UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

(Mark One)

☒


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 26,~~September 25, 2020

☐


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-15885

MATERION CORPORATION

(Exact name of Registrant as specified in charter)


Ohio						34-1919973
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

6070 Parkland Blvd., Mayfield Heights, Ohio 44124

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

(216)-486-4200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	MTRN	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

Number of Shares of Common Stock, without par value, outstanding at ~~June 26,~~September 25, 2020: ~~20,322,225.~~20,327,254.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


		Second Quarter Ended						Six Months Ended							Third Quarter Ended				Nine Months Ended
(Thousands, except per share amounts)	(Thousands, except per share amounts)	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019		(Thousands, except per share amounts)	September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019
Net sales	Net sales	$	271,468	$	297,843	$	549,414	$	599,284	Net sales	$	287,171	$	305,979	$	836,585	$	905,263
Cost of sales	Cost of sales	223,378		228,249		455,749		460,378		Cost of sales	240,531		240,748		696,280		701,126
Gross margin	Gross margin	48,090		69,594		93,665		138,906		Gross margin	46,640		65,231		140,305		204,137
Selling, general, and administrative expense	Selling, general, and administrative expense	32,852		39,891		63,596		79,955		Selling, general, and administrative expense	35,696		35,812		99,292		115,767
Research and development expense	Research and development expense	4,502		4,062		8,687		7,802		Research and development expense	5,417		5,262		14,104		13,064
Goodwill impairment charges	Goodwill impairment charges	—		—		9,053		—		Goodwill impairment charges	0		11,560		9,053		11,560
Held for sale impairment charges		—		—		1,713		—
Asset impairment charges										Asset impairment charges	0		2,581		1,713		2,581
Restructuring expense	Restructuring expense	2,387		—		4,551		—		Restructuring expense	2,593		785		7,144		785
Other—net	Other—net	(357)		2,891		1,922		7,012		Other—net	2,221		2,942		4,143		9,954
Operating profit	Operating profit	8,706		22,750		4,143		44,137		Operating profit	713		6,289		4,856		50,426
Other non-operating (income) expense—net	Other non-operating (income) expense—net	(851)		3,112		(1,795)		3,357		Other non-operating (income) expense—net	(1,076)		127		(2,871)		3,484
Interest expense—net	Interest expense—net	1,259		500		1,505		966		Interest expense—net	1,334		436		2,839		1,402
Income before income taxes	Income before income taxes	8,298		19,138		4,433		39,814		Income before income taxes	455		5,726		4,888		45,540
Income tax expense		1,620		3,598		858		7,368
Income tax (benefit) expense										Income tax (benefit) expense	(6,041)		2,263		(5,183)		9,631
Net income	Net income	$	6,678	$	15,540	$	3,575	$	32,446	Net income	$	6,496	$	3,463	$	10,071	$	35,909
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income per share of common stock	Net income per share of common stock	$	0.33	$	0.76	$	0.18	$	1.60	Net income per share of common stock	$	0.32	$	0.17	$	0.50	$	1.76
Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income per share of common stock	Net income per share of common stock	$	0.32	$	0.75	$	0.17	$	1.57	Net income per share of common stock	$	0.32	$	0.17	$	0.49	$	1.74
Weighted-average number of shares of common stock outstanding:	Weighted-average number of shares of common stock outstanding:									Weighted-average number of shares of common stock outstanding:
Basic	Basic	20,317		20,383		20,350		20,326		Basic	20,325		20,401		20,342		20,351
Diluted	Diluted	20,554		20,666		20,587		20,635		Diluted	20,592		20,677		20,595		20,645

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


		Second Quarter Ended						Six Months Ended							Third Quarter Ended				Nine Months Ended
		June 26,		June 28,		June 26,		June 28,			September 25,		September 27,		September 25,		September 27,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2020		2019		2020		2019
Net income	Net income	$	6,678	$	15,540	$	3,575	$	32,446	Net income	$	6,496	$	3,463	$	10,071	$	35,909
Other comprehensive (loss) income:
Other comprehensive income (loss):										Other comprehensive income (loss):
Foreign currency translation adjustment	Foreign currency translation adjustment	1,166		339		293		(164)		Foreign currency translation adjustment	3,076		(463)		3,369		(627)
Derivative and hedging activity, net of tax	Derivative and hedging activity, net of tax	347		(1,000)		(507)		(73)		Derivative and hedging activity, net of tax	(315)		82		(822)		9
Pension and post-employment benefit adjustment, net of tax	Pension and post-employment benefit adjustment, net of tax	89		13,953		105		14,493		Pension and post-employment benefit adjustment, net of tax	29		501		134		14,994
Other comprehensive income (loss)		1,602		13,292		(109)		14,256
Other comprehensive income										Other comprehensive income	2,790		120		2,681		14,376
Comprehensive income	Comprehensive income	$	8,280	$	28,832	$	3,466	$	46,702	Comprehensive income	$	9,286	$	3,583	$	12,752	$	50,285

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets


		(Unaudited)					(Unaudited)
		June 26,		Dec. 31,			September 25,		Dec. 31,
(Thousands)	(Thousands)	2020		2019		(Thousands)	2020		2019
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	265,068	$	125,007	Cash and cash equivalents	$	117,754	$	125,007
Accounts receivable, net	Accounts receivable, net	146,527		154,751		Accounts receivable, net	150,454		154,751
Inventories, net	Inventories, net	209,847		190,390		Inventories, net	211,700		190,390
Prepaid and other current assets	Prepaid and other current assets	29,191		21,839		Prepaid and other current assets	24,515		21,839
Assets held for sale		5,811		—
Total current assets	Total current assets	656,444		491,987		Total current assets	504,423		491,987
Deferred income taxes	Deferred income taxes	1,669		1,666		Deferred income taxes	5,156		1,666
Property, plant, and equipment	Property, plant, and equipment	924,620		916,965		Property, plant, and equipment	987,902		916,965
Less allowances for depreciation, depletion, and amortization	Less allowances for depreciation, depletion, and amortization	(685,355)		(684,689)		Less allowances for depreciation, depletion, and amortization	(693,223)		(684,689)
Property, plant, and equipment—net		239,265		232,276
Property, plant, and equipment, net						Property, plant, and equipment, net	294,679		232,276
Operating lease, right-of-use assets	Operating lease, right-of-use assets	48,942		23,413		Operating lease, right-of-use assets	62,235		23,413
Intangible assets	Intangible assets	5,732		6,380		Intangible assets	54,449		6,380
Other assets	Other assets	19,169		17,937		Other assets	20,754		17,937
Goodwill	Goodwill	70,001		79,011		Goodwill	143,118		79,011
Total Assets	Total Assets	$	1,041,222	$	852,670	Total Assets	$	1,084,814	$	852,670
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Current liabilities	Current liabilities					Current liabilities
Short-term debt	Short-term debt	$	151,731	$	868	Short-term debt	$	122,216	$	868
Accounts payable	Accounts payable	52,093		43,206		Accounts payable	56,524		43,206
Salaries and wages	Salaries and wages	24,367		41,167		Salaries and wages	24,853		41,167
Other liabilities and accrued items	Other liabilities and accrued items	33,429		32,477		Other liabilities and accrued items	42,238		32,477
Income taxes	Income taxes	1,779		1,342		Income taxes	1,435		1,342
Unearned revenue	Unearned revenue	3,003		3,380		Unearned revenue	4,360		3,380
Liabilities held for sale		2,126		—
Total current liabilities	Total current liabilities	268,528		122,440		Total current liabilities	251,626		122,440
Other long-term liabilities	Other long-term liabilities	10,117		11,560		Other long-term liabilities	10,057		11,560
Operating lease liabilities	Operating lease liabilities	44,830		18,091		Operating lease liabilities	56,891		18,091
Finance lease liabilities	Finance lease liabilities	16,939		17,424		Finance lease liabilities	20,540		17,424
Retirement and post-employment benefits	Retirement and post-employment benefits	32,389		32,466		Retirement and post-employment benefits	40,208		32,466
Unearned income	Unearned income	57,799		32,891		Unearned income	72,632		32,891
Long-term income taxes	Long-term income taxes	3,508		3,451		Long-term income taxes	3,365		3,451
Deferred income taxes	Deferred income taxes	2,172		2,410		Deferred income taxes	11,340		2,410
Long-term debt	Long-term debt	—		1,260		Long-term debt	6,374		1,260
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—		Serial preferred stock (no par value; 5,000 authorized shares, none issued)	0		0
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at June 26 and December 31)		256,756		249,674
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at September 25 and December 31)						Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at September 25 and December 31)	257,019		249,674
Retained earnings	Retained earnings	588,803		589,888		Retained earnings	592,980		589,888
Common stock in treasury	Common stock in treasury	(198,726)		(186,845)		Common stock in treasury	(199,185)		(186,845)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(45,571)		(45,462)		Accumulated other comprehensive loss	(42,781)		(45,462)
Other equity	Other equity	3,678		3,422		Other equity	3,748		3,422
Total shareholders' equity	Total shareholders' equity	604,940		610,677		Total shareholders' equity	611,781		610,677
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	1,041,222	$	852,670	Total Liabilities and Shareholders’ Equity	$	1,084,814	$	852,670

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended
June 26, June 28,
(Thousands) 2020 2019
Cash flows from operating activities:
Net income $ 3,575 $ 32,446
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization 23,522 22,607
Amortization of deferred financing costs in interest expense 364 472
Stock-based compensation expense (non-cash) 3,966 3,541
Deferred income tax (benefit) expense (234) 4,578
Net pension curtailments and settlements 94 3,296
Held for sale impairment charges 10,766 —
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
5,331 (11,778)
Decrease (increase) in inventory (20,585) 1,306
Decrease (increase) in prepaid and other current assets (7,264) (588)
Increase (decrease) in accounts payable and accrued expenses (7,634) (18,813)
Increase (decrease) in unearned revenue (257) (88)
Increase (decrease) in interest and taxes payable
1,058 (1,130)
Increase (decrease) in unearned income due to customer prepayments 26,713 —
Domestic pension plan contributions — (3,000)
Other-net (2,982) (2,803)
Net cash provided by operating activities 36,433 30,046
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment (32,034) (13,833)
Payments for mine development — (1,591)
Proceeds from sale of property, plant, and equipment 33 15
Net cash used in investing activities (32,001) (15,409)
Cash flows from financing activities:
Short-term debt under revolving credit agreement 150,000 —
Repayment of long-term debt (428) (397)
Principal payments under finance lease obligations (626) (599)
Cash dividends paid (4,582) (4,368)
Repurchase of common stock (6,766) (199)
Payments of withholding taxes for stock-based compensation awards (2,025) (4,763)
Net cash provided by (used in) financing activities 135,573 (10,326)
Effects of exchange rate changes 56 (100)
Net change in cash and cash equivalents 140,061 4,211
Cash and cash equivalents at beginning of period 125,007 70,645
Cash and cash equivalents at end of period $ 265,068 $ 74,856


	Nine Months Ended
	September 25,		September 27,
(Thousands)	2020		2019
Cash flows from operating activities:
Net income	$	10,071	$	35,909
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization	32,042		31,955
Amortization of deferred financing costs in interest expense	547		720
Stock-based compensation expense (non-cash)	3,989		5,230

Deferred income tax (benefit) expense	(5,187)		5,725
Net pension curtailments and settlements	94		3,296
Impairment charges	10,766		14,141
Changes in assets and liabilities, net of acquired assets and liabilities:
Decrease (increase) in accounts receivable	13,899		(36,146)
Decrease (increase) in inventory	(9,883)		22,089
Decrease (increase) in prepaid and other current assets	(686)		(416)
Increase (decrease) in accounts payable and accrued expenses	(9,759)		(14,114)
Increase (decrease) in unearned revenue	(298)		(728)
Increase (decrease) in interest and taxes payable	143		(1,499)
Increase (decrease) in unearned income due to customer prepayments	40,385		0
Domestic pension plan contributions	0		(4,500)
Other-net	(6,679)		(2,126)
Net cash provided by operating activities	79,444		59,536
Cash flows from investing activities:
Payments for acquisition, net of cash acquired	(130,715)		0
Payments for purchase of property, plant, and equipment	(46,285)		(18,193)
Payments for mine development	0		(1,903)
Proceeds from settlement of currency exchange contract	3,249		0
Proceeds from sale of property, plant, and equipment	35		17
Net cash used in investing activities	(173,716)		(20,079)
Cash flows from financing activities:


Short-term debt under revolving credit agreement, net	120,000		0
Repayment of long-term debt	(16,357)		(599)
Principal payments under finance lease obligations	(1,440)		(894)
Cash dividends paid	(6,920)		(6,612)
Repurchase of common stock	(6,766)		(199)
Payments of withholding taxes for stock-based compensation awards	(2,212)		(4,832)
Deferred financing costs	0		(2,018)
Net cash provided by (used in) financing activities	86,305		(15,154)
Effects of exchange rate changes	714		(422)
Net change in cash and cash equivalents	(7,253)		23,881
Cash and cash equivalents at beginning of period	125,007		70,645
Cash and cash equivalents at end of period	$	117,754	$	94,526

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity

(Unaudited)


		Common Shares				Shareholders' Equity																					Common Shares				Shareholders' Equity
(Thousands, except per share amounts)	(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss)		Other Equity		Total		(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss)		Other Equity		Total
Balance at March 27, 2020		20,310	(6,838)	$	253,967	$	584,505	$	(198,311)	$	(47,173)	$	3,490	$	596,478
Balance at June 26, 2020																Balance at June 26, 2020	20,322	(6,826)	$	256,756	$	588,803	$	(198,726)	$	(45,571)	$	3,678	$	604,940
Net income	Net income	—	—	—		6,678		—		—		—		6,678		Net income	—	—	0		6,496		0		0		0		6,496
Other comprehensive income (loss)		—	—	—		—		—		1,602		—		1,602
Other comprehensive income																Other comprehensive income	—	—	0		0		0		2,790		0		2,790
Cash dividends declared ($0.115 per share)	Cash dividends declared ($0.115 per share)	—	—	—		(2,337)		—		—		—		(2,337)		Cash dividends declared ($0.115 per share)	—	—	0		(2,338)		0		0		0		(2,338)
Stock-based compensation activity	Stock-based compensation activity	11	11	2,775		(43)		(259)		—		—		2,473		Stock-based compensation activity	7	7	235		19		(231)		0		0		23
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	—	—	—		—		(10)		—		—		(10)		Payments of withholding taxes for stock-based compensation awards	(3)	(3)	0		0		(187)		0		0		(187)
Directors’ deferred compensation	Directors’ deferred compensation	1	1	14		—		(146)		—		188		56		Directors’ deferred compensation	1	1	28		0		(41)		0		70		57
Balance at June 26, 2020		20,322	(6,826)	$	256,756	$	588,803	$	(198,726)	$	(45,571)	$	3,678	$	604,940
Balance at September 25, 2020																Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	592,980	$	(199,185)	$	(42,781)	$	3,748	$	611,781

Balance at March 29, 2019		20,354	(6,794)	$	241,480	$	562,941	$	(184,812)	$	(57,270)	$	4,538	$	566,877
Balance at June 28, 2019																Balance at June 28, 2019	20,399	(6,749)	$	245,785	$	576,211	$	(187,224)	$	(43,978)	$	3,991	$	594,785
Net income	Net income	—	—	—		15,540		—		—		—		15,540		Net income	—	—	0		3,463		0		0		0		3,463
Other comprehensive income	Other comprehensive income	—	—	—		—		—		9,996		—		9,996		Other comprehensive income	—	—	0		0		0		120		0		120
Pension curtailment		—	—	—		—		—		3,296		—		3,296
Cash dividends declared ($0.11 per share)	Cash dividends declared ($0.11 per share)	—	—	—		(2,243)		—		—		—		(2,243)		Cash dividends declared ($0.11 per share)	—	—	0		(2,244)		0		0		0		(2,244)
Stock-based compensation activity	Stock-based compensation activity	55	55	4,287		(27)		(2,266)		—		—		1,994		Stock-based compensation activity	5	5	1,836		(21)		(126)		0		0		1,689
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(12)	(12)	—		—		(785)		—		—		(785)		Payments of withholding taxes for stock-based compensation awards	(2)	(2)	0		0		(69)		0		0		(69)
Directors’ deferred compensation	Directors’ deferred compensation	2	2	18		—		639		—		(547)		110		Directors’ deferred compensation	1	1	30		0		(45)		0		67		52
Balance at June 28, 2019		20,399	(6,749)	$	245,785	$	576,211	$	(187,224)	$	(43,978)	$	3,991	$	594,785
Balance at September 27, 2019																Balance at September 27, 2019	20,403	(6,745)	$	247,651	$	577,409	$	(187,464)	$	(43,858)	$	4,058	$	597,796


		Common Shares				Shareholders' Equity																					Common Shares				Shareholders' Equity
(Thousands, except per share amounts)	(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss)		Other Equity		Total		(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss)		Other Equity		Total
Balance at December 31, 2019	Balance at December 31, 2019	20,404	(6,744)	$	249,674	$	589,888	$	(186,845)	$	(45,462)	$	3,422	$	610,677	Balance at December 31, 2019	20,404	(6,744)	$	249,674	$	589,888	$	(186,845)	$	(45,462)	$	3,422	$	610,677
Net income	Net income	—	—	—		3,575		—		—		—		3,575		Net income	—	—	0		10,071		0		0		0		10,071
Other comprehensive income (loss)		—	—	—		—		—		(109)		—		(109)
Cash dividends declared ($0.225 per share)		—	—	—		(4,582)		—		—		—		(4,582)
Other comprehensive income																Other comprehensive income	—	—	0		0		0		2,681		0		2,681
Cash dividends declared ($0.34 per share)																Cash dividends declared ($0.34 per share)	—	—	0		(6,920)		0		0		0		(6,920)
Stock-based compensation activity	Stock-based compensation activity	110	110	7,037		(78)		(2,902)		—		—		4,057		Stock-based compensation activity	117	117	7,272		(59)		(3,133)		0		0		4,080
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(36)	(36)	—		—		(2,025)		—		—		(2,025)		Payments of withholding taxes for stock-based compensation awards	(39)	(39)	0		0		(2,212)		0		0		(2,212)
Repurchase of shares	Repurchase of shares	(158)	(158)	—		—		(6,766)		—		—		(6,766)		Repurchase of shares	(158)	(158)	0		0		(6,766)		0		0		(6,766)
Directors’ deferred compensation	Directors’ deferred compensation	2	2	45		—		(188)		—		256		113		Directors’ deferred compensation	3	3	73		0		(229)		0		326		170
Balance at June 26, 2020		20,322	(6,826)	$	256,756	$	588,803	$	(198,726)	$	(45,571)	$	3,678	$	604,940
Balance at September 25, 2020																Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	592,980	$	(199,185)	$	(42,781)	$	3,748	$	611,781

Balance at December 31, 2018	Balance at December 31, 2018	20,242	(6,906)	$	234,704	$	548,374	$	(175,426)	$	(58,234)	$	4,488	$	553,906	Balance at December 31, 2018	20,242	(6,906)	$	234,704	$	548,374	$	(175,426)	$	(58,234)	$	4,488	$	553,906
Net income	Net income	—	—	—		32,446		—		—		—		32,446		Net income	—	—	0		35,909		0		0		0		35,909
Other comprehensive income	Other comprehensive income	—	—	—		—		—		10,960		—		10,960		Other comprehensive income	—	—	0		0		0		11,080		0		11,080
Pension curtailment	Pension curtailment	—	—	—		—		—		3,296		—		3,296		Pension curtailment	—	—	0		0		0		3,296		0		3,296
Cumulative effect of accounting change	Cumulative effect of accounting change	—	—	—		(179)		—		—		—		(179)		Cumulative effect of accounting change	—	—	0		(179)		0		0		0		(179)
Cash dividends declared ($0.215 per share)		—	—	—		(4,368)		—		—		—		(4,368)
Cash dividends declared ($0.325 per share)																Cash dividends declared ($0.325 per share)	—	—	0		(6,612)		0		0		0		(6,612)
Stock-based compensation activity	Stock-based compensation activity	247	247	11,046		(62)		(7,443)		—		—		3,541		Stock-based compensation activity	252	252	12,882		(83)		(7,569)		0		0		5,230
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(87)	(87)	—		—		(4,763)		—		—		(4,763)		Payments of withholding taxes for stock-based compensation awards	(89)	(89)	0		0		(4,832)		0		0		(4,832)
Repurchase of shares	Repurchase of shares	(5)	(5)	—		—		(199)		—		—		(199)		Repurchase of shares	(5)	(5)	0		0		(199)		0		0		(199)
Directors’ deferred compensation	Directors’ deferred compensation	2	2	35		—		607		—		(497)		145		Directors’ deferred compensation	3	3	65		0		562		0		(430)		197
Balance at June 28, 2019		20,399	(6,749)	$	245,785	$	576,211	$	(187,224)	$	(43,978)	$	3,991	$	594,785
Balance at September 27, 2019																Balance at September 27, 2019	20,403	(6,745)	$	247,651	$	577,409	$	(187,464)	$	(43,858)	$	4,058	$	597,796

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note A — Accounting Policies

Basis of Presentation: In management’s opinion, 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. Certain amounts in prior periods have been reclassified to conform to the 2020 consolidated financial statement presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2019 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.

The amounts reflected in Note B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.

New Pronouncements Adopted: In June 2016, the Financial Accounting Standards Board ~~(FASB)~~ issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses. This ASU requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. ~~Early adoption is permitted.~~ The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements. Accounts receivable were net of an allowance for credit losses of $0.7 million and $0.4 million at ~~June 26,~~September 25, 2020 and December 31, 2019, respectively. The change in the allowance for credit losses includes expense and net write-offs, none of which is significant.

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 — Acquisition

On July 17, 2020, the Company acquired 100% of the capital stock of Optics Balzers AG (Optics Balzers), an industry leader in thin film optical coatings. The purchase price for Optics Balzers was $136.1 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility during the first half of 2020. This business will operate within the Precision Coatings segment, and the results of operations are included as of the date of acquisition. The combination of Materion and Optics Balzers creates a premier optical thin film coating solutions provider with a highly complementary geographic, product, and end market portfolio.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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


(Thousands)	July 17, 2020
Assets:
Cash and cash equivalents	$	5,390
Accounts receivable	8,594
Inventories	10,170
Prepaid and other current assets	937
Property, plant, and equipment	46,743
Operating lease, right-of-use assets	13,357
Intangible assets	48,600
Goodwill	71,510
Total assets acquired	$	205,301

Liabilities:
Short-term debt	$	600
Accounts payable	2,851
Salaries and wages	4,392
Other liabilities and accrued items	4,178
Income taxes	61
Unearned revenue	1,259
Operating lease liabilities	12,355
Finance lease liabilities	2,574
Retirement and post-employment benefits	6,586
Unearned income	1,835
Long-term income taxes	181
Deferred income taxes	10,366
Long-term debt	21,958
Total liabilities assumed	$	69,196
Net assets acquired	$	136,105

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. These preliminary estimates are based on available information and will be revised during the measurement period, not to exceed 12 months, as third-party valuations are finalized, additional information becomes available, and as additional analysis is performed. Such revisions are not expected to have a material impact on the Company's results of operations and financial position.

The Company's consolidated financial statements include the results of operations of Optics Balzers from the acquisition date through September 25, 2020. The amount of Net sales and operating results attributable to the acquisition during this period were not material.

Acquisition-related transaction and integration costs totaled $4.7 million and $6.1 million in the third quarter and first nine months of 2020, respectively. These costs are included in selling, general, and administrative expense in the Consolidated Statements of Income.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

As part of the acquisition, the Company recorded approximately $71.5 million of goodwill in its Precision Coatings segment. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired and primarily attributable to the synergies expected to arise after the acquisition dates. The goodwill is not expected to be deductible for U.S. tax purposes.

The following table reports the intangible assets by asset category and accumulated amortization from the closing date through September 25, 2020:


(Thousands)	Value at Acquisition		Accumulated Amortization		Weighted Average Life
Customer relationships	$	39,300	$	(420)	18 years
Technology	4,200		(162)		5 years
Licenses and other	5,100		(196)		5 years
Total	$	48,600	$	(778)

Note C — Segment Reporting

The Company has the following reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, 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 Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.

Advanced 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 Coatings 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.

810


(Thousands)	(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total		(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
Second Quarter 2020
Third Quarter 2020												Third Quarter 2020
Net sales	Net sales	$	101,614	$	150,108	$	19,746	$	—	$	271,468	Net sales	$	91,203	$	165,582	$	30,386	$	0	$	287,171
Intersegment sales	Intersegment sales	(213)		8,997		—		—		8,784		Intersegment sales	0		6,602		0		0		6,602
Operating profit (loss)	Operating profit (loss)	8,244		4,370		2,091		(5,999)		8,706		Operating profit (loss)	721		5,920		1,421		(7,349)		713
Second Quarter 2019
Third Quarter 2019												Third Quarter 2019
Net sales	Net sales	$	135,231	$	133,238	$	29,374	$	—	$	297,843	Net sales	$	130,704	$	147,650	$	27,625	$	0	$	305,979
Intersegment sales	Intersegment sales	6		19,260		—		—		19,266		Intersegment sales	0		17,161		0		0		17,161
Operating profit (loss)	Operating profit (loss)	19,328		6,139		3,937		(6,654)		22,750		Operating profit (loss)	18,780		6,202		(11,198)		(7,495)		6,289

First Six Months 2020
First Nine Months 2020												First Nine Months 2020
Net sales	Net sales	$	200,681	$	310,273	$	38,460	$	—	$	549,414	Net sales	$	291,884	$	475,855	$	68,846	$	0	$	836,585
Intersegment sales	Intersegment sales	2		18,188		—		—		18,190		Intersegment sales	2		24,790		0		0		24,792
Operating profit (loss)	Operating profit (loss)	13,035		9,155		(7,501)		(10,546)		4,143		Operating profit (loss)	13,756		15,075		(6,080)		(17,895)		4,856
First Six Months 2019
First Nine Months 2019												First Nine Months 2019
Net sales	Net sales	$	262,344	$	277,263	$	59,677	$	—	$	599,284	Net sales	$	393,048	$	424,913	$	87,302	$	0	$	905,263
Intersegment sales	Intersegment sales	15		36,473		—		—		36,488		Intersegment sales	15		53,634		0		0		53,649
Operating profit (loss)	Operating profit (loss)	38,286		13,219		6,014		(13,382)		44,137		Operating profit (loss)	57,066		19,421		(5,184)		(20,877)		50,426

911

The following table disaggregates revenue for each segment by end market for the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019, respectively:


(Thousands)	(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total		(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
Second Quarter 2020
Third Quarter 2020												Third Quarter 2020
End Market	End Market											End Market
Semiconductor	Semiconductor	$	1,537	$	123,908	$	232	$	—	$	125,677	Semiconductor	$	983	$	131,380	$	1,008	$	0	$	133,371
Industrial	Industrial	23,831		8,419		2,574		—		34,824		Industrial	21,630		9,967		4,976		0		36,573
Aerospace and Defense	Aerospace and Defense	17,952		1,650		4,119		—		23,721		Aerospace and Defense	14,740		1,687		4,867		0		21,294
Consumer Electronics	Consumer Electronics	9,956		21		3,404		—		13,381		Consumer Electronics	11,074		78		6,550		0		17,702
Automotive	Automotive	16,415		1,186		7		—		17,608		Automotive	14,077		1,477		1,059		0		16,613
Energy	Energy	5,590		9,327		—		—		14,917		Energy	5,825		16,693		0		0		22,518
Telecom and Data Center	Telecom and Data Center	12,586		788		—		—		13,374		Telecom and Data Center	10,452		500		0		0		10,952
Other	Other	13,747		4,809		9,410		—		27,966		Other	12,422		3,800		11,926		0		28,148
Total	Total	$	101,614	$	150,108	$	19,746	$	—	$	271,468	Total	$	91,203	$	165,582	$	30,386	$	0	$	287,171

Second Quarter 2019
Third Quarter 2019												Third Quarter 2019
End Market	End Market											End Market
Semiconductor	Semiconductor	$	1,303	$	101,634	$	93	$	—	$	103,030	Semiconductor	$	1,220	$	107,883	$	0	$	0	$	109,103
Industrial	Industrial	28,585		7,704		3,842		—		40,131		Industrial	28,353		8,302		3,365		0		40,020
Aerospace and Defense	Aerospace and Defense	26,046		1,125		4,750		—		31,921		Aerospace and Defense	27,653		1,779		5,303		0		34,735
Consumer Electronics	Consumer Electronics	22,663		500		4,430		—		27,593		Consumer Electronics	18,399		395		5,613		0		24,407
Automotive	Automotive	16,564		1,669		365		—		18,598		Automotive	16,071		3,012		296		0		19,379
Energy	Energy	11,303		16,027		—		—		27,330		Energy	10,629		20,911		0		0		31,540
Telecom and Data Center	Telecom and Data Center	18,244		713		—		—		18,957		Telecom and Data Center	14,964		835		0		0		15,799
Other	Other	10,523		3,866		15,894		—		30,283		Other	13,415		4,533		13,048		0		30,996
Total	Total	$	135,231	$	133,238	$	29,374	$	—	$	297,843	Total	$	130,704	$	147,650	$	27,625	$	0	$	305,979

1012


(Thousands)	(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total		(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total
First Six Months 2020
First Nine Months 2020												First Nine Months 2020
End Market	End Market											End Market
Semiconductor	Semiconductor	$	2,443	$	244,727	$	243	$	—	$	247,413	Semiconductor	$	3,426	$	376,107	$	1,251	$	0	$	380,784
Industrial	Industrial	47,171		16,781		5,671		—		69,623		Industrial	68,801		26,748		10,647		0		106,196
Aerospace and Defense	Aerospace and Defense	32,158		3,077		9,228		—		44,463		Aerospace and Defense	46,898		4,764		14,095		0		65,757
Consumer Electronics	Consumer Electronics	24,651		138		6,946		—		31,735		Consumer Electronics	35,725		216		13,496		0		49,437
Automotive	Automotive	34,579		3,266		24		—		37,869		Automotive	48,656		4,743		1,083		0		54,482
Energy	Energy	11,019		32,795		—		—		43,814		Energy	16,844		49,488		0		0		66,332
Telecom and Data Center	Telecom and Data Center	22,575		1,658		—		—		24,233		Telecom and Data Center	33,027		2,158		0		0		35,185
Other	Other	26,085		7,831		16,348		—		50,264		Other	38,507		11,631		28,274		0		78,412
Total	Total	$	200,681	$	310,273	$	38,460	$	—	$	549,414	Total	$	291,884	$	475,855	$	68,846	$	0	$	836,585

First Six Months 2019
First Nine Months 2019												First Nine Months 2019
End Market	End Market											End Market
Semiconductor	Semiconductor	$	3,268	$	206,725	$	205	$	—	$	210,198	Semiconductor	$	4,489	$	314,607	$	205	$	0	$	319,301
Industrial	Industrial	55,015		15,632		7,992		—		78,639		Industrial	83,368		23,934		11,358		0		118,660
Aerospace and Defense	Aerospace and Defense	53,120		2,618		9,622		—		65,360		Aerospace and Defense	80,774		4,397		14,924		0		100,095
Consumer Electronics	Consumer Electronics	36,218		705		7,916		—		44,839		Consumer Electronics	54,617		1,100		13,530		0		69,247
Automotive	Automotive	37,277		3,023		587		—		40,887		Automotive	53,348		6,035		882		0		60,265
Energy	Energy	22,397		38,224		—		—		60,621		Energy	33,026		59,136		0		0		92,162
Telecom and Data Center	Telecom and Data Center	35,836		914		—		—		36,750		Telecom and Data Center	50,800		1,749		0		0		52,549
Other	Other	19,213		9,422		33,355		—		61,990		Other	32,626		13,955		46,403		0		92,984
Total	Total	$	262,344	$	277,263	$	59,677	$	—	$	599,284	Total	$	393,048	$	424,913	$	87,302	$	0	$	905,263

Intersegment sales are eliminated in consolidation.

Note CD — 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 the product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.

Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification ~~(ASC)~~ 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 ~~June 26,~~September 25, 2020. 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 ~~June 26,~~September 25, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$29.2~~$27.6 million.

1113

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)	(Thousands)	June 26, 2020		December 31, 2019		$ change		% change		(Thousands)	September 25, 2020		December 31, 2019		$ change		% change
Accounts receivable, trade	Accounts receivable, trade	$	141,465	$	141,168	$	297	—	%	Accounts receivable, trade	$	142,363	$	141,168	$	1,195	1	%
Unbilled receivables	Unbilled receivables	5,218		13,583		(8,365)		(62)	%	Unbilled receivables	8,364		13,583		(5,219)		(38)	%
Unearned revenue	Unearned revenue	3,003		3,380		(377)		(11)	%	Unearned revenue	4,360		3,380		980		29	%

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 relating to our receivables were immaterial during the ~~second~~third quarter and first ~~six~~nine months of 2020.

Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally 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 ~~$3.1~~$3.2 million of the unearned amounts as revenue during the first ~~six~~nine months of 2020.

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 DE — Other-net

Other-net for the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019 is summarized as follows:


		Second Quarter Ended						Six Months Ended							Third Quarter Ended				Nine Months Ended
		June 26,		June 28,		June 26,		June 28,			September 25,		September 27,		September 25		September 27,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2020		2019		2020		2019
Metal consignment fees	Metal consignment fees	$	2,037	$	2,225	$	4,266	$	5,316	Metal consignment fees	$	2,317	$	1,936	$	6,583	$	7,252
Amortization of intangible assets	Amortization of intangible assets	106		368		294		758		Amortization of intangible assets	907		375		1,201		1,133
Foreign currency (gain) loss	Foreign currency (gain) loss	(2,486)		307		(2,548)		384		Foreign currency (gain) loss	(1,029)		469		(3,577)		853
Net loss on disposal of fixed assets	Net loss on disposal of fixed assets	9		118		55		142		Net loss on disposal of fixed assets	19		1		74		143
Other items	Other items	(23)		(127)		(145)		412		Other items	7		161		(138)		573
Total	Total	$	(357)	$	2,891	$	1,922	$	7,012	Total	$	2,221	$	2,942	$	4,143	$	9,954

Note EF — Restructuring

During the third quarter of 2020, the Company concluded that it intends to close the Large Area Coatings (LAC) business (a reporting unit in the Precision Coatings segment) and as a result only the fixed assets of the LAC business are classified as held for sale. Any closure costs are expected to be immaterial. At September 25, 2020, fixed assets totaling $0.8 million were classified as held for sale and reflected within Prepaid and other current assets in the Consolidated Balance Sheet. No additional impairment charges were recorded during the third quarter of 2020.

In addition, in the third quarter of 2020, the Company completed cost reduction actions in order to align costs with commensurate business levels in its Precision Coatings segment. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reductions. Costs associated with these actions totaled $0.4 million and included severance associated with approximately 28 employees and other related costs, all of which was paid during the third quarter of 2020.

~~In the first half of~~14

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

During 2020, the Company initiated a restructuring plan in its Performance Alloys and Composites (PAC) segment to close its Warren, Michigan and Fremont, California locations. Costs associated with the plan totaled ~~$2.4~~$2.2 million and ~~$4.6~~$6.8 million in the ~~second~~third quarter and first ~~six~~nine months of 2020, respectively. In the ~~second~~third quarter of 2020, these costs included ~~$0.9~~$0.4 million of severance ~~associated with approximately 60 employees~~ and ~~$1.5~~$1.6 million of facility and other related costs. Included in restructuring charges for the first ~~six~~nine months of 2020 was ~~$1.4~~$1.8 million of severance associated with approximately 60 employees and ~~$3.1~~$4.4 million of facility and other related costs.

Remaining severance payments of ~~$1.2~~$1.1 million and facility costs of $0.4 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items, respectively, in the Consolidated Balance Sheets. The Company expects to incur additional costs related to these initiatives of approximately $4$2.5 million in the remainder of 2020.

In the third quarter of 2019, the Company initiated a restructuring plan in its LAC business to reduce headcount, idle certain machinery and equipment, and exit a facility in Windsor, Connecticut. Costs associated with this plan totaled $0.3 million and included severance and related costs for approximately 19 employees.

In addition, in the third quarter of 2019, the Company completed other cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reductions. Costs associated with these actions totaled $0.5 million within the Other segment and included severance associated with approximately 7 employees and other related costs.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note FG — Income Taxes

The Company's effective tax rate for the ~~second~~third quarter of 2020 and 2019 was ~~19.5%~~(1,327.7)% and ~~18.8%~~39.5%, respectively, and ~~19.4%~~(106.0)% and ~~18.5%~~21.1% for the first ~~six~~nine months of 2020 and 2019, respectively.

The effective tax rate for ~~each period is lower than~~the third quarter and first nine months of 2020 differed from the statutory tax rate primarily due to the impact of percentage depletion and the research and development ~~credit. Additionally,~~credit, and the recognition of discrete tax benefits. The effective tax rate for the first ~~six~~nine months of 2020 included a net discrete income tax ~~expense~~benefit of ~~$0.8~~$3.8 million, primarily related to ~~an impairment~~the release of ~~goodwill.~~a valuation allowance. The effective tax rate for the first ~~six~~nine months of 2019 included a net discrete income tax ~~benefit~~expense of ~~$0.5~~$1.3 million, primarily related to ~~excess~~an impairment of goodwill and return to provision tax ~~benefits from stock-based compensation awards.~~expense adjustments.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. While the Company continues to examine the impacts the CARES Act may have on its business, it does not expect it will have a material impact to its consolidated financial statements.

On July 9, 2020, the U.S. Treasury Department issued final tax regulations related to the foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions. Also, on July 20, 2020, the U.S. Treasury Department released final tax regulations permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax. The Company ~~is currently assessing the impact of~~has determined the new legislation does not have a material impact to its consolidated financial statements.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note GH — Earnings Per Share (EPS)

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


		Second Quarter Ended						Six Months Ended							Third Quarter Ended				Nine Months Ended
		June 26,		June 28,		June 26,		June 28,			September 25,		September 27,		September 25,		September 27,
(Thousands, except per share amounts)	(Thousands, except per share amounts)	2020		2019		2020		2019		(Thousands, except per share amounts)	2020		2019		2020		2019
Numerator for basic and diluted EPS:	Numerator for basic and diluted EPS:									Numerator for basic and diluted EPS:
Net income	Net income	$	6,678	$	15,540	$	3,575	$	32,446	Net income	$	6,496	$	3,463	$	10,071	$	35,909
Denominator:	Denominator:									Denominator:
Denominator for basic EPS:	Denominator for basic EPS:									Denominator for basic EPS:
Weighted-average shares outstanding	Weighted-average shares outstanding	20,317		20,383		20,350		20,326		Weighted-average shares outstanding	20,325		20,401		20,342		20,351
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Stock appreciation rights	Stock appreciation rights	36		76		36		92		Stock appreciation rights	46		59		39		80
Restricted stock units	Restricted stock units	63		76		80		77		Restricted stock units	77		75		90		73
Performance-based restricted stock units	Performance-based restricted stock units	138		131		121		140		Performance-based restricted stock units	144		142		124		141
Diluted potential common shares	Diluted potential common shares	237		283		237		309		Diluted potential common shares	267		276		253		294
Denominator for diluted EPS:	Denominator for diluted EPS:									Denominator for diluted EPS:
Adjusted weighted-average shares outstanding	Adjusted weighted-average shares outstanding	20,554		20,666		20,587		20,635		Adjusted weighted-average shares outstanding	20,592		20,677		20,595		20,645
Basic EPS	Basic EPS	$	0.33	$	0.76	$	0.18	$	1.60	Basic EPS	$	0.32	$	0.17	$	0.50	$	1.76
Diluted EPS	Diluted EPS	$	0.32	$	0.75	$	0.17	$	1.57	Diluted EPS	$	0.32	$	0.17	$	0.49	$	1.74

Adjusted weighted-average shares outstanding-diluted excludes securities totaling ~~191,500~~114,335 and ~~84,509~~70,562 for the quarters ended ~~June 26,~~September 25, 2020 and ~~June 28,~~September 27, 2019, respectively, and ~~230,893~~164,447 and ~~144,154~~127,759 for the ~~six~~nine months ended ~~June 26,~~September 25, 2020 and ~~June 28,~~September 27, 2019, respectively. These securities primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices ~~less~~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~~

~~(Unaudited)~~

Note HI — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:


		June 26,		December 31,			September 25,		December 31,
(Thousands)	(Thousands)	2020		2019		(Thousands)	2020		2019
Raw materials and supplies	Raw materials and supplies	$	54,720	$	35,612	Raw materials and supplies	$	46,776	$	35,612
Work in process	Work in process	172,678		177,780		Work in process	184,348		177,780
Finished goods	Finished goods	30,304		25,506		Finished goods	27,839		25,506
Subtotal	Subtotal	$	257,702	$	238,898	Subtotal	$	258,963	$	238,898
Less: LIFO reserve balance	Less: LIFO reserve balance	47,855		48,508		Less: LIFO reserve balance	47,263		48,508
Inventories	Inventories	$	209,847	$	190,390	Inventories	$	211,700	$	190,390

The liquidation of last in, first out (LIFO) inventory layers did not impact cost of sales in the third quarter of 2020 and increased cost of sales by $0.1 million in the ~~second~~first nine months of 2020. LIFO liquidation decreased cost of sales by $0.5 million and $0.4 million in the third quarter and first ~~six~~nine months of ~~both 2020 and 2019.~~2019, respectively.

The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$333.9~~$382.8 million ~~as of June 26, 2020 versus~~and $309.3 million as of September 25, 2020 and December 31, ~~2019.~~

~~Note I — Held for Sale~~

In the first six months of 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) reporting unit within the Precision Coatings segment and determined that it met the criteria to be classified as held for sale. Therefore, its assets and liabilities have been presented as held for sale in the Consolidated Balance Sheet as of June 26, 2020. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell.

Before measuring the fair value less costs to sell of the disposal group as a whole, the Company first reviewed individual assets and liabilities to determine if any fair value adjustments were required. The Company recorded a goodwill impairment charge of $9.1 million in the first half of 2020 to write-off the remaining balance of goodwill for the LAC reporting unit. The Company determined fair value based on its expected proceeds to be received, which it concluded is most representative of the value of the assets.

The Company then estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value. Based on this review, the Company recorded a $1.7 million asset impairment loss in the first six months of 2020. NaN additional impairment charges were recorded in the second quarter of 2020.

~~The assets and liabilities of the LAC reporting unit classified as held for sale at June 26, 2020 were as follows:~~


~~(Thousands)~~
~~Accounts receivable, net~~	$	~~2,987~~
~~Inventories, net~~	~~1,305~~
~~Prepaid and other current assets~~	8
~~Property, plant, and equipment - net~~	~~2,508~~
~~Operating lease, right-of-use assets~~	~~716~~
~~Impairment on carrying value~~	~~(1,713)~~
~~Assets held for sale~~	$	~~5,811~~

~~Accounts payable~~	$	~~870~~
~~Salaries and wages~~	~~245~~
~~Other liabilities and accrued items~~	~~228~~
~~Operating lease liabilities~~	~~728~~
~~Other long term liabilities~~	55
~~Liabilities held for sale~~	$	~~2,126~~

2019, respectively.

1416

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

~~Excluding~~Note J — Mine Development

Mine development costs at the ~~$9.1 million goodwill impairment charge~~Company's open pit surface mine include drilling, infrastructure, and ~~$1.7 million asset impairment charge recorded in~~other related costs to delineate an ore body, and the ~~first half~~removal of overburden to initially expose an ore body. Historically, the Company’s mine development costs involved the development of a new source of ore, and, as such, mine development costs incurred were capitalized during the pre-production phase of a mine and amortized into inventory as the ore was extracted. In the third quarter of 2020, the ~~operating results~~Company expanded a mine to further develop an ore body. Since the pre-production phase ended when ore was first extracted from this mine, the Company recognized approximately $7.3 million of mine development costs in the ~~LAC reporting unit were not material~~third quarter of 2020 as a component of cost of sales. The Company expects to incur additional period costs as a component of cost of sales related to mine development of approximately $6.0 million in the fourth quarter of 2020 related to the ~~Company for any period presented.~~

same mine.

Note JK — Goodwill

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


(Thousands)	(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Total		(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Total
Balance at December 31, 2019	Balance at December 31, 2019	$	1,899	$	50,190	$	26,922	$	79,011	Balance at December 31, 2019	$	1,899	$	50,190	$	26,922	$	79,011
Acquisition										Acquisition	0		0		71,510		71,510
Impairment charge	Impairment charge	—		—		(9,053)		(9,053)		Impairment charge	0		0		(9,053)		(9,053)
Other	Other	—		43		—		43		Other	0		173		1,477		1,650
Balance at June 26, 2020		$	1,899	$	50,233	$	17,869	$	70,001
Balance at September 25, 2020										Balance at September 25, 2020	$	1,899	$	50,363	$	90,856	$	143,118

Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment.

In the first quarter of 2020, the Company recorded a $9.1 million impairment charge related to its LAC reporting unit.

The acquisition line represents the goodwill allocation during the measurement period subsequent to the applicable acquisition date. Refer to Note B for further discussion.

Note KL — Customer Prepayments

The Company entered into an investment agreement with a customer to procure equipment to manufacture product for the customer. The customer will make prepayments to the Company in the amount of approximately $70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer. The Company will own the equipment and be responsible for operating and maintenance costs. The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement. Accordingly, ~~$31.4~~as of September 25, 2020, $45.1 million of prepayments are classified as Unearned Income in the Consolidated Balance Sheet, of which ~~$19.6~~$13.7 million were received during the ~~second~~third quarter of 2020, and the liability is expected to be settled as commercial shipments are made.

Note LM — Leases

The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. The weighted average remaining lease term for the Company's operating and finance leases as of ~~June 26,~~September 25, 2020 was ~~13.57~~12.98 years and ~~19.37~~16.29 years, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the Company's operating and finance lease liabilities as of ~~June 26,~~September 25, 2020 was ~~6.41%~~6.52% and ~~5.31%~~4.86%, respectively.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

The components of operating and finance lease cost for the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019 were as follows:


		Second Quarter Ended						Six Months Ended							Third Quarter Ended				Nine Months Ended
(Thousands)	(Thousands)	June 26, 2020		June 28, 2019		June 26, 2020		June 28, 2019		(Thousands)	September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019
Components of lease expense	Components of lease expense									Components of lease expense
Operating lease cost	Operating lease cost	$	2,274	$	2,291	$	4,532	$	5,003	Operating lease cost	$	3,008	$	2,449	$	7,540	$	7,452

Finance lease cost	Finance lease cost									Finance lease cost
Amortization of right-of-use assets	Amortization of right-of-use assets	350		354		701		710		Amortization of right-of-use assets	601		353		1,302		1,063
Interest on lease liabilities	Interest on lease liabilities	238		259		482		522		Interest on lease liabilities	266		256		748		778
Total lease cost	Total lease cost	$	2,862	$	2,904	$	5,715	$	6,235	Total lease cost	$	3,875	$	3,058	$	9,590	$	9,293

Operating lease expense amounted to ~~$2.3~~$3.0 million and ~~$4.5~~$7.5 million during the ~~second~~third quarter and first ~~six~~nine months of 2020, respectively, compared to ~~$2.3~~$2.4 million and ~~$5.0~~$7.5 million, respectively, during the same periods of 2019. The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred. These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.

1618

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Supplemental balance sheet information related to the Company's operating and finance leases as of ~~June 26,~~September 25, 2020 and December 31, 2019 was as follows:


		June 26,		Dec. 31,			September 25,		December 31,
(Thousands)	(Thousands)	2020		2019		(Thousands)	2020		2019
Supplemental balance sheet information	Supplemental balance sheet information					Supplemental balance sheet information

Operating Leases	Operating Leases					Operating Leases
Operating lease right-of-use assets	Operating lease right-of-use assets	$	48,942	$	23,413	Operating lease right-of-use assets	$	62,235	$	23,413
Other liabilities and accrued items	Other liabilities and accrued items	5,298		6,542		Other liabilities and accrued items	6,781		6,542
Operating lease liabilities	Operating lease liabilities	44,830		18,091		Operating lease liabilities	56,891		18,091

Finance Leases	Finance Leases					Finance Leases
Property, plant, and equipment	Property, plant, and equipment	$	26,258	$	26,069	Property, plant, and equipment	$	34,500	$	26,069
Allowances for depreciation, depletion, and amortization	Allowances for depreciation, depletion, and amortization	(4,035)		(3,570)		Allowances for depreciation, depletion, and amortization	(7,045)		(3,570)
Finance lease assets, net	Finance lease assets, net	$	22,223	$	22,499	Finance lease assets, net	$	27,455	$	22,499
Other liabilities and accrued items	Other liabilities and accrued items	$	1,305	$	1,265	Other liabilities and accrued items	$	2,700	$	1,265
Finance lease liabilities	Finance lease liabilities	16,939		17,424		Finance lease liabilities	20,540		17,424
Total principal payable on finance leases	Total principal payable on finance leases	$	18,244	$	18,689	Total principal payable on finance leases	$	23,240	$	18,689

Future maturities of the Company's lease liabilities as of ~~June 26,~~September 25, 2020 are as follows:


		Finance		Operating			Finance		Operating
(Thousands)	(Thousands)	Leases		Leases		(Thousands)	Leases		Leases
2020	2020	$	1,119	$	3,986	2020	$	935	$	2,728
2021	2021	2,238		7,841		2021	3,735		10,275
2022	2022	2,238		6,846		2022	3,723		8,813
2023	2023	1,528		6,548		2023	2,455		8,371
2024	2024	1,174		4,704		2024	1,530		6,494
2025 and thereafter	2025 and thereafter	21,126		46,967		2025 and thereafter	22,372		58,992
Total lease payments	Total lease payments	29,423		76,892		Total lease payments	34,750		95,673
Less amount of lease payment representing interest	Less amount of lease payment representing interest	11,179		26,764		Less amount of lease payment representing interest	11,510		32,001
Total present value of lease payments	Total present value of lease payments	$	18,244	$	50,128	Total present value of lease payments	$	23,240	$	63,672

Supplemental cash flow information related to leases for the first ~~six~~nine months of 2020 and 2019 were as follows:


		Six Months Ended							Nine Months Ended
(Thousands)	(Thousands)	June 26, 2020		June 28, 2019		(Thousands)	September 25, 2020		September 27, 2019
Supplemental cash flow information	Supplemental cash flow information					Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:	Cash paid for amounts included in the measurement of lease liabilities:					Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	Operating cash flows from operating leases	$	7,275	$	7,710	Operating cash flows from operating leases	$	11,406	$	11,763
Operating cash flows from finance leases	Operating cash flows from finance leases	482		522		Operating cash flows from finance leases	748		778
Financing cash flows from finance leases	Financing cash flows from finance leases	626		599		Financing cash flows from finance leases	1,440		894

1719

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note MN — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.


		Pension Benefits						Other Benefits							Pension Benefits				Other Benefits
		Second Quarter Ended						Second Quarter Ended							Third Quarter Ended				Third Quarter Ended
		June 26,		June 28,		June 26,		June 28,			September 25,		September 27,		September 25,		September 27,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2020		2019		2020		2019
Components of net periodic benefit cost (credit)
Components of net periodic benefit (income) cost										Components of net periodic benefit (income) cost
Service cost	Service cost	$	—	$	1,418	$	15	$	18	Service cost	$	0	$	1,359	$	14	$	18
Interest cost	Interest cost	1,215		1,347		53		99		Interest cost	1,215		1,500		53		100
Expected return on plan assets	Expected return on plan assets	(2,205)		(2,167)		—		—		Expected return on plan assets	(2,206)		(2,134)		0		0
Amortization of prior service cost (benefit)	Amortization of prior service cost (benefit)	—		122		(374)		(375)		Amortization of prior service cost (benefit)	0		120		(374)		(374)
Amortization of net loss (gain)	Amortization of net loss (gain)	284		627		(83)		(23)		Amortization of net loss (gain)	284		762		(83)		(24)
Net periodic benefit (credit) cost		$	(706)	$	1,347	$	(389)	$	(281)
Net pension settlements/curtailments		94		3,296		—		—
Total net benefit cost		$	(612)	$	4,643	$	(389)	$	(281)
Total net benefit (income) cost										Total net benefit (income) cost	$	(707)	$	1,607	$	(390)	$	(280)


		Pension Benefits						Other Benefits							Pension Benefits				Other Benefits
		Six Months Ended						Six Months Ended							Nine Months Ended				Nine Months Ended
		June 26,		June 28,		June 26,		June 28,			September 25,		September 27,		September 25,		September 27,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2020		2019		2020		2019
Components of net periodic benefit cost (credit)
Components of net periodic benefit (income) cost										Components of net periodic benefit (income) cost
Service cost	Service cost	$	—	$	2,758	$	31	$	35	Service cost	$	0	$	4,117	$	45	$	53
Interest cost	Interest cost	2,429		2,904		107		199		Interest cost	3,644		4,404		160		299
Expected return on plan assets	Expected return on plan assets	(4,410)		(4,290)		—		—		Expected return on plan assets	(6,616)		(6,424)		0		0
Amortization of prior service cost (benefit)	Amortization of prior service cost (benefit)	—		242		(749)		(749)		Amortization of prior service cost (benefit)	0		362		(1,123)		(1,123)
Amortization of net loss (gain)	Amortization of net loss (gain)	568		1,431		(166)		(46)		Amortization of net loss (gain)	852		2,193		(249)		(70)
Net periodic benefit (credit) cost	Net periodic benefit (credit) cost	$	(1,413)	$	3,045	$	(777)	$	(561)	Net periodic benefit (credit) cost	$	(2,120)	$	4,652	$	(1,167)	$	(841)
Net pension settlements/curtailments	Net pension settlements/curtailments	94		3,296		—		—		Net pension settlements/curtailments	94		3,296		0		0
Total net benefit cost		$	(1,319)	$	6,341	$	(777)	$	(561)
Total net benefit (income) cost										Total net benefit (income) cost	$	(2,026)	$	7,948	$	(1,167)	$	(841)

The Company did not make any contributions to its domestic defined benefit plan in the first ~~six~~nine months of 2020 and made contributions of ~~$3.0~~$4.5 million in the first ~~six~~nine months of 2019.

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.

In May 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plan. The Company froze the pay and service amounts used to calculate pension benefits for active participants in the pension plan as of January 1, 2020. The Company recognized a non-cash pre-tax pension curtailment charge of $3.3 million associated with the plan amendment during the first nine months of 2019.

1820

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note NO — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019 are as follows:


		Gains and Losses on Cash Flow Hedges																					Gains and Losses on Cash Flow Hedges
(Thousands)	(Thousands)	Foreign Currency		Precious Metals		Copper		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total		(Thousands)	Foreign Currency		Precious Metals		Copper		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total
Balance at March 27, 2020		$	1,214	$	(841)	$	(330)	$	43	$	(41,330)	$	(5,886)	$	(47,173)
Balance at June 26, 2020																Balance at June 26, 2020	$	1,065	$	(779)	$	104	$	390	$	(41,241)	$	(4,720)	$	(45,571)
Other comprehensive income (loss) before reclassifications																Other comprehensive income (loss) before reclassifications	(520)		(617)		182		(955)		0		3,076		2,121
Amounts reclassified from accumulated other comprehensive income																Amounts reclassified from accumulated other comprehensive income	191		710		(353)		548		(11)		0		537
Net current period other comprehensive (loss) income before tax																Net current period other comprehensive (loss) income before tax	(329)		93		(171)		(407)		(11)		3,076		2,658
Deferred taxes																Deferred taxes	(76)		22		(38)		(92)		(40)		0		(132)
Net current period other comprehensive (loss) income after tax																Net current period other comprehensive (loss) income after tax	(253)		71		(133)		(315)		29		3,076		2,790
Balance at September 25, 2020																Balance at September 25, 2020	$	812	$	(708)	$	(29)	$	75	$	(41,212)	$	(1,644)	$	(42,781)

Balance at June 28, 2019																Balance at June 28, 2019	$	1,420	$	(458)	$	(134)	$	828	$	(40,050)	$	(4,756)	$	(43,978)
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	(201)		(411)		426		(186)		—		1,166		980		Other comprehensive (loss) income before reclassifications	354		(730)		(271)		(647)		0		(463)		(1,110)
Amounts reclassified from accumulated other comprehensive income	Amounts reclassified from accumulated other comprehensive income	8		491		132		631		70		—		701		Amounts reclassified from accumulated other comprehensive income	(3)		343		413		753		609		0		1,362
Net current period other comprehensive income (loss) before tax		(193)		80		558		445		70		1,166		1,681
Net current period other comprehensive (loss) income before tax																Net current period other comprehensive (loss) income before tax	351		(387)		142		106		609		(463)		252
Deferred taxes	Deferred taxes	(44)		18		124		98		(19)		—		79		Deferred taxes	(80)		(66)		10		24		108		0		132
Net current period other comprehensive income (loss) after tax		(149)		62		434		347		89		1,166		1,602
Balance at June 26, 2020		$	1,065	$	(779)	$	104	$	390	$	(41,241)	$	(4,720)	$	(45,571)

Balance at March 29, 2019		$	1,663	$	(24)	$	189	$	1,828	$	(54,003)	$	(5,095)	$	(57,270)
Other comprehensive income (loss) before reclassifications		(269)		(563)		(580)		(1,412)		14,224		339		13,151
Amounts reclassified from accumulated other comprehensive income		(46)		(1)		163		116		3,781		—		3,897
Net current period other comprehensive income (loss) before tax		(315)		(564)		(417)		(1,296)		18,005		339		17,048
Deferred taxes		(72)		(130)		(94)		(296)		4,052		—		3,756
Net current period other comprehensive income (loss) after tax		(243)		(434)		(323)		(1,000)		13,953		339		13,292
Balance at June 28, 2019		$	1,420	$	(458)	$	(134)	$	828	$	(40,050)	$	(4,756)	$	(43,978)
Net current period other comprehensive (loss) income after tax																Net current period other comprehensive (loss) income after tax	271		(321)		132		82		501		(463)		120
Balance at September 27, 2019																Balance at September 27, 2019	$	1,691	$	(779)	$	(2)	$	910	$	(39,549)	$	(5,219)	$	(43,858)

1921

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Gains and Losses on Cash Flow Hedges
(Thousands) Foreign Currency Precious Metals Copper Total Pension and Post-Employment Benefits Foreign Currency Translation Total
Balance at December 31, 2019 $ 1,324 $ (452) $ 25 $ 897 $ (41,346) $ (5,013) $ (45,462)
Other comprehensive (loss) income before reclassifications (343) (1,234) (352) (1,929) — 293 (1,636)
Amounts reclassified from accumulated other comprehensive income 7 809 453 1,269 46 — 1,315
Net current period other comprehensive income (loss) before tax (336) (425) 101 (660) 46 293 (321)
Deferred taxes (77) (98) 22 (153) (59) — (212)
Net current period other comprehensive income (loss) after tax (259) (327) 79 (507) 105 293 (109)
Balance at June 26, 2020 $ 1,065 $ (779) $ 104 $ 390 $ (41,241) $ (4,720) $ (45,571)
Balance at December 31, 2018 $ 1,263 $ 79 $ (441) $ 901 $ (54,543) $ (4,592) $ (58,234)
Other comprehensive (loss) income before reclassifications 248 (636) 304 (84) 14,224 (164) 13,976
Amounts reclassified from accumulated other comprehensive income (44) (62) 92 (14) 4,441 — 4,427
Net current period other comprehensive income (loss) before tax 204 (698) 396 (98) 18,665 (164) 18,403
Deferred taxes 47 (161) 89 (25) 4,172 — 4,147
Net current period other comprehensive income (loss) after tax 157 (537) 307 (73) 14,493 (164) 14,256
Balance at June 28, 2019 $ 1,420 $ (458) $ (134) $ 828 $ (40,050) $ (4,756) $ (43,978)


	Gains and Losses on Cash Flow Hedges
(Thousands)	Foreign Currency		Precious Metals		Copper		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total
Balance at December 31, 2019	$	1,324	$	(452)	$	25	$	897	$	(41,346)	$	(5,013)	$	(45,462)
Other comprehensive income (loss) before reclassifications	(863)		(1,851)		(170)		(2,884)		0		3,369		485
Amounts reclassified from accumulated other comprehensive income	198		1,519		100		1,817		34		0		1,851
Net current period other comprehensive (loss) income before tax	(665)		(332)		(70)		(1,067)		34		3,369		2,336
Deferred taxes	(153)		(76)		(16)		(245)		(100)		0		(345)
Net current period other comprehensive (loss) income after tax	(512)		(256)		(54)		(822)		134		3,369		2,681
Balance at September 25, 2020	$	812	$	(708)	$	(29)	$	75	$	(41,212)	$	(1,644)	$	(42,781)

Balance at December 31, 2018	$	1,263	$	79	$	(441)	$	901	$	(54,543)	$	(4,592)	$	(58,234)
Other comprehensive income (loss) before reclassifications	602		(1,366)		33		(731)		14,224		(627)		12,866
Amounts reclassified from accumulated other comprehensive income	(47)		281		505		739		5,050		0		5,789
Net current period other comprehensive (loss) income before tax	555		(1,085)		538		8		19,274		(627)		18,655
Deferred taxes	127		(227)		99		(1)		4,280		0		4,279
Net current period other comprehensive (loss) income after tax	428		(858)		439		9		14,994		(627)		14,376
Balance at September 27, 2019	$	1,691	$	(779)	$	(2)	$	910	$	(39,549)	$	(5,219)	$	(43,858)

Reclassifications from accumulated other comprehensive income 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 of gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note QR for additional details on cash flow hedges.

Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note MN for additional details on pension and post-employment expenses.

2022

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note OP — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was ~~$3.1~~less than $0.1 million and $4.1 million in the ~~second~~third quarter and first ~~six~~nine months of 2020, respectively, compared to ~~$3.5~~$2.5 million and ~~$6.2~~$8.7 million, respectively, in the same periods of 2019. The decrease in stock-based compensation expense in both the third quarter and first nine months of 2020 was primarily related to the forfeiture of employee equity awards.

The Company granted 64,636 stock appreciation rights (SARs) to certain employees during the first ~~six~~nine months of 2020. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ~~six~~nine months ended ~~June 26,~~September 25, 2020 were $50.95 and $13.67, 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	1.41	%
Dividend yield	0.9	%
Volatility	31.8	%
Expected term (in years)	4.8

The Company granted ~~62,841~~66,663 stock-settled restricted stock units (RSUs) to certain employees and 15,976 stock-settled RSUs to non-employee directors during the first ~~six~~nine months of 2020. 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 ~~$49.34~~$49.72 and $48.42 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the ~~six~~nine months ended ~~June 26,~~September 25, 2020. RSUs are expensed over the vesting period of three years for employees and one year for non-employee directors.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first ~~six~~nine months of 2020. The weighted-average fair value of the stock-settled PRSUs was $57.65 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 the total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At ~~June 26,~~September 25, 2020, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$12.6~~$9.0 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note PQ — 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.

2123

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 ~~June 26,~~September 25, 2020 and December 31, 2019:



(Thousands)	(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)						(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)
				2020			2019			2020			2019			2020			2019			2020			2019	(Thousands)				2020		2019		2020		2019		2020		2019		2020		2019
Financial Assets	Financial Assets																								Financial Assets
Deferred compensation investments	Deferred compensation investments	$	2,625		$	3,391		$	2,625		$	3,391		$	—		$	—		$	—		$	—	Deferred compensation investments		$	2,985		$	3,391	$	2,985	$	3,391	$	0	$	0	$	0	$	0
Foreign currency forward contracts	Foreign currency forward contracts	2,220			188			—			—			2,220			188			—			—		Foreign currency forward contracts		44			188		0		0		44		188		0		0
Precious metal swaps	Precious metal swaps	—			35			—			—			—			35			—			—		Precious metal swaps		100			35		0		0		100		35		0		0
Copper swaps	Copper swaps	137			61			—			—			137			61			—			—		Copper swaps		45			61		0		0		45		61		0		0
Total	Total	$	4,982		$	3,675		$	2,625		$	3,391		$	2,357		$	284		$	—		$	—	Total		$	3,174		$	3,675	$	2,985	$	3,391	$	189	$	284	$	0	$	0
Financial Liabilities	Financial Liabilities																								Financial Liabilities
Deferred compensation liability	Deferred compensation liability	$	2,625		$	3,391		$	2,625		$	3,391		$	—		$	—		$	—		$	—	Deferred compensation liability		$	2,985		$	3,391	$	2,985	$	3,391	$	0	$	0	$	0	$	0
Foreign currency forward contracts	Foreign currency forward contracts	523			211			—			—			523			211			—			—		Foreign currency forward contracts		805			211		0		0		805		211		0		0
Precious metal swaps	Precious metal swaps	1,013			623			—			—			1,013			623			—			—		Precious metal swaps		1,020			623		0		0		1,020		623		0		0
Copper swaps	Copper swaps	3			28			—			—			3			28			—			—		Copper swaps		82			28		0		0		82		28		0		0
Total	Total	$	4,164		$	4,253		$	2,625		$	3,391		$	1,539		$	862		$	—		$	—	Total		$	4,892		$	4,253	$	2,985	$	3,391	$	1,907	$	862	$	0	$	0

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 and metals. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of ~~June 26,~~September 25, 2020 and December 31, 2019. 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 QR — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows:

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 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

2224

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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 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 precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions that charge the Company a financing fee based upon the current value of the metal on hand.

In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. 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 purchased, thereby reducing the exposure to adverse movements in the price of the metal. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine.

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.

The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.

Copper. The Company also uses copper in its production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges a portion of this pricing risk.

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.

2325

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

All derivatives are recorded on the balance sheet at fair value. If the 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) until the hedged item is recognized in 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 fair values will also be classified as short-term or long-term depending upon their maturity dates.

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 balance sheet classification as of ~~June 26,~~September 25, 2020 and December 31, 2019:


		June 26, 2020						December 31, 2019							September 25, 2020				December 31, 2019
(Thousands)	(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value		(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Foreign currency forward contracts	Foreign currency forward contracts									Foreign currency forward contracts
Prepaid expenses	Prepaid expenses	$	152,803	$	2,198	$	13,734	$	95	Prepaid expenses	$	10,517	$	28	$	13,734	$	95
Other liabilities and accrued items	Other liabilities and accrued items	9,786		63		5,757		16		Other liabilities and accrued items	10,831		22		5,757		16

These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany ~~loans,~~loans. Other-net included $0.4 million and $2.7 million of foreign currency gains related to derivatives in the third quarter and first nine months of 2020, respectively, primarily due to a gain realized on the settlement of a foreign currency hedge for the purchase of Optics Balzers AG (Optics Balzers), which the Company agreed to buy in June 2020. See Note T for additional information. Other-net included $1.7 million and $2.3 million of foreign currency gains relating to these derivatives during the second quarter and first six months of 2020, respectively.Balzers.

2426

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 ~~June 26,~~September 25, 2020 and December 31, 2019:


		June 26, 2020						December 31, 2019							September 25, 2020				December 31, 2019
(Thousands)	(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value		(Thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Prepaid expenses	Prepaid expenses									Prepaid expenses
Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	$	—	$	—	$	1,025	$	10	Foreign currency forward contracts - yen	$	0	$	0	$	1,025	$	10
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	5,084		22		3,466		83		Foreign currency forward contracts - euro	296		4		3,466		83
Precious metal swaps	Precious metal swaps	—		—		1,116		34		Precious metal swaps	1,583		90		1,116		34
Copper swaps	Copper swaps	2,235		137		1,951		61		Copper swaps	1,861		45		1,951		61
Total	Total	7,319		159		7,558		188		Total	3,740		139		7,558		188

Other assets	Other assets									Other assets
Foreign currency forward contracts - euro										Foreign currency forward contracts - euro	892		12		0		0
Precious metal swaps	Precious metal swaps	—		—		157		1		Precious metal swaps	757		10		157		1
Total										Total	1,649		22		157		1

Other liabilities and accrued items	Other liabilities and accrued items									Other liabilities and accrued items
Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	2,031		25		2,355		12		Foreign currency forward contracts - yen	1,441		39		2,355		12
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	11,974		420		15,686		183		Foreign currency forward contracts - euro	12,101		743		15,686		183
Precious metal swaps	Precious metal swaps	5,910		1,004		7,034		618		Precious metal swaps	6,492		1,020		7,034		618
Copper swaps	Copper swaps	293		3		1,266		28		Copper swaps	3,258		82		1,266		28
Total	Total	20,208		1,452		26,341		841		Total	23,292		1,884		26,341		841

Other long-term liabilities	Other long-term liabilities									Other long-term liabilities
Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	112		1		—		—		Foreign currency forward contracts - yen	113		1		0		0
Foreign currency forward contracts - euro		553		14		—		—

Precious metal swaps	Precious metal swaps	172		9		149		5		Precious metal swaps	0		0		149		5
Total	Total	837		24		149		5		Total	113		1		149		5

Total	Total	$	28,364	$	1,317	$	34,205	$	657	Total	$	28,794	$	1,724	$	34,205	$	657

All of these contracts were designated and effective as cash flow hedges. The Company expects to relieve substantially the entire balance in OCI as of ~~June 26,~~September 25, 2020 to the Consolidated Statements of Income within the next 15-month period. Refer to Note NO for additional OCI details.

The following table summarizes the amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019:


			Second Quarter Ended		Second Quarter Ended				Third Quarter Ended
(Thousands)	(Thousands)		June 26, 2020		June 28, 2019		(Thousands)		September 25, 2020		September 27, 2019
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	8	$	(46)	Foreign currency forward contracts	Net sales	$	191	$	(3)
Precious metal swaps	Precious metal swaps	Cost of sales	491		(1)		Precious metal swaps	Cost of sales	710		343
Copper swaps	Copper swaps	Cost of sales	132		163		Copper swaps	Cost of sales	(353)		413
Total	Total		$	631	$	116	Total		$	548	$	753

2527

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


			Six Months Ended		Six Months Ended				Nine Months Ended
(Thousands)	(Thousands)		June 26, 2020		June 28, 2019		(Thousands)		September 25, 2020		September 27, 2019
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	7	$	(44)	Foreign currency forward contracts	Net sales	$	198	$	(47)
Precious metal swaps	Precious metal swaps	Cost of sales	809		(62)		Precious metal swaps	Cost of sales	1,519		281
Copper swaps	Copper swaps	Cost of sales	453		92		Copper swaps	Cost of sales	100		505
Total	Total		$	1,269	$	(14)	Total		$	1,817	$	739

Note RS — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note R ("Contingencies and Commitments") in the Company's 2019 Annual Report on Form 10-K.

NaN beryllium cases were outstanding as of ~~June 26,~~September 25, 2020. The Company does not expect the resolution of ~~this matter~~these matters to have a material impact on the consolidated financial statements.

Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. 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.

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 $~~6.0~~5.9 million ~~and $5.9 million~~ at ~~June 26,~~both September 25, 2020 and December 31, ~~2019, respectively.~~2019. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Note ST — Debt


(Thousands)	September 25, 2020		December 31, 2019
Foreign debt	$	6,988	$	0
Fixed rate industrial development revenue bonds	1,602		2,218
Total long-term debt outstanding	8,590		2,218
Current portion of long-term debt	2,216		868
Gross long-term debt	6,374		1,350
Unamortized deferred financing fees	0		90
Long-term debt	$	6,374	$	1,260

In the ~~second quarter~~first nine months of 2020, the Company borrowed $150.0 million under its revolving credit facility, ~~and the~~of which $120.0 million was outstanding as of September 25, 2020. The remaining borrowing capacity under the revolving credit facility as of ~~June 26,~~September 25, 2020 ~~was $179.1~~was $233.9 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2024.

~~Note T — Subsequent Event~~

In July 2020, the Company completed the acquisition of Optics Balzers, an industry leader in thin film optical coatings, with a final transaction value of approximately $160 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.

2628


Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications. Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data center.

Coronavirus (COVID-19) ~~Second~~Third Quarter 2020 Update

The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of the Company’s end markets beginning in the first ~~half~~quarter of 2020 primarily in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial end markets. In the first ~~six~~nine months of 2020, the Company recorded additional reserves for slow-moving and excess inventory of approximately $1.3 million related to the collapse in demand in the oil and gas industry. The Company also reviewed for any other potential impairment indicators and did not identify any. We may temporarily shut down our facilities in response to reduced demand, due to employees being impacted by COVID-19, or changes in government policy. The Company is not experiencing any significant supply chain disruptions. We expect reduced demand to continue at least through the remainder of 2020, but the extent and timing cannot be reasonably estimated due to the evolving nature of this pandemic.

In the ~~second~~third quarter of 2020, the Company incurred ~~$2.7~~$0.8 million of expense related to COVID-19. These costs were primarily related to ~~premium pay for production workers who were deemed essential to work onsite during the pandemic.~~personal protective equipment and temperature-checking services.

The impact of the COVID-19 pandemic is fluid and continues to evolve, and, therefore, we cannot predict the extent to which our business, results of operations, financial condition, or cash flows will ultimately be impacted.

The Company suspended its share buyback program in the first quarter of 2020. In addition, the Company is currently evaluating the impact of the CARES Act. See Note FG to the Consolidated Financial Statements for additional discussion.

From a liquidity perspective, we believe we are well positioned to manage through this global crisis. In order to ensure we have more than adequate liquidity, we borrowed $150.0 million under the revolving credit facility in April 2020, $30.0 million of which was repaid during the third quarter of 2020. We ended the ~~second~~third quarter with total cash of ~~$265.1~~$117.8 million and ~~$151.8~~$128.6 million of total debt, or in a net ~~cash~~debt position of ~~$113.3~~$10.9 million. In addition, we had ~~$179.1~~$233.9 million of available borrowings under our revolving credit facility as of the end of the ~~second~~third quarter.

Additionally, in ~~July~~the third quarter of 2020, we completed the acquisition of Optics Balzers for a ~~total transaction value~~purchase price of ~~approximately $160~~$136.1 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility induring the ~~second quarter~~first nine months of 2020.

2729

RESULTS OF OPERATIONS

~~Second~~Third Quarter


		Second Quarter Ended																			Third Quarter Ended
		June 26,			June 28,			$		%			September 25,			September 27,			$		%
(Thousands, except per share data)	(Thousands, except per share data)	2020			2019			Change		Change		(Thousands, except per share data)	2020			2019			Change		Change
Net sales	Net sales	$	271,468		$	297,843		$	(26,375)	(9)	%	Net sales	$	287,171		$	305,979		$	(18,808)	(6)	%
Value-added sales	Value-added sales	161,569			194,896			(33,327)		(17)	%	Value-added sales	167,545			188,598			(21,053)		(11)	%
Gross margin	Gross margin	48,090			69,594			(21,504)		(31)	%	Gross margin	46,640			65,231			(18,591)		(29)	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	30		%	36		%					Gross margin as a % of value-added sales	28		%	35		%
Selling, general, and administrative (SG&A) expense	Selling, general, and administrative (SG&A) expense	32,852			39,891			(7,039)		(18)	%	Selling, general, and administrative (SG&A) expense	35,696			35,812			(116)		—	%
SG&A expense as a % of value-added sales	SG&A expense as a % of value-added sales	20		%	20		%					SG&A expense as a % of value-added sales	21		%	19		%
Research and development (R&D) expense	Research and development (R&D) expense	4,502			4,062			440		11	%	Research and development (R&D) expense	5,417			5,262			155		3	%
R&D expense as a % of value-added sales	R&D expense as a % of value-added sales	3		%	2		%					R&D expense as a % of value-added sales	3		%	3		%
Goodwill impairment charges												Goodwill impairment charges	—			11,560			(11,560)		N/A
Asset impairment charges												Asset impairment charges	—			2,581			(2,581)		N/A
Restructuring expense	Restructuring expense	2,387			—			2,387		N/A		Restructuring expense	2,593			785			1,808		N/A
Other—net	Other—net	(357)			2,891			(3,248)		(112)	%	Other—net	2,221			2,942			(721)		(25)	%
Operating profit	Operating profit	8,706			22,750			(14,044)		(62)	%	Operating profit	713			6,289			(5,576)		(89)	%
Other non-operating (income) expense—net	Other non-operating (income) expense—net	(851)			3,112			(3,963)		(127)	%	Other non-operating (income) expense—net	(1,076)			127			(1,203)		(947)	%
Interest expense—net	Interest expense—net	1,259			500			759		152	%	Interest expense—net	1,334			436			898		206	%
Income before income taxes	Income before income taxes	8,298			19,138			(10,840)		(57)	%	Income before income taxes	455			5,726			(5,271)		(92)	%
Income tax expense		1,620			3,598			(1,978)		(55)	%
Income tax (benefit) expense												Income tax (benefit) expense	(6,041)			2,263			(8,304)		(367)	%
Net income	Net income	$	6,678		$	15,540		$	(8,862)	(57)	%	Net income	$	6,496		$	3,463		$	3,033	88	%

Diluted earnings per share	Diluted earnings per share	$	0.32		$	0.75		$	(0.43)	(57)	%	Diluted earnings per share	$	0.32		$	0.17		$	0.15	88	%

N/A = Not Applicable

Net sales of ~~$271.5~~$287.2 million in the ~~second~~third quarter of 2020 decreased ~~$26.3~~$18.8 million from ~~$297.8~~$306.0 million in the ~~second~~third quarter of 2019. Net sales growth in our Advanced Materials ~~segment~~and Precision Coatings segments was more than offset by decreased net sales in our Performance Alloys and Composites ~~and Precision Coatings~~ segments driven by lower sales volumes. The change in precious metal and copper prices favorably impacted net sales during the ~~second~~third quarter of 2020 by ~~$19.3~~$24.2 million.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices and changes in mix due to customer-supplied material. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein. Value-added sales of ~~$161.6~~$167.5 million in the ~~second~~third quarter of 2020 decreased ~~$33.3~~$21.1 million, or ~~17%~~11%, compared to the ~~second~~third quarter of 2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales due to reduced demand in the ~~consumer electronics,~~ aerospace and defense, energy, industrial, and telecom and data center end markets.

Gross margin in the ~~second~~third quarter of 2020 was ~~$48.1~~$46.6 million, which was down ~~31%~~29% compared to the ~~second~~third quarter of 2019. Gross margin expressed as a percentage of value-added sales decreased to ~~30%~~28% in the ~~second~~third quarter of 2020 from ~~36%~~35% in the ~~second~~third quarter of 2019. The decrease was primarily driven by lower ~~volumes.~~volumes, as well as $7.3 million of mine development costs recorded in the third quarter of 2020.

SG&A expense was ~~$32.9~~$35.7 million in the ~~second~~third quarter of 2020, compared to ~~$39.9~~$35.8 million in the ~~second~~third quarter of 2019. The decrease in SG&A expense for the ~~second~~third quarter of 2020 was primarily driven by the forfeiture of non-cash stock-based compensation awards, lower variable compensation expense, and cost management ~~actions.~~actions, partially offset by acquisition and integration costs related to the purchase of Optics Balzers. Expressed as a percentage of value-added sales, SG&A expense was ~~20%~~21% and 19% in the ~~second quarters~~third quarter of ~~both~~ 2020 and ~~2019.~~2019, respectively.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expense accounted for 3% ~~and 2%~~ of value-added sales in the ~~second~~third quarter of both 2020 and 2019.

Goodwill and Asset impairment charges includes non-recurring charges relating to goodwill and other assets recorded in the third quarter of 2019 ~~respectively. The increase reflects additional investment~~ in ~~new product and application development.~~our Precision Coatings segment.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the ~~second~~third quarter of 2020, we recorded ~~$2.4~~$2.2 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. In addition, in the third quarter of 2020, we recorded $0.4 million of restructuring charges related to cost reduction actions taken in our Precision Coatings segment. Refer to Note F to the Consolidated Financial Statements for additional discussion.

Other-net was $2.2 million of expense in the third quarter of 2020, or a $0.7 million decrease from the third quarter of 2019, which was primarily driven by a $1.1 million foreign currency hedge gain realized in the third quarter of 2020. Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs. Refer to Note N to the Consolidated Financial Statements for details of the components.

Interest expense-net was $1.3 million and $0.4 million in the third quarter of 2020 and 2019, respectively. The increase in interest expense is primarily due to borrowings under our revolving credit facility.

Income tax (benefit) expensefor the third quarter of 2020 was a benefit of $6.0 million compared to expense of $2.3 million in the third quarter of 2019. The effective tax rate for the third quarter of 2020 was (1,327.7)% compared to 39.5% in the prior-year period. The effective tax rate for the third quarter of 2020 differed from the statutory tax rate primarily due to the impact of percentage depletion, the research and development credit, and the recognition of discrete tax benefits. The effective tax rate for the third quarter of 2020 included a net discrete income tax benefit of $3.8 million, primarily related to the release of a foreign valuation allowance. Refer to Note G to the Consolidated Financial Statements for further details on income taxes.

Nine Months


	Nine Months Ended
	September 25,			September 27,			$		%
(Thousands, except per share data)	2020			2019			Change		Change
Net sales	$	836,585		$	905,263		$	(68,678)	(8)	%
Value-added sales	487,780			571,175			(83,395)		(15)	%
Gross margin	140,305			204,137			(63,832)		(31)	%
Gross margin as a % of value-added sales	29		%	36		%
SG&A expense	99,292			115,767			(16,475)		(14)	%
SG&A expense as a % of value-added sales	20		%	20		%
R&D expense	14,104			13,064			1,040		8	%
R&D expense as a % of value-added sales	3		%	2		%
Goodwill impairment charges	9,053			11,560			(2,507)		N/A
Asset impairment charges	1,713			2,581			(868)		N/A
Restructuring expense	7,144			785			6,359		N/A
Other—net	4,143			9,954			(5,811)		(58)	%
Operating profit	4,856			50,426			(45,570)		(90)	%
Other non-operating (income) expense—net	(2,871)			3,484			(6,355)		(182)	%
Interest expense—net	2,839			1,402			1,437		102	%
Income before income taxes	4,888			45,540			(40,652)		(89)	%
Income tax (benefit) expense	(5,183)			9,631			(14,814)		(154)	%
Net income	$	10,071		$	35,909		$	(25,838)	(72)	%

Diluted earnings per share	$	0.49		$	1.74		$	(1.25)	(72)	%

N/A = Not Applicable

2831

Net sales of $836.6 million in the first nine months of 2020 decreased $68.7 million from $905.3 million in the first nine months of 2019. Net sales growth in our Advanced Materials segment was more than offset by decreased net sales in our Performance Alloys and Composites and Precision Coatings segments driven by lower sales volumes. The change in precious metal and copper prices favorably impacted net sales during the first nine months of 2020 by $63.8 million.

Value-added sales of $487.8 million in the first nine months of 2020 decreased $83.4 million, or 15%, compared to the first nine months of 2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales due to reduced demand in the aerospace and defense, energy, telecom and data center, and industrial end markets.

Gross margin in the first nine months of 2020 was $140.3 million, which was down 31% compared to the first nine months of 2019. Gross margin expressed as a percentage of value-added sales decreased to 29% in the first nine months of 2020 from 36% in the first nine months of 2019. The decrease was primarily driven by lower volumes, as well as $7.3 million of mine development costs and a $1.3 million charge to reserve for slow moving and excess inventory related to the collapse in demand in the oil and gas industry, both recorded in the first nine months of 2020.

SG&A expense was $99.3 million in the first nine months of 2020, compared to $115.8 million in the first nine months of 2019. The decrease in SG&A expense for the first nine months of 2020 was primarily driven by lower variable compensation expense and cost management actions. Expressed as a percentage of value-added sales, SG&A expense was 20% in the first nine months of both 2020 and 2019.

R&D expense accounted for 3% and 2% of value-added sales in the first nine months of 2020 and 2019, respectively. The increase reflects additional investment in new product and application development.

Goodwill and Asset impairment charges includes non-recurring charges relating to goodwill and other assets in our Precision Coatings segment. Refer to Note K to the Consolidated Financial Statements for additional discussion.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first nine months of 2020, we recorded $7.1 million of restructuring charges primarily in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note EF to the Consolidated Financial Statements for additional discussion.

Other-net was ~~$0.4~~$4.1 million of ~~income~~expense in the ~~second quarter~~first nine months of 2020, or a ~~$3.2~~$5.8 million decrease from the ~~second quarter~~first nine months of ~~2019, which~~2019. The decrease in Other-net was primarily driven by a ~~$2.2~~$3.3 million foreign ~~currency~~exchange hedge gain realized in the ~~second quarter~~first nine months of ~~2020.~~2020, as well as reduced metal consignment fees in the first nine months of 2020 compared to the first nine months of 2019. Refer to Note DE to the Consolidated Financial Statements for details of the major components within Other-net.

Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs and a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to freeze the pay and service amounts used to calculate pension benefits during the ~~second quarter~~first nine months of 2019. Refer to Note MN to the Consolidated Financial Statements for details of the components.

Interest expense-net was ~~$1.3~~$2.8 million and ~~$0.5~~$1.4 million in the ~~second quarter~~first nine months of 2020 and 2019, respectively. The increase ~~in interest expense~~ is primarily due to ~~higher~~ borrowings under our revolving credit facility.

Income tax (benefit) expense for the ~~second quarter~~first nine months of 2020 was ~~$1.6~~a benefit of $5.2 million compared to ~~$3.6~~an expense of $9.6 million in the ~~second quarter~~first nine months of 2019. The effective tax rate for the ~~second quarter~~first nine months of 2020 and 2019 was ~~19.5% compared to 18.8% in the prior-year period.~~(106.0%) and 21.1%, respectively. The effective tax rate for ~~each period is lower than~~the first nine months of 2020 differed from the statutory tax rate primarily due to the impact of percentage depletion and the research and development ~~credit. Refer to Note F to~~credit, and the ~~Consolidated Financial Statements for further details on income taxes.~~

~~Six Months~~

Six Months Ended
June 26, June 28, $ %
(Thousands, except per share data) 2020 2019 Change Change
Net sales $ 549,414 $ 599,284 $ (49,870) (8) %
Value-added sales 320,235 382,577 (62,342) (16) %
Gross margin 93,665 138,906 (45,241) (33) %
Gross margin as a % of value-added sales 29 % 36 %
SG&A expense 63,596 79,955 (16,359) (20) %
SG&A expense as a % of value-added sales 20 % 21 %
R&D expense 8,687 7,802 885 11 %
R&D expense as a % of value-added sales 3 % 2 %
Goodwill impairment charges 9,053 — 9,053 N/A
Held for sale impairment charges 1,713 — 1,713 N/A
Restructuring expense 4,551 — 4,551 N/A
Other—net 1,922 7,012 (5,090) (73) %
Operating profit 4,143 44,137 (39,994) (91) %
Other non-operating (income) expense—net (1,795) 3,357 (5,152) (153) %
Interest expense—net 1,505 966 539 56 %
Income before income taxes 4,433 39,814 (35,381) (89) %
Income tax expense 858 7,368 (6,510) (88) %
Net income $ 3,575 $ 32,446 $ (28,871) (89) %
Diluted earnings per share $ 0.17 $ 1.57 $ (1.40) (89) %

~~N/A = Not Applicable~~

~~Net sales~~recognition of $549.4 million in the first six months of 2020 decreased $49.9 million from $599.3 million in the first six months of 2019. Net sales growth in our Advanced Materials segment was more than offset by decreased net sales in our Performance Alloys and Composites and Precision Coatings segments driven by lower sales volumes. The change in precious metal and copper prices favorably impacted net sales during the first six months of 2020 by $39.2 million.

~~Value-added sales~~ of $320.2 million in the first six months of 2020 decreased $62.3 million, or 16%, compared to the first six months of 2019. The increase in semiconductor end market sales was more than offset by the decrease in value-added sales due to reduced demand in the aerospace and defense, energy, telecom and data center, and industrial end markets.

~~Gross margin~~ in the first half of 2020 was $93.7 million, which was down 33% compared to the first six months of 2019. Gross margin expressed as a percentage of value-added sales decreased to 29% in the first half of 2020 from 36% in the first half of 2019. The decrease was primarily driven by lower volumes, as well as a $1.3 million charge to reserve for slow moving and excess inventory related to the collapse in demand in the oil and gas industry.

~~SG&A expense~~ was $63.6 million in the first six months of 2020, compared to $80.0 million in the first six months of 2019. The decrease in SG&A expense for the first half of 2020 was primarily driven by lower variable compensation expense and cost management actions. Expressed as a percentage of value-added sales, SG&A expense was 20% and 21% in the first six months of 2020 and 2019, respectively.

~~R&D expense~~ ~~accounted for 3% and 2% of value-added sales in the first six months of 2020 and 2019, respectively. The increase reflects additional investment in new product and application development.~~

~~Goodwill and Held for sale impairment charges~~ ~~includes non-recurring charges relating to goodwill and other assets in our Precision Coatings segment. Refer to Notes I and J to the Consolidated Financial Statements for additional discussion.~~

~~Restructuring expense~~ consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first six months of 2020, we recorded $4.6 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note E to the Consolidated Financial Statements for additional discussion.

~~Other-net~~ was $1.9 million of expense in the first six months of 2020, or a $5.1 million decrease from the first six months of 2019. The decrease in Other-net was primarily driven by a $2.2 million foreign exchange hedge gain realized in the second quarter of 2020, as well as reduced metal consignment fees in the first half of 2020 compared to the first half of 2019. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.

~~Other non-operating (income) expense-net~~ includes components of pension and post-retirement expense other than service costs and a non-cash pre-tax pension curtailment charge of $3.3 million associated with the pension plan amendment to freeze the pay and service amounts used to calculate pension benefits during the second quarter of 2019. Refer to Note M to the Consolidated Financial Statements for details of the components.

~~Interest expense-net~~ ~~was $1.5 million and $1.0 million in the first six months of 2020 and 2019, respectively. The increase is primarily due to higher borrowings under our revolving credit facility.~~

~~Income~~discrete tax ~~expense~~ ~~for the first six months of 2020 was $0.9 million compared to $7.4 million in the first six months of 2019.~~benefits. The effective tax rate for the first six months of 2020 was 19.4% compared to 18.5% in the prior-year period. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for the first sixnine months of 2020 included a net discrete income tax ~~expense~~benefit of ~~$0.8~~$3.8 million, primarily related to ~~an impairment~~the release of ~~goodwill.~~a valuation allowance. The effective tax rate for the first ~~six~~nine months of 2019 included a net discrete income tax ~~benefit~~expense of ~~$0.5~~$1.3 million, primarily related to ~~excess~~an impairment of goodwill and return to provision tax ~~benefits from stock-based compensation awards.~~expense adjustments. Refer to Note FG to the Consolidated Financial Statements for further details on income taxes.

3032

Value-Added Sales - Reconciliation of Non-GAAP Financial Measure

A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the ~~second~~third quarter and first ~~six~~nine months of 2020 and 2019 is as follows:


		Second Quarter Ended						Six Months Ended							Third Quarter Ended				Nine Months Ended
		June 26,		June 28,		June 26,		June 28,			September 25,		September 27,		September 25,		September 27,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2020		2019		2020		2019
Net sales	Net sales									Net sales
Performance Alloys and Composites	Performance Alloys and Composites	$	101,614	$	135,231	$	200,681	$	262,344	Performance Alloys and Composites	$	91,203	$	130,704	$	291,884	$	393,048
Advanced Materials	Advanced Materials	150,108		133,238		310,273		277,263		Advanced Materials	165,582		147,650		475,855		424,913
Precision Coatings	Precision Coatings	19,746		29,374		38,460		59,677		Precision Coatings	30,386		27,625		68,846		87,302
Other	Other	—		—		—		—		Other	—		—		—		—
Total	Total	$	271,468	$	297,843	$	549,414	$	599,284	Total	$	287,171	$	305,979	$	836,585	$	905,263

Less: pass-through metal costs	Less: pass-through metal costs									Less: pass-through metal costs
Performance Alloys and Composites	Performance Alloys and Composites	$	11,858	$	19,988	$	27,210	$	37,500	Performance Alloys and Composites	$	9,321	$	18,747	$	36,531	$	56,247
Advanced Materials	Advanced Materials	95,443		74,931		196,420		161,449		Advanced Materials	107,916		92,040		304,336		253,489
Precision Coatings	Precision Coatings	1,968		6,285		3,693		14,051		Precision Coatings	2,076		5,183		5,769		19,234
Other	Other	630		1,743		1,856		3,707		Other	313		1,411		2,169		5,118
Total	Total	$	109,899	$	102,947	$	229,179	$	216,707	Total	$	119,626	$	117,381	$	348,805	$	334,088

Value-added sales	Value-added sales									Value-added sales
Performance Alloys and Composites	Performance Alloys and Composites	$	89,756	$	115,243	$	173,471	$	224,844	Performance Alloys and Composites	$	81,882	$	111,957	$	255,353	$	336,801
Advanced Materials	Advanced Materials	54,665		58,307		113,853		115,814		Advanced Materials	57,666		55,610		171,519		171,424
Precision Coatings	Precision Coatings	17,778		23,089		34,767		45,626		Precision Coatings	28,310		22,442		63,077		68,068
Other	Other	(630)		(1,743)		(1,856)		(3,707)		Other	(313)		(1,411)		(2,169)		(5,118)
Total	Total	$	161,569	$	194,896	$	320,235	$	382,577	Total	$	167,545	$	188,598	$	487,780	$	571,175

The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.

Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.

By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.

Segment Results

The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Other reportable segment includes unallocated corporate costs.

3133

Performance Alloys and Composites

~~Second~~Third Quarter


		Second Quarter Ended															Third Quarter Ended
		June 26,		June 28,		$		%			September 25,		September 27,		$		%
(Thousands)	(Thousands)	2020		2019		Change		Change		(Thousands)	2020		2019		Change		Change
Net sales	Net sales	$	101,614	$	135,231	$	(33,617)	(25)	%	Net sales	$	91,203	$	130,704	$	(39,501)	(30)	%
Value-added sales	Value-added sales	89,756		115,243		(25,487)		(22)	%	Value-added sales	81,882		111,957		(30,075)		(27)	%
Operating profit	Operating profit	8,244		19,328		(11,084)		(57)	%	Operating profit	721		18,780		(18,059)		(96)	%

Net sales from the Performance Alloys and Composites segment of ~~$101.6~~$91.2 million in the ~~second~~third quarter of 2020 were ~~25%~~30% lower than net sales of ~~$135.2~~$130.7 million in the ~~second~~third quarter of 2019. The decrease was due to reduced sales into all major end markets, with the largest declines in the aerospace and defense, ~~consumer electronics,~~industrial, and telecom and data ~~center.~~center end markets.

Value-added sales of ~~$89.8~~$81.9 million in the ~~second~~third quarter of 2020 were ~~22%~~27% lower than value-added sales of ~~$115.2~~$112.0 million in the ~~second~~third quarter of 2019. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

Performance Alloys and Composites generated operating profit of ~~$8.2~~$0.7 million in the ~~second~~third quarter of 2020 compared to ~~$19.3~~$18.8 million in the ~~second~~third quarter of 2019. The decrease in operating profit was primarily due to reduced sales volumes as well as $7.3 million of mine development costs recorded in the third quarter of 2020. In addition, restructuring charges of ~~$2.4~~$2.2 million were recorded in the ~~second~~third quarter of 2020 related to the closure of our Warren, Michigan and Fremont, California facilities.

~~Six~~Nine Months


		Six Months Ended															Nine Months Ended
		June 26,		June 28,		$		%			September 25,		September 27,		$		%
(Thousands)	(Thousands)	2020		2019		Change		Change		(Thousands)	2020		2019		Change		Change
Net sales	Net sales	$	200,681	$	262,344	$	(61,663)	(24)	%	Net sales	$	291,884	$	393,048	$	(101,164)	(26)	%
Value-added sales	Value-added sales	173,471		224,844		(51,373)		(23)	%	Value-added sales	255,353		336,801		(81,448)		(24)	%
Operating profit	Operating profit	13,035		38,286		(25,251)		(66)	%	Operating profit	13,756		57,066		(43,310)		(76)	%

Net sales from the Performance Alloys and Composites segment of ~~$200.7~~$291.9 million in the first ~~six~~nine months of 2020 were ~~24%~~26% lower than net sales of ~~$262.3~~$393.0 million in the first ~~six~~nine months of 2019. The decrease was due to reduced sales into all major end markets, with the largest declines in the aerospace and defense, telecom and data center, and ~~energy.~~energy end markets.

Value-added sales of ~~$173.5~~$255.4 million in the first ~~six~~nine months of 2020 were ~~23%~~24% lower than value-added sales of ~~$224.8~~$336.8 million in the first ~~six~~nine months of 2019. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

Performance Alloys and Composites generated operating profit of ~~$13.0~~$13.8 million in the first ~~half~~nine months of 2020 compared to ~~$38.3~~$57.1 million in the first ~~half~~nine months of 2019. The decrease in operating profit was primarily due to reduced sales volumes as well as ~~restructuring charges~~$7.3 million of ~~$4.6 million~~mine development costs recorded in the first ~~half~~nine months of 2020. In addition, we recorded $6.7 million of restructuring charges in the first nine months of 2020 related to the closure of our Warren, Michigan and Fremont, California facilities. ~~In addition, we~~We also recorded $1.3 million of additional reserves for slow-moving and excess inventory related to the collapse in demand in the oil and gas industry.

Advanced Materials

~~Second~~Third Quarter


		Second Quarter Ended													Third Quarter Ended
		June 26,		June 28,		$	%			September 25,		September 27,		$	%
(Thousands)	(Thousands)	2020		2019		Change	Change		(Thousands)	2020		2019		Change	Change
Net sales	Net sales	$	150,108	$	133,238	16,870	13	%	Net sales	$	165,582	$	147,650	17,932	12	%
Value-added sales	Value-added sales	54,665		58,307		(3,642)	(6)	%	Value-added sales	57,666		55,610		2,056	4	%
Operating profit	Operating profit	4,370		6,139		(1,769)	(29)	%	Operating profit	5,920		6,202		(282)	(5)	%

Net sales from the Advanced Materials segment of ~~$150.1~~$165.6 million in the ~~second~~third quarter of 2020 were ~~13%~~12% higher than net sales of ~~$133.2~~$147.7 million in the ~~second~~third quarter of 2019. The increase in net sales was primarily due to the impact of higher pass-through

metal prices of ~~$19.8~~$24.2 million, partially offset by a lower mix of precious metal-containing products and the mix of customer-supplied material.

Value-added sales of ~~$54.7~~$57.7 million in the ~~second~~third quarter of 2020 ~~decreased 6%~~increased 4% compared to value-added sales of ~~$58.3~~$55.6 million in the ~~second~~third quarter of 2019. Higher semiconductor end market sales were ~~more than~~partially offset by decreased value-added sales into the energy ~~and industrial markets.~~end market.

The Advanced Materials segment generated operating profit of ~~$4.4~~$5.9 million in the ~~second~~third quarter of 2020 compared to ~~$6.1~~$6.2 million in the ~~second~~third quarter of 2019. Decreased operating profit in the ~~second~~third quarter of 2020, compared to the ~~second~~third quarter of 2019, was the primarily the result of ~~lower sales volumes and~~ reduced manufacturing yields.

~~Six~~Nine Months


		Six Months Ended													Nine Months Ended
		June 26,		June 28,		$	%			September 25,		September 27,		$	%
(Thousands)	(Thousands)	2020		2019		Change	Change		(Thousands)	2020		2019		Change	Change
Net sales	Net sales	$	310,273	$	277,263	33,010	12	%	Net sales	$	475,855	$	424,913	50,942	12	%
Value-added sales	Value-added sales	113,853		115,814		(1,961)	(2)	%	Value-added sales	171,519		171,424		95	—	%
Operating profit	Operating profit	9,155		13,219		(4,064)	(31)	%	Operating profit	15,075		19,421		(4,346)	(22)	%

Net sales from the Advanced Materials segment of ~~$310.3~~$475.9 million in the first ~~six~~nine months of 2020 were 12% higher than net sales of ~~$277.3~~$424.9 million in the first ~~six~~nine months of 2019. The increase in net sales was primarily due to the impact of higher pass-through metal prices of ~~$39.1~~$63.7 million, partially offset by a lower mix of precious metal-containing products and the mix of customer-supplied material.

Value-added sales of ~~$113.9~~$171.5 million in the first ~~six~~nine months of 2020 were ~~down 2%~~flat compared to value-added sales of ~~$115.8~~$171.4 million in the first ~~six~~nine months of 2019. Higher semiconductor end market sales were ~~more than~~partially offset by decreased value-added sales into the energy and industrial markets.

The Advanced Materials segment generated operating profit of ~~$9.2~~$15.1 million in the first ~~six~~nine months of 2020 compared to ~~$13.2~~$19.4 million in the first ~~six~~nine months of 2019. Decreased operating profit in the first ~~half~~nine months of 2020, compared to the first ~~half~~nine months of 2019, was the result of unfavorable sales mix and reduced manufacturing ~~yields primarily related to new product introductions.~~yields.

Precision Coatings

~~Second~~Third Quarter


(Thousands)	(Thousands)	Second Quarter Ended														(Thousands)	Third Quarter Ended
				June 26,		June 28,	$		%			(Thousands)			September 25,		September 27,		$	%
				2020		2019	Change		Change						2020		2019		Change	Change
Net sales	Net sales	$	19,746	$	29,374	(9,628)	(33)	%		Net sales	$		$	27,625	2,761		10	%
Value-added sales	Value-added sales	17,778		23,089		(5,311)	(23)	%		Value-added sales	28,310		22,442		5,868		26	%
Operating profit		2,091		3,937		(1,846)	(47)	%
Operating profit (loss)										Operating profit (loss)	1,421		(11,198)		12,619		(113)	%

Net sales from the Precision Coatings segment of ~~$19.7~~$30.4 million in the ~~second~~third quarter of 2020 ~~decreased 33%~~increased 10% compared to net sales of ~~$29.4~~$27.6 million in the ~~second~~third quarter of 2019. The increase was due to sales attributable to our Optics Balzers acquisition, partially offset by lower sales related to our LAC reporting unit and projection display products.

Value-added sales of $28.3 million in the third quarter of 2020 increased 26% compared to value-added sales of $22.4 million in the third quarter of 2019. The increase in value-added sales was due to the same factors driving the increase in net sales.

The Precision Coatings segment generated an operating profit of $1.4 million in the third quarter of 2020, compared to an operating loss of $11.2 million in the third quarter of 2019. The operating loss in the third quarter of 2019 included a goodwill impairment charge of $11.6 million and an other assets impairment charge of $2.6 million related to our LAC reporting unit.

Nine Months


(Thousands)	Nine Months Ended
			September 25,		September 27,	$		%
			2020		2019	Change		Change
Net sales	$	68,846	$	87,302	(18,456)	(21)	%
Value-added sales	63,077		68,068		(4,991)	(7)	%
Operating loss	(6,080)		(5,184)		(896)	17	%

Net sales from the Precision Coatings segment of $68.8 million in the first nine months of 2020 decreased 21% compared to net sales of $87.3 million in the first nine months of 2019 primarily due to reduced sales volumes and lower mix of precious metal-containing ~~products.~~products, partially offset by an increase of sales attributable to our Optics Balzers acquisition.

Value-added sales of ~~$17.8~~$63.1 million in the ~~second quarter~~first nine months of 2020 decreased ~~23%~~7% compared to value-added sales of ~~$23.1 million in the second quarter of 2019. Growth in optical filters was more than offset by a reduction in value-added sales related to blood glucose test strip products.~~

The Precision Coatings segment generated an operating profit of $2.1 million in the second quarter of 2020, compared to $3.9 million in the second quarter of 2019. The decrease in operating profit was driven by lower sales of blood glucose test strip products.

~~Six Months~~

(Thousands) Six Months Ended
June 26, June 28, $ %
2020 2019 Change Change
Net sales $ 38,460 $ 59,677 (21,217) (36) %
Value-added sales 34,767 45,626 (10,859) (24) %
Operating (loss) profit (7,501) 6,014 (13,515) (225) %

~~Net sales from the Precision Coatings segment of $38.5~~$68.1 million in the first ~~half of 2020 decreased 36% compared to net sales of $59.7 million in the first half of 2019 primarily due to reduced sales volumes and lower mix of precious metal-containing products.~~

~~Value-added sales of $34.8 million in the first half of 2020 decreased 24% compared to value-added sales of $45.6 million in the first half~~nine months of 2019. The decrease is primarily due to a reduction in value-added sales related to blood glucose test strip ~~products.~~products, partially offset by an increase of sales attributable to our Optics Balzers acquisition.

The Precision Coatings segment generated an operating loss of ~~$7.5~~$6.1 million and $5.2 million in the first ~~half~~nine months of 2020 ~~compared to~~and 2019, respectively. The operating ~~profit of $6.0 million~~loss in the first ~~half~~nine months of ~~2019. The operating loss was driven by~~2020 includes a goodwill impairment charge of $9.1 million and ~~a held-for-sale~~an other assets impairment charge of $1.7 million related to our LAC reporting ~~unit, which met~~unit. The operating loss in the ~~criteria~~first nine months of 2019 included a goodwill impairment charge of $11.6 million and an other assets impairment charge of $2.6 million related to ~~be classified as held for sale as of March 27, 2020.~~our LAC reporting unit.

Other

~~Second~~Third Quarter


(Thousands)	(Thousands)	Second Quarter Ended																	(Thousands)	Third Quarter Ended
				June 26,			June 28,		$			%	(Thousands)			September 25,		September 27,		$		%
				2020			2019		Change			Change				2020		2019		Change		Change
Net sales	Net sales	$	—		$	—		—		—	%	Net sales		$	—	$	—	—		—	%
Value-added sales	Value-added sales	(630)			(1,743)			1,113		(64)	%	Value-added sales		(313)		(1,411)		1,098		(78)	%
Operating loss	Operating loss	(5,999)			(6,654)			655		(10)	%	Operating loss		(7,349)		(7,495)		146		(2)	%

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs ~~of $6.0~~were $7.3 million in the ~~second~~third quarter of 2020 ~~decreased $0.7 million as~~ compared to ~~$6.7~~$7.5 million in the ~~second~~third quarter of 2019. Corporate costs accounted for 4% ~~and 3%~~ of Company-wide value-added sales in the ~~second quarters~~third quarter of both 2020 and ~~2019, respectively.~~2019. The decrease in corporate costs in the ~~second~~third quarter of 2020 compared to the ~~second~~third quarter of 2019 is primarily related to lower variable compensation expenses and cost management actions, partially offset by transaction costs related to the Optics Balzers acquisition.

Nine Months


(Thousands)	Nine Months Ended
			September 25,			September 27,		$			%
			2020			2019		Change			Change
Net sales	$	—		$	—		—		—	%
Value-added sales	(2,169)			(5,118)			2,949		(58)	%
Operating loss	(17,895)			(20,877)			2,982		(14)	%

Corporate costs of $17.9 million in the first nine months of 2020 decreased $3.0 million as compared to $20.9 million in the first nine months of 2019. Corporate costs accounted for 4% of Company-wide value-added sales in the first nine months of both 2020 and 2019. The decrease in corporate costs in the first nine months of 2020 compared to the first nine months of 2019 is primarily related to lower variable compensation expense and cost management ~~actions.~~

~~Six Months~~

(Thousands) Six Months Ended
June 26, June 28, $ %
2020 2019 Change Change
Net sales $ — $ — — — %
Value-added sales (1,856) (3,707) 1,851 (50) %
Operating loss (10,546) (13,382) 2,836 (21) %

~~Corporate~~actions, partially offset by transaction costs of $10.5 million in the first half of 2020 decreased $2.8 million as compared to $13.4 million in the first half of 2019. Corporate costs accounted for 3% of Company-wide value-added sales in the first half of both 2020 and 2019. The decrease in corporate costs in the first half of 2020 comparedrelated to the ~~first half of 2019 is primarily related to lower variable compensation expense and cost management actions.~~Optics Balzers acquisition.

3436

FINANCIAL POSITION

Cash Flow

A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:


		Six Months Ended											Nine Months Ended
		June 26,		June 28,		$			September 25,		September 27,		$
(Thousands)	(Thousands)	2020		2019		Change		(Thousands)	2020		2019		Change
Net cash provided by operating activities	Net cash provided by operating activities	$	36,433	$	30,046	$	6,387	Net cash provided by operating activities	$	79,444	$	59,536	$	19,908
Net cash used in investing activities	Net cash used in investing activities	(32,001)		(15,409)		(16,592)		Net cash used in investing activities	(173,716)		(20,079)		(153,637)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	135,573		(10,326)		145,899		Net cash provided by (used in) financing activities	86,305		(15,154)		101,459
Effects of exchange rate changes	Effects of exchange rate changes	56		(100)		156		Effects of exchange rate changes	714		(422)		1,136
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	140,061	$	4,211	$	135,850	Net change in cash and cash equivalents	$	(7,253)	$	23,881	$	(31,134)

Net cash provided by operating activities totaled ~~$36.4~~$79.4 million in the first ~~six~~nine months of 2020 versus ~~$30.0~~$59.5 million in the prior-year period. ~~Working~~The increase in operating cash flow was primarily due to customer prepayments. See Note L to the Consolidated Financial Statements for additional discussion. In addition, working capital requirements used cash of ~~$22.9~~$5.7 million and ~~$29.3~~$28.2 million during the first ~~six~~nine months of 2020 and 2019, respectively. Cash flows provided by accounts receivable were ~~$17.1~~$50.0 million higher than the prior-year period. Three-month trailing days sales outstanding was approximately 4544 days at ~~June 26,~~September 25, 2020 and 47 days at December 31, 2019. Cash flows used for inventory were ~~$20.6~~$9.9 million in the first ~~six~~nine months of 2020, compared to providing ~~$1.3~~$22.1 million of cash in the prior-year period primarily in our Performance Alloys and Composites and Advanced Materials segments. Cash flows used for accounts payable and accrued expenses were ~~$7.6~~$9.8 million compared to the prior-year period use of cash of ~~$18.8~~$14.1 million due to higher accounts payable balances related to increased inventory levels.

Net cash used in investing activities was ~~$32.0~~$173.7 million in the first ~~six~~nine months of 2020 compared to ~~$15.4~~$20.1 million in the prior-year period due to ~~increased levels~~a $130.7 million payment, net of ~~capital spending. The increase in~~cash acquired, for the Optics Balzers acquisition. In addition, capital expenditures ~~was~~increased due to investments in new equipment funded by customer prepayments. See ~~Note K~~Notes B and L to the Consolidated Financial Statements for additional discussion.

Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2020, the Company expects payments for property, plant, and equipment to be approximately ~~$30.0~~$25.0 million, excluding any capital expenditures related to customer ~~prepayments, and mine development expenditures to be approximately $14.0 million.~~prepayments.

Net cash provided by financing activities totaled ~~$135.6~~$86.3 million in the first ~~six~~nine months of 2020 versus ~~$10.3~~$15.2 million used in financing activities in the comparable prior-year period. The increase is primarily due to ~~the borrowing~~net borrowings of ~~$150.0~~$120.0 million under our revolving credit facility in the ~~second quarter~~first nine months of 2020, partially offset by ~~an increase~~the paydown of $16.4 million of long-term debt, primarily related to repayment of debt assumed in ~~shares repurchased under our share repurchase program.~~the Optics Balzers acquisition.

Liquidity

We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, and the current dividend program, environmental remediation projects, and strategic acquisitions. At ~~June 26,~~September 25, 2020, cash and cash equivalents held by our foreign operations totaled ~~$21.2~~$33.2 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of ~~June 26,~~September 25, 2020 and December 31, 2019 is as follows:


		June 26,		December 31,			September 25,		December 31,
(Thousands)	(Thousands)	2020		2019		(Thousands)	2020		2019
Cash and cash equivalents	Cash and cash equivalents	$	265,068	$	125,007	Cash and cash equivalents	$	117,754	$	125,007
Total outstanding debt	Total outstanding debt	151,790		2,218		Total outstanding debt	128,633		2,218
Net cash		$	113,278	$	122,789
Net (debt) cash						Net (debt) cash	$	(10,879)	$	122,789
Available borrowing capacity	Available borrowing capacity	$	179,137	$	340,906	Available borrowing capacity	$	233,893	$	340,906

Total outstanding debt increased $126.4 million compared to December 31, 2019 primarily due to additional borrowings on our revolving credit facility as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic.

Net (debt) cash is a non-GAAP financial measure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods.

The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.

In 2019, we amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement). The maturity date of the Credit Agreement was extended from 2020 to 2024, and the Credit Agreement provides more favorable interest rates under certain circumstances. In addition, the Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives. Borrowings under the Credit Agreement are secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets.

The Credit Agreement allows the Company to borrow money at a premium over LIBOR or a prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the agreement. The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the 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 26,~~September 25, 2020. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.

~~During~~In the ~~second~~third quarter of ~~2020, we borrowed $150.0 million under our Credit Agreement as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic.~~

~~In July~~ 2020, we completed the acquisition of 100% of the capital stock of Optics Balzers. The ~~final acquisition value~~purchase price was approximately ~~$160~~$136.1 million, including the assumption of debt. The all-cash transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.

Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. In 2019, we entered into a precious metals consignment agreement, maturing on August 27, 2022, which replaced the consignment agreement that would have matured on September 30, 2019. The available and unused capacity under the metal financing lines expiring in August 2022 totaled approximately ~~$116.1~~$67.2 million as of ~~June 26,~~September 25, 2020, compared to $140.7 million as of December 31, 2019. The availability is determined by Board approved levels and actual line capacity.

In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We did not repurchase any shares under this program in the ~~second~~third quarter of 2020. In the first ~~six~~nine months of 2020, we repurchased 158,000 shares of our common stock for $6.8 million. Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million. Due to the COVID-19 pandemic, we have temporarily suspended our share repurchase program.

We paid cash dividends of $2.3 million and ~~$4.6~~$6.9 million on our common stock in the ~~second~~third quarter and first ~~six~~nine months of 2020, respectively. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$333.9~~$382.8 million ~~as of June 26, 2020, versus~~and $309.3 million as of September 25, 2020 and December 31, ~~2019.~~2019, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of ~~June 26,~~September 25, 2020 and December 31, 2019. For additional information on our contractual obligations, refer to our 2019 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our 2019 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2020.

Forward-looking ~~Statements~~

Statements:

Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein:

▪~~Actual net sales, operating rates, and margins for 2020;~~

▪~~Our ability to achieve~~ the ~~strategic and other objectives related to the proposed acquisition of Optics Balzers, including any expected synergies;~~

▪Our ability to successfully integrate the Optics Balzers business and achieve the expected results of the acquisition, including, without limitation, the acquisition being accretive in the expected timeframe or at all;

▪~~The global economy, including the impact of tariffs and trade agreements;~~

▪~~The~~ ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity;

▪~~The~~ the global economy, including the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns and sequestrations;

▪~~The~~ the condition of the markets which we serve, whether defined geographically or by ~~segment, with the major market segments being: semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center;~~

▪~~Changes~~segment; changes in product mix and the financial condition of customers;

▪~~Our~~ our success in developing and introducing new products and new product ramp-up rates;

▪~~Our~~ our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values;

▪~~Our~~ our success in identifying acquisition candidates and in acquiring and integrating such ~~businesses;~~

▪~~The~~businesses, including the integration of Optics Balzers; the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these ~~acquisitions;~~

▪~~Our~~acquisitions, including, without limitation, the acquisition of Optics Balzers being accretive in the expected timeframe or at all; our success in implementing our strategic plans and the timely and successful completion and start-up of any capital projects;

▪~~Other~~ other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal financing fees, tax rates, exchange rates, interest rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans;

▪~~The~~ the uncertainties related to the impact of war, terrorist activities, and acts of God;

▪~~Changes~~ changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations;

▪~~The~~ the conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects;

▪~~Our~~ our ability to successfully complete the disposition of our LAC business;

▪~~The~~ the disruptions on operations from, and other effects of, catastrophic and other extraordinary events including the COVID-19 pandemic; and

•~~The~~ the risk factors set forth in Part 1, Item 1A of our 2019 Annual Report on Form ~~10-K.~~10-K and our Quarterly Report on Form 10-Q for the second quarter 2020.


Item 3.			Quantitative and Qualitative Disclosures about Market Risk

For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2019 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2019 Annual Report on Form 10-K.

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Item 4.			Controls and Procedures

a)Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and procedures as of ~~June 26,~~September 25, 2020 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that disclosure controls and procedures are effective as of ~~June 26,~~September 25, 2020.

b)Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended ~~June 26,~~September 25, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II OTHER INFORMATION


Item 1.			Legal Proceedings

Our subsidiaries and our holding company are subject, from time to time, to a variety of civil and administrative proceedings arising out of our normal operations, including, without limitation, product liability claims, health, safety, and environmental claims, and employment-related actions. Among such proceedings are cases alleging that plaintiffs have contracted, or have been placed at risk of contracting, beryllium sensitization or chronic beryllium disease or other lung conditions as a result of exposure to beryllium (beryllium cases). The plaintiffs in beryllium cases seek recovery under negligence and various other legal theories and demand compensatory and often punitive damages, in many cases of an unspecified sum. Spouses of some plaintiffs claim loss of consortium.

As of ~~June 26,~~September 25, 2020, our subsidiary, Materion Brush Inc., was a defendant in two beryllium cases, as discussed more fully below.

In 2019, one new beryllium case was filed. In Ronald Dwayne Manning v. Arconic Inc. et al., case number 19CI000219, filed in the Superior Court of the State of California, Tehama County, the Company is one of four named defendants and 120 Doe defendants. The plaintiff alleges that he contracted beryllium disease from exposures to beryllium-containing products during his employment as an auto mechanic, welder, sprinkler installer, and movie projector operator, and asserts claims for negligence, strict liability, fraudulent concealment, and breach of implied warranties. The plaintiff seeks economic damages, non-economic damages, consequential damages, and punitive damages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

In the second quarter of 2020, one new beryllium case was filed. In Richard Miller v. Dolphin, Inc. et al., case number CV2020-005163, filed in the Superior Court of Arizona, Maricopa County, the Company is one of six named defendants and 100 Doe defendants. The plaintiff alleges that he contracted beryllium disease from exposures to beryllium-containing products supplied to his employer, Karsten Manufacturing Corporation, where he was a production worker, and asserts claims for negligence, strict liability – failure to warn, strict liability – design defect, and fraudulent concealment. The plaintiff seeks general damages, medical expenses, loss of earnings, consequential damages, and punitive damages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

The Company has insurance coverage, which may apply, subject to an annual deductible.


Item 1A.			Risk Factors

The information set forth in this quarterly report on Form 10-Q, including, without limitation, the risk factor presented below, updates and should be read in conjunction with, the risk factors and information disclosed in Part 1, Item 1A., “Risk Factors,” in our 2019 Annual Report on Form 10-K.

Our business, results of operations, financial position, and cash flows have been and are expected to continue to be adversely affected by the COVID-19 pandemic.

In December 2019, there was an outbreak of a novel strain of coronavirus (COVID-19) in China that has since spread to the majority of the regions of the world. The outbreak was subsequently declared a pandemic by the World Health Organization in March 2020. To date, the COVID-19 outbreak and preventative measures taken to contain or mitigate the outbreak have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruption in global financial markets. Although we are unable to predict the ultimate impact of the COVID-19 outbreak at this time, the pandemic has adversely affected, and is expected to continue to adversely affect, our business, results of operations, financial position, and cash flows. Such effects may be material and the potential impacts include, but are not limited to:

•disruptions to our facilities, including as a result of facility closures, reductions in operating hours, labor shortages, and changes in operating procedures, including additional cleaning and disinfecting procedures;

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•disruptions in our supply chain due to transportation delays, travel restrictions, raw material cost increases, and closures of businesses or facilities;

•reductions in our operating effectiveness due to workforce disruptions resulting from “shelter in place," “stay at home” orders, the need for social distancing, and the unavailability of key personnel necessary to conduct our business activities; and

•volatility in the global financial markets, which could have a negative impact on our ability to access capital and additional sources of financing in the future.

In addition, we cannot predict the impact that COVID-19 will have on our customers, employees, suppliers, and distributors, and any adverse impacts on these parties may have a material adverse impact on our business. The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A, “Risk Factors,” in our 2019 Annual Report on Form 10-K, any of which could have a material effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.


Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to repurchases of common stock made by us during the three months ended ~~June 26,~~September 25, 2020.

Period Total Number of Shares Purchased (1) Average Price Paid per Share (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
March 28 through May 1, 2020
— $ — — $ 8,316,239
May 2 through May 29, 2020
196 51.19 — 8,316,239
May 30 through June 26, 2020
— — — 8,316,239
Total 196 $ 51.19 — $ 8,316,239


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
June 27 through July 31, 2020	—	$	—	—	$	8,316,239
August 1 through August 28, 2020	3,065	61.03		—	8,316,239
August 29 through September 25, 2020	—	—		—	8,316,239
Total	3,065	$	61.03	—	$	8,316,239


(1)			Includes ~~196~~3,065 shares surrendered to the Company in ~~May~~August by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.

(2)			On January 14, 2014, we announced that our Board of Directors had authorized the repurchase of up to $50.0 million of our common stock. During the three months ended ~~June 26,~~September 25, 2020, we did not repurchase any shares under this program. As of ~~June 26,~~September 25, 2020, $8.3 million may still be purchased under the program.


Item 4.			Mine Safety Disclosures

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this quarterly report on Form 10-Q.


Item 6.			Exhibits

All documents referenced below were filed pursuant to the Exchange Act by Materion Corporation, file number 001-15885, unless otherwise noted.


~~10.1~~						Form of Non-Employee Directors' Restricted Stock Units Agreement under the Materion Corporation 2006 Non-Employee Director Equity Plan (As Amended and Restated as of May 3, 2017), covering grants made in 2020*
31.1						Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*
31.2						Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*
32						Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350*
95						Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended ~~June 26~~September 25 , 2020*
101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
101.SCH						Inline XBRL Taxonomy Extension Schema Document*
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments)

*Submitted electronically herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MATERION CORPORATION

Dated: ~~July 23,~~October 22, 2020

/s/ Stephen F. Shamrock

Stephen F. Shamrock

Interim Chief Financial Officer

(Principal Financial and Accounting Officer)

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