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, 2020~~April 2, 2021

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


~~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, 2020: 20,322,225.~~April 2, 2021: 20,413,705.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income (Loss)

(Unaudited)


		Second Quarter Ended						Six Months Ended							First Quarter 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)	April 2, 2021		March 27, 2020*
Net sales	Net sales	$	271,468	$	297,843	$	549,414	$	599,284	Net sales	$	354,386	$	277,946
Cost of sales	Cost of sales	223,378		228,249		455,749		460,378		Cost of sales	287,590		233,376
Gross margin	Gross margin	48,090		69,594		93,665		138,906		Gross margin	66,796		44,570
Selling, general, and administrative expense	Selling, general, and administrative expense	32,852		39,891		63,596		79,955		Selling, general, and administrative expense	36,776		30,744
Research and development expense	Research and development expense	4,502		4,062		8,687		7,802		Research and development expense	6,206		4,185
Goodwill impairment charges	Goodwill impairment charges	—		—		9,053		—		Goodwill impairment charges	0		9,053
Held for sale impairment charges		—		—		1,713		—
Restructuring expense		2,387		—		4,551		—
Asset impairment charges										Asset impairment charges	0		1,713
Restructuring (income) expense										Restructuring (income) expense	(378)		2,164
Other—net	Other—net	(357)		2,891		1,922		7,012		Other—net	4,474		2,279
Operating profit		8,706		22,750		4,143		44,137
Other non-operating (income) expense—net		(851)		3,112		(1,795)		3,357
Operating profit (loss)										Operating profit (loss)	19,718		(5,568)
Other non-operating income—net										Other non-operating income—net	(1,276)		(944)
Interest expense—net	Interest expense—net	1,259		500		1,505		966		Interest expense—net	761		246
Income before income taxes		8,298		19,138		4,433		39,814
Income tax expense		1,620		3,598		858		7,368
Net income		$	6,678	$	15,540	$	3,575	$	32,446
Income (loss) before income taxes										Income (loss) before income taxes	20,233		(4,870)
Income tax expense (benefit)										Income tax expense (benefit)	3,466		(992)
Net income (loss)										Net income (loss)	$	16,767	$	(3,878)
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income per share of common stock		$	0.33	$	0.76	$	0.18	$	1.60
Net income (loss) per share of common stock										Net income (loss) per share of common stock	$	0.82	$	(0.19)
Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income per share of common stock		$	0.32	$	0.75	$	0.17	$	1.57
Net income (loss) per share of common stock										Net income (loss) per share of common stock	$	0.81	$	(0.19)
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	20,374		20,384
Diluted	Diluted	20,554		20,666		20,587		20,635		Diluted	20,628		20,384

*Amounts for the period ended March 27, 2020 have been adjusted to reflect the change in inventory accounting method, as described in Note A to the Consolidated Financial Statements in the Company's 2020 Annual Report on Form 10-K.

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)


		Second Quarter Ended						Six Months Ended							First Quarter Ended
		June 26,		June 28,		June 26,		June 28,			April 2,		March 27
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2021		2020*
Net income		$	6,678	$	15,540	$	3,575	$	32,446
Net income (loss)										Net income (loss)	$	16,767	$	(3,878)
Other comprehensive (loss) income:	Other comprehensive (loss) income:									Other comprehensive (loss) income:
Foreign currency translation adjustment	Foreign currency translation adjustment	1,166		339		293		(164)		Foreign currency translation adjustment	(8,857)		(873)
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	1,245		(854)
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	164		16
Other comprehensive income (loss)		1,602		13,292		(109)		14,256
Comprehensive income		$	8,280	$	28,832	$	3,466	$	46,702
Other comprehensive loss										Other comprehensive loss	(7,448)		(1,711)
Comprehensive income (loss)										Comprehensive income (loss)	$	9,319	$	(5,589)

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets


		(Unaudited)					(Unaudited)
		June 26,		Dec. 31,			April 2,		Dec. 31,
(Thousands)	(Thousands)	2020		2019		(Thousands)	2021		2020
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	$	18,934	$	25,878
Accounts receivable, net	Accounts receivable, net	146,527		154,751		Accounts receivable, net	180,544		166,447
Inventories, net	Inventories, net	209,847		190,390		Inventories, net	272,828		250,778
Prepaid and other current assets	Prepaid and other current assets	29,191		21,839		Prepaid and other current assets	22,449		20,896
Assets held for sale		5,811		—
Total current assets	Total current assets	656,444		491,987		Total current assets	494,755		463,999
Deferred income taxes	Deferred income taxes	1,669		1,666		Deferred income taxes	1,932		3,134
Property, plant, and equipment	Property, plant, and equipment	924,620		916,965		Property, plant, and equipment	1,021,174		998,312
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	(692,101)		(688,626)
Property, plant, and equipment—net		239,265		232,276
Property, plant, and equipment, net						Property, plant, and equipment, net	329,073		309,686
Operating lease, right-of-use assets	Operating lease, right-of-use assets	48,942		23,413		Operating lease, right-of-use assets	59,826		62,089
Intangible assets		5,732		6,380
Intangible assets, net						Intangible assets, net	51,503		54,672
Other assets	Other assets	19,169		17,937		Other assets	20,791		19,364
Goodwill	Goodwill	70,001		79,011		Goodwill	140,392		144,916
Total Assets	Total Assets	$	1,041,222	$	852,670	Total Assets	$	1,098,272	$	1,057,860
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	$	1,541	$	1,937
Accounts payable	Accounts payable	52,093		43,206		Accounts payable	72,489		55,640
Salaries and wages	Salaries and wages	24,367		41,167		Salaries and wages	22,803		18,809
Other liabilities and accrued items	Other liabilities and accrued items	33,429		32,477		Other liabilities and accrued items	36,927		40,887
Income taxes	Income taxes	1,779		1,342		Income taxes	5,102		1,898
Unearned revenue	Unearned revenue	3,003		3,380		Unearned revenue	8,573		7,713
Liabilities held for sale		2,126		—
Total current liabilities	Total current liabilities	268,528		122,440		Total current liabilities	147,435		126,884
Other long-term liabilities	Other long-term liabilities	10,117		11,560		Other long-term liabilities	17,777		17,002
Operating lease liabilities	Operating lease liabilities	44,830		18,091		Operating lease liabilities	54,593		56,761
Finance lease liabilities	Finance lease liabilities	16,939		17,424		Finance lease liabilities	18,937		20,539
Retirement and post-employment benefits	Retirement and post-employment benefits	32,389		32,466		Retirement and post-employment benefits	39,662		41,877
Unearned income	Unearned income	57,799		32,891		Unearned income	92,301		86,761
Long-term income taxes		3,508		3,451
Deferred income taxes	Deferred income taxes	2,172		2,410		Deferred income taxes	14,824		15,864
Long-term debt	Long-term debt	—		1,260		Long-term debt	51,407		36,542
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 April 2 and December 31)						Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at April 2 and December 31)	264,940		258,642
Retained earnings	Retained earnings	588,803		589,888		Retained earnings	645,468		631,058
Common stock in treasury	Common stock in treasury	(198,726)		(186,845)		Common stock in treasury	(206,845)		(199,187)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(45,571)		(45,462)		Accumulated other comprehensive loss	(46,087)		(38,639)
Other equity	Other equity	3,678		3,422		Other equity	3,860		3,756
Total shareholders' equity	Total shareholders' equity	604,940		610,677		Total shareholders' equity	661,336		655,630
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	1,041,222	$	852,670	Total Liabilities and Shareholders’ Equity	$	1,098,272	$	1,057,860

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


		Six Months Ended							Three Months Ended
		June 26,		June 28,			April 2,		March 27
(Thousands)	(Thousands)	2020		2019		(Thousands)	2021		2020*
Cash flows from operating activities:	Cash flows from operating activities:					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:
Net income (loss)						Net income (loss)	$	16,767	$	(3,878)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:						Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, and amortization	Depreciation, depletion, and amortization	23,522		22,607		Depreciation, depletion, and amortization	8,599		14,274
Amortization of deferred financing costs in interest expense	Amortization of deferred financing costs in interest expense	364		472		Amortization of deferred financing costs in interest expense	182		182
Stock-based compensation expense (non-cash)	Stock-based compensation expense (non-cash)	3,966		3,541		Stock-based compensation expense (non-cash)	1,473		1,492

Deferred income tax (benefit) expense		(234)		4,578
Net pension curtailments and settlements		94		3,296
Held for sale impairment charges		10,766		—
Deferred income tax expense (benefit)						Deferred income tax expense (benefit)	382		(1,457)
Impairment charges						Impairment charges	0		10,766
Changes in assets and liabilities:	Changes in assets and liabilities:					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)
Accounts receivable						Accounts receivable	(15,697)		11,049
Inventory						Inventory	(23,219)		(15,718)
Prepaid and other current assets						Prepaid and other current assets	(2,107)		1,127
Accounts payable and accrued expenses						Accounts payable and accrued expenses	19,224		(13,002)
Unearned revenue						Unearned revenue	932		(938)
Interest and taxes payable						Interest and taxes payable	3,164		368
Unearned income due to customer prepayments						Unearned income due to customer prepayments	5,890		7,113
Other-net	Other-net	(2,982)		(2,803)		Other-net	(140)		(2,248)
Net cash provided by operating activities	Net cash provided by operating activities	36,433		30,046		Net cash provided by operating activities	15,450		9,130
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Payments for purchase of property, plant, and equipment	Payments for purchase of property, plant, and equipment	(32,034)		(13,833)		Payments for purchase of property, plant, and equipment	(31,250)		(14,789)
Payments for mine development		—		(1,591)

Proceeds from sale of property, plant, and equipment	Proceeds from sale of property, plant, and equipment	33		15		Proceeds from sale of property, plant, and equipment	575		10
Net cash used in investing activities	Net cash used in investing activities	(32,001)		(15,409)		Net cash used in investing activities	(30,675)		(14,779)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Short-term debt under revolving credit agreement		150,000		—
Proceeds from borrowings under revolving credit agreement, net						Proceeds from borrowings under revolving credit agreement, net	14,955		0
Repayment of long-term debt	Repayment of long-term debt	(428)		(397)		Repayment of long-term debt	(377)		(142)
Principal payments under finance lease obligations	Principal payments under finance lease obligations	(626)		(599)		Principal payments under finance lease obligations	(675)		(233)
Cash dividends paid	Cash dividends paid	(4,582)		(4,368)		Cash dividends paid	(2,338)		(2,245)
Repurchase of common stock	Repurchase of common stock	(6,766)		(199)		Repurchase of common stock	0		(6,766)
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(2,025)		(4,763)		Payments of withholding taxes for stock-based compensation awards	(2,838)		(2,015)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	135,573		(10,326)		Net cash provided by (used in) financing activities	8,727		(11,401)
Effects of exchange rate changes	Effects of exchange rate changes	56		(100)		Effects of exchange rate changes	(446)		(381)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	140,061		4,211		Net change in cash and cash equivalents	(6,944)		(17,431)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	125,007		70,645		Cash and cash equivalents at beginning of period	25,878		125,007
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	265,068	$	74,856	Cash and cash equivalents at end of period	$	18,934	$	107,576

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity

(Unaudited)

Common Shares Shareholders' Equity
(Thousands, except per share amounts) Common Shares Common Shares Held in Treasury Common
Stock Retained
Earnings Common
Stock in
Treasury Accumulated Other
Comprehensive
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
Net income — — — 6,678 — — — 6,678
Other comprehensive income (loss) — — — — — 1,602 — 1,602
Cash dividends declared ($0.115 per share) — — — (2,337) — — — (2,337)
Stock-based compensation activity 11 11 2,775 (43) (259) — — 2,473
Payments of withholding taxes for stock-based compensation awards — — — — (10) — — (10)
Directors’ deferred compensation 1 1 14 — (146) — 188 56
Balance at June 26, 2020 20,322 (6,826) $ 256,756 $ 588,803 $ (198,726) $ (45,571) $ 3,678 $ 604,940
Balance at March 29, 2019 20,354 (6,794) $ 241,480 $ 562,941 $ (184,812) $ (57,270) $ 4,538 $ 566,877
Net income — — — 15,540 — — — 15,540
Other comprehensive income — — — — — 9,996 — 9,996
Pension curtailment — — — — — 3,296 — 3,296
Cash dividends declared ($0.11 per share) — — — (2,243) — — — (2,243)
Stock-based compensation activity 55 55 4,287 (27) (2,266) — — 1,994
Payments of withholding taxes for stock-based compensation awards (12) (12) — — (785) — — (785)
Directors’ deferred compensation 2 2 18 — 639 — (547) 110
Balance at June 28, 2019 20,399 (6,749) $ 245,785 $ 576,211 $ (187,224) $ (43,978) $ 3,991 $ 594,785


	Common Shares		Shareholders' Equity
(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings*		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total*
Balance at December 31, 2020	20,328	(6,820)	$	258,642	$	631,058	$	(199,187)	$	(38,639)	$	3,756	$	655,630
Net income	—	—	0		16,767		0		0		0		16,767
Other comprehensive loss	—	—	0		0		0		(7,448)		0		(7,448)
Cash dividends declared ($0.115 per share)	—	—	0		(2,338)		0		0		0		(2,338)
Stock-based compensation activity	127	127	6,259		(19)		(4,767)		0		0		1,473
Payments of withholding taxes for stock-based compensation awards	(43)	(43)	0		0		(2,838)		0		0		(2,838)
Directors’ deferred compensation	2	2	39		0		(53)		0		104		90
Balance at April 2, 2021	20,414	(6,734)	$	264,940	$	645,468	$	(206,845)	$	(46,087)	$	3,860	$	661,336

Balance at December 31, 2019	20,404	(6,744)	$	249,674	$	624,954	$	(186,845)	$	(45,462)	$	3,422	$	645,743
Net loss	—	—	0		(3,878)		0		0		0		(3,878)
Other comprehensive loss	—	—	0		0		0		(1,711)		0		(1,711)
Cash dividends declared ($0.11 per share)	—	—	0		(2,245)		0		0		0		(2,245)
Stock-based compensation activity	99	99	4,262		(35)		(2,643)		0		0		1,584
Payments of withholding taxes for stock-based compensation awards	(36)	(36)	0		0		(2,015)		0		0		(2,015)
Repurchase of shares	(158)	(158)	0		0		(6,766)		0		0		(6,766)
Directors’ deferred compensation	1	1	31		0		(42)		0		68		57
Balance at March 27, 2020	20,310	(6,838)	$	253,967	$	618,796	$	(198,311)	$	(47,173)	$	3,490	$	630,769

Common Shares Shareholders' Equity
(Thousands, except per share amounts) Common Shares Common Shares Held in Treasury Common
Stock Retained
Earnings Common
Stock in
Treasury Accumulated Other
Comprehensive
Income (Loss) Other
Equity Total
Balance at December 31, 2019 20,404 (6,744) $ 249,674 $ 589,888 $ (186,845) $ (45,462) $ 3,422 $ 610,677
Net income — — — 3,575 — — — 3,575
Other comprehensive income (loss) — — — — — (109) — (109)
Cash dividends declared ($0.225 per share) — — — (4,582) — — — (4,582)
Stock-based compensation activity 110 110 7,037 (78) (2,902) — — 4,057
Payments of withholding taxes for stock-based compensation awards (36) (36) — — (2,025) — — (2,025)
Repurchase of shares (158) (158) — — (6,766) — — (6,766)
Directors’ deferred compensation 2 2 45 — (188) — 256 113
Balance at June 26, 2020 20,322 (6,826) $ 256,756 $ 588,803 $ (198,726) $ (45,571) $ 3,678 $ 604,940
Balance at December 31, 2018 20,242 (6,906) $ 234,704 $ 548,374 $ (175,426) $ (58,234) $ 4,488 $ 553,906
Net income — — — 32,446 — — — 32,446
Other comprehensive income — — — — — 10,960 — 10,960
Pension curtailment — — — — — 3,296 — 3,296
Cumulative effect of accounting change — — — (179) — — — (179)
Cash dividends declared ($0.215 per share) — — — (4,368) — — — (4,368)
Stock-based compensation activity 247 247 11,046 (62) (7,443) — — 3,541
Payments of withholding taxes for stock-based compensation awards (87) (87) — — (4,763) — — (4,763)
Repurchase of shares (5) (5) — — (199) — — (199)
Directors’ deferred compensation 2 2 35 — 607 — (497) 145
Balance at June 28, 2019 20,399 (6,749) $ 245,785 $ 576,211 $ (187,224) $ (43,978) $ 3,991 $ 594,785

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~~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~~2021 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~~2020 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 a preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.

Change in Accounting Principle: During the fourth quarter of 2020, the Company elected to change its method for valuing its inventories at locations that previously used the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company believes that the FIFO method is preferable as it improves comparability with its most similar peers, it more closely resembles the physical flow of its inventory (i.e., it provides better matching of revenues and expenses), and it results in uniformity across a significant majority of the Company’s inventory. The effects of the change in accounting principle from LIFO to FIFO were retrospectively applied. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheets as of March 27, 2020 and the consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for the three months ended March 27, 2020 were adjusted as necessary. For further information, refer to the Company's 2020 Annual Report on Form 10-K.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the prior periods presented in the accompanying financial statements:

Consolidated Statement of Income


(Thousands except per share amounts)
	First Quarter Ended
	March 27, 2020
Selected Items	As Reported		As Adjusted		Adjustment
Cost of sales	$	232,371	$	233,376	$	1,005
Gross margin	45,575		44,570		(1,005)
Operating loss	(4,563)		(5,568)		(1,005)
Loss before income taxes	(3,865)		(4,870)		(1,005)
Income tax (benefit)	(762)		(992)		(230)
Net loss	(3,103)		(3,878)		(775)
Basic earnings per share:
Net loss per share of common stock	$	(0.15)	$	(0.19)	$	(0.04)
Diluted earnings per share:
Net loss per share of common stock	$	(0.15)	$	(0.19)	$	(0.04)

Consolidated Statement of Comprehensive Income (Loss)


(Thousands)
	First Quarter Ended
	March 27, 2020
Selected Items	As Reported		As Adjusted		Adjustment
Net loss	$	(3,103)	$	(3,878)	$	(775)
Comprehensive loss	(4,814)		(5,589)		(775)

Consolidated Statement of Cash Flow


(Thousands)
	Three Months Ended
	March 27, 2020
Selected Items	As Reported		As Adjusted		Adjustment
Net loss	$	(3,103)	$	(3,878)	$	(775)
Deferred income tax benefit	(1,227)		(1,457)		(230)
Decrease (increase) in inventory	(16,723)		(15,718)		1,005

New Pronouncements Adopted: In ~~June 2016,~~December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2016-13,~~2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing various exceptions, such as the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items. The amendments in this update also simplify the accounting for income taxes related to income-based franchise taxes and require that an entity reflect enacted tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted the standard on January 1, 2021. The adoption did not materially impact the Company's financial statements or disclosures.

New Accounting Guidance Issued and Not Yet Adopted:In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial ~~Instruments - Credit Losses~~Reporting. This ~~ASU requires an entity~~guidance is intended

Materion Corporation and Subsidiaries

Notes to ~~change its~~Consolidated Financial Statements

(Unaudited)

to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting ~~approach~~to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in ~~determining impairment of certain financial instruments, including trade receivables, from an “incurred loss”~~any period prior to ~~a “current expected credit loss” model. The standard is effective for fiscal years beginning after~~the guidance expiration on December ~~15, 2019, including interim periods within such fiscal years. Early adoption is permitted.~~31, 2022. The Company ~~adopted~~is currently assessing which of its various contracts will require an update for a new reference rate, and will determine the timing for implementation of this guidance asat the completion 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, 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.that analysis.

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

Business acquisitions have been accounted for using the acquisition method, with acquired assets and assumed liabilities recognized at their respective fair values as of the acquisition date. The cost in excess of the net assets of the business acquired is included in goodwill.

On July 17, 2020, the Company completed the acquisition 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 $22.5 million of debt. The transaction was funded with cash on hand. Based on the fair value of assets acquired and liabilities assumed, goodwill of $70.8 million and identifiable intangible assets of $49.3 million were recorded. Goodwill associated with this acquisition is not tax deductible. This acquisition is being reported in our Precision Optics segment and the results of Optics Balzers are not material to our Consolidated Financial Statements. NaN material measurement period adjustments have been recorded during the first quarter of 2021. As of April 2, 2021, the purchase price allocation remains preliminary as the Company completes its assessments of income taxes.

Note C — Segment Reporting

The Company has the following reportable segments: Performance Alloys and Composites, Advanced Materials, Precision ~~Coatings,~~Optics, and Other. The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's chief operating decision maker, in determining how to allocate the Company’s resources and evaluate performance.

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

The Other reportable segment includes unallocated corporate costs and assets.


(Thousands)	(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total		(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Optics		Other		Total
Second Quarter 2020
First Quarter 2021												First Quarter 2021
Net sales	Net sales	$	101,614	$	150,108	$	19,746	$	—	$	271,468	Net sales	$	114,143	$	204,644	$	35,599	$	0	$	354,386
Intersegment sales	Intersegment sales	(213)		8,997		—		—		8,784		Intersegment sales	5		2,687		0		0		2,692
Operating profit (loss)	Operating profit (loss)	8,244		4,370		2,091		(5,999)		8,706		Operating profit (loss)	13,491		8,933		4,558		(7,264)		19,718
Second Quarter 2019
First Quarter 2020												First Quarter 2020
Net sales	Net sales	$	135,231	$	133,238	$	29,374	$	—	$	297,843	Net sales	$	99,067	$	160,165	$	18,714	$	0	$	277,946
Intersegment sales	Intersegment sales	6		19,260		—		—		19,266		Intersegment sales	215		9,191		0		0		9,406
Operating profit (loss)	Operating profit (loss)	19,328		6,139		3,937		(6,654)		22,750		Operating profit (loss)	3,523		5,050		(9,592)		(4,549)		(5,568)

First Six Months 2020
Net sales		$	200,681	$	310,273	$	38,460	$	—	$	549,414
Intersegment sales		2		18,188		—		—		18,190
Operating profit (loss)		13,035		9,155		(7,501)		(10,546)		4,143
First Six Months 2019
Net sales		$	262,344	$	277,263	$	59,677	$	—	$	599,284
Intersegment sales		15		36,473		—		—		36,488
Operating profit (loss)		38,286		13,219		6,014		(13,382)		44,137

The following table disaggregates revenue for each segment by end market for the ~~second~~first quarter of 2021 and ~~first six months of 2020 and 2019, respectively:~~2020:

(Thousands) Performance Alloys and Composites Advanced Materials Precision Coatings Other Total
Second Quarter 2020
End Market
Semiconductor $ 1,537 $ 123,908 $ 232 $ — $ 125,677
Industrial 23,831 8,419 2,574 — 34,824
Aerospace and Defense 17,952 1,650 4,119 — 23,721
Consumer Electronics 9,956 21 3,404 — 13,381
Automotive 16,415 1,186 7 — 17,608
Energy 5,590 9,327 — — 14,917
Telecom and Data Center 12,586 788 — — 13,374
Other 13,747 4,809 9,410 — 27,966
Total $ 101,614 $ 150,108 $ 19,746 $ — $ 271,468
Second Quarter 2019
End Market
Semiconductor $ 1,303 $ 101,634 $ 93 $ — $ 103,030
Industrial 28,585 7,704 3,842 — 40,131
Aerospace and Defense 26,046 1,125 4,750 — 31,921
Consumer Electronics 22,663 500 4,430 — 27,593
Automotive 16,564 1,669 365 — 18,598
Energy 11,303 16,027 — — 27,330
Telecom and Data Center 18,244 713 — — 18,957
Other 10,523 3,866 15,894 — 30,283
Total $ 135,231 $ 133,238 $ 29,374 $ — $ 297,843

(Thousands) Performance Alloys and Composites Advanced Materials Precision Coatings Other Total
First Six Months 2020
End Market
Semiconductor $ 2,443 $ 244,727 $ 243 $ — $ 247,413
Industrial 47,171 16,781 5,671 — 69,623
Aerospace and Defense 32,158 3,077 9,228 — 44,463
Consumer Electronics 24,651 138 6,946 — 31,735
Automotive 34,579 3,266 24 — 37,869
Energy 11,019 32,795 — — 43,814
Telecom and Data Center 22,575 1,658 — — 24,233
Other 26,085 7,831 16,348 — 50,264
Total $ 200,681 $ 310,273 $ 38,460 $ — $ 549,414
First Six Months 2019
End Market
Semiconductor $ 3,268 $ 206,725 $ 205 $ — $ 210,198
Industrial 55,015 15,632 7,992 — 78,639
Aerospace and Defense 53,120 2,618 9,622 — 65,360
Consumer Electronics 36,218 705 7,916 — 44,839
Automotive 37,277 3,023 587 — 40,887
Energy 22,397 38,224 — — 60,621
Telecom and Data Center 35,836 914 — — 36,750
Other 19,213 9,422 33,355 — 61,990
Total $ 262,344 $ 277,263 $ 59,677 $ — $ 599,284


(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Optics		Other		Total
First Quarter 2021
End Market
Semiconductor	$	997	$	155,061	$	471	$	0	$	156,529
Industrial	24,030		12,590		7,375		0		43,995
Aerospace and defense	21,842		1,398		6,576		0		29,816
Consumer electronics	10,044		165		9,460		0		19,669
Automotive	23,507		1,669		2,193		0		27,369
Energy	4,137		27,190		0		0		31,327
Telecom and data center	11,343		70		0		0		11,413
Other	18,243		6,501		9,524		0		34,268
Total	$	114,143	$	204,644	$	35,599	$	0	$	354,386

First Quarter 2020
End Market
Semiconductor	$	906	$	120,819	$	11	$	0	$	121,736
Industrial	23,340		8,362		3,097		0		34,799
Aerospace and defense	14,206		1,426		5,109		0		20,741
Consumer electronics	14,695		118		3,541		0		18,354
Automotive	18,163		2,080		17		0		20,260
Energy	5,429		23,468		0		0		28,897
Telecom and data center	9,989		871		0		0		10,860
Other	12,339		3,021		6,939		0		22,299
Total	$	99,067	$	160,165	$	18,714	$	0	$	277,946

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, 2020.~~April 2, 2021. 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, 2020,~~April 2, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$29.2~~$81.9 million.

1110

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)	April 2, 2021		December 31, 2020		$ change		% change
Accounts receivable, trade	Accounts receivable, trade	$	141,465	$	141,168	$	297	—	%	Accounts receivable, trade	$	166,411	$	156,821	$	9,590	6	%
Unbilled receivables	Unbilled receivables	5,218		13,583		(8,365)		(62)	%	Unbilled receivables	13,895		8,832		5,063		57	%
Unearned revenue	Unearned revenue	3,003		3,380		(377)		(11)	%	Unearned revenue	8,573		7,713		860		11	%

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~~first quarter ~~and first six months~~ of ~~2020.~~2021.

Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are ~~normally~~generally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables.

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately ~~$3.1~~$2.4 million of the December 31, 2020 unearned amounts as revenue during the first ~~six~~three months of ~~2020.~~2021.

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~~first quarter of 2021 and ~~first six months of~~ 2020 ~~and 2019~~ is summarized as follows:


		Second Quarter Ended						Six Months Ended							First Quarter Ended
		June 26,		June 28,		June 26,		June 28,			April 2,		March 27
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2021		2020
Metal consignment fees	Metal consignment fees	$	2,037	$	2,225	$	4,266	$	5,316	Metal consignment fees	$	2,150	$	2,229
Amortization of intangible assets	Amortization of intangible assets	106		368		294		758		Amortization of intangible assets	1,173		188
Foreign currency (gain) loss		(2,486)		307		(2,548)		384
Net loss on disposal of fixed assets		9		118		55		142
Foreign currency loss (gain)										Foreign currency loss (gain)	1,249		(62)
Net (gain) loss on disposal of fixed assets										Net (gain) loss on disposal of fixed assets	(388)		46
Other items	Other items	(23)		(127)		(145)		412		Other items	290		(122)
Total	Total	$	(357)	$	2,891	$	1,922	$	7,012	Total	$	4,474	$	2,279

Note EF — Restructuring

InDuring 2020, the Company determined it would close its Large Area Coatings (LAC) business (a reporting unit in the Precision Optics segment). The closure was substantially completed by the end of the first ~~half~~quarter of 2021. Income of $0.4 million was recorded in 2021 primarily related to lower than previously estimated facility closure costs that were recorded in 2020.

Remaining severance payments of $0.2 million are reflected in Salaries and wages in the Consolidated Balance Sheet as of April 2, 2021 and are expected to be substantially paid by the end of 2021. Any additional costs related to the closure of this business are expected to be immaterial.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

In addition, 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 million and $4.6~~$2.2 million in the ~~second quarter and~~ first ~~six months of 2020, respectively. In the second~~ quarter of 2020 ~~these costs~~and included ~~$0.9~~$0.5 million of severance associated with approximately 6063 employees and ~~$1.5~~$1.3 million of facility and other related costs. ~~Included in restructuring charges for~~This plan was substantially complete by the ~~first six months~~end of ~~2020 was $1.4 million of severance associated with approximately 60 employees and $3.1 million of facility and other related costs.~~2020.

Remaining severance payments of ~~$1.2~~$0.2 million and facility costs of ~~$0.4~~$0.5 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~~Sheets and are expected to ~~incur additional costs related to these initiatives~~be substantially paid by the end of ~~approximately $4 million in~~ the ~~remainder~~second quarter of ~~2020.~~2021.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note FG — Income Taxes

The Company's effective tax rate for the ~~second~~first quarter of 2021 and 2020 was 17.1% and ~~2019 was 19.5% and 18.8%~~20.4%, ~~respectively, and 19.4% and 18.5% for the first six months of 2020 and 2019,~~ respectively. The effective tax rate for ~~each period is~~the first quarter of 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion and ~~the~~ research and development ~~credit. Additionally, the~~credits. The effective tax rate for the first ~~six~~three months of 2021 included a net discrete income tax benefit of $0.3 million, primarily related to excess tax benefits from stock-based compensation awards. The effective tax rate for the first quarter of 2020 included a net discrete income tax expense of ~~$0.8~~$0.2 million, primarily related to an impairment of ~~goodwill. The effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to~~goodwill and excess tax benefits from stock-based compensation awards.

On March ~~27, 2020,~~11, 2021, President Biden signed the ~~Coronavirus Aid, Relief and Economic Security (CARES) Act was signed~~American Rescue Plan (the Plan) into law. The ~~CARES Act,~~Plan, among other things, ~~includes provisions relating to refundable payroll~~extends and enhances a number of current-law 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.~~incentives for businesses. While the Company continues to examine the impacts the ~~CARES Act~~Plan 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 the new legislation to its consolidated financial statements.

Note GH — Earnings Per Share (EPS)

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


		Second Quarter Ended						Six Months Ended							First Quarter Ended
		June 26,		June 28,		June 26,		June 28,			April 2,		March 27
(Thousands, except per share amounts)	(Thousands, except per share amounts)	2020		2019		2020		2019		(Thousands, except per share amounts)	2021		2020
Numerator for basic and diluted EPS:	Numerator for basic and diluted EPS:									Numerator for basic and diluted EPS:
Net income		$	6,678	$	15,540	$	3,575	$	32,446
Net income (loss)										Net income (loss)	$	16,767	$	(3,878)
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	20,374		20,384
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	72		0
Restricted stock units	Restricted stock units	63		76		80		77		Restricted stock units	108		0
Performance-based restricted stock units	Performance-based restricted stock units	138		131		121		140		Performance-based restricted stock units	74		0
Diluted potential common shares	Diluted potential common shares	237		283		237		309		Diluted potential common shares	254		0
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	20,628		20,384
Basic EPS	Basic EPS	$	0.33	$	0.76	$	0.18	$	1.60	Basic EPS	$	0.82	$	(0.19)
Diluted EPS	Diluted EPS	$	0.32	$	0.75	$	0.17	$	1.57	Diluted EPS	$	0.81	$	(0.19)

Adjusted weighted-average shares ~~outstanding-diluted excludes~~outstanding - diluted exclude securities totaling ~~191,500~~63,627 and ~~84,509~~302,573 for the quarters ended ~~June 26,~~April 2, 2021 and March 27, 2020, ~~and June 28, 2019, respectively, and 230,893 and 144,154 for the six months ended June 26, 2020 and June 28, 2019,~~ respectively. These securities are 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.

1312

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Additionally, adjusted weighted-average shares outstanding - diluted for the three months ended March 27, 2020 exclude the dilutive effect of approximately 239,000 shares, primarily related to restricted stock units and stock appreciation rights, as their inclusion would have been anti-dilutive due to the Company's net loss.

Note HI — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:

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

~~The liquidation of last in, first out (LIFO) inventory layers increased cost of sales by $0.1 million in the second quarter and first six months of both 2020 and 2019.~~


	April 2,		December 31,
(Thousands)	2021		2020
Raw materials and supplies	$	59,384	$	42,905
Work in process	164,497		156,093
Finished goods	48,947		51,780
Inventories, net	$	272,828	$	250,778

The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce ~~our~~its exposure to metal price movements and to reduce ~~our~~its working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$333.9~~$411.9 million and $400.0 million as of ~~June 26, 2020 versus $309.3 million as of~~April 2, 2021 and December 31, ~~2019.~~

~~Note I — Held~~2020, respectively. Amounts for ~~Sale~~

In the ~~first six months of~~year ended December 31, 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~~revised to reflect a $44.6 million reclassification out of work in ~~the Consolidated Balance Sheet as of June 26, 2020. Assets~~process 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~~

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Excluding the $9.1 million goodwill impairment charge and $1.7 million asset impairment charge recorded in the first half of 2020, the operating results of the LAC reporting unit were not material to the Company for any period presented.into finished goods inventory.

Note J — ~~Goodwill~~

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

(Thousands) Performance Alloys and Composites Advanced Materials Precision Coatings Total
Balance at December 31, 2019 $ 1,899 $ 50,190 $ 26,922 $ 79,011
Impairment charge — — (9,053) (9,053)
Other — 43 — 43
Balance at June 26, 2020 $ 1,899 $ 50,233 $ 17,869 $ 70,001

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.Customer Prepayments

~~Note K — Customer Prepayments~~

The Company entered into an investment ~~agreement~~and master supply agreements with a customer to procure equipment to manufacture product for the customer. The customer ~~will make~~is providing 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 April 2, 2021 and December 31, 2020, $64.7 million and $58.8 million, respectively, of prepayments are classified as Unearned Income in the Consolidated Balance Sheet, of which ~~$19.6~~$5.9 million ~~were~~was received during the ~~second~~first quarter of ~~2020, and the liability is expected to be settled as commercial shipments are made.~~2021.

Note ~~L — 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, 2020 was 13.57 years and 19.37 years, respectively.

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, 2020 was 6.41% and 5.31%, respectively.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

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

Second Quarter Ended Six Months Ended
(Thousands) June 26, 2020 June 28, 2019 June 26, 2020 June 28, 2019
Components of lease expense
Operating lease cost $ 2,274 $ 2,291 $ 4,532 $ 5,003
Finance lease cost
Amortization of right-of-use assets 350 354 701 710
Interest on lease liabilities 238 259 482 522
Total lease cost $ 2,862 $ 2,904 $ 5,715 $ 6,235

Operating lease expense amounted to $2.3 million and $4.5 million during the second quarter and first six months of 2020, respectively, compared to $2.3 million and $5.0 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.

~~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, 2020 and December 31, 2019 was as follows:~~

June 26, Dec. 31,
(Thousands) 2020 2019
Supplemental balance sheet information
Operating Leases
Operating lease right-of-use assets $ 48,942 $ 23,413
Other liabilities and accrued items 5,298 6,542
Operating lease liabilities 44,830 18,091
Finance Leases
Property, plant, and equipment $ 26,258 $ 26,069
Allowances for depreciation, depletion, and amortization (4,035) (3,570)
Finance lease assets, net $ 22,223 $ 22,499
Other liabilities and accrued items $ 1,305 $ 1,265
Finance lease liabilities 16,939 17,424
Total principal payable on finance leases $ 18,244 $ 18,689

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

Finance Operating
(Thousands) Leases Leases
2020 $ 1,119 $ 3,986
2021 2,238 7,841
2022 2,238 6,846
2023 1,528 6,548
2024 1,174 4,704
2025 and thereafter 21,126 46,967
Total lease payments 29,423 76,892
Less amount of lease payment representing interest 11,179 26,764
Total present value of lease payments
$ 18,244 $ 50,128

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

Six Months Ended
(Thousands) June 26, 2020 June 28, 2019
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 7,275 $ 7,710
Operating cash flows from finance leases 482 522
Financing cash flows from finance leases 626 599

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~Note M~~K — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the ~~second~~first quarter of 2021 and ~~first six 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
Second Quarter Ended Second Quarter Ended
June 26, June 28, June 26, June 28,
(Thousands) 2020 2019 2020 2019
Components of net periodic benefit cost (credit)
Service cost $ — $ 1,418 $ 15 $ 18
Interest cost 1,215 1,347 53 99
Expected return on plan assets (2,205) (2,167) — —
Amortization of prior service cost (benefit) — 122 (374) (375)
Amortization of net loss (gain) 284 627 (83) (23)
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)


		Pension Benefits						Other Benefits							Pension Benefits				Other Benefits
		Six Months Ended						Six Months Ended							First Quarter Ended				First Quarter Ended
		June 26,		June 28,		June 26,		June 28,			April 2,		March 27		April 2,		March 27
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2021		2020		2021		2020
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	$	0	$	20	$	15
Interest cost	Interest cost	2,429		2,904		107		199		Interest cost	986		1,215		29		53
Expected return on plan assets	Expected return on plan assets	(4,410)		(4,290)		—		—		Expected return on plan assets	(2,234)		(2,205)		0		0
Amortization of prior service cost (benefit)	Amortization of prior service cost (benefit)	—		242		(749)		(749)		Amortization of prior service cost (benefit)	0		0		(374)		(374)
Amortization of net loss (gain)	Amortization of net loss (gain)	568		1,431		(166)		(46)		Amortization of net loss (gain)	418		284		(69)		(83)
Net periodic benefit (credit) cost		$	(1,413)	$	3,045	$	(777)	$	(561)
Net pension settlements/curtailments		94		3,296		—		—
Total net benefit cost		$	(1,319)	$	6,341	$	(777)	$	(561)
Total net benefit (income) cost										Total net benefit (income) cost	$	(830)	$	(706)	$	(394)	$	(389)

The Company did not make any contributions to its domestic defined benefit plan in the first ~~six months~~quarter of ~~2020~~2021 or 2020.

Materion Corporation and ~~made contributions of $3.0 million in the first six months of 2019.~~Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note NL — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the ~~second~~first quarter of 2021 and ~~first six months of~~ 2020 ~~and 2019~~ are as follows:

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 March 27, 2020 $ 1,214 $ (841) $ (330) $ 43 $ (41,330) $ (5,886) $ (47,173)
Other comprehensive (loss) income before reclassifications (201) (411) 426 (186) — 1,166 980
Amounts reclassified from accumulated other comprehensive income 8 491 132 631 70 — 701
Net current period other comprehensive income (loss) before tax (193) 80 558 445 70 1,166 1,681
Deferred taxes (44) 18 124 98 (19) — 79
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)


	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, 2020	$	519	$	(170)	$	468	$	817	$	(43,473)	$	4,017	$	(38,639)
Other comprehensive income (loss) before reclassifications	1,085		741		1,291		3,117		0		(8,857)		(5,740)
Amounts reclassified from accumulated other comprehensive income (loss)	140		(104)		(1,534)		(1,498)		157		0		(1,341)
Net current period other comprehensive (loss) income before tax	1,225		637		(243)		1,619		157		(8,857)		(7,081)
Deferred taxes	282		147		(55)		374		(7)		0		367
Net current period other comprehensive (loss) income after tax	943		490		(188)		1,245		164		(8,857)		(7,448)
Balance at April 2, 2021	$	1,462	$	320	$	280	$	2,062	$	(43,309)	$	(4,840)	$	(46,087)

Balance at December 31, 2019	$	1,324	$	(452)	$	25	$	897	$	(41,346)	$	(5,013)	$	(45,462)
Other comprehensive (loss) income before reclassifications	(142)		(823)		(778)		(1,743)		0		(873)		(2,616)
Amounts reclassified from accumulated other comprehensive income (loss)	(1)		318		321		638		(24)		0		614
Net current period other comprehensive (loss) income before tax	(143)		(505)		(457)		(1,105)		(24)		(873)		(2,002)
Deferred taxes	(33)		(116)		(102)		(251)		(40)		0		(291)
Net current period other comprehensive (loss) income after tax	(110)		(389)		(355)		(854)		16		(873)		(1,711)
Balance at March 27, 2020	$	1,214	$	(841)	$	(330)	$	43	$	(41,330)	$	(5,886)	$	(47,173)

~~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)

Reclassifications from accumulated other comprehensive income (loss) of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of ~~Income.~~Income (Loss). Reclassifications from accumulated other comprehensive income (loss) of gains and losses on precious metal and copper cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note QO for additional details on cash flow hedges.

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

2014

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note OM — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was ~~$3.1~~$1.6 million and ~~$4.1~~$1.0 million in the ~~second~~first quarter of 2021 and ~~first six months of~~ 2020, ~~respectively, compared to $3.5 million and $6.2 million, respectively, in the same periods of 2019.~~respectively.

The Company granted ~~64,636~~52,709 stock appreciation rights (SARs) to certain employees during the first ~~six months~~quarter of ~~2020.~~2021. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ~~six~~three months ended ~~June 26, 2020~~April 2, 2021 were ~~$50.95~~$68.82 and ~~$13.67,~~$20.66, 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~~0.57	%
Dividend yield	~~0.9~~0.7	%
Volatility	~~31.8~~37.6	%
Expected term (in years)	~~4.8~~4.6

The Company granted ~~62,841~~53,199 stock-settled restricted stock units (RSUs) to certain employees ~~and 15,976 to non-employee directors~~ during the first ~~six months~~quarter of ~~2020.~~2021. 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 and $48.42~~$68.49 for stock-settled RSUs granted to employees ~~and non-employee directors, respectively,~~ during the ~~six~~three months ended ~~June 26, 2020.~~April 2, 2021. RSUs are generally expensed over the vesting period of three years for ~~employees and one year for non-employee directors.~~employees.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first ~~six months~~quarter of ~~2020.~~2021. The weighted-average fair value of the stock-settled PRSUs was ~~$57.65~~$83.78 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~~its total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At ~~June 26, 2020,~~April 2, 2021, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$12.6~~$13.8 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note PN — 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.

2115

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, 2020~~April 2, 2021 and December 31, ~~2019:~~2020:



(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)			2021				2020			2021			2020			2021			2020			2021			2020
Financial Assets	Financial Assets																								Financial Assets
Deferred compensation investments	Deferred compensation investments	$	2,625		$	3,391		$	2,625		$	3,391		$	—		$	—		$	—		$	—	Deferred compensation investments		$	3,802			$	3,802		$	3,802		$	3,802		$	0		$	0		$	0		$	0
Foreign currency forward contracts	Foreign currency forward contracts	2,220			188			—			—			2,220			188			—			—		Foreign currency forward contracts		299				107			0			0			299			107			0			0
Precious metal swaps	Precious metal swaps	—			35			—			—			—			35			—			—		Precious metal swaps		418				127			0			0			418			127			0			0
Copper swaps	Copper swaps	137			61			—			—			137			61			—			—		Copper swaps		550				632			0			0			550			632			0			0
Total	Total	$	4,982		$	3,675		$	2,625		$	3,391		$	2,357		$	284		$	—		$	—	Total		$	5,069			$	4,668		$	3,802		$	3,802		$	1,267		$	866		$	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		$	3,802			$	3,802		$	3,802		$	3,802		$	0		$	0		$	0		$	0
Foreign currency forward contracts	Foreign currency forward contracts	523			211			—			—			523			211			—			—		Foreign currency forward contracts		685				1,203			0			0			685			1,203			0			0
Precious metal swaps	Precious metal swaps	1,013			623			—			—			1,013			623			—			—		Precious metal swaps		3				349			0			0			3			349			0			0
Copper swaps	Copper swaps	3			28			—			—			3			28			—			—		Copper swaps		188				27			0			0			188			27			0			0
Total	Total	$	4,164		$	4,253		$	2,625		$	3,391		$	1,539		$	862		$	—		$	—	Total		$	4,678			$	5,381		$	3,802		$	3,802		$	876		$	1,579		$	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, 2020~~April 2, 2021 and December 31, ~~2019.~~2020. 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 QO — 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

2216

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.

2317

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, 2020~~April 2, 2021 and December 31, ~~2019:~~2020:


		June 26, 2020						December 31, 2019							April 2, 2021				December 31, 2020
(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	$	4,261	$	45	$	62,012	$	107
Other liabilities and accrued items	Other liabilities and accrued items	9,786		63		5,757		16		Other liabilities and accrued items	63,062		509		7,695		55

These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany ~~loans, and 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.~~loans. Other-net included ~~$1.7~~$1.6 million and ~~$2.3~~$0.6 million of foreign currency gains ~~relating~~related to ~~these~~ derivatives ~~during~~in the ~~second~~first quarter of 2021 and ~~first six months of~~ 2020, respectively.

~~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, 2020~~April 2, 2021 and December 31, ~~2019:~~2020:


		June 26, 2020						December 31, 2019							April 2, 2021				December 31, 2020
(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	$	2,887	$	108	$	0	$	0
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	5,084		22		3,466		83		Foreign currency forward contracts - euro	12,818		129		0		0
Precious metal swaps	Precious metal swaps	—		—		1,116		34		Precious metal swaps	4,568		418		2,155		127
Copper swaps	Copper swaps	2,235		137		1,951		61		Copper swaps	6,533		550		6,225		632
Total	Total	7,319		159		7,558		188		Total	26,806		1,205		8,380		759

Other assets	Other assets									Other assets
Precious metal swaps		—		—		157		1
Foreign currency forward contracts - yen										Foreign currency forward contracts - yen	111		2		0		0
Foreign currency forward contracts - euro										Foreign currency forward contracts - euro	1,202		15		0		0
Total										Total	1,313		17		0		0

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	0		0		2,668		59
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	11,974		420		15,686		183		Foreign currency forward contracts - euro	2,179		176		17,611		1,089
Precious metal swaps	Precious metal swaps	5,910		1,004		7,034		618		Precious metal swaps	515		3		4,964		349
Copper swaps	Copper swaps	293		3		1,266		28		Copper swaps	4,254		188		2,445		27
Total	Total	20,208		1,452		26,341		841		Total	6,948		367		27,688		1,524

Other long-term liabilities
Foreign currency forward contracts - yen		112		1		—		—
Foreign currency forward contracts - euro		553		14		—		—
Precious metal swaps		172		9		149		5
Total	Total	837		24		149		5		Total	$	35,067	$	855	$	36,068	$	765

Total		$	28,364	$	1,317	$	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, 2020~~April 2, 2021 to the Consolidated Statements of Income within the next 15-month period. Refer to Note NL for additional OCI details.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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~~first quarter of 2021 and ~~first six months of 2020 and 2019:~~2020:

Second Quarter Ended Second Quarter Ended
(Thousands) June 26, 2020 June 28, 2019
Hedging relationship Line item
Foreign currency forward contracts Net sales $ 8 $ (46)
Precious metal swaps Cost of sales 491 (1)
Copper swaps Cost of sales 132 163
Total $ 631 $ 116

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~


			Six Months Ended		Six Months Ended				First Quarter Ended
(Thousands)	(Thousands)		June 26, 2020		June 28, 2019		(Thousands)		April 2, 2021		March 27, 2020
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	$	140	$	(1)
Precious metal swaps	Precious metal swaps	Cost of sales	809		(62)		Precious metal swaps	Cost of sales	(104)		318
Copper swaps	Copper swaps	Cost of sales	453		92		Copper swaps	Cost of sales	(1,534)		321
Total	Total		$	1,269	$	(14)	Total		$	(1,498)	$	638

Note RP — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note RT ("Contingencies and Commitments") in the Company's ~~2019~~2020 Annual Report on Form 10-K.

NaN beryllium cases were outstanding as of ~~June 26, 2020.~~April 2, 2021. 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.

On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. Plaintiff also alleges the Company failed to include all remuneration he and others received for premium and bonus pay when computing overtime pay. The case is currently in the preliminary stages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

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~~$5.4 million and $5.5 million ~~and $5.9 million~~ at ~~June 26, 2020~~April 2, 2021 and December 31, ~~2019,~~2020, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note SQ — Debt

~~In the second quarter~~


(Thousands)	April 2, 2021		December 31, 2020
Borrowings under Credit Agreement	$	48,955	$	34,000
Foreign debt	2,880		3,157
Fixed rate industrial development revenue bonds	1,113		1,322
Total debt outstanding	52,948		38,479
Current portion of long-term debt	(1,541)		(1,937)
Long-term debt	$	51,407	$	36,542

As of April 2, 2021 and December 31, 2020, the Company ~~borrowed $150.0~~had $49.0 million ~~under~~and $34.0 million, respectively, outstanding against its revolving credit facility with average interest rates of 1.88% and ~~the~~1.65% at April 2, 2021 and December 31, 2020, respectively. The remaining borrowing capacity under the revolving credit facility as of ~~June 26,~~April 2, 2021 and December 31, 2020 ~~was $179.1 million.~~ was $250.4 million and $245.8 million, respectively.The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2024. 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 April 2, 2021.

~~Note T — Subsequent Event~~

~~In July~~At both April 2, 2021 and December 31, 2020, there was $48.1 million outstanding against the ~~Company completed the acquisition~~letters 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.~~sub-facility.


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~~First Quarter ~~2020~~2021 Update

The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of ~~the Company’s~~our end markets ~~beginning~~throughout 2020 primarily in the first half of ~~2020 primarily~~the year in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial end markets. InDuring the first ~~six months~~quarter of ~~2020, the Company recorded additional reserves for slow-moving and excess inventory of approximately $1.3 million related~~2021, we began to ~~the collapse~~see improvements in demand as global government-imposed restrictions continued to be lifted and many country vaccination programs gained momentum. However, the world continues to be impacted by the COVID-19 pandemic and the impact on our operations and the markets we serve is fluid and will depend largely on future developments, including the availability and effectiveness of vaccines globally, new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or mitigate its economic, public health, and other impacts. These developments are constantly evolving and cannot be accurately predicted. We continue to invest in the ~~oil~~business, people, and ~~gas industry. The Company also reviewed for any other potential impairment indicators and did not identify any.~~strategies necessary to achieve our long-term priorities as we focus on driving profitable growth. We ~~may temporarily shut down our facilities in response~~have continued 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 quarter of 2020, the Company incurred $2.7 million of expense related to COVID-19. These costs were primarily related to premium pay for production workers who were deemed essential to work onsiteoperate during the ~~pandemic.~~

~~The impact~~course of the COVID-19 pandemic ~~is fluid and continues to evolve, and, therefore, we cannot predict~~in all our production facilities, having taken 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 F 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~~recommended public health measures to ensure ~~we have more than adequate liquidity, we borrowed $150.0 million under the revolving credit facility in April 2020. We ended the second quarter with total cash of $265.1 million~~worker and $151.8 million of total debt, or in a net cash position of $113.3 million. In addition, we had $179.1 million of available borrowings under our revolving credit facility as of the end of the second quarter.

Additionally, in July 2020, we completed the acquisition of Optics Balzers for a total 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.

workplace safety.

2720

RESULTS OF OPERATIONS

~~Second~~First Quarter


		Second Quarter Ended																			First Quarter Ended
		June 26,			June 28,			$		%			April 2,			March 27			$		%
(Thousands, except per share data)	(Thousands, except per share data)	2020			2019			Change		Change		(Thousands, except per share data)	2021			2020			Change		Change
Net sales	Net sales	$	271,468		$	297,843		$	(26,375)	(9)	%	Net sales	$	354,386		$	277,946		$	76,440	28	%
Value-added sales	Value-added sales	161,569			194,896			(33,327)		(17)	%	Value-added sales	198,582			153,971			44,611		29	%
Gross margin	Gross margin	48,090			69,594			(21,504)		(31)	%	Gross margin	66,796			44,570			22,226		50	%
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	34		%	29		%
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	36,776			30,744			6,032		20	%
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	19		%	20		%
Research and development (R&D) expense	Research and development (R&D) expense	4,502			4,062			440		11	%	Research and development (R&D) expense	6,206			4,185			2,021		48	%
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		%
Restructuring expense		2,387			—			2,387		N/A
Impairment charges												Impairment charges	—			10,766			(10,766)		NM
Restructuring (income) expense												Restructuring (income) expense	(378)			2,164			(2,542)		NM
Other—net	Other—net	(357)			2,891			(3,248)		(112)	%	Other—net	4,474			2,279			2,195		96	%
Operating profit		8,706			22,750			(14,044)		(62)	%
Other non-operating (income) expense—net		(851)			3,112			(3,963)		(127)	%
Operating profit (loss)												Operating profit (loss)	19,718			(5,568)			25,286		NM
Other non-operating (income)—net												Other non-operating (income)—net	(1,276)			(944)			(332)		35	%
Interest expense—net	Interest expense—net	1,259			500			759		152	%	Interest expense—net	761			246			515		209	%
Income before income taxes		8,298			19,138			(10,840)		(57)	%
Income tax expense		1,620			3,598			(1,978)		(55)	%
Net income		$	6,678		$	15,540		$	(8,862)	(57)	%
Income (loss) before income taxes												Income (loss) before income taxes	20,233			(4,870)			25,103		NM
Income tax expense (benefit)												Income tax expense (benefit)	3,466			(992)			4,458		NM
Net income (loss)												Net income (loss)	$	16,767		$	(3,878)		$	20,645	NM

Diluted earnings per share	Diluted earnings per share	$	0.32		$	0.75		$	(0.43)	(57)	%	Diluted earnings per share	$	0.81		$	(0.19)		$	1.00	NM

~~N/A~~NM = Not ~~Applicable~~Meaningful

Net sales of ~~$271.5~~$354.4 million in the ~~second~~first quarter of ~~2020 decreased $26.3~~2021 increased $76.5 million from ~~$297.8~~$277.9 million in the ~~second~~first quarter of ~~2019.~~2020. Net sales ~~growth~~increased in all of our ~~Advanced Materials segment~~segments primarily due to increased volumes, as well as due to sales attributable to our Optics Balzers acquisition, which was ~~more than offset by decreased net sales in our Performance Alloys and Composites and Precision Coatings segments driven by lower sales volumes.~~completed during the third quarter of 2020. The change in precious metal and copper prices favorably impacted net sales during the ~~second~~first quarter of ~~2020~~2021 by ~~$19.3~~$18.6 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~~$198.6 million in the ~~second~~first quarter of ~~2020 decreased $33.3~~2021 increased $44.6 million, or ~~17%~~29%, compared to the ~~second~~first quarter of ~~2019.~~2020. The increase ~~in semiconductor end market sales was more than offset~~is primarily driven by ~~the decrease in~~increased value-added sales ~~due to reduced demand in~~into the ~~consumer electronics,~~semiconductor, aerospace and defense, ~~energy, industrial,~~ and ~~telecom and data center~~automotive end ~~markets.~~markets, as well as value-added sales from our Optics Balzers acquisition.

Gross margin in the ~~second~~first quarter of ~~2020~~2021 was ~~$48.1~~$66.8 million, which was ~~down 31%~~up 50% compared to the ~~second~~first quarter of ~~2019.~~2020. Gross margin expressed as a percentage of value-added sales ~~decreased~~increased to ~~30%~~34% in the ~~second~~first quarter of ~~2020~~2021 from ~~36%~~29% in the ~~second~~first quarter of ~~2019.~~2020. The ~~decrease~~increase was primarily driven by ~~lower volumes.~~increased sales volumes in 2021. In addition, gross margin in the first quarter of 2020 included a $1.3 million charge to reserve for slow moving and excess inventory related to the oil and gas industry.

SG&A expense was ~~$32.9~~$36.8 million in the ~~second~~first quarter of ~~2020,~~2021, compared to ~~$39.9~~$30.7 million in the ~~second~~first quarter of ~~2019.~~2020. The ~~decrease~~increase in SG&A expense for the ~~second~~first quarter of ~~2020~~2021 was primarily driven by ~~lower~~increased variable compensation ~~expense and cost management actions.~~expense. Expressed as a percentage of value-added sales, SG&A expense was 19% and 20% in the ~~second quarters~~first quarter of ~~both~~2021 and 2020, ~~and 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~~first quarter of both 2021 and 2020.

Impairment charges includes non-recurring charges relating to goodwill and other assets recorded in the first quarter of 2020 ~~and 2019, respectively. The increase reflects additional investment~~ in ~~new product and application development.~~our Precision Optics segment.

Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. During the first quarter of 2021, we substantially completed the closure of our LAC business and recorded $0.4 million of income related to lower than expected facility closure costs that were recorded in 2020.

In the ~~second~~first 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. Refer to Note EF to the Consolidated Financial Statements for additional discussion.

Other-net was ~~$0.4~~$4.5 million of ~~income~~expense in the ~~second~~first quarter of ~~2020,~~2021, or a ~~$3.2~~$2.2 million ~~decrease~~increase from the ~~second~~first quarter of ~~2019,~~2020, which was primarily driven by ~~a $2.2~~$1.3 million of increased foreign ~~currency hedge gain realized~~exchange losses and $1.0 million of increased intangible asset amortization expense, related to the acquisition of Optics Balzers in ~~the second quarter of~~July 2020. 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 of 2019.costs. Refer to Note MK to the Consolidated Financial Statements for details of the components.

Interest expense-net was ~~$1.3~~$0.8 million and ~~$0.5~~$0.2 million in the ~~second~~first quarter of ~~2020~~2021 and ~~2019,~~2020, respectively. The increase in interest expense is primarily due to ~~higher~~reduced interest income from investments in money market accounts, as well as increased borrowings under our revolving credit facility.

Income tax expense (benefit) for the ~~second~~first quarter of ~~2020~~2021 was ~~$1.6~~expense of $3.5 million, compared to ~~$3.6~~a benefit of $1.0 million in the ~~second~~first quarter of ~~2019.~~2020. The effective tax rate for the ~~second~~first quarter of 2021 and 2020 was ~~19.5% compared to 18.8% in the prior-year period.~~17.1% and 20.4%, respectively. The effective tax rate for ~~each period is~~the first quarter of 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion and ~~the~~ research and development ~~credit. Refer to~~credits. See Note ~~F to 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~~ 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~~G 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 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. 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 six months of 2020 included a net discrete income tax expense of $0.8 million primarily related to an impairment of goodwill. The effective tax rate for the first six months of 2019 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation awards. Refer to Note F to the Consolidated Financial Statements for further details on income taxes.

3022

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~~first quarter of 2021 and ~~first six months of~~ 2020 ~~and 2019~~ is as follows:

Second Quarter Ended Six Months Ended
June 26, June 28, June 26, June 28,
(Thousands) 2020 2019 2020 2019
Net sales
Performance Alloys and Composites $ 101,614 $ 135,231 $ 200,681 $ 262,344
Advanced Materials 150,108 133,238 310,273 277,263
Precision Coatings 19,746 29,374 38,460 59,677
Other — — — —
Total $ 271,468 $ 297,843 $ 549,414 $ 599,284
Less: pass-through metal costs
Performance Alloys and Composites $ 11,858 $ 19,988 $ 27,210 $ 37,500
Advanced Materials 95,443 74,931 196,420 161,449
Precision Coatings 1,968 6,285 3,693 14,051
Other 630 1,743 1,856 3,707
Total $ 109,899 $ 102,947 $ 229,179 $ 216,707
Value-added sales
Performance Alloys and Composites $ 89,756 $ 115,243 $ 173,471 $ 224,844
Advanced Materials 54,665 58,307 113,853 115,814
Precision Coatings 17,778 23,089 34,767 45,626
Other (630) (1,743) (1,856) (3,707)
Total $ 161,569 $ 194,896 $ 320,235 $ 382,577

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.


	First Quarter Ended
	April 2,		March 27
(Thousands)	2021		2020
Net sales
Performance Alloys and Composites	$	114,143	$	99,067
Advanced Materials	204,644		160,165
Precision Optics	35,599		18,714
Other	—		—
Total	$	354,386	$	277,946

Less: pass-through metal costs
Performance Alloys and Composites	$	13,311	$	15,352
Advanced Materials	141,695		105,672
Precision Optics	34		1,725
Other	764		1,226
Total	$	155,804	$	123,975

Value-added sales
Performance Alloys and Composites	$	100,832	$	83,715
Advanced Materials	62,949		54,493
Precision Optics	35,565		16,989
Other	(764)		(1,226)
Total	$	198,582	$	153,971

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.

The cost of gold, silver, platinum, palladium, copper, ruthenium, iridium, rhodium, rhenium, and osmium 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. During the first quarter of 2021, we added ruthenium, iridium, rhodium, rhenium, and osmium to our definition of value-added sales as the costs of these materials are treated as pass-through and the business use and price volatility of these materials has increased in recent periods. Prior period value-added sales amounts have been recast to reflect this change.

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,~~Optics, and Other. The Other reportable segment includes unallocated corporate costs.

Performance Alloys and Composites

~~Second~~First Quarter


		Second Quarter Ended															First Quarter Ended
		June 26,		June 28,		$		%			April 2,		March 27		$		%
(Thousands)	(Thousands)	2020		2019		Change		Change		(Thousands)	2021		2020		Change		Change
Net sales	Net sales	$	101,614	$	135,231	$	(33,617)	(25)	%	Net sales	$	114,143	$	99,067	$	15,076	15	%
Value-added sales	Value-added sales	89,756		115,243		(25,487)		(22)	%	Value-added sales	100,832		83,715		17,117		20	%
Operating profit	Operating profit	8,244		19,328		(11,084)		(57)	%	Operating profit	13,491		3,523		9,968		283	%

Net sales from the Performance Alloys and Composites segment of ~~$101.6~~$114.1 million in the ~~second~~first quarter of ~~2020 were 25% lower than~~2021 increased 15% compared to net sales of ~~$135.2~~$99.1 million in the ~~second~~first quarter of ~~2019.~~2020. The ~~decrease~~increase was due to ~~reduced~~sales related to our new precision clad engineered strip project, as well as increased sales into ~~all major end markets, with~~ the ~~largest declines in~~ aerospace and defense ~~consumer electronics,~~ and ~~telecom and data center.~~automotive end markets.

Value-added sales of ~~$89.8~~$100.8 million in the ~~second~~first quarter of ~~2020~~2021 were ~~22% lower~~20% higher than value-added sales of ~~$115.2~~$83.7 million in the ~~second~~first quarter of ~~2019.~~2020. The ~~decrease~~increase in value-added sales was due to the same factors driving the ~~decrease~~increase in net sales.

Performance Alloys and Composites generated operating profit of ~~$8.2~~$13.5 million in the ~~second~~first quarter of ~~2020~~2021 compared to ~~$19.3~~$3.5 million in the ~~second~~first quarter of ~~2019.~~2020. The ~~decrease~~increase in operating profit was primarily due to ~~reduced~~increased sales ~~volumes as well as~~volumes. Operating profit for the first quarter of 2020 included restructuring charges of ~~$2.4~~$2.2 million ~~in the second quarter of 2020~~ related to the closure of our Warren, Michigan and Fremont, California ~~facilities.~~facilities, as well as a $1.3 million charge to reserve for slow moving and excess inventory related to the oil and gas industry.

~~Six Months~~Advanced Materials

Six Months Ended
June 26, June 28, $ %
(Thousands) 2020 2019 Change Change
Net sales $ 200,681 $ 262,344 $ (61,663) (24) %
Value-added sales 173,471 224,844 (51,373) (23) %
Operating profit 13,035 38,286 (25,251) (66) %
First Quarter


	First Quarter Ended
	April 2,		March 27		$	%
(Thousands)	2021		2020		Change	Change
Net sales	$	204,644	$	160,165	44,479	28	%
Value-added sales	62,949		54,493		8,456	16	%
Operating profit	8,933		5,050		3,883	77	%

Net sales from the ~~Performance Alloys and Composites~~Advanced Materials segment of ~~$200.7~~$204.6 million in the first ~~six months~~quarter of ~~2020~~2021 were ~~24% lower~~28% higher than net sales of ~~$262.3~~$160.2 million in the first ~~six months~~quarter of ~~2019.~~2020. The ~~decrease~~increase in net sales was primarily due to ~~reduced sales into all major end markets, with~~increased volumes, as well as the ~~largest declines in aerospace and defense, telecom and data center, and energy.~~impact of higher pass-through metal prices of $19.7 million.

Value-added sales of ~~$173.5~~$62.9 million in the first ~~six months~~quarter of ~~2020 were 23% lower than~~2021 increased 16% compared to value-added sales of ~~$224.8~~$54.5 million in the first ~~six months~~quarter of ~~2019.~~2020. The ~~decrease~~increase was primarily driven by increased value-added sales into the semiconductor end market.

The Advanced Materials segment generated operating profit of $8.9 million in the first quarter of 2021 compared to $5.1 million in the first quarter of 2020. The increase in operating profit is due to increased sales volumes partially offset by increased variable compensation expense.

Precision Optics

First Quarter


(Thousands)	First Quarter Ended
	April 2,		March 27		$	%
	2021		2020		Change	Change
Net sales	$	35,599	$	18,714	16,885	90	%
Value-added sales	35,565		16,989		18,576	109	%
Operating profit (loss)	4,558		(9,592)		14,150	NM

NM = Not Meaningful

Net sales from the Precision Optics segment of $35.6 million in the first quarter of 2021 increased 90% compared to net sales of $18.7 million in the first quarter of 2020. The increase was primarily due to sales attributable to our Optics Balzers acquisition, partially offset by lower sales related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021, and projection display products.

Value-added sales of $35.6 million in the first quarter of 2021 increased 109% compared to value-added sales of $17.0 million in the first quarter of 2020. The increase in value-added sales was due to the same factors driving the ~~decrease~~increase in net sales.

~~Performance Alloys and Composites~~The Precision Optics segment generated an operating profit of $13.0 million in the first half of 2020 compared to $38.3 million in the first half of 2019. The decrease in operating profit was primarily due to reduced sales volumes as well as restructuring charges of $4.6 million in the first half of 2020 related to the closure of our Warren, Michigan and Fremont, California facilities. In addition, we 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 Quarter~~

Second Quarter Ended
June 26, June 28, $ %
(Thousands) 2020 2019 Change Change
Net sales $ 150,108 $ 133,238 16,870 13 %
Value-added sales 54,665 58,307 (3,642) (6) %
Operating profit 4,370 6,139 (1,769) (29) %

~~Net sales from the Advanced Materials segment of $150.1 million in the second~~ quarter of 2020 were 13% higher than net sales of $133.2 million in the second quarter of 2019. The increase in net sales was primarily due to the impact of higher pass-through metal prices of $19.8 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 million in the second quarter of 2020 decreased 6%~~2021, compared to ~~value-added sales~~an operating loss of ~~$58.3 million in the second quarter of 2019. Higher semiconductor end market sales were more than offset by decreased value-added sales into the energy and industrial markets.~~

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

~~Six Months~~

Six Months Ended
June 26, June 28, $ %
(Thousands) 2020 2019 Change Change
Net sales $ 310,273 $ 277,263 33,010 12 %
Value-added sales 113,853 115,814 (1,961) (2) %
Operating profit 9,155 13,219 (4,064) (31) %

~~Net sales from the Advanced Materials segment of $310.3~~$9.6 million in the first ~~six months~~quarter of ~~2020 were 12% higher than net sales of $277.3 million in the first six months of 2019.~~2020. The increase in net sales was primarily due to the impact of higher pass-through metal prices of $39.1 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 million in the first six months of 2020 were down 2% compared to value-added sales of $115.8 million in the first six months of 2019. Higher semiconductor end market sales were more than offset by decreased value-added sales into the energy and industrial markets.

~~The Advanced Materials segment generated operating profit of $9.2 million in the first six months of 2020 compared to $13.2 million in the first six months of 2019. Decreased~~ operating profit in the first ~~half~~quarter of ~~2020, compared to the first half of 2019,~~2021 was ~~the result of unfavorable~~driven by increased sales ~~mix and reduced manufacturing yields primarily related to new product introductions.~~

~~Precision Coatings~~

~~Second Quarter~~

(Thousands) Second Quarter Ended
June 26, June 28, $ %
2020 2019 Change Change
Net sales $ 19,746 $ 29,374 (9,628) (33) %
Value-added sales 17,778 23,089 (5,311) (23) %
Operating profit 2,091 3,937 (1,846) (47) %

~~Net sales from the Precision Coatings segment of $19.7 million~~volumes, as well as our Optics Balzers acquisition. The operating loss in the ~~second~~first quarter of 2020 ~~decreased 33% compared to net sales of $29.4 million in the second quarter of 2019 primarily due to reduced sales volumes and lower mix of precious metal-containing products.~~

Value-added sales of $17.8 million in the second quarter of 2020 decreased 23% 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 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 of 2019. The decrease is primarily due to a reduction in value-added sales related to blood glucose test strip products.

The Precision Coatings segment generated an operating loss of $7.5 million in the first half of 2020, compared to operating profit of $6.0 million in the first half of 2019. The operating loss was driven byincluded 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 the criteria to be classified as held for sale as of March 27, 2020.~~unit.

Other

~~Second~~First Quarter


(Thousands)	(Thousands)	Second Quarter Ended																			(Thousands)		First Quarter Ended
				June 26,			June 28,		$			%	(Thousands)			April 2,			March 27			$			%
				2020			2019		Change			Change				2021			2020			Change			Change
Net sales	Net sales	$	—		$	—		—		—	%	Net sales		$	—		$	—		—			—	%
Value-added sales	Value-added sales	(630)			(1,743)			1,113		(64)	%	Value-added sales		(764)			(1,226)			462			(38)	%
Operating loss	Operating loss	(5,999)			(6,654)			655		(10)	%	Operating loss		(7,264)			(4,549)			(2,715)			60	%

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs ~~of $6.0~~were $7.3 million in the ~~second~~first quarter of ~~2020 decreased $0.7 million as~~2021 compared to ~~$6.7~~$4.5 million in the ~~second~~first quarter of ~~2019.~~2020. Corporate costs accounted for 4% and 3% of Company-wide value-added sales in the ~~second quarters~~first quarter of ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~decrease in corporate costs in the second quarter of 2020 compared to the second quarter 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 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 decreaseincrease in corporate costs in the first ~~half~~quarter of ~~2020~~2021 compared to the first ~~half~~quarter of ~~2019~~2020 is primarily related to ~~lower~~increased variable compensation ~~expense and cost management actions.~~expenses.

3425

FINANCIAL POSITION

Cash Flow

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


		Six Months Ended											Three Months Ended
		June 26,		June 28,		$			April 2,		March 27		$
(Thousands)	(Thousands)	2020		2019		Change		(Thousands)	2021		2020		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	$	15,450	$	9,130	$	6,320
Net cash used in investing activities	Net cash used in investing activities	(32,001)		(15,409)		(16,592)		Net cash used in investing activities	(30,675)		(14,779)		(15,896)
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	8,727		(11,401)		20,128
Effects of exchange rate changes	Effects of exchange rate changes	56		(100)		156		Effects of exchange rate changes	(446)		(381)		(65)
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	$	(6,944)	$	(17,431)	$	10,487

Net cash provided by operating activities totaled ~~$36.4~~$15.5 million in the first ~~six~~three months of ~~2020~~2021 versus ~~$30.0~~$9.1 million in the prior-year period. ~~Working~~The increase in operating cash flow was primarily due to increased net income of $20.6 million. In addition, working capital requirements used cash of ~~$22.9~~$19.7 million and ~~$29.3~~$17.7 million during the first ~~six~~three months of ~~2020~~2021 and ~~2019,~~2020, respectively. Cash flows ~~provided by~~used in accounts receivable were ~~$17.1~~$26.7 million higher than in the prior-year period. Three-month trailing days sales outstanding was approximately 4543 days at ~~June 26, 2020~~April 2, 2021 and 4741 days at December 31, ~~2019.~~2020. Cash flows used for inventory were ~~$20.6~~$23.2 million in the first ~~six months~~quarter of ~~2020,~~2021, compared to ~~providing $1.3~~a use of $15.7 million of cash in the prior-year ~~period primarily in our Performance Alloys and Composites and Advanced Materials segments.~~period. Cash flows ~~used for~~provided by accounts payable and accrued expenses were ~~$7.6~~$19.2 million compared to the prior-year period use of cash of ~~$18.8 million due to higher accounts payable balances related to increased inventory levels.~~$13.0 million.

Net cash used in investing activities was ~~$32.0~~$31.3 million in the first ~~six months~~quarter of ~~2020~~2021 compared to ~~$15.4~~$14.8 million in the prior-year period due to increased ~~levels of capital spending. The increase in~~ capital expenditures, ~~was due~~primarily related to investments in new equipment funded by customer prepayments. See Note KJ 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,~~2021, the Company expects payments for property, plant, and equipment to be approximately ~~$30.0 million, excluding any capital expenditures related to customer prepayments, and mine development expenditures to be approximately $14.0~~$100.0 million.

Net cash provided by financing activities totaled ~~$135.6~~$8.7 million in the first ~~six~~three months of ~~2020~~2021 versus ~~$10.3~~$11.4 million used in financing activities in the comparable prior-year period. The increase is primarily due to ~~the borrowing~~increased net borrowings of ~~$150.0~~$15.0 million under our revolving credit facility in the ~~second~~first quarter of ~~2020,~~2021, partially offset by ~~an increase in shares repurchased under our share repurchase program.~~payments made for taxes withheld on stock-based compensation awards and dividends.

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, 2020,~~April 2, 2021, cash and cash equivalents held by our foreign operations totaled ~~$21.2~~$17.1 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, 2020~~April 2, 2021 and December 31, ~~2019~~2020 is as follows:

June 26, December 31,
(Thousands) 2020 2019
Cash and cash equivalents $ 265,068 $ 125,007
Total outstanding debt 151,790 2,218
Net cash $ 113,278 $ 122,789
Available borrowing capacity $ 179,137 $ 340,906


	April 2,		December 31,
(Thousands)	2021		2020
Cash and cash equivalents	$	18,934	$	25,878
Total outstanding debt	52,960		38,506
Net debt	$	(34,026)	$	(12,628)
Available borrowing capacity	$	250,418	$	245,772

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, 2020.~~April 2, 2021. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.

~~During the second 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 Optics Balzers. The final acquisition value was approximately $160 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~~$38.1 million as of ~~June 26, 2020,~~April 2, 2021, compared to ~~$140.7~~$50.0 million as of December 31, ~~2019.~~2020. 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~~first quarter of ~~2020. In the first six months of 2020, we repurchased 158,000 shares of our common stock for $6.8 million.~~2021. 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 million~~ on our common stock in the ~~second~~first quarter ~~and first six months~~ of ~~2020, respectively.~~2021. 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~~$411.9 million and $400.0 million as of ~~June 26, 2020, versus $309.3 million as of~~April 2, 2021 and December 31, ~~2019.~~2020, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of ~~June 26, 2020 and December 31, 2019.~~April 2, 2021. For additional information on our contractual obligations, refer to our ~~2019~~2020 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~~2020 Annual Report on Form ~~10-K and our Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2020.~~10-K.

~~Forward-looking Statements~~

Forward-looking 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 ability to successfully complete~~ the ~~disposition of our LAC business;~~

▪~~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~~the Company's 2020 Annual Report on Form 10-K.


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~~2020 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~~2020 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, 2020~~April 2, 2021 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, 2020.~~April 2, 2021.

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, 2020~~April 2, 2021 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.

Beryllium Claims

As of ~~June 26, 2020,~~April 2, 2021, 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~~cases. During 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. A co-defendent, Dolphin, Inc., filed a cross-claim against the Company for indemnification. On August 12, 2020, the Company moved to dismiss the cross-claim for failure to state a claim upon which relief can be granted. The court denied the motion on October 23, 2020. On December 7, 2020, the Company filed a Petition for Special Action in the Court of Appeals seeking to appeal the motion to dismiss the cross-claim. The Court of Appeals declined to accept jurisdiction on December 30, 2020. The Company believes that it has substantive defenses and intends to vigorously defend this suit.

In 2019, one 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, and later removed to the United States District Court, Eastern District of California (Sacramento Division), case number 2:19-CV-02202-MCE-DMC, 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.

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

Other Claims


~~Item 1A.~~			~~Risk Factors~~

~~The information set forth~~On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in ~~this quarterly report on Form 10-Q, including, without limitation,~~ the ~~risk factor presented below, updates~~Northern District of Ohio against the Company and ~~should be read~~its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment 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~~violation of the ~~regions of~~Fair Labor Standards Act and Ohio law. Plaintiff also alleges the ~~world.~~Company failed to include all remuneration he and others received for premium and bonus pay when computing overtime pay. The ~~outbreak was subsequently declared a pandemic by~~case is currently in the ~~World Health Organization in March 2020. To date, the COVID-19 outbreak~~preliminary stages. The Company believes that it has substantive defenses and ~~preventative measures taken~~intends 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 atvigorously defend 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:suit.

•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, 2020~~April 2, 2021.

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)
January 1 through February 5, 2021	145	$	68.73	—	$	8,316,239
February 6 through March 5, 2021	42,543	66.48		—	8,316,239
March 6 through April 2, 2021	—	—		—	8,316,239
Total	42,688	$	66.49	—	$	8,316,239


(1)			Includes ~~196~~145 and 42,543 shares surrendered to the Company in ~~May~~January and February, respectively, 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, 2020,~~April 2, 2021, we did not repurchase any shares under this program. As of ~~June 26, 2020,~~April 2, 2021, $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						Materion and Subsidiaries Management Incentive Plan for the 2021 Plan Year*
10.2						Form of ~~Non-Employee Directors'~~2021 Performance-Based Restricted Stock Units Agreement under the Materion Corporation 2006 ~~Non-Employee Director Equity~~Stock Incentive Plan (As Amended and Restated as of May 3, 2017), covering grants made in 20202021
10.3						Form of 2021 Appreciation Rights Agreement under the Materion Corporation 2006 Stock Incentive Plan (As Amended and Restated as of May 3, 2017), covering grants made in 2021*
10.4						Form of 2021 Restricted Stock Unit Agreement (Stock-Settled) under the Materion Corporation 2006 Stock Incentive Plan (As Amended and Restated as of May 3, 2017), covering grants made in 2021*
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~~A ~~, 2020~~p ril 2, 2021*
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, 2020~~April 29, 2021

/s/ ~~Stephen F. Shamrock~~Shelly M. Chadwick

~~Stephen F. Shamrock~~Shelly M. Chadwick

~~Interim~~Vice President, Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)

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	Finance		Operating
(Thousands)	Leases		Leases
2020	$	1,119	$	3,986
2021	2,238		7,841
2022	2,238		6,846
2023	1,528		6,548
2024	1,174		4,704
2025 and thereafter	21,126		46,967
Total lease payments	29,423		76,892
Less amount of lease payment representing interest	11,179		26,764
Total present value of lease payments	$	18,244	$	50,128