UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
____________________________________________ 
FORM 10-Q
(Mark One)

	
		
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended June 30, 2017

	
		
¨	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
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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   ¨ (Do not check if a smaller reporting company)	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, 2017: 20,038,672 .

PART I FINANCIAL INFORMATION
MATERION CORPORATION AND SUBSIDIARIES

	
		
Item 1.	Financial Statements	
The consolidated financial statements of Materion Corporation and its subsidiaries for the second quarter and six months ended June 30, 2017 are as follows:

			
 	Consolidated Statements of Income -	2	
 	Second quarter and six months ended June 30, 2017 and July 1, 2016

 	Consolidated Statements of Comprehensive Income -	3	
 	Second quarter and six months ended June 30, 2017 and July 1, 2016	 	
 	 	 	
 	Consolidated Balance Sheets -
	4
	
 	June 30, 2017 and December 31, 2016	 	
 	 	 	
 	Consolidated Statements of Cash Flows -	5	
 	Six months ended June 30, 2017 and July 1, 2016	 	

1

Materion Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)

	
																	
 	 	Second Quarter Ended	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	June 30,	 	July 1,	
(Thousands, except per share amounts)	 	2017	 	2016	 	2017	 	2016	
Net sales	 	$	295,842		 	$	249,776		 	$	536,511		 	$	485,287		
Cost of sales	 	241,285		 	204,470		 	438,958		 	396,624		
Gross margin	 	54,557		 	45,306		 	97,553		 	88,663		
Selling, general, and administrative expense	 	38,075		 	32,437		 	71,703		 	62,924		
Research and development expense	 	3,544		 	3,171		 	6,674		 	6,623		
Other—net	 	3,204		 	3,921		 	6,022		 	5,807		
Operating profit	 	9,734		 	5,777		 	13,154		 	13,309		
Interest expense—net	 	695		 	512		 	1,188		 	927		
Income before income taxes	 	9,039		 	5,265		 	11,966		 	12,382		
Income tax (benefit) expense	 	1,726		 	(284	)	 	1,603		 	1,465		
Net income	 	$	7,313		 	$	5,549		 	$	10,363		 	$	10,917		
Basic earnings per share:	 	 	 	 	 	 	 	 	
Net income per share of common stock	 	$	0.37		 	$	0.28		 	$	0.52		 	$	0.55		
Diluted earnings per share:	 	 	 	 	 	 	 	 	
Net income per share of common stock	 	$	0.36		 	$	0.27		 	$	0.51		 	$	0.54		
Cash dividends per share	 	$	0.100		 	$	0.095		 	$	0.195		 	$	0.185		
Weighted-average number of shares of common stock outstanding:	 	 	 	 	 	 	 	 	
Basic	 	20,012		 	20,015		 	19,991		 	20,016		
Diluted	 	20,347		 	20,214		 	20,348		 	20,220		

The accompanying notes are an integral part of the consolidated financial statements.

2

Materion Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

	
																	
 	 	Second Quarter Ended	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	June 30,	 	July 1,	
(Thousands)	 	2017	 	2016	 	2017	 	2016	
Net income	 	$	7,313		 	$	5,549		 	$	10,363		 	$	10,917		
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Foreign currency translation adjustment	 	275		 	1,167		 	1,378		 	2,451		
Derivative and hedging activity, net of tax	 	(174	)	 	302		 	(635	)	 	(621	)	
Pension and post-employment benefit adjustment, net of tax	 	759		 	675		 	1,516		 	2,250		
Other comprehensive income	 	860		 	2,144		 	2,259		 	4,080		
Comprehensive income	 	$	8,173		 	$	7,693		 	$	12,622		 	$	14,997		

The accompanying notes are an integral part of the consolidated financial statements.

3

Materion Corporation and Subsidiaries
Consolidated Balance Sheets

									
 	 	(Unaudited)	 	 	
 	 	June 30,	 	Dec. 31,	
(Thousands)	 	2017	 	2016	
Assets	 	 	 	 	
Current assets	 	 	 	 	
Cash and cash equivalents	 	$	18,497		 	$	31,464		
Accounts receivable	 	133,674		 	100,817		
Inventories	 	215,987		 	200,865		
Prepaid and other current assets	 	22,162		 	12,138		
Total current assets	 	390,320		 	345,284		
Long-term deferred income taxes	 	40,543		 	39,409		
Property, plant, and equipment	 	872,618		 	861,267		
Less allowances for depreciation, depletion, and amortization	 	(622,351	)	 	(608,636	)	
Property, plant, and equipment—net	 	250,267		 	252,631		
Intangible assets	 	12,074		 	11,074		
Other assets	 	6,183		 	5,950		
Goodwill	 	90,035		 	86,950		
Total Assets	 	$	789,422		 	$	741,298		
Liabilities and Shareholders’ Equity	 	 	 	 	
Current liabilities	 	 	 	 	
Short-term debt	 	$	3,140		 	$	733		
Accounts payable	 	46,064		 	32,533		
Salaries and wages	 	28,541		 	29,885		
Other liabilities and accrued items	 	25,878		 	21,340		
Income taxes	 	3,195		 	4,781		
Unearned revenue	 	2,797		 	1,105		
Total current liabilities	 	109,615		 	90,377		
Other long-term liabilities	 	17,700		 	17,979		
Retirement and post-employment benefits	 	94,549		 	91,505		
Unearned income	 	39,076		 	41,369		
Long-term income taxes	 	1,994		 	2,100		
Deferred income taxes	 	277		 	274		
Long-term debt	 	23,254		 	3,605		
Shareholders’ equity	 	 	 	 	
Serial preferred stock	 	—		 	—		
Common stock	 	218,902		 	212,702		
Retained earnings	 	524,367		 	517,903		
Common stock in treasury	 	(160,785	)	 	(154,399	)	
Accumulated other comprehensive loss	 	(83,922	)	 	(86,181	)	
Other equity transactions	 	4,395		 	4,064		
Total shareholders' equity	 	502,957		 	494,089		
Total Liabilities and Shareholders’ Equity	 	$	789,422		 	$	741,298		
The accompanying notes are an integral part of the consolidated financial statements.

4

Materion Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)  

									
 	 	Six Months Ended	
 	 	June 30,	 	July 1,	
(Thousands)	 	2017	 	2016	
Cash flows from operating activities:	 	 	 	 	
Net income	 	$	10,363		 	$	10,917		
Adjustments to reconcile net income to net cash provided from (used in) operating activities:	 	 	 	 	
Depreciation, depletion, and amortization	 	20,725		 	23,497		
Amortization of deferred financing costs in interest expense	 	440		 	281		
Stock-based compensation expense (non-cash)	 	3,507		 	1,919		
(Gain) loss on sale of property, plant, and equipment	 	147		 	(695	)	
Deferred income tax expense (benefit)	 	658		 	(1,489	)	
Changes in assets and liabilities net of acquired assets and liabilities:	 	 	 		
Decrease (increase) in accounts receivable	 	(30,882	)	 	(13,013	)	
Decrease (increase) in inventory	 	(6,498	)	 	1,153		
Decrease (increase) in prepaid and other current assets	 	(9,267	)	 	(782	)	
Increase (decrease) in accounts payable and accrued expenses	 	15,519		 	(7,871	)	
Increase (decrease) in unearned revenue	 	1,685		 	(743	)	
Increase (decrease) in interest and taxes payable	 	(1,115	)	 	1,310		
Increase (decrease) in long-term liabilities	 	(3,891	)	 	(6,221	)	
Other-net	 	(1,088	)	 	1,598		
Net cash provided by operating activities	 	303		 	9,861		
Cash flows from investing activities:	 	 	 	 	
Payments for purchase of property, plant, and equipment	 	(11,252	)	 	(14,326	)	
Payments for mine development	 	(509	)	 	(7,806	)	
Payments for acquisition	 	(16,504	)	 	—		
Proceeds from sale of property, plant, and equipment	 	27		 	827		
Net cash (used in) investing activities	 	(28,238	)	 	(21,305	)	
Cash flows from financing activities:	 	 	 	 	
Proceeds from issuance of short-term debt, net	 	2,387		 	5,805		
Proceeds from issuance of long-term debt	 	45,000		 	10,000		
Repayment of long-term debt	 	(25,362	)	 	(399	)	
Principal payments under capital lease obligations	 	(383	)	 	(425	)	
Cash dividends paid	 	(3,899	)	 	(3,704	)	
Deferred financing costs	 	(300	)	 	—		
Common shares withheld for taxes	 	(2,302	)	 	(827	)	
Repurchase of common stock	 	(1,086	)	 	(2,663	)	
Net cash provided by financing activities	 	14,055		 	7,787		
Effects of exchange rate changes	 	913		 	406		
Net change in cash and cash equivalents	 	(12,967	)	 	(3,251	)	
Cash and cash equivalents at beginning of period	 	31,464		 	24,236		
Cash and cash equivalents at end of period	 	$	18,497		 	$	20,985		

The accompanying notes are an integral part of the consolidated financial statements.

5

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

Note A — Accounting Policies

(Dollars in thousands)
Basis of Presentation: In management’s opinion, the accompanying consolidated financial statements of Materion Corporation and its subsidiaries (referred to herein as the Company, our, we, or us) contain all of the adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods reported. All adjustments were of a normal and recurring nature. Certain amounts in prior years have been reclassified to conform to the 2017 consolidated financial statement presentation.
These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2016 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
The amounts reflected in Note B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.
New Pronouncements Adopted: In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , which impacts several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement, and the tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. An entity will also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the reporting period. Excess tax benefits will be classified, along with other income tax cash flows, as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted the new guidance during the first quarter of 2017. An impact of adoption was the recognition of excess tax benefits in Income tax expense rather than Shareholders' equity in 2017. As a result, the Company recognized discrete tax benefits of $82 and $374 in Income tax (benefit) expense during the second quarter and first six months of 2017, respectively. The cash flow classification requirements of ASU 2016-09 were applied retrospectively. As a result, for the six months ended July 1, 2016, cash flows from operating activities increased by $827 with a corresponding decrease to cash flows from financing activities. None of the other provisions in this ASU had a material effect on the Company's consolidated financial statements.
New Pronouncements Issued: In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments also allow only the service cost component to be eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The amendments should be applied retrospectively for the presentation of service cost and other components of net benefit cost on the income statement and prospectively for the capitalization of service cost and net periodic postretirement benefits in assets. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.

6

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

In February 2016, the FASB issued ASU 2016-02, Leases , which eliminates the off-balance-sheet accounting for leases. The new guidance will require lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The ASU, which is required to be applied on a modified retrospective basis, will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which supersedes previous revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Companies will need to use more judgment and estimates than under the guidance currently in effect, including estimating the amount of variable revenue to recognize over each identified performance obligation. Additional disclosures will be required to help users of financial statements understand the nature, amount, and timing of revenue and cash flows arising from contracts. This ASU is effective beginning in fiscal year 2018 and can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. To evaluate the impact of adopting this new guidance on the consolidated financial statements, we established a cross-functional implementation team to assess our revenue streams against the requirements of this ASU. In addition, we are in the process of identifying and implementing changes to our processes and controls to meet the standard's updated reporting and disclosure requirements. The Company plans to adopt the standard as of the first quarter of 2018 using the modified retrospective approach and will record a cumulative adjustment to equity for open contracts as of January 1, 2018. The Company continues to update our assessment of the impact of the standard and related updates to its consolidated financial statements, and will disclose material impacts, if any.
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 — Acquisitions

On February 28, 2017, the Company acquired the target materials business of the Heraeus Group (HTB), of Hanau, Germany, for $16.5 million . This business manufactures precious and non-precious metal target materials for the architectural and automotive glass, electronic display, photovoltaic and semiconductor markets at facilities in Germany, Taiwan, and the United States. This business will operate within the Advanced Materials segment, and the results of operations are included as of the date of acquisition.

7

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

The Company will make adjustments to the purchase price allocation prior to completion of the measurement period, as necessary. Only items identified as of the acquisition date will be considered for subsequent adjustment. The purchase price allocation for the acquisition is as follows:

				
(Thousands)	Amount	
Assets:	 	
Inventories	$	7,140		
Prepaid and other current assets	902		
Long-term deferred income taxes	1,450		
Property, plant, and equipment	7,637		
Intangible assets	3,236		
Goodwill	2,891		
Total assets acquired	$	23,256		
 	 	
Liabilities:	 	
Other liabilities and accrued items	$	1,030		
Other long-term liabilities	430		
Retirement and post-employment benefits	5,292		
Total liabilities assumed	$	6,752		
 	 	
Total purchase price	$	16,504		

As part of the acquisition, the Company recorded approximately $2.9 million of goodwill. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired. Also, the Company acquired approximately $3.2 million of other intangible assets, which will be amortized using the straight-line method over an average life of about ten years . The following table reports the intangible assets by asset category and accumulated amortization from the closing date through June 30, 2017:

	
											
(Thousands)	 	Value at Acquisition	 	Accumulated Amortization	 	Useful Life	
Customer relationships	 	$	1,861		 	$	(41	)	 	15 years	
Technology	 	1,375		 	(154	)	 	3 years	
Total	 	$	3,236		 	$	(195	)	 	 	

Note C — Segment Reporting
 
The Company has the following operating segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance.
Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, beryllia ceramics, and bulk metallic glass materials.
Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.

8

Precision Coatings produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.

	
																					
(Thousands)	 	Performance
Alloys and
Composites	 	Advanced Materials	 	Precision Coatings	 	Other	 	Total	
Second Quarter 2017	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	108,541		 	$	157,044		 	$	30,257		 	$	—		 	$	295,842		
Intersegment sales  	 	4		 	13,247		 	—		 	—		 	13,251		
Value-added sales	 	92,686		 	62,041		 	22,613		 	(1,241	)	 	176,099		
Operating profit (loss)	 	5,548		 	8,670		 	2,314		 	(6,798	)	 	9,734		
Second Quarter 2016	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	97,696		 	$	113,557		 	$	38,523		 	$	—		 	$	249,776		
Intersegment sales	 	117		 	17,429		 	—		 	—		 	17,546		
Value-added sales	 	83,350		 	46,993		 	25,111		 	(1,520	)	 	153,934		
Operating profit (loss)	 	234		 	7,320		 	2,272		 	(4,049	)	 	5,777		
 	 	 	 	 	 	 	 	 	 	 	
First Six Months 2017	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	201,094		 	$	271,780		 	$	63,637		 	$	—		 	$	536,511		
Intersegment sales  	 	59		 	29,694		 	—		 	—		 	29,753		
Value-added sales	 	171,897		 	109,329		 	45,914		 	(2,060	)	 	325,080		
Operating profit (loss)	 	5,737		 	15,117		 	4,532		 	(12,232	)	 	13,154		
First Six Months 2016	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	188,325		 	$	221,677		 	$	75,285		 	$	—		 	$	485,287		
Intersegment sales  	 	179		 	32,605		 	—		 	—		 	32,784		
Value-added sales	 	161,552		 	89,059		 	49,745		 	(2,564	)	 	297,792		
Operating profit (loss)	 	1,746		 	12,503		 	6,371		 	(7,311	)	 	13,309		

Intersegment sales are eliminated in consolidation.

Note D — Other-net
Other-net expense for the second quarter and first six months of 2017 and 2016 is summarized as follows:  

																	
 	 	Second Quarter Ended	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	June 30,	 	July 1,	
(Thousands)	 	2017	 	2016	 	2017	 	2016	
Foreign currency exchange/translation loss (gain)	 	$	(336	)	 	$	650		 	$	(593	)	 	$	641		
Amortization of intangible assets	 	1,232		 	1,148		 	2,277		 	2,296		
Metal consignment fees	 	2,062		 	1,653		 	3,747		 	3,186		
Net loss (gain) on disposal of fixed assets	 	119		 	25		 	147		 	(695	)	
Other items	 	127		 	445		 	444		 	379		
Total	 	$	3,204		 	$	3,921		 	$	6,022		 	$	5,807		

9

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

Note E — Restructuring
In the first six months of 2017, the Company took cost reduction measures in order to align corporate costs with lower business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. Costs associated with the plan included severance associated with approximately five employees and other related costs.
In 2016, the Company initiated a plan to close the Fukuya, Japan service center, which is a part of the Performance Alloys and Composites segment. Costs associated with the plan included severance associated with approximately twelve employees and related facility exit costs.
These costs are presented in the Consolidated Statements of Income as follows: 

																	
 	 	Second Quarter Ended	 	Six Months Ended	
(Thousands)	 	June 30, 2017	 	July 1, 2016	 	June 30, 2017	 	July 1, 2016	
Cost of sales	 	$	117		 	$	—		 	$	117		 	$	—		
Selling, general, and administrative (SG&A) expense	 	578		 	—		 	1,132		 	—		
Total	 	$	695		 	$	—		 	$	1,249		 	$	—		
Remaining severance payments related to this initiative of $0.3 million are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company does not expect to incur additional costs related to these initiatives.

Note F — Income Taxes
The Company recorded income tax expense of $1.7 million in the second quarter of 2017 , an effective tax rate of 19.1% against income before income taxes and an income tax benefit of $0.3 million in the second quarter of 2016 , with a negative effective tax rate of 5.4% against income before income taxes.
In the first six months of 2017, income tax expense of $1.6 million was calculated using an effective tax rate of 13.4% , while income tax expense of $1.5 million in the first six months of 2016 was calculated using an effective tax rate of 11.8% .
The Company recorded discrete benefits of $0.1 million and $0.8 million , respectively, in the second quarter and first six months of 2017. Of these amounts, $0.4 million in the first six months of 2017 related to officer compensation which was previously considered non-deductible and $0.1 million in the second quarter and $0.4 million in the first six months of 2017 related to the adoption of ASU 2016-09, Improvements to Employee Share-based Payment Accounting.
In the second quarter of 2016, the Company recorded a discrete tax benefit of $0.9 million , resulting from international tax planning initiatives. For the first six months of 2016, discrete items amounted to a net benefit of $0.8 million .
In addition to the discrete benefits listed above, the difference between the statutory and effective rates in the second quarter and first six months of both years was primarily due to the impact of percentage depletion, the foreign rate differential, the research and development credit, and other items.

10

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

Note G — Earnings Per Share
The following table sets forth the computation of basic and diluted EPS:

																	
 	 	Second Quarter Ended	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	June 30,	 	July 1,	
(Thousands, except per share amounts)	 	2017	 	2016	 	2017	 	2016	
Numerator for basic and diluted EPS:	 	 	 	 	 	 	 	 	
Net income	 	$	7,313		 	$	5,549		 	$	10,363		 	$	10,917		
Denominator:	 	 	 	 	 	 	 	 	
Denominator for basic EPS:	 	 	 	 	 	 	 	 	
Weighted-average shares outstanding	 	20,012		 	20,015		 	19,991		 	20,016		
Effect of dilutive securities:	 	 	 	 	 	 	 	 	
Stock appreciation rights	 	125		 	63		 	152		 	63		
Restricted stock units	 	102		 	75		 	102		 	90		
Performance-based restricted stock units	 	108		 	61		 	103		 	51		
Diluted potential common shares	 	335		 	199		 	357		 	204		
Denominator for diluted EPS:	 		 		 	 	 	 	
Adjusted weighted-average shares outstanding	 	20,347		 	20,214		 	20,348		 	20,220		
Basic EPS	 	$	0.37		 	$	0.28		 	$	0.52		 	$	0.55		
Diluted EPS	 	$	0.36		 	$	0.27		 	$	0.51		 	$	0.54		

Stock appreciation rights (SARs) totaling 31,835 and 1,018,778 for the quarters ended June 30, 2017 and July 1, 2016 , respectively, and 67,761 and 1,018,778 for the six months ended June 30, 2017 and July 1, 2016, respectively, were excluded from the dilution calculation as their effect would have been anti-dilutive.

Note H — Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:

									
 	 	June 30,	 	Dec. 31,	
(Thousands)	 	2017	 	2016	
Raw materials and supplies	 	$	41,222		 	$	36,233		
Work in process	 	178,063		 	169,327		
Finished goods	 	39,858		 	38,147		
Subtotal	 	$	259,143		 	$	243,707		
Less: LIFO reserve balance	 	43,156		 	42,842		
Inventories	 	$	215,987		 	$	200,865		
The liquidation of last in, first out (LIFO) inventory layers increased cost of sales in both the second quarter and first six months of 2017 by $0.2 million . In the second quarter and first six months of 2016, cost of sales was reduced by $0.5 million and $3.2 million , respectively.

Note I — Pensions and Other Post-employment Benefits
The following is a summary of the net periodic benefit cost for the second quarter and first six months of 2017 and 2016 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.

11

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

	
																	
 		Pension Benefits		Other Benefits	
 		Second Quarter Ended		Second Quarter Ended	
		June 30,		July 1,		June 30,		July 1,	
(Thousands)		2017		2016		2017		2016	
Components of net periodic benefit cost									
Service cost		$	2,070			$	1,946			$	23			$	25		
Interest cost		2,370			2,595			99			141		
Expected return on plan assets		(3,671	)		(3,488	)		—			—		
Amortization of prior service benefit		(73	)		(115	)		(374	)		(374	)	
Amortization of net loss		1,611			1,430			—			—		
Net periodic benefit cost (benefit)		$	2,307			$	2,368			$	(252	)		$	(208	)	
 	 	 	 	 	 	 	 	 	
 	 	Pension Benefits	 	Other Benefits	
 	 	Six Months Ended	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	June 30,	 	July 1,	
(Thousands)	 	2017	 	2016	 	2017	 	2016	
Components of net periodic benefit cost	 	 	 	 	 	 	 	 	
Service cost	 	$	4,082		 	$	3,891		 	$	46		 	$	51		
Interest cost	 	4,726		 	5,190		 	198		 	282		
Expected return on plan assets	 	(7,329	)	 	(6,976	)	 	—		 	—		
Amortization of prior service benefit	 	(194	)	 	(230	)	 	(748	)	 	(748	)	
Amortization of net loss	 	3,198		 	2,861		 	—		 	—		
Net periodic benefit cost (benefit)	 	$	4,483		 	$	4,736		 	$	(504	)	 	$	(415	)	
The Company made contributions to the domestic defined benefit pension plan of $4.0 million and $8.0 million in the first six months of 2017 and 2016 , respectively.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates for each projected benefit payment in the calculation. Historically, the Company used a weighted-average approach to determine the service and interest cost components. The change is being accounted for as a change in estimate and, accordingly, is being applied prospectively. The reduction in service and interest costs for 2017 associated with this change approximated $0.2 million and $0.5 million during the second quarter and first six months of 2017, respectively, and is expected to total approximately $1.0 million .

Note J — Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the second quarter and first six months of 2017 and 2016 are as follows:

																									
 	 	Gains and Losses on Cash Flow Hedges	 	 	 	 	 	 	
(Thousands)	 	Foreign Currency	 	Precious Metals	 	Total	 	Pension and Post-Employment Benefits	 	Foreign Currency Translation	 	Total	
Balance at March 31, 2017		$	1,476			$	(100	)		$	1,376			$	(81,601	)		$	(4,557	)		$	(84,782	)	
Other comprehensive income (loss) before reclassifications		(629	)		393			(236	)		—			275			39		
Amounts reclassified from accumulated other comprehensive income		47			(88	)		(41	)		1,156			—			1,115		

12

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

	
																									
 	 	Gains and Losses on Cash Flow Hedges	 	 	 	 	 	 	
(Thousands)	 	Foreign Currency	 	Precious Metals	 	Total	 	Pension and Post-Employment Benefits	 	Foreign Currency Translation	 	Total	
Net current period other comprehensive income (loss) before tax		(582	)		305			(277	)		1,156			275			1,154		
Deferred taxes on current period activity		(215	)		112			(103	)		397			—			294		
Net current period other comprehensive income (loss) after tax		(367	)		193			(174	)		759			275			860		
Balance at June 30, 2017		$	1,109			$	93			$	1,202			$	(80,842	)		$	(4,282	)		$	(83,922	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at April 1, 2016	 	$	656		 	$	—		 	$	656		 	$	(75,221	)	 	$	(4,204	)	 	$	(78,769	)	
Other comprehensive income (loss) before reclassifications	 	98		 	—		 	98		 	—		 	1,167		 	1,265		
Amounts reclassified from accumulated other comprehensive income	 	382		 	—		 	382		 	1,016		 	—		 	1,398		
Net current period other comprehensive income (loss) before tax	 	480		 	—		 	480		 	1,016		 	1,167		 	2,663		
Deferred taxes on current period activity	 	178		 	—		 	178		 	341		 	—		 	519		
Net current period other comprehensive income (loss) after tax	 	302		 	—		 	302		 	675		 	1,167		 	2,144		
Balance at July 1, 2016	 	$	958		 	$	—		 	$	958		 	$	(74,546	)	 	$	(3,037	)	 	$	(76,625	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2016		$	1,837			$	—			$	1,837			$	(82,358	)		$	(5,660	)		$	(86,181	)	
Other comprehensive income (loss) before reclassifications		(881	)		235			(646	)		—			1,378			732		
Amounts reclassified from accumulated other comprehensive income		(214	)		(88	)		(302	)		2,309			—			2,007		
Net current period other comprehensive income (loss) before tax		(1,095	)		147			(948	)		2,309			1,378			2,739		
Deferred taxes on current period activity		(367	)		54			(313	)		793			—			480		
Net current period other comprehensive income (loss) after tax		(728	)		93			(635	)		1,516			1,378			2,259		
Balance at June 30, 2017		$	1,109			$	93			$	1,202			$	(80,842	)		$	(4,282	)		$	(83,922	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2015	 	$	1,579		 	$	—		 	$	1,579		 	$	(76,796	)	 	$	(5,488	)	 	$	(80,705	)	
Other comprehensive income (loss) before reclassifications	 	(1,445	)	 	—		 	(1,445	)	 	—		 	2,451		 	1,006		
Amounts reclassified from accumulated other comprehensive income	 	457		 	—		 	457		 	2,030		 	—		 	2,487		
Net current period other comprehensive income (loss) before tax	 	(988	)	 	—		 	(988	)	 	2,030		 	2,451		 	3,493		
Deferred taxes on current period activity	 	(367	)	 	—		 	(367	)	 	(220	)	 	—		 	(587	)	
Net current period other comprehensive income (loss) after tax	 	(621	)	 	—		 	(621	)	 	2,250		 	2,451		 	4,080		
Balance at July 1, 2016	 	$	958		 	$	—		 	$	958		 	$	(74,546	)	 	$	(3,037	)	 	$	(76,625	)	

13

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

Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Other-net in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income of gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note M for additional details on cash flow hedges.
Reclassifications from accumulated other comprehensive income for pension and post-employment benefits are included in the computation of the net periodic pension and post-employment benefit expense. Refer to Note I for additional details on pension and post-employment expenses.

14

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

Note K — Stock-based Compensation Expense
Stock-based compensation expense, which includes awards settled in shares and in cash, was $2.4 million and $4.7 million in the second quarter and first six months of 2017 , respectively, compared to $1.1 million and $2.3 million in the same periods of 2016.
The Company granted 97,015 SARs to certain employees during the first six months of 2017 . The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the six months ended June 30, 2017 were $35.26 and $10.89 , respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:

				
Risk-free interest rate	 	1.92	%	
Dividend yield	 	1.1	%	
Volatility	 	34.0	%	
Expected term (in years)	 	5.6		
The Company granted 62,185 stock-settled restricted stock units (RSUs) and 32,466 cash-settled RSUs to certain employees and non-employee directors during the first six months of 2017 . 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 $34.95 for stock-settled RSUs granted during the six months ended June 30, 2017 . Cash-settled RSUs are accounted for as liability-based compensation awards and adjusted based on the closing price of Materion’s common stock over the vesting period of three years .
The Company granted stock-settled and cash-settled performance-based restricted stock units (PRSUs) to certain employees in the first six months of 2017 . The weighted-average fair value of the stock-settled PRSUs was $30.28 per share and will be expensed over the vesting period of three years . The liability for cash-settled PRSUs is re-measured at fair value each reporting period, and the expense is recorded accordingly. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and the total return to shareholders over the vesting period relative to a peer group’s performance over the same period.
At June 30, 2017 , unearned compensation cost related to the unvested portion of all stock-based awards was approximately $6.3 million , and is expected to be recognized over the remaining vesting period of the respective grants.

Note L — Fair Value of Financial Instruments
The Company measures and records financial instruments at fair value. A fair value 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.

15

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, 2017 and December 31, 2016 :  

																																	
 	 	 	 	 	 	 	 	 	
(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)	
	 	2017	 	2016	 	2017	 	2016	 	2017	 	2016	 	2017	 	2016	
Financial Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred compensation investments	 	$	2,075		 	$	1,734		 	$	2,075		 	$	1,734		 	$	—		 	$	—		 	$	—		 	$	—		
Foreign currency forward contracts	 	72		 	691		 	—		 	—		 	72		 	691		 	—		 	—		
Precious metal swaps	 	191		 	—		 	—		 	—		 	191		 	—		 	—		 	—		
Total	 	$	2,338		 	$	2,425		 	$	2,075		 	$	1,734		 	$	263		 	$	691			$	—			$	—		
Financial Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred compensation liability	 	$	2,075		 	$	1,734		 	$	2,075		 	$	1,734		 	$	—		 	$	—		 	$	—		 	$	—		
Foreign currency forward contracts	 	1,066		 	1		 	—		 	—		 	1,066		 	1		 	—		 	—		
Precious metal swaps	 	44		 	—		 	—		 	—		 	44		 	—		 	—		 	—		
Total	 	$	3,185		 	$	1,735		 	$	2,075		 	$	1,734		 	$	1,110		 	$	1		 	$	—		 	$	—		
The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values as of June 30, 2017 and December 31, 2016.

Note M — Derivative Instruments and Hedging Activity
The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency.     The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, 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 risk 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 instruments to use to hedge that exposure within the confines of the policy. 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. Hedge

16

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

contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of rate movements.
Precious Metals.     The Company maintains the majority of its precious metal production requirements on consignment in order to reduce its working capital investment and the exposure to metal price movements. When a precious metal product is fabricated and ready for shipment to the customer, the metal is purchased out of consignment at the current market price. The price paid by the Company forms the basis for the price charged to the customer. This methodology allows for changes in either direction in the market prices of the precious metals used by the Company to be passed through to the customer, and reduces the impact changes in prices could have on the Company's margins and operating profit. The consigned metal is owned by financial institutions that charge the Company a financing fee based upon the current value of the metal on hand.
In certain instances, a customer may want to establish the price for the precious metal at the time the sales order is placed rather than at the time of shipment. Setting the sales price at a different date than when the material would be purchased potentially creates an exposure to movements in the market price of the metal. Therefore, in these limited situations, the Company may elect to enter into a forward contract to purchase precious metal. The forward contract allows the Company to purchase metal at a fixed price on a specific future date. The price in the forward contract serves as the basis for the price to be charged to the customer. By doing so, the selling price and purchase price are matched, and the Company's price exposure is reduced.
The Company refines precious metal-containing materials for its customers and typically will purchase the refined metal from the customer at current market prices. In limited circumstances, the customer may want to fix the price to be paid at the time of the order as opposed to when the material is refined. The customer may also want to fix the price for a set period of time. The Company may then elect to enter into a hedge contract, either a forward contract or a swap, to fix the price for the estimated quantity of metal to be purchased, thereby reducing the exposure to adverse movements in the price of the metal.
In certain circumstances, the Company also refines metal from the customer and may retain a portion of the refined metal as payment. The Company may elect to enter into a forward contract to sell precious metal to reduce the Company's price exposure.
The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.
The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held until maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses currency hedge contracts that are denominated in the same currency as the underlying exposure and precious metal hedge contracts denominated in the same metal as the underlying exposure.
All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.

17

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 not designated as hedging instruments and balance sheet classification as of June 30, 2017 and December 31, 2016 :

																	
 	 	June 30, 2017	 	December 31, 2016	
(Thousands)	 	Notional
Amount	 	Fair
Value	 	Notional
Amount	 	Fair
Value	
Other liabilities and accrued items	 	 	 	 	 	 	 	 	
Foreign currency forward contracts - euro	 	$	12,223		 	$	(590	)	 	$	—		 	$	—		
Total	 	$	12,223		 	$	(590	)	 	$	—		 	$	—		
These outstanding foreign currency derivatives were related to intercompany loans. Other-net included foreign currency losses of $0.5 million relating to these derivatives during the second quarter of 2017 and $0.6 million during the first six months of 2017.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges and balance sheet classification as of June 30, 2017 and December 31, 2016 :

																	
 	 	June 30, 2017	 	December 31, 2016	
(Thousands)	 	Notional
Amount	 	Fair
Value	 	Notional
Amount	 	Fair
Value	
Prepaid expenses	 	 	 	 	 	 	 	 	
Foreign currency forward contracts - yen	 	$	1,450		 	$	64		 	$	2,418		 	$	239		
Foreign currency forward contracts - euro	 	915		 	8		 	6,493		 	452		
Precious metal swaps	 	6,402		 	125		 	—		 	—		
Total	 	8,767		 	197		 	8,911		 	691		
 	 	 	 	 	 	 	 	 	
Other assets	 	 	 	 	 	 	 	 	
Precious metal swaps	 	3,335		 	66		 	—		 	—		
Total	 	3,335		 	66		 	—		 	—		
 	 	 	 	 	 	 	 	 	
Other liabilities and accrued items	 	 	 	 	 	 	 	 	
Foreign currency forward contracts - euro	 	10,523		 	(476	)	 	537		 	(1	)	
Precious metal swaps	 	2,576		 	(42	)	 	—		 	—		
Total	 	13,099		 	(518	)	 	537		 	(1	)	
 	 	 	 	 	 	 	 	 	
Other long-term liabilities	 	 	 	 	 	 	 	 	
Precious metal swaps	 	188		 	(2	)	 	—		 	—		
Total	 	$	25,389		 	$	(257	)	 	$	9,448		 	$	690		
All of these contracts were designated and effective as cash flow hedges. No ineffectiveness expense was recorded in the second quarter or first six months of 2017 or 2016.
Changes in the fair value of outstanding cash flow hedges recorded in OCI for the first six months of 2017 and 2016 totaled decreases of $0.6 million and $1.4 million , respectively. The Company expects to relieve substantially the entire balance in OCI as of June 30, 2017 to the Consolidated Statements of Income within the next 18-month period. Refer to Note J for additional OCI details.

18

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

Note N — Contingencies
Legal Proceedings . For information regarding legal proceedings relating to Chronic Beryllium Disease Claims , refer to Note Q ("Contingencies and Commitments") in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 .
Other litigation. The Company is party to several pending legal proceedings and claims arising in the normal course of business. The Company records a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosure related to such matters. To the extent there is a reasonable possibility that the losses could exceed any amounts accrued, the Company will adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made.
Environmental Proceedings. The Company has an active environmental compliance program and records reserves for the probable cost of identified environmental remediation projects. The reserves are established based upon analyses conducted by the Company’s engineers and outside consultants and are adjusted from time to time based upon ongoing studies, the difference between actual and estimated costs, and other factors. The reserves may also be affected by rulings and negotiations with regulatory agencies. The undiscounted reserve balance was $6.2 million at June 30, 2017 and $6.0 million at December 31, 2016 . Environmental projects tend to be long term, and the final actual remediation costs may differ from the amounts currently recorded.

	
		
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
OVERVIEW
We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications. Our products are sold into numerous end markets, including consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance.

19

RESULTS OF OPERATIONS
Second Quarter

																
 	 	Second Quarter Ended	
 	 	June 30,	 	July 1,	 	$	 	%	
(Thousands, except per share data)	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	295,842		 	$	249,776		 	$	46,066		 	18	 %	
Value-added sales	 	176,099		 	153,934		 	22,165		 	14	 %	
Gross margin	 	54,557		 	45,306		 	9,251		 	20	 %	
Gross margin as a % of value-added sales	 	31	%	 	29	%	 	N/A		 	N/A		
Selling, general, and administrative (SG&A) expense	 	38,075		 	32,437		 	5,638		 	17	 %	
SG&A expense as a % of value-added sales	 	22	%	 	21	%	 	N/A		 	N/A		
Research and development (R&D) expense	 	3,544		 	3,171		 	373		 	12	 %	
R&D expense as a % of value-added sales	 	2	%	 	2	%	 	N/A		 	N/A		
Other—net	 	3,204		 	3,921		 	(717	)	 	(18	)%	
Operating profit	 	9,734			5,777		 	3,957		 	68	 %	
Interest expense—net	 	695		 	512		 	183		 	36	 %	
Income before income taxes	 	9,039		 	5,265		 	3,774		 	72	 %	
Income tax expense (benefit)	 	1,726		 	(284	)	 	2,010		 	(708	)%	
Net income	 	$	7,313		 	$	5,549		 	$	1,764		 	32	 %	
 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	$	0.36		 	$	0.27		 	$	0.09		 	33	 %	
N/A = Not Applicable

Net sales of $295.8 million in the second quarter of 2017 were $46.0 million higher than the $249.8 million recorded in the second quarter of 2016 . Changes in precious metal and copper prices favorably impacted net sales in the second quarter of 2017 by approximately $2.2 million when compared to the second quarter of 2016. Net sales in the Performance Alloys and Composites segment increased $10.8 million due to higher sales volume, including shipments of raw material beryllium hydroxide under a new supply agreement with a long-standing customer. Net sales of $32.3 million during the second quarter of 2017 were attributable to the high performance target materials business of the Heraeus Group (HTB). Excluding the HTB acquisition, net sales in the Advanced Materials segment increased $11.2 million due to higher sales volume in the consumer electronics and industrial components end markets. These favorable impacts were offset by lower sales volume in the medical end market in the Precision Coatings segment.

Value-added sales is a non-GAAP measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices. Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP measure, to value-added sales is included herein. Value-added sales of $176.1 million in the second quarter of 2017 increased $22.2 million, or 14% compared to the second quarter of 2016 . Value-added sales from the HTB acquisition totaled $10.6 million in the second quarter of 2017. Value-added sales to the consumer electronics end market, which accounted for 30% of our total value-added sales during the second quarter of 2017, increased $3.2 million from the prior-year period. Also, value-added sales in the industrial components increased $4.0 million from the prior-year period. These increases were offset by weakness in the medical and defense end markets, which lowered value-added sales by $3.0 million.

Gross margin in the second quarter of 2017 was $54.6 million, or $9.3 million higher than the $45.3 million gross margin recorded during the second quarter of 2016 . Expressed as a percentage of value-added sales, gross margin increased from 29% in the second quarter of 2016 to 31% in the second quarter of 2017 .

SG&A expense was $38.1 million in the second quarter of 2017 , or $5.7 million higher than $32.4 million in the second quarter of 2016 . The increase related to higher incentive and stock-based compensation expense of $4.3 million. Additionally, the increase is attributable to $1.5 million of HTB expenses.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D expense was flat as a percentage of value-added sales at approximately 2% in the second quarter of both 2017 and 2016 .

20

Other-net was $3.2 million of expense in the second quarter of 2017 , or a $0.7 million decrease from the second quarter of 2016 . Other-net in the second quarter of 2017 included foreign currency exchange gains of $0.3 million compared to a foreign currency exchange loss of $0.7 million in the second quarter of 2016. Additionally, Other-net in the second quarter of 2017 included higher metal consignment fees of $0.4 million. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.

Interest expense-net was $0.7 million in the second quarter of 2017 , or a $0.2 million increase from $0.5 million in the second quarter of 2016 due to higher average debt outstanding.

Income tax expense for the second quarter of 2017 was $1.7 million versus a benefit of $0.3 million in the second quarter of 2016 . The effective tax rate for the second quarter of 2017 was 19.1% compared to a negative effective tax rate of 5.4% in the prior-year period. The effects of discrete items, percentage depletion, the foreign rate differential, the research and development credit, and other items were the primary factors for the difference between the effective and statutory rates in the second quarter of 2017 and 2016 . Refer to Note F to the Consolidated Financial Statements for further details on income taxes.

Six Months

																
 	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	$	 	%	
(Thousands, except per share data)	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	536,511		 	$	485,287		 	$	51,224		 	11	 %	
Value-added sales	 	325,080		 	297,792		 	27,288		 	9	 %	
Gross margin	 	97,553		 	88,663		 	8,890		 	10	 %	
Gross margin as a % of value-added sales	 	30	%	 	30	%	 	N/A		 	N/A		
SG&A expense	 	71,703		 	62,924		 	8,779		 	14	 %	
SG&A expense as a % of value-added sales	 	22	%	 	21	%	 	N/A		 	N/A		
R&D expense	 	6,674		 	6,623		 	51		 	1	 %	
R&D expense as a % of value-added sales	 	2	%	 	2	%	 	N/A		 	N/A		
Other—net	 	6,022		 	5,807		 	215		 	4	 %	
Operating profit	 	13,154		 	13,309		 	(155	)	 	(1	)%	
Interest expense—net	 	1,188		 	927		 	261		 	28	 %	
Income before income taxes	 	11,966		 	12,382		 	(416	)	 	(3	)%	
Income tax expense	 	1,603		 	1,465		 	138		 	9	 %	
Net income	 	$	10,363		 	$	10,917		 	$	(554	)	 	(5	)%	
 	 	 	 	 	 	 	 	 	
Diluted earnings per share	 	$	0.51		 	$	0.54		 	$	(0.03	)	 	(6	)%	
N/A = Not Applicable

Net sales of $536.5 million in the first six months of 2017 were $51.2 million higher than the $485.3 million recorded in the first six months of 2016 . Changes in precious metal and copper prices favorably impacted net sales in the first six months of 2017 by approximately $8.4 million when compared to the first six months of 2016. Net sales in the Performance Alloys and Composites segment increased $12.8 million due to higher sales volume, including shipments of raw material beryllium hydroxide. Net sales of $39.3 million during the first six months of 2017 were attributable to the HTB acquisition. Excluding the HTB acquisition, net sales in the Advanced Materials segment increased $10.8 million due to higher sales volume in the consumer electronics and industrial components end markets. These favorable impacts were offset by lower sales volume in the medical end market in the Precision Coatings segment.

Value-added sales of $325.1 million in the first six months of 2017 increased $27.3 million , or 9% compared to the first six months of 2016 . Value-added sales from the HTB acquisition totaled approximately $13.5 million in the first six months of 2017. Excluding the HTB acquisition, value-added sales to the consumer electronics end market, which accounted for 30% of our total value-added sales during the first six months of 2017, increased $6.5 million from the prior-year period. Also, value-added sales in the industrial components end market increased $6.1 million from the prior-year period. These increases were offset by weakness in the medical and defense end markets, which lowered value-added sales by $5.9 million.

Gross margin in the first six months of 2017 was $97.6 million , or $8.9 million higher than the $88.7 million gross margin recorded during the first six months of 2016 . Gross margin was 30% of value-added sales in the first half of both 2017 and 2016.

21

SG&A expense was $71.7 million in the first six months of 2017 , or $8.8 million higher than $62.9 million in the first six months of 2016 . The increase related to higher incentive compensation and stock-based compensation expense of $6.5 million, which included $1.4 million due to accelerated stock compensation expense associated with the transition of the Company's CEO. Additionally, the increase is attributable to HTB expenses of $2.1 million.

R&D expense was flat as a percentage of value-added sales at approximately 2% in the first six months of both 2017 and 2016 .

Other-net was $6.0 million and $5.8 million of expense in the first six months of 2017 and 2016 , respectively. Other-net in the first six months of 2017 included foreign currency exchange gains of $0.6 million compared to a foreign currency exchange loss of $0.6 million in the second quarter of 2016. Additionally, Other-net in the first six months of 2017 included higher metal consignment fees of $0.6 million. Other-net in the first six months of 2016 included a net gain on the sale of equipment of $0.7 million. Refer to Note D to the Consolidated Financial Statements for details of the major components within Other-net.

Interest expense-net was $1.2 million in the first six months of 2017 , or a $0.3 million increase from $0.9 million in the first six months of 2016 due to higher average debt outstanding.

Income tax expense for the first six months of 2017 was $1.6 million , compared to $1.5 million in the first six months of 2016 . The effective tax rate for the first six months of 2017 was 13.4% compared to an effective tax rate of 11.8% in the prior-year period. The effects of discrete items, percentage depletion, the foreign rate differential, the research and development credit, and other items were the primary factors for the difference between the effective and statutory rates in the first half of 2017 and 2016 . Refer to Note F to the Consolidated Financial Statements for further details on income taxes.

22

Value-Added Sales - Reconciliation of Non-GAAP Measure
A reconciliation of net sales to value-added sales, a non-GAAP measure, for each reportable segment and for the total Company for the first six months of 2017 and 2016 is as follows:

																	
 	 	Second Quarter Ended	 	Six Months Ended	
 	 	June 30,		July 1,	 	June 30,	 	July 1,	
(Thousands)	 	2017		2016	 	2017	 	2016	
Net sales	 	 	 	 	 	 	 	 	
Performance Alloys and Composites	 	$	108,541		 	$	97,696		 	$	201,094		 	$	188,325		
Advanced Materials	 	157,044		 	113,557		 	271,780		 	221,677		
Precision Coatings	 	30,257		 	38,523		 	63,637		 	75,285		
Other	 	—		 	—		 	—		 	—		
Total	 	$	295,842		 	$	249,776		 	$	536,511		 	$	485,287		
 	 	 	 	 	 	 	 	 	
Less: pass-through metal costs	 	 	 	 	 	 	 	 	
Performance Alloys and Composites	 	$	15,855		 	$	14,346		 	$	29,197		 	$	26,773		
Advanced Materials	 	95,003		 	66,564		 	162,451		 	132,618		
Precision Coatings	 	7,644		 	13,412		 	17,723		 	25,540		
Other	 	1,241		 	1,520		 	2,060		 	2,564		
Total	 	$	119,743		 	$	95,842		 	$	211,431		 	$	187,495		
 	 	 	 	 	 	 	 	 	
Value-added sales	 	 	 	 	 	 	 	 	
Performance Alloys and Composites	 	$	92,686		 	$	83,350		 	$	171,897		 	$	161,552		
Advanced Materials	 	62,041		 	46,993		 	109,329		 	89,059		
Precision Coatings	 	22,613		 	25,111		 	45,914		 	49,745		
Other	 	(1,241	)	 	(1,520	)	 	(2,060	)	 	(2,564	)	
Total	 	$	176,099		 	$	153,934		 	$	325,080		 	$	297,792		
The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.
Internally, management reviews net sales on a value-added basis. Value-added sales are a non-GAAP measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.
Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.
By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals.

23

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

																
 	 	Second Quarter Ended	
 	 	June 30,	 	July 1,	 	$	 	%	
(Thousands)	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	108,541		 	$	97,696		 	$	10,845		 	11	%	
Value-added sales	 	92,686		 	83,350		 	9,336		 	11	%	
Operating profit	 	5,548		 	234		 	5,314		 	2,271	%	
Net sales from the Performance Alloys and Composites segment of $108.5 million in the second quarter of 2017 were 11% higher than net sales of $97.7 million in the second quarter of 2016 primarily due to higher sales volume related to shipments of raw material beryllium hydroxide. In addition, sales volume increased in the commercial aerospace, industrial components, and consumer electronics end markets. The impact of higher pass-through metal prices favorably impacted net sales by approximately $2.0 million.
Value-added sales of $92.7 million in the second quarter of 2017 were 11% higher than value-added sales of $83.4 million in the second quarter of 2016 . The increase in value-added sales was driven by higher raw material sales of beryllium hydroxide of $5.3 million. Also, stronger demand in the consumer electronics and industrial components end markets increased value-added sales by $3.8 million compared to the second quarter of 2016 .
Performance Alloys and Composites generated operating profit of $5.5 million in the second quarter of 2017 compared to $0.2 million in the second quarter of 2016 . The increase in operating profit was primarily due to higher sales volume, favorable product mix, and productivity improvements.

Six Months

																
 	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	$	 	%	
(Thousands)	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	201,094		 	$	188,325		 	$	12,769		 	7	%	
Value-added sales	 	171,897		 	161,552		 	10,345		 	6	%	
Operating profit	 	5,737		 	1,746		 	3,991		 	229	%	
Net sales from the Performance Alloys and Composites segment of $201.1 million in the first six months of 2017 were 7% higher than net sales of $188.3 million in the first six months of 2016 primarily due to higher sales volume related to shipments of raw material beryllium hydroxide. Also, sales volume increased in the consumer electronics and industrial components end markets. The impact of higher pass-through metal prices favorably impacted net sales by approximately $4.1 million.
Value-added sales of $171.9 million in the first six months of 2017 were 6% higher than value-added sales of $161.6 million in the first six months of 2016. Stronger demand in the consumer electronics and industrial components end markets increased value-added sales by $6.8 million compared to the first six months of 2016. Also, the increase in value-added sales was driven by higher raw material sales of beryllium hydroxide of $5.3 million.
Performance Alloys and Composites generated operating profit of $5.7 million in the first six months of 2017 compared to $1.7 million in the first six months of 2016. The increase in operating profit was primarily due to higher sales volume, favorable product mix, and productivity improvements.

24

Advanced Materials
Second Quarter

															
 		Second Quarter Ended	
		June 30,		July 1,	 	$	 	%	
(Thousands)		2017		2016	 	Change	 	Change	
Net sales		$	157,044			$	113,557		 	43,487		 	38	%	
Value-added sales		62,041			46,993		 	15,048		 	32	%	
Operating profit		8,670			7,320		 	1,350		 	18	%	
Net sales from the Advanced Materials segment of $157.0 million in the second quarter of 2017 were 38% higher than net sales of $113.6 million in the second quarter of 2016 due to higher sales volume. Net sales of $32.3 million during the second quarter of 2017 were attributable to our HTB acquisition.
Value-added sales of $62.0 million in the second quarter of 2017 were 32% higher than value-added sales of $47.0 million in the second quarter of 2016. This increase included value-added sales of $10.6 million attributable to our HTB acquisition. Also, the increase in value-added sales was driven by higher value-added sales to the consumer electronics end market of $2.5 million due primarily to higher demand.
The Advanced Materials segment generated operating profit of $8.7 million in the second quarter of 2017 compared to $7.3 million in the second quarter of 2016. Operating profit in the second quarter of 2017 was favorably impacted by higher sales volume, and favorable product mix.

Six Months

															
 	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	$	 	%	
(Thousands)	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	271,780		 	$	221,677		 	50,103		 	23	%	
Value-added sales	 	109,329		 	89,059		 	20,270		 	23	%	
Operating profit	 	15,117		 	12,503		 	2,614		 	21	%	
Net sales from the Advanced Materials segment of $271.8 million in the first six months of 2017 were 23% higher than net sales of $221.7 million in the first six months of 2016. Net sales of $39.3 million during the first six months of 2017 were attributable to the HTB acquisition. Also, net sales increased due to higher sales volume and the impact of higher pass-through metal prices of $3.6 million.
Value-added sales of $109.3 million in the first six months of 2017 were 23% higher than value-added sales of $89.1 million in the first six months of 2016. This increase included value-added sales of $13.5 million attributable to our HTB acquisition. Also, the increase in value-added sales was primarily driven by higher value-added sales to the consumer electronics end market. Value-added sales to the consumer electronics end market, which represents approximately 49% of total segment value-added sales, increased $4.7 million due primarily to higher demand.
The Advanced Materials segment generated operating profit of $15.1 million in the first six months of 2017 compared to $12.5 million in the first six months of 2016. As a percentage of value-added sales, operating profit was 14% in both the first six months of 2017 and 2016. Operating profit in the first six months of 2017 was favorably impacted by higher sales volume and product mix offset by integration expenses of approximately $3.4 million attributable to the HTB acquisition.

25

Precision Coatings
Second Quarter

															
(Thousands)		Second Quarter Ended	
		June 30,		July 1,	 	$	 	%	
		2017		2016	 	Change	 	Change	
Net sales		$	30,257			$	38,523		 	(8,266	)	 	(21	)%	
Value-added sales		22,613			25,111		 	(2,498	)	 	(10	)%	
Operating profit		2,314			2,272		 	42		 	2	 %	
Net sales from the Precision Coatings segment of $30.3 million in the second quarter of 2017 were 21% lower than net sales of $38.5 million in the second quarter of 2016 primarily due to lower sales volume.
Value-added sales of $22.6 million in the second quarter of 2017 were 10% lower than value-added sales of $25.1 million in the second quarter of 2016. Medical end market sales decreased $1.9 million due to lower volume in the blood glucose test strip segment of the medical end market.
The Precision Coatings segment generated operating profit of $2.3 million in both the second quarters of 2017 and 2016. Operating profit remained flat despite the decline in medical end market sales due to lower SG&A expenses.
Six Months

															
(Thousands)	 	Six Months Ended	
		June 30,	 	July 1,	 	$	 	%	
		2017	 	2016	 	Change	 	Change	
Net sales	 	$	63,637		 	$	75,285		 	(11,648	)	 	(15	)%	
Value-added sales	 	45,914		 	49,745		 	(3,831	)	 	(8	)%	
Operating profit	 	4,532		 	6,371		 	(1,839	)	 	(29	)%	
Net sales from the Precision Coatings segment of $63.6 million in the first six months of 2017 were 15% lower than net sales of $75.3 million in the first six months of 2016 primarily due to lower sales volume.
Value-added sales of $45.9 million in the first six months of 2017 were 8% lower than value-added sales of $49.7 million in the first six months of 2016. Value-added sales in the medical end market decreased $3.6 million compared to the prior-year period.
The Precision Coatings segment generated operating profit of $4.5 million in the first six months of 2017 compared to $6.4 million in the first six months of 2016. The decrease in operating profit in the first six months of 2017 versus the comparable period of 2016 was due to lower sales volume and the absence of a gain on the sale of equipment of $0.8 million realized during the first six months of 2016.

26

Other
Second Quarter

															
(Thousands)	 	Second Quarter Ended	
	 	June 30,	 	July 1,	 	$	 	%	
	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	—		 	$	—		 	—		 	—	 %	
Value-added sales	 	(1,241	)	 	(1,520	)	 	279		 	(18	)%	
Operating loss	 	(6,798	)	 	(4,049	)	 	(2,749	)	 	68	 %	
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of $6.8 million in the second quarter of 2017 increased $2.8 million as compared to $4.0 million in the second quarter of 2016. As a percent of total Company value-added sales, corporate costs increased to 4% in the second quarter of 2017 from 3% in the prior-year period. The increase in corporate costs was due to higher incentive compensation and stock-based compensation expense of $2.6 million and higher SG&A expenses associated with our CEO transition of $0.9 million. This increase was offset by the favorable impact of foreign exchange rate movements of $0.4 million and lower corporate spending of approximately $0.3 million during the second quarter of 2017.

Six Months

															
(Thousands)	 	Six Months Ended	
	 	June 30,	 	July 1,	 	$	 	%	
	 	2017	 	2016	 	Change	 	Change	
Net sales	 	$	—		 	$	—		 	—		 	—	 %	
Value-added sales	 	(2,060	)	 	(2,564	)	 	504		 	(20	)%	
Operating loss	 	(12,232	)	 	(7,311	)	 	(4,921	)	 	67	 %	
Corporate costs of $12.2 million in the first six months of 2017 increased $4.9 million as compared to $7.3 million in the first six months of 2016. As a percent of total Company value-added sales, corporate costs increased to 3% in the first six months of 2017 from 1% in the prior-year. The increase in corporate costs was due to higher incentive compensation and stock-based compensation expense of $4.2 million, which included $1.4 million due to accelerated stock compensation expense associated with the transition of the Company's CEO. Also, during the first six months of 2017, the Company incurred additional SG&A expenses associated with our CEO transition of $1.2 million. These increases were offset by the favorable impact of foreign exchange rate movements of $0.5 million.

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

													
 	 	Six Months Ended	
 	 	June 30,	 	July 1,	 	$	
(Thousands)	 	2017	 	2016	 	Change	
Net cash provided by operating activities	 	$	303		 	$	9,861		 	$	(9,558	)	
Net cash used in investing activities	 	(28,238	)	 	(21,305	)	 	(6,933	)	
Net cash provided by financing activities	 	14,055		 	7,787		 	6,268		
Effects of exchange rate changes	 	913		 	406		 	507		
Net change in cash and cash equivalents	 	$	(12,967	)	 	$	(3,251	)	 	$	(9,716	)	
Net cash provided by operating activities totaled $0.3 million in the first six months of 2017 versus $9.9 million in the comparable prior-year period. Cash used in prepaid and other current assets during the first six months of 2017 was $9.3 million, or $8.5 million higher than $0.8 million of cash used in the first six months of 2016 . The majority of the increase was due to prepaid value added taxes.
Working capital requirements used cash of $21.9 million during the first six months of 2017 compared to a use of $19.7 million in the first six months of 2016. Cash flows used for accounts receivable were $17.9 million higher than the prior year-period

27

due to higher sales volume. Also, accounts receivable from our HTB acquisition attributed to $13.8 million of this increase. Our three-month trailing days sales outstanding (DSO) was approximately 38 days at June 30, 2017 versus 41 days at December 31, 2016. Cash flows used for inventory increased $7.7 million primarily within the Performance Alloys and Composites and Advanced Materials segments to respond to anticipated orders and demand. Cash flows from accounts payable and accrued expenses provided cash of approximately $15.5 million compared to a use of $7.9 million in the prior-year period. Cash used for incentive compensation payouts during the first six months of 2017 was more than offset by a higher accounts payable balance due to the timing of payments. Also, our HTB acquisition attributed $5.8 million to the higher accounts payable balance.
Net cash used in investing activities was $28.2 million in the first six months of 2017 compared to $21.3 million in the prior-year period, reflecting a $16.5 million payment for the HTB acquisition offset by lower payments for property, plant, and equipment and mine development of $10.4 million.
Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2017, the Company expects payments for property, plant, and equipment to range from $25.0 million to $30.0 million and mine development expenditures to be less than $3.0 million.
Net cash provided by financing activities totaled $14.1 million in the first six months of 2017 versus $7.8 million provided by financing activities in the comparable prior-year period primarily due to higher net borrowings of $6.6 million in 2017.
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 and share repurchase programs, environmental remediation projects, and strategic acquisitions. At June 30, 2017 , cash and cash equivalents held by our foreign operations totaled $16.4 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, available borrowing capacity, and debt-to-debt-plus-equity ratio, as of June 30, 2017 and December 31, 2016 is as follows:

									
 	 	June 30,	 	December 31,	
(Thousands)	 	2017	 	2016	
Total outstanding debt	 	$	26,640		 	$	4,615		
Cash	 	18,497		 	31,464		
Net debt (cash)	 	8,143		 	(26,849	)	
Available borrowing capacity	 	$	235,602		 	$	238,886		
Debt-to-debt-plus-equity ratio	 	5	%	 	1	%	
Net debt (cash) is a non-GAAP measure reflecting the Company's current liquidity 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. Non-GAAP measures, such as net debt (cash), have inherent limitations and should not be considered in isolation, or as a substitute for GAAP measures.
Total outstanding debt increased $22.0 million compared to December 31, 2016 due to additional borrowings on our revolving credit facility to support payment for the HTB acquisition, capital expenditures, and working capital needs.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments. The main cause for the decrease in the available borrowing capacity at June 30, 2017 as compared to December 31, 2016 was due to higher borrowing levels.

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In 2015, we entered into an amendment to our $375.0 million revolving credit agreement (Credit Agreement). The amendment extends the maturity date of the Credit Agreement from 2018 to 2020 and provides more favorable pricing under certain circumstances. In addition, the amendment provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives. The Credit Agreement is secured by substantially all of the assets of the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit Agreement allows us to borrow money at a premium over LIBOR or the prime rate and at varying maturities. The premium resets quarterly according to the terms and conditions available under the Credit Agreement.
The Credit Agreement includes restrictive covenants including incurring restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with all of our debt covenants as of June 30, 2017 and December 31, 2016. Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.
Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. As a result, we have negotiated increases in the available capacity under existing lines, added additional lines, and extended the maturity dates of existing lines in recent years. The available and unused capacity under the metal financing lines totaled approximately $142.8 million as of June 30, 2017 . The availability is determined by Board approved levels and actual line capacity.
In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We repurchased 20,000 shares at a cost of $0.7 million in the second quarter of 2017 and 32,409 shares at a cost of $1.1 million in the first six months of 2017. Since the approval of the repurchase plan, we have purchased 1,082,264 shares at a total cost of $34.3 million.
In the second quarter and first six months of 2017, we paid cash dividends of $2.0 million and $3.9 million, respectively, on our common stock. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We maintain the majority of the precious metals and 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 $307.2 million as of June 30, 2017 , versus $194.8 million as of December 31, 2016 . We were in compliance with all of the covenants contained in the consignment agreements as of June 30, 2017 and December 31, 2016 . For additional information on our contractual obligations, refer to our Form 10-K for the year ended December 31, 2016 .

CRITICAL ACCOUNTING POLICIES

For additional information regarding critical accounting policies, please refer to our Form 10-K for the year ended December 31, 2016 . There have been no material changes to our critical accounting policies subsequent to the issuance of our 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:

▪	Actual net sales, operating rates, and margins for 2017 ;	

▪	Our ability to effectively integrate the HTB acquisition;	

29

		
▪	The global economy;	

▪	The impact of any U.S. Federal Government shutdowns and sequestrations;	

▪	The condition of the markets which we serve, whether defined geographically or by segment, with the major market segments being: consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, and science;	

▪	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 completion and start-up of any capital projects;	

▪	The availability of adequate lines of credit and the associated interest rates;	

▪	Other financial factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal financing fees, tax rates, exchange rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, 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 success of the realignment of our businesses;	

▪	Our ability to strengthen our internal control over financial reporting and disclosure controls and procedures; and	

•	The risk factors set forth in Part 1, Item 1A of our Form 10-K for the year ended December 31, 2016 .	

		
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 Annual Report on Form 10-K for the year ended December 31, 2016 . There have been no material changes in our market risks since the inclusion of this discussion in our Annual Report on Form 10-K.

30

	
		
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, 2017 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, 2017 .
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, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

31

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 CBD 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.
The information presented in the Legal Proceedings section of Note N ("Contingencies") of the Notes to Consolidated Financial Statements (Unaudited) is incorporated herein by reference.

		
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	
The following table presents information with respect to repurchases of common stock made by us during the three months ended June 30, 2017 . 

															
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, 2017		10,425			$	33.79			10,200			$	16,041,266		
May 6 through June 2, 2017		21,037			34.71			6,900			15,803,872		
June 3 through June 30, 2017		11,430			36.82			2,900			15,703,744		
Total		42,892			$	35.05			20,000			$	15,703,744		

			
(1)	Includes 225; 14,137; and 8,530 shares surrendered to the Company in April, May, and June, respectively, by employees to satisfy tax withholding obligations on equity awards issued under the Company's stock incentive plan.	
			
(2)	On January 14, 2014, we announced that our Board of Directors had authorized the repurchase of up to $50.0 million of our common stock. As of June 30, 2017, $15.7 million may still be purchased under the program. During the three months ended June 30, 2017, we repurchased 20,000 shares at an average price of $34.08 per share, or $0.7 million in the aggregate.	

		
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.

32

	
		
Item 6.	Exhibits	

Refer to the Exhibit Index herein.

33

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

	

 	 	 	 	MATERION CORPORATION	
 	 	 	
Dated: July 27, 2017	 	 	 	 	
 	 	 	 	/s/   Joseph P. Kelley	
 	 	 	 	Joseph P. Kelley	
 	 	 	 	Vice President, Finance and Chief Financial Officer	
 	 	 	 	(Principal Financial and Accounting Officer)	

34

Exhibit Index

	
			
10.1		Amended and Restated Materion Corporation 2006 Stock Incentive Plan (As Amended and Restated as of May 3, 2017) (filed as Exhibit 10.1 to the Company's Form 8-K filed on May 8, 2017), incorporated herein by reference.	
10.2		Amended and Restated Materion Corporation 2006 Non-Employee Director Equity Plan (As Amended and Restated as of May 3, 2017) (filed as Exhibit 4.3 to the Registration Statement on Form S-8, Registration No. 333-217618 filed on May 3, 2017), incorporated herein by reference.	
31.1	  	Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)*	
31.2	  	Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a)*	
32	  	Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350*	
95	  	Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act for the period ended June 30, 2017*	
101.INS	  	XBRL Instance Document*	
101.SCH	  	XBRL Taxonomy Extension Schema Document*	
101.DEF	  	XBRL Taxonomy Extension Definition Linkbase Document*	
101.CAL	  	XBRL Taxonomy Extension Calculation Linkbase Document*	
101.LAB	  	XBRL Taxonomy Extension Label Linkbase Document*	
101.PRE	  	XBRL Taxonomy Extension Presentation Linkbase Document*	

* Submitted electronically herewith.

35

Exhibit 31.1
CERTIFICATIONS
I, Jugal K. Vijayvargiya, certify that:

		
1)	I have reviewed this quarterly report on Form 10-Q of Materion Corporation (the “registrant”);	

		
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

		
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

		
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

			
 	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	

			
 	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	

			
 	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	

			
 	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

		
5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

			
 	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	

			
 	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

	

 	 	 	 	/s/   Jugal K. Vijayvargiya	
Dated: July 27, 2017	 	 	 	Jugal K. Vijayvargiya	
 	 	 	 	President and Chief Executive Officer	

Exhibit 31.2
CERTIFICATIONS
I, Joseph P. Kelley, certify that:

		
1)	I have reviewed this quarterly report on Form 10-Q of Materion Corporation (the “registrant”);	

		
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

		
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

		
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

			
 	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	

			
 	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	

			
 	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	

			
 	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

		
5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

			
 	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	

			
 	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	

	

 	 	 	 	/s/   Joseph P. Kelley	
Dated: July 27, 2017	 	 	 	Joseph P. Kelley	
 	 	 	 	Vice President, Finance and Chief Financial Officer	

Exhibit 32
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the Quarterly Report on Form 10-Q of Materion Corporation (the “Company”) for the quarter ended June 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies that, to such officer’s knowledge:

	
		
1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), and	

	
		
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.	
Dated: July 27, 2017

	
/s/   Jugal K. Vijayvargiya	
Jugal K. Vijayvargiya	
President and Chief Executive Officer	

	
	
/s/   Joseph P. Kelley	
Joseph P. Kelley	
Vice President, Finance and Chief Financial Officer	

Exhibit 95
Materion Corporation
Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act for the Fiscal Quarter Ended June 30, 2017
Materion Natural Resources Inc., a wholly owned subsidiary, operates a beryllium mining complex in the State of Utah which is regulated by both the U.S. Mine Safety and Health Administration (“MSHA”) and state regulatory agencies. We endeavor to conduct our mining and other operations in compliance with all applicable federal, state and local laws and regulations. We present information below regarding certain mining safety and health citations which MSHA has levied with respect to our mining operations.
Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Section 1503(a)”) requires the Company to present certain information regarding mining safety in its periodic reports filed with the Securities and Exchange Commission.
The following table reflects citations, orders and notices issued to Materion Natural Resources Inc. by MSHA during the fiscal quarter ended June 30, 2017 (the “Reporting Period”) and contains certain additional information as required by Section 1503(a) and Item 104 of Regulation S-K, including information regarding mining-related fatalities, proposed assessments from MSHA and legal actions (“Legal Actions”) before the Federal Mine Safety and Health Review Commission, an independent adjudicative agency that provides administrative trial and appellate review of legal disputes arising under the Mine Act.
Included below is the information required by Section 1503(a) with respect to the beryllium mining complex (MSHA Identification Number 4200706) for the Reporting Period:

				
(A)	Total number of alleged violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard under Section 104 of the Mine Act for which Materion Natural Resources Inc. received a citation from MSHA	 	0	
(B)	Total number of orders issued under Section 104(b) of the Mine Act	 	0	
(C)	Total number of citations and orders for alleged unwarrantable failure by Materion Natural Resources Inc. to comply with mandatory health or safety standards under Section 104(d) of the Mine Act	 	0	
(D)	Total number of alleged flagrant violations under Section 110(b)(2) of the Mine Act	 	0	
(E)	Total number of imminent danger orders issued under Section 107(a) of the Mine Act	 	0	
(F)	Total dollar value of proposed assessments from MSHA under the Mine Act	 	$0	
(G)	Total number of mining-related fatalities	 	0	
(H)	Received notice from MSHA of a pattern of violations under Section 104(e) of the Mine Act	 	No	
(I)	Received notice from MSHA of the potential to have a pattern of violations under Section 104(e) of the Mine Act	 	No	
(J)	Total number of Legal Actions pending as of the last day of the Reporting Period	 	0	
(K)	Total number of Legal Actions instituted during the Reporting Period	 	0	
(L)	Total number of Legal Actions resolved during the Reporting Period	 	0