MATERION CORP, 10-Q filed on 5/2/2019
Quarterly Report
v3.19.1
Document and Entity Information
3 Months Ended
Mar. 29, 2019
shares
Document and Entity Information [Abstract]  
Entity Registrant Name MATERION Corp
Entity Central Index Key 0001104657
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Document Type 10-Q
Document Period End Date Mar. 29, 2019
Document Fiscal Year Focus 2019
Document Fiscal Period Focus Q1
Trading Symbol MTRN
Amendment Flag false
Entity Emerging Growth Company false
Entity Small Business false
Entity Common Stock, Shares Outstanding 20,354,680
v3.19.1
Consolidated Statements of Income - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Income Statement [Abstract]    
Net sales $ 301,441 $ 303,467
Cost of sales 232,129 245,187
Gross margin 69,312 58,280
Selling, general, and administrative expense 40,064 38,462
Research and development expense 3,740 3,643
Other net 4,121 2,924
Operating profit 21,387 13,251
Interest expense—net 466 730
Other non-operating expense - net 245 442
Income before income taxes 20,676 12,079
Income tax expense 3,770 1,515
Net income $ 16,906 $ 10,564
Basic earnings per share:    
Net income per share of common stock (in dollars per share) $ 0.83 $ 0.52
Diluted earnings per share:    
Net income per share of common stock (in dollars per share) $ 0.82 $ 0.51
Weighted-average number of shares of common stock outstanding:    
Basic (in shares) 20,267 20,135
Diluted (in shares) 20,606 20,574
v3.19.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Statement of Comprehensive Income [Abstract]    
Net income $ 16,906 $ 10,564
Other comprehensive income (loss):    
Foreign currency translation adjustment (503) 1,113
Derivative and hedging activity, net of tax 927 (675)
Pension and post-employment benefit adjustment, net of tax 540 1,278
Net current period other comprehensive income (loss) after tax 964 1,716
Comprehensive income $ 17,870 $ 12,280
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 29, 2019
Dec. 31, 2018
Current assets    
Cash and cash equivalents $ 41,864 $ 70,645
Accounts receivable 144,952 130,538
Inventories, net 224,198 214,871
Prepaid and other current assets 23,832 23,299
Total current assets 434,846 439,353
Deferred income taxes 5,301 5,616
Property, Plant and Equipment 908,481 898,251
Less allowances for depreciation, depletion, and amortization (656,326) (647,233)
Property, plant, and equipment—net 252,155 251,018
Operating lease, right-of-use asset 28,327 0
Intangible assets 5,808 6,461
Other assets 7,725 7,236
Goodwill 90,600 90,657
Total Assets 824,762 800,341
Current liabilities    
Short-term debt 836 823
Accounts payable 56,586 49,622
Salaries and wages 24,435 47,501
Other liabilities and accrued items 38,228 33,301
Income taxes 5,877 2,615
Unearned revenue 5,194 5,918
Total current liabilities 131,156 139,780
Other long-term liabilities 11,231 14,764
Operating lease liabilities 22,575 0
Finance lease liabilities 18,502 15,221
Retirement and post-employment benefits 37,813 38,853
Unearned income 31,478 32,563
Long-term income taxes 3,067 2,993
Deferred income taxes 194 195
Long-term debt 1,869 2,066
Serial preferred stock (no par value; 5,000 authorized shares, none issued) 0 0
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 at March 29 and December 31) 241,480 234,704
Retained earnings 562,941 548,374
Common stock in treasury (6,794 shares at March 29 and 6,906 shares at December 31) (184,812) (175,426)
Accumulated other comprehensive loss (57,270) (58,234)
Other equity 4,538 4,488
Total shareholders' equity 566,877 553,906
Total Liabilities and Shareholders’ Equity $ 824,762 $ 800,341
v3.19.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands, $ / shares in Thousands
Mar. 29, 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
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Cash flows from operating activities:    
Net income $ 16,906 $ 10,564
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Depreciation, depletion, and amortization 9,067 9,207
Amortization of deferred financing costs in interest expense 236 261
Stock-based compensation expense (non-cash) 1,547 771
Deferred income tax expense (benefit) 371 (359)
Changes in assets and liabilities:    
Decrease (increase) in accounts receivable (14,698) (8,582)
Decrease (increase) in inventory (9,561) 5,097
Decrease (increase) in prepaid and other current assets (556) (634)
Increase (decrease) in accounts payable and accrued expenses (16,030) (16,308)
Increase (decrease) in interest and taxes payable 2,525 1,626
Domestic pension plan contributions (1,500) (9,000)
Other-net (924) (818)
Net cash used in operating activities (12,617) (8,175)
Cash flows from investing activities:    
Payments for purchase of property, plant, and equipment (8,027) (7,867)
Payments for mine development (1,352) (1,661)
Proceeds from sale of property, plant, and equipment 58 3
Net cash used in investing activities (9,321) (9,525)
Cash flows from financing activities:    
Repayment of long-term debt (197) (190)
Principal payments under finance lease obligations 298 211
Cash dividends paid (2,125) (2,012)
Repurchase of common stock (199) 0
Payments of withholding taxes for stock-based compensation awards (3,978) (2,133)
Net cash used in financing activities (6,797) (4,546)
Effects of exchange rate changes (46) 608
Net change in cash and cash equivalents (28,781) (21,638)
Cash and cash equivalents at beginning of period 70,645 41,844
Cash and cash equivalents at end of period $ 41,864 $ 20,206
v3.19.1
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
Beginning balance (in shares) at Dec. 31, 2017   20,107            
Beginning balances (in Treasury shares) at Dec. 31, 2017     (7,042)          
Beginning balances at Dec. 31, 2017 $ 494,981     $ 223,484 $ 536,116 $ (166,128) $ (102,937) $ 4,446
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 10,564     0 10,564 0 0 0
Other comprehensive income (loss) 1,716     0 0 0 1,716 0
Cumulative effect of accounting change 425     0 425 0 0 0
Cash dividends declared (2,012)     0 (2,012) 0 0 0
Stock-based compensation activity (in shares)   126 126          
Stock-based compensation activity 771     4,200 0 (3,429) 0 0
Payments of withholding taxes for stock-based compensation awards (in shares)   (42) (42)          
Payments of withholding taxes for stock-based compensation awards (2,133)     0 0 (2,133) 0 0
Directors' deferred compensation 17 $ 0 $ 0 10 0 116 0 (109)
Ending balance (in shares) at Mar. 30, 2018   20,191            
Ending balances (in Treasury shares) at Mar. 30, 2018     (6,958)          
Ending balances at Mar. 30, 2018 504,329     227,694 545,093 (171,574) (101,221) 4,337
Beginning balance (in shares) at Dec. 31, 2018   20,242            
Beginning balances (in Treasury shares) at Dec. 31, 2018     (6,906)          
Beginning balances at Dec. 31, 2018 553,906     234,704 548,374 (175,426) (58,234) 4,488
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 16,906     0 16,906 0 0 0
Other comprehensive income (loss) 964     0 0 0 964 0
Cumulative effect of accounting change (179)     0 (179) 0 0 0
Cash dividends declared (2,125)     0 (2,125) 0 0 0
Stock-based compensation activity (in shares)   192 192          
Stock-based compensation activity 1,547     6,759 (35) (5,177) 0 0
Payments of withholding taxes for stock-based compensation awards (in shares)   (75) (75)          
Payments of withholding taxes for stock-based compensation awards (3,978)     0 0 (3,978) 0 0
Repurchase of shares (in shares)   (5) (5)          
Repurchase of shares (199)     0 0 (199) 0 0
Directors' deferred compensation 35 $ 0 $ 0 17 0 (32) 0 50
Ending balance (in shares) at Mar. 29, 2019   20,354            
Ending balances (in Treasury shares) at Mar. 29, 2019     (6,794)          
Ending balances at Mar. 29, 2019 $ 566,877     $ 241,480 $ 562,941 $ (184,812) $ (57,270) $ 4,538
v3.19.1
Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Statement of Stockholders' Equity [Abstract]    
Cash dividends declared (per share) $ 0.105 $ 0.10
v3.19.1
Accounting Policies
3 Months Ended
Mar. 29, 2019
Accounting Policies [Abstract]  
Accounting Policies
Accounting Policies

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 periods have been reclassified to conform to the 2019 consolidated financial statement presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2018 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
New Pronouncements Adopted: In 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.

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 H for additional disclosures relating to the Company's leasing arrangements.
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 currently assessing the effect that this ASU will have on its financial position, results of operations, and disclosures.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.
v3.19.1
Segment Reporting
3 Months Ended
Mar. 29, 2019
Segment Reporting [Abstract]  
Segment Reporting
Segment Reporting
 
The Company has the following reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. The Company’s reportable segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance.
Performance Alloys and Composites produces strip and bulk form alloy products, strip metal products with clad inlay and overlay metals, beryllium-based metals, beryllium, and aluminum metal matrix composites, in rod, sheet, foil, and a variety of customized forms, 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.
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
First Quarter 2019
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
127,113

 
$
144,025

 
$
30,303

 
$

 
$
301,441

Intersegment sales 
 
9

 
17,213

 

 

 
17,222

Operating profit (loss)
 
18,958

 
7,080

 
2,077

 
(6,728
)
 
21,387

First Quarter 2018
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
118,236

 
$
153,545

 
$
31,686

 
$

 
$
303,467

Intersegment sales
 
28

 
11,652

 

 

 
11,680

Operating profit (loss)
 
9,861

 
5,898

 
3,375

 
(5,883
)
 
13,251



The following table disaggregates revenue for each segment by end market for the first quarter of 2019 and 2018:

 (Thousands)
 
Performance Alloys and Composites
 
Advanced Materials
 
Precision Coatings
 
Other
 
Total
First Quarter 2019
 
 
 
 
 
 
 
 
 
 
End Market
 
 
 
 
 
 
 
 
 
 
Consumer Electronics
 
$
23,210

 
$
73,700

 
$
3,734

 
$

 
$
100,644

Industrial Components
 
23,850

 
11,136

 
2,995

 

 
37,981

Energy
 
12,409

 
23,559

 

 

 
35,968

Automotive Electronics
 
18,144

 

 

 

 
18,144

Defense
 
12,722

 
4,764

 
5,260

 

 
22,746

Medical
 
2,760

 
4,871

 
17,019

 

 
24,650

Telecom Infrastructure
 
10,123

 
6,466

 

 

 
16,589

Other
 
23,895

 
19,529

 
1,295

 

 
44,719

    Total
 
$
127,113

 
$
144,025

 
$
30,303

 
$

 
$
301,441

 
 
 
 
 
 
 
 
 
 
 
First Quarter 2018
 
 
 
 
 
 
 
 
 
 
End Market
 
 
 
 
 
 
 
 
 
 
Consumer Electronics
 
$
25,358

 
$
82,050

 
$
4,279

 
$

 
$
111,687

Industrial Components
 
28,521

 
13,299

 
2,492

 

 
44,312

Energy
 
7,804

 
23,436

 

 

 
31,240

Automotive Electronics
 
18,970

 

 
222

 

 
19,192

Defense
 
6,622

 
4,485

 
4,315

 

 
15,422

Medical
 
1,743

 
4,409

 
19,070

 

 
25,222

Telecom Infrastructure
 
8,094

 
7,357

 
59

 

 
15,510

Other
 
21,124

 
18,509

 
1,249

 

 
40,882

    Total
 
$
118,236

 
$
153,545

 
$
31,686

 
$

 
$
303,467


Intersegment sales are eliminated in consolidation.
v3.19.1
Revenue Recognition
3 Months Ended
Mar. 29, 2019
Revenue from Contract with Customer [Abstract]  
Revenue from Contract with Customer [Text Block]
Revenue Recognition

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

Transaction Price Allocated to Future Performance Obligations: Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied at March 29, 2019. Remaining performance obligations include noncancelable 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 March 29, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $26.6 million, of which $7.4 million will be recognized in 2019.

Contract Balances: The timing of revenue recognition, billings, and cash collections resulted in the following contract assets and contract liabilities:

(Thousands)
 
March 29, 2019
 
December 31, 2018
 
$ change
 
% change
Accounts receivable, trade
 
$
138,498

 
$
124,498

 
$
14,000

 
11
 %
Unbilled receivables
 
6,027

 
4,619

 
1,408

 
30
 %
Unearned revenue
 
5,194

 
5,918

 
(724
)
 
(12
)%


Accounts receivable, trade represents payments due from customers relating to the transfer of the Company’s products and services. The Company believes that its receivables are collectible and appropriate allowances for doubtful accounts have been recorded. Impairment losses (bad debt) incurred relating to our receivables were immaterial during the first quarter of 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 $3.0 million of the unearned amounts as revenue during the first quarter of 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.
v3.19.1
Other-net
3 Months Ended
Mar. 29, 2019
Other Income and Expenses [Abstract]  
Other-net
Other-net
Other-net expense for the first quarter of 2019 and 2018 is summarized as follows: 
 
 
First Quarter Ended
 
 
March 29,
 
March 30,
(Thousands)
 
2019
 
2018
Metal consignment fees
 
$
3,091

 
$
2,429

Amortization of intangible assets
 
390

 
773

Foreign currency loss (gain)
 
77

 
(11
)
Net loss on disposal of fixed assets
 
24

 
26

Rental income
 
(29
)
 
(126
)
Other items
 
568

 
(167
)
Total
 
$
4,121

 
$
2,924

v3.19.1
Income Taxes
3 Months Ended
Mar. 29, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes

The Company's effective tax rate for the three-month periods ended March 29, 2019 and March 30, 2018 was 18.2% and 12.5%, respectively. The effective tax rate for each period is lower than the statutory tax rate primarily due to the impact of percentage depletion and the research and development credit. Additionally, the effective tax rate for both periods included discrete income tax benefits of $0.9 million, primarily related to excess tax benefits from stock-based compensation in 2019 and Staff Accounting Bulletin No. 118 adjustments in 2018.
v3.19.1
Earnings Per Share
3 Months Ended
Mar. 29, 2019
Earnings Per Share [Abstract]  
Earnings Per Share
Earnings Per Share (EPS)
The following table sets forth the computation of basic and diluted EPS:
 
 
First Quarter Ended
 
 
March 29,
 
March 30,
(Thousands, except per share amounts)
 
2019
 
2018
Numerator for basic and diluted EPS:
 
 
 
 
Net income
 
$
16,906

 
$
10,564

Denominator:
 
 
 
 
Denominator for basic EPS:
 
 
 
 
Weighted-average shares outstanding
 
20,267

 
20,135

Effect of dilutive securities:
 
 
 
 
Stock appreciation rights
 
107

 
203

Restricted stock units
 
83

 
98

Performance-based restricted stock units
 
149

 
138

Diluted potential common shares
 
339

 
439

Denominator for diluted EPS:
 

 

Adjusted weighted-average shares outstanding
 
20,606

 
20,574

Basic EPS
 
$
0.83

 
$
0.52

Diluted EPS
 
$
0.82

 
$
0.51



Securities totaling 201,394 and 65,112 for the quarters ended March 29, 2019 and March 30, 2018, respectively were excluded from the dilution calculation as their effect would have been anti-dilutive.
v3.19.1
Inventories
3 Months Ended
Mar. 29, 2019
Inventory Disclosure [Abstract]  
Inventories
Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
 
 
March 29,
 
December 31,
(Thousands)
 
2019
 
2018
Raw materials and supplies
 
$
38,002

 
$
33,182

Work in process
 
194,548

 
195,879

Finished goods
 
36,838

 
30,643

Subtotal
 
$
269,388

 
$
259,704

Less: LIFO reserve balance
 
45,190

 
44,833

Inventories
 
$
224,198

 
$
214,871


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 $276.3 million as of March 29, 2019 versus $316.1 million as of December 31, 2018.
v3.19.1
Leases
3 Months Ended
Mar. 29, 2019
Leases [Abstract]  
Leases of Lessee Disclosure [Text Block]
Leases
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 March 29, 2019 was 5.12 years and 19.75 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 March 29, 2019 was 5.38% and 5.31%, respectively.

The components of operating and finance lease cost for the first quarter of 2019 were as follows:
 
 
First Quarter Ended
 
 
March 29,
(Thousands)
 
2019
Components of lease expense
 
 
Operating lease cost
 
$
2,712

 
 
 
Finance lease cost
 
 
Amortization of right-of-use assets
 
356

Interest on lease liabilities
 
263

Total lease cost
 
$
3,331



Operating lease expense amounted to $2.7 million and $3.0 million during the first quarter of 2019 and 2018, 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 March 29, 2019 was as follows:
 
 
March 29,
(Thousands)
 
2019
Supplemental balance sheet information
 
 
 
 
 
Operating Leases
 
 
Operating lease right-of-use assets
 
$
28,327

Other liabilities and accrued items
 
7,190

Operating lease liabilities
 
22,575

 
 
 
Finance Leases
 
 
Property, plant, and equipment
 
$
26,185

Allowances for depreciation, depletion, and amortization
 
(2,906
)
Finance lease assets, net
 
$
23,279

Other liabilities and accrued items
 
$
1,218

Finance lease liabilities
 
18,502

Total principal payable on finance leases
 
$
19,720



Future maturities of the Company's lease liabilities as of March 29, 2019 are as follows:
 
 
Finance
 
Operating
(Thousands)
 
Leases
 
Leases
2019
 
$
1,675

 
$
6,296

2020
 
2,234

 
7,614

2021
 
2,234

 
6,629

2022
 
2,234

 
4,737

2023
 
1,524

 
3,825

2024 and thereafter
 
22,212

 
5,153

Total lease payments
 
32,113

 
34,254

Less amount of lease payment representing interest
 
12,393

 
4,489

Total present value of lease payments

 
$
19,720

 
$
29,765



Supplemental cash flow information related to leases for the first quarter of 2019 was as follows:
 
 
First Quarter Ended
 
 
March 29,
(Thousands)
 
2019
Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
3,779

Operating cash flows from finance leases
 
263

Financing cash flows from finance leases
 
298

v3.19.1
Pensions and Other Post-employment Benefits
3 Months Ended
Mar. 29, 2019
Retirement Benefits [Abstract]  
Pensions and Other Post-employment Benefits
Pensions and Other Post-employment Benefits
The following is a summary of the net periodic benefit cost for the first quarter of 2019 and 2018 for the domestic pension plans (which include the defined benefit pension plan and the supplemental retirement plans) and the domestic retiree medical plan.
 

Pension Benefits

Other Benefits
 

First Quarter Ended

First Quarter Ended


March 29,

March 30,

March 29,

March 30,
(Thousands)

2019

2018

2019

2018
Components of net periodic benefit cost (benefit)








Service cost

$
1,340


$
1,674


$
17


$
28

Interest cost

1,557


2,397


100


99

Expected return on plan assets

(2,123
)

(3,697
)




Amortization of prior service benefit

120


(31
)

(374
)

(374
)
Amortization of net loss (gain)

804


1,960


(23
)


Net periodic benefit cost (benefit)

$
1,698


$
2,303


$
(280
)

$
(247
)

The Company made contributions to the domestic defined benefit pension plan of $1.5 million and $9.0 million in the first quarter of 2019 and 2018, respectively.
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating expenses.
v3.19.1
Accumulated Other Comprehensive Income
3 Months Ended
Mar. 29, 2019
Equity [Abstract]  
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income, including the amounts reclassified, for the first quarter of 2019 and 2018 are as follows:
 
 
Gains and Losses on Cash Flow Hedges
 
 
 
 
 
 
(Thousands)
 
Foreign Currency
 
Precious Metals
 
Copper
 
Total
 
Pension and Post-Employment Benefits
 
Foreign Currency Translation
 
Total
Balance at December 31, 2018

$
1,263


$
79


$
(441
)
 
$
901


$
(54,543
)

$
(4,592
)

$
(58,234
)
Other comprehensive income before reclassifications

517


(73
)

884

 
1,328




(503
)

825

Amounts reclassified from accumulated other comprehensive income

2


(61
)

(71
)
 
(130
)

660




530

Net current period other comprehensive income (loss) before tax

519


(134
)

813

 
1,198


660


(503
)

1,355

Deferred taxes

119


(31
)

183

 
271


120




391

Net current period other comprehensive income (loss) after tax

400


(103
)

630

 
927


540


(503
)

964

Balance at March 29, 2019

$
1,663


$
(24
)

$
189

 
$
1,828


$
(54,003
)

$
(5,095
)

$
(57,270
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
$
959

 
$
(196
)
 
$

 
$
763

 
$
(99,592
)
 
$
(4,108
)
 
$
(102,937
)
Other comprehensive income (loss) before reclassifications
 
(1,198
)
 
(191
)
 

 
(1,389
)
 

 
1,113

 
(276
)
Amounts reclassified from accumulated other comprehensive income
 
377

 
136

 

 
513

 
1,626

 

 
2,139

Net current period other comprehensive income (loss) before tax
 
(821
)
 
(55
)
 

 
(876
)
 
1,626

 
1,113

 
1,863

Deferred taxes
 
(188
)
 
(13
)
 

 
(201
)
 
348

 

 
147

Net current period other comprehensive income (loss) after tax
 
(633
)
 
(42
)
 

 
(675
)
 
1,278

 
1,113

 
1,716

Balance at March 30, 2018
 
$
326

 
$
(238
)
 
$

 
$
88

 
$
(98,314
)
 
$
(2,995
)
 
$
(101,221
)

Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income. Reclassifications from accumulated other comprehensive income of gains and losses on precious metal cash flow hedges are recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note 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.
v3.19.1
Stock-based Compensation Expense
3 Months Ended
Mar. 29, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-based Compensation Expense
Stock-based Compensation Expense
Stock-based compensation expense, which includes awards settled in shares and in cash, was $2.7 million and $2.5 million in the first quarter of 2019 and 2018, respectively.
The Company granted 73,461 stock appreciation rights (SARs) to certain employees during the first quarter of 2019. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the three months ended March 29, 2019 were $58.30 and $17.76, 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
 
2.47
%
Dividend yield
 
0.7
%
Volatility
 
31.7
%
Expected term (in years)
 
5.2


The Company granted 63,665 stock-settled restricted stock units (RSUs) to certain employees during the first three months of 2019. 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 $58.30 for stock-settled RSUs granted to employees during the three months ended March 29, 2019. RSUs are expensed over the vesting period of three years.
The Company granted stock-settled performance-based restricted stock units (PRSUs) to certain employees in the first three months of 2019. The weighted-average fair value of the stock-settled PRSUs was $69.84 per share and will be expensed over the vesting period of three years. The final payout to the employees for all PRSUs will be based upon the Company’s return on invested capital and the total return to shareholders over the vesting period relative to a peer group’s performance over the same period.
At March 29, 2019, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $14.9 million, and is expected to be recognized over the remaining vesting period of the respective grants.
v3.19.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 29, 2019
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
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.
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets as of March 29, 2019 and December 31, 2018: 
 
 
 
 
 
 
 
 
 
(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)
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation investments
 
$
2,915

 
$
2,156

 
$
2,915

 
$
2,156

 
$

 
$

 
$

 
$

Foreign currency forward contracts
 
495

 
246

 

 

 
495

 
246

 

 

Precious metal swaps
 
112

 
237

 

 

 
112

 
237

 

 

Copper swaps
 
273

 

 

 

 
273

 

 

 

Total
 
$
3,795

 
$
2,639

 
$
2,915

 
$
2,156

 
$
880

 
$
483


$


$

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liability
 
$
2,915

 
$
2,156

 
$
2,915

 
$
2,156

 
$

 
$

 
$

 
$

Foreign currency forward contracts
 
136

 
432

 

 

 
136

 
432

 

 

Precious metal swaps
 
144

 
135

 

 

 
144

 
135

 

 

Copper swaps
 
29

 
569

 

 

 
29

 
569

 

 

Total
 
$
3,224

 
$
3,292

 
$
2,915

 
$
2,156

 
$
309

 
$
1,136

 
$

 
$


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 March 29, 2019 and December 31, 2018.
v3.19.1
Derivative Instruments and Hedging Activity
3 Months Ended
Mar. 29, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activity
Derivative Instruments and Hedging Activity
The Company uses derivative contracts to hedge portions of its foreign currency exposures and uses derivatives to hedge a portion of its precious metal and copper exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency.    The Company sells a portion of its products to overseas customers in their local currencies, primarily the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending upon the methods used, 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 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.
Copper. We also use copper in our production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time our price exposure to copper is generally in balance, there can be a lag between the change in our cost and the pass-through to our customers, resulting in higher or lower margins in a given period. To mitigate this impact, we hedge a portion of this pricing risk.
The Company will only enter into a derivative contract if there is an underlying identified exposure. Contracts are typically held 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. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.

The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of March 29, 2019 and December 31, 2018:
 
 
March 29, 2019
 
December 31, 2018
(Thousands)
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Foreign currency forward contracts - euro
 
 
 
 
 
 
 
 
Prepaid expenses
 
$
4,379

 
$
154

 
$
8,767

 
$
244

Other liabilities and accrued items
 
3,514

 
133

 
8,771

 
249


These outstanding foreign currency derivatives were related to intercompany loans. Other-net included no foreign currency impact relating to these derivatives during the first quarter of 2019 and included $0.5 million of foreign currency losses during the first quarter of 2018.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification as of March 29, 2019 and December 31, 2018:
 
 
March 29, 2019
 
December 31, 2018
(Thousands)
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Prepaid expenses
 
 
 
 
 
 
 
 
Foreign currency forward contracts - yen
 
$
2,081

 
$
60

 
$

 
$

Foreign currency forward contracts - euro
 
14,922

 
270

 
725

 
2

Precious metal swaps
 
3,374

 
112

 
4,533

 
237

Copper swaps
 
5,123

 
273

 

 

Total
 
25,500

 
715

 
5,258

 
239

 
 
 
 
 
 
 
 
 
Other assets
 
 
 
 
 
 
 
 
Foreign currency forward contracts - euro
 
553

 
11

 

 

Total
 
553

 
11

 

 

 
 
 
 
 
 
 
 
 
Other liabilities and accrued items
 
 
 
 
 
 
 
 
Foreign currency forward contracts - yen
 
823

 
1

 
1,264

 
17

Foreign currency forward contracts - euro
 
1,236

 
2

 
19,158

 
166

Precious metal swaps
 
3,134

 
144

 
2,864

 
135

Copper swaps
 
2,372

 
29

 
11,170

 
569

Total
 
7,565

 
176

 
34,456

 
887

 
 
 
 
 
 
 
 
 
Total
 
$
33,618

 
$
550

 
$
39,714

 
$
648


All of these contracts were designated and effective as cash flow hedges. The Company expects to relieve substantially the entire balance in OCI as of March 29, 2019 to the Consolidated Statements of Income within the next 15-month period. Refer to Note J for additional OCI details.
The following table summarizes the amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification as of March 29, 2019:
 
 
 
 
First Quarter Ended
 
 
 
 
March 29,
(Thousands)
 
 
 
2019
Hedging relationship
 
Line item
 
 
Foreign currency forward contracts - yen
 
Net sales
 
$
8

Foreign currency forward contracts - euro
 
Net sales
 
(6
)
Precious metal swaps
 
Cost of sales
 
(61
)
Copper swaps
 
Cost of sales
 
(71
)
Total
 
 
 
$
(130
)
v3.19.1
Contingencies - USD ($)
$ in Millions
3 Months Ended
Mar. 29, 2019
Dec. 31, 2018
Loss Contingency [Abstract]    
Undiscounted reserve balance $ 6.4 $ 6.5
Commitments and Contingencies Disclosure [Text Block]
Contingencies
Legal Proceedings. For information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note S ("Contingencies and Commitments") in the Company's 2018 Annual Report on Form 10-K.
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 $6.4 million and $6.5 million at March 29, 2019 and December 31, 2018, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.
 
v3.19.1
Basis of Accounting (Policies)
3 Months Ended
Mar. 29, 2019
Accounting Policies [Abstract]  
Basis of Accounting
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 periods have been reclassified to conform to the 2019 consolidated financial statement presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2018 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.