UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June 30,~~September 29, 2023

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

For the transition period from to

Commission file number 001-15885

MATERION CORPORATION

(Exact name of Registrant as specified in charter)


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

6070 Parkland Blvd., Mayfield Heights, Ohio 44124

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:

(216)-486-4200

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


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

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

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

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

Large accelerated filer þ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company ☐

Emerging growth company ☐

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

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

Number of Shares of Common Stock, without par value, outstanding at ~~June 30,~~September 29, 2023: ~~20,636,758.~~20,642,396.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


		Second Quarter Ended				Six Months Ended					Third Quarter Ended				Nine Months Ended
(Thousands, except per share amounts)	(Thousands, except per share amounts)	June 30, 2023		July 1, 2022		June 30, 2023		July 1, 2022		(Thousands, except per share amounts)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Net sales	Net sales	$	398,551	$	445,295	$	841,076	$	894,340	Net sales	$	403,067	$	428,191	$	1,244,144	$	1,322,531
Cost of sales	Cost of sales	309,496		357,868		660,685		731,622		Cost of sales	314,131		345,448		974,817		1,077,070
Gross margin	Gross margin	89,055		87,427		180,391		162,718		Gross margin	88,936		82,743		269,327		245,461
Selling, general, and administrative expense	Selling, general, and administrative expense	38,911		42,047		79,247		83,708		Selling, general, and administrative expense	38,806		38,958		118,053		122,666
Research and development expense	Research and development expense	7,154		7,592		14,776		14,666		Research and development expense	6,322		7,430		21,098		22,096
Restructuring expense (income)	Restructuring expense (income)	1,454		—		2,118		1,076		Restructuring expense (income)	1,077		484		3,194		1,560
Other—net	Other—net	6,192		5,928		11,966		11,801		Other—net	6,211		6,774		18,178		18,575
Operating profit	Operating profit	35,344		31,860		72,284		51,467		Operating profit	36,520		29,097		108,804		80,564
Other non-operating income—net		(726)		(1,168)		(1,456)		(2,337)
Other non-operating (income)—net										Other non-operating (income)—net	(685)		(1,175)		(2,141)		(3,512)
Interest expense—net	Interest expense—net	7,641		4,701		15,142		8,437		Interest expense—net	7,678		5,888		22,820		14,325
Income before income taxes	Income before income taxes	28,429		28,327		58,598		45,367		Income before income taxes	29,527		24,384		88,125		69,751
Income tax expense	Income tax expense	4,347		5,072		8,928		8,093		Income tax expense	2,963		4,432		11,891		12,525
Net income	Net income	$	24,082	$	23,255	$	49,670	$	37,274	Net income	$	26,564	$	19,952	$	76,234	$	57,226
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	$	1.17	$	1.13	$	2.41	$	1.82	Net income per share of common stock	$	1.29	$	0.97	$	3.70	$	2.79
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	$	1.15	$	1.12	$	2.38	$	1.80	Net income per share of common stock	$	1.27	$	0.96	$	3.65	$	2.76
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	20,625		20,517		20,596		20,491		Basic	20,640		20,526		20,611		20,502
Diluted	Diluted	20,896		20,723		20,892		20,743		Diluted	20,905		20,780		20,891		20,756

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)


		Second Quarter Ended				Six Months Ended					Third Quarter Ended				Nine Months Ended
		June 30,		July 1,		June 30,		July 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2023		2022		2023		2022		(Thousands)	2023		2022		2023		2022
Net income	Net income	$	24,082	$	23,255	$	49,670	$	37,274	Net income	$	26,564	$	19,952	$	76,234	$	57,226
Other comprehensive income (loss):	Other comprehensive income (loss):									Other comprehensive income (loss):
Foreign currency translation adjustment	Foreign currency translation adjustment	(743)		(6,343)		1,946		(8,390)		Foreign currency translation adjustment	(3,259)		(6,094)		(1,313)		(14,484)
Derivative and hedging activity, net of tax	Derivative and hedging activity, net of tax	3,180		1,894		841		4,164		Derivative and hedging activity, net of tax	2,019		4,125		2,860		8,289
Pension and post-employment benefit adjustment, net of tax	Pension and post-employment benefit adjustment, net of tax	(254)		16		(321)		(224)		Pension and post-employment benefit adjustment, net of tax	(145)		8		(466)		(216)
Other comprehensive income (loss)		2,183		(4,433)		2,466		(4,450)
Other comprehensive loss										Other comprehensive loss	(1,385)		(1,961)		1,081		(6,411)
Comprehensive income	Comprehensive income	26,265		$	18,822	$	52,136	$	32,824	Comprehensive income	$	25,179	$	17,991	$	77,315	$	50,815

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)


		June 30,		Dec. 31,			September 29,		December 31,
(Thousands)	(Thousands)	2023		2022		(Thousands)	2023		2022
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	16,574	$	13,101	Cash and cash equivalents	$	16,401	$	13,101
Accounts receivable, net	Accounts receivable, net	188,166		215,211		Accounts receivable, net	186,177		215,211
Inventories, net	Inventories, net	455,343		423,080		Inventories, net	452,042		423,080
Prepaid and other current assets	Prepaid and other current assets	37,750		39,056		Prepaid and other current assets	54,972		39,056
Total current assets	Total current assets	697,833		690,448		Total current assets	709,592		690,448
Deferred income taxes	Deferred income taxes	3,248		3,265		Deferred income taxes	3,214		3,265
Property, plant, and equipment	Property, plant, and equipment	1,232,787		1,209,205		Property, plant, and equipment	1,252,455		1,209,205
Less allowances for depreciation, depletion, and amortization	Less allowances for depreciation, depletion, and amortization	(739,670)		(760,440)		Less allowances for depreciation, depletion, and amortization	(755,626)		(760,440)
Property, plant, and equipment, net	Property, plant, and equipment, net	493,117		448,765		Property, plant, and equipment, net	496,829		448,765
Operating lease, right-of-use assets	Operating lease, right-of-use assets	60,207		64,249		Operating lease, right-of-use assets	57,747		64,249
Intangible assets, net	Intangible assets, net	137,937		143,219		Intangible assets, net	134,594		143,219
Other assets	Other assets	25,140		22,535		Other assets	27,186		22,535
Goodwill	Goodwill	320,229		319,498		Goodwill	319,435		319,498
Total Assets	Total Assets	$	1,737,711	$	1,691,979	Total Assets	$	1,748,597	$	1,691,979
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity					Liabilities and Shareholders’ Equity
Current liabilities	Current liabilities					Current liabilities
Short-term debt	Short-term debt	$	27,471	$	21,105	Short-term debt	$	38,634	$	21,105
Accounts payable	Accounts payable	123,862		107,899		Accounts payable	93,096		107,899
Salaries and wages	Salaries and wages	21,552		35,543		Salaries and wages	27,971		35,543
Other liabilities and accrued items	Other liabilities and accrued items	42,501		54,993		Other liabilities and accrued items	40,425		54,993
Income taxes	Income taxes	2,558		3,928		Income taxes	2,001		3,928
Unearned revenue	Unearned revenue	15,306		15,496		Unearned revenue	15,078		15,496
Total current liabilities	Total current liabilities	233,250		238,964		Total current liabilities	217,205		238,964
Other long-term liabilities	Other long-term liabilities	13,658		12,181		Other long-term liabilities	11,558		12,181
Operating lease liabilities	Operating lease liabilities	55,951		59,055		Operating lease liabilities	54,111		59,055
Finance lease liabilities	Finance lease liabilities	13,824		13,876		Finance lease liabilities	13,279		13,876
Retirement and post-employment benefits	Retirement and post-employment benefits	20,591		20,422		Retirement and post-employment benefits	20,089		20,422
Unearned income	Unearned income	111,598		107,736		Unearned income	109,076		107,736
Long-term income taxes	Long-term income taxes	827		665		Long-term income taxes	1,155		665
Deferred income taxes	Deferred income taxes	28,156		28,214		Deferred income taxes	27,795		28,214
Long-term debt	Long-term debt	412,733		410,876		Long-term debt	422,361		410,876
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)	Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—		Serial preferred stock (no par value; 5,000 authorized shares, none issued)	—		—
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both June 30th and December 31st)		303,390		288,100
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both September 29th and December 31st)						Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at both September 29th and December 31st)	306,593		288,100
Retained earnings	Retained earnings	813,793		769,418		Retained earnings	837,598		769,418
Common stock in treasury	Common stock in treasury	(236,423)		(220,864)		Common stock in treasury	(237,259)		(220,864)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(39,443)		(41,909)		Accumulated other comprehensive loss	(40,828)		(41,909)
Other equity	Other equity	5,806		5,245		Other equity	5,864		5,245
Total shareholders' equity	Total shareholders' equity	847,123		799,990		Total shareholders' equity	871,968		799,990
Total Liabilities and Shareholders’ Equity	Total Liabilities and Shareholders’ Equity	$	1,737,711	$	1,691,979	Total Liabilities and Shareholders’ Equity	$	1,748,597	$	1,691,979

See the notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


		Six Months Ended					Nine Months Ended
		June 30,		July 1,			September 29,		September 30,
(Thousands)	(Thousands)	2023		2022		(Thousands)	2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	49,670	$	37,274	Net income	$	76,234	$	57,226
Adjustments to reconcile net income to net cash provided by 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	31,444		26,070		Depreciation, depletion, and amortization	46,524		39,223
Amortization of deferred financing costs in interest expense	Amortization of deferred financing costs in interest expense	855		780		Amortization of deferred financing costs in interest expense	1,284		1,310
Stock-based compensation expense (non-cash)	Stock-based compensation expense (non-cash)	5,042		3,694		Stock-based compensation expense (non-cash)	7,578		5,997

Deferred income tax expense (benefit)	Deferred income tax expense (benefit)	(166)		1,966		Deferred income tax expense (benefit)	(149)		1,825
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Accounts receivable	Accounts receivable	26,886		(2,566)		Accounts receivable	27,832		(20,964)
Inventory	Inventory	(36,451)		(67,304)		Inventory	(30,868)		(64,832)
Prepaid and other current assets	Prepaid and other current assets	1,210		(2,462)		Prepaid and other current assets	(16,175)		(3,019)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	(10,583)		8,897		Accounts payable and accrued expenses	(25,533)		(1,785)
Unearned revenue	Unearned revenue	(9,222)		(141)		Unearned revenue	(12,398)		(2,191)
Interest and taxes payable	Interest and taxes payable	(1,441)		(1,765)		Interest and taxes payable	(1,730)		(1,741)
Unearned income due to customer prepayments	Unearned income due to customer prepayments	15,061		13,059		Unearned income due to customer prepayments	16,676		17,501
Other-net	Other-net	(1,783)		3,913		Other-net	(4,770)		5,654
Net cash provided by operating activities	Net cash provided by operating activities	70,522		21,415		Net cash provided by operating activities	84,505		34,204
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Payments for purchase of property, plant, and equipment	Payments for purchase of property, plant, and equipment	(59,469)		(37,730)		Payments for purchase of property, plant, and equipment	(85,251)		(54,236)
Payments for mine development	Payments for mine development	(3,617)		—		Payments for mine development	(9,326)		—
Proceeds from sale of property, plant, and equipment	Proceeds from sale of property, plant, and equipment	409		105		Proceeds from sale of property, plant, and equipment	417		827
Payments for acquisition, net of cash acquired	Payments for acquisition, net of cash acquired	—		(2,971)		Payments for acquisition, net of cash acquired	—		(2,971)
Net cash used in investing activities	Net cash used in investing activities	(62,677)		(40,596)		Net cash used in investing activities	(94,160)		(56,380)
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from borrowings under credit facilities, net	Proceeds from borrowings under credit facilities, net	15,151		54,853		Proceeds from borrowings under credit facilities, net	39,649		55,735

Repayment of long-term debt	Repayment of long-term debt	(7,743)		(7,177)		Repayment of long-term debt	(11,579)		(11,761)
Principal payments under finance lease obligations	Principal payments under finance lease obligations	(1,117)		(1,334)		Principal payments under finance lease obligations	(1,297)		(1,985)
Cash dividends paid	Cash dividends paid	(5,254)		(5,112)		Cash dividends paid	(7,937)		(7,584)
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(4,872)		(2,812)		Payments of withholding taxes for stock-based compensation awards	(5,101)		(3,056)
Net cash (used in)/provided by financing activities		(3,835)		38,418
Net cash provided by financing activities						Net cash provided by financing activities	13,735		31,349
Effects of exchange rate changes	Effects of exchange rate changes	(537)		(1,524)		Effects of exchange rate changes	(780)		(2,953)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	3,473		17,713		Net change in cash and cash equivalents	3,300		6,220
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	13,101		14,462		Cash and cash equivalents at beginning of period	13,101		14,462
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	16,574	$	32,175	Cash and cash equivalents at end of period	$	16,401	$	20,682

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 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 March 31, 2023		20,609	(6,539)	$	297,802	$	792,421	$	(231,906)	$	(41,626)	$	5,303	$	821,994
Balance at June 30, 2023																Balance at June 30, 2023	20,637	(6,511)	$	303,390	$	813,793	$	(236,423)	$	(39,443)	$	5,806	$	847,123
Net income	Net income	—	—	—		24,082		—		—		—		24,082		Net income	—	—	—		$	26,564	—		—		—		26,564
Other comprehensive income	Other comprehensive income	—	—	—		—		—		2,183		—		2,183		Other comprehensive income	—	—	—		—		—		(1,385)		—		(1,385)
Cash dividends declared ($0.130 per share)	Cash dividends declared ($0.130 per share)	—	—	—		(2,683)		—		—		—		(2,683)		Cash dividends declared ($0.130 per share)	—	—	—		(2,683)		—		—		—		(2,683)
Stock-based compensation activity	Stock-based compensation activity	40	40	5,567		(27)		(2,748)		—		—		2,792		Stock-based compensation activity	8	8	3,174		(76)		(562)		—		—		2,536
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(12)	(12)	—		—		(1,258)		—		—		(1,258)		Payments of withholding taxes for stock-based compensation awards	(3)	(3)	—		—		(229)		—		—		(229)
Directors’ deferred compensation	Directors’ deferred compensation	—	—	21		—		(511)		—		503		13		Directors’ deferred compensation	—	—	29		—		(45)		—		58		42
Balance at June 30, 2023		20,637	(6,511)	$	303,390	$	813,793	$	(236,423)	$	(39,443)	$	5,806	$	847,123
Balance at September 29, 2023																Balance at September 29, 2023	20,642	(6,506)	$	306,593	$	837,598	$	(237,259)	$	(40,828)	$	5,864	$	871,968

Balance at April 1, 2022		20,511	(6,637)	$	278,589	$	705,255	$	(217,549)	$	(40,186)	$	4,855	$	730,964
Balance at July 1, 2022																Balance at July 1, 2022	20,523	(6,625)	$	281,296	$	725,918	$	(218,356)	$	(44,619)	$	4,915	$	749,154
Net income	Net income	—	—	—		23,255		—		—		—		23,255		Net income	—	—	—		19,952		—		—		—		19,952
Other comprehensive income	Other comprehensive income	—	—	—		—		—		(4,433)		—		(4,433)		Other comprehensive income	—	—	—		—		—		(1,961)		—		(1,961)
Cash dividends declared ($0.125 per share)	Cash dividends declared ($0.125 per share)	—	—	—		(2,592)		—		—		—		(2,592)		Cash dividends declared ($0.125 per share)	—	—	—		(2,557)		—		—		—		(2,557)
Stock-based compensation activity	Stock-based compensation activity	13	13	2,671		—		(676)		—		—		1,995		Stock-based compensation activity	6	6	2,695		(30)		(392)		—		—		2,273
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(1)	(1)	—		—		(95)		—		—		(95)		Payments of withholding taxes for stock-based compensation awards	(2)	(2)	—		—		(244)		—		—		(244)
Directors’ deferred compensation	Directors’ deferred compensation	—	—	36		—		(36)		—		60		60		Directors’ deferred compensation	1	1	33		—		(227)		—		254		60
Balance at July 1, 2022		20,523	(6,625)	$	281,296	$	725,918	$	(218,356)	$	(44,619)	$	4,915	$	749,154
Balance at September 30, 2022																Balance at September 30, 2022	20,528	(6,620)	$	284,024	$	743,283	$	(219,219)	$	(46,580)	$	5,169	$	766,677


		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 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, 2022	Balance at December 31, 2022	20,543	(6,605)	$	288,100	$	769,418	$	(220,864)		$	(41,909)	$	5,245	$	799,990	Balance at December 31, 2022	20,543	(6,605)	$	288,100	$	769,418	$	(220,864)	$	(41,909)	$	5,245	$	799,990
Net income	Net income	—	—	—		49,670		—			—		—		49,670		Net income	—	—	—		76,234		—		—		—		76,234
Other comprehensive loss	Other comprehensive loss	—	—	—		—		—			2,466		—		2,466		Other comprehensive loss	—	—	—		—		—		1,081		—		1,081
Cash dividends declared ($0.255 per share)		—	—	—		(5,254)		—			—		—		(5,254)
Cash dividends declared ($0.385 per share)																	Cash dividends declared ($0.385 per share)	—	—	—		(7,937)		—		—		—		(7,937)
Stock-based compensation activity	Stock-based compensation activity	138	138	15,242		(41)		(10,159)		—			—		5,042		Stock-based compensation activity	146	146	18,416		(117)		(10,721)		—		—		7,578
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(45)	(45)	—		—		(4,872)			—		—		(4,872)		Payments of withholding taxes for stock-based compensation awards	(48)	(48)	—		—		(5,101)		—		—		(5,101)
Directors’ deferred compensation	Directors’ deferred compensation	1	1	48		—		(528)			—		561		81		Directors’ deferred compensation	1	1	77		—		(573)		—		619		123
Balance at June 30, 2023		20,637	(6,511)	$	303,390	$	813,793	$	(236,423)		$	(39,443)	$	5,806	$	847,123
Balance at September 29, 2023																	Balance at September 29, 2023	20,642	(6,506)	$	306,593	$	837,598	$	(237,259)	$	(40,828)	$	5,864	$	871,968

Balance at December 31, 2021	Balance at December 31, 2021	20,448	(6,700)	$	271,978	$	693,756	$	(209,920)		$	(40,169)	$	4,795	$	720,440	Balance at December 31, 2021	20,448	(6,700)	$	271,978	$	693,756	$	(209,920)	$	(40,169)	$	4,795	$	720,440
Net income	Net income	—	—	—		37,274		—			—		—		37,274		Net income	—	—	—		57,226		—		—		—		57,226
Other comprehensive loss	Other comprehensive loss	—	—	—		—		—			(4,450)		—		(4,450)		Other comprehensive loss	—	—	—		—		—		(6,411)		—		(6,411)
Cash dividends declared ($0.245 per share)		—	—	—		(5,112)		—			—		—		(5,112)
Cash dividends declared ($0.370 per share)																	Cash dividends declared ($0.370 per share)	—	—	—		(7,584)		—		—		—		(7,584)
Stock-based compensation activity	Stock-based compensation activity	108	108	9,243		—		(5,549)			—		—		3,694		Stock-based compensation activity	115	115	11,938		(115)		(5,941)		—		—		5,882
Payments of withholding taxes for stock-based compensation awards	Payments of withholding taxes for stock-based compensation awards	(34)	(34)	—		—		(2,812)			—		—		(2,812)		Payments of withholding taxes for stock-based compensation awards	(37)	(37)	—		—		(3,056)		—		—		(3,056)
Directors’ deferred compensation	Directors’ deferred compensation	1	1	75		—		(75)			—		120		120		Directors’ deferred compensation	2	2	108		—		(302)		—		374		$	180
Balance at July 1, 2022		20,523	(6,625)	$	281,296	$	725,918	$	(218,356)		$	(44,619)	$	4,915	$	749,154
Balance at September 30, 2022																	Balance at September 30, 2022	20,528	(6,620)	$	284,024	$	743,283	$	(219,219)	$	(46,580)	$	5,169	$	766,677

See notes to these consolidated financial statements.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note A — Accounting Policies

Basis of Presentation:

The accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2022 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

New Pronouncements Adopted:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is available immediately and may be implemented in any period prior to the guidance expiration on December 31, 2024. The Company has applied this guidance in accounting for the interest rate swaps discussed in Note N. Any additional reference rate reform impacts will be accounted for in accordance with ASU 2020-04 and ASU 2022-06.

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

Note B — Segment Reporting

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

Performance Materials provides advanced engineered solutions comprised of beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes.

Electronic Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.

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

The Other reportable segment includes unallocated corporate costs and assets.

The primary measurement used by management to measure the financial performance of each segment is earnings before interest, taxes, depreciation and amortization (EBITDA).

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


(Thousands)	(Thousands)	Second Quarter 2023		Second Quarter 2022		First Six Months Ended 2023		First Six Months Ended 2022		(Thousands)	Third Quarter 2023		Third Quarter 2022		First Nine Months 2023		First Nine Months 2022
Net sales:	Net sales:									Net sales:
Performance Materials(1)	Performance Materials(1)	$	182,771	$	154,889	$	369,785	$	304,520	Performance Materials(1)	$	184,642	$	169,357	$	554,427	$	473,876
Electronic Materials(1)	Electronic Materials(1)	190,730		260,971		419,549		531,807		Electronic Materials(1)	192,305		230,841		611,855		762,649
Precision Optics	Precision Optics	25,050		29,435		51,742		58,013		Precision Optics	26,120		27,993		77,862		86,006
Other	Other	—		—		—		—		Other	—		—		—		—
Net sales	Net sales	398,551		445,295		841,076		894,340		Net sales	403,067		428,191		1,244,144		1,322,531
Segment EBITDA:	Segment EBITDA:									Segment EBITDA:
Performance Materials	Performance Materials	$	44,925	$	27,229	$	87,695	$	52,021	Performance Materials	$	46,366	$	28,866	$	134,061	$	80,886
Electronic Materials	Electronic Materials	13,394		22,337		27,349		34,484		Electronic Materials	10,155		16,853		37,504		51,338
Precision Optics	Precision Optics	1,701		3,544		4,393		5,735		Precision Optics	3,261		3,546		7,654		9,281
Other	Other	(7,598)		(7,191)		(14,253)		(12,366)		Other	(7,497)		(5,839)		(21,750)		(18,206)
Total Segment EBITDA	Total Segment EBITDA	52,422		45,919		105,184		79,874		Total Segment EBITDA	52,285		43,426		157,469		123,299
Income tax expense	Income tax expense	4,347		5,072		8,928		8,093		Income tax expense	2,963		4,432		11,891		12,525
Interest expense - net	Interest expense - net	7,641		4,701		15,142		8,437		Interest expense - net	7,678		5,888		22,820		14,325
Depreciation, depletion and amortization	Depreciation, depletion and amortization	16,352		12,891		31,444		26,070		Depreciation, depletion and amortization	15,080		13,154		46,524		39,223
Net income	Net income	$	24,082	$	23,255	$	49,670	$	37,274	Net income	$	26,564	$	19,952	$	76,234	$	57,226

(1) Excludes inter-segment sales of ~~$1.0~~$3.2 million for the ~~second~~third quarter of 2023 and ~~$4.1~~$7.3 million for the first ~~six~~nine months of 2023 for Electronic Materials. There were no material inter-segment sales for Performance Materials in 2023. ~~Additionally, excludes~~Excludes inter-segment sales of $0.2 million for the ~~second~~third quarter of 2022 and ~~$0.5~~$0.6 million for the first ~~six~~nine months of 2022 for Performance Materials and ~~$2.7~~$3.8 million for the ~~second~~third quarter of 2022 and ~~$8.2~~$12.1 million for the first ~~six~~nine months of 2022 for Electronic Materials. Inter-segment sales are eliminated in consolidation.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


(Thousands)	(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total		(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total
Second Quarter 2023
Third Quarter 2023												Third Quarter 2023
End Market	End Market											End Market
Semiconductor	Semiconductor	$	4,411	$	155,356	$	745	$	—	$	160,512	Semiconductor	$	2,712	$	151,388	$	624	$	—	$	154,724
Industrial	Industrial	39,615		4,175		6,713		—		50,503		Industrial	32,046		7,958		6,954		—		46,958
Aerospace and defense	Aerospace and defense	31,438		1,491		5,998		—		38,927		Aerospace and defense	30,938		1,102		7,124		—		39,164
Consumer electronics	Consumer electronics	10,289		195		3,566		—		14,050		Consumer electronics	10,827		144		4,254		—		15,225
Automotive	Automotive	21,813		1,718		1,876		—		25,407		Automotive	19,447		1,747		2,606		—		23,800
Energy	Energy	12,117		21,810		—		—		33,927		Energy	13,013		25,179		—		—		38,192
Telecom and data center	Telecom and data center	17,413		45		—		—		17,458		Telecom and data center	15,685		10		—		—		15,695
Other	Other	45,675		5,940		6,152		—		57,767		Other	59,974		4,777		4,558		—		69,309
Total	Total	$	182,771	$	190,730	$	25,050	$	—	$	398,551	Total	$	184,642	$	192,305	$	26,120	$	—	$	403,067

Second Quarter 2022
Third Quarter 2022												Third Quarter 2022
End Market	End Market											End Market
Semiconductor	Semiconductor	$	2,446	$	213,742	$	1,530	$	—	$	217,718	Semiconductor	$	2,410	$	185,223	$	1,151	$	—	$	188,784
Industrial	Industrial	40,970		11,957		7,608		—		60,535		Industrial	44,550		9,383		7,564		—		61,497
Aerospace and defense	Aerospace and defense	27,615		1,284		3,666		—		32,565		Aerospace and defense	28,262		1,243		3,532		—		33,037
Consumer electronics	Consumer electronics	16,212		280		5,814		—		22,306		Consumer electronics	9,607		364		6,799		—		16,770
Automotive	Automotive	24,855		1,465		2,708		—		29,028		Automotive	24,802		1,863		2,268		—		28,933
Energy	Energy	11,410		25,361		—		—		36,771		Energy	15,971		25,220		—		—		41,191
Telecom and data center	Telecom and data center	16,223		21		—		—		16,244		Telecom and data center	15,412		42		—		—		15,454
Other	Other	15,158		6,861		8,109		—		30,128		Other	28,343		7,503		6,679		—		42,525
Total	Total	$	154,889	$	260,971	$	29,435	$	—	$	445,295	Total	$	169,357	$	230,841	$	27,993	$	—	$	428,191

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


(Thousands)	(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total		(Thousands)	Performance Materials		Electronic Materials		Precision Optics		Other		Total
First Six Months 2023
First Nine Months 2023												First Nine Months 2023
End Market	End Market											End Market
Semiconductor	Semiconductor	$	7,001	$	335,972	$	1,656	$	—	$	344,629	Semiconductor	$	9,713	$	487,361	$	2,279	$	—	$	499,353
Industrial	Industrial	79,390		17,144		15,445		—		111,979		Industrial	111,436		25,102		22,400		—		158,938
Aerospace and defense	Aerospace and defense	61,796		3,568		10,647		—		76,011		Aerospace and defense	92,734		4,670		17,771		—		115,175
Consumer electronics	Consumer electronics	19,645		382		6,822		—		26,849		Consumer electronics	30,473		526		11,075		—		42,074
Automotive	Automotive	47,306		3,219		4,484		—		55,009		Automotive	66,753		4,966		7,090		—		78,809
Energy	Energy	25,584		46,761		—		—		72,345		Energy	38,597		71,940		—		—		110,537
Telecom and data center	Telecom and data center	33,538		58		—		—		33,596		Telecom and data center	49,223		68		—		—		49,291
Other	Other	95,525		12,445		12,688		—		120,658		Other	155,498		17,222		17,247		—		189,967
Total	Total	$	369,785	$	419,549	$	51,742	$	—	$	841,076	Total	$	554,427	$	611,855	$	77,862	$	—	$	1,244,144

First Six Months 2022
First Nine Months 2022												First Nine Months 2022
End Market	End Market											End Market
Semiconductor	Semiconductor	$	4,246	$	428,664	$	2,857	$	—	$	435,767	Semiconductor	$	6,657	$	613,887	$	4,007	$	—	$	624,551
Industrial	Industrial	81,039		27,823		16,041		—		124,903		Industrial	125,588		37,206		23,605		—		186,399
Aerospace and defense	Aerospace and defense	51,299		3,898		8,812		—		64,009		Aerospace and defense	79,561		5,141		12,344		—		97,046
Consumer electronics	Consumer electronics	29,215		605		11,126		—		40,946		Consumer electronics	38,822		969		17,925		—		57,716
Automotive	Automotive	47,091		3,122		5,026		—		55,239		Automotive	71,893		4,985		7,294		—		84,172
Energy	Energy	22,259		54,481		—		—		76,740		Energy	38,231		79,701		—		—		117,932
Telecom and data center	Telecom and data center	32,303		65		—		—		32,368		Telecom and data center	47,716		107		—		—		47,823
Other	Other	37,068		13,149		14,151		—		64,368		Other	65,408		20,653		20,831		—		106,892
Total	Total	$	304,520	$	531,807	$	58,013	$	—	$	894,340	Total	$	473,876	$	762,649	$	86,006	$	—	$	1,322,531

Note C — Revenue Recognition

Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue in an amount that reflects the consideration to which it expects to be entitled upon satisfaction of a performance obligation by transferring control over a product to the customer. Control over a product is generally transferred to the customer when the Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.

Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at ~~June 30,~~September 29, 2023. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at ~~June 30,~~September 29, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$64.1~~$55.9 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)	June 30, 2023		December 31, 2022		$ change		% change		(Thousands)	September 29, 2023		December 31, 2022		$ change		% change
Accounts receivable, trade	Accounts receivable, trade	$	188,328	$	215,726	$	(27,398)	(13)	%	Accounts receivable, trade	$	186,937	$	215,726	$	(28,789)	(13)	%
Unbilled receivables	Unbilled receivables	11,340		10,765		575		5	%	Unbilled receivables	16,910		10,765		6,145		57	%
Unearned revenue	Unearned revenue	15,306		15,496		(190)		(1)	%	Unearned revenue	15,078		15,496		(418)		(3)	%

Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred related to our receivables were immaterial during the ~~second~~third quarter of 2023.

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

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately ~~$11.7~~$11.6 million of the December 31, 2022 unearned amounts as revenue during the first ~~six~~nine months of 2023.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less. The Company does not include extended payment terms in its contracts with customers.

Note D — ~~Other-net~~

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

Second Quarter Ended Six Months Ended
June 30, July 1, June 30, July 1,
(Thousands) 2023 2022 2023 2022
Amortization of intangible assets $ 3,130 $ 3,099 $ 6,250 $ 6,230
Metal consignment fees 2,797 2,871 5,726 5,882
Foreign currency (gain) loss 170 28 (38) (305)
Other items 95 (70) 28 (6)
Total $ 6,192 $ 5,928 $ 11,966 $ 11,801

~~Note E —~~ Restructuring

~~During~~Over the first nine months of 2023, the Company implemented various restructuring initiatives across the Performance Materials, Electronic Materials and Precision Optics segments to improve operational efficiency. This resulted in severance and related costs of approximately ~~$1.5~~$1.1 million and ~~$2.1~~$3.2 million during the three months and ~~six~~nine months ended ~~June 30,~~September 29, 2023, respectively. Approximately $1.9 million of those severance costs were paid as of September 29, 2023.

In the first ~~six~~nine months of 2022, the Company recorded a combined total of ~~$1.1~~$1.6 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments as a result of cost reduction actions taken in order to reduce our fixed cost structure.

Note E — Other-net

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


	Third Quarter Ended				Nine Months Ended
	September 29,		September 30,		September 29,		September 30,
(Thousands)	2023		2022		2023		2022
Amortization of intangible assets	$	3,153	$	3,088	$	9,403	$	9,318
Metal consignment fees	2,580		3,111		8,307		8,993
Foreign currency (gain) loss	609		235		571		(70)
Other items	(131)		340		(103)		334
Total	$	6,211	$	6,774	$	18,178	$	18,575

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note F — Income Taxes

The Company's effective tax rate for the ~~second~~third quarter of 2023 and 2022 was ~~15.3%~~10.0% and ~~17.9%~~18.2%, respectively, and ~~15.2%~~13.5% and ~~17.8%~~18.0% in the first ~~six~~nine months of 2023 and 2022, respectively. The effective tax rate for 2023 was lower than the statutory

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

tax rate primarily due to the impact of the foreign derived intangible income deduction, percentage depletion, research and development and production ~~credits and the foreign derived intangible income deduction.~~credits. The effective tax rate for 2022 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits and the ~~foreign derived~~foreign-derived intangible income deduction. The effective tax rate for the first ~~six~~nine months of 2023 included a net discrete income tax benefit of ~~$1.0~~$3.4 million, primarily related to an optimization of our foreign-derived intangible income deduction benefit, excess tax benefits from stock-based compensation ~~awards.~~awards and return to provision adjustments . The effective tax rate for the first ~~six~~nine months of 2022 included a net discrete income tax benefit of ~~$0.4~~$0.9 million, primarily related to excess tax benefits from stock-based compensation ~~awards.~~awards and return to provision adjustments.

Government Tax Credits

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law. The IRA, among other provisions, includes a new corporate alternative minimum tax on certain large corporations and new or enhanced federal energy and manufacturing tax credits effective for tax years beginning in 2023. The Company is not subject to the minimum tax as our average annual book profits over the prior three-year period were less than $1 billion. The IRA introduced a new advanced manufacturing production credit (production credit), which provides an annual cash benefit for a portion of production costs for the sale of certain minerals produced in the U.S. and sold by a taxpayer during the year.

The IRA affords the Company eligibility to a production credit beginning in 2023, for which the Company expects to recognize cash savings of ~~at least $8~~approximately $10 million for the year ending December 31, 2023. The issuance of guidance and interpretation as to the eligibility for, calculation of, and methods for claiming the production credit remain pending. We will continue to monitor developments related to the production credit from the Internal Revenue Service and U.S. Treasury Department and evaluate the potential impact to the Company’s production credit. The Company will finalize the expected annual production credit impact as further guidance is issued.

The production credit is recorded as a reduction in cost of goods sold as the applicable items are produced and sold. U.S. GAAP does not address the accounting for government grants received by a business entity that are outside the scope of ASC 740; our accounting policy is to analogize to IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, under IFRS Accounting Standards. We recognize the benefit of tax credits accounted for by applying IAS 20 in pretax income on a systematic basis in line with its recognition of the expenses that the grant is intended to compensate.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note G — Earnings Per Share (EPS)

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


		Second Quarter Ended				Six Months Ended					Third Quarter Ended				Nine Months Ended
		June 30,		July 1,		June 30,		July 1,			September 29,		September 30,		September 29,		September 30,
(Thousands, except per share amounts)	(Thousands, except per share amounts)	2023		2022		2023		2022		(Thousands, except per share amounts)	2023		2022		2023		2022
Numerator for basic and diluted EPS:	Numerator for basic and diluted EPS:									Numerator for basic and diluted EPS:
Net income	Net income	$	24,082	$	23,255	$	49,670	$	37,274	Net income	$	26,564	$	19,952	$	76,234	$	57,226
Denominator:	Denominator:									Denominator:
Denominator for basic EPS
Denominator for basic EPS:										Denominator for basic EPS:
Weighted-average shares outstanding	Weighted-average shares outstanding	20,625		20,517		20,596		20,491		Weighted-average shares outstanding	20,640		20,526		20,611		20,502
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Stock appreciation rights	Stock appreciation rights	91		81		93		86		Stock appreciation rights	79		85		87		85
Restricted stock units	Restricted stock units	77		82		91		116		Restricted stock units	84		98		89		113
Performance-based restricted stock units	Performance-based restricted stock units	103		43		112		50		Performance-based restricted stock units	102		71		104		55
Diluted potential common shares	Diluted potential common shares	271		206		296		252		Diluted potential common shares	265		254		280		254
Denominator for diluted EPS:	Denominator for diluted EPS:									Denominator for diluted EPS:
Adjusted weighted-average shares outstanding	Adjusted weighted-average shares outstanding	20,896		20,723		20,892		20,743		Adjusted weighted-average shares outstanding	20,905		20,780		20,891		20,756
Basic EPS	Basic EPS	$	1.17	$	1.13	$	2.41	$	1.82	Basic EPS	$	1.29	$	0.97	$	3.70	$	2.79
Diluted EPS	Diluted EPS	$	1.15	$	1.12	$	2.38	$	1.80	Diluted EPS	$	1.27	$	0.96	$	3.65	$	2.76

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Adjusted weighted-average shares outstanding - diluted exclude securities totaling ~~47,084~~47,250 and ~~119,744~~45,016 for the quarters ended ~~June 30,~~September 29, 2023 and ~~July 1,~~September 30, 2022, respectively, and ~~totaling 69,716~~36,927 and ~~79,949~~54,680 for the ~~six~~nine months ended ~~June 30,~~September 29, 2023 and ~~July 1,~~September 30, 2022, respectively. These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common ~~stock~~shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.

Note H — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:


		June 30,		December 31,			September 29,		December 31,
(Thousands)	(Thousands)	2023		2022		(Thousands)	2023		2022
Raw materials and supplies	Raw materials and supplies	$	114,942	$	113,694	Raw materials and supplies	$	109,731	$	113,694
Work in process	Work in process	263,604		249,105		Work in process	269,508		249,105
Finished goods	Finished goods	76,797		60,281		Finished goods	72,803		60,281
Inventories, net	Inventories, net	$	455,343	$	423,080	Inventories, net	$	452,042	$	423,080

The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce its exposure to metal market price movements and to reduce its working capital investment. The notional value of off-balance sheet precious metals and copper was ~~$321.3~~$344.8 million and $373.1 million as of ~~June 30,~~September 29, 2023 and December 31, 2022, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note I — Customer Prepayments

In 2020, the Company entered into an investment agreement and a master supply agreement with a customer to procure equipment to manufacture product for the customer. The customer provided prepayments to the Company to fund the necessary infrastructure improvements and procure the equipment necessary to supply the customer with the desired product. The Company owns, operates and maintains the equipment that is being used to manufacture product for the customer.

Revenue will be recognized as the Company fulfills purchase orders and ships the commercial product to the customer, as product delivery is considered the satisfaction of the performance obligation.

Additionally, during the second quarter of 2022, the Company entered into an amendment to the investment agreement with the same customer to procure additional equipment to manufacture product for the customer. ~~As of June 30,~~During 2023, the Company has received approximately ~~$37.0~~$16.7 million in prepayments under the terms of this amended ~~agreement, of which $15.1 million was received during the first six months of 2023.~~agreement.

As of ~~June 30,~~September 29, 2023 and December 31, 2022, ~~$91.4~~$90.0 million and $85.9 million, respectively, of prepayments are classified as Unearned income on the Consolidated Balance Sheets. The prepayments will remain in Unearned income until commercial purchase orders are received for product serviced out of the equipment, at which time a portion of the purchase order value related to prepayments will be reclassified to Unearned revenue. As of ~~June 30,~~September 29, 2023 ~~$6.7~~$5.8 million of the prepayments are classified as Unearned revenue.

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the ~~second~~third quarter and first ~~six~~nine months ended ~~June 30,~~September 29, 2023 and ~~July 1,~~September 30, 2022, respectively, for the pension plans as shown below. The Pension Benefits column aggregates defined benefit pension plans in the U.S., Germany, Liechtenstein, England, and the U.S. supplemental retirement plans. The Other Benefits column includes the domestic retiree medical and life insurance plan.


		Pension Benefits				Other Benefits					Pension Benefits				Other Benefits
		Second Quarter Ended				Second Quarter Ended					Third Quarter Ended				Third Quarter Ended
		June 30,		July 1,		June 30,		July 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2023		2022		2023		2022		(Thousands)	2023		2022		2023		2022
Components of net periodic benefit (credit) cost	Components of net periodic benefit (credit) cost									Components of net periodic benefit (credit) cost
Service cost	Service cost	$	211	$	292	$	13	$	20	Service cost	$	209	$	281	$	13	$	21
Interest cost	Interest cost	1,970		1,213		68		39		Interest cost	1,966		1,203		68		39
Expected return on plan assets	Expected return on plan assets	(2,422)		(2,378)		—		—		Expected return on plan assets	(2,421)		(2,380)		—		—
Amortization of prior service (benefit) cost	Amortization of prior service (benefit) cost	(21)		(18)		(139)		(374)		Amortization of prior service (benefit) cost	(21)		(19)		(139)		(374)
Amortization of net loss (gain)	Amortization of net loss (gain)	(75)		420		(95)		(68)		Amortization of net loss (gain)	(75)		410		(95)		(68)
Net periodic benefit (credit) cost	Net periodic benefit (credit) cost	$	(337)	$	(471)	$	(153)	$	(383)	Net periodic benefit (credit) cost	$	(342)	$	(505)	$	(153)	$	(382)


		Pension Benefits				Other Benefits					Pension Benefits				Other Benefits
		Six Months Ended				Six Months Ended					Nine Months Ended				Nine Months Ended
		June 30,		July 1,		June 30,		July 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2023		2022		2023		2022		(Thousands)	2023		2022		2023		2022
Components of net periodic benefit (credit) cost	Components of net periodic benefit (credit) cost									Components of net periodic benefit (credit) cost
Service cost	Service cost	$	433	$	610	$	25	$	42	Service cost	$	642	$	891	$	38	$	63
Interest cost	Interest cost	3,943		2,436		136		78		Interest cost	5,909		3,639		205		117
Expected return on plan assets	Expected return on plan assets	(4,861)		(4,778)		—		—		Expected return on plan assets	(7,282)		(7,158)		—		—
Amortization of prior service (benefit) cost	Amortization of prior service (benefit) cost	(44)		(38)		(278)		(748)		Amortization of prior service (benefit) cost	(65)		(57)		(417)		(1,122)
Amortization of net loss (gain)	Amortization of net loss (gain)	(156)		850		(190)		(136)		Amortization of net loss (gain)	(231)		1,260		(285)		(204)
Net periodic benefit (credit) cost	Net periodic benefit (credit) cost	$	(685)	$	(920)	$	(307)	$	(764)	Net periodic benefit (credit) cost	$	(1,027)	$	(1,425)	$	(459)	$	(1,146)

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The Company did not make any contributions to its domestic defined benefit plan in the ~~second~~third quarter or first ~~six~~nine months of 2023 or 2022.

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

Note K — Accumulated Other Comprehensive Income (Loss)

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

~~Materion Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

~~(Unaudited)~~


		Gains and Losses on Cash Flow Hedges															Gains and Losses on Cash Flow Hedges
(Thousands)	(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total		(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total
Balance at March 31, 2023		$	1,165	$	4,141	$	(570)	$	4,736	$	(40,295)	$	(6,067)	$	(41,626)
Balance at June 30, 2023																Balance at June 30, 2023	$	1,290	$	7,069	$	(443)	$	7,916	$	(40,549)	$	(6,810)	$	(39,443)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	163		4,830		79		5,072		—		(743)		4,329		Other comprehensive income (loss) before reclassifications	766		2,398		515		3,679		—		(3,259)		420
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	—		(1,028)		85		(943)		(207)		—		(1,150)		Amounts reclassified from accumulated other comprehensive income (loss)	—		(1,140)		83		(1,057)		(299)		—		(1,356)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	163		3,802		164		4,129		(207)		(743)		3,179		Net current period other comprehensive (loss) income before tax	766		1,258		598		2,622		(299)		(3,259)		(936)
Deferred taxes	Deferred taxes	38		874		37		949		47		—		996		Deferred taxes	176		289		138		603		(154)		—		449
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	125		2,928		127		3,180		(254)		(743)		2,183		Net current period other comprehensive (loss) income after tax	590		969		460		2,019		(145)		(3,259)		(1,385)
Balance at June 30, 2023		$	1,290	$	7,069	$	(443)	$	7,916	$	(40,549)	$	(6,810)	$	(39,443)
Balance at September 29, 2023																Balance at September 29, 2023	$	1,880	$	8,038	$	17	$	9,935	$	(40,694)	$	(10,069)	$	(40,828)

Balance at April 1, 2022		$	2,451	$	2,485	$	(246)	$	4,690	$	(39,942)	$	(4,934)	$	(40,186)
Balance at July 1, 2022																Balance at July 1, 2022	$	3,226	$	3,250	$	108	$	6,584	$	(39,926)	$	(11,277)	$	(44,619)
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	1,117		756		467		2,340		—		(6,343)		(4,003)		Other comprehensive (loss) income before reclassifications	837		4,360		441		$	5,638	—		(6,094)		(456)
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(110)		238		(8)		120		(10)		—		110		Amounts reclassified from accumulated other comprehensive income (loss)	(41)		(115)		(126)		$	(282)	(18)		—		(300)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	1,007		994		459		2,460		(10)		(6,343)		(3,893)		Net current period other comprehensive (loss) income before tax	796		4,245		315		5,356		(18)		(6,094)		(756)
Deferred taxes	Deferred taxes	232		229		105		566		(26)		—		540		Deferred taxes	183		976		72		1,231		(26)		—		1,205
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	775		765		354		1,894		16		(6,343)		(4,433)		Net current period other comprehensive (loss) income after tax	613		3,269		243		4,125		8		(6,094)		(1,961)
Balance at July 1, 2022		$	3,226	$	3,250	$	108	$	6,584	$	(39,926)	$	(11,277)	$	(44,619)
Balance at September 30, 2022																Balance at September 30, 2022	$	3,839	$	6,519	$	351	$	10,709	$	(39,918)	$	(17,371)	$	(46,580)

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


		Gains and Losses on Cash Flow Hedges																Gains and Losses on Cash Flow Hedges
(Thousands)	(Thousands)	Foreign Currency		Interest Rate				Precious Metals		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total			(Thousands)	Foreign Currency		Interest Rate		Precious Metals		Total		Pension and Post-Employment Benefits		Foreign Currency Translation		Total
Balance at December 31, 2022	Balance at December 31, 2022	$	1,243	$	6,055			$	(223)	$	7,075	$	(40,228)	$	(8,756)	$	(41,909)		Balance at December 31, 2022	$	1,243	$	6,055	$	(223)	$	7,075	$	(40,228)	$	(8,756)	$	(41,909)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	96		3,127				(396)		2,827		—		1,946		4,773			Other comprehensive income (loss) before reclassifications	862		5,525		119		6,506		—		(1,313)		5,193
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(35)		(1,810)				110		(1,735)		(545)		—		(2,280)			Amounts reclassified from accumulated other comprehensive income (loss)	(35)		(2,950)		193		(2,792)		(844)		—		(3,636)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	61		1,317				(286)		1,092		(545)		1,946		2,493			Net current period other comprehensive (loss) income before tax	827		2,575		312		3,714		(844)		(1,313)		1,557
Deferred taxes	Deferred taxes	14		303				(66)		251		(224)		—		27			Deferred taxes	190		592		72		854		(378)		—		476
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	47		1,014				(220)		841		(321)		1,946		2,466			Net current period other comprehensive (loss) income after tax	637		1,983		240		2,860		(466)		(1,313)		1,081
Balance at June 30, 2023		$	1,290	$	7,069			$	(443)	$	7,916	$	(40,549)	$	(6,810)	$	(39,443)
Balance at September 29, 2023																			Balance at September 29, 2023	$	1,880	$	8,038	$	17	$	9,935	$	(40,694)	$	(10,069)	$	(40,828)

Balance at December 31, 2021	Balance at December 31, 2021	$	2,348	$	—	$	—	$	72	$	2,420	$	(39,702)	$	(2,887)	$	(40,169)		Balance at December 31, 2021	$	2,348	$	—	$	72	$	2,420	$	(39,702)	$	(2,887)	$	(40,169)
Other comprehensive (loss) income before reclassifications	Other comprehensive (loss) income before reclassifications	1,270		3,868		3,868		(53)		5,085		—		(8,390)		(3,305)			Other comprehensive (loss) income before reclassifications	2,107		8,228		388		10,723		—		(14,484)		(3,761)
Amounts reclassified from accumulated other comprehensive income (loss)	Amounts reclassified from accumulated other comprehensive income (loss)	(130)		353		353		99		322		(1,011)		—		(689)			Amounts reclassified from accumulated other comprehensive income (loss)	(170)		238		(27)		41		(1,028)		—		(987)
Net current period other comprehensive (loss) income before tax	Net current period other comprehensive (loss) income before tax	1,140		4,221				46		5,407		(1,011)		(8,390)		(3,994)			Net current period other comprehensive (loss) income before tax	1,937		8,466		361		10,764		(1,028)		(14,484)		(4,748)
Deferred taxes	Deferred taxes	262		971				10		1,243		(787)		—		456			Deferred taxes	446		1,947		82		2,475		(812)		—		1,663
Net current period other comprehensive (loss) income after tax	Net current period other comprehensive (loss) income after tax	878		3,250				36		4,164		(224)		(8,390)		(4,450)			Net current period other comprehensive (loss) income after tax	1,491		6,519		279		8,289		(216)		(14,484)		(6,411)
Balance at July 1, 2022		$	3,226	$	3,250			$	108	$	6,584	$	(39,926)	$	(11,277)	$	(44,619)
Balance at September 30, 2022																			Balance at September 30, 2022	$	3,839	$	6,519	$	351	$	10,709	$	(39,918)	$	(17,371)	$	(46,580)

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

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note L — Stock-based Compensation Expense

Stock-based compensation expense, which includes awards settled in shares and in cash, was ~~$2.8~~$2.6 million and ~~$5.2~~$7.8 million in the ~~second~~third quarter and first ~~six~~nine months of 2023, respectively, compared to ~~$2.0~~$2.2 million and ~~$3.8~~$6.0 million, respectively, in the same periods of 2022.

The Company granted 47,084 stock appreciation rights (SARs) to certain employees during the first ~~six~~nine months of 2023. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the ~~six~~nine months ended ~~June 30,~~September 29, 2023 were $113.28 and $42.27, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:


Risk-free interest rate	4.27	%
Dividend yield	0.44	%
Volatility	39.0	%
Expected term (in years)	4.5

The Company granted ~~53,906~~54,788 stock-settled restricted stock units (RSUs) to certain employees during the first ~~six~~nine months of 2023. The Company measures the fair value of stock-settled RSUs based on the closing market price of a share of Materion common stock on the date of the grant. The weighted-average fair value per share was ~~$112.61~~$112.53 for stock-settled RSUs granted to employees during the ~~six~~nine months ended ~~June 30,~~September 29, 2023. RSUs are generally expensed over the vesting period of three years for employees.

The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first ~~six~~nine months of 2023. The weighted-average fair value of the stock-settled PRSUs was $154.97 per share and will be expensed over the vesting period of three years. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and its total return to shareholders over the vesting period relative to a peer group’s performance over the same period.

At ~~June 30,~~September 29, 2023, unrecognized compensation cost related to the unvested portion of all stock-based awards was approximately ~~$20.7~~$17.0 million, and is expected to be recognized over the remaining vesting period of the respective grants.

Note M — Fair Value of Financial Instruments

The Company measures and records financial instruments at fair value. A hierarchy is used for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 — Quoted market prices in active markets for identical assets and liabilities;

Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 — Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect

those that a market participant would use.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of ~~June 30,~~September 29, 2023 and December 31, 2022:



(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)
		2023		2022		2023		2022		2023		2022		2023		2022			2023		2022		2023		2022		2023		2022		2023		2022
Financial Assets	Financial Assets																	Financial Assets
Deferred compensation investments	Deferred compensation investments	$	4,451	$	3,001	$	4,451	$	3,001	$	—	$	—	$	—	$	—	Deferred compensation investments	$	4,521	$	3,001	$	4,521	$	3,001	$	—	$	—	$	—	$	—
Foreign currency forward contracts	Foreign currency forward contracts	512		1,291		—		—		512		1,291		—		—		Foreign currency forward contracts	1,643		1,291		—		—		1,643		1,291		—		—
Interest rate swap	Interest rate swap	9,736		7,863		—		—		9,736		7,863		—		—		Interest rate swap	10,438		7,863		—		—		10,438		7,863		—		—
Precious metal swaps	Precious metal swaps	1		118		—		—		1		118		—		—		Precious metal swaps	94		118		—		—		94		118		—		—
Total	Total	$	14,700	$	12,273	$	4,451	$	3,001	$	10,249	$	9,272	$	—	$	—	Total	$	16,696	$	12,273	$	4,521	$	3,001	$	12,175	$	9,272	$	—	$	—
Financial Liabilities	Financial Liabilities																	Financial Liabilities
Deferred compensation liability	Deferred compensation liability	$	4,451	$	3,001	$	4,451	$	3,001	$	—	$	—	$	—	$	—	Deferred compensation liability	$	4,521	$	3,001	$	4,521	$	3,001	$	—	$	—	$	—	$	—
Foreign currency forward contracts	Foreign currency forward contracts	946		1,757		—		—		946		1,757		—		—		Foreign currency forward contracts	776		1,757		—		—		776		1,757		—		—
Interest rate swap		556		—		—		—		556		—		—		—
Interest Rate Swap																		Interest Rate Swap	—		—				—		—		—				—
Precious metal swaps	Precious metal swaps	580		411		—		—		580		411		—		—		Precious metal swaps	75		411		—		—		75		411		—		—
Total	Total	$	6,533	$	5,169	$	4,451	$	3,001	$	2,082	$	2,168	$	—	$	—	Total	$	5,372	$	5,169	$	4,521	$	3,001	$	851	$	2,168	$	—	$	—

The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies, metals, and interest rates. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of ~~June 30,~~September 29, 2023 and December 31, 2022. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.

Note N — Derivative Instruments and Hedging Activity

The Company uses derivative contracts to hedge exposure to movements in interest rates associated with borrowings, foreign currency exposures, and precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows:

Interest Rate. On March 4, 2022, the Company entered into a $100.0 million interest rate swap to hedge the interest rate risk on the Credit Agreement described in Note P. The swap hedges the change in 1-month ~~Secured Overnight Financial Rate (SOFR)~~LIBOR from March 4, 2022 to November 2, 2026. On March 21, 2023, the Company entered into two $50.0 million interest rate swaps to hedge the interest rate risk on the Credit Agreement described in Note P. The swaps hedge the change in 1-month USD-SOFR. The purpose of ~~these hedges~~this hedge is to manage the risk of changes in the monthly interest payments attributable to changes in the benchmark interest rate.

Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

the hedge contracts. Depending upon the methods used, the hedge contracts may limit the benefits from a weakening U.S. dollar.

The use of forward contracts locks in a firm rate and eliminates any downside from an adverse rate movement as well as any benefit from a favorable rate movement. The Company may from time to time choose to hedge with options or a tandem of options, known as a collar. These hedging techniques can limit or eliminate the downside risk but can allow for some or all of the benefit from a favorable rate movement to be realized. Unlike a forward contract, a premium is paid for an option; collars, which are a combination of a put and call option, may have a net premium but can be structured to be cash neutral. The Company will primarily hedge with forward contracts due to the relationship between the cash outlay and the level of risk.

The use of foreign currency derivative contracts is governed by policies approved by the Audit Committee of the Board of Directors. A team consisting of senior financial managers reviews the estimated exposure levels, as defined by budgets, forecasts, and other internal data, and determines the timing, amounts, and nature of instruments to use to hedge exposures. Management analyzes the effective hedged rates and the actual and projected gains and losses on the hedging transactions against the program objectives, targeted rates, and levels of risk assumed. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market rate movements.

Precious Metals. The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a product containing precious metal is fabricated and delivered to the customer, the metal content is purchased out of consignment based on the current market price. The price paid by the Company for the precious metal forms the basis for the price charged to the customer for the metal content in the product. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by precious metal consignors that charge the Company consignment fees based upon the value of the metal as it fluctuates while on consignment. Each precious metal consignor retains title to its consigned precious metal until it is purchased by the Company, and it is the Company’s typical practice to purchase metal out of consignment only after a product containing that metal has been purchased by one of our customers.

In certain instances, a customer may want to fix the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased out of consignment potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.

The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be refined and purchased, thereby reducing the exposure to adverse movements in the price of the metal. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals that we process or refine.

In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure in these instances.

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

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.

All derivatives are recorded on the balance sheet at fair value. If a derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The derivative assets and liabilities are classified as short-term or long-term depending upon the contract maturity date.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and the balance sheet classification as of ~~June 30,~~September 29, 2023 and December 31, 2022:


		June 30, 2023				December 31, 2022					September 29, 2023				December 31, 2022
(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 and other current assets	Prepaid and other current assets	$	21,807	$	235	$	12,242	$	791	Prepaid and other current assets	$	25,255	$	924	$	12,242	$	791
Other liabilities and accrued items	Other liabilities and accrued items	27,995		521		17,061		1,048		Other liabilities and accrued items	16,142		675		17,061		1,048

These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included ~~$0.2~~less than $0.1 million of foreign currency losses in the third quarter and $0.4 million of foreign currency losses related to derivatives in the ~~second quarter and~~ first ~~six~~nine months of 2023, ~~respectively,~~ compared to less than $0.1 million of foreign currency losses and $0.7 million of foreign currency gains in the ~~second~~third quarter and first ~~six~~nine months of 2022, respectively.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of ~~June 30,~~September 29, 2023 and December 31, 2022:


		June 30, 2023											September 29, 2023
				Fair Value											Fair Value
(Thousands)	(Thousands)	Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities		(Thousands)	Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities
Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	$	2,369	$	142	$	6	$	1	$	1	Foreign currency forward contracts - yen	$	1,873	$	156	$	6	$	—	$	—
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	29,155		120		9		411		12		Foreign currency forward contracts - euro	19,366		516		41		101		—
Precious metal swaps	Precious metal swaps	7,125		1		—		580		—		Precious metal swaps	4,049		84		10		75		—
Interest rate swap	Interest rate swap	200,000		4,922		4,814		—		556		Interest rate swap	200,000		5,047		5,391		—		—
Total	Total	$	238,649	$	5,185	$	4,829	$	992	$	569	Total	$	225,288	$	5,803	$	5,448	$	176	$	—

		December 31, 2022											December 31, 2022
				Fair Value											Fair Value
		Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities			Notional Amount		Prepaid and other current assets		Other assets		Other liabilities and accrued items		Other long-term liabilities

Foreign currency forward contracts - yen	Foreign currency forward contracts - yen	$	2,985	$	145	$	—	$	74	$	26	Foreign currency forward contracts - yen	$	2,985	$	145	$	—	$	74	$	26
Foreign currency forward contracts - euro	Foreign currency forward contracts - euro	25,712		355		—		472		137		Foreign currency forward contracts - euro	25,712		355		—		472		137
Precious metal swaps	Precious metal swaps	8,758		118		—		411		—		Precious metal swaps	8,758		118		—		411		—
Interest rate swap	Interest rate swap	100,000		3,114		4,749		—		—		Interest rate swap	100,000		3,114		4,749		—		—
Total	Total	$	137,455	$	3,732	$	4,749	$	957	$	163	Total	$	137,455	$	3,732	$	4,749	$	957	$	163

All of the contracts summarized above were designated and effective as cash flow hedges. We expect to reclassify ~~$4.1~~$5.6 million of net gains into earnings in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. At ~~June 30,~~September 29, 2023, the maximum term of derivative instruments that hedge forecasted transactions was approximately four years. Refer to Note K for further details related to OCI.

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


			Second Quarter Ended						Third Quarter Ended
(Thousands)	(Thousands)		June 30, 2023		July 1, 2022		(Thousands)		September 29, 2023		September 30, 2022
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	—	$	(110)	Foreign currency forward contracts	Net sales	$	—	$	(41)
Precious metal swaps	Precious metal swaps	Cost of sales	85		(8)		Precious metal swaps	Cost of sales	83		(126)
Interest rate swap	Interest rate swap	Interest expense - net	(1,028)		238		Interest rate swap	Interest expense - net	(1,140)		(115)
Total	Total		$	(943)	$	120	Total		$	(1,057)	$	(282)

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)


			Six Months Ended						Nine Months Ended
(Thousands)	(Thousands)		June 30, 2023		July 1, 2022		(Thousands)		September 29, 2023		September 30, 2022
Hedging relationship	Hedging relationship	Line item					Hedging relationship	Line item
Foreign currency forward contracts	Foreign currency forward contracts	Net sales	$	(35)	$	(130)	Foreign currency forward contracts	Net sales	$	(35)	$	(171)
Precious metal swaps	Precious metal swaps	Cost of sales	110		99		Precious metal swaps	Cost of sales	193		(27)
Interest rate swap	Interest rate swap	Interest expense - net	(1,810)		353		Interest rate swap	Interest expense - net	(2,950)		238
Total	Total		$	(1,735)	$	322	Total		$	(2,792)	$	40

Note O — Contingencies

Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note S "Contingencies and Commitments" in the Company's 2022 Annual Report on Form 10-K.

There were no pending beryllium cases as of September 29, 2023. One beryllium case that was ~~outstanding as of June 30, 2023; however, the Company has entered into a confidential settlement agreement with plaintiffs, pursuant to which all remaining claims~~settled in the ~~case are to be~~second quarter of 2023 was dismissed with prejudice ~~subject to~~during the third quarter of 2023 after receiving court approval. ~~The resolution of this matter will not have a material impact on the consolidated financial statements.~~

Other Litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.

On October 14, 2020, Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges, among other things, that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. Plaintiff filed a motion for conditional certification, which the Company opposed. On August 2, 2022, the ~~court~~Court conditionally certified a class of employees at the Company’s Elmore facility only and rejected certification of a class across the Company’s other facilities. In November 2022, the parties reached a settlement for an immaterial amount. The ~~court~~Court preliminarily approved the settlement on March 30, 2023 and a final approval hearing was held on July 6, 2023. There were no objections to the settlement and the ~~court~~Court entered an order approving the final settlement on July 7, ~~2023. The final~~2023, and the settlement amount ~~approximated~~was subsequently paid out prior to the ~~amount previously reserved for related to this matter.~~end of the third quarter.

Environmental Proceedings. The Company has an active environmental compliance program and records reserves for the probable cost of identified environmental remediation projects. The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the difference between actual and estimated costs, and other factors. The reserves may also be affected by rulings and negotiations with regulatory agencies. The undiscounted reserve balance was $4.4 million and $4.5 million at ~~June 30,~~September 29, 2023 and December 31, 2022, respectively, and is included in Other liabilities and accrued items and Other long-term liabilities on the Consolidated Balance Sheet. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.

Materion Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note P — Debt


(Thousands)	(Thousands)	June 30, 2023		December 31, 2022		(Thousands)	September 29, 2023		December 31, 2022
Borrowings under Credit Agreement	Borrowings under Credit Agreement	$	159,750	$	143,250	Borrowings under Credit Agreement	$	176,750	$	143,250
Borrowings under the Term Loan Facility	Borrowings under the Term Loan Facility	277,500		285,000		Borrowings under the Term Loan Facility	273,750		285,000
Overdraft Sweep Facility	Overdraft Sweep Facility	495		—		Overdraft Sweep Facility	6,848		—
Foreign debt	Foreign debt	5,774		7,541		Foreign debt	6,714		7,541
Total debt outstanding	Total debt outstanding	443,519		435,791		Total debt outstanding	464,062		435,791
Current portion of long-term debt	Current portion of long-term debt	(27,471)		(21,105)		Current portion of long-term debt	(38,634)		(21,105)
Gross long-term debt	Gross long-term debt	416,048		414,686		Gross long-term debt	425,428		414,686
Unamortized deferred financing fees	Unamortized deferred financing fees	(3,315)		(3,810)		Unamortized deferred financing fees	(3,067)		(3,810)
Long-term debt	Long-term debt	$	412,733	$	410,876	Long-term debt	$	422,361	$	410,876

As of ~~June 30,~~September 29, 2023 and December 31, 2022, the Company had ~~$159.8~~$176.8 million outstanding at an average interest rate of ~~6.71%~~6.92% and $143.3 million outstanding at an average interest rate of 6.08%, respectively, under its revolving credit facility. The available borrowing capacity under the revolving credit facility as of ~~June 30,~~September 29, 2023 was ~~$168.9~~$151.0 million. The Company has the option to repay or borrow additional funds under the revolving credit facility until the maturity date in 2026. In connection with the revolving credit facility, the administrative agent provides the Company with an overdraft sweep facility that the Company uses on a daily basis for short-term cash needs. As of June 30, 2023, the overdraft sweep facility had a balance of $0.5 million. The amended and restated credit agreement governing the revolving credit ~~facility and the term loan~~ facility (Credit Agreement) includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of ~~June 30,~~September 29, 2023.

The balance outstanding on the term loan facility as of ~~June 30,~~September 29, 2023 and December 31, 2022 was ~~$277.5~~was $273.8 million and $285.0 million, respectively.

At ~~June 30,~~September 29, 2023 and December 31, 2022, there was ~~$46.3~~$47.3 million and $46.5 million, respectively, outstanding against the letters of credit sub-facility.


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

OVERVIEW

We are an integrated producer of high-performance advanced engineered materials used in a variety of 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.

RESULTS OF OPERATIONS

~~Second~~Third Quarter


		Second Quarter Ended										Third Quarter Ended
		June 30,			July 1,			$		%				September 29,			September 30,			$		%
(Thousands, except per share data)	(Thousands, except per share data)	2023			2022			Change		Change			(Thousands, except per share data)	2023			2022			Change		Change
Net sales	Net sales	$	398,551		$	445,295		$	(46,744)	(10)	%		Net sales	$	403,067		$	428,191		$	(25,124)	(6)	%
Value-added sales	Value-added sales	268,261			268,797			(536)		—	%		Value-added sales	270,532			283,497			(12,965)		(5)	%
Gross margin	Gross margin	89,055			87,427			1,628		2	%		Gross margin	88,936			82,743			6,193		7	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	33		%	33		%						Gross margin as a % of value-added sales	33		%	29		%
Selling, general, and administrative (SG&A) expense	Selling, general, and administrative (SG&A) expense	38,911			42,047			(3,136)		(7)	%		Selling, general, and administrative (SG&A) expense	38,806			38,958			(152)		—	%
SG&A expense as a % of value-added sales	SG&A expense as a % of value-added sales	15		%	16		%						SG&A expense as a % of value-added sales	14		%	14		%
Research and development (R&D) expense	Research and development (R&D) expense	7,154			7,592			(438)		(6)	%		Research and development (R&D) expense	6,322			7,430			(1,108)		(15)	%
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	2		%	3		%
Restructuring expense	Restructuring expense	1,454			—			1,454		—	%		Restructuring expense	1,077			484			593		123	%
Other—net	Other—net	6,192			5,928			264		4	%		Other—net	6,211			6,774			(563)		(8)	%
Operating profit	Operating profit	35,344			31,860			3,484		11	%		Operating profit	36,520			29,097			7,423		26	%
Other non-operating (income)—net	Other non-operating (income)—net	(726)			(1,168)			442		(38)	%		Other non-operating (income)—net	(685)			(1,175)			490		(42)	%
Interest expense—net	Interest expense—net	7,641			4,701			2,940		63	%		Interest expense—net	7,678			5,888			1,790		30	%
Income before income taxes	Income before income taxes	28,429			28,327			102		—	%		Income before income taxes	29,527			24,384			5,143		21	%
Income tax expense	Income tax expense	4,347			5,072			(725)		(14)	%		Income tax expense	2,963			4,432			(1,469)		(33)	%
Net income	Net income	$	24,082		$	23,255		$	827	4	%		Net income	$	26,564		$	19,952		$	6,612	33	%

Diluted earnings per share	Diluted earnings per share	$	1.15		$	1.12		$	0.03	3	%		Diluted earnings per share	$	1.27		$	0.96		$	0.31	32	%

Net sales of ~~$398.6~~$403.1 million in the ~~second~~third quarter of 2023 decreased ~~$46.7~~$25.1 million from ~~$445.3~~$428.2 million in the ~~second~~third quarter of 2022. A decrease in net sales in the Electronic Materials and Precision Optics segments were partially offset by increased net sales in the Performance Materials segment. Volume decreases in the semiconductor ~~(26%~~(18%), industrial (19%), automotive (18%) and ~~consumer electronics~~medical (37%) end markets were partially offset by an increase in the aerospace and defense (19%) end market, ~~(22%),~~as well as incremental sales from the clad strip project of ~~$27.0 million and a $5.8 million increase in the volume of raw material beryllium hydroxide sales when compared to the second quarter of 2022.~~$28.2 million. See Note B to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper prices ~~unfavorably~~favorably impacted net sales by $3.1 million during the ~~second~~third quarter of 2023 ~~by $1.3 million~~ compared to ~~the~~ prior year ~~period.~~quarter.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through ~~precious~~ metal ~~market~~ costs and allows for analysis without the distortion of the movement or volatility in precious metal market 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 ~~$268.3~~$270.5 million in the ~~second~~third quarter of 2023 decreased ~~$0.5~~$13.0 million, or ~~0.2%~~5%, compared to the ~~second~~third quarter of 2022. Volume decreases in the semiconductor ~~(29%~~(33%) and ~~consumer electronics (38%~~industrial (19%) end markets were partially offset by an increase in the aerospace and defense end market ~~(25%~~(27%), and incremental sales from the clad strip project of ~~$27.0 million and a $5.8 million increase in the volume of raw material beryllium hydroxide sales when compared to the second quarter of 2022.~~$28.2 million.

Gross margin in the ~~second~~third quarter of 2023 was ~~$89.1~~$88.9 million, ~~an increase of 2%~~which was up 7% compared to the ~~second~~third quarter of 2022. Gross margin expressed as a percentage of value-added sales ~~was~~increased to 33% in ~~both~~ the ~~second~~third quarter of 2023 ~~and~~from 29% in the ~~second~~third quarter of 2022. The production tax credit recorded in the ~~second~~third quarter of 2023 favorably impacted gross margin. See Note F to the Consolidated Financial Statements for further discussion.

SG&A expense was ~~$38.9~~$38.8 million in the ~~second~~third quarter of 2023, compared to ~~$42.0~~$39.0 million in the ~~second~~third quarter of 2022. ~~The decrease in~~ SG&A expense ~~from the prior year period was primarily driven by $1.0 million of merger~~remained relatively flat and acquisition costs related to the acquisition of HCS-Electronic Materials incurred in the second quarter of 2022 that did not recur in 2023 as well as lower selling related expenses associated with the decrease in value-added sales. Expressedexpressed as a percentage of value-added sales ~~SG&A expense~~ was ~~15% and 16% in~~14% for both the ~~second~~third quarter of 2023 and ~~2022, respectively.~~2022.

customers. R&D expense ~~accounted for 3%~~as a percent of value-added sales decreased slightly from 3% in the ~~second~~third quarter of ~~both 2023 and 2022.~~2022 to 2% in the third quarter of 2023.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the ~~second~~third quarter of 2023, we recorded ~~a combined total of $1.5~~$1.1 million of restructuring charges primarily in our ~~Performance Materials,~~ Electronic Materials ~~and~~segment. In the third quarter of 2022, we recorded $0.5 million of restructuring charges primarily in our Precision Optics ~~segments. Refer to~~segment. See Note ED to the Consolidated Financial Statements for ~~details.~~further discussion.

Other-net was $6.2 million of expense in the ~~second~~third quarter of 2023, or a ~~marginal increase of $0.3~~$0.6 million decrease from the ~~second~~third quarter of 2022. Refer to Note DE to the Consolidated Financial Statements for details of the major components within Other-net.

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

Interest expense-net was ~~$7.6~~$7.7 million and ~~$4.7~~$5.9 million in the ~~second~~third quarter of 2023 and 2022, respectively. The increase in interest expense is primarily due to an increase in interest rates compared to the prior year period.

Income tax expense for the ~~second~~third quarter of 2023 was ~~$4.3~~$3.0 million, compared to ~~$5.1~~$4.4 million in the ~~second~~third quarter of 2022. The effective tax rate for the ~~second~~third quarter of 2023 and 2022 was ~~15.3%~~10.0% and ~~17.9%~~18.2%, respectively. The effective tax rate for 2023 was lower than the statutory tax rate primarily due to the impact of the foreign derived intangible income deduction, percentage depletion, research and development ~~credits~~ and ~~the foreign derived intangible income deduction.~~production credits. The effective tax rate for 2022 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits and the ~~foreign derived~~foreign-derived intangible income deduction. See Note F to the Consolidated Financial Statements for additional discussion.

~~Six~~Nine Months


		Six Months Ended										Nine Months Ended
		June 30,			July 1,			$		%				September 29,			September 30,			$		%
(Thousands, except per share data)	(Thousands, except per share data)	2023			2022			Change		Change			(Thousands, except per share data)	2023			2022			Change		Change
Net sales	Net sales	$	841,076		$	894,340		$	(53,264)	(6)	%		Net sales	$	1,244,144		$	1,322,531		$	(78,387)	(6)	%
Value-added sales	Value-added sales	566,819			527,919			38,900		7	%		Value-added sales	837,351			811,417			25,934		3	%
Gross margin	Gross margin	180,391			162,718			17,673		11	%		Gross margin	269,327			245,461			23,866		10	%
Gross margin as a % of value-added sales	Gross margin as a % of value-added sales	32		%	31		%						Gross margin as a % of value-added sales	32		%	30		%
SG&A expense	SG&A expense	79,247			83,708			(4,461)		(5)	%		SG&A expense	118,053			122,666			(4,613)		(4)	%
SG&A expense as a % of value-added sales	SG&A expense as a % of value-added sales	14		%	16		%						SG&A expense as a % of value-added sales	14		%	15		%
R&D expense	R&D expense	14,776			14,666			110		1	%		R&D expense	21,098			22,096			(998)		(5)	%
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		%
Restructuring expense		2,118			1,076			1,042		97	%
Restructuring (income) expense													Restructuring (income) expense	3,194			1,560			1,634		105	%
Other—net	Other—net	11,966			11,801			165		1	%		Other—net	18,178			18,575			(397)		(2)	%
Operating profit	Operating profit	72,284			51,467			20,817		40	%		Operating profit	108,804			80,564			28,240		35	%
Other non-operating (income)—net	Other non-operating (income)—net	(1,456)			(2,337)			881		(38)	%		Other non-operating (income)—net	(2,141)			(3,512)			1,371		(39)	%
Interest expense—net	Interest expense—net	15,142			8,437			6,705		79	%		Interest expense—net	22,820			14,325			8,495		59	%
Income before income taxes	Income before income taxes	58,598			45,367			13,231		29	%		Income before income taxes	88,125			69,751			18,374		26	%
Income tax expense	Income tax expense	8,928			$	8,093		835		10	%		Income tax expense	11,891			12,525			(634)		(5)	%
Net income	Net income	$	49,670		$	37,274		$	12,396	33	%		Net income	$	76,234		$	57,226		$	19,008	33	%

Diluted earnings per share	Diluted earnings per share	$	2.38		$	1.80		$	0.58	32	%		Diluted earnings per share	$	3.65		$	2.76		$	0.89	32	%

Net sales of ~~$841.1~~$1,244.1 million in the first ~~six~~nine months of 2023 decreased ~~$53.3~~$78.4 million from ~~$894.3~~$1,322.5 million in the first ~~six~~nine months of 2022. Decreases in net sales in the Electronic Materials and Precision Optics segments were partially offset by increased net sales in the Performance Materials segment. Volume decreases in the semiconductor ~~(21%~~(20%), industrial ~~(10%~~(13%) and consumer electronics ~~(34%~~(27%) end markets were partially offset by an increase in the aerospace and defense end market (19%) and incremental sales from the clad strip project of ~~$63.2~~$91.4 million when compared to the first ~~six~~nine months of 2022. Additionally, there was a ~~$3.1~~$2.4 million year over year decrease in ~~the volume of~~ raw material beryllium hydroxide sales compared to the first

~~six~~ nine months of 2022. See Note B to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper market prices unfavorably impacted net sales by $2.9 million during the first ~~six~~nine months of 2023 ~~by $6.1 million~~ compared to the same period in the prior ~~year period.~~year.

Value-added sales of ~~$566.8~~$837.4 million in the first ~~six~~nine months of 2023 increased ~~$38.9~~$25.9 million, or 7%3%, compared to the first ~~six~~nine months of 2022. ~~The~~Despite the decrease in net sales, value-added sales increased due to a shift in mix to higher non-precious metal sales versus precious metal sales commensurate with an increase ~~was driven by increased~~in value-added sales into the aerospace and defense ~~(22%~~(23%) end market as well as ~~$63.2~~$91.4 million of incremental sales from the clad strip project. These increases were slightly offset by a ~~$3.1~~$2.4 million decrease in the volume of raw material beryllium hydroxide sales in the first ~~six~~nine months of 2023 when compared to the first ~~six~~nine months of 2022 as well as lower value-added sales into the semiconductor ~~(13%~~(20%), industrial (7%) and consumer electronics ~~(34%~~(27%) end markets.

Gross margin in the first ~~half~~nine months of 2023 was ~~$180.4~~$269.3 million, ~~which was up 11%~~an increase of 10% compared to the first ~~half~~nine months of 2022. Gross margin expressed as a percentage of value-added sales increased to 32% in the first ~~six~~nine months of 2023 from ~~31%~~30% in the first ~~six~~nine months of 2022. Gross margin increased from the prior year period primarily due to $7.5 million of inventory step up amortization from the HCS-Electronic Material acquisition that was recorded during the first quarter of 2022 that did not recur in 2023. In addition, the production tax credit recorded in the first ~~half~~nine months of 2023 favorably impacted gross margin. See Note F to the Consolidated Financial Statements for further discussion.

SG&A expense was ~~$79.2~~$118.1 million in the first ~~six~~nine months of 2023, compared to ~~$83.7~~$122.7 million in the first ~~six~~nine months of 2022. The decrease in SG&A expense for the first ~~six~~nine months of 2023 was primarily driven by ~~$2.8~~$4 million of merger and acquisition costs related to the acquisition of HCS-Electronic Materials incurred in the first ~~six~~nine months of 2022 that did not recur in 2023 as well as lower selling related expenses associated with the decrease in value-added sales. Expressed as a percentage of value-added sales, SG&A expense was 14% and ~~16%~~15% in the first ~~half~~nine months of 2023 and 2022, 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 to deliver new high performing advanced materials to our customers. R&D expense accounted for 3% of value-added sales in the first ~~half~~nine months of both 2023 and 2022.

Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first ~~six~~nine months of 2023, we recorded a combined total of ~~$2.1~~$3.2 million of restructuring charges in our Electronic Materials, Precision Optics, ~~Electronic~~Performance Materials and ~~Precision Optics~~Other segments. In the first ~~six~~nine months of 2022, we recorded a combined total of ~~$1.1~~$1.6 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments. Refer to Note ED to the Consolidated Financial Statements for details.

Other-net was ~~$12.0~~$18.2 million of expense in the first ~~six~~nine months of 2023, or a ~~$0.2~~$0.4 million ~~increase~~decrease from the first ~~six~~nine months of 2022. Refer to Note DE to the Consolidated Financial Statements for details of the major components within Other-net.

Interest expense-net was ~~$15.1~~$22.8 million and ~~$8.4~~$14.3 million in the first ~~six~~nine months of 2023 and 2022, respectively. The increase in interest expense is primarily due to an increase in interest rates compared to the prior ~~year.~~year period.

Income tax expense for the first ~~half~~nine months of 2023 was ~~$8.9~~$11.9 million, compared to ~~$8.1~~$12.5 million in the ~~first half~~nine months of 2022. The Company's effective tax rate for the first ~~six~~nine months of 2023 and 2022 was ~~15.2%~~13.5% and ~~17.8%~~18.0%, respectively. The effective tax rate for ~~each period in~~ 2023 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development and production credits and the foreign derived intangible income deduction. The effective tax rate for 2022 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits and the ~~foreign derived~~foreign-derived intangible income deduction. The effective tax rate for the first nine months of 2023 included a net discrete income tax benefit of ~~$1.0~~$3.4 million, ~~and $0.4 million for the first six months of 2023 and 2022, respectively,~~ primarily related to excess tax benefits from stock-based compensation ~~awards.~~

awards, return to provision adjustments and an optimization of our foreign-derived intangible income deduction benefit. The effective tax rate for the first nine months of 2022 included a net discrete income tax benefit of $0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments.

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

A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the ~~second~~third quarter and first ~~six~~nine months of 2023 and 2022 is as follows:


		Second Quarter Ended				Six Months Ended					Third Quarter Ended				Nine Months Ended
		June 30,		July 1,		June 30,		July 1,			September 29,		September 30,		September 29,		September 30,
(Thousands)	(Thousands)	2023		2022		2023		2022		(Thousands)	2023		2022		2023		2022
Net sales	Net sales									Net sales
Performance Materials	Performance Materials	$	182,771	$	154,889	$	369,785	$	304,520	Performance Materials	$	184,642	$	169,357	$	554,427	$	473,876
Electronic Materials	Electronic Materials	190,730		260,971		419,549		531,807		Electronic Materials	192,305		230,841		611,855		762,649
Precision Optics	Precision Optics	25,050		29,435		51,742		58,013		Precision Optics	26,120		27,993		77,862		86,006

Other										Other	—		—		—		—
Total	Total	$	398,551	$	445,295	$	841,076	$	894,340	Total	$	403,067	$	428,191	$	1,244,144	$	1,322,531

Less: pass-through metal costs	Less: pass-through metal costs									Less: pass-through metal costs
Performance Materials	Performance Materials	$	17,153	$	20,923	$	36,157	$	41,436	Performance Materials	$	15,748	$	20,525	$	51,906	$	61,959
Electronic Materials	Electronic Materials	113,115		155,208		238,056		323,813		Electronic Materials	116,772		123,905		354,829		447,719
Precision Optics	Precision Optics	22		18		44		67		Precision Optics	15		16		58		83
Other	Other	—		349		—		1,105		Other	—		248		—		1,353
Total	Total	$	130,290	$	176,498	$	274,257	$	366,421	Total	$	132,535	$	144,694	$	406,793	$	511,114

Value-added sales	Value-added sales									Value-added sales
Performance Materials	Performance Materials	$	165,618	$	133,966	$	333,628	$	263,084	Performance Materials	$	168,894	$	148,832	$	502,521	$	411,917
Electronic Materials	Electronic Materials	77,615		105,763		181,493		207,994		Electronic Materials	75,533		106,936		257,026		314,930
Precision Optics	Precision Optics	25,028		29,417		51,698		57,946		Precision Optics	26,105		27,977		77,804		85,923
Other	Other	—		(349)		—		(1,105)		Other	—		(248)		—		(1,353)
Total	Total	$	268,261	$	268,797	$	566,819	$	527,919	Total	$	270,532	$	283,497	$	837,351	$	811,417

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 precious metal market 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 market 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 market 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.

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 Materials, Electronic Materials, Precision Optics, and Other. The Other reportable segment includes unallocated corporate costs.

Performance Materials

~~Second~~Third Quarter


		Second Quarter Ended								Third Quarter Ended
		June 30,		July 1,		$		%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2023		2022		Change		Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	$	182,771	$	154,889	$	27,882	18	%		Net sales	$	184,642	$	169,357	$	15,285	9	%
Value-added sales	Value-added sales	165,618		133,966		31,652		24	%		Value-added sales	168,894		148,832		20,062		13	%
EBITDA	EBITDA	44,925		27,229		17,696		65	%		EBITDA	46,366		28,866		17,500		61	%

Net sales from the Performance Materials segment of ~~$182.8~~$184.6 million in the ~~second~~third quarter of 2023 increased ~~18%~~9% compared to net sales of ~~$154.9~~$169.4 million in the ~~second~~third quarter of 2022. The increase in sales was due to incremental sales from the clad strip project of ~~$27.0~~$28.2 million and increased ~~sales~~ volumes in the aerospace and defense ~~(17%)~~ end market ~~as well as a $5.8 million~~(9%). This increase ~~in the volume of raw material beryllium hydroxide sales when compared to the second quarter of 2022. These increases were~~was partially offset by decreased volumes in ~~consumer electronics (37%~~the automotive (22%) and industrial (28%) end ~~market.~~markets.

Value-added sales of ~~$165.6~~$168.9 million in the ~~second~~third quarter of 2023 were ~~24%~~13% higher than value-added sales of ~~$134.0~~$148.8 million in the ~~second~~third quarter of 2022. The increase in value-added sales was due to the same factors driving the increase in net sales.

EBITDA for the Performance Materials segment was ~~$44.9~~$46.4 million in the ~~second~~third quarter of 2023, compared to ~~$27.2~~$28.9 million in the ~~second~~third quarter of 2022. The increase in EBITDA in the third quarter of 2023 was primarily due to the same factors driving ~~the increase~~increases in net sales, ~~as well as an increase due to~~manufacturing efficiencies and the ~~$4.6~~$1.6 million of ~~start-up~~startup costs and ~~manufacturing inefficiencies~~$4.1 million of additional resource cost and scrap for the new wide area precision strip clad facility ~~million~~ incurred in the ~~second~~third quarter of ~~2022~~the prior year that did not recur in the ~~second~~third quarter of 2023. In addition, we recorded a portion of the expected $8$10 million annual benefit from the production credit in the ~~second~~third quarter of 2023, which favorably impacted EBITDA. See Note F to the Consolidated Financial Statements for further discussion.

~~Six~~Nine Months


		Six Months Ended								Nine Months Ended
		June 30,		July 1,		$		%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2023		2022		Change		Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	$	369,785	$	304,520	$	65,265	21	%		Net sales	$	554,427	$	473,876	$	80,551	17	%
Value-added sales	Value-added sales	333,628		263,084		70,544		27	%		Value-added sales	502,521		411,917		90,604		22	%
EBITDA	EBITDA	87,695		52,021		35,674		69	%		EBITDA	134,061		80,886		53,175		66	%

Net sales from the Performance Materials segment of ~~$369.8~~$554.4 million in the first ~~six~~nine months of 2023 increased ~~21%~~17% compared to net sales of ~~$304.5~~$473.9 million in the first ~~six~~nine months of 2022. The increase in sales was primarily due to incremental sales from the clad strip project of ~~$63.2~~$91.4 million as well an increase in the aerospace and defense ~~(20%~~(17%) end market, partially offset by decreases in the industrial (8%) and consumer electronics (22%) end ~~market (33%)~~markets when compared to the first ~~six~~nine months of 2022. Additionally, there was a ~~$3.1~~$2.4 million year over year decrease in ~~the volume of~~ raw material beryllium hydroxide sales compared to the first ~~six~~nine months of 2022.

Value-added sales of ~~$333.6~~$502.5 million in the first ~~six~~nine months of 2023 were ~~27%~~22% higher than value-added sales of ~~$263.1~~$411.9 million in the first ~~six~~nine months of 2022. The increase in value-added sales was due to the same factors driving the increase in net sales.

EBITDA for the Performance Materials segment was ~~$87.7~~$134.1 million in the first ~~six~~nine months of 2023 compared to ~~$52.0~~$80.9 million in the first ~~six~~nine months of 2022. The increase in EBITDA was primarily due to the same factors driving ~~the increase~~increases in net sales, ~~as well as lower~~manufacturing efficiencies and due to the $9.8 million of startup costs and $4.1 million of additional resource cost

and scrap for the new wide area precision strip clad facility incurred in the prior year period and $2.7 million of merger and acquisition costs ~~of $2.7 million and improved efficiencies due to higher clad strip volumes~~incurred in the ~~new facility.~~prior year period that did not recur in 2023. In addition, we recorded a portion of the expected $8$10 million annual benefit from the production credit in the first ~~six~~nine months of 2023, which favorably impacted EBITDA. See Note F to the Consolidated Financial Statements for further discussion.

Electronic Materials

~~Second~~Third Quarter


		Second Quarter Ended								Third Quarter Ended
		June 30,		July 1,		$		%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2023		2022		Change		Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	$	190,730	$	260,971	$	(70,241)	(27)	%		Net sales	$	192,305	$	230,841	$	(38,536)	(17)	%
Value-added sales	Value-added sales	77,615		105,763		(28,148)		(27)	%		Value-added sales	75,533		106,936		(31,403)		(29)	%
EBITDA	EBITDA	13,394		22,337		(8,943)		(40)	%		EBITDA	10,155		16,853		(6,698)		(40)	%

Net sales from the Electronic Materials segment of ~~$190.7~~$192.3 million in the ~~second~~third quarter of 2023 ~~decreased by 27% compared to~~were 17% lower than net sales of ~~$261.0~~$230.8 million in the ~~second~~third quarter of 2022. The decrease in net sales was primarily due to lower sales volumes in the semiconductor ~~(27%~~(18%) end market.

Value-added sales of ~~$77.6~~$75.5 million in the ~~second~~third quarter of 2023 decreased ~~27%~~29% compared to value-added sales of ~~$105.8~~$106.9 million in the ~~second~~third quarter of 2022. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Electronic Materials segment was ~~$13.4~~$10.2 million in the ~~second~~third quarter of 2023 compared to ~~$22.3~~$16.9 million in the ~~second~~third quarter of 2022. The decrease in EBITDA was due to decreased sales volumes, partially offset by decreases in manufacturing and SG&A ~~expense~~expenses as a result of various targeted cost control initiatives implemented in the second quarter of 2023.

~~Six~~Nine Months


		Six Months Ended								Nine Months Ended
		June 30,		July 1,		$		%				September 29,		September 30,		$		%
(Thousands)	(Thousands)	2023		2022		Change		Change			(Thousands)	2023		2022		Change		Change
Net sales	Net sales	$	419,549	$	531,807	$	(112,258)	(21)	%		Net sales	$	611,855	$	762,649	$	(150,794)	(20)	%
Value-added sales	Value-added sales	181,493		207,994		(26,501)		(13)	%		Value-added sales	257,026		314,930		(57,904)		(18)	%
EBITDA	EBITDA	27,349		34,484		(7,135)		(21)	%		EBITDA	37,504		51,338		(13,834)		(27)	%

Net sales from the Electronic Materials segment of ~~$419.5~~$611.9 million in the first ~~six~~nine months of 2023 ~~decreased by 21% compared to~~were 20% lower than net sales of ~~$531.8~~$762.6 million in the first ~~six~~nine months of 2022. The decrease in net sales was primarily due to lower sales volumes in the semiconductor ~~(22%~~(21%) end market. Additionally, pass-through metal price ~~reductions~~fluctuations reduced net sales by ~~$3.6~~$3.5 million compared to the first ~~six~~nine months of 2022.

Value-added sales of ~~$181.5~~$257.0 million in the first ~~half~~nine months of 2023 decreased ~~13%~~18% compared to value-added sales of ~~$208.0~~$314.9 million in the first ~~half~~nine months of 2022. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Electronic Materials segment was ~~$27.3~~$37.5 million in the first ~~six~~nine months of 2023 compared to ~~$34.5~~$51.3 million in the first ~~six~~nine months of 2022. The decrease in EBITDA was due to decreased sales volumes, partially offset by decreases in manufacturing and SG&A ~~expense~~expenses as a result of various targeted cost control initiatives implemented in 2023 as well as lower merger and acquisition costs of $6.8 million incurred in the ~~second quarter of~~prior year period that did not recur in 2023.

Precision Optics

~~Second~~Third Quarter


(Thousands)	(Thousands)	Second Quarter Ended								(Thousands)	Third Quarter Ended
		June 30,		July 1,		$		%			(Thousands)		September 29,		September 30,		$		%
		2023		2022		Change		Change					2023		2022		Change		Change
Net sales	Net sales	$	25,050	$	29,435	$	(4,385)	(15)	%				$	26,120	$	27,993	$	(1,873)	(7)		%
Value-added sales	Value-added sales	25,028		29,417		(4,389)		(15)	%			Value-added sales		26,105		27,977		(1,872)		(7)		%
EBITDA	EBITDA	1,701		3,544		(1,843)		(52)	%			EBITDA		3,261		3,546		(285)		(8)		%

Net sales from the Precision Optics segment of ~~$25.1~~$26.1 million in the ~~second~~third quarter of 2023 decreased ~~15%~~7% compared to net sales of ~~$29.4~~$28.0 million in the ~~second~~third quarter of 2022. The decrease was primarily due to lower sales volumes as a result of a reduction in sales related to COVID-19 PCR testing programs as well as decreased sales in the consumer electronics end market ~~(39%~~(37%), which was primarily due to the discontinuation of a consumer electronic application. These decreases were partially offset by an increase in sales volumes in the aerospace and defense ~~(64%~~(102%) end market.

Value-added sales of ~~$25.0~~$26.1 million in the ~~second~~third quarter of 2023 decreased ~~15%~~7% compared to value-added sales of ~~$29.4~~$28.0 million in the ~~second~~third quarter of 2022. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Precision Optics segment was ~~$1.7~~$3.3 million in the ~~second~~third quarter of 2023 compared to $3.5 million in the ~~second~~third quarter of 2022. The decrease in EBITDA was driven by decreased volumes, partially offset by targeted cost control initiatives ~~continued~~implemented in ~~the second quarter of~~ 2023.

~~Six~~Nine Months


(Thousands)	(Thousands)	Six Months Ended								(Thousands)	Nine Months Ended
		June 30,		July 1,		$		%			(Thousands)		September 29,		September 30,		$		%
		2023		2022		Change		Change					2023		2022		Change		Change
Net sales	Net sales	$	51,742	$	58,013	$	(6,271)	(11)	%				$	77,862	$	86,006	$	(8,144)	(9)		%
Value-added sales	Value-added sales	51,698		57,946		(6,248)		(11)	%			Value-added sales		77,804		85,923		(8,119)		(9)		%
EBITDA	EBITDA	4,393		5,735		(1,342)		(23)	%			EBITDA		7,654		9,281		(1,627)		(18)		%

Net sales from the Precision Optics segment of ~~$51.7~~$77.9 million in the first ~~half~~nine months of 2023 decreased ~~11%~~9% compared to net sales of ~~$58.0~~$86.0 million in the first ~~half~~nine months of 2022. The decrease was primarily due to lower sales volumes as a result of a reduction in sales related to COVID-19 PCR testing programs as well as decreased sales in the consumer electronics end market ~~(39%~~(38%), which was primarily due to the discontinuation of a consumer electronic application. These decreases were partially offset by an increase in sales volumes in the aerospace and defense ~~(21%~~(44%) end market.

Value-added sales of ~~$51.7~~$77.8 million in the first ~~half~~nine months of 2023 decreased ~~11%~~9% compared to value-added sales of ~~$57.9~~$85.9 million in the first ~~half~~nine months of 2022. The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Precision Optics segment was ~~$4.4~~$7.7 million in the first ~~six~~nine months of 2023 compared to ~~$5.7~~$9.3 million in the first ~~six~~nine months of 2022. The decrease in EBITDA was driven by decreased volumes partially offset by targeted cost control initiatives implemented in ~~the first half of~~ 2023.

Other

~~Second~~Third Quarter


(Thousands)	(Thousands)	Second Quarter Ended					(Thousands)	Third Quarter Ended
		June 30,	July 1,	$	%			September 29,		September 30,		$		%
		2023	2022	Change	Change			2023		2022		Change		Change
Net sales	Net sales	—	—	—	—	%	Net sales	$	—	$	—	$	—	—	%
Value-added sales	Value-added sales	—	(349)	349	(100)	%	Value-added sales	—		(248)		248		(100)	%
EBITDA	EBITDA	(7,598)	(7,191)	(407)	6	%	EBITDA	(7,497)		(5,839)		(1,658)		28	%

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs were ~~$7.6~~$7.5 million in the ~~second~~third quarter of 2023 compared to ~~$7.2~~$5.8 million in the ~~second~~third quarter of 2022. Corporate costs ~~accounted for 3%~~increased from 2% of Company-wide value-added sales in the ~~second~~third quarter of ~~both~~2022 to 3% in the third quarter of 2023. The increase in corporate costs in the third quarter of 2023 compared to the third quarter of 2022 is primarily driven by changes in variable-based compensation and ~~2022 and remained relatively flat year over year.~~incentives.

~~Six~~Nine Months


(Thousands)	(Thousands)	Six Months Ended							(Thousands)	Nine Months Ended
		June 30,		July 1,		$	%			September 29,		September 30,		$		%
		2023		2022		Change	Change			2023		2022		Change		Change
Net sales	Net sales	$	—	$	—	—	—	%	Net sales	$	—	$	—	$	—	—	%
Value-added sales	Value-added sales	—		(1,105)		1,105	(100)	%	Value-added sales	—		(1,353)		1,353		(100)	%
EBITDA	EBITDA	(14,253)		(12,366)		(1,887)	15	%	EBITDA	(21,750)		(18,206)		(3,544)		19	%

Corporate costs were ~~$14.3~~$21.8 million in the first ~~half~~nine months of 2023 compared to ~~$12.4~~$18.2 million in the first ~~half~~nine months of 2022. Corporate costs ~~accounted for 3% and~~increased from 2% of Company-wide value-added sales in the first ~~half~~nine months of ~~2023 and~~ 2022 ~~respectively.~~to 3% in the first nine months of 2023. The increase in corporate costs in the first ~~half~~nine months of 2023 compared to the first ~~half~~nine months of 2022 is ~~reflective of investments to execute our strategic initiatives~~primarily driven by changes in variable-based compensation and ~~variable costs associated with improved financial performance.~~incentives.

FINANCIAL POSITION

Cash Flow

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


		Six Months Ended						Nine Months Ended
		June 30,		July 1,		$				September 29,		September 30,		$
(Thousands)	(Thousands)	2023		2022		Change			(Thousands)	2023		2022		Change
Net cash provided by operating activities	Net cash provided by operating activities	$	70,522	$	21,415	$	49,107		Net cash provided by operating activities	$	84,505	$	34,204	$	50,301
Net cash (used in) investing activities		(62,677)		(40,596)		(22,081)
Net cash (used in)/provided by financing activities		(3,835)		38,418		(42,253)
Net cash used in investing activities									Net cash used in investing activities	(94,160)		(56,380)		(37,780)
Net cash provided by financing activities									Net cash provided by financing activities	13,735		31,349		(17,614)
Effects of exchange rate changes	Effects of exchange rate changes	(537)		(1,524)		987			Effects of exchange rate changes	(780)		(2,953)		2,173
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	3,473	$	17,713	$	(14,240)		Net change in cash and cash equivalents	$	3,300	$	6,220	$	(2,920)

Net cash provided by operating activities totaled ~~$70.5~~$84.5 million in the first ~~six~~nine months of 2023 versus ~~$21.4~~$34.2 million in the prior-year period. ~~Working capital initiatives in the first half of 2023 drove the year~~The period over ~~year~~period increase in cash provided by operating ~~cash. The increase in operating cash~~activities from the prior year period was primarily due to ~~stronger cash collection~~increased net earnings as well as favorable changes in working capital, primarily inventory and ~~continued inventory management.~~accounts receivable, primarily due to working capital initiatives during 2023.

Net cash used in investing activities was ~~$62.7~~$94.2 million in the first ~~six~~nine months of 2023 compared to ~~$40.6~~$56.4 million in the prior-year period. The increase in cash used in investing activities is due to increased capital expenditures and mine development, as expected, to support continued business growth.

Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2023, the Company expects payments for property, plant, and equipment to be approximately ~~$100~~$105 million.

Net ~~cash used in financing activities~~ ~~totaled $3.8 million in the first six months of 2023 and compared to net~~ cash provided by financing activities totaled $13.7 million in the first nine months of ~~$38.4~~2023 and $31.3 million in the comparable prior-year period. The ~~net financing cash outflow in 2023 was~~decrease is primarily due to ~~debt repayments,~~a decrease in borrowings under our revolving credit facilities in the first nine months of 2023 of $39.6 million, compared to ~~financing used to support continued business growth~~net borrowings of $55.7 million in the same period in the prior year.

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, the current dividend program, environmental remediation projects, and strategic acquisitions for at least the next twelve months and for the foreseeable future thereafter. At ~~June 30,~~September 29, 2023, cash and cash equivalents held by our foreign operations totaled $15.8 million. We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of ~~June 30,~~September 29, 2023 and December 31, 2022 is as follows:


		June 30,		December 31,			September 29,		December 31,
(Thousands)	(Thousands)	2023		2022		(Thousands)	2023		2022
Cash and cash equivalents	Cash and cash equivalents	$	16,574	$	13,101	Cash and cash equivalents	$	16,401	$	13,101
Total outstanding debt	Total outstanding debt	440,204		431,981		Total outstanding debt	460,995		431,981
Net debt	Net debt	$	(423,630)	$	(418,880)	Net debt	$	(444,594)	$	(418,880)
Available borrowing capacity	Available borrowing capacity	$	168,904	$	185,294	Available borrowing capacity	$	150,996	$	185,294

Net debt 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, depletion and amortization, and other adjustments.

In January 2023, we amended the agreement governing our $375.0 million revolving credit facility and term loan facility (Credit Agreement).

Pursuant to the amendment, we transitioned U.S. dollar denominated borrowings from LIBOR to SOFR for both the revolving credit agreement and the term loan and increased the cap on precious metals consignment line from $600 million to $615 million.

The Company had previously amended and restated the Credit Agreement in connection with the HCS-Electronic Materials acquisition in November 2021. A $300 million delayed draw term loan facility was added to the Credit Agreement and the maturity date of the Credit Agreement was extended from 2024 to 2026. Moreover, the Credit Agreement also provides for an uncommitted incremental facility whereby, under certain conditions, the Company may be able to borrow additional term loans in an aggregate amount not to exceed $150.0 million. The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment 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, precious metal, copper and certain other assets.

The Credit Agreement allows the Company to borrow money at a premium over SOFR, following the January 2023 amendment or prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions stipulated in 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 that limit the Company to a maximum leverage ratio and a minimum interest coverage ratio. We were in compliance with all of our debt covenants as of ~~June 30,~~September 29, 2023 and December 31, 2022. Cash on hand up to ~~$25~~$25.0 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement.

In November 2021, we completed the acquisition of HCS-Electronic Materials. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new ~~$300~~$300.0 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and ~~$103~~$103.0 million of borrowings under its amended revolving credit facility. The interest rate for the term loan is based on SOFR, following the January 2023 amendment, plus a tiered rate determined by the Company's quarterly leverage ratio.

Portions of our business utilize off-balance sheet consignment arrangements allowing us to use metal owned by precious metal consignors as we manufacture product for our customers. Metal is purchased from the precious metal consignor and sold to our customer at the time of product shipment. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. In August 2022, we entered into a precious metals consignment agreement, maturing on August 31, 2025, which replaced the consignment agreements that would have matured on August 27, 2022. The available and unused capacity under the metal consignment agreements expiring in August 2025 totaled approximately ~~$293.7~~$270.2 million as of ~~June 30,~~September 29, 2023, compared to $241.9 million as of December 31, 2022. The availability is determined by Board approved levels and actual capacity.

In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We did not repurchase any shares under this program in the ~~second~~third quarter or first ~~six~~nine months of 2023. Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million.

We paid cash dividends of $2.7 million and ~~$5.3~~$7.9 million on our common stock in the ~~second~~third quarter and first ~~six~~nine months of ~~2023.~~2023, 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 CASH 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 ~~$321.3~~$344.8 million and $373.1 million as of ~~June 30,~~September 29, 2023 and December 31, 2022, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of ~~June 30,~~September 29, 2023. For additional information on our material cash obligations, refer to our 2022 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 2022 Annual Report on Form 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 global economy, including inflationary pressures, potential future recessionary conditions and the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns or 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; the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions; our success in implementing our strategic plans and the timely and successful start-up and completion 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 consignment 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; the disruptions in operations from, and other effects of, catastrophic and other extraordinary events including outbreaks of infectious diseases and the conflict between Russia and ~~Ukraine;~~Ukraine and other hostilities; realization of expected financial benefits expected from the Inflation Reduction Act of 2022; and the risk factors set forth in Part 1, Item 1A of the Company's 2022 Annual Report on Form 10-K.


Item 3.			Quantitative and Qualitative Disclosures about Market Risk

For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2022 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2022 Annual Report on Form 10-K.


Item 4.			Controls and Procedures

a)Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with participation of the Company's management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and procedures as of ~~June 30,~~September 29, 2023 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, management, including the chief executive officer and chief financial officer, concluded that disclosure controls and procedures are effective as of ~~June 30,~~September 29, 2023.

b)Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended ~~June 30,~~September 29, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II OTHER INFORMATION


Item 1.			Legal Proceedings

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

Beryllium Claims

As of ~~June 30,~~September 29, 2023, ~~our subsidiary, Materion Brush Inc., was a defendant in~~there were no pending beryllium cases. During the quarter ended September 29, 2023, one beryllium ~~case.~~case was dismissed. In Richard Miller v. Dolphin, Inc. et al., case number CV2020-005163, filed in the Superior Court of Arizona, Maricopa County, the Company iswas one of six named defendants and 100 Doe defendants. The plaintiff ~~alleges~~alleged 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~~asserted claims for negligence, strict liability – failure to warn, strict liability – design defect, and fraudulent concealment. The plaintiff ~~seeks~~sought general damages, medical expenses, loss of earnings, consequential damages, and punitive damages, and his wife ~~claims~~claimed 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. Amended scheduling orders were entered on April 8, 2022, August 4, 2022, and November 1, 2022 that likewise did not set a trial date. On March 30, 2023, the court dismissed all claims against four of the Company’s ~~co-defendants,~~codefendants, as well as the cross-claim by those ~~co-defendants~~codefendants against the Company, pursuant to a confidential settlement agreement between those ~~co-defendants~~codefendants and the plaintiffs.Following a court-ordered mediation on June 20, 2023, the Company and the other remaining defendant entered into a confidential settlement agreement with plaintiffs, pursuant to which all remaining claims in the case ~~are~~were to be dismissed with prejudice. On August 2, 2023, an order granting stipulation for dismissal with prejudice ~~subject to court approval.~~was filed by the court.

No beryllium cases were filed in the ~~second~~third quarter of 2023.

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

Other Claims

In November 2022, the parties reached a settlement for an immaterial amount. The ~~court~~Court preliminarily approved the settlement on March 30, 2023 and a final approval hearing was held on July 6, 2023. There were no objections to the settlement and the ~~court~~Court entered an order approving the final settlement on July 7, ~~2023. The final~~2023, and the settlement amount ~~approximated~~was subsequently paid out prior to the ~~amount previously reserved for related to this matter.~~end of the third quarter.


Item 2.			Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds and Issuer Purchases of Equity Securities

The following table presents information with respect to repurchases of common stock made by the Company during the three months ended ~~June 30,~~September 29, 2023.

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)
April 1 through May 5, 2023 2,369 $ 108.22 — $ 8,316,239
May 6 through June 2, 2023 9,158 101.63 — 8,316,239
June 3 through June 30, 2023 590 113.07 — 8,316,239
Total 12,117 $ 103.47 — $ 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 1 through August 4, 2023	905	$	120.67	—	$	8,316,239
August 5 through September 1, 2023	791	107.02		—	8,316,239
September 2 through September 29, 2023	342	101.98		—	8,316,239
Total	2,038	$	112.23	—	$	8,316,239


(1)			Represents shares surrendered to the Company by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.

(2)			On January 14, 2014, the Company announced that its Board of Directors had authorized the repurchase of up to $50.0 million of its common stock. During the three months ended ~~June 30,~~September 29, 2023, the Company did not repurchase any shares under this program. As of ~~June 30,~~September 29, 2023, $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 5.~~


Item 5.			Other Information

During the quarter ended ~~June 30,~~September 29, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).


Item 6.			Exhibits

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


31.1						Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*
31.2						Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*
32						Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350*
95						Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended ~~June 30,~~September 29, 2023*
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.

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: ~~August 2,~~November 1, 2023

/s/ Shelly M. Chadwick

Shelly M. Chadwick

Vice President, Finance and Chief Financial Officer

(Principal Financial and Accounting Officer)