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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 April 1, 2022
OR
 
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueMTRNNew 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 April 1, 2022: 20,511,415.



PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 First Quarter Ended
(Thousands, except per share amounts)April 1, 2022April 2, 2021
Net sales$449,045 $354,386 
Cost of sales373,754 287,590 
Gross margin75,291 66,796 
Selling, general, and administrative expense41,662 36,776 
Research and development expense7,074 6,206 
Restructuring expense (income)1,076 (378)
Other—net5,873 4,474 
Operating profit19,606 19,718 
Other non-operating income—net(1,169)(1,276)
Interest expense—net3,735 761 
Income before income taxes17,040 20,233 
Income tax expense3,021 3,466 
Net income$14,019 $16,767 
Basic earnings per share:
Net income per share of common stock$0.69 $0.82 
Diluted earnings per share:
Net income per share of common stock$0.68 $0.81 
Weighted-average number of shares of common stock outstanding:
Basic20,464 20,374 
Diluted20,724 20,628 














See notes to these consolidated financial statements.


2


Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 First Quarter Ended
 April 1,April 2,
(Thousands)20222021
Net income$14,019 $16,767 
Other comprehensive (loss) income:
Foreign currency translation adjustment(2,047)(8,857)
Derivative and hedging activity, net of tax2,270 1,245 
Pension and post-employment benefit adjustment, net of tax(240)164 
Other comprehensive loss(17)(7,448)
Comprehensive income$14,002 $9,319 





































See notes to these consolidated financial statements.


3


Materion Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
April 1,Dec. 31,
(Thousands)20222021
Assets
Current assets
Cash and cash equivalents$20,237 $14,462 
Accounts receivable, net237,712 223,553 
Inventories, net386,992 361,115 
Prepaid and other current assets27,971 28,122 
Total current assets672,912 627,252 
Deferred income taxes5,323 5,431 
Property, plant, and equipment1,149,458 1,132,223 
Less allowances for depreciation, depletion, and amortization(732,529)(723,248)
Property, plant, and equipment, net416,929 408,975 
Operating lease, right-of-use assets70,862 63,096 
Intangible assets, net152,922 156,736 
Other assets30,063 27,369 
Goodwill317,897 318,620 
Total Assets$1,666,908 $1,607,479 
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt$15,351 $15,359 
Accounts payable103,438 86,243 
Salaries and wages21,848 37,544 
Other liabilities and accrued items47,793 53,388 
Income taxes5,624 4,205 
Unearned revenue7,407 7,770 
Total current liabilities201,461 204,509 
Other long-term liabilities16,457 14,954 
Operating lease liabilities64,569 57,099 
Finance lease liabilities15,192 16,327 
Retirement and post-employment benefits32,704 33,394 
Unearned income96,971 97,962 
Long-term income taxes1,205 1,190 
Deferred income taxes27,564 27,216 
Long-term debt479,821 434,388 
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)  
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at April 1 and December 31)278,589 271,978 
Retained earnings705,255 693,756 
Common stock in treasury(217,549)(209,920)
Accumulated other comprehensive loss(40,186)(40,169)
Other equity 4,855 4,795 
Total shareholders' equity730,964 720,440 
Total Liabilities and Shareholders’ Equity$1,666,908 $1,607,479 



See the notes to these consolidated financial statements.


4


Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended
 April 1,April 2,
(Thousands)20222021
Cash flows from operating activities:
Net income$14,019 $16,767 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization13,179 8,599 
Amortization of deferred financing costs in interest expense511 182 
Stock-based compensation expense (non-cash)1,699 1,473 
Deferred income tax (benefit) expense401 382 
Changes in assets and liabilities:
Accounts receivable
(15,045)(15,697)
Inventory(28,129)(23,219)
Prepaid and other current assets(5)(2,107)
Accounts payable and accrued expenses(4,177)19,224 
Unearned revenue(343)932 
Interest and taxes payable
1,874 3,164 
Unearned income due to customer prepayments 5,890 
Other-net1,712 (140)
Net cash (used in) provided by operating activities(14,304)15,450 
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment(18,977)(31,250)
Proceeds from sale of property, plant, and equipment11 575 
Net cash used in investing activities(18,966)(30,675)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit agreement, net49,067 14,955 
Repayment of long-term debt(3,839)(377)
Principal payments under finance lease obligations(686)(675)
Cash dividends paid(2,520)(2,338)
Payments of withholding taxes for stock-based compensation awards(2,717)(2,838)
Net cash provided by financing activities39,305 8,727 
Effects of exchange rate changes(260)(446)
Net change in cash and cash equivalents5,775 (6,944)
Cash and cash equivalents at beginning of period14,462 25,878 
Cash and cash equivalents at end of period$20,237 $18,934 


See notes to these consolidated financial statements.


5


Materion Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Unaudited)
Common SharesShareholders' Equity
(Thousands, except per share amounts)Common SharesCommon Shares Held in TreasuryCommon
Stock
Retained
Earnings
Common
Stock in
Treasury
Accumulated Other
Comprehensive
Loss
Other
Equity
Total
Balance at December 31, 202120,448 (6,700)$271,978 $693,756 $(209,920)$(40,169)$4,795 $720,440 
Net income— — — 14,019 — — — 14,019 
Other comprehensive loss— — — — — (17)— (17)
Cash dividends declared ($0.12 per share)— — — (2,520)— — — (2,520)
Stock-based compensation activity95 95 6,572  (4,873)— — 1,699 
Payments of withholding taxes for stock-based compensation awards(33)(33)— — (2,717)— — (2,717)
Directors’ deferred compensation1 1 39 — (39)— 60 60 
Balance at April 1, 202220,511 (6,637)$278,589 $705,255 $(217,549)$(40,186)$4,855 $730,964 
Balance at December 31, 202020,328 (6,820)$258,642 $631,058 $(199,187)$(38,639)$3,756 $655,630 
Net income— — — 16,767 — — — 16,767 
Other comprehensive loss— — — — — (7,448)— (7,448)
Cash dividends declared ($0.115 per share)— — — (2,338)— — — (2,338)
Stock-based compensation activity127 127 6,259 (19)(4,767)— — 1,473 
Payments of withholding taxes for stock-based compensation awards(43)(43)— — (2,838)— — (2,838)
Directors’ deferred compensation2 2 39 — (53)— 104 90 
Balance at April 2, 202120,414 (6,734)$264,940 $645,468 $(206,845)$(46,087)$3,860 $661,336 

















See notes to these consolidated financial statements.


6


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 2021 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.

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

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

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, 2022. The Company has applied this guidance in accounting for the interest rate swap discussed in Note N. Any additional reference rate reform impacts will be accounted for in accordance with ASU 2020-04.

New Accounting Guidance Issued and Not Yet Adopted:
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832). ASU 2021-10 is intended to increase transparency related to governmental assistance by requiring entities to disclose the types of government assistance, the entity's accounting for government assistance, and the effect of government assistance on an entity's financial statements. This new guidance is effective for all entities for annual reporting periods beginning after December 15, 2021. The Company is in the process of evaluating the impact of the guidance on its annual disclosures.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.

Note B — Acquisition



7


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
On November 1, 2021, the Company acquired the industry-leading electronic materials business of H.C. Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $395.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. During the first quarter of 2022, acquisition-related inventory step-up expense was $7.5 million and classified in Cost of Sales and transaction and integration costs were $2.1 million and classified in Selling, General and Administrative expenses in the accompanying consolidated statements of income. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility executed in October 2021 and $103 million of borrowings under its amended revolving credit facility. The maturity date on the revolving credit facility was also extended to October 2026. The interest rate for the term loan is based on LIBOR plus a tiered credit spread that is indexed to the Company's quarterly leverage ratio. This acquired business operates within the Performance Materials and Electronic Materials segments, and the results of operations are included as of the date of acquisition. The combination of Materion and HCS-Electronic Materials enhances the Company's position as the leading supplier to the high growth semiconductor industry.

No adjustments to the preliminary purchase price allocation were made during the first quarter of 2022. The preliminary purchase price allocation for the acquisition is as follows:

(Thousands)November 1, 2021
Assets:
Cash and cash equivalents$3,685 
Accounts receivable28,352 
Inventories70,681 
Prepaid and other current assets660 
Property, plant, and equipment 44,681 
Operating lease, right-of-use assets6,120 
Intangible assets107,800 
Other long-term assets4,528 
Goodwill178,181 
Total assets acquired$444,688 
Liabilities:
Accounts payable$12,139 
Salaries and wages2,516 
Other liabilities and accrued items28 
Income taxes2,183 
Other long-term liabilities5,543 
Operating lease liabilities6,042 
Deferred income taxes20,300 
Total liabilities assumed$48,751 
Net assets acquired$395,937 

Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The Company engaged specialists to assist in the valuation of inventories, property, plant, and equipment, and intangible assets. The estimates in the purchase price allocation are based on available information and will be revised during the measurement period, not to exceed 12 months, as additional information becomes available on tax-related items, and as additional analyses are performed. During the measurement period for the acquisition, we will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date.



8


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
In determining the fair value of the amounts above, inventory is fair valued based on the comparative sales method for work in process and finished goods at the selling price less cost to dispose and remaining manufacturing effort. The remaining working capital accounts' carrying values approximate fair value. For property, plant and equipment and intangible asset values, the Company utilized various forms of the income, cost and market approaches depending on the asset being valued. The Company used a relief from royalty method under the income approach to value its trade names and the developed technology and the multi-period excess earnings method under the income approach to value customer relationships. The significant assumptions used to estimate the fair value of these intangible assets included the discount rate and certain assumptions that form the basis of forecasted future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships). Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions and are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company.

As part of the acquisition, the Company recorded approximately $178.2 million of goodwill allocated between its Electronic Materials and Performance Materials segments based on the relative fair values. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired and primarily attributable to the synergies expected to arise after the acquisition dates. The goodwill is not expected to be deductible for U.S. tax purposes.

The following table reports the intangible assets by asset category as of the closing date:
(Thousands)Value at AcquisitionUseful Life
Customer relationships$50,200 13 years
Technology35,300 13 years
Trade name22,300 15 years
Total$107,800 

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials in the first quarter of 2022 consolidated statements are $43.1 million and ($1.6) million, respectively, and include three months of the purchase accounting inventory step-up expense. Had the HCS-Electronic Materials acquisition occurred as of the beginning of fiscal 2020, the Company's sales and income (loss) before taxes would have been as follows:
(Unaudited)
Three months ended
April 2, 2021
Net Sales$385,384 
Profit income (loss) before taxes$18,997 

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the acquisition occurred on January 1, 2020. These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results. The transaction accounting adjustments and other adjustments are based on available information and assumptions that the Company’s management believes are reasonable. Such adjustments are estimates and actual experience may differ from expectations. The pro forma income (loss) before taxes includes approximately $2.9 million of additional interest expense related to committed financing to fund the acquisition and acquisition-related intangible asset amortization expense of $2.0 million as if the transaction occurred on January 1, 2020.




9


Note C — Segment Reporting

The Company changed two segment names during the first quarter of 2022: Performance Alloys and Composites became Performance Materials, and Advanced Materials became Electronic Materials. The Company believes these names better represent the markets served and the advanced next - generation product solutions provided to our customers. Other than the name changes, there were no changes in the composition or structure of the Company's reportable segments in the first quarter of 2022.

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.

Beginning with the first quarter of 2022, the Company began using earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) as the main operating income metric used by management to measure the financial performance of the Company and each segment. The Company made this change because recent acquisitions have resulted in increased purchase accounting amortization expense, which in turn has affected the comparability of results across periods and when compared to other companies. Management believes EBITDA is useful to investors as it better represents the Company's performance excluding the effect of the recent acquisition of significant intangible assets that are now being amortized. EBITDA is not a measurement of financial performance under U.S. GAAP. Although the Company uses EBITDA to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S. GAAP.



10


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 first quarter of 2022 and 2021:
(Thousands)Three months ended April 1, 2022Three months ended April 2, 2021
Net sales:
Performance Materials (1)
149,630 114,143 
Electronic Materials(1)
270,836 204,644 
Precision Optics28,579 35,599 
Other  
Net sales$449,045 $354,386 
Segment EBITDA:
Performance Materials24,792 16,792 
Electronic Materials12,148 10,930 
Precision Optics2,191 7,471 
Other(5,177)(5,600)
Total Segment EBITDA33,954 29,593 
Income tax expense3,021 3,466 
Interest expense - net3,735 761 
Depreciation, depletion and amortization13,179 8,599 
Net income14,019 16,767 
(1) Excludes inter-segment sales of $5.5 million for the first quarter of 2022 and $2.7 million for the first quarter of 2021 for Electronic Materials and $0.3 million for the first quarter of 2022 for Performance Materials. Inter-segment sales are eliminated in consolidation.




11


The following table disaggregates revenue for each segment by end market for the first quarter of 2022 and 2021:
 (Thousands)Performance MaterialsElectronic MaterialsPrecision OpticsOtherTotal
First Quarter 2022
End Market
Semiconductor$1,800 $214,922 $1,327 $ $218,049 
Industrial40,819 15,866 8,434  65,119 
Aerospace and defense23,684 2,614 5,145  31,443 
Consumer electronics13,002 325 5,312  18,639 
Automotive22,235 1,657 2,464  26,356 
Energy10,099 29,119   39,218 
Telecom and data center16,081 45   16,126 
Other21,910 6,288 5,897  34,095 
Total$149,630 $270,836 $28,579 $ $449,045 
First Quarter 2021
End Market
Semiconductor$997 $155,061 $471 $ $156,529 
Industrial24,030 12,590 7,375  43,995 
Aerospace and defense21,842 1,398 6,576  29,816 
Consumer electronics10,044 165 9,460  19,669 
Automotive23,507 1,669 2,193  27,369 
Energy4,137 27,190   31,327 
Telecom and data center11,343 70   11,413 
Other18,243 6,501 9,524  34,268 
Total$114,143 $204,644 $35,599 $ $354,386 


Note D — Revenue Recognition

Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue in an amount that reflects the consideration to which it expects to be entitled upon satisfaction of a performance obligation by transferring control over a product to the customer. Control over 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 April 1, 2022. 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 April 1, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $76.5 million.



12


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)April 1, 2022December 31, 2021$ change% change
Accounts receivable, trade
$230,805 $213,584 $17,221 8 %
Unbilled receivables
6,445 7,961 (1,516)(19)%
Unearned revenue
7,407 7,770 (363)(5)%
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 first quarter of 2022.

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 $4.5 million of the December 31, 2021 unearned amounts as revenue during the first three months of 2022.

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

Note E — Other-net

Other-net for the first quarter of 2022 and 2021 is summarized as follows: 
 First Quarter Ended
 April 1,April 2,
(Thousands)20222021
Amortization of intangible assets$3,131 $1,173 
Metal consignment fees3,011 $2,150 
Foreign currency (gain) loss(333)1,249 
Net (gain) loss on disposal of fixed assets(11)(388)
Other items75 290 
Total$5,873 $4,474 
Note F — Income Taxes

The Company's effective tax rate for the first quarter of 2022 and 2021 was 17.7% and 17.1%, respectively. The effective tax rate for the first quarter of 2022 was lower than the statutory tax rate primarily due to the impact of percentage depletion and research and development credits. The effective tax rate for the first three months of 2022 included a net discrete income tax benefit of $0.1 million, primarily related to excess tax benefits from stock-based compensation awards. The effective tax rate for the first quarter of 2021 included a net discrete income tax benefit of $0.3 million, primarily related to excess tax benefits from stock-based compensation awards.




13


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note G — Earnings Per Share (EPS)

The following table sets forth the computation of basic and diluted EPS:
First Quarter Ended
April 1,April 2,
(Thousands, except per share amounts)20222021
Numerator for basic and diluted EPS:
Net income (loss)$14,019 $16,767 
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding20,464 20,374 
Effect of dilutive securities:
Stock appreciation rights97 72 
Restricted stock units106 108 
Performance-based restricted stock units57 74 
Diluted potential common shares260 254 
Denominator for diluted EPS:
Adjusted weighted-average shares outstanding20,724 20,628 
Basic EPS$0.69 $0.82 
Diluted EPS$0.68 $0.81 
Adjusted weighted-average shares outstanding - diluted exclude securities totaling 117,390 and 63,627 for the quarters ended April 1, 2022 and April 2, 2021, respectively. These securities are primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices greater than the average market price of the Company's common shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.


Note H — Inventories

Inventories on the Consolidated Balance Sheets are summarized as follows:
April 1,December 31,
(Thousands)20222021
Raw materials and supplies$106,625 $93,518 
Work in process228,194 221,638 
Finished goods52,173 45,959 
Inventories, net$386,992 $361,115 

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 price movements and to reduce its working capital investment. The notional value of off-balance sheet precious metals and copper was $485.5 million and $480.2 million as of April 1, 2022 and December 31, 2021, respectively.



14


Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note I — Customer Prepayments

The Company had previously 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 and procure the equipment necessary to supply the customer with the desired product. The Company will own, operate and maintain the equipment in order to produce and provide product to the customer.

Revenue will be recognized when the Company receives and fulfills purchase orders, including shipment of the commercial product to the customer as the product delivery is considered the fulfillment of the performance obligation. To date there have been no purchase orders received from the customer for the commercial product out of these assets. Accordingly, as of April 1, 2022 and December 31, 2021, $72.6 million of prepayments are classified as Unearned income in the Consolidated Balance Sheet.

During the second quarter of 2022, the Company entered into an investment agreement amendment with the customer to procure additional equipment to manufacture product for the customer. No prepayments under this amendment were received as of April 1, 2022. As of April 28, 2022 the Company has received approximately $4 million in prepayments.

Note J — Pensions and Other Post-employment Benefits

The following is a summary of the net periodic benefit cost for the first quarter of 2022 and 2021 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 BenefitsOther Benefits
 First Quarter EndedFirst Quarter Ended
April 1,April 2,April 1,April 2,
(Thousands)2022202120222021
Components of net periodic benefit (income) cost
Service cost$318 $438 $22 $20 
Interest cost1,223 1,048 39 29 
Expected return on plan assets(2,400)(2,474)  
Amortization of prior service cost (benefit)(20)(21)(374)(374)
Amortization of net loss (gain)430 577 (68)(69)
Total net benefit (income) cost$(449)$(432)$(381)$(394)
The Company did not make any contributions to its defined benefit plan in the first quarter of 2022 or 2021.
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.


15

Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Note K — Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the first quarter of 2022 and 2021 are as follows:
Gains and Losses on Cash Flow Hedges
(Thousands)Foreign CurrencyInterest RatePrecious MetalsCopperTotalPension and Post-Employment BenefitsForeign Currency TranslationTotal
Balance at December 31, 2021$2,348 $ $72 $ $2,420 $(39,702)$(2,887)$(40,169)
Other comprehensive income (loss) before reclassifications153 3,112 (520) 2,745  (2,047)698 
Amounts reclassified from accumulated other comprehensive income (loss)(19)115 107  203 (1,000) (797)
Net current period other comprehensive (loss) income before tax134 3,227 (413) 2,948 (1,000)(2,047)(99)
Deferred taxes31 742 (95) 678 (760) (82)
Net current period other comprehensive (loss) income after tax103 2,485 (318) 2,270 (240)(2,047)(17)
Balance at April 1, 2022$2,451 $2,485 $(246)$ $4,690 $(39,942)$(4,934)$(40,186)
Balance at December 31, 2020$519 $ $(170)$468 $817 $(43,473)$4,017 $(38,639)
Other comprehensive (loss) income before reclassifications1,085  741 1,291 3,117  (8,857)(5,740)
Amounts reclassified from accumulated other comprehensive income (loss)140  (104)(1,534)(1,498)157  (1,341)
Net current period other comprehensive (loss) income before tax1,225 637 (