MATERION CORP, 10-K filed on 2/13/2020
Annual Report
v3.19.3.a.u2
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2019
Jan. 31, 2020
Jun. 28, 2019
Document and Entity Information [Abstract]      
Local Phone Number 486-4200    
Title of 12(b) Security Common Stock, no par value    
Entity Incorporation, State or Country Code OH    
Entity Registrant Name MATERION CORPORATION    
Entity Central Index Key 0001104657    
Current Fiscal Year End Date --12-31    
Entity Filer Category Large Accelerated Filer    
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Common Stock, Shares Outstanding   20,405,347  
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Small Business false    
Entity Shell Company false    
Entity Emerging Growth Company false    
Entity Public Float     $ 1,368,001,720
Entity File Number 1-15885    
Entity Tax Identification Number 34-1919973    
Entity Address, Address Line One 6070 Parkland Blvd    
Entity Address, City or Town Mayfield Heights    
Entity Address, State or Province OH    
Entity Address, Postal Zip Code 44124    
City Area Code 216    
Trading Symbol MTRN    
Security Exchange Name NYSE    
Entity Interactive Data Current Yes    
Documents Incorporated by Reference [Text Block] Portions of the Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated by reference into Part III.    
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Consolidated Statements of Income - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Net sales $ 1,185,424 $ 1,207,815 $ 1,139,447
Cost of sales 926,280 956,710 926,618
Gross margin 259,144 251,105 212,829
Selling, general, and administrative expense 147,164 153,489 144,280
Research and development expense 18,271 15,187 13,981
Goodwill impairment charges 11,560 0 0
Asset impairment charges 2,581 0 0
Restructuring expense 785 5,599 644
Other - net 11,783 15,334 13,893
Operating profit 67,000 61,496 40,031
Other non-operating expense-net 3,431 42,683 1,452
Interest expense - net 1,579 2,471 2,183
Income before income taxes 61,990 16,342 36,396
Income tax expense (benefit) 11,330 (4,504) 24,945
Net income $ 50,660 $ 20,846 $ 11,451
Basic earnings per share:      
Net income per share of common stock (in usd per share) $ 2.49 $ 1.03 $ 0.57
Diluted earnings per share:      
Net income per share of common stock (in usd per share) $ 2.45 $ 1.01 $ 0.56
Weighted-average number of shares of common stock outstanding:      
Basic 20,365 20,212 20,027
Diluted 20,655 20,613 20,415
v3.19.3.a.u2
Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Net income $ 50,660 $ 20,846 $ 11,451
Other comprehensive income:      
Foreign currency translation adjustment (421) (484) 1,552
Derivative and hedging activity, net of tax (expense) benefit of $5, $672, and ($271) (4) 138 (1,074)
Pension and post-employment benefit adjustment, net of tax (expense) of ($4,741), ($13,300), and ($13,820) 13,197 45,049 (17,234)
Other comprehensive income (loss) 12,772 44,703 (16,756)
Comprehensive income (loss) $ 63,432 $ 65,549 $ (5,305)
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Consolidated Statements of Comprehensive Income (Parentheticals) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Derivative and hedging activity, tax benefit (expense) $ 5 $ 672 $ (271)
Pension and post employment benefit adjustment, tax benefit (expense) $ (4,741) $ (13,300) $ (13,820)
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Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities:      
Net income $ 50,660 $ 20,846 $ 11,451
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation, depletion, and amortization 41,116 35,524 42,751
Amortization of deferred financing costs in interest expense 962 1,009 919
Stock-based compensation expense (non-cash) 7,170 5,313 4,957
Amortization of pension and post-retirement costs 386 5,551 4,865
Loss (gain) on sale of property, plant, and equipment 344 518 234
Deferred income tax (benefit) expense 2,584 (1,318) 20,256
Impairment charges 14,141 0 0
Net pension curtailments and settlements 3,328 41,406 0
Changes in assets and liabilities net of acquired assets and liabilities:      
Decrease (increase) in accounts receivable (23,933) (7,219) (18,484)
Decrease (increase) in inventory 24,031 4,234 (9,462)
Decrease (increase) in prepaid and other current assets 1,418 1,162 (11,606)
Increase (decrease) in accounts payable and accrued expenses (18,575) 8,820 34,433
Increase (decrease) in unearned revenue (2,538) 477 4,336
Increase (decrease) in interest and taxes payable (805) 435 (514)
Domestic pension plan contributions (4,500) (42,000) (16,000)
Other — net 3,433 1,616 (341)
Net cash provided by operating activities 99,222 76,374 67,795
Cash flows from investing activities:      
Payments for purchase of property, plant, and equipment (24,251) (27,702) (27,516)
Payments for mine development (2,277) (6,558) (1,560)
Payments for acquisition 0 0 (16,504)
Proceeds from sale of property, plant, and equipment 44 432 2,222
Net cash used in investing activities (26,484) (33,828) (43,358)
Cash flows from financing activities:      
Proceeds from issuance of long-term debt 0 0 55,000
Repayment of long-term debt (823) (777) (55,797)
Principal payments under finance lease obligations (1,200) (861) (843)
Cash dividends paid (8,856) (8,389) (7,913)
Deferred financing costs (2,130) 0 (300)
Repurchase of common stock (199) (422) (1,086)
Payments of withholding taxes for stock-based compensation awards (4,846) (3,156) (4,506)
Net cash used in financing activities (18,054) (13,605) (15,445)
Effects of exchange rate changes (322) (140) 1,388
Net change in cash and cash equivalents 54,362 28,801 10,380
Cash and cash equivalents at beginning of period 70,645 41,844 31,464
Cash and cash equivalents at end of period $ 125,007 $ 70,645 $ 41,844
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Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current assets    
Cash and cash equivalents $ 125,007 $ 70,645
Accounts receivable 154,751 130,538
Inventories 190,390 214,871
Prepaid and other current assets 21,839 23,299
Total current assets 491,987 439,353
Deferred income taxes 1,666 5,616
Property, plant, and equipment 916,965 898,251
Less allowances for depreciation, depletion, and amortization (684,689) (647,233)
Property, plant, and equipment — net 232,276 251,018
Operating Lease, Right-of-Use Asset 23,413 0
Intangible assets 6,380 6,461
Other assets 17,937 7,236
Goodwill 79,011 90,657
Total Assets 852,670 800,341
Current liabilities    
Short-term debt 868 823
Accounts payable 43,206 49,622
Salaries and wages 41,167 47,501
Other liabilities and accrued items 32,477 33,301
Income taxes 1,342 2,615
Unearned revenue 3,380 5,918
Total current liabilities 122,440 139,780
Other long-term liabilities 11,560 14,764
Operating lease liabilities 18,091 0
Finance lease liabilities 17,424 15,221
Retirement and post-employment benefits 32,466 38,853
Unearned income 32,891 32,563
Long-term income taxes 3,451 2,993
Deferred income taxes 2,410 195
Long-term debt 1,260 2,066
Shareholders’ equity    
Serial preferred stock (no par value; 5,000 authorized shares, none issued) 0 0
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 for both 2019 and 2018) 249,674 234,704
Retained earnings 589,888 548,374
Common stock in treasury (6,744 shares for 2019 and 6,906 shares for 2018) (186,845) (175,426)
Accumulated other comprehensive loss (45,462) (58,234)
Other equity 3,422 4,488
Total shareholders’ equity 610,677 553,906
Total Liabilities and Shareholders’ Equity $ 852,670 $ 800,341
v3.19.3.a.u2
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands, $ / shares in Thousands
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Serial preferred stock, par value (in dollars per share) $ 0 $ 0
Serial preferred stock, shares authorized 5,000 5,000
Serial preferred stock, shares issued 0 0
Common stock, par value (in dollars per share) $ 0 $ 0
Common stock, shares authorized 60,000 60,000
Common stock, shares, issued 27,148 27,148
Treasury stock, shares 6,744 6,906
v3.19.3.a.u2
Consolidated Statements of Shareholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Total
Common Shares
Common Shares Held In Treasury
Common Stock
Retained Earnings
Common Stock In Treasury
Accumulated Other Comprehensive Income (Loss)
Other Equity Transactions
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Common shares   19,949            
Common shares held in Treasury     7,200          
Beginning balances at Dec. 31, 2016 $ 494,089     $ 212,702 $ 517,903 $ (154,399) $ (86,181) $ 4,064
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 11,451     0 11,451 0 0 0
Other comprehensive income (loss), net of tax (2,081)     0 0 0 (2,081) 0
Net pension curtailments and settlements 0              
Tax Cuts and Jobs Act Reclassification 0     0 14,675 0 (14,675) 0
Cash dividends declared (7,913)     0 (7,913) 0 0 0
Stock-based compensation activity, in shares   296 (296)          
Stock-based compensation activity 4,956     10,750 0 (5,794) 0 0
Payments for withholding taxes for stock-based compensation awards, in shares   (108) 108          
Payments of withholding taxes for stock-based compensation awards (4,506)     0 0 (4,506) 0 0
Repurchase of shares   32 32          
Repurchase of 32, 10, and 5 shares for the years ended 2017, 2018, and 2019, respectively (1,086)     0 0 (1,086) 0 0
Directors' deferred compensation, in shares   2 (2)          
Directors' deferred compensation 71     32 0 (343) 0 382
Ending balances at Dec. 31, 2017 494,981     223,484 536,116 (166,128) (102,937) 4,446
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Common shares   20,107            
Common shares held in Treasury     7,042          
Net income 20,846     0 20,846 0 0 0
Other comprehensive income (loss), net of tax 2,722     0 0 0 2,722 0
Net pension curtailments and settlements 41,406     0 0 0 41,406 0
Pension settlement charges 41,400              
Tax Cuts and Jobs Act Reclassification 0     0 (575) 0 575 0
Cumulative effect of accounting change 425     0 425 0 0 0
Cash dividends declared (8,389)     0 (8,389) 0 0 0
Stock-based compensation activity, in shares   202 (203)          
Stock-based compensation activity 5,314     11,131 (49) (5,768) 0 0
Payments for withholding taxes for stock-based compensation awards, in shares   (60) 60          
Payments of withholding taxes for stock-based compensation awards (3,156)     0 0 (3,156) 0 0
Repurchase of shares   10 10          
Repurchase of 32, 10, and 5 shares for the years ended 2017, 2018, and 2019, respectively (422)     0 0 (422) 0 0
Directors' deferred compensation, in shares   3 (3)          
Directors' deferred compensation 179     89 0 48 0 42
Ending balances at Dec. 31, 2018 $ 553,906     234,704 548,374 (175,426) (58,234) 4,488
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Common shares   20,242            
Common shares held in Treasury 6,906   6,906          
Net income $ 50,660     0 50,660 0 0 0
Other comprehensive income (loss), net of tax 9,444     0 0 0 9,444 0
Net pension curtailments and settlements 3,328              
Pension settlement charges 3,328     0 0 0 3,328 0
Cumulative effect of accounting change (179)     0 (179) 0 0 0
Cash dividends declared (8,856)     0 (8,856) 0 0 0
Stock-based compensation activity, in shares   252 (252)          
Stock-based compensation activity 7,170     14,876 (111) (7,595) 0 0
Payments for withholding taxes for stock-based compensation awards, in shares   (89) 89          
Payments of withholding taxes for stock-based compensation awards (4,846)     0 0 (4,846) 0 0
Repurchase of shares   5 5          
Repurchase of 32, 10, and 5 shares for the years ended 2017, 2018, and 2019, respectively (199)     0 0 (199) 0 0
Directors' deferred compensation, in shares   4 (4)          
Directors' deferred compensation 249     94 0 1,221 0 (1,066)
Ending balances at Dec. 31, 2019 $ 610,677     $ 249,674 $ 589,888 $ (186,845) $ (45,462) $ 3,422
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Common shares   20,404            
Common shares held in Treasury 6,744   6,744          
v3.19.3.a.u2
Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Stockholders' Equity [Abstract]      
Cash dividends per share $ 0.435 $ 0.415 $ 0.395
v3.19.3.a.u2
Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Significant Accounting Policies Significant Accounting Policies
(Dollars in thousands)
Organization:  Materion Corporation (the Company) is a holding company with subsidiaries that have operations in the United States, Europe, and Asia. These operations manufacture advanced engineered materials used in a variety of end markets, including semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center. The Company has four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. Other includes unallocated corporate costs.
Refer to Note B for additional segment details. The Company is vertically integrated and distributes its products through a combination of company-owned facilities and independent distributors and agents.
Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Consolidation:  The Consolidated Financial Statements include the accounts of Materion Corporation and its subsidiaries. All of the Company’s subsidiaries were wholly owned as of December 31, 2019. Intercompany accounts and transactions are eliminated in consolidation.
Cash Equivalents:  All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. At December 31, 2019, the Company had $104.5 million of cash equivalents invested in institutional money market funds. The carrying value of the money market funds approximates fair value due to their short-term maturities.
Accounts Receivable:  An allowance for doubtful accounts is maintained for the estimated losses resulting from the inability of customers to pay amounts due. The allowance is based upon identified delinquent accounts, customer payment patterns, and other analyses of historical data and trends. The allowance for doubtful accounts was $392 and $616 at December 31, 2019 and 2018, respectfully. The Company extends credit to customers based upon their financial condition, and collateral is not generally required.
Inventories:  Inventories are stated at the lower of cost or net realizable value. The cost of the majority of domestic inventories is determined using the last-in, first-out (LIFO) method to reflect a better matching of costs and revenues. The remaining inventories are stated principally at average costs. Inventories valued on the LIFO cost method were approximately 45% and 57% of inventories in 2019 and 2018, respectively.
Property, Plant, and Equipment:  Property, plant, and equipment is stated on the basis of cost. Depreciation is computed principally by the straight-line method, except certain assets for which depreciation may be computed by the units-of-production method. The depreciable lives that are used in computing the annual provision for depreciation by class of asset are primarily as follows:
 
Years
Land improvements
10 to 20
Buildings
20 to 40
Leasehold improvements
Life of lease
Machinery and equipment
3 to 15
Furniture and fixtures
4 to 10
Automobiles and trucks
3 to 8
Research equipment
3 to 10
Computer hardware
3 to 10
Computer software
3 to 10

An asset acquired under a finance lease will be recorded at the lesser of the present value of the projected lease payments or the fair value of the asset and will be depreciated in accordance with the above schedule. Leasehold improvements will be depreciated over the life of the improvement if it is shorter than the life of the lease. Repair and maintenance costs are expensed as incurred.
Mineral Resources and Mine Development: Property acquisition costs are capitalized as mineral resources on the balance sheet and are depleted using the units-of-production method based upon total estimated recoverable proven reserves of the beryllium-
bearing bertrandite ore body. The Company uses beryllium pounds as the unit of accounting measure, and depletion expense is recorded on a pro-rata basis based upon the amount of beryllium pounds extracted as a percentage of total estimated beryllium pounds contained in all ore bodies.

Mine development costs at our open pit surface mines include drilling, infrastructure, other related costs to delineate an ore body, and the removal of overburden to initially expose an ore body. Before mineralization is classified as proven and probable reserves, costs are classified as exploration expense. Capitalization of mine development project costs that meet the definition of an asset begins once mineralization is classified as proven and probable reserves.

Drilling and related costs are capitalized for an ore body where proven and probable reserves exist, and the activities are directed at obtaining additional information on the ore body. All other drilling and related costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to inventory costs and then included as a component of costs applicable to sales.

The costs of removing overburden and waste materials to access the ore body at an open-pit mine prior to the production phase are capitalized during the development of an open-pit mine and are capitalized at each pit. These costs are amortized as the ore is extracted using the units-of-production method based upon total estimated recoverable proven reserves for the individual pit. The Company uses beryllium pounds as the unit of accounting measure for recording amortization.

To the extent that the aforementioned costs benefit an entire ore body, the costs are amortized over the estimated useful life of the ore body. Costs incurred to access specific ore blocks or areas that only provide benefit over the life of that area are amortized over the estimated life of that specific ore block area.
Goodwill and Other Intangible Assets:  Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill and indefinite-lived intangible asset impairment assessment as of the first day of the fourth quarter, or more frequently under certain circumstances. Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Intangible assets with finite lives are amortized using the straight-line method or effective interest method, as applicable, over the periods estimated to be benefited, which is generally 20 years or less. Finite-lived intangible assets are also reviewed for impairment if facts and circumstances warrant.
Long-Lived Asset Impairment: In accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment,” management performs impairment tests of long-lived assets, including property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future undiscounted cash flows generated by the asset group are less than its carrying value.  If such undiscounted cash flows indicate that the carrying value of the asset group is not recoverable, impairment losses are measured by comparing the estimated fair value of the asset group to its carrying amount.
Derivatives:  The Company recognizes all derivatives 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 (loss), a component of shareholders’ equity, until the hedged item is recognized in earnings. If the derivative is designated as a fair value hedge, changes in fair value are offset against the change in the fair value of the hedged asset, liability, or commitment through earnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in its fair value are adjusted through the income statement.
Asset Retirement Obligation:  The Company records a liability to recognize the legal obligation to remove an asset at the time the asset is acquired or when the legal liability arises. The liability is recorded for the present value of the ultimate obligation by discounting the estimated future cash flows using a credit-adjusted risk-free interest rate. The liability is accreted over time, with the accretion charged to expense. An asset equal to the fair value of the liability is recorded concurrent with the liability and depreciated over the life of the underlying asset. The Company's asset retirement obligation related to its mine located in Utah for the years ended December 31, 2019 and 2018 was $1.4 million and $1.3 million, respectively.
Unearned Income:  Expenditures for capital equipment to be reimbursed under government contracts are recorded in property, plant, and equipment, while the reimbursements for those expenditures are recorded in unearned income, a liability on the balance sheet. When the assets subject to reimbursement are placed in service, the total cost is depreciated over the useful lives, and the unearned income liability is reduced and credited to cost of sales on the Consolidated Statements of Income ratably with the annual depreciation expense. Depreciation and amortization expense on the Consolidated Statements of Cash Flows is shown net of the associated period reduction in the unearned income liability.
Advertising Costs: The Company expenses all advertising costs as incurred. Advertising costs were $677 in 2019, $1,196 in 2018, and $1,252 in 2017.
Stock-based Compensation:  The Company recognizes stock-based compensation expense based on the grant date fair value of the award over the period during which an employee is required to provide service in exchange for the award. The fair value of restricted stock units is based on the closing price of the Company's common shares on the grant date. Stock appreciation rights (SARs) are granted with an exercise price equal to the closing price of the Company's common shares on the date of grant. The fair value of SARs is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. See Note P for additional information about stock-based compensation.
Capitalized Interest: Interest expense associated with active capital asset construction and mine development projects is capitalized and amortized over the future useful lives of the related assets.
Income Taxes:  The Company uses the liability method in measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. The Company will record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized, as warranted by current facts and circumstances. The Company applies a more-likely-than-not recognition threshold for all tax uncertainties and will record a liability for those tax benefits that have a less than 50% likelihood of being sustained upon examination by the taxing authorities.
Net Income Per Share:  Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive common stock equivalents as appropriate using the treasury stock method.
New Pronouncements Adopted:  In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 (Topic 842), Leases, which eliminates the off-balance-sheet accounting for leases. This guidance requires lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. The Company adopted this guidance as of January 1, 2019 using the modified retrospective method and applied it retrospectively through a cumulative-effect adjustment to retained earnings. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification, and initial direct costs of leases commencing before this ASU's effective date; however, the Company did not elect the hindsight transitional practical expedient. The Company also applied the practical expedient to not separate lease and non-lease components to new leases as well as existing leases through transition. The Company made an accounting policy election not to apply recognition requirements of the guidance to short-term leases (leases less than twelve months in duration).

Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.

The Company recorded a net reduction to opening retained earnings of $0.2 million as of January 1, 2019 due to the cumulative impact of adopting Topic 842, with the impact primarily related to derecognition of a built-to-suit lease. Refer to Note K for additional disclosures relating to the Company's leasing arrangements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which intended to simplify the subsequent measurement of goodwill. This ASU eliminates the requirement for an entity to calculate the implied fair value of goodwill in measuring an impairment charge. Instead, an entity will perform its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value. The Company adopted this guidance as of January 1, 2019, and the adoption did not have a material effect on the Company's consolidated financial statements. Refer to Note L for additional disclosures related to goodwill.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The Company adopted this guidance as of January 1, 2019, and the adoption did not have a material effect on the Company’s consolidated financial statements.
New Pronouncements Issued: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. This ASU requires an entity to change its accounting approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard will be effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company is nearing completion of its assessment process, as well as the impact to the consolidated financial statements. The adoption of this ASU is not expected to have a material impact on the Company's results of operations, cash flows, or debt covenants.
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.
v3.19.3.a.u2
Segment Reporting and Geographic Information
12 Months Ended
Dec. 31, 2019
Segment Reporting [Abstract]  
Segment Reporting and Geographic Information Segment Reporting and Geographic Information
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. The segments are determined based on several factors, including the availability of discrete financial information and the Company’s organizational and management structure.
Performance Alloys and Composites provides advanced engineered solutions comprised of beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes.
Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Coatings 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.
Financial information for reportable segments was as follows:
 
 
 
 
 
 
 
 
 
 
 
(Thousands)
 
Performance
Alloys and
Composites
 
Advanced Materials
 
Precision Coatings
 
Other
 
Total
2019
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
500,201

 
$
573,763

 
$
111,460

 
$

 
$
1,185,424

Intersegment sales
 
38

 
70,047

 

 

 
70,085

Operating profit (loss)
 
70,652

 
24,740

 
(3,550
)
 
(24,842
)
 
67,000

Depreciation, depletion, and amortization
 
24,437

 
8,955

 
5,695

 
2,029

 
41,116

Expenditures for long-lived assets
 
15,520

 
7,572

 
1,045

 
2,391

 
26,528

Total Assets
 
400,022

 
215,368

 
78,981

 
158,299

 
852,670

2018


 

 

 



Net sales

$
500,590

 
$
586,643

 
$
120,582

 
$


$
1,207,815

Intersegment sales

37

 
50,460

 

 


50,497

Operating profit (loss)
 
58,832

 
17,651

 
11,468

 
(26,455
)
 
61,496

Depreciation, depletion, and amortization
 
17,434

 
8,575

 
7,066

 
2,449

 
35,524

Expenditures for long-lived assets
 
15,396

 
15,523

 
1,983

 
1,358

 
34,260

Total Assets
 
410,239

 
207,183

 
90,537

 
92,382

 
800,341

2017
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
429,442

 
$
590,789

 
$
119,216

 
$

 
$
1,139,447

Intersegment sales
 
114

 
58,056

 

 

 
58,170

Operating profit (loss)
 
21,978

 
32,763

 
8,445

 
(23,155
)
 
40,031

Depreciation, depletion, and amortization
 
23,209

 
7,354

 
9,721

 
2,467

 
42,751

Expenditures for long-lived assets
 
10,427

 
13,318

 
3,048

 
2,283

 
29,076

Total Assets
 
418,798

 
202,389

 
97,504

 
72,393

 
791,084


Intersegment sales are eliminated in consolidation.
The primary measures of evaluating segment performance are operating profit and net sales. From an assets perspective, segments are evaluated based upon a return on invested capital metric, which includes inventory (excluding the impact of LIFO), accounts receivable, and property, plant, and equipment.
Other geographic information includes the following:
(Thousands)
 
2019

2018
 
2017
Net sales
 


 
 
 
United States
 
$
743,345

 
$
726,881

 
$
650,675

Asia
 
256,114

 
270,672

 
265,991

Europe
 
169,132

 
186,081

 
205,118

All other
 
16,833

 
24,181

 
17,663

Total
 
$
1,185,424

 
$
1,207,815

 
$
1,139,447

Long-lived assets by country deployed
 


 
 
 
United States
 
$
194,596


$
215,395

 
$
227,412

All other
 
37,680


35,623

 
28,166

Total
 
$
232,276

 
$
251,018

 
$
255,578


International sales include sales from international operations and direct exports from our U.S. operations. No individual country, other than the United States, or customer accounted for 10% or more of the Company’s net sales for the years presented.
Long-lived assets are comprised of property, plant, and equipment based on physical location.
The following table disaggregates revenue for each segment by end market for 2019 and 2018:

 (Thousands)
 
Performance Alloys and Composites
 
Advanced Materials
 
Precision Coatings
 
Other
 
Total
2019
 
 
 
 
 
 
 
 
 
 
End Market
 
 
 
 
 
 
 
 
 
 
Semiconductor
 
$
5,353

 
$
432,658

 
$
711

 
$

 
$
438,722

Industrial
 
106,334

 
29,917

 
14,253

 

 
150,504

Aerospace and Defense
 
109,717

 
5,647

 
20,731

 

 
136,095

Consumer Electronics
 
72,360

 
1,254

 
18,201

 

 
91,815

Automotive
 
69,057

 
8,179

 
969

 

 
78,205

Energy
 
41,101

 
74,613

 

 

 
115,714

Telecom and Data Center
 
61,344

 
2,981

 

 

 
64,325

Other
 
34,935

 
18,514

 
56,595

 

 
110,044

    Total
 
$
500,201

 
$
573,763

 
$
111,460

 
$

 
$
1,185,424

 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
End Market
 
 
 
 
 
 
 
 
 
 
Semiconductor
 
$
5,020

 
$
436,807

 
$
1,460

 
$

 
$
443,287

Industrial
 
111,149

 
32,246

 
12,756

 

 
156,151

Aerospace and Defense
 
88,041

 
3,813

 
20,044

 

 
111,898

Consumer Electronics
 
62,816

 
1,002

 
18,838

 

 
82,656

Automotive
 
93,720

 
7,843

 
1,362

 

 
102,925

Energy
 
40,877

 
72,027

 

 

 
112,904

Telecom and Data Center
 
67,157

 
2,792

 

 

 
69,949

Other
 
31,810

 
30,113

 
66,122

 

 
128,045

    Total
 
$
500,590

 
$
586,643

 
$
120,582

 
$

 
$
1,207,815


v3.19.3.a.u2
Revenue Recognition
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Revenue from Contract with Customer Revenue Recognition

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

Shipping and Handling Costs: The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill its promise to transfer the associated products. Accordingly, customer payments of shipping and handling costs are recorded as a component of net sales, and related costs are recorded as a component of cost of sales.

Taxes Collected from Customers and Remitted to Governmental Authorities: Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

Product Warranty: Substantially all of the Company’s customer contracts contain a warranty that provides assurance that the purchased product will function as expected and in accordance with certain specifications. The warranty is intended to safeguard the customer against existing defects and does not provide any incremental service to the customer.

Transaction Price Allocated to Future Performance Obligations: ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at December 31, 2019. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. After considering the practical expedient, at December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $42.3 million.

Contract Costs: The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs primarily relate to sales commissions, which are included in selling, general, and administrative expenses.
Contract Balances: The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:

(Thousands)
 
December 31, 2019
 
December 31, 2018
 
$ change
 
% change
Accounts receivable, trade
 
$
141,168

 
$
124,498

 
$
16,670

 
13
 %
Unbilled receivables
 
13,583

 
4,619

 
8,964

 
194
 %
Unearned revenue
 
3,380

 
5,918

 
(2,538
)
 
(43
)%


Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred relating to our receivables were immaterial during 2019.

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

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $5.0 million of the unearned amounts as revenue during 2019.

As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less. The Company does not include extended payment terms in its contracts with customers.
v3.19.3.a.u2
Restructuring
12 Months Ended
Dec. 31, 2019
Restructuring and Related Activities [Abstract]  
Restructuring Restructuring
In 2019, the Company initiated a restructuring plan in the Large Area Coatings (LAC) business (a reporting unit in the Precision Coatings segment) to reduce headcount, idle certain machinery and equipment, and exit a facility in Windsor, Connecticut. Costs
associated with this plan also included severance and related costs for 19 employees. Remaining severance payments related to these initiatives of $0.1 million are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets.
In addition, in each of the last three years, the Company completed cost reduction actions in order to align costs with commensurate business levels. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. Costs associated with these actions in 2019 were in the Other segment and included severance associated with seven employees and other related costs. Remaining severance payments related to these initiatives of $0.1 million are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company expects that the remaining severance payments will be substantially paid by the end of 2020 and does not expect to incur additional costs related to these initiatives.
Costs associated with these actions in 2018 were in the Advanced Materials segment and included severance associated with approximately forty employees and other related costs. Remaining severance payments amount to approximately $1.3 million as of December 31, 2019.
Costs associated with these actions in 2017 were within the Other and Precision Coatings segments and included severance associated with twenty-three employees and other related costs. The severance payments were substantially paid by the end of 2017.
These costs are presented in the Company's segment results as follows:
(Thousands)
 
2019
 
2018
 
2017
Performance Alloys & Composites
 
$

 
$

 
$
(16
)
Advanced Materials
 

 
5,599

 

Precision Coatings
 
328

 

 
431

Other
 
457

 

 
229

Total
 
$
785

 
$
5,599

 
$
644


v3.19.3.a.u2
Other-net
12 Months Ended
Dec. 31, 2019
Other-net [Abstract]  
Other-net Other-net
Other-net is summarized for 2019, 2018, and 2017 as follows:
 
 
(Income) Expense
(Thousands)
 
2019

2018
 
2017
Metal consignment fees
 
$
9,247


$
10,999

 
$
8,782

Amortization of intangible assets
 
1,400


2,265

 
4,629

Foreign currency loss (gain)
 
666


1,487

 
(722
)
Net loss (gain) on disposal of fixed assets
 
344


518

 
234

Rental income
 
(87
)
 
(416
)
 
(168
)
Other items
 
213


481

 
1,138

Total other-net
 
$
11,783

 
$
15,334

 
$
13,893


v3.19.3.a.u2
Interest
12 Months Ended
Dec. 31, 2019
Interest [Abstract]  
Interest Interest expense-net
The following chart summarizes the interest incurred, capitalized, and paid for 2019, 2018, and 2017:
(Thousands)
 
2019
 
2018
 
2017
Interest incurred, net
 
$
1,641


$
2,870

 
$
2,608

Less: Capitalized interest
 
62


399

 
425

Total net expense
 
$
1,579

 
$
2,471

 
$
2,183

Interest paid
 
$
1,799

 
$
1,436

 
$
1,646


The decrease in interest expense for 2019 versus 2018 was primarily due to interest income received on investments held in money market accounts. The increase in interest expense in 2018 compared to 2017 was primarily due to interest expense recorded for a finance lease entered into in 2017 in connection with the acquisition of the high-performance target materials business of the
Heraeus Group. Amortization of deferred financing costs within interest expense was $1.0 million in 2019, $1.0 million in 2018, and $0.9 million in 2017.
v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA) was enacted in the United States. The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations where a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA in 2017 and throughout 2018. As of December 31, 2017, the Company had not completed its accounting for the enactment-date income tax effects of the TCJA under ASC 740 for the following items: remeasurement of deferred tax assets and liabilities, the one-time transition tax on earnings of foreign subsidiaries, and the policy election to account for global intangible low-taxed income (GILTI) as a period cost. In 2017, the Company recorded a total provisional amount of $17.1 million, which was recognized and included as a component of income tax expense. The $17.1 million provisional amount included $5.0 million of tax expense for the re-measurement of deferred tax assets, $6.1 million of tax expense for the transition tax on the mandatory deemed repatriation of foreign earnings, a $9.5 million valuation allowance recorded on foreign tax credits that were deemed unrealizable as a result of the TCJA, and a $3.5 million tax benefit for the generation of foreign tax credits.
The Company completed its accounting for all of the enactment-date income tax effects of the TCJA in the fourth quarter of 2018. During 2018, the Company recognized adjustments to the provisional amounts recorded as of December 31, 2017 and included the adjustments as a component of income tax expense. In 2018, the Company recorded a $11.1 million net tax benefit related to the enactment-date effects of the TCJA, including a $2.8 million tax benefit for the re-measurement of deferred tax assets and liabilities, a $1.2 million tax benefit for the one-time transition tax on the mandatory deemed repatriation of foreign earnings, and a $7.1 million tax benefit related to the generation of foreign tax credits and the reversal of the valuation allowance related to foreign tax credits.
Income before income taxes and income tax expense (benefit) are comprised of the following:
(Thousands)
 
2019
 
2018
 
2017
Income before income taxes:
 
 
 
 
 
 
Domestic
 
$
56,725


$
20,272

 
$
28,327

Foreign
 
5,265


(3,930
)
 
8,069

Total income before income taxes
 
$
61,990

 
$
16,342

 
$
36,396

Income tax expense:
 
 
 
 
 
 
Current income tax expense:
 
 
 
 
 
 
Domestic
 
$
7,544


$
(5,896
)
 
$
1,912

Foreign
 
1,202


2,710

 
2,777

Total current
 
$
8,746

 
$
(3,186
)
 
$
4,689

Deferred income tax expense (benefit):
 
 
 
 
 
 
Domestic
 
$
1,326


$
(4,083
)
 
$
19,935

Foreign
 
1,258


2,765

 
321

Total deferred
 
$
2,584

 
$
(1,318
)
 
$
20,256

Total income tax expense (benefit)
 
$
11,330

 
$
(4,504
)
 
$
24,945


A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
 
 
2019
 
2018
 
2017
U.S. federal statutory rate
 
21.0
 %

21.0
 %
 
35.0
 %
State and local income taxes, net of federal tax effect
 
1.0


0.1

 
2.3

Effect of excess of percentage depletion over cost depletion
 
(4.5
)

(17.8
)
 
(10.0
)
Manufacturing production deduction, including impact of NOL carryback
 


6.3

 
(0.8
)
Foreign derived intangible income deduction
 
(3.2
)
 
(2.9
)
 

Non-deductible goodwill impairment
 
1.2

 

 

Tax Cuts and Jobs Act impact
 
2.5

 
(67.8
)
 
47.1

Foreign rate differential
 
(0.1
)
 
1.5

 
(3.4
)
Research and development tax credit
 
(1.2
)
 
(7.6
)
 
(2.6
)
Foreign tax credit
 
(0.3
)
 
(1.9
)
 
(1.1
)
Foreign repatriation
 
0.4

 
2.0

 
1.3

Incremental fixed asset basis
 

 

 
(3.4
)
Adjustment to unrecognized tax benefits
 
0.2


2.7

 
2.8

Stock compensation - excess tax benefits
 
(3.4
)

(4.4
)
 
(1.9
)
Valuation allowance
 
2.2

 
38.7

 
2.4

Other items
 
2.5


2.5

 
0.8

Effective tax rate
 
18.3
 %
 
(27.6
)%
 
68.5
 %


Deferred tax assets and (liabilities) are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and (liabilities) recorded in the Consolidated Balance Sheets consist of the following:
 
 
December 31,
(Thousands)
 
2019
 
2018
Asset (liability)
 
 
 
 
Post-employment benefits other than pensions
 
$
1,626

 
$
2,198

Other reserves
 
543

 
693

Deferred compensation
 
3,314

 
3,539

Environmental reserves
 
1,384

 
1,463

Inventory
 
2,740

 
3,032

Lease liabilities
 
4,614

 

Pensions
 
5,149

 
8,105

Accrued compensation expense
 
5,364

 
6,215

Net operating loss and credit carryforwards
 
13,513

 
12,002

Research and development tax credit carryforward
 
25

 
744

Foreign tax credit carryforward
 

 
2,385

Subtotal
 
38,272

 
40,376

Valuation allowance
 
(17,676
)
 
(15,917
)
Total deferred tax assets
 
20,596

 
24,459

Depreciation
 
(10,780
)
 
(10,280
)
Lease assets
 
(4,428
)
 

Amortization
 
(2,426
)
 
(3,635
)
Mine development
 
(3,706
)
 
(5,123
)
Total deferred tax liabilities
 
(21,340
)
 
(19,038
)
Net deferred tax (liabilities) assets
 
$
(744
)
 
$
5,421



The Company had deferred income tax assets offset with a valuation allowance for certain foreign and state net operating losses, state investment and research and development tax credit carryforwards, and deferred tax assets that are not likely to be realized for several of the Company's controlled foreign corporations. The Company intends to maintain a valuation allowance on these deferred tax assets until a realization event occurs to support reversal of all or a portion of the allowance.    

At December 31, 2019, for income tax purposes, the Company had foreign net operating loss carryforwards of $29.4 million that do not expire, and $6.5 million that expire in calendar years 2020 through 2027, of which $0.5 million expires within the next twelve months. The Company also had state net operating loss carryforwards of $21.6 million that expire in calendar years 2020 through 2037 and state tax credits of $3.6 million that expire in calendar years 2020 through 2034. A valuation allowance of $11.6 million has been provided against certain foreign and state net operating loss carryforwards and state tax credits due to uncertainty of their realization.
The Company files income tax returns in the U.S. federal jurisdiction, and in various state, local, and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2016, and foreign examinations for tax years before 2011.
A reconciliation of the Company’s unrecognized tax benefits for the year-to-date periods ended December 31, 2019 and 2018 is as follows:
(Thousands)
 
2019
 
2018
Balance at January 1
 
$
2,883

 
$
2,944

Additions to tax provisions related to the current year
 

 
443

Additions to tax positions related to prior years
 
399

 
4

Reduction to tax positions related to prior years
 

 
(508
)
Lapses on statutes of limitations
 
(61
)
 

Balance at December 31
 
$
3,221

 
$
2,883



Included in the balance of unrecognized tax benefits, including interest and penalties, as of December 31, 2019 and December 31, 2018 are $2.4 million and $2.2 million, respectively, of tax benefits that would affect the Company’s effective tax rate if recognized. It is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a material impact on the Consolidated Statements of Income or the Consolidated Balance Sheets.
The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Income. Accrued interest and penalties are included on the related tax liability line in the Consolidated Balance Sheets. The amount of interest and penalties, net of the related tax benefit, recognized in earnings was immaterial during 2019, 2018, and 2017. As of December 31, 2019 and 2018, accrued interest and penalties, net of the related tax benefit, were immaterial.
Income taxes paid during 2019, 2018, and 2017, were approximately $9.3 million, $2.6 million, and $8.1 million, respectively.
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations as of December 31, 2019. The amount of such unrepatriated earnings totaled $84.8 million as of December 31, 2019. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.
v3.19.3.a.u2
Earnings Per Share
12 Months Ended
Dec. 31, 2019
Earnings Per Share [Abstract]  
Earnings Per Share Earnings Per Share
The following table sets forth the computation of basic and diluted EPS:
(Thousands except per share amounts)
 
2019
 
2018
 
2017
Numerator for basic and diluted EPS:
 
 
 
 
 
 
Net income
 
$
50,660


$
20,846

 
$
11,451

Denominator:
 


 
 
 
Denominator for basic EPS:
 


 
 
 
Weighted-average shares outstanding
 
20,365


20,212

 
20,027

Effect of dilutive securities:
 


 
 
 
Stock appreciation rights
 
72


170

 
174

Restricted stock units
 
75


85

 
96

Performance-based restricted stock units
 
143


146

 
118

Diluted potential common shares
 
290

 
401

 
388

Denominator for diluted EPS:
 
 
 
 
 
 
Adjusted weighted-average shares outstanding
 
20,655

 
20,613

 
20,415

Basic EPS
 
$
2.49

 
$
1.03

 
$
0.57

Diluted EPS
 
$
2.45

 
$
1.01

 
$
0.56


Equity awards covering shares of common stock totaling 71,199 in 2019, 65,112 in 2018, and 124,319 in 2017 were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.
v3.19.3.a.u2
Inventories
12 Months Ended
Dec. 31, 2019
Inventory Disclosure [Abstract]  
Inventories Inventories, net
Inventories in the Consolidated Balance Sheets are summarized as follows:
 
 
December 31,
(Thousands)
 
2019
 
2018
Raw materials and supplies
 
$
35,612

 
$
33,182

Work in process
 
177,780

 
195,879

Finished goods
 
25,506

 
30,643

Subtotal
 
238,898

 
259,704

Less: LIFO reserve balance
 
48,508

 
44,833

Inventories
 
$
190,390

 
$
214,871


The liquidation of LIFO inventory layers increased cost of sales by $0.9 million and $1.2 million in 2019 and 2018, respectively, and reduced cost of sales by $0.8 million in 2017.
The Company takes and records the results of a physical inventory count of its precious metals on a quarterly basis. The Company's precious metal operations include a refinery that processes precious metal-containing scrap and other materials from its customers, as well as its own internally generated scrap. The Company also outsources portions of its refining requirements to other vendors, particularly those materials with longer processing times. The precious metal content within these various refine streams may be in solutions, sludges, and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters. The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volumes of solutions and other materials within the refinery, data from the Company's refine vendors, and other factors. The resulting calculated weight of the precious metals in the Company's refine operations may differ, in either direction, from what its records indicate that the Company should have on hand, which would then result in an adjustment to its pre-tax income in the period when the physical inventory was taken, and the related estimates were made.
The Company maintains the majority of the precious metals and copper used 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 $309.3 million as of December 31, 2019 versus $316.1 million as of December 31, 2018.
v3.19.3.a.u2
Property, Plant, and Equipment
12 Months Ended
Dec. 31, 2019
Property, Plant and Equipment [Abstract]  
Property, Plant, and Equipment Property, Plant, and Equipment
Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows:
 
 
December 31,
(Thousands)
 
2019
 
2018
Land
 
$
4,874

 
$
4,874

Buildings
 
150,323

 
149,701

Machinery and equipment
 
639,310

 
631,421

Software
 
44,652

 
42,678

Construction in progress
 
16,699

 
14,468

Allowances for depreciation
 
(669,250
)
 
(642,365
)
Subtotal
 
186,608

 
200,777

Finance leases
 
26,069

 
22,150

Allowances for depreciation
 
(3,569
)
 
(2,412
)
Subtotal
 
22,500

 
19,738

Mineral resources
 
4,980

 
4,980

Mine development
 
30,058

 
27,979

Allowances for amortization and depletion
 
(11,870
)
 
(2,456
)
Subtotal
 
23,168

 
30,503

Property, plant, and equipment — net
 
$
232,276

 
$
251,018


The Company received $63.5 million from the U.S. Department of Defense (DoD), in previous periods, for reimbursement of the DoD's share of the cost of equipment. This amount was recorded in property, plant, and equipment and the reimbursements are reflected in Unearned income on the Consolidated Balance Sheets. The equipment was placed in service during 2012, and its full cost is being depreciated in accordance with Company policy. The unearned income liability is being reduced ratably with the depreciation expense recorded over the life of the equipment.
Unearned income was reduced by $4.4 million and $4.3 million in 2019 and 2018, respectively, and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.
We recorded depreciation and depletion expense of $30.3 million in 2019, $33.3 million in 2018, and $38.1 million in 2017. Depreciation, depletion, and amortization as shown on the Consolidated Statement of Cash Flows is also net of the reduction in the unearned income liability in 2019, 2018, and 2017. The net book value of capitalized software was $7.9 million and $8.0 million at December 31, 2019 and December 31, 2018, respectively. Depreciation expense related to software was $2.4 million, $2.6 million, and $2.4 million in 2019, 2018, and 2017, respectively.
v3.19.3.a.u2
Leasing Arrangements
12 Months Ended
Dec. 31, 2019
Leases [Abstract]  
Leasing Arrangements Leasing Arrangements
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. The weighted average remaining lease term for the Company's operating and finance leases as of December 31, 2019 was 4.69 years and 19.47 years, respectively.

The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure the Company's operating and finance lease liabilities as of December 31, 2019 was 5.91% and 5.31%, respectively.

The components of operating and finance lease cost for 2019 were as follows:
(Thousands)
 
2019
Components of lease expense
 
 
Operating lease cost
 
$
9,835

 
 
 
Finance lease cost
 
 
Amortization of right-of-use assets
 
1,414

Interest on lease liabilities
 
1,028

Total lease cost
 
$
12,277



Operating lease expense under ASC 840 amounted to $11.6 million and $9.3 million during 2018 and 2017, respectively. The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred. These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.
Supplemental balance sheet information related to the Company's operating and finance leases as of December 31, 2019 was as follows:
 
 
Dec. 31,
(Thousands)
 
2019
Supplemental balance sheet information
 
 
 
 
 
Operating Leases
 
 
Operating lease right-of-use assets
 
$
23,413

Other liabilities and accrued items
 
6,542

Operating lease liabilities
 
18,091

 
 
 
Finance Leases
 
 
Property, plant, and equipment
 
$