MATERION Corp 10-Q

Item 1. Financial Statements Materion Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Third Quarter Ended Nine Months Ended (Thousands, except per share amounts) September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 Net sales $ 403,067 $ 428,191 $ 1,244,144 $ 1,322,531 Cost of sales 314,131 345,448 974,817 1,077,070 Gross margin 88,936 82,743 269,327 245,461 Selling, general, and administrative expense 38,806 38,958 118,053 122,666 Research and development expense 6,322 7,430 21,098 22,096 Restructuring expense (income) 1,077 484 3,194 1,560 Other—net 6,211 6,774 18,178 18,575 Operating profit 36,520 29,097 108,804 80,564 Other non-operating (income)—net ( 685 ) ( 1,175 ) ( 2,141 ) ( 3,512 ) Interest expense—net 7,678 5,888 22,820 14,325 Income before income taxes 29,527 24,384 88,125 69,751 Income tax expense 2,963 4,432 11,891 12,525 Net income $ 26,564 $ 19,952 $ 76,234 $ 57,226 Basic earnings per share: Net income per share of common stock $ 1.29 $ 0.97 $ 3.70 $ 2.79 Diluted earnings per share: Net income per share of common stock $ 1.27 $ 0.96 $ 3.65 $ 2.76 Weighted-average number of shares of common stock outstanding: Basic 20,640 20,526 20,611 20,502 Diluted 20,905 20,780 20,891 20,756 See notes to these consolidated financial statements. 2 Materion Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited) Third Quarter Ended Nine Months Ended September 29, September 30, September 29, September 30, (Thousands) 2023 2022 2023 2022 Net income $ 26,564 $ 19,952 $ 76,234 $ 57,226 Other comprehensive income (loss): Foreign currency translation adjustment ( 3,259 ) ( 6,094 ) ( 1,313 ) ( 14,484 ) Derivative and hedging activity, net of tax 2,019 4,125 2,860 8,289 Pension and post-employment benefit adjustment, net of tax ( 145 ) 8 ( 466 ) ( 216 ) Other comprehensive loss ( 1,385 ) ( 1,961 ) 1,081 ( 6,411 ) Comprehensive income $ 25,179 $ 17,991 $ 77,315 $ 50,815 See notes to these consolidated financial statements. 3 Materion Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) September 29, December 31, (Thousands) 2023 2022 Assets Current assets Cash and cash equivalents $ 16,401 $ 13,101 Accounts receivable, net 186,177 215,211 Inventories, net 452,042 423,080 Prepaid and other current assets 54,972 39,056 Total current assets 709,592 690,448 Deferred income taxes 3,214 3,265 Property, plant, and equipment 1,252,455 1,209,205 Less allowances for depreciation, depletion, and amortization ( 755,626 ) ( 760,440 ) Property, plant, and equipment, net 496,829 448,765 Operating lease, right-of-use assets 57,747 64,249 Intangible assets, net 134,594 143,219 Other assets 27,186 22,535 Goodwill 319,435 319,498 Total Assets $ 1,748,597 $ 1,691,979 Liabilities and Shareholders’ Equity Current liabilities Short-term debt $ 38,634 $ 21,105 Accounts payable 93,096 107,899 Salaries and wages 27,971 35,543 Other liabilities and accrued items 40,425 54,993 Income taxes 2,001 3,928 Unearned revenue 15,078 15,496 Total current liabilities 217,205 238,964 Other long-term liabilities 11,558 12,181 Operating lease liabilities 54,111 59,055 Finance lease liabilities 13,279 13,876 Retirement and post-employment benefits 20,089 20,422 Unearned income 109,076 107,736 Long-term income taxes 1,155 665 Deferred income taxes 27,795 28,214 Long-term debt 422,361 410,876 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 both September 29 th and December 31 st ) 306,593 288,100 Retained earnings 837,598 769,418 Common stock in treasury ( 237,259 ) ( 220,864 ) Accumulated other comprehensive loss ( 40,828 ) ( 41,909 ) Other equity 5,864 5,245 Total shareholders' equity 871,968 799,990 Total Liabilities and Shareholders’ Equity $ 1,748,597 $ 1,691,979 See the notes to these consolidated financial statements. 4 Materion Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 29, September 30, (Thousands) 2023 2022 Cash flows from operating activities: Net income $ 76,234 $ 57,226 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 46,524 39,223 Amortization of deferred financing costs in interest expense 1,284 1,310 Stock-based compensation expense (non-cash) 7,578 5,997 Deferred income tax expense (benefit) ( 149 ) 1,825 Changes in assets and liabilities: Accounts receivable 27,832 ( 20,964 ) Inventory ( 30,868 ) ( 64,832 ) Prepaid and other current assets ( 16,175 ) ( 3,019 ) Accounts payable and accrued expenses ( 25,533 ) ( 1,785 ) Unearned revenue ( 12,398 ) ( 2,191 ) Interest and taxes payable ( 1,730 ) ( 1,741 ) Unearned income due to customer prepayments 16,676 17,501 Other-net ( 4,770 ) 5,654 Net cash provided by operating activities 84,505 34,204 Cash flows from investing activities: Payments for purchase of property, plant, and equipment ( 85,251 ) ( 54,236 ) Payments for mine development ( 9,326 ) — Proceeds from sale of property, plant, and equipment 417 827 Payments for acquisition, net of cash acquired — ( 2,971 ) Net cash used in investing activities ( 94,160 ) ( 56,380 ) Cash flows from financing activities: Proceeds from borrowings under credit facilities, net 39,649 55,735 Repayment of long-term debt ( 11,579 ) ( 11,761 ) Principal payments under finance lease obligations ( 1,297 ) ( 1,985 ) Cash dividends paid ( 7,937 ) ( 7,584 ) Payments of withholding taxes for stock-based compensation awards ( 5,101 ) ( 3,056 ) Net cash provided by financing activities 13,735 31,349 Effects of exchange rate changes ( 780 ) ( 2,953 ) Net change in cash and cash equivalents 3,300 6,220 Cash and cash equivalents at beginning of period 13,101 14,462 Cash and cash equivalents at end of period $ 16,401 $ 20,682 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 June 30, 2023 20,637 ( 6,511 ) $ 303,390 $ 813,793 $ ( 236,423 ) $ ( 39,443 ) $ 5,806 $ 847,123 Net income — — — $ 26,564 — — — 26,564 Other comprehensive income — — — — — ( 1,385 ) — ( 1,385 ) Cash dividends declared ($ 0.130 per share) — — — ( 2,683 ) — — — ( 2,683 ) Stock-based compensation activity 8 8 3,174 ( 76 ) ( 562 ) — — 2,536 Payments of withholding taxes for stock-based compensation awards ( 3 ) ( 3 ) — — ( 229 ) — — ( 229 ) Directors’ deferred compensation — — 29 — ( 45 ) — 58 42 Balance at September 29, 2023 20,642 ( 6,506 ) $ 306,593 $ 837,598 $ ( 237,259 ) $ ( 40,828 ) $ 5,864 $ 871,968 Balance at July 1, 2022 20,523 ( 6,625 ) $ 281,296 $ 725,918 $ ( 218,356 ) $ ( 44,619 ) $ 4,915 $ 749,154 Net income — — — 19,952 — — — 19,952 Other comprehensive income — — — — — ( 1,961 ) — ( 1,961 ) Cash dividends declared ($ 0.125 per share) — — — ( 2,557 ) — — — ( 2,557 ) Stock-based compensation activity 6 6 2,695 ( 30 ) ( 392 ) — — 2,273 Payments of withholding taxes for stock-based compensation awards ( 2 ) ( 2 ) — — ( 244 ) — — ( 244 ) Directors’ deferred compensation 1 1 33 — ( 227 ) — 254 60 Balance at September 30, 2022 20,528 ( 6,620 ) $ 284,024 $ 743,283 $ ( 219,219 ) $ ( 46,580 ) $ 5,169 $ 766,677 6 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 — — — 76,234 — — — 76,234 Other comprehensive loss — — — — — 1,081 — 1,081 Cash dividends declared ($ 0.385 per share) — — — ( 7,937 ) — — — ( 7,937 ) Stock-based compensation activity 146 146 18,416 ( 117 ) ( 10,721 ) — — 7,578 Payments of withholding taxes for stock-based compensation awards ( 48 ) ( 48 ) — — ( 5,101 ) — — ( 5,101 ) Directors’ deferred compensation 1 1 77 — ( 573 ) — 619 123 Balance at September 29, 2023 20,642 ( 6,506 ) $ 306,593 $ 837,598 $ ( 237,259 ) $ ( 40,828 ) $ 5,864 $ 871,968 Balance at December 31, 2021 20,448 ( 6,700 ) $ 271,978 $ 693,756 $ ( 209,920 ) $ ( 40,169 ) $ 4,795 $ 720,440 Net income — — — 57,226 — — — 57,226 Other comprehensive loss — — — — — ( 6,411 ) — ( 6,411 ) Cash dividends declared ($ 0.370 per share) — — — ( 7,584 ) — — — ( 7,584 ) Stock-based compensation activity 115 115 11,938 ( 115 ) ( 5,941 ) — — 5,882 Payments of withholding taxes for stock-based compensation awards ( 37 ) ( 37 ) — — ( 3,056 ) — — ( 3,056 ) Directors’ deferred compensation 2 2 108 — ( 302 ) — 374 $ 180 Balance at September 30, 2022 20,528 ( 6,620 ) $ 284,024 $ 743,283 $ ( 219,219 ) $ ( 46,580 ) $ 5,169 $ 766,677 See notes to these consolidated financial statements. 7 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 N. 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 third quarter and first nine months of 2023 and 2022: 8 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Thousands) Third Quarter 2023 Third Quarter 2022 First Nine Months 2023 First Nine Months 2022 Net sales: Performance Materials (1) $ 184,642 $ 169,357 $ 554,427 $ 473,876 Electronic Materials (1) 192,305 230,841 611,855 762,649 Precision Optics 26,120 27,993 77,862 86,006 Other — — — — Net sales 403,067 428,191 1,244,144 1,322,531 Segment EBITDA: Performance Materials $ 46,366 $ 28,866 $ 134,061 $ 80,886 Electronic Materials 10,155 16,853 37,504 51,338 Precision Optics 3,261 3,546 7,654 9,281 Other ( 7,497 ) ( 5,839 ) ( 21,750 ) ( 18,206 ) Total Segment EBITDA 52,285 43,426 157,469 123,299 Income tax expense 2,963 4,432 11,891 12,525 Interest expense - net 7,678 5,888 22,820 14,325 Depreciation, depletion and amortization 15,080 13,154 46,524 39,223 Net income $ 26,564 $ 19,952 $ 76,234 $ 57,226 (1) Excludes inter-segment sales of $ 3.2 million for the third quarter of 2023 and $ 7.3 million for the first nine months of 2023 for Electronic Materials. There were no material inter-segment sales for Performance Materials in 2023. Excludes inter-segment sales of $ 0.2 million for the third quarter of 2022 and $ 0.6 million for the first nine months of 2022 for Performance Materials and $ 3.8 million for the third quarter of 2022 and $ 12.1 million for the first nine months of 2022 for Electronic Materials. Inter-segment sales are eliminated in consolidation. The following table disaggregates revenue for each segment by end market for the third quarter and first nine months of 2023 and 2022: 9 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Thousands) Performance Materials Electronic Materials Precision Optics Other Total Third Quarter 2023 End Market Semiconductor $ 2,712 $ 151,388 $ 624 $ — $ 154,724 Industrial 32,046 7,958 6,954 — 46,958 Aerospace and defense 30,938 1,102 7,124 — 39,164 Consumer electronics 10,827 144 4,254 — 15,225 Automotive 19,447 1,747 2,606 — 23,800 Energy 13,013 25,179 — — 38,192 Telecom and data center 15,685 10 — — 15,695 Other 59,974 4,777 4,558 — 69,309 Total $ 184,642 $ 192,305 $ 26,120 $ — $ 403,067 Third Quarter 2022 End Market Semiconductor $ 2,410 $ 185,223 $ 1,151 $ — $ 188,784 Industrial 44,550 9,383 7,564 — 61,497 Aerospace and defense 28,262 1,243 3,532 — 33,037 Consumer electronics 9,607 364 6,799 — 16,770 Automotive 24,802 1,863 2,268 — 28,933 Energy 15,971 25,220 — — 41,191 Telecom and data center 15,412 42 — — 15,454 Other 28,343 7,503 6,679 — 42,525 Total $ 169,357 $ 230,841 $ 27,993 $ — $ 428,191 10 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) (Thousands) Performance Materials Electronic Materials Precision Optics Other Total First Nine Months 2023 End Market Semiconductor $ 9,713 $ 487,361 $ 2,279 $ — $ 499,353 Industrial 111,436 25,102 22,400 — 158,938 Aerospace and defense 92,734 4,670 17,771 — 115,175 Consumer electronics 30,473 526 11,075 — 42,074 Automotive 66,753 4,966 7,090 — 78,809 Energy 38,597 71,940 — — 110,537 Telecom and data center 49,223 68 — — 49,291 Other 155,498 17,222 17,247 — 189,967 Total $ 554,427 $ 611,855 $ 77,862 $ — $ 1,244,144 First Nine Months 2022 End Market Semiconductor $ 6,657 $ 613,887 $ 4,007 $ — $ 624,551 Industrial 125,588 37,206 23,605 — 186,399 Aerospace and defense 79,561 5,141 12,344 — 97,046 Consumer electronics 38,822 969 17,925 — 57,716 Automotive 71,893 4,985 7,294 — 84,172 Energy 38,231 79,701 — — 117,932 Telecom and data center 47,716 107 — — 47,823 Other 65,408 20,653 20,831 — 106,892 Total $ 473,876 $ 762,649 $ 86,006 $ — $ 1,322,531 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 September 29, 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 September 29, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $ 55.9 million. 11 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) September 29, 2023 December 31, 2022 $ change % change Accounts receivable, trade $ 186,937 $ 215,726 $ ( 28,789 ) ( 13 ) % Unbilled receivables 16,910 10,765 6,145 57 % Unearned revenue 15,078 15,496 ( 418 ) ( 3 ) % 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 third quarter 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 $ 11.6 million of the December 31, 2022 unearned amounts as revenue during the first nine 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 — Restructuring Over the first nine months of 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 $ 1.1 million and $ 3.2 million during the three months and nine months ended September 29, 2023, respectively. Approximately $ 1.9 million of those severance costs were paid as of September 29, 2023. In the first nine months of 2022, the Company recorded a combined total of $ 1.6 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 E — Other-net Other-net for the third quarter and first nine months of 2023 and 2022 is summarized as follows: Third Quarter Ended Nine Months Ended September 29, September 30, September 29, September 30, (Thousands) 2023 2022 2023 2022 Amortization of intangible assets $ 3,153 $ 3,088 $ 9,403 $ 9,318 Metal consignment fees 2,580 3,111 8,307 8,993 Foreign currency (gain) loss 609 235 571 ( 70 ) Other items ( 131 ) 340 ( 103 ) 334 Total $ 6,211 $ 6,774 $ 18,178 $ 18,575 12 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note F — Income Taxes The Company's effective tax rate for the third quarter of 2023 and 2022 was 10.0 % and 18.2 %, respectively, and 13.5 % and 18.0 % in the first nine months of 2023 and 2022, respectively. The effective tax rate for 2023 was lower than the statutory tax rate primarily due to the impact of the foreign derived intangible income deduction, percentage depletion, research and development and production credits. 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 nine months of 2023 included a net discrete income tax benefit of $ 3.4 million, primarily related to an optimization of our foreign-derived intangible income deduction benefit, excess tax benefits from stock-based compensation awards and return to provision adjustments . The effective tax rate for the first nine months of 2022 included a net discrete income tax benefit of $ 0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments. Government Tax Credits 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 $ 10 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 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. 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. 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. 13 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note G — Earnings Per Share (EPS) The following table sets forth the computation of basic and diluted EPS: Third Quarter Ended Nine Months Ended September 29, September 30, September 29, September 30, (Thousands, except per share amounts) 2023 2022 2023 2022 Numerator for basic and diluted EPS: Net income $ 26,564 $ 19,952 $ 76,234 $ 57,226 Denominator: Denominator for basic EPS: Weighted-average shares outstanding 20,640 20,526 20,611 20,502 Effect of dilutive securities: Stock appreciation rights 79 85 87 85 Restricted stock units 84 98 89 113 Performance-based restricted stock units 102 71 104 55 Diluted potential common shares 265 254 280 254 Denominator for diluted EPS: Adjusted weighted-average shares outstanding 20,905 20,780 20,891 20,756 Basic EPS $ 1.29 $ 0.97 $ 3.70 $ 2.79 Diluted EPS $ 1.27 $ 0.96 $ 3.65 $ 2.76 Adjusted weighted-average shares outstanding - diluted exclude securities totaling 47,250 and 45,016 for the quarters ended September 29, 2023 and September 30, 2022, respectively, and 36,927 and 54,680 for the nine months ended September 29, 2023 and September 30, 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 shares 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: September 29, December 31, (Thousands) 2023 2022 Raw materials and supplies $ 109,731 $ 113,694 Work in process 269,508 249,105 Finished goods 72,803 60,281 Inventories, net $ 452,042 $ 423,080 The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce its exposure to metal market price movements and to reduce its working capital investment. The notional value of off-balance sheet precious metals and copper was $ 344.8 million and $ 373.1 million as of September 29, 2023 and December 31, 2022, respectively. 14 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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. 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. During 2023, the Company has received approximately $ 16.7 million in prepayments under the terms of this amended agreement. As of September 29, 2023 and December 31, 2022, $ 90.0 million and $ 85.9 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets. The prepayments will remain in Unearned income until commercial purchase orders are received for product serviced out of the equipment, at which time a portion of the purchase order value related to prepayments will be reclassified to Unearned revenue. As of September 29, 2023 $ 5.8 million of the prepayments are classified as Unearned revenue. Note J — Pensions and Other Post-employment Benefits The following is a summary of the net periodic benefit cost for the third quarter and first nine months ended September 29, 2023 and September 30, 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 column includes the domestic retiree medical and life insurance plan. Pension Benefits Other Benefits Third Quarter Ended Third Quarter Ended September 29, September 30, September 29, September 30, (Thousands) 2023 2022 2023 2022 Components of net periodic benefit (credit) cost Service cost $ 209 $ 281 $ 13 $ 21 Interest cost 1,966 1,203 68 39 Expected return on plan assets ( 2,421 ) ( 2,380 ) — — Amortization of prior service (benefit) cost ( 21 ) ( 19 ) ( 139 ) ( 374 ) Amortization of net loss (gain) ( 75 ) 410 ( 95 ) ( 68 ) Net periodic benefit (credit) cost $ ( 342 ) $ ( 505 ) $ ( 153 ) $ ( 382 ) Pension Benefits Other Benefits Nine Months Ended Nine Months Ended September 29, September 30, September 29, September 30, (Thousands) 2023 2022 2023 2022 Components of net periodic benefit (credit) cost Service cost $ 642 $ 891 $ 38 $ 63 Interest cost 5,909 3,639 205 117 Expected return on plan assets ( 7,282 ) ( 7,158 ) — — Amortization of prior service (benefit) cost ( 65 ) ( 57 ) ( 417 ) ( 1,122 ) Amortization of net loss (gain) ( 231 ) 1,260 ( 285 ) ( 204 ) Net periodic benefit (credit) cost $ ( 1,027 ) $ ( 1,425 ) $ ( 459 ) $ ( 1,146 ) 15 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) The Company did no t make any contributions to its domestic defined benefit plan in the third quarter or first nine 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 third quarter and first nine months 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 June 30, 2023 $ 1,290 $ 7,069 $ ( 443 ) $ 7,916 $ ( 40,549 ) $ ( 6,810 ) $ ( 39,443 ) Other comprehensive income (loss) before reclassifications 766 2,398 515 3,679 — ( 3,259 ) 420 Amounts reclassified from accumulated other comprehensive income (loss) — ( 1,140 ) 83 ( 1,057 ) ( 299 ) — ( 1,356 ) Net current period other comprehensive (loss) income before tax 766 1,258 598 2,622 ( 299 ) ( 3,259 ) ( 936 ) Deferred taxes 176 289 138 603 ( 154 ) — 449 Net current period other comprehensive (loss) income after tax 590 969 460 2,019 ( 145 ) ( 3,259 ) ( 1,385 ) Balance at September 29, 2023 $ 1,880 $ 8,038 $ 17 $ 9,935 $ ( 40,694 ) $ ( 10,069 ) $ ( 40,828 ) Balance at July 1, 2022 $ 3,226 $ 3,250 $ 108 $ 6,584 $ ( 39,926 ) $ ( 11,277 ) $ ( 44,619 ) Other comprehensive (loss) income before reclassifications 837 4,360 441 $ 5,638 — ( 6,094 ) ( 456 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 41 ) ( 115 ) ( 126 ) $ ( 282 ) ( 18 ) — ( 300 ) Net current period other comprehensive (loss) income before tax 796 4,245 315 5,356 ( 18 ) ( 6,094 ) ( 756 ) Deferred taxes 183 976 72 1,231 ( 26 ) — 1,205 Net current period other comprehensive (loss) income after tax 613 3,269 243 4,125 8 ( 6,094 ) ( 1,961 ) Balance at September 30, 2022 $ 3,839 $ 6,519 $ 351 $ 10,709 $ ( 39,918 ) $ ( 17,371 ) $ ( 46,580 ) 16 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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 862 5,525 119 6,506 — ( 1,313 ) 5,193 Amounts reclassified from accumulated other comprehensive income (loss) ( 35 ) ( 2,950 ) 193 ( 2,792 ) ( 844 ) — ( 3,636 ) Net current period other comprehensive (loss) income before tax 827 2,575 312 3,714 ( 844 ) ( 1,313 ) 1,557 Deferred taxes 190 592 72 854 ( 378 ) — 476 Net current period other comprehensive (loss) income after tax 637 1,983 240 2,860 ( 466 ) ( 1,313 ) 1,081 Balance at September 29, 2023 $ 1,880 $ 8,038 $ 17 $ 9,935 $ ( 40,694 ) $ ( 10,069 ) $ ( 40,828 ) Balance at December 31, 2021 $ 2,348 $ — $ 72 $ 2,420 $ ( 39,702 ) $ ( 2,887 ) $ ( 40,169 ) Other comprehensive (loss) income before reclassifications 2,107 8,228 388 10,723 — ( 14,484 ) ( 3,761 ) Amounts reclassified from accumulated other comprehensive income (loss) ( 170 ) 238 ( 27 ) 41 ( 1,028 ) — ( 987 ) Net current period other comprehensive (loss) income before tax 1,937 8,466 361 10,764 ( 1,028 ) ( 14,484 ) ( 4,748 ) Deferred taxes 446 1,947 82 2,475 ( 812 ) — 1,663 Net current period other comprehensive (loss) income after tax 1,491 6,519 279 8,289 ( 216 ) ( 14,484 ) ( 6,411 ) Balance at September 30, 2022 $ 3,839 $ 6,519 $ 351 $ 10,709 $ ( 39,918 ) $ ( 17,371 ) $ ( 46,580 ) 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 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 J for additional details on pension and post-employment expenses. 17 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note L — Stock-based Compensation Expense Stock-based compensation expense, which includes awards settled in shares and in cash, was $ 2.6 million and $ 7.8 million in the third quarter and first nine months of 2023, respectively, compared to $ 2.2 million and $ 6.0 million, respectively, in the same periods of 2022. The Company granted 47,084 stock appreciation rights (SARs) to certain employees during the first nine months of 2023. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the nine months ended September 29, 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 54,788 stock-settled restricted stock units (RSUs) to certain employees during the first nine 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 $ 112.53 for stock-settled RSUs granted to employees during the nine months ended September 29, 2023. RSUs are generally expensed over the vesting period of three years for employees. The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first nine months of 2023. The weighted-average fair value of the stock-settled PRSUs was $ 154.97 per share and will be expensed over the vesting period of three years . The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and its total return to shareholders over the vesting period relative to a peer group’s performance over the same period. At September 29, 2023, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately $ 17.0 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. 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. 18 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 September 29, 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 $ 4,521 $ 3,001 $ 4,521 $ 3,001 $ — $ — $ — $ — Foreign currency forward contracts 1,643 1,291 — — 1,643 1,291 — — Interest rate swap 10,438 7,863 — — 10,438 7,863 — — Precious metal swaps 94 118 — — 94 118 — — Total $ 16,696 $ 12,273 $ 4,521 $ 3,001 $ 12,175 $ 9,272 $ — $ — Financial Liabilities Deferred compensation liability $ 4,521 $ 3,001 $ 4,521 $ 3,001 $ — $ — $ — $ — Foreign currency forward contracts 776 1,757 — — 776 1,757 — — Interest Rate Swap — — — — — — Precious metal swaps 75 411 — — 75 411 — — Total $ 5,372 $ 5,169 $ 4,521 $ 3,001 $ 851 $ 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 September 29, 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 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. The objectives and strategies for using derivatives in these areas are as follows: Interest Rate. On March 4, 2022, the Company entered into a $ 100.0 million interest rate swap to hedge the interest rate risk on the Credit Agreement described in Note P. The swap hedges the change in 1-month LIBOR from March 4, 2022 to November 2, 2026. 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. The purpose of this hedge is to manage the risk of changes in the monthly interest payments attributable to changes in the benchmark interest rate. Foreign Currency. 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 19 Materion Corporation and Subsidiaries 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 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 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 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. 20 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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 September 29, 2023 and December 31, 2022: September 29, 2023 December 31, 2022 (Thousands) Notional Amount Fair Value Notional Amount Fair Value Foreign currency forward contracts Prepaid and other current assets $ 25,255 $ 924 $ 12,242 $ 791 Other liabilities and accrued items 16,142 675 17,061 1,048 These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included less than $ 0.1 million of foreign currency losses in the third quarter and $ 0.4 million of foreign currency losses related to derivatives in the first nine months of 2023, compared to less than $ 0.1 million of foreign currency losses and $ 0.7 million of foreign currency gains in the third quarter and first nine months of 2022, respectively. 21 Materion Corporation and Subsidiaries 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 balance sheet classification as of September 29, 2023 and December 31, 2022: September 29, 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 $ 1,873 $ 156 $ 6 $ — $ — Foreign currency forward contracts - euro 19,366 516 41 101 — Precious metal swaps 4,049 84 10 75 — Interest rate swap 200,000 5,047 5,391 — — Total $ 225,288 $ 5,803 $ 5,448 $ 176 $ — 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 $ 5.6 million of net gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. At September 29, 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 third quarter and first nine months of 2023 and 2022: Third Quarter Ended (Thousands) September 29, 2023 September 30, 2022 Hedging relationship Line item Foreign currency forward contracts Net sales $ — $ ( 41 ) Precious metal swaps Cost of sales 83 ( 126 ) Interest rate swap Interest expense - net ( 1,140 ) ( 115 ) Total $ ( 1,057 ) $ ( 282 ) 22 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Nine Months Ended (Thousands) September 29, 2023 September 30, 2022 Hedging relationship Line item Foreign currency forward contracts Net sales $ ( 35 ) $ ( 171 ) Precious metal swaps Cost of sales 193 ( 27 ) Interest rate swap Interest expense - net ( 2,950 ) 238 Total $ ( 2,792 ) $ 40 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. There were no pending beryllium cases as of September 29, 2023. One beryllium case that was settled in the second quarter of 2023 was dismissed with prejudice during the third quarter of 2023 after receiving court approval. Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. 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 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, and the settlement amount was subsequently paid out prior to the end of the third quarter. 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 September 29, 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. 23 Materion Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note P — Debt (Thousands) September 29, 2023 December 31, 2022 Borrowings under Credit Agreement $ 176,750 $ 143,250 Borrowings under the Term Loan Facility 273,750 285,000 Overdraft Sweep Facility 6,848 — Foreign debt 6,714 7,541 Total debt outstanding 464,062 435,791 Current portion of long-term debt ( 38,634 ) ( 21,105 ) Gross long-term debt 425,428 414,686 Unamortized deferred financing fees ( 3,067 ) ( 3,810 ) Long-term debt $ 422,361 $ 410,876 As of September 29, 2023 and December 31, 2022, the Company had $ 176.8 million outstanding at an average interest rate of 6.92 % 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 September 29, 2023 was $ 151.0 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2026. The amended and restated credit agreement governing the revolving credit facility (Credit Agreement) includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of September 29, 2023. The balance outstanding on the term loan facility as of September 29, 2023 and December 31, 2022 was $ 273.8 million and $ 285.0 million, respectively. At September 29, 2023 and December 31, 2022, there was $ 47.3 million and $ 46.5 million, respectively, outstanding against the letters of credit sub-facility.