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 ~~September 25, 2020~~October 1, 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 ~~September 25, 2020: 20,327,254.~~October 1, 2021: 20,439,191.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


		Third Quarter Ended						Nine Months Ended							Third Quarter Ended				Nine Months Ended
(Thousands, except per share amounts)	(Thousands, except per share amounts)	September 25, 2020		September 27, 2019		September 25, 2020		September 27, 2019		(Thousands, except per share amounts)	October 1, 2021		September 25, 2020*		October 1, 2021		September 25, 2020*
Net sales	Net sales	$	287,171	$	305,979	$	836,585	$	905,263	Net sales	$	388,028	$	287,171	$	1,113,413	$	836,585
Cost of sales	Cost of sales	240,531		240,748		696,280		701,126		Cost of sales	313,715		241,860		902,723		699,749
Gross margin	Gross margin	46,640		65,231		140,305		204,137		Gross margin	74,313		45,311		210,690		136,836
Selling, general, and administrative expense	Selling, general, and administrative expense	35,696		35,812		99,292		115,767		Selling, general, and administrative expense	43,195		35,696		118,031		99,292
Research and development expense	Research and development expense	5,417		5,262		14,104		13,064		Research and development expense	6,354		5,417		19,164		14,104
Goodwill impairment charges	Goodwill impairment charges	0		11,560		9,053		11,560		Goodwill impairment charges	—		—		—		9,053
Asset impairment charges	Asset impairment charges	0		2,581		1,713		2,581		Asset impairment charges	—		—		—		1,713
Restructuring expense		2,593		785		7,144		785
Restructuring (income) expense										Restructuring (income) expense	—		2,593		(378)		7,144
Other—net	Other—net	2,221		2,942		4,143		9,954		Other—net	3,604		2,221		12,272		4,143
Operating profit		713		6,289		4,856		50,426
Other non-operating (income) expense—net		(1,076)		127		(2,871)		3,484
Operating profit (loss)										Operating profit (loss)	21,160		(616)		61,601		1,387
Other non-operating income—net										Other non-operating income—net	(1,279)		(1,076)		(3,832)		(2,871)
Interest expense—net	Interest expense—net	1,334		436		2,839		1,402		Interest expense—net	861		1,334		2,480		2,839
Income before income taxes		455		5,726		4,888		45,540
Income tax (benefit) expense		(6,041)		2,263		(5,183)		9,631
Income (Loss) before income taxes										Income (Loss) before income taxes	21,578		(874)		62,953		1,419
Income tax expense (benefit)										Income tax expense (benefit)	3,422		(6,345)		10,162		(5,977)
Net income	Net income	$	6,496	$	3,463	$	10,071	$	35,909	Net income	$	18,156	$	5,471	$	52,791	$	7,396
Basic earnings per share:	Basic earnings per share:									Basic earnings per share:
Net income per share of common stock	Net income per share of common stock	$	0.32	$	0.17	$	0.50	$	1.76	Net income per share of common stock	$	0.89	$	0.27	$	2.59	$	0.36
Diluted earnings per share:	Diluted earnings per share:									Diluted earnings per share:
Net income per share of common stock	Net income per share of common stock	$	0.32	$	0.17	$	0.49	$	1.74	Net income per share of common stock	$	0.88	$	0.27	$	2.56	$	0.36
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	20,325		20,401		20,342		20,351		Basic	20,439		20,325		20,414		20,342
Diluted	Diluted	20,592		20,677		20,595		20,645		Diluted	20,657		20,592		20,659		20,595

*Amounts for the periods ended September 25, 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

(Unaudited)


		Third Quarter Ended						Nine Months Ended							Third Quarter Ended				Nine Months Ended
		September 25,		September 27,		September 25,		September 27,			October 1,		September 25,		October 1,		September 25,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2021		2020*		2021		2020*
Net income	Net income	$	6,496	$	3,463	$	10,071	$	35,909	Net income	$	18,156	$	5,471	$	52,791	$	7,396
Other comprehensive income (loss):
Other comprehensive (loss) income:										Other comprehensive (loss) income:
Foreign currency translation adjustment	Foreign currency translation adjustment	3,076		(463)		3,369		(627)		Foreign currency translation adjustment	(2,029)		3,076		(7,693)		3,369
Derivative and hedging activity, net of tax	Derivative and hedging activity, net of tax	(315)		82		(822)		9		Derivative and hedging activity, net of tax	439		(315)		1,411		(822)
Pension and post-employment benefit adjustment, net of tax	Pension and post-employment benefit adjustment, net of tax	29		501		134		14,994		Pension and post-employment benefit adjustment, net of tax	121		29		368		134
Other comprehensive income		2,790		120		2,681		14,376
Other comprehensive (loss) income										Other comprehensive (loss) income	(1,469)		2,790		(5,914)		2,681
Comprehensive income	Comprehensive income	$	9,286	$	3,583	$	12,752	$	50,285	Comprehensive income	$	16,687	$	8,261	$	46,877	$	10,077

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)
September 25, Dec. 31,
(Thousands) 2020 2019
Assets
Current assets
Cash and cash equivalents $ 117,754 $ 125,007
Accounts receivable, net 150,454 154,751
Inventories, net 211,700 190,390
Prepaid and other current assets 24,515 21,839
Total current assets 504,423 491,987
Deferred income taxes 5,156 1,666
Property, plant, and equipment 987,902 916,965
Less allowances for depreciation, depletion, and amortization (693,223) (684,689)
Property, plant, and equipment, net 294,679 232,276
Operating lease, right-of-use assets 62,235 23,413
Intangible assets 54,449 6,380
Other assets 20,754 17,937
Goodwill 143,118 79,011
Total Assets $ 1,084,814 $ 852,670
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt $ 122,216 $ 868
Accounts payable 56,524 43,206
Salaries and wages 24,853 41,167
Other liabilities and accrued items 42,238 32,477
Income taxes 1,435 1,342
Unearned revenue 4,360 3,380
Total current liabilities 251,626 122,440
Other long-term liabilities 10,057 11,560
Operating lease liabilities 56,891 18,091
Finance lease liabilities 20,540 17,424
Retirement and post-employment benefits 40,208 32,466
Unearned income 72,632 32,891
Long-term income taxes 3,365 3,451
Deferred income taxes 11,340 2,410
Long-term debt 6,374 1,260
Shareholders’ equity
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 September 25 and December 31) 257,019 249,674
Retained earnings 592,980 589,888
Common stock in treasury (199,185) (186,845)
Accumulated other comprehensive loss (42,781) (45,462)
Other equity 3,748 3,422
Total shareholders' equity 611,781 610,677
Total Liabilities and Shareholders’ Equity $ 1,084,814 $ 852,670
(Unaudited)


	October 1,		Dec. 31,
(Thousands)	2021		2020
Assets
Current assets
Cash and cash equivalents	$	18,009	$	25,878
Accounts receivable, net	190,601		166,447
Inventories, net	311,745		250,778
Prepaid and other current assets	36,138		20,896
Total current assets	556,493		463,999
Deferred income taxes	1,908		3,134
Property, plant, and equipment	1,069,592		998,312
Less allowances for depreciation, depletion, and amortization	(715,158)		(688,626)
Property, plant, and equipment, net	354,434		309,686
Operating lease, right-of-use assets	56,556		62,089
Intangible assets, net	49,012		54,672
Other assets	23,269		19,364
Goodwill	140,990		144,916
Total Assets	$	1,182,662	$	1,057,860
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt	$	529	$	1,937
Accounts payable	71,576		55,640
Salaries and wages	37,168		18,809
Other liabilities and accrued items	54,749		40,887
Income taxes	439		1,898
Unearned revenue	8,308		7,713
Total current liabilities	172,769		126,884
Other long-term liabilities	17,572		17,002
Operating lease liabilities	52,177		56,761
Finance lease liabilities	17,285		20,539
Retirement and post-employment benefits	39,216		41,877
Unearned income	93,061		86,761
Deferred income taxes	14,118		15,864
Long-term debt	79,036		36,542
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both October 1st and December 31st)	269,716		258,642
Retained earnings	676,527		631,058
Common stock in treasury	(208,952)		(199,187)
Accumulated other comprehensive loss	(44,553)		(38,639)
Other equity	4,690		3,756
Total shareholders' equity	697,428		655,630
Total Liabilities and Shareholders’ Equity	$	1,182,662	$	1,057,860

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


		Nine Months Ended							Nine Months Ended
		September 25,		September 27,			October 1,		September 25,
(Thousands)	(Thousands)	2020		2019		(Thousands)	2021		2020*
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	10,071	$	35,909	Net income	$	52,791	$	7,396
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:						Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization	Depreciation, depletion, and amortization	32,042		31,955		Depreciation, depletion, and amortization	32,478		32,042
Amortization of deferred financing costs in interest expense	Amortization of deferred financing costs in interest expense	547		720		Amortization of deferred financing costs in interest expense	546		547
Stock-based compensation expense (non-cash)	Stock-based compensation expense (non-cash)	3,989		5,230		Stock-based compensation expense (non-cash)	4,924		3,989

Deferred income tax (benefit) expense		(5,187)		5,725
Net pension curtailments and settlements		94		3,296
Deferred income tax benefit						Deferred income tax benefit	(263)		(5,981)
Impairment charges	Impairment charges	10,766		14,141		Impairment charges	—		10,766
Changes in assets and liabilities, net of acquired assets and liabilities:	Changes in assets and liabilities, net of acquired assets and liabilities:					Changes in assets and liabilities, net of acquired assets and liabilities:
Decrease (increase) in accounts receivable		13,899		(36,146)
Decrease (increase) in inventory		(9,883)		22,089
Decrease (increase) in prepaid and other current assets		(686)		(416)
Increase (decrease) in accounts payable and accrued expenses		(9,759)		(14,114)
Increase (decrease) in unearned revenue		(298)		(728)
Increase (decrease) in interest and taxes payable		143		(1,499)
Increase (decrease) in unearned income due to customer prepayments		40,385		0
Domestic pension plan contributions		0		(4,500)
Accounts receivable						Accounts receivable	(26,041)		13,899
Inventory						Inventory	(62,353)		(6,414)
Prepaid and other current assets						Prepaid and other current assets	(7,020)		(686)
Accounts payable						Accounts payable	14,863		6,281
Accrued expenses						Accrued expenses	20,451		(16,040)
Unearned revenue						Unearned revenue	650		(298)
Interest and taxes payable						Interest and taxes payable	(1,504)		143
Unearned income due to customer prepayments						Unearned income due to customer prepayments	9,022		40,385
Other-net	Other-net	(6,679)		(2,126)		Other-net	1,974		(6,585)
Net cash provided by operating activities	Net cash provided by operating activities	79,444		59,536		Net cash provided by operating activities	40,518		79,444
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Payments for acquisition, net of cash acquired	Payments for acquisition, net of cash acquired	(130,715)		0		Payments for acquisition, net of cash acquired	—		(130,715)
Payments for purchase of property, plant, and equipment	Payments for purchase of property, plant, and equipment	(46,285)		(18,193)		Payments for purchase of property, plant, and equipment	(77,640)		(46,285)
Payments for mine development		0		(1,903)
Proceeds from settlement of currency exchange contract	Proceeds from settlement of currency exchange contract	3,249		0		Proceeds from settlement of currency exchange contract	—		3,249
Proceeds from sale of property, plant, and equipment	Proceeds from sale of property, plant, and equipment	35		17		Proceeds from sale of property, plant, and equipment	686		35
Net cash used in investing activities	Net cash used in investing activities	(173,716)		(20,079)		Net cash used in investing activities	(76,954)		(173,716)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Short-term debt under revolving credit agreement, net		120,000		0
Proceeds from borrowings under revolving credit agreement, net						Proceeds from borrowings under revolving credit agreement, net	43,010		120,000
Repayment of long-term debt	Repayment of long-term debt	(16,357)		(599)		Repayment of long-term debt	(1,803)		(16,357)
Principal payments under finance lease obligations	Principal payments under finance lease obligations	(1,440)		(894)		Principal payments under finance lease obligations	(2,152)		(1,440)
Cash dividends paid	Cash dividends paid	(6,920)		(6,612)		Cash dividends paid	(7,243)		(6,920)
Repurchase of common stock	Repurchase of common stock	(6,766)		(199)		Repurchase of common stock	—		(6,766)
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(2,212)		(4,832)		Payments of withholding taxes for stock-based compensation awards	(3,033)		(2,212)
Deferred financing costs		0		(2,018)
Net cash provided by (used in) financing activities		86,305		(15,154)
Net cash provided by financing activities						Net cash provided by financing activities	28,779		86,305
Effects of exchange rate changes	Effects of exchange rate changes	714		(422)		Effects of exchange rate changes	(212)		714
Net change in cash and cash equivalents	Net change in cash and cash equivalents	(7,253)		23,881		Net change in cash and cash equivalents	(7,869)		(7,253)
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	$	117,754	$	94,526	Cash and cash equivalents at end of period	$	18,009	$	117,754

*Amounts for the period ended September 25, 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 Shareholders' Equity

(Unaudited)


		Common Shares				Shareholders' Equity																					Common Shares				Shareholders' Equity
(Thousands, except per share amounts)	(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss)		Other Equity		Total		(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings*		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total*
Balance at July 2, 2021																Balance at July 2, 2021	20,438	(6,710)	$	268,205	$	660,851	$	(208,854)	$	(43,084)	$	4,583	$	681,701
Net income																Net income	—	—	—		18,156		—		—		—		18,156
Other comprehensive income																Other comprehensive income	—	—	—		—		—		(1,469)		—		(1,469)
Cash dividends declared ($0.12 per share)																Cash dividends declared ($0.12 per share)	—	—	—		(2,452)		—		—		—		(2,452)
Stock-based compensation activity																Stock-based compensation activity	—	—	1,458		(28)		(18)		—		—		1,412
Payments of withholding taxes for stock-based compensation awards																Payments of withholding taxes for stock-based compensation awards	—	—	—		—		(12)		—		—		(12)
Directors’ deferred compensation																Directors’ deferred compensation	1	1	53		—		(68)		—		107		92
Balance at October 1, 2021																Balance at October 1, 2021	20,439	(6,709)	$	269,716	$	676,527	$	(208,952)	$	(44,553)	$	4,690	$	697,428

Balance at June 26, 2020	Balance at June 26, 2020	20,322	(6,826)	$	256,756	$	588,803	$	(198,726)	$	(45,571)	$	3,678	$	604,940	Balance at June 26, 2020	20,322	(6,826)	$	256,756	$	622,219	$	(198,726)	$	(45,571)	$	3,678	$	638,356
Net income	Net income	—	—	0		6,496		0		0		0		6,496		Net income	—	—	—		5,471		—		—		—		5,471
Other comprehensive income	Other comprehensive income	—	—	0		0		0		2,790		0		2,790		Other comprehensive income	—	—	—		—		—		2,790		—		2,790
Cash dividends declared ($0.115 per share)	Cash dividends declared ($0.115 per share)	—	—	0		(2,338)		0		0		0		(2,338)		Cash dividends declared ($0.115 per share)	—	—	—		(2,338)		—		—		—		(2,338)
Stock-based compensation activity	Stock-based compensation activity	7	7	235		19		(231)		0		0		23		Stock-based compensation activity	7	7	235		19		(231)		—		—		23
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(3)	(3)	0		0		(187)		0		0		(187)		Payments of withholding taxes for stock-based compensation awards	(3)	(3)	—		—		(187)		—		—		(187)
Directors’ deferred compensation	Directors’ deferred compensation	1	1	28		0		(41)		0		70		57		Directors’ deferred compensation	1	1	28		—		(41)		—		70		57
Balance at September 25, 2020	Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	592,980	$	(199,185)	$	(42,781)	$	3,748	$	611,781	Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	625,371	$	(199,185)	$	(42,781)	$	3,748	$	644,172

Balance at June 28, 2019		20,399	(6,749)	$	245,785	$	576,211	$	(187,224)	$	(43,978)	$	3,991	$	594,785
Net income		—	—	0		3,463		0		0		0		3,463
Other comprehensive income		—	—	0		0		0		120		0		120
Cash dividends declared ($0.11 per share)		—	—	0		(2,244)		0		0		0		(2,244)
Stock-based compensation activity		5	5	1,836		(21)		(126)		0		0		1,689
Payments of withholding taxes for stock-based compensation awards		(2)	(2)	0		0		(69)		0		0		(69)
Directors’ deferred compensation		1	1	30		0		(45)		0		67		52
Balance at September 27, 2019		20,403	(6,745)	$	247,651	$	577,409	$	(187,464)	$	(43,858)	$	4,058	$	597,796


		Common Shares				Shareholders' Equity																					Common Shares				Shareholders' Equity
(Thousands, except per share amounts)	(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings		Common Stock in Treasury		Accumulated Other Comprehensive Income (Loss)		Other Equity		Total		(Thousands, except per share amounts)	Common Shares	Common Shares Held in Treasury	Common Stock		Retained Earnings*		Common Stock in Treasury		Accumulated Other Comprehensive Loss		Other Equity		Total*
Balance at December 31, 2020																Balance at December 31, 2020	20,328	(6,820)	$	258,642	$	631,058	$	(199,187)	$	(38,639)	$	3,756	$	655,630
Net income																Net income	—	—	—		52,791		—		—		—		52,791
Other comprehensive loss																Other comprehensive loss	—	—	—		—		—		(5,914)		—		(5,914)
Cash dividends declared ($0.355 per share)																Cash dividends declared ($0.355 per share)	—	—	—		(7,243)		—		—		—		(7,243)
Stock-based compensation activity																Stock-based compensation activity	152	152	10,932		(79)		(5,929)		—		—		4,924
Payments of withholding taxes for stock-based compensation awards																Payments of withholding taxes for stock-based compensation awards	(45)	(45)	—		—		(3,033)		—		—		(3,033)
Directors’ deferred compensation																Directors’ deferred compensation	4	4	142		—		(803)		—		934		273
Balance at October 1, 2021																Balance at October 1, 2021	20,439	(6,709)	$	269,716	$	676,527	$	(208,952)	$	(44,553)	$	4,690	$	697,428

Balance at December 31, 2019	Balance at December 31, 2019	20,404	(6,744)	$	249,674	$	589,888	$	(186,845)	$	(45,462)	$	3,422	$	610,677	Balance at December 31, 2019	20,404	(6,744)	$	249,674	$	624,954	$	(186,845)	$	(45,462)	$	3,422	$	645,743
Net income	Net income	—	—	0		10,071		0		0		0		10,071		Net income	—	—	—		7,396		—		—		—		7,396
Other comprehensive income		—	—	0		0		0		2,681		0		2,681
Other comprehensive loss																Other comprehensive loss	—	—	—		—		—		2,681		—		2,681
Cash dividends declared ($0.34 per share)	Cash dividends declared ($0.34 per share)	—	—	0		(6,920)		0		0		0		(6,920)		Cash dividends declared ($0.34 per share)	—	—	—		(6,920)		—		—		—		(6,920)
Stock-based compensation activity	Stock-based compensation activity	117	117	7,272		(59)		(3,133)		0		0		4,080		Stock-based compensation activity	117	117	7,272		(59)		(3,133)		—		—		4,080
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(39)	(39)	0		0		(2,212)		0		0		(2,212)		Payments of withholding taxes for stock-based compensation awards	(39)	(39)	—		—		(2,212)		—		—		(2,212)
Repurchase of shares	Repurchase of shares	(158)	(158)	0		0		(6,766)		0		0		(6,766)		Repurchase of shares	(158)	(158)	—		—		(6,766)		—		—		(6,766)
Directors’ deferred compensation	Directors’ deferred compensation	3	3	73		0		(229)		0		326		170		Directors’ deferred compensation	3	3	73		—		(229)		—		326		170
Balance at September 25, 2020	Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	592,980	$	(199,185)	$	(42,781)	$	3,748	$	611,781	Balance at September 25, 2020	20,327	(6,821)	$	257,019	$	625,371	$	(199,185)	$	(42,781)	$	3,748	$	644,172

Balance at December 31, 2018		20,242	(6,906)	$	234,704	$	548,374	$	(175,426)	$	(58,234)	$	4,488	$	553,906
Net income		—	—	0		35,909		0		0		0		35,909
Other comprehensive income		—	—	0		0		0		11,080		0		11,080
Pension curtailment		—	—	0		0		0		3,296		0		3,296
Cumulative effect of accounting change		—	—	0		(179)		0		0		0		(179)
Cash dividends declared ($0.325 per share)		—	—	0		(6,612)		0		0		0		(6,612)
Stock-based compensation activity		252	252	12,882		(83)		(7,569)		0		0		5,230
Payments of withholding taxes for stock-based compensation awards		(89)	(89)	0		0		(4,832)		0		0		(4,832)
Repurchase of shares		(5)	(5)	0		0		(199)		0		0		(199)
Directors’ deferred compensation		3	3	65		0		562		0		(430)		197
Balance at September 27, 2019		20,403	(6,745)	$	247,651	$	577,409	$	(187,464)	$	(43,858)	$	4,058	$	597,796

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note A — Accounting Policies

Basis of Presentation: ~~In management’s opinion, the~~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~~Change in ~~Note B~~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 ~~Consolidated Financial Statements are~~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 ~~preliminary purchase price allocation and will be updated upon completion~~Company’s inventory. The effects of the ~~final valuation. The Company is required~~change in accounting principle from LIFO to ~~complete the purchase price allocation within 12 months~~FIFO were retrospectively applied. As a result of the ~~acquisition date. If such completion~~retrospective application of the ~~allocation results in a~~ change in ~~the preliminary values, the measurement period adjustment will be recognized~~accounting principle, certain financial statement line items in the ~~period in which~~Company’s consolidated balance sheet as of September 25, 2020 and the ~~adjustment amount is determined.~~consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the three and nine months ended September 25, 2020 were adjusted as necessary. For further information, refer to the Company's 2020 Annual Report on Form 10-K.

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

~~No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.~~

~~Note B — Acquisition~~

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The ~~preliminary purchase price allocation~~following tables reflect the impact to the financial statement line items as a result of the change in accounting principle for the ~~acquisition is as follows:~~prior periods presented in the accompanying financial statements:


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

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

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


(Thousands except per share amounts)
	Third Quarter Ended						Nine Months Ended
	September 25, 2020						September 25, 2020
Selected Items	As Reported		As Adjusted		Adjustment		As Reported		As Adjusted		Adjustment
Cost of sales	$	240,531	$	241,860	$	1,329	$	696,280	$	699,749	$	3,469
Gross margin	46,640		45,311		(1,329)		140,305		136,836		(3,469)
Operating profit (loss)	713		(616)		(1,329)		4,856		1,387		(3,469)
Income (Loss) before income taxes	455		(874)		(1,329)		4,888		1,419		(3,469)
Income tax benefit	(6,041)		(6,345)		(304)		(5,183)		(5,977)		(794)
Net income	6,496		5,471		(1,025)		10,071		7,396		(2,675)
Basic earnings per share:
Net income per share of common stock	$	0.32	$	0.27	$	(0.05)	$	0.50	$	0.36	$	(0.14)
Diluted earnings per share:
Net income per share of common stock	$	0.32	$	0.27	$	(0.05)	$	0.49	$	0.36	$	(0.13)

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


(Thousands)
	Third Quarter Ended						Nine Months Ended
	September 25, 2020						September 25, 2020
Selected Items	As Reported		As Adjusted		Adjustment		As Reported		As Adjusted		Adjustment
Net income	$	6,496	$	5,471	$	(1,025)	$	10,071	$	7,396	$	(2,675)
Comprehensive income	9,286		8,261		(1,025)		12,752		10,077		(2,675)

~~Acquisition-related transaction~~Consolidated Statement of Cash Flows


(Thousands)
	Nine Months Ended
	September 25, 2020
Selected Items	As Reported		As Adjusted		Adjustment
Net income	$	10,071	$	7,396	$	(2,675)
Deferred income tax benefit	(5,187)		(5,981)		(794)
Increase in inventory	(9,883)		(6,414)		3,469

New Pronouncements Adopted: In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 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 ~~integration costs totaled $4.7 million~~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 ~~$6.1 million~~require that an entity reflect enacted tax laws or rates in the ~~third quarter and first nine months of 2020, respectively. These costs are included in selling, general, and administrative expense~~annual effective tax rate computation in the ~~Consolidated Statements~~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 ~~Income.~~the Effects of Reference Rate Reform on Financial Reporting. This guidance is intended

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2022. The Company 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 at the completion of 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.

~~As part~~

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 ~~the Company recorded approximately $71.5 million of goodwill~~date. The cost in ~~its Precision Coatings segment. Goodwill was calculated as the~~ 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 ~~over~~for Optics Balzers was $136.1 million, including the ~~estimated~~assumption of $22.5 million of debt. The transaction was funded with cash on hand. Based on the fair ~~values~~value of ~~the tangible net assets and intangible~~ assets acquired and ~~primarily attributable~~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 the Company's Precision Optics segment and the results of Optics Balzers are not material to the ~~synergies expected to arise after~~Company's Consolidated Financial Statements. No material measurement period adjustments have been recorded during the ~~acquisition dates. The goodwill~~third quarter or first nine months of 2021, and as of October 1, 2021, the purchase price allocation is ~~not expected to be deductible for U.S. tax purposes.~~

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

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

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, and beryllia ~~ceramics, and bulk metallic glass materials.~~ceramics.

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, and braze ~~materials, and ultra-fine wire.~~materials.

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
Third Quarter 2021												Third Quarter 2021
Net sales												Net sales	$	136,096	$	220,723	$	31,209	$	—	$	388,028
Intersegment sales												Intersegment sales	32		3,036		—		—		3,068
Operating profit (loss)												Operating profit (loss)	20,928		9,281		3,329		(12,378)		21,160
Third Quarter 2020	Third Quarter 2020											Third Quarter 2020
Net sales	Net sales	$	91,203	$	165,582	$	30,386	$	0	$	287,171	Net sales	$	91,203	$	165,582	$	30,386	$	—	$	287,171
Intersegment sales	Intersegment sales	0		6,602		0		0		6,602		Intersegment sales	—		6,602		—		—		6,602
Operating profit (loss)		721		5,920		1,421		(7,349)		713
Third Quarter 2019
Operating (loss) profit												Operating (loss) profit	(437)		5,749		1,421		(7,349)		(616)

First Nine Months 2021												First Nine Months 2021
Net sales	Net sales	$	130,704	$	147,650	$	27,625	$	0	$	305,979	Net sales	$	375,533	$	638,481	$	99,399	$	—	$	1,113,413
Intersegment sales	Intersegment sales	0		17,161		0		0		17,161		Intersegment sales	47		8,908		—		—		8,955
Operating profit (loss)	Operating profit (loss)	18,780		6,202		(11,198)		(7,495)		6,289		Operating profit (loss)	51,733		26,547		10,513		(27,192)		61,601

First Nine Months 2020	First Nine Months 2020											First Nine Months 2020
Net sales	Net sales	$	291,884	$	475,855	$	68,846	$	0	$	836,585	Net sales	$	291,884	$	475,855	$	68,846	$	—	$	836,585
Intersegment sales	Intersegment sales	2		24,790		0		0		24,792		Intersegment sales	2		24,790		—		—		24,792
Operating profit (loss)	Operating profit (loss)	13,756		15,075		(6,080)		(17,895)		4,856		Operating profit (loss)	9,910		15,452		(6,080)		(17,895)		1,387
First Nine Months 2019
Net sales		$	393,048	$	424,913	$	87,302	$	0	$	905,263
Intersegment sales		15		53,634		0		0		53,649
Operating profit (loss)		57,066		19,421		(5,184)		(20,877)		50,426

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


(Thousands)	(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Coatings		Other		Total		(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Optics		Other		Total
Third Quarter 2021												Third Quarter 2021
End Market												End Market
Semiconductor												Semiconductor	$	3,163	$	173,689	$	630	$	—	$	177,482
Industrial												Industrial	31,521		10,479		8,296		—		50,296
Aerospace and defense												Aerospace and defense	19,129		1,622		5,652		—		26,403
Consumer electronics												Consumer electronics	9,717		530		7,788		—		18,035
Automotive												Automotive	28,922		1,719		2,571		—		33,212
Energy												Energy	7,524		27,081		—		—		34,605
Telecom and data center												Telecom and data center	14,980		31		—		—		15,011
Other												Other	21,140		5,572		6,272		—		32,984
Total												Total	$	136,096	$	220,723	$	31,209	$	—	$	388,028

Third Quarter 2020	Third Quarter 2020											Third Quarter 2020
End Market	End Market											End Market
Semiconductor	Semiconductor	$	983	$	131,380	$	1,008	$	0	$	133,371	Semiconductor	$	983	$	131,380	$	1,008	$	—	$	133,371
Industrial	Industrial	21,630		9,967		4,976		0		36,573		Industrial	21,630		9,967		4,976		—		36,573
Aerospace and Defense		14,740		1,687		4,867		0		21,294
Consumer Electronics		11,074		78		6,550		0		17,702
Aerospace and defense												Aerospace and defense	14,740		1,687		4,867		—		21,294
Consumer electronics												Consumer electronics	11,074		78		6,550		—		17,702
Automotive	Automotive	14,077		1,477		1,059		0		16,613		Automotive	14,077		1,477		1,059		—		16,613
Energy	Energy	5,825		16,693		0		0		22,518		Energy	5,825		16,693		—		—		22,518
Telecom and Data Center		10,452		500		0		0		10,952
Telecom and data center												Telecom and data center	10,452		500		—		—		10,952
Other	Other	12,422		3,800		11,926		0		28,148		Other	12,422		3,800		11,926		—		28,148
Total	Total	$	91,203	$	165,582	$	30,386	$	0	$	287,171	Total	$	91,203	$	165,582	$	30,386	$	—	$	287,171

Third Quarter 2019
End Market
Semiconductor		$	1,220	$	107,883	$	0	$	0	$	109,103
Industrial		28,353		8,302		3,365		0		40,020
Aerospace and Defense		27,653		1,779		5,303		0		34,735
Consumer Electronics		18,399		395		5,613		0		24,407
Automotive		16,071		3,012		296		0		19,379
Energy		10,629		20,911		0		0		31,540
Telecom and Data Center		14,964		835		0		0		15,799
Other		13,415		4,533		13,048		0		30,996
Total		$	130,704	$	147,650	$	27,625	$	0	$	305,979

(Thousands) Performance Alloys and Composites Advanced Materials Precision Coatings Other Total
First Nine Months 2020
End Market
Semiconductor $ 3,426 $ 376,107 $ 1,251 $ 0 $ 380,784
Industrial 68,801 26,748 10,647 0 106,196
Aerospace and Defense 46,898 4,764 14,095 0 65,757
Consumer Electronics 35,725 216 13,496 0 49,437
Automotive 48,656 4,743 1,083 0 54,482
Energy 16,844 49,488 0 0 66,332
Telecom and Data Center 33,027 2,158 0 0 35,185
Other 38,507 11,631 28,274 0 78,412
Total $ 291,884 $ 475,855 $ 68,846 $ 0 $ 836,585
First Nine Months 2019
End Market
Semiconductor $ 4,489 $ 314,607 $ 205 $ 0 $ 319,301
Industrial 83,368 23,934 11,358 0 118,660
Aerospace and Defense 80,774 4,397 14,924 0 100,095
Consumer Electronics 54,617 1,100 13,530 0 69,247
Automotive 53,348 6,035 882 0 60,265
Energy 33,026 59,136 0 0 92,162
Telecom and Data Center 50,800 1,749 0 0 52,549
Other 32,626 13,955 46,403 0 92,984
Total $ 393,048 $ 424,913 $ 87,302 $ 0 $ 905,263


(Thousands)	Performance Alloys and Composites		Advanced Materials		Precision Optics		Other		Total
First Nine Months 2021
End Market
Semiconductor	$	5,966	$	495,718	$	1,664	$	—	$	503,348
Industrial	85,815		33,756		23,305		—		142,876
Aerospace and defense	60,221		4,680		17,825		—		82,726
Consumer electronics	30,483		961		24,212		—		55,656
Automotive	78,195		5,145		6,871		—		90,211
Energy	16,541		78,487		—		—		95,028
Telecom and data center	39,348		140		—		—		39,488
Other	58,964		19,594		25,522		—		104,080
Total	$	375,533	$	638,481	$	99,399	$	—	$	1,113,413

First Nine Months 2020
End Market
Semiconductor	$	3,426	$	376,107	$	1,251	$	—	$	380,784
Industrial	68,801		26,748		10,647		—		106,196
Aerospace and defense	46,898		4,764		14,095		—		65,757
Consumer electronics	35,725		216		13,496		—		49,437
Automotive	48,656		4,743		1,083		—		54,482
Energy	16,844		49,488		—		—		66,332
Telecom and data center	33,027		2,158		—		—		35,185
Other	38,507		11,631		28,274		—		78,412
Total	$	291,884	$	475,855	$	68,846	$	—	$	836,585

Intersegment sales are eliminated in consolidation.

Note D — 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 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at ~~September 25, 2020.~~October 1, 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 ~~September 25, 2020,~~October 1, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$27.6~~$81.0 million.

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)	September 25, 2020		December 31, 2019		$ change		% change		(Thousands)	October 1, 2021		December 31, 2020		$ change		% change
Accounts receivable, trade	Accounts receivable, trade	$	142,363	$	141,168	$	1,195	1	%	Accounts receivable, trade	$	176,766	$	156,821	$	19,945	13	%
Unbilled receivables	Unbilled receivables	8,364		13,583		(5,219)		(38)	%	Unbilled receivables	12,450		8,832		3,618		41	%
Unearned revenue	Unearned revenue	4,360		3,380		980		29	%	Unearned revenue	8,308		7,713		595		8	%

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 ~~third quarter and~~ first nine 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 ~~$3.2~~$5.6 million of the December 31, 2020 unearned amounts as revenue during the first nine 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 E — Other-net

Other-net for the third quarter and first nine months of ~~2020~~2021 and ~~2019~~2020 is summarized as follows:


		Third Quarter Ended						Nine Months Ended							Third Quarter Ended				Nine Months Ended
		September 25,		September 27,		September 25		September 27,			October 1,		September 25,		October 1,		September 25,
(Thousands)	(Thousands)	2020		2019		2020		2019		(Thousands)	2021		2020		2021		2020
Metal consignment fees	Metal consignment fees	$	2,317	$	1,936	$	6,583	$	7,252	Metal consignment fees	$	2,243	$	2,317	$	6,857	$	6,583
Amortization of intangible assets	Amortization of intangible assets	907		375		1,201		1,133		Amortization of intangible assets	1,283		907		3,461		1,201
Foreign currency (gain) loss		(1,029)		469		(3,577)		853
Net loss on disposal of fixed assets		19		1		74		143
Foreign currency loss (gain)										Foreign currency loss (gain)	380		(1,029)		1,596		(3,577)
Net loss (gain) on disposal of fixed assets										Net loss (gain) on disposal of fixed assets	81		19		(283)		74
Other items	Other items	7		161		(138)		573		Other items	(383)		7		641		(138)
Total	Total	$	2,221	$	2,942	$	4,143	$	9,954	Total	$	3,604	$	2,221	$	12,272	$	4,143

Note F — Restructuring

During ~~the third quarter of~~ 2020, the Company ~~concluded that~~determined it ~~intends to~~would close ~~the~~its Large Area Coatings (LAC) business (a reporting unit in the Precision ~~Coatings~~Optics segment) ~~and as a result only~~. The closure was substantially completed by the ~~fixed assets~~end of the ~~LAC business are classified as held for sale. Any~~first quarter of 2021. Income of $0.4 million was recorded in the first quarter of 2021, primarily related to lower than previously estimated facility closure costs that were recorded in 2020.

Remaining severance payments are immaterial and reflected in Salaries and wages in the Consolidated Balance Sheet as of October 1, 2021. Any additional costs related to the closure of this business are expected to be immaterial. At September 25, 2020, fixed assets totaling $0.8 million were classified as held for sale and reflected within Prepaid and other current assets in the Consolidated Balance Sheet. No additional impairment charges were recorded during the third quarter of 2020.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

~~During~~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 $2.2 million and $6.8 million in the third quarter and first nine months of 2020, respectively. In the third quarter of 2020, these costs included $0.4 million of severance and $1.6 million of facility and other related costs. Included in restructuring charges for the first nine months of 2020 was $1.8 million of severance associated with approximately 60 employees and $4.4 million of facility and other related costs.

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

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

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

Note G — Income Taxes

The Company's effective tax rate for the third quarter of 2021 and 2020 was 15.9% and ~~2019 was (1,327.7)% and 39.5%~~726.0%, respectively, and ~~(106.0)~~16.1% and (421.2)% ~~and 21.1% for~~in the first nine months of 2021 and 2020, ~~and 2019,~~ respectively.

The effective tax rate for ~~the third quarter and first nine months of 2020 differed from~~each period in 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, ~~and the~~ research and development ~~credit,~~credits, and the ~~recognition~~foreign derived intangible income deduction. The effective tax rate for the third quarter of 2020 was higher than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on a loss for the period. The effective tax rate for the first nine months of 2020 was lower than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on income for the period. The effective tax rate for the first nine months of 2021 included a net discrete income tax ~~benefits.~~benefit of $0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments recorded. The effective tax rate for the first nine months of 2020 included a net discrete income tax benefit of $3.8 million, primarily related to the release of a valuation allowance.

Given the Company’s recent history of foreign earnings, management believes that there is a reasonable possibility that, within the next twelve months, sufficient positive evidence may become available to allow management to reach a conclusion that a significant portion of the valuation allowance recorded against the deferred tax assets held by its German subsidiaries will be reversed. The ~~effective~~reversal would result in an income tax ~~rate~~benefit for the ~~first nine months~~quarterly and annual period in which the Company releases the valuation allowance. However, the exact timing and amount of ~~2019 included a net discrete income tax expense~~the valuation allowance release are subject to change on the basis of ~~$1.3 million, primarily related to an impairment~~the level of ~~goodwill and return to provision tax expense adjustments.~~profitability that the Company actually achieves.

On March ~~27, 2020,~~11, 2021, President Biden signed the ~~Coronavirus Aid, Relief and Economic Security (CARES) Act was signed~~American Rescue Plan (the Rescue Plan) into law. The ~~CARES Act,~~Rescue 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~~Rescue 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 has determined the new legislation does not have a material impact to its consolidated financial statements.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note H — Earnings Per Share (EPS)

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


		Third Quarter Ended						Nine Months Ended							Third Quarter Ended				Nine Months Ended
		September 25,		September 27,		September 25,		September 27,			October 1,		September 25,		October 1,		September 25,
(Thousands, except per share amounts)	(Thousands, except per share amounts)	2020		2019		2020		2019		(Thousands, except per share amounts)	2021		2020		2021		2020
Numerator for basic and diluted EPS:	Numerator for basic and diluted EPS:									Numerator for basic and diluted EPS:
Net income	Net income	$	6,496	$	3,463	$	10,071	$	35,909	Net income	$	18,156	$	5,471	$	52,791	$	7,396
Denominator:	Denominator:									Denominator:
Denominator for basic EPS:	Denominator for basic EPS:									Denominator for basic EPS:
Weighted-average shares outstanding	Weighted-average shares outstanding	20,325		20,401		20,342		20,351		Weighted-average shares outstanding	20,439		20,325		20,414		20,342
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Stock appreciation rights	Stock appreciation rights	46		59		39		80		Stock appreciation rights	72		46		73		39
Restricted stock units	Restricted stock units	77		75		90		73		Restricted stock units	94		77		113		90
Performance-based restricted stock units	Performance-based restricted stock units	144		142		124		141		Performance-based restricted stock units	52		144		59		124
Diluted potential common shares	Diluted potential common shares	267		276		253		294		Diluted potential common shares	218		267		245		253
Denominator for diluted EPS:	Denominator for diluted EPS:									Denominator for diluted EPS:
Adjusted weighted-average shares outstanding	Adjusted weighted-average shares outstanding	20,592		20,677		20,595		20,645		Adjusted weighted-average shares outstanding	20,657		20,592		20,659		20,595
Basic EPS	Basic EPS	$	0.32	$	0.17	$	0.50	$	1.76	Basic EPS	$	0.89	$	0.27	$	2.59	$	0.36
Diluted EPS	Diluted EPS	$	0.32	$	0.17	$	0.49	$	1.74	Diluted EPS	$	0.88	$	0.27	$	2.56	$	0.36

Adjusted weighted-average shares ~~outstanding-diluted excludes~~outstanding - diluted exclude securities totaling ~~114,335~~55,598 and ~~70,562~~114,335 for the quarters ended October 1, 2021 and September 25, 2020, ~~and September 27, 2019,~~ respectively and ~~164,447~~56,319 and ~~127,759~~164,447 for the nine months ended October 1, 2021 and September 25, 2020, ~~and September 27, 2019,~~ respectively. These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.

Note I — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:

September 25, December 31,
(Thousands) 2020 2019
Raw materials and supplies $ 46,776 $ 35,612
Work in process 184,348 177,780
Finished goods 27,839 25,506
Subtotal $ 258,963 $ 238,898
Less: LIFO reserve balance 47,263 48,508
Inventories $ 211,700 $ 190,390

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


	October 1,		December 31,
(Thousands)	2021		2020
Raw materials and supplies	$	79,937	$	42,905
Work in process	179,616		156,093
Finished goods	52,192		51,780
Inventories, net	$	311,745	$	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 ~~$382.8~~$452.9 million and ~~$309.3~~$400.0 million as of ~~September 25, 2020~~October 1, 2021 and December 31, ~~2019,~~2020, respectively. Amounts for the year ended December 31, 2020 have been revised to reflect a $44.6 million reclassification out of work in process and into finished goods inventory.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note J — ~~Mine Development~~

Mine development costs at the Company's open pit surface mine include drilling, infrastructure, and other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body. Historically, the Company’s mine development costs involved the development of a new source of ore, and, as such, mine development costs incurred were capitalized during the pre-production phase of a mine and amortized into inventory as the ore was extracted. In the third quarter of 2020, the Company expanded a mine to further develop an ore body. Since the pre-production phase ended when ore was first extracted from this mine, the Company recognized approximately $7.3 million of mine development costs in the third quarter of 2020 as a component of cost of sales. The Company expects to incur additional period costs as a component of cost of sales related to mine development of approximately $6.0 million in the fourth quarter of 2020 related to the same mine.

~~Note K — 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
Acquisition 0 0 71,510 71,510
Impairment charge 0 0 (9,053) (9,053)
Other 0 173 1,477 1,650
Balance at September 25, 2020 $ 1,899 $ 50,363 $ 90,856 $ 143,118

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

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

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

~~Note L — 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, as of ~~September 25,~~October 1, 2021 and December 31, 2020, ~~$45.1~~$67.9 million and $58.8 million, respectively, of prepayments ~~are~~were classified as Unearned ~~Income~~income in the Consolidated Balance Sheet, of which ~~$13.7~~$1.0 million ~~were~~and $9.0 million, respectively, was received during the third quarter and first nine months of ~~2020, and the liability is expected to be settled as commercial shipments are made.~~2021.

Note MK — ~~Leases~~Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit credit for the third quarter and first nine months of 2021 and 2020 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
	Third Quarter Ended				Third Quarter Ended
	October 1,		September 25,		October 1,		September 25,
(Thousands)	2021		2020		2021		2020
Components of net periodic benefit (credit) cost
Service cost	$	—	$	—	$	20	$	14
Interest cost	986		1,215		29		53
Expected return on plan assets	(2,234)		(2,206)		—		—
Amortization of prior service cost (benefit)	—		—		(374)		(374)
Amortization of net loss (gain)	418		284		(69)		(83)
Total net benefit (credit) cost	$	(830)	$	(707)	$	(394)	$	(390)


	Pension Benefits				Other Benefits
	Nine Months Ended				Nine Months Ended
	October 1,		September 25,		October 1,		September 25,
(Thousands)	2021		2020		2021		2020
Components of net periodic benefit (credit) cost
Service cost	$	—	$	—	$	60	$	45
Interest cost	2,959		3,644		87		160
Expected return on plan assets	(6,702)		(6,616)		—		—
Amortization of prior service cost (benefit)	—		—		(1,123)		(1,123)
Amortization of net loss (gain)	1,253		852		(206)		(249)
Net periodic benefit (credit) cost	$	(2,490)	$	(2,120)	$	(1,182)	$	(1,167)
Settlements	—		94		—		—
Total net benefit (credit) cost	$	(2,490)	$	(2,026)	$	(1,182)	$	(1,167)

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

The Company reports the service cost component of net periodic benefit credit in the same line item as other compensation costs in operating expenses 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~~non-service cost components 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 fornet periodic benefit credit in Other non-operating (income) expense.

In May 2019, the Company's ~~operating and finance leases as~~Board of ~~September 25, 2020 was 12.98 years and 16.29 years, respectively.~~

Directors approved changes to the U.S. defined benefit pension plan. The Company

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

~~The discount rate implicit within~~froze the ~~leases is generally not determinable,~~pay 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 rateservice amounts used to ~~measure~~calculate pension benefits for active participants in the ~~Company's operating and finance lease liabilities~~pension plan as of ~~September 25, 2020 was 6.52% and 4.86%, respectively.~~January 1, 2020.

~~The~~Note L — Accumulated Other Comprehensive Income (Loss)

Changes in the components of ~~operating and finance lease cost~~accumulated other comprehensive income, including the amounts reclassified, for the third quarter and first nine months of 2021 and 2020 ~~and 2019 were~~are as follows:

Third Quarter Ended Nine Months Ended
(Thousands) September 25, 2020 September 27, 2019 September 25, 2020 September 27, 2019
Components of lease expense
Operating lease cost $ 3,008 $ 2,449 $ 7,540 $ 7,452
Finance lease cost
Amortization of right-of-use assets 601 353 1,302 1,063
Interest on lease liabilities 266 256 748 778
Total lease cost $ 3,875 $ 3,058 $ 9,590 $ 9,293

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


	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 July 2, 2021	$	1,603	$	186	$	—	$	1,789	$	(43,226)	$	(1,647)	$	(43,084)
Other comprehensive income (loss) before reclassifications	625		30		8		663		—		(2,029)		(1,366)
Amounts reclassified from accumulated other comprehensive income (loss)	(2)		(83)		(8)		(93)		114		—		21
Net current period other comprehensive (loss) income before tax	623		(53)		—		570		114		(2,029)		(1,345)
Deferred taxes	143		(12)		—		131		(7)		—		124
Net current period other comprehensive (loss) income after tax	480		(41)		—		439		121		(2,029)		(1,469)
Balance at October 1, 2021	$	2,083	$	145	$	—	$	2,228	$	(43,105)	$	(3,676)	$	(44,553)

Balance at June 26, 2020	$	1,065	$	(779)	$	104	$	390	$	(41,241)	$	(4,720)	$	(45,571)
Other comprehensive (loss) income before reclassifications	(520)		(617)		182		(955)		—		3,076		2,121
Amounts reclassified from accumulated other comprehensive income (loss)	191		710		(353)		548		(11)		—		537
Net current period other comprehensive (loss) income before tax	(329)		93		(171)		(407)		(11)		3,076		2,658
Deferred taxes	(76)		22		(38)		(92)		(40)		—		(132)
Net current period other comprehensive (loss) income after tax	(253)		71		(133)		(315)		29		3,076		2,790
Balance at September 25, 2020	$	812	$	(708)	$	(29)	$	75	$	(41,212)	$	(1,644)	$	(42,781)

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

~~Supplemental balance sheet information related~~


	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	1,893		532		2,444		4,869		—		(7,693)		(2,824)
Amounts reclassified from accumulated other comprehensive income (loss)	138		(122)		(3,049)		(3,033)		348		—		(2,685)
Net current period other comprehensive (loss) income before tax	2,031		410		(605)		1,836		348		(7,693)		(5,509)
Deferred taxes	467		95		(137)		425		(20)		—		405
Net current period other comprehensive (loss) income after tax	1,564		315		(468)		1,411		368		(7,693)		(5,914)
Balance at October 1, 2021	$	2,083	$	145	$	—	$	2,228	$	(43,105)	$	(3,676)	$	(44,553)

Balance at December 31, 2019	$	1,324	$	(452)	$	25	$	897	$	(41,346)	$	(5,013)	$	(45,462)
Other comprehensive (loss) income before reclassifications	(863)		(1,851)		(170)		(2,884)		—		3,369		485
Amounts reclassified from accumulated other comprehensive income (loss)	198		1,519		100		1,817		34		—		1,851
Net current period other comprehensive (loss) income before tax	(665)		(332)		(70)		(1,067)		34		3,369		2,336
Deferred taxes	(153)		(76)		(16)		(245)		(100)		—		(345)
Net current period other comprehensive (loss) income after tax	(512)		(256)		(54)		(822)		134		3,369		2,681
Balance at September 25, 2020	$	812	$	(708)	$	(29)	$	75	$	(41,212)	$	(1,644)	$	(42,781)

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

Reclassifications from accumulated other comprehensive income (loss) for pension and post-employment benefits are included in the ~~Company's operating and finance leases as of September 25, 2020 and December 31, 2019 was as follows:~~

September 25, December 31,
(Thousands) 2020 2019
Supplemental balance sheet information
Operating Leases
Operating lease right-of-use assets $ 62,235 $ 23,413
Other liabilities and accrued items 6,781 6,542
Operating lease liabilities 56,891 18,091
Finance Leases
Property, plant, and equipment $ 34,500 $ 26,069
Allowances for depreciation, depletion, and amortization (7,045) (3,570)
Finance lease assets, net $ 27,455 $ 22,499
Other liabilities and accrued items $ 2,700 $ 1,265
Finance lease liabilities 20,540 17,424
Total principal payable on finance leases $ 23,240 $ 18,689

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

Finance Operating
(Thousands) Leases Leases
2020 $ 935 $ 2,728
2021 3,735 10,275
2022 3,723 8,813
2023 2,455 8,371
2024 1,530 6,494
2025 and thereafter 22,372 58,992
Total lease payments 34,750 95,673
Less amount of lease payment representing interest 11,510 32,001
Total present value of lease payments
$ 23,240 $ 63,672

~~Supplemental cash flow information related~~net periodic pension and post-employment benefit expense. Refer to ~~leases~~Note K for ~~the first nine months of 2020~~additional details on pension and ~~2019 were as follows:~~

Nine Months Ended
(Thousands) September 25, 2020 September 27, 2019
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 11,406 $ 11,763
Operating cash flows from finance leases 748 778
Financing cash flows from finance leases 1,440 894
post-employment expenses.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note ~~N — Pensions and Other Post-employment Benefits~~

The following is a summary of the net periodic benefit cost for the third quarter and first nine months 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
Third Quarter Ended Third Quarter Ended
September 25, September 27, September 25, September 27,
(Thousands) 2020 2019 2020 2019
Components of net periodic benefit (income) cost
Service cost $ 0 $ 1,359 $ 14 $ 18
Interest cost 1,215 1,500 53 100
Expected return on plan assets (2,206) (2,134) 0 0
Amortization of prior service cost (benefit) 0 120 (374) (374)
Amortization of net loss (gain) 284 762 (83) (24)
Total net benefit (income) cost $ (707) $ 1,607 $ (390) $ (280)

Pension Benefits Other Benefits
Nine Months Ended Nine Months Ended
September 25, September 27, September 25, September 27,
(Thousands) 2020 2019 2020 2019
Components of net periodic benefit (income) cost
Service cost $ 0 $ 4,117 $ 45 $ 53
Interest cost 3,644 4,404 160 299
Expected return on plan assets (6,616) (6,424) 0 0
Amortization of prior service cost (benefit) 0 362 (1,123) (1,123)
Amortization of net loss (gain) 852 2,193 (249) (70)
Net periodic benefit (credit) cost $ (2,120) $ 4,652 $ (1,167) $ (841)
Net pension settlements/curtailments 94 3,296 0 0
Total net benefit (income) cost $ (2,026) $ 7,948 $ (1,167) $ (841)

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

The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating (income) expense.

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~Note O — Accumulated Other Comprehensive Income (Loss)~~

~~Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the third quarter and first nine months of 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 June 26, 2020 $ 1,065 $ (779) $ 104 $ 390 $ (41,241) $ (4,720) $ (45,571)
Other comprehensive income (loss) before reclassifications (520) (617) 182 (955) 0 3,076 2,121
Amounts reclassified from accumulated other comprehensive income 191 710 (353) 548 (11) 0 537
Net current period other comprehensive (loss) income before tax (329) 93 (171) (407) (11) 3,076 2,658
Deferred taxes (76) 22 (38) (92) (40) 0 (132)
Net current period other comprehensive (loss) income after tax (253) 71 (133) (315) 29 3,076 2,790
Balance at September 25, 2020 $ 812 $ (708) $ (29) $ 75 $ (41,212) $ (1,644) $ (42,781)
Balance at June 28, 2019 $ 1,420 $ (458) $ (134) $ 828 $ (40,050) $ (4,756) $ (43,978)
Other comprehensive (loss) income before reclassifications 354 (730) (271) (647) 0 (463) (1,110)
Amounts reclassified from accumulated other comprehensive income (3) 343 413 753 609 0 1,362
Net current period other comprehensive (loss) income before tax 351 (387) 142 106 609 (463) 252
Deferred taxes (80) (66) 10 24 108 0 132
Net current period other comprehensive (loss) income after tax 271 (321) 132 82 501 (463) 120
Balance at September 27, 2019 $ 1,691 $ (779) $ (2) $ 910 $ (39,549) $ (5,219) $ (43,858)

~~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 income (loss) before reclassifications (863) (1,851) (170) (2,884) 0 3,369 485
Amounts reclassified from accumulated other comprehensive income 198 1,519 100 1,817 34 0 1,851
Net current period other comprehensive (loss) income before tax (665) (332) (70) (1,067) 34 3,369 2,336
Deferred taxes (153) (76) (16) (245) (100) 0 (345)
Net current period other comprehensive (loss) income after tax (512) (256) (54) (822) 134 3,369 2,681
Balance at September 25, 2020 $ 812 $ (708) $ (29) $ 75 $ (41,212) $ (1,644) $ (42,781)
Balance at December 31, 2018 $ 1,263 $ 79 $ (441) $ 901 $ (54,543) $ (4,592) $ (58,234)
Other comprehensive income (loss) before reclassifications 602 (1,366) 33 (731) 14,224 (627) 12,866
Amounts reclassified from accumulated other comprehensive income (47) 281 505 739 5,050 0 5,789
Net current period other comprehensive (loss) income before tax 555 (1,085) 538 8 19,274 (627) 18,655
Deferred taxes 127 (227) 99 (1) 4,280 0 4,279
Net current period other comprehensive (loss) income after tax 428 (858) 439 9 14,994 (627) 14,376
Balance at September 27, 2019 $ 1,691 $ (779) $ (2) $ 910 $ (39,549) $ (5,219) $ (43,858)

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

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

~~Note P~~M — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was ~~less than $0.1~~$1.5 million and ~~$4.1~~$5.3 million in the third quarter and first nine months of ~~2020,~~2021, respectively, compared to ~~$2.5~~less than $0.1 million and ~~$8.7~~$4.1 million, respectively, in the same periods of ~~2019. The decrease in stock-based compensation expense in both the third quarter and first nine months of 2020 was primarily related to the forfeiture of employee equity awards.~~2020.

The Company granted ~~64,636~~52,709 stock appreciation rights (SARs) to certain employees during the first nine months of ~~2020.~~2021. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the nine months ended ~~September 25, 2020~~October 1, 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 ~~66,663~~59,818 stock-settled restricted stock units (RSUs) to certain employees and ~~15,976 stock-settled RSUs~~9,904 to non-employee directors during the first nine months 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 ~~$49.72~~$68.62 and ~~$48.42~~$75.77 for stock-settled RSUs granted to employees and non-employee directors, respectively, during the nine months ended ~~September 25, 2020.~~October 1, 2021. RSUs are generally expensed over the vesting period of three years for employees and one year for non-employee directors.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first nine months 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 ~~September 25, 2020,~~October 1, 2021, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$9.0~~$10.9 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note QN — 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.

2320

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of ~~September 25, 2020~~October 1, 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	$	2,985		$	3,391		$	2,985		$	3,391		$	0		$	0		$	0		$	0	Deferred compensation investments		$	3,994			$	3,802		$	3,994		$	3,802		$	—		$	—		$	—		$	—
Foreign currency forward contracts	Foreign currency forward contracts	44			188			0			0			44			188			0			0		Foreign currency forward contracts		1,800				107			—			—			1,800			107			—			—
Precious metal swaps	Precious metal swaps	100			35			0			0			100			35			0			0		Precious metal swaps		237				127			—			—			237			127			—			—
Copper swaps	Copper swaps	45			61			0			0			45			61			0			0		Copper swaps		—				632			—			—			—			632			—			—
Total	Total	$	3,174		$	3,675		$	2,985		$	3,391		$	189		$	284		$	0		$	0	Total		$	6,031			$	4,668		$	3,994		$	3,802		$	2,037		$	866		$	—		$	—
Financial Liabilities	Financial Liabilities																								Financial Liabilities
Deferred compensation liability	Deferred compensation liability	$	2,985		$	3,391		$	2,985		$	3,391		$	0		$	0		$	0		$	0	Deferred compensation liability		$	3,994			$	3,802		$	3,994		$	3,802		$	—		$	—		$	—		$	—
Foreign currency forward contracts	Foreign currency forward contracts	805			211			0			0			805			211			0			0		Foreign currency forward contracts		128				1,203			—			—			128			1,203			—			—
Precious metal swaps	Precious metal swaps	1,020			623			0			0			1,020			623			0			0		Precious metal swaps		49				349			—			—			49			349			—			—
Copper swaps	Copper swaps	82			28			0			0			82			28			0			0		Copper swaps		—				27			—			—			—			27			—			—
Total	Total	$	4,892		$	4,253		$	2,985		$	3,391		$	1,907		$	862		$	0		$	0	Total		$	4,171			$	5,381		$	3,994		$	3,802		$	177		$	1,579		$	—		$	—

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 ~~September 25, 2020~~October 1, 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 RO — 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

2421

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.

2522

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 ~~September 25, 2020~~October 1, 2021 and December 31, ~~2019:~~2020:


		September 25, 2020						December 31, 2019							October 1, 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	$	10,517	$	28	$	13,734	$	95	Prepaid expenses	$	58,289	$	914	$	62,012	$	107
Other liabilities and accrued items	Other liabilities and accrued items	10,831		22		5,757		16		Other liabilities and accrued items	17,735		125		7,695		55

These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included $0.7 million of foreign currency gains in the third quarter of 2021 and $0.5 million of foreign currency losses related to derivatives in the first nine months of 2021, compared to $0.4 million and $2.7 million of foreign currency gains ~~related to derivatives~~ in the third quarter and first nine months of 2020, ~~respectively, primarily due to a gain realized on the settlement of a foreign currency hedge for the purchase of Optics Balzers.~~

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

respectively.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of ~~September 25, 2020~~October 1, 2021 and December 31, ~~2019:~~2020:


		September 25, 2020						December 31, 2019							October 1, 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	$	0	$	0	$	1,025	$	10	Foreign currency forward contracts - yen	$	4,786	$	109	$	—	$	—
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	296		4		3,466		83		Foreign currency forward contracts - euro	27,028		720		—		—
Precious metal swaps	Precious metal swaps	1,583		90		1,116		34		Precious metal swaps	4,447		225		2,155		127
Copper swaps	Copper swaps	1,861		45		1,951		61		Copper swaps	—		—		6,225		632
Total	Total	3,740		139		7,558		188		Total	36,261		1,054		8,380		759

Other assets	Other assets									Other assets
Foreign currency forward contracts - yen										Foreign currency forward contracts - yen	327		1		—		—
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	892		12		0		0		Foreign currency forward contracts - euro	3,567		56		—		—
Precious metal swaps	Precious metal swaps	757		10		157		1		Precious metal swaps	541		12		—		—
Total	Total	1,649		22		157		1		Total	4,435		69		—		—

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	1,441		39		2,355		12		Foreign currency forward contracts - yen	606		3		2,668		59
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	12,101		743		15,686		183		Foreign currency forward contracts - euro	—		—		17,611		1,089
Precious metal swaps	Precious metal swaps	6,492		1,020		7,034		618		Precious metal swaps	870		49		4,964		349
Copper swaps	Copper swaps	3,258		82		1,266		28		Copper swaps	—		—		2,445		27
Total	Total	23,292		1,884		26,341		841		Total	1,476		52		27,688		1,524

Other long-term liabilities
Foreign currency forward contracts - yen		113		1		0		0

Precious metal swaps		0		0		149		5
Total		113		1		149		5

Total	Total	$	28,794	$	1,724	$	34,205	$	657	Total	$	42,172	$	1,071	$	36,068	$	765

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

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 ~~September 25, 2020~~October 1, 2021 to the Consolidated Statements of Income within the next ~~15-month period.~~15-months. Refer to Note OL for additional OCI details.

The following table summarizes the pre-tax 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 third quarter and first nine months of ~~2020~~2021 and ~~2019:~~2020:


			Third Quarter Ended								Third Quarter Ended
(Thousands)	(Thousands)		September 25, 2020		September 27, 2019		(Thousands)		October 2, 2021		September 25, 2020
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	191	$	(3)	Foreign currency forward contracts	Net sales	$	(2)	$	191
Precious metal swaps	Precious metal swaps	Cost of sales	710		343		Precious metal swaps	Cost of sales	(83)		710
Copper swaps	Copper swaps	Cost of sales	(353)		413		Copper swaps	Cost of sales	(8)		(353)
Total	Total		$	548	$	753	Total		$	(93)	$	548

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~


			Nine Months Ended								Nine Months Ended
(Thousands)	(Thousands)		September 25, 2020		September 27, 2019		(Thousands)		October 1, 2021		September 25, 2020
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	198	$	(47)	Foreign currency forward contracts	Net sales	$	138	$	198
Precious metal swaps	Precious metal swaps	Cost of sales	1,519		281		Precious metal swaps	Cost of sales	(122)		1,519
Copper swaps	Copper swaps	Cost of sales	100		505		Copper swaps	Cost of sales	(3,049)		100
Total	Total		$	1,817	$	739	Total		$	(3,033)	$	1,817

Note SP — 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 ~~September 25, 2020.~~October 1, 2021. The Company does not expect the resolution of 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, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. 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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

difference between actual and estimated costs, and other factors. The reserves may also be affected by rulings and negotiations with regulatory agencies. The undiscounted reserve balance was $4.9 million and $5.5 million~~$5.9 million~~ at ~~both September 25, 2020~~October 1, 2021 and December 31, ~~2019.~~2020, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Note TQ — Debt


(Thousands)	(Thousands)	September 25, 2020		December 31, 2019		(Thousands)	October 1, 2021		December 31, 2020
Borrowings under Credit Agreement						Borrowings under Credit Agreement	$	77,010	$	34,000
Foreign debt	Foreign debt	$	6,988	$	0	Foreign debt	2,555		3,157
Fixed rate industrial development revenue bonds	Fixed rate industrial development revenue bonds	1,602		2,218		Fixed rate industrial development revenue bonds	—		1,322
Total long-term debt outstanding		8,590		2,218
Total debt outstanding						Total debt outstanding	79,565		38,479
Current portion of long-term debt	Current portion of long-term debt	2,216		868		Current portion of long-term debt	(529)		(1,937)
Gross long-term debt		6,374		1,350
Unamortized deferred financing fees		0		90
Long-term debt	Long-term debt	$	6,374	$	1,260	Long-term debt	$	79,036	$	36,542

~~In the first nine months~~As of October 1, 2021 and December 31, 2020, the Company ~~borrowed $150.0~~had $77.0 million ~~under~~and $34.0 million, respectively, outstanding against its revolving credit facility (Credit Agreement) with average interest rates of ~~which $120.0 million was outstanding as of September 25, 2020.~~1.51% and 1.65% at October 1, 2021 and December 31, 2020, respectively. The remaining borrowing capacity under the revolving credit facility as of ~~September 25,~~October 1, 2021 and December 31, 2020 was ~~$233.9 million.~~$319.4 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. The Company was in compliance with all of its debt covenants as of October 1, 2021.

At October 1, 2021 and December 31, 2020, there was $47.3 million and $48.1 million outstanding against the letters of credit sub-facility, respectively.

Note R — Subsequent Event

28On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire the industry-leading electronic materials business of H.C. Starck (HCS) for a purchase price of approximately $380 million in cash, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. Acquisition-related transaction and integration costs totaled $5.3 million in the third quarter of 2021. These costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income. On November 1, 2021, the Company completed the acquisition. The Company financed the purchase price for the HCS acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility entered during October 2021 and $103 million of borrowings under its amended revolving credit facility, which was also extended to expire five years in October 2026. The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.


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.

On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire the industry-leading electronic materials business of H.C. Starck (HCS) for a purchase price of approximately $380 million in cash, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. Acquisition-related transaction and integration costs totaled $5.3 million in the third quarter of 2021. These costs are included in selling, general, and administrative expenses in the Consolidated Statement of Income. On November 1, 2021, the Company completed the acquisition. The Company financed the purchase price for the HCS acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility entered during October 2021 and $103 million of borrowings under its amended revolving credit facility, which was also extended to expire five years in October 2026. The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.

Coronavirus (COVID-19) Third 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 ~~quarter~~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 nine months of ~~2020, the Company recorded additional reserves for slow-moving and excess inventory of approximately $1.3 million related~~2021, we continued to ~~the collapse~~see improvements in demand as global government-imposed restrictions continued to be lifted and many country vaccination programs gained further 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 throughoperate during the ~~remainder of 2020, but the extent and timing cannot be reasonably estimated due to the evolving nature of this pandemic.~~

~~In the third quarter of 2020, the Company incurred $0.8 million of expense related to COVID-19. These costs were primarily related to personal protective equipment and temperature-checking services.~~

~~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 G 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, $30.0 million of which was repaid during the third quarter of 2020. We ended the third quarter with total cash of $117.8 millionworker and $128.6 million of total debt, or in a net debt position of $10.9 million. In addition, we had $233.9 million of available borrowings under our revolving credit facility as of the end of the third quarter.

Additionally, in the third quarter of 2020, we completed the acquisition of Optics Balzers for a purchase price of $136.1 million, including the assumption of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility during the first nine months of 2020.workplace safety.

2926

RESULTS OF OPERATIONS

Third Quarter


		Third Quarter Ended																			Third Quarter Ended
		September 25,			September 27,			$		%			October 1,			September 25,			$		%
(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	$	287,171		$	305,979		$	(18,808)	(6)	%	Net sales	$	388,028		$	287,171		$	100,857	35	%
Value-added sales	Value-added sales	167,545			188,598			(21,053)		(11)	%	Value-added sales	215,826			164,905			50,921		31	%
Gross margin	Gross margin	46,640			65,231			(18,591)		(29)	%	Gross margin	74,313			45,311			29,002		64	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	28		%	35		%					Gross margin as a % of value-added sales	34		%	27		%
Selling, general, and administrative (SG&A) expense	Selling, general, and administrative (SG&A) expense	35,696			35,812			(116)		—	%	Selling, general, and administrative (SG&A) expense	43,195			35,696			7,499		21	%
SG&A expense as a % of value-added sales	SG&A expense as a % of value-added sales	21		%	19		%					SG&A expense as a % of value-added sales	20		%	22		%
Research and development (R&D) expense	Research and development (R&D) expense	5,417			5,262			155		3	%	Research and development (R&D) expense	6,354			5,417			937		17	%
R&D expense as a % of value-added sales	R&D expense as a % of value-added sales	3		%	3		%					R&D expense as a % of value-added sales	3		%	3		%
Goodwill impairment charges		—			11,560			(11,560)		N/A
Asset impairment charges		—			2,581			(2,581)		N/A
Restructuring expense	Restructuring expense	2,593			785			1,808		N/A		Restructuring expense	—			2,593			(2,593)		n.m.
Other—net	Other—net	2,221			2,942			(721)		(25)	%	Other—net	3,604			2,221			1,383		62	%
Operating profit		713			6,289			(5,576)		(89)	%
Other non-operating (income) expense—net		(1,076)			127			(1,203)		(947)	%
Operating profit (loss)												Operating profit (loss)	21,160			(616)			21,776		n.m.
Other non-operating (income)—net												Other non-operating (income)—net	(1,279)			(1,076)			(203)		19	%
Interest expense—net	Interest expense—net	1,334			436			898		206	%	Interest expense—net	861			1,334			(473)		(35)	%
Income before income taxes		455			5,726			(5,271)		(92)	%
Income tax (benefit) expense		(6,041)			2,263			(8,304)		(367)	%
Income (Loss) before income taxes												Income (Loss) before income taxes	21,578			(874)			22,452		n.m.
Income tax expense (benefit)												Income tax expense (benefit)	3,422			(6,345)			9,767		n.m.
Net income	Net income	$	6,496		$	3,463		$	3,033	88	%	Net income	$	18,156		$	5,471		$	12,685	232	%

Diluted earnings per share	Diluted earnings per share	$	0.32		$	0.17		$	0.15	88	%	Diluted earnings per share	$	0.88		$	0.27		$	0.61	226	%

~~N/A~~n.m. = ~~Not Applicable~~not meaningful

Net sales of $388.0 million in the third quarter of 2021 increased $100.9 million from $287.2 million in the third quarter of ~~2020 decreased $18.8 million from $306.0 million in the third quarter of 2019.~~2020. Net sales ~~growth~~increased in all of our ~~Advanced Materials and Precision Coatings~~ 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 segments driven by lower sales volumes. The change in precious metal and copper prices favorably impacted net sales~~completed during the third quarter of ~~2020 by $24.2 million.~~2020.

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 ~~$167.5~~$215.8 million in the third quarter of ~~2020 decreased $21.1~~2021 increased $50.9 million, or ~~11%~~31%, compared to the third 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 ~~aerospace and defense, energy,~~semiconductor, 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 third quarter of ~~2020~~2021 was ~~$46.6~~$74.3 million, which was ~~down 29%~~up 64% compared to the third quarter of ~~2019.~~2020. Gross margin expressed as a percentage of value-added sales ~~decreased~~increased to ~~28%~~34% in the third quarter of ~~2020~~2021 from ~~35%~~27% in the third quarter of ~~2019.~~2020. The ~~decrease~~increase was primarily driven by ~~lower~~increased sales volumes in the third quarter of 2021, as well as the absence of $7.3 million of mine development costs recorded in the third quarter of 2020.

SG&A expense was $43.2 million in the third quarter of 2021, compared to $35.7 million in the third quarter of ~~2020, compared to $35.8 million in the third quarter of 2019.~~2020. The ~~decrease~~increase in SG&A expense for the third quarter of ~~2020~~2021 was primarily driven by ~~the forfeiture of non-cash stock-based compensation awards, lower~~increased variable compensation expense, ~~and cost management actions, partially offset by acquisition and integration~~as well as costs ~~related~~attributable to ~~the purchase of~~our Optics ~~Balzers.~~Balzers acquisition. Expressed as a percentage of value-added sales, SG&A expense was ~~21%~~20% and ~~19%~~22% in the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively.

R&D expense consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and ~~applications.~~applications to deliver new high performing advanced materials to our customers. R&D expense accounted for 3% of value-added sales in the third quarter of both ~~2020~~2021 and ~~2019.~~

~~Goodwill and Asset impairment charges~~ ~~includes non-recurring charges relating to goodwill and other assets recorded in the third quarter of 2019 in our Precision Coatings segment.~~2020.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure.

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

Other-net was ~~$2.2~~$3.6 million of expense in the third quarter of ~~2020,~~2021, or a ~~$0.7~~$1.4 million ~~decrease~~increase from the third quarter of ~~2019,~~2020, which was primarily driven by ~~a $1.1~~$1.4 million of decreased foreign ~~currency hedge gain realized in the third quarter of 2020.~~exchange gains. Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

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

Interest expense-net was ~~$1.3~~$0.9 million and ~~$0.4~~$1.3 million in the third quarter of ~~2020~~2021 and ~~2019,~~2020, respectively. The ~~increase~~decrease in interest expense is primarily due to reduced borrowings under our revolving credit ~~facility.~~facility in the third quarter of 2021, compared to the third quarter of 2020.

Income tax expense (benefit) ~~expense~~ for the third quarter of ~~2020~~2021 was ~~a benefit of $6.0~~$3.4 million, compared to ~~expense of $2.3~~a $6.3 million benefit in the third quarter of ~~2019.~~2020. The effective tax rate for the third quarter of 2021 and 2020 was ~~(1,327.7)% compared to 39.5% in the prior-year period.~~15.9% and 726.0%, respectively. The effective tax rate for the third quarter of ~~2020 differed from~~2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, ~~the~~ research and development ~~credit,~~credits, and the ~~recognition of discrete tax benefits.~~foreign derived intangible income deduction. The effective tax rate for the third quarter of 2020 ~~included a net discrete income~~was higher than the statutory tax ~~benefit of $3.8 million,~~rate primarily ~~related~~due to the release of a ~~foreign~~significant valuation ~~allowance. Refer to~~allowance, which generated a tax benefit on a loss for the period. See Note G to the Consolidated Financial Statements for ~~further details on income taxes.~~additional discussion.

Nine Months


		Nine Months Ended																			Nine Months Ended
		September 25,			September 27,			$		%			October 1,			September 25,			$		%
(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	$	836,585		$	905,263		$	(68,678)	(8)	%	Net sales	$	1,113,413		$	836,585		$	276,828	33	%
Value-added sales	Value-added sales	487,780			571,175			(83,395)		(15)	%	Value-added sales	622,295			477,944			144,351		30	%
Gross margin	Gross margin	140,305			204,137			(63,832)		(31)	%	Gross margin	210,690			136,836			73,854		54	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	29		%	36		%					Gross margin as a % of value-added sales	34		%	29		%
SG&A expense	SG&A expense	99,292			115,767			(16,475)		(14)	%	SG&A expense	118,031			99,292			18,739		19	%
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		%	21		%
R&D expense	R&D expense	14,104			13,064			1,040		8	%	R&D expense	19,164			14,104			5,060		36	%
R&D expense as a % of value-added sales	R&D expense as a % of value-added sales	3		%	2		%					R&D expense as a % of value-added sales	3		%	3		%
Goodwill impairment charges		9,053			11,560			(2,507)		N/A
Asset impairment charges		1,713			2,581			(868)		N/A
Restructuring expense		7,144			785			6,359		N/A
Impairment charges												Impairment charges	—			10,766			(10,766)		(100)	%
Restructuring (income) expense												Restructuring (income) expense	(378)			7,144			(7,522)		n.m.
Other—net	Other—net	4,143			9,954			(5,811)		(58)	%	Other—net	12,272			4,143			8,129		196	%
Operating profit	Operating profit	4,856			50,426			(45,570)		(90)	%	Operating profit	61,601			1,387			60,214		4,341	%
Other non-operating (income) expense—net		(2,871)			3,484			(6,355)		(182)	%
Other non-operating (income)—net												Other non-operating (income)—net	(3,832)			(2,871)			(961)		33	%
Interest expense—net	Interest expense—net	2,839			1,402			1,437		102	%	Interest expense—net	2,480			2,839			(359)		(13)	%
Income before income taxes	Income before income taxes	4,888			45,540			(40,652)		(89)	%	Income before income taxes	62,953			1,419			61,534		4,336	%
Income tax (benefit) expense		(5,183)			9,631			(14,814)		(154)	%
Income tax expense (benefit)												Income tax expense (benefit)	10,162			(5,977)			16,139		n.m.
Net income	Net income	$	10,071		$	35,909		$	(25,838)	(72)	%	Net income	$	52,791		$	7,396		$	45,395	614	%

Diluted earnings per share	Diluted earnings per share	$	0.49		$	1.74		$	(1.25)	(72)	%	Diluted earnings per share	$	2.56		$	0.36		$	2.20	611	%

n.m. = not meaningful

~~N/A = Not Applicable~~

Net sales of $1.1 billion in the first nine months of 2021 increased $276.8 million from $836.6 million in the first nine months of ~~2020 decreased $68.7 million from $905.3 million in the first nine months of 2019.~~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 first nine months of ~~2020~~2021 by ~~$63.8~~$42.2 million.

Value-added sales of ~~$487.8~~$622.3 million in the first nine months of ~~2020 decreased $83.4~~2021 increased $144.4 million, or ~~15%~~30%, compared to the first nine months 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 semiconductor, automotive, industrial, and aerospace and defense ~~energy, telecom and data center, and industrial~~ end ~~markets.~~markets, as well as value-added sales from our Optics Balzers acquisition.

Gross margin in the first nine months of ~~2020~~2021 was ~~$140.3~~$210.7 million, which was ~~down 31%~~up 54% compared to the first nine months of ~~2019.~~2020. Gross margin expressed as a percentage of value-added sales ~~decreased~~increased to 34% in the first nine months of 2021 from 29% in the first nine months of ~~2020 from 36%~~2020. The increase was primarily driven by increased sales volumes in the first nine months of ~~2019. The decrease was primarily driven by lower volumes,~~2021, as well as the absence in 2021 of $7.3 million of mine development costs and a $1.3 million charge to reserve for slow moving and excess inventory related to the collapse in demand in the oil and gas industry, both recorded in the first nine months of 2020.

SG&A expense was $118.0 million in the first nine months of 2021, compared to $99.3 million in the first nine months of ~~2020, compared to $115.8 million in the first nine months of 2019.~~2020. The ~~decrease~~increase in SG&A expense for the first nine months of ~~2020~~2021 was primarily driven by ~~lower~~increased variable compensation expense, ~~and cost management actions.~~as well as costs attributable to our Optics Balzers acquisition. Expressed as a percentage of value-added sales, SG&A expense was ~~20%~~19% and 21% in the first nine months of ~~both~~2021 and 2020, ~~and 2019.~~respectively.

R&D expenseconsists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications to deliver new high performing advanced materials to our customers. R&D expense accounted for 3% ~~and 2%~~ of value-added sales in the first nine months of ~~2020~~both 2021 and ~~2019, respectively. The increase reflects additional investment in new product and application development.~~2020.

~~Goodwill and Asset impairment~~Impairment charges ~~includes~~include non-recurring charges relating to goodwill and other assets recorded in the first nine months of 2020 in our Precision ~~Coatings~~Optics segment. ~~Refer to Note K to the Consolidated Financial Statements for additional discussion.~~

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.

In the first nine months of 2020, we recorded ~~$7.1~~$6.8 million of restructuring charges ~~primarily~~ in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities. Refer to Note F to the Consolidated Financial Statements for additional discussion.

Other-net was ~~$4.1~~$12.3 million of expense in the first nine months of ~~2020,~~2021, or a ~~$5.8~~$8.1 million ~~decrease~~increase from the first nine months of ~~2019. The decrease in Other-net~~2020, which was primarily driven by ~~a $3.3~~$3.6 million of foreign exchange ~~hedge gain~~gains realized ~~in the first nine months of 2020, as well as reduced metal consignment fees in~~during the first nine months of 2020 compared to $1.6 million of foreign exchange losses realized in the first nine months of ~~2019.~~2021, as well as $2.3 million of increased intangible asset amortization expense, both of which were primarily related to the acquisition of Optics Balzers in third quarter of 2020. Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

Other non-operating (income) ~~expense-net~~-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 first nine months of 2019.costs. Refer to Note NK to the Consolidated Financial Statements for details of the components.

Interest expense-net was ~~$2.8~~$2.5 million and ~~$1.4~~$2.8 million in the first nine months of 2021 and 2020, ~~and 2019,~~ respectively. ~~The increase is primarily due to borrowings under our revolving credit facility.~~

Income tax expense (benefit) ~~expense~~for the first nine months of ~~2020~~2021 was $10.2 million of expense, compared to a benefit of ~~$5.2 million compared to an expense of $9.6~~$6.0 million in the first nine months of ~~2019.~~2020. The effective tax rate for the first nine months of 2021 and 2020 was 16.1% and ~~2019 was (106.0%) and 21.1%~~(421.2)%, respectively. The effective tax rate for the first nine months of ~~2020 differed from~~2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, ~~and the~~ research and development ~~credit,~~credits, and the ~~recognition~~foreign derived intangible income deduction. The effective tax rate for the first nine months of 2020 was lower than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on income for the period. The effective tax rate for the first nine months of 2021 included a net discrete income tax ~~benefits.~~benefit of $0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments recorded. The effective tax rate for the first nine months of 2020 included a net discrete income tax benefit of $3.8 million, primarily related to the release of a valuation allowance. The effective tax rate for the first nine months of 2019 included a net discrete income tax expense of $1.3 million, primarily related to an impairment of goodwill and return to provision tax expense adjustments. Refer toSee Note G to the Consolidated Financial Statements for ~~further details on income taxes.~~additional discussion.

3229

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

Third Quarter Ended Nine Months Ended
September 25, September 27, September 25, September 27,
(Thousands) 2020 2019 2020 2019
Net sales
Performance Alloys and Composites $ 91,203 $ 130,704 $ 291,884 $ 393,048
Advanced Materials 165,582 147,650 475,855 424,913
Precision Coatings 30,386 27,625 68,846 87,302
Other — — — —
Total $ 287,171 $ 305,979 $ 836,585 $ 905,263
Less: pass-through metal costs
Performance Alloys and Composites $ 9,321 $ 18,747 $ 36,531 $ 56,247
Advanced Materials 107,916 92,040 304,336 253,489
Precision Coatings 2,076 5,183 5,769 19,234
Other 313 1,411 2,169 5,118
Total $ 119,626 $ 117,381 $ 348,805 $ 334,088
Value-added sales
Performance Alloys and Composites $ 81,882 $ 111,957 $ 255,353 $ 336,801
Advanced Materials 57,666 55,610 171,519 171,424
Precision Coatings 28,310 22,442 63,077 68,068
Other (313) (1,411) (2,169) (5,118)
Total $ 167,545 $ 188,598 $ 487,780 $ 571,175

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


	Third Quarter Ended				Nine Months Ended
	October 1,		September 25,		October 1,		September 25,
(Thousands)	2021		2020		2021		2020
Net sales
Performance Alloys and Composites	$	136,096	$	91,203	$	375,533	$	291,884
Advanced Materials	220,723		165,582		638,481		475,855
Precision Optics	31,209		30,386		99,399		68,846
Other	—		—		—		—
Total	$	388,028	$	287,171	$	1,113,413	$	836,585

Less: pass-through metal costs
Performance Alloys and Composites	$	20,929	$	9,321	$	50,936	$	36,531
Advanced Materials	151,019		110,556		438,928		314,172
Precision Optics	—		2,076		43		5,769
Other	254		313		1,211		2,169
Total	$	172,202	$	122,266	$	491,118	$	358,641

Value-added sales
Performance Alloys and Composites	$	115,167	$	81,882	$	324,597	$	255,353
Advanced Materials	69,704		55,026		199,553		161,683
Precision Optics	31,209		28,310		99,356		63,077
Other	(254)		(313)		(1,211)		(2,169)
Total	$	215,826	$	164,905	$	622,295	$	477,944

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

Third Quarter


		Third Quarter Ended															Third Quarter Ended
		September 25,		September 27,		$		%			October 1,		September 25,		$		%
(Thousands)	(Thousands)	2020		2019		Change		Change		(Thousands)	2021		2020		Change		Change
Net sales	Net sales	$	91,203	$	130,704	$	(39,501)	(30)	%	Net sales	$	136,096	$	91,203	$	44,893	49	%
Value-added sales	Value-added sales	81,882		111,957		(30,075)		(27)	%	Value-added sales	115,167		81,882		33,285		41	%
Operating profit		721		18,780		(18,059)		(96)	%
Operating profit (loss)										Operating profit (loss)	20,928		(437)		21,365		4,889	%

Net sales from the Performance Alloys and Composites segment of $136.1 million in the third quarter of 2021 increased 49% compared to net sales of $91.2 million in the third quarter of ~~2020 were 30% lower than net~~2020. The increase was due to sales related to our new precision clad engineered strip project and the timing of beryllium hydroxide sales,as well as increased sales into the automotive, industrial, and aerospace and defense end markets. Value-added sales of ~~$130.7~~$115.2 million in the third quarter of ~~2019. The decrease was due to reduced sales into all major end markets, with the largest declines in the aerospace and defense, industrial, and telecom and data center end markets.~~

~~Value-added~~2021 were 41% higher than value-added sales of $81.9 million in the third quarter of ~~2020 were 27% lower than value-added sales of $112.0 million in the third quarter of 2019. The decrease in value-added sales was due to the same factors driving the decrease in net sales.~~2020.

Performance Alloys and Composites generated operating profit of ~~$0.7~~$20.9 million in the third quarter of ~~2020~~2021 compared to ~~$18.8~~an operating loss of $0.4 million in the third quarter of ~~2019.~~2020. The ~~decrease~~increase in operating profit was primarily due to ~~reduced~~increased sales volumes ~~as well as~~and improved operating performance. The operating loss for the third quarter of 2020 included $7.3 million of mine development costs, ~~recorded in the third quarter of 2020. In addition,~~as well as restructuring charges of $2.2 million ~~were recorded in the third quarter of 2020~~ related to the closure of our Warren, Michigan and Fremont, California facilities.

Nine Months


		Nine Months Ended															Nine Months Ended
		September 25,		September 27,		$		%			October 1,		September 25,		$		%
(Thousands)	(Thousands)	2020		2019		Change		Change		(Thousands)	2021		2020		Change		Change
Net sales	Net sales	$	291,884	$	393,048	$	(101,164)	(26)	%	Net sales	$	375,533	$	291,884	$	83,649	29	%
Value-added sales	Value-added sales	255,353		336,801		(81,448)		(24)	%	Value-added sales	324,597		255,353		69,244		27	%
Operating profit	Operating profit	13,756		57,066		(43,310)		(76)	%	Operating profit	51,733		9,910		41,823		422	%

Net sales from the Performance Alloys and Composites segment of $375.5 million in the first nine months of 2021 increased 29% compared to net sales of $291.9 million in the first nine months of ~~2020 were 26% lower than net~~2020. The increase was due to sales related to our new precision clad engineered strip project, as well as increased sales into the automotive and industrial end markets. Value-added sales of ~~$393.0~~$324.6 million in the first nine months of ~~2019. The decrease was due to reduced sales into all major end markets, with the largest declines in the aerospace and defense, telecom and data center, and energy end markets.~~

~~Value-added~~2021 were 27% higher than value-added sales of $255.4 million in the first nine months of ~~2020 were 24% lower than value-added sales of $336.8 million in the first nine months of 2019. The decrease in value-added sales was due to the same factors driving the decrease in net sales.~~2020.

Performance Alloys and Composites generated operating profit of ~~$13.8~~$51.7 million in the first nine months of ~~2020~~2021 compared to ~~$57.1~~$9.9 million in the first nine months 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 nine months of 2020 included $7.3 million of mine development costs, ~~recorded in the first nine months of 2020. In addition, we recorded $6.7 million of~~as well as restructuring charges ~~in the first nine months~~ of ~~2020~~$6.8 million related to the closure of our Warren, Michigan and Fremont, California facilities. ~~We also recorded $1.3 million of additional reserves for slow-moving and excess inventory related to the collapse in demand in the oil and gas industry.~~

Advanced Materials

Third Quarter


		Third Quarter Ended													Third Quarter Ended
		September 25,		September 27,		$	%			October 1,		September 25,		$	%
(Thousands)	(Thousands)	2020		2019		Change	Change		(Thousands)	2021		2020		Change	Change
Net sales	Net sales	$	165,582	$	147,650	17,932	12	%	Net sales	$	220,723	$	165,582	55,141	33	%
Value-added sales	Value-added sales	57,666		55,610		2,056	4	%	Value-added sales	69,704		55,026		14,678	27	%
Operating profit	Operating profit	5,920		6,202		(282)	(5)	%	Operating profit	9,281		5,749		3,532	61	%

Net sales from the Advanced Materials segment of $220.7 million in the third quarter of 2021 were 33% higher than net sales of $165.6 million in the third quarter of ~~2020 were 12% higher than net sales of $147.7 million in the third quarter of 2019.~~2020. The increase in net sales was primarily due to increased sales volumes in the semiconductor end market, partially offset by the impact of ~~higher~~ pass-through

metal prices of ~~$24.2 million, partially offset by a lower mix of precious metal-containing products and the mix of customer-supplied material.~~$5.3 million.

Value-added sales of ~~$57.7~~$69.7 million in the third quarter of ~~2020~~2021 increased 4%27% compared to value-added sales of ~~$55.6~~$55.0 million in the third quarter of ~~2019. Higher semiconductor end market sales were partially offset~~2020. The increase was primarily driven by ~~decreased~~increased value-added sales into the ~~energy~~semiconductor end market.

The Advanced Materials segment generated operating profit of ~~$5.9~~$9.3 million in the third quarter of ~~2020~~2021 compared to ~~$6.2~~$5.7 million in the third quarter of ~~2019. Decreased~~2020. The increase in operating profit ~~in the third quarter of 2020, compared~~is due to ~~the third quarter of 2019, was the primarily the result of reduced manufacturing yields.~~increased sales volumes, as well as improved operating performance.

Nine Months


		Nine Months Ended													Nine Months Ended
		September 25,		September 27,		$	%			October 1,		September 25,		$	%
(Thousands)	(Thousands)	2020		2019		Change	Change		(Thousands)	2021		2020		Change	Change
Net sales	Net sales	$	475,855	$	424,913	50,942	12	%	Net sales	$	638,481	$	475,855	162,626	34	%
Value-added sales	Value-added sales	171,519		171,424		95	—	%	Value-added sales	199,553		161,683		37,870	23	%
Operating profit	Operating profit	15,075		19,421		(4,346)	(22)	%	Operating profit	26,547		15,452		11,095	72	%

Net sales from the Advanced Materials segment of $638.5 million in the first nine months of 2021 were 34% higher than net sales of $475.9 million in the first nine months of ~~2020 were 12% higher than net sales of $424.9 million in the first nine months of 2019.~~2020. The increase in net sales was primarily due to increased sales volumes, as well as the impact of higher pass-through metal prices of ~~$63.7 million, partially offset by a lower mix of precious metal-containing products and the mix of customer-supplied material.~~$34.6 million.

Value-added sales of ~~$171.5~~$199.6 million in the first nine months of ~~2020 were flat~~2021 increased 23% compared to value-added sales of ~~$171.4~~$161.7 million in the first nine months of ~~2019. Higher semiconductor end market sales were partially offset~~2020. The increase was primarily driven by ~~decreased~~increased value-added sales into the ~~energy and industrial markets.~~semiconductor end market.

The Advanced Materials segment generated operating profit of ~~$15.1~~$26.5 million in the first nine months of ~~2020~~2021 compared to ~~$19.4~~$15.5 million in the first nine months of ~~2019. Decreased~~2020. The increase in operating profit ~~in the first nine months of 2020, compared~~is due to ~~the first nine months of 2019, was the result of unfavorable~~increased sales ~~mix and reduced manufacturing yields.~~volumes, as well as improved operating performance.

Precision ~~Coatings~~Optics

Third Quarter


(Thousands)	(Thousands)	Third Quarter Ended														(Thousands)	Third Quarter Ended
				September 25,		September 27,	$		%			(Thousands)	October 1,		September 25,		$		%
				2020		2019	Change		Change				2021		2020		Change		Change
Net sales	Net sales	$	30,386	$	27,625	2,761	10	%		Net sales	$		$	30,386	823		3	%
Value-added sales	Value-added sales	28,310		22,442		5,868	26	%		Value-added sales	31,209		28,310		2,899		10	%
Operating profit (loss)		1,421		(11,198)		12,619	(113)	%
Operating profit										Operating profit	3,329		1,421		1,908		134	%

Net sales from the Precision ~~Coatings~~Optics segment of $31.2 million in the third quarter of 2021 increased 3% compared to net sales of $30.4 million in the third quarter of ~~2020 increased 10%~~2020. The increase was primarily due to to a full quarter of sales attributable to our Optics Balzers acquisition compared to ~~net~~only two months in the prior-year same period, partially offset by no sales related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021.

Value-added sales of ~~$27.6~~$31.2 million in the third quarter of ~~2019.~~2021 increased 10% compared to value-added sales of $28.3 million in the third quarter of 2020. The increase in value-added sales was due to the same factors driving the increase in net sales.

The Precision Optics segment generated an operating profit of $3.3 million in the third quarter of 2021, compared to an operating profit of $1.4 million in the third quarter of 2020. The increase was driven by our Optics Balzers acquisition.

Nine Months


(Thousands)	Nine Months Ended
	October 1,		September 25,		$	%
	2021		2020		Change	Change
Net sales	$	99,399	$	68,846	30,553	44	%
Value-added sales	99,356		63,077		36,279	58	%
Operating profit (loss)	10,513		(6,080)		16,593	NM

NM = Not Meaningful

Net sales from the Precision Optics segment of $99.4 million in the first nine months of 2021 increased 44% compared to net sales of $68.8 million in the first nine months 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, ~~and projection display products.~~whose closure was finalized in the first quarter of 2021. In addition, sales from our base Precision Optics business increased, compared to the first nine months of 2020.

Value-added sales of ~~$28.3~~$99.4 million in the ~~third quarter~~first nine months of ~~2020~~2021 increased ~~26%~~58% compared to value-added sales of ~~$22.4~~$63.1 million in the ~~third quarter~~first nine months of ~~2019.~~2020. The increase in value-added sales was due to the same factors driving the increase in net sales.

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

~~Nine Months~~

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

~~Net sales from the Precision Coatings segment of $68.8~~$10.5 million in the first nine months of ~~2020 decreased 21%~~2021, compared to ~~net sales~~an operating loss of ~~$87.3~~$6.1 million in the first nine months of ~~2019 primarily due to reduced sales volumes and lower mix of precious metal-containing products, partially offset by an increase of sales attributable to our Optics Balzers acquisition.~~

~~Value-added sales of $63.1 million~~2020. The increased operating profit in the first nine months of 2020 decreased 7% compared to value-added sales of $68.1 million in the first nine months of 2019. The decrease is primarily due to a reduction in value-added sales related to blood glucose test strip products, partially offset2021 was driven by ~~an increase of sales attributable to~~ our Optics Balzers acquisition.

~~The Precision Coatings segment generated an operating loss of $6.1 million and $5.2 million in the first nine months of 2020 and 2019, respectively.~~ The operating loss in the first nine months of 2020 ~~includes a goodwill~~included impairment ~~charge~~charges of $9.1 million and an other assets impairment charge of $1.7 million related to our LAC reporting unit. The operating loss in the first nine months of 2019 included a goodwill impairment charge of $11.6 million and an other assets impairment charge of $2.6$10.8 million related to our LAC reporting unit.

Other

Third Quarter


(Thousands)	(Thousands)	Third Quarter Ended																			(Thousands)		Third Quarter Ended
				September 25,			September 27,		$			%	(Thousands)			October 1,			September 25,			$			%
				2020			2019		Change			Change				2021			2020			Change			Change
Net sales	Net sales	$	—		$	—		—		—	%	Net sales		$	—		$	—		—			—	%
Value-added sales	Value-added sales	(313)			(1,411)			1,098		(78)	%	Value-added sales		(254)			(313)			59			(19)	%
Operating loss	Operating loss	(7,349)			(7,495)			146		(2)	%	Operating loss		(12,378)			(7,349)			(5,029)			68	%

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs were $12.4 million in the third quarter of 2021 compared to $7.3 million in the third quarter of ~~2020 compared to $7.5 million in the third quarter of 2019.~~2020. Corporate costs accounted for 6% and 4% of Company-wide value-added sales in the third quarter of ~~both~~2021 and 2020, ~~and 2019.~~

respectively. The ~~decrease~~increase in corporate costs in the third quarter of ~~2020~~2021 compared to the third quarter of ~~2019~~2020 is primarily related to ~~lower~~increased variable compensation expenses, ~~and cost management actions, partially offset by transaction costs related~~foreign exchange losses in the third quarter of 2021 compared to foreign exchange gains in the ~~Optics Balzers acquisition.~~third quarter of 2020, as well as increased acquisition costs.

Nine Months


(Thousands)	(Thousands)	Nine Months Ended																			(Thousands)		Nine Months Ended
				September 25,			September 27,		$			%	(Thousands)			October 1,			September 25,			$			%
				2020			2019		Change			Change				2021			2020			Change			Change
Net sales	Net sales	$	—		$	—		—		—	%	Net sales		$	—		$	—		—			—	%
Value-added sales	Value-added sales	(2,169)			(5,118)			2,949		(58)	%	Value-added sales		(1,211)			(2,169)			958			(44)	%
Operating loss	Operating loss	(17,895)			(20,877)			2,982		(14)	%	Operating loss		(27,192)			(17,895)			(9,297)			52	%

Corporate costs were $27.2 million in the first nine months of 2021 compared to $17.9 million in the first nine months of ~~2020 decreased $3.0 million as compared to $20.9 million in the first nine months of 2019.~~2020. Corporate costs accounted for 4% of Company-wide value-added sales in the first nine months of both ~~2020~~2021 and ~~2019.~~2020. The ~~decrease~~increase in corporate costs in the first nine months of ~~2020~~2021 compared to the first nine months of ~~2019~~2020 is primarily related to ~~lower~~foreign exchange losses in the first nine months of 2021 compared to foreign exchange gains in the first nine months of 2020, as well as increased variable compensation ~~expense and cost management actions, partially offset by transaction costs related to the Optics Balzers acquisition.~~

expenses.

3634

FINANCIAL POSITION

Cash Flow

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


		Nine Months Ended											Nine Months Ended
		September 25,		September 27,		$			October 1,		September 25,		$
(Thousands)	(Thousands)	2020		2019		Change		(Thousands)	2021		2020		Change
Net cash provided by operating activities	Net cash provided by operating activities	$	79,444	$	59,536	$	19,908	Net cash provided by operating activities	$	40,518	$	79,444	$	(38,926)
Net cash used in investing activities	Net cash used in investing activities	(173,716)		(20,079)		(153,637)		Net cash used in investing activities	(76,954)		(173,716)		96,762
Net cash provided by (used in) financing activities		86,305		(15,154)		101,459
Net cash provided by financing activities								Net cash provided by financing activities	28,779		86,305		(57,526)
Effects of exchange rate changes	Effects of exchange rate changes	714		(422)		1,136		Effects of exchange rate changes	(212)		714		(926)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	(7,253)	$	23,881	$	(31,134)	Net change in cash and cash equivalents	$	(7,869)	$	(7,253)	$	(616)

Net cash provided by operating activities totaled ~~$79.4~~$40.5 million in the first nine months of ~~2020~~2021 versus ~~$59.5~~$79.4 million in the prior-year period. The ~~increase~~decrease in operating cash flow was primarily due the usage in working capital change of $87.3 million (displayed below) and less unearned income due to customer ~~prepayments. See Note L to~~prepayments of $31.4 million, partially offset by increased net income of $45.4 million.

The following table displays the ~~Consolidated Financial Statements for additional discussion. In addition,~~impact of working capital ~~requirements used~~items on cash ~~of $5.7 million and $28.2 million~~ during the first nine months of 2021 and 2020, ~~and 2019, respectively. Cash flows provided by accounts receivable were $50.0 million higher than the prior-year period.~~ respectively:


	Nine Months Ended
	October 1,		September 25,		$
(Thousands)	2021		2020		Change
Cash provided (used):
Accounts receivable	$	(26,041)	$	13,899	$	(39,940)
Inventory	(62,353)		(6,414)		(55,939)
Accounts payable	14,863		6,281		8,582
Cash (used in) provided by working capital items	$	(73,531)	$	13,766	$	(87,297)

Three-month trailing days sales outstanding was approximately 4442 days at ~~September 25, 2020~~October 1, 2021 and 4741 days at December 31, 2019. Cash flows used for inventory were $9.9 million in the first nine months of 2020, compared to providing $22.1 million of cash in the prior-year period primarily in our Performance Alloys and Composites and Advanced Materials segments. Cash flows used for accounts payable and accrued expenses were $9.8 million compared to the prior-year period use of cash of $14.1 million due to higher accounts payable balances related to increased inventory levels.2020.

Net cash used in investing activities was ~~$173.7~~$77.0 million in the first nine months of ~~2020~~2021 compared to ~~$20.1~~$173.7 million in the prior-year ~~period~~period. The decrease is primarily due to a $130.7 million ~~payment, net~~paid in the first nine months of ~~cash acquired,~~2020 for the acquisition of Optics Balzers, ~~acquisition. In addition,~~partially offset by increased capital expenditures, ~~increased due~~primarily related to investments in new equipment funded by customer prepayments. See ~~Notes B and L~~Note J 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 ~~$25.0 million, excluding any capital expenditures related to customer prepayments.~~$100.0 million.

Net cash provided by financing activities totaled ~~$86.3~~$28.8 million in the first nine months of ~~2020 versus $15.2~~2021 and $86.3 million ~~used in financing activities~~ in the comparable prior-year period. The ~~increase~~decrease is primarily due to decreased net borrowings of ~~$120.0~~$77.0 million under our revolving credit facility in the first nine months of ~~2020,~~2021, partially offset by ~~the paydown~~no repurchases of ~~$16.4 million of long-term debt, primarily related to repayment of debt assumed~~common stock in the ~~Optics Balzers acquisition.~~first nine months of 2021 compared to $6.8 million in the first nine months of 2020.

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 ~~September 25, 2020,~~October 1, 2021, cash and cash equivalents held by our foreign operations totaled ~~$33.2~~$16.6 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.

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A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of ~~September 25, 2020~~October 1, 2021 and December 31, ~~2019~~2020 is as follows:

September 25, December 31,
(Thousands) 2020 2019
Cash and cash equivalents $ 117,754 $ 125,007
Total outstanding debt 128,633 2,218
Net (debt) cash $ (10,879) $ 122,789
Available borrowing capacity $ 233,893 $ 340,906

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


	October 1,		December 31,
(Thousands)	2021		2020
Cash and cash equivalents	$	18,009	$	25,878
Total outstanding debt	79,565		38,506
Net debt	$	(61,556)	$	(12,628)
Available borrowing capacity	$	319,385	$	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,~~September and October 2021, we amended and then amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement). to, among other things, (i) include an increase in the maximum leverage ratio covenant on a temporary basis in connection with the HCS acquisition and permit the incurrence of certain debt in connection with the HCS acquisition, (ii) provide for a $300 million delayed draw term loan facility and (iii) extend the maturity of revolving credit facility to October 2026. We financed the purchase price for the HCS acquisition with the new $300 million term loan and $103 million of borrowings under the amended revolving credit facility. 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, certain precious metals 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~~an interest coverage ratio. We were in compliance with all of our debt covenants as of ~~September 25, 2020. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.~~

In the third quarter of 2020, we completed the acquisition of 100% of the capital stock of Optics Balzers. The purchase price was approximately $136.1 million, including the assumption of debt. The all-cash transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility in the second quarter of 2020.October 1, 2021.

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.~~2022. The available and unused capacity under the metal financing lines expiring in August 2022 totaled approximately ~~$67.2~~$97.1 million as of ~~September 25, 2020,~~October 1, 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 third quarter ~~of 2020. In the~~or first nine 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~~$2.4 million and ~~$6.9~~$7.2 million on our common stock in the third quarter and first nine months of ~~2020,~~2021, respectively. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$382.8~~$452.9 million and ~~$309.3~~$400.0 million as of ~~September 25, 2020~~October 1, 2021 and December 31, ~~2019,~~2020, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of ~~September 25, 2020 and December 31, 2019.~~October 1, 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: 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: the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity; our ability to achieve the strategic and other objectives related to the HCS acquisition, included any expected synergies; the global economy, including the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns and sequestrations; the condition of the markets which we serve, whether defined geographically or by segment; changes in product mix and the financial condition of customers; our success in developing and introducing new products and new product ramp-up rates; 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 success in identifying acquisition candidates and in acquiring and integrating such businesses, including the integration of ~~Optics Balzers;~~the HCS business; the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions, including, without limitation, the HCS 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 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 uncertainties related to the impact of war, terrorist activities, and acts of God; changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations; 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 risk factors set forth in Part 1, Item 1A of ~~our 2019~~the Company's 2020 Annual Report on Form ~~10-K and our Quarterly Report on Form 10-Q for the second quarter 2020.~~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.

3937


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 ~~September 25, 2020~~October 1, 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 ~~September 25, 2020.~~October 1, 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 ~~September 25, 2020~~October 1, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

4038

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 ~~September 25, 2020,~~October 1, 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, and his wife claims loss of consortium. A co-defendant, 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 denial of the motion to dismiss the cross-claim. The Court of Appeals declined to accept jurisdiction on December 30, 2020. The court entered a scheduling order on September 14, 2021 that did not set a date for trial. 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, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in ~~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. The case is currently in the ~~world.~~preliminary stages. The ~~outbreak was subsequently declared a pandemic by the World Health Organization in March 2020. To date, the COVID-19 outbreak~~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;

4139

•~~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 usthe Company during the three months ended ~~September 25, 2020~~October 1, 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)
June 27 through July 31, 2020
— $ — — $ 8,316,239
August 1 through August 28, 2020
3,065 61.03 — 8,316,239
August 29 through September 25, 2020
— — — 8,316,239
Total 3,065 $ 61.03 — $ 8,316,239


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)
July 3 through August 6, 2021	—	$	—	—	$	8,316,239
August 7 through September 3, 2021	154	72.37		—	8,316,239
September 4 through October 1, 2021	—	—		—	8,316,239
Total	154	$	72.37	—	$	8,316,239


(1)			Includes ~~3,065~~154 shares surrendered to the Company in August by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.

(2)			On January 14, 2014, wethe Company announced that ~~our~~its Board of Directors had authorized the repurchase of up to $50.0 million of ~~our~~its common stock. During the three months ended ~~September 25, 2020, we~~October 1, 2021, the Company did not repurchase any shares under this program. As of ~~September 25, 2020,~~October 1, 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.


2.1						Share Purchase Agreement, dated as of September 19, 2021, by and among Materion Corporation, HCST Hungary Holding Vagyonkezelő Korlátolt Felelősségű Társaság, H.C. Starck Group GmbH and Opus HoldCo S.à r.l. (filed as Exhibit 2.1 to the Company's Form 8-K filed on September 20, 2021), incorporated herein by reference.
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 ~~September 25~~Octob er 1 , ~~2020~~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.

4341

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: ~~October 22, 2020~~November 2, 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)

4442


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


	Finance		Operating
(Thousands)	Leases		Leases
2020	$	935	$	2,728
2021	3,735		10,275
2022	3,723		8,813
2023	2,455		8,371
2024	1,530		6,494
2025 and thereafter	22,372		58,992
Total lease payments	34,750		95,673
Less amount of lease payment representing interest	11,510		32,001
Total present value of lease payments	$	23,240	$	63,672