter-segment sales of $ 1.0 million for the second quarter of 2023 and $ 4.1 million for the first six months of 2023 for Electronic Materials.

There were no material inter-segment sales for Performance Materials in 2023.

Additionally, excludes inter-segment sales of $ 0.2 million for the second quarter of 2022 and $ 0.5 million for the first six months of 2022 for Performance Materials and $ 2.7 million for the second quarter of 2022 and $ 8.2 million for the first six months of 2022 for Electronic Materials.

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:

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

First Quarter 2023

Second Quarter 2023

Semiconductor $ 4,411 $ 155,356 $ 745 $ — $ 160,512

7 unchanged sentences

Total $ 182,771 $ 190,730 $ 25,050 $ — $ 398,551

First Quarter 2022

Second Quarter 2022

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

7 unchanged sentences

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Thousands) Performance Materials Electronic Materials Precision Optics Other Total

First Six Months 2023

Semiconductor $ 7,001 $ 335,972 $ 1,656 $ — $ 344,629

Industrial 79,390 17,144 15,445 — 111,979

Aerospace and defense 61,796 3,568 10,647 — 76,011

Consumer electronics 19,645 382 6,822 — 26,849

Automotive 47,306 3,219 4,484 — 55,009

Energy 25,584 46,761 — — 72,345

Telecom and data center 33,538 58 — — 33,596

Other 95,525 12,445 12,688 — 120,658

Total $ 369,785 $ 419,549 $ 51,742 $ — $ 841,076

First Six Months 2022

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

Industrial 81,039 27,823 16,041 — 124,903

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

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

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

Energy 22,259 54,481 — — 76,740

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

Other 37,068 13,149 14,151 — 64,368

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

Note C — Revenue Recognition

4 unchanged sentences

Transaction Price Allocated to Future Performance Obligations:

Accounting Standards Codification 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at March 31, 2023.

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

After considering the practical expedient at June 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 64.1 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) March 31, 2023 December 31, 2022 $ change % change

(Thousands) June 30, 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 first three months of 2023.

Impairment losses (bad debt) incurred related to our receivables were immaterial during the second quarter 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 $ 7.5 million of the December 31, 2022 unearned amounts as revenue during the first three months of 2023.

The Company recognized approximately $ 11.7 million of the December 31, 2022 unearned amounts as revenue during the first six 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.

1 unchanged sentence

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,

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

Second Quarter Ended Six Months Ended

June 30, July 1, June 30, July 1,

(Thousands) 2023 2022 2023 2022

2 unchanged sentences

Foreign currency (gain) loss 170 28 ( 38 ) ( 305 )

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

Other items 95 ( 70 ) 28 ( 6 )

Total $ 6,192 $ 5,928 $ 11,966 $ 11,801

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

Note E — Restructuring

During 2023, the Company implemented various restructuring initiatives across the Performance Materials, Electronic Materials and Precision Optics segments to improve operational efficiency.

This resulted in severance and related costs of approximately $ 1.5 million and $ 2.1 million during the three months and six months ended June 30, 2023, respectively.

In the first six months of 2022, Company recorded a combined total of $ 1.1 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments as a result of cost reduction actions taken in order to reduce our fixed cost structure.

Note F — Income Taxes

The Company's effective tax rate for the second quarter of 2023 and 2022 was 15.3 % and 17.9 %, respectively, and 15.2 % and 17.8 % in the first six months of 2023 and 2022, respectively.

The effective tax rate for 2023 was lower than the statutory

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

tax rate primarily due to the impact of percentage depletion, research and development and production credits and the foreign derived intangible income deduction.

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

The effective tax rate for the first six months of 2023 included a net discrete income tax benefit of $ 1.0 million, primarily related to excess tax benefits from stock-based compensation awards.

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

Government Tax Credits

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

3 unchanged sentences

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 IRA affords the Company eligibility to a production credit beginning in 2023, for which the Company expects to recognize cash savings of at least $ 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.

We will continue to monitor developments related to the production credit from the Internal Revenue Service and U.S.

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.

1 unchanged sentence

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)

our accounting policy is to analogize to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, under IFRS Accounting Standards.

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 G — Earnings Per Share (EPS)

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

First Quarter Ended

March 31, April 1,

Second Quarter Ended Six Months Ended

June 30, July 1, June 30, July 1,

(Thousands, except per share amounts) 2023 2022 2023 2022

Numerator for basic and diluted EPS:

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

Net income $ 24,082 $ 23,255 $ 49,670 $ 37,274

Denominator for basic EPS

9 unchanged sentences

Diluted EPS $ 1.15 $ 1.12 $ 2.38 $ 1.80

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

Adjusted weighted-average shares outstanding - diluted exclude securities totaling 47,084 and 119,744 for the quarters ended June 30, 2023 and July 1, 2022, respectively, and totaling 69,716 and 79,949 for the six months ended June 30, 2023 and July 1, 2022, 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 stock and were excluded from the dilution calculation as the effect would have been anti-dilutive.

Note H — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:

March 31, December 31,

June 30, December 31,

(Thousands) 2023 2022

3 unchanged sentences

Inventories, net $ 455,343 $ 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

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 $ 321.3 million and $ 373.1 million as of June 30, 2023 and December 31, 2022, respectively.

Note I — 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 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.

As of June 30, 2023, the Company has received approximately $ 37.0 million in prepayments under the terms of this amended agreement, of which $ 15.1 million was received during the first six months of 2023.

As of June 30, 2023 and December 31, 2022, $ 91.4 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.

As of June 30, 2023 $ 6.7 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.

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the second quarter and first six months ended June 30, 2023 and July 1, 2022, 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 columns include the domestic retiree medical and life insurance plan.

The Other Benefits column includes 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,

Second Quarter Ended Second Quarter Ended

June 30, July 1, June 30, July 1,

(Thousands) 2023 2022 2023 2022

Components of net periodic benefit (income) cost

Components of net periodic benefit (credit) cost

Service cost $ 211 $ 292 $ 13 $ 20

1 unchanged sentence

Expected return on plan assets ( 2,422 ) ( 2,378 ) — —

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

Amortization of prior service (benefit) cost ( 21 ) ( 18 ) ( 139 ) ( 374 )

Amortization of net loss (gain) ( 75 ) 420 ( 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.

Net periodic benefit (credit) cost $ ( 337 ) $ ( 471 ) $ ( 153 ) $ ( 383 )

Pension Benefits Other Benefits

Six Months Ended Six Months Ended

June 30, July 1, June 30, July 1,

(Thousands) 2023 2022 2023 2022

Components of net periodic benefit (credit) cost

Service cost $ 433 $ 610 $ 25 $ 42

Interest cost 3,943 2,436 136 78

Expected return on plan assets ( 4,861 ) ( 4,778 ) — —

Amortization of prior service (benefit) cost ( 44 ) ( 38 ) ( 278 ) ( 748 )

Amortization of net loss (gain) ( 156 ) 850 ( 190 ) ( 136 )

Net periodic benefit (credit) cost $ ( 685 ) $ ( 920 ) $ ( 307 ) $ ( 764 )

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

Note K — Accumulated Other Comprehensive Income (Loss)

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

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 Total Pension and Post-Employment Benefits Foreign Currency Translation Total

Balance at March 31, 2023

$ 1,165 $ 4,141 $ ( 570 ) $ 4,736 $ ( 40,295 ) $ ( 6,067 ) $ ( 41,626 )

Other comprehensive income (loss) before reclassifications 163 4,830 79 5,072 — ( 743 ) 4,329

Amounts reclassified from accumulated other comprehensive income (loss) — ( 1,028 ) 85 ( 943 ) ( 207 ) — ( 1,150 )

Net current period other comprehensive (loss) income before tax 163 3,802 164 4,129 ( 207 ) ( 743 ) 3,179

Deferred taxes 38 874 37 949 47 — 996

Net current period other comprehensive (loss) income after tax 125 2,928 127 3,180 ( 254 ) ( 743 ) 2,183

Balance at June 30, 2023

$ 1,290 $ 7,069 $ ( 443 ) $ 7,916 $ ( 40,549 ) $ ( 6,810 ) $ ( 39,443 )

Balance at April 1, 2022

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

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

Amounts reclassified from accumulated other comprehensive income (loss) ( 110 ) 238 ( 8 ) 120 ( 10 ) — 110

Net current period other comprehensive (loss) income before tax 1,007 994 459 2,460 ( 10 ) ( 6,343 ) ( 3,893 )

Deferred taxes 232 229 105 566 ( 26 ) — 540

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

Balance at July 1, 2022

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 96 3,127 ( 396 ) 2,827 — 1,946 4,773

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Net current period other comprehensive (loss) income after tax 47 1,014 ( 220 ) 841 ( 321 ) 1,946 2,466

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

Balance at June 30, 2023

$ 1,290 $ 7,069 $ ( 443 ) $ 7,916 $ ( 40,549 ) $ ( 6,810 ) $ ( 39,443 )

Balance at December 31, 2021

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

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

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

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).

Balance at July 1, 2022

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

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

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

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.

Refer to Note N 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.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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.

Note L — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 2.8 million and $ 5.2 million in the second quarter and first six months of 2023, respectively, compared to $ 2.0 million and $ 3.8 million, respectively, in the same periods of 2022.

The Company granted 47,084 stock appreciation rights (SARs) to certain employees during the first six months of 2023.

The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the six months ended June 30, 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 47,759 stock-settled RSUs to certain employees during the first quarter of 2023.

The Company granted 53,906 stock-settled restricted stock units (RSUs) to certain employees during the first six months 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.

The weighted-average fair value per share was $ 112.61 for stock-settled RSUs granted to employees during the six months ended June 30, 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 Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first six months 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

At June 30, 2023, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $ 20.7 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note M — 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 March 31, 2023 and December 31, 2022:

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022:

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

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

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

The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of June 30, 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.

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

Note M — Derivative Instruments and Hedging Activity

Note N — 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.

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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.

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 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.

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 P.

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

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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.

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 precious metal consignors that charge the Company consignment fees based upon the value of the metal as it fluctuates while on consignment.

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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.

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

These purchases are 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

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.

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.

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

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and the balance sheet classification as of March 31, 2023 and December 31, 2022:

March 31, 2023

December 31, 2022

June 30, 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 $ 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.

Other-net included $ 0.2 million and $ 0.4 million of foreign currency losses in the second quarter and first six months of 2023, respectively, compared to less than $ 0.1 million of foreign currency losses and $ 0.7 million of foreign currency gains in the second quarter and first six months of 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

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 June 30, 2023 and December 31, 2022:

June 30, 2023

(Thousands) Notional

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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

We expect to reclassify $ 4.1 million of net gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions.

At June 30, 2023, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years .

Refer to Note K for further details related to OCI.

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

Second Quarter Ended

(Thousands) June 30, 2023 July 1, 2022

Hedging relationship Line item

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Total $ ( 943 ) $ 120

Note N — Contingencies

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Six Months Ended

(Thousands) June 30, 2023 July 1, 2022

Hedging relationship Line item

Foreign currency forward contracts Net sales $ ( 35 ) $ ( 130 )

Precious metal swaps Cost of sales 110 99

Interest rate swap Interest expense - net ( 1,810 ) 353

Total $ ( 1,735 ) $ 322

Note O — 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.

One beryllium case was outstanding as of June 30, 2023;

however, the Company has entered into a confidential settlement agreement with plaintiffs, pursuant to which all remaining claims in the case are to be dismissed with prejudice, subject to court approval.

The resolution of this matter will not 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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 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.

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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.

The court preliminarily approved the settlement on March 30, 2023 and a final approval hearing was held on July 6, 2023.

There were no objections to the settlement and the court entered an order approving the final settlement on July 7, 2023.

The final settlement amount approximated the amount previously reserved for related to this matter.

Environmental Proceedings.

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

The undiscounted reserve balance was $ 4.4 million and $ 4.5 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.

The undiscounted reserve balance was $ 4.4 million and $ 4.5 million at June 30, 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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note P — Debt

(Thousands) June 30, 2023 December 31, 2022

Borrowings under Credit Agreement $ 159,750 $ 143,250

Borrowings under the Term Loan Facility 277,500 285,000

Overdraft Sweep Facility 495 —

Foreign debt 5,774 7,541

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Long-term debt $ 412,733 $ 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.

As of June 30, 2023 and December 31, 2022, the Company had $ 159.8 million outstanding at an average interest rate of 6.71 % 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 June 30, 2023 was $ 168.9 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.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

In connection with the revolving credit facility, the administrative agent provides the Company with an overdraft sweep facility that the Company uses on a daily basis for short-term cash needs.

As of June 30, 2023, the overdraft sweep facility had a balance of $ 0.5 million.

The amended and restated credit agreement governing the revolving credit facility and the term loan 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 June 30, 2023.

The balance outstanding on the term loan facility as of June 30, 2023 and December 31, 2022 wa s $ 277.5 million and $ 285.0 million, respectively.

At June 30, 2023 and December 31, 2022, there was $ 46.3 million and $ 46.5 million, respectively, outstanding against the letters of credit sub-facility.

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

What changed 10-Q

Item 1. Financial Statements