MATERION CORP, 10-K filed on 2/14/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
12 Months Ended
Dec. 31, 2018
Feb. 01, 2019
Jun. 29, 2018
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-K    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Amendment Flag false    
Entity Common Stock, Shares Outstanding   20,238,146  
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     $ 1,082,760,630
v3.10.0.1
Consolidated Statements of Income - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Net sales $ 1,207,815 $ 1,139,447 $ 969,236
Cost of sales 956,710 926,618 784,708
Gross margin 251,105 212,829 184,528
Selling, general, and administrative expense 153,489 144,280 128,972
Research and development expense 15,187 13,981 12,802
Restructuring expense 5,599 644 2,586
Other - net 15,334 13,893 11,288
Operating profit 61,496 40,031 28,880
Interest expense - net 2,471 2,183 1,789
Other non-operating expense-net 42,683 1,452 1,776
Income before income taxes 16,342 36,396 25,315
Income tax (benefit) expense (4,504) 24,945 (425)
Net income $ 20,846 $ 11,451 $ 25,740
Basic earnings per share:      
Net income per share of common stock (in usd per share) $ 1.03 $ 0.57 $ 1.29
Diluted earnings per share:      
Net income per share of common stock (in usd per share) 1.01 0.56 1.27
Cash dividends per share $ 0.415 $ 0.395 $ 0.375
Weighted-average number of shares of common stock outstanding:      
Basic 20,212 20,027 19,983
Diluted 20,613 20,415 20,213
v3.10.0.1
Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net income $ 20,846 $ 11,451 $ 25,740
Other comprehensive income:      
Foreign currency translation adjustment (484) 1,552 (172)
Derivative and hedging activity, net of tax benefit (expense) of $672, ($271), and ($149) 138 (1,074) 258
Pension and post-employment benefit adjustment, net of tax benefit (expense) of ($13,300), ($13,820), and $4,555 45,049 (17,234) (5,562)
Other comprehensive income (loss) 44,703 (16,756) (5,476)
Comprehensive income (loss) $ 65,549 $ (5,305) $ 20,264
v3.10.0.1
Consolidated Statements of Comprehensive Income (Parentheticals) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Derivative and hedging activity, tax benefit (expense) $ 672 $ (271) $ (149)
Pension and post employment benefit adjustment, tax benefit (expense) $ (13,300) $ (13,820) $ 4,555
v3.10.0.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities:      
Net income $ 20,846 $ 11,451 $ 25,740
Adjustments to reconcile net income to net cash provided from operating activities:      
Depreciation, depletion, and amortization 35,524 42,751 45,651
Amortization of deferred financing costs in interest expense 1,009 919 666
Stock-based compensation expense (non-cash) 5,313 4,957 3,174
Amortization of pension and post-retirement costs 5,551 4,865 4,060
Loss (gain) on sale of property, plant, and equipment 518 234 (648)
Deferred income tax (benefit) expense (1,318) 20,256 (9,010)
Pension settlement charges 41,406 0 120
Changes in assets and liabilities net of acquired assets and liabilities:      
Decrease (increase) in accounts receivable (7,219) (18,484) (4,096)
Decrease (increase) in inventory 4,234 (9,462) 10,791
Decrease (increase) in prepaid and other current assets 1,162 (11,606) 658
Increase (decrease) in accounts payable and accrued expenses 8,820 34,433 2,758
Increase (decrease) in unearned revenue 477 4,336 (2,590)
Increase (decrease) in interest and taxes payable 435 (514) 2,511
Domestic pension plan contributions (42,000) (16,000) (16,000)
Other — net 1,616 (341) 4,395
Net cash provided from operating activities 76,374 67,795 68,180
Cash flows from investing activities:      
Payments for purchase of property, plant, and equipment (27,702) (27,516) (27,177)
Payments for mine development (6,558) (1,560) (9,861)
Payments for acquisition 0 (16,504) (1,750)
Proceeds from sale of property, plant, and equipment 432 2,222 1,433
Net cash (used in) investing activities (33,828) (43,358) (37,355)
Cash flows from financing activities:      
Repayment of short-term debt 0 0 (8,305)
Proceeds from issuance of long-term debt 0 55,000 10,000
Repayment of long-term debt (777) (55,797) (10,694)
Principal payments under capital lease obligations (861) (843) (736)
Cash dividends paid (8,389) (7,913) (7,496)
Deferred financing costs 0 (300) (1,000)
Repurchase of common stock (422) (1,086) (3,798)
Payments of withholding taxes for stock-based compensation awards (3,156) (4,506) (1,089)
Net cash (used in) financing activities (13,605) (15,445) (23,118)
Effects of exchange rate changes (140) 1,388 (479)
Net change in cash and cash equivalents 28,801 10,380 7,228
Cash and cash equivalents at beginning of period 41,844 31,464 24,236
Cash and cash equivalents at end of period $ 70,645 $ 41,844 $ 31,464
v3.10.0.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current assets    
Cash and cash equivalents $ 70,645 $ 41,844
Accounts receivable 130,538 124,014
Inventories 214,871 220,352
Prepaid and other current assets 23,299 24,733
Total current assets 439,353 410,943
Deferred income taxes 5,616 17,047
Property, plant, and equipment 898,251 891,789
Less allowances for depreciation, depletion, and amortization (647,233) (636,211)
Property, plant, and equipment — net 251,018 255,578
Intangible assets 6,461 9,847
Other assets 7,236 6,992
Goodwill 90,657 90,677
Total Assets 800,341 791,084
Current liabilities    
Short-term debt 823 777
Accounts payable 49,622 49,059
Salaries and wages 47,501 42,694
Other liabilities and accrued items 33,301 28,044
Income taxes 2,615 1,084
Unearned revenue 5,918 5,451
Total current liabilities 139,780 127,109
Other long-term liabilities 14,764 14,895
Capital lease obligations 15,221 16,072
Retirement and post-employment benefits 38,853 93,225
Unearned income 32,563 36,905
Long-term income taxes 2,993 4,857
Deferred income taxes 195 213
Long-term debt 2,066 2,827
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 2018 and 2017) 234,704 223,484
Retained earnings 548,374 536,116
Common stock in treasury (6,906 shares for 2018 and 7,042 shares for 2017) (175,426) (166,128)
Accumulated other comprehensive loss (58,234) (102,937)
Other equity 4,488 4,446
Total shareholders’ equity 553,906 494,981
Total Liabilities and Shareholders’ Equity $ 800,341 $ 791,084
v3.10.0.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands, $ / shares in Thousands
Dec. 31, 2018
Dec. 31, 2017
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 6,906 7,042
v3.10.0.1
Consolidated Statements of Shareholders' Equity - USD ($)
$ in Thousands
Total
Common Stock
Retained Earnings
Common Stock In Treasury
Accumulated Other Comprehensive Income (Loss)
Other Equity Transactions
Beginning balances at Dec. 31, 2015 $ 482,957 $ 208,967 $ 499,659 $ (148,559) $ (80,705) $ 3,595
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income 25,740 0 25,740 0 0 0
Other comprehensive income (loss) (5,476) 0 0 0 (5,476) 0
Pension settlement charges 120          
Cash dividends declared (7,496) 0 (7,496) 0 0 0
Stock-based compensation activity 2,002 3,764 0 (1,762) 0 0
Repurchase of 147, 32 and 10 shares for the years ended 2016, 2017, and 2018, respectively (3,798) 0 0 (3,798) 0 0
Directors' deferred compensation 160 (29) 0 (280) 0 469
Ending 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) (16,756) 0 0 0 (2,081) 0
Other comprehensive income (loss), net of tax (2,081)          
Pension settlement charges 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 450 10,750 0 (10,300) 0 0
Repurchase of 147, 32 and 10 shares for the years ended 2016, 2017, and 2018, respectively (1,086) 0 0 (1,086) 0 0
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]            
Net income 20,846 0 20,846 0 0 0
Other comprehensive income (loss) 44,703 0 0 0 2,722 0
Other comprehensive income (loss), net of tax 2,722          
Pension settlement charges 41,406 0 0 0 41,406 0
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 2,158 11,131 (49) (8,924) 0 0
Repurchase of 147, 32 and 10 shares for the years ended 2016, 2017, and 2018, respectively (422) 0 0 (422) 0 0
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
v3.10.0.1
Consolidated Statements of Shareholders' Equity (Parenthetical) - shares
shares in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Stockholders' Equity [Abstract]      
Shares repurchased 10 32 147
v3.10.0.1
Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
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 consumer electronics, industrial components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and appliance. The Company has four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings, and Other. Other includes unallocated corporate costs.
Refer to Note D 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.
Business Combinations: The Company records assets acquired and liabilities assumed at the date of acquisition at their respective fair values. Any intangible assets acquired in a business combination are recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
The amounts reflected in Note C are the results of the final purchase price allocation.
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, 2018. 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, 2018, the Company had $50.3 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 $616 and $640 at December 31, 2018 and 2017, 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 57% of inventories, net in 2018, and 52% of inventories, net in 2017.
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 capital 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.
Asset Impairment:    In the event that facts and circumstances indicate that the carrying value of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to the associated estimated future undiscounted cash flow. If the carrying value exceeds that cash flow, then the assets are written down to their fair values.
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.
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 $1,196 in 2018, $1,252 in 2017, and $1,163 in 2016.
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 Q 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 March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, which requires an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by pertinent employees during the period. This ASU requires non-service cost components of net benefit cost to be presented in a caption below the Company's Operating profit and allows only the service cost component to be eligible for capitalization. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The Company adopted the new standard as of January 1, 2018 and applied its amendments retrospectively for the presentation of service cost and other components of net benefit cost on the income statement and prospectively for the capitalization of service cost and net periodic post-retirement benefits in assets. The application of ASU 2017-07 resulted in an increase to Operating profit of $1.5 million and $1.8 million for 2017 and 2016, respectively, which was offset by a corresponding increase in Other non-operating expense, net. The adoption of this ASU did not have a material effect on the Company's financial condition or liquidity. The Company utilized this ASU's practical expedient, which permits the Company to use the amounts disclosed in its Pensions and Other Post-employment Benefits note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which supersedes previous revenue recognition guidance. The Company adopted the new standard using the modified retrospective method as of January 1, 2018. Prior periods were not retrospectively adjusted. This approach was applied to all contracts not completed as of January 1, 2018. The new standard primarily impacted the Company's timing of revenue recognition for certain contracts and subcontracts with the United States (U.S.) government that contain termination for convenience clauses, and due to the cumulative impact of adopting ASC 606, the Company recorded an increase to beginning retained earnings of $0.4 million, net of tax as summarized below:
(Thousands)
 
December 31, 2017
 
Adjustments due to ASC 606
 
January 1, 2018
Assets
 
 
 
 
 
 
Unbilled receivables
 
$

 
$
2,658

 
$
2,658

Inventories
 
220,352

 
(2,059
)
 
218,293

 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
Other liabilities and accrued items
 
$
28,044

 
61

 
28,105

Deferred income taxes
 
213

 
113

 
326

Retained earnings
 
536,116

 
425

 
536,541



The adoption of the standard did not have a material impact to the Company's consolidated financial statements. Refer to Note B for additional disclosures relating to ASC 606.
New Pronouncements Issued: 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. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which eliminates the off-balance-sheet accounting for leases. The new guidance will require lessees to report their operating leases as both an asset and liability on the balance sheet and disclose key information about leasing arrangements. This ASU is required to be applied using a modified retrospective adoption method with the option of applying the guidance either retrospectively to each prior comparative reporting period presented or retrospectively at the beginning of the period of adoption. This ASU is effective for interim and annual periods on January 1, 2019, and the Company will apply 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 will not elect the hindsight transitional practical expedient. The Company also will apply the practical expedient to not separate lease and non-lease components to new leases as well as existing leases through transition. The Company will elect an accounting policy to not apply recognition requirements of the guidance to short-term leases.

The Company is nearing completion of its assessment process and its determination of the expanded disclosure regarding leases, as well as the impact to the consolidated financial statements. The Company is also concluding its testing of the functionality and related controls of a new third-party lease accounting system and implementing other new processes and controls to support recognition and disclosure under the new lease standard. The adoption of the new standard will result in the recording of lease assets and lease liabilities for operating leases in the range of approximately $26 million to $28 million as of January 1, 2019. 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 ASUs are expected to have a material effect on the Company's results of operations, financial condition, or liquidity.
v3.10.0.1
Revenue Recognition
12 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue from Contract with Customer
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, 2018. 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 December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $28.8 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, 2018
 
January 1, 2018
 
$ change
 
% change
Accounts receivable, trade
 
$
124,498

 
$
122,393

 
$
2,105

 
2
%
Unbilled receivables
 
4,619

 
2,658

 
1,961

 
74
%
Unearned revenue
 
5,918

 
5,451

 
467

 
9
%


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 2018.

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.

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.
v3.10.0.1
Acquisitions
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Business Combination Disclosure
Acquisitions

On February 28, 2017, the Company acquired the high-performance target materials business of the Heraeus Group (HTB), of Hanau, Germany, for $16.5 million. This business manufactures precious and non-precious metal target materials for the architectural and automotive glass, electronic display, photovoltaic, and semiconductor markets at facilities in Germany, Taiwan, and the United States. This business operates within the Advanced Materials segment, and the results of operations are included as of the date of acquisition.
The final purchase price allocation for the acquisition is as follows:
(Thousands)
Amount
Assets:
 
Inventories
$
7,221

Prepaid and other current assets
2,270

Deferred income taxes
14

Property, plant, and equipment
6,501

Intangible assets
3,649

Goodwill
3,574

Total assets acquired
$
23,229

 
 
Liabilities:
 
Other liabilities and accrued items
$
984

Other long-term liabilities
449

Retirement and post-employment benefits
5,292

Total liabilities assumed
$
6,725

 
 
Total purchase price
$
16,504



No material measurement period adjustments were recorded upon finalizing the purchase price allocation in the first quarter of 2018.
v3.10.0.1
Segment Reporting and Geographic Information
12 Months Ended
Dec. 31, 2018
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 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.
Financial information for reportable segments was as follows:
 
 
 
 
 
 
 
 
 
 
 
(Thousands)
 
Performance
Alloys and
Composites
 
Advanced Materials
 
Precision Coatings
 
Other
 
Total
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

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

Assets
 
418,798

 
202,389

 
97,504

 
72,393

 
791,084

2016
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
387,539

 
$
437,249

 
$
144,448

 
$

 
$
969,236

Intersegment sales
 
240

 
70,457

 

 

 
70,697

Operating profit (loss)
 
6,601

 
26,282

 
11,635

 
(15,638
)
 
28,880

Depreciation, depletion, and amortization
 
27,059

 
6,644

 
9,945

 
2,003

 
45,651

Expenditures for long-lived assets
 
26,604

 
4,931

 
3,176

 
2,327

 
37,038

Assets
 
422,787

 
133,682

 
108,788

 
76,041

 
741,298


Intersegment sales are eliminated in consolidation.
The primary measures of evaluating segment performance is 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)
 
2018

2017
 
2016
Net sales
 


 
 
 
United States
 
$
726,881

 
$
650,675

 
$
639,675

Asia
 
270,672

 
265,991

 
193,739

Europe
 
186,081

 
205,118

 
121,648

All other
 
24,181

 
17,663

 
14,174

Total
 
$
1,207,815

 
$
1,139,447

 
$
969,236

Long-lived assets by country deployed
 


 
 
 
United States
 
$
215,395


$
227,412

 
$
240,309

All other
 
35,623


28,166

 
12,322

Total
 
$
251,018

 
$
255,578

 
$
252,631


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 2018:

 (Thousands)
 
Performance Alloys and Composites
 
Advanced Materials
 
Precision Coatings
 
Other
 
Total
2018
 
 
 
 
 
 
 
 
 
 
End Market
 
 
 
 
 
 
 
 
 
 
Consumer Electronics
 
$
103,339

 
$
327,355

 
$
18,886

 
$

 
$
449,580

Industrial Components
 
101,646

 
46,988

 
11,139

 

 
159,773

Energy
 
41,474

 
77,248

 
12

 

 
118,734

Automotive Electronics
 
78,963

 

 
1,521

 

 
80,484

Defense
 
45,162

 
15,233

 
20,077

 

 
80,472

Medical
 
8,349

 
17,627

 
65,125

 

 
91,101

Telecom Infrastructure
 
38,526

 
28,437

 
59

 

 
67,022

Other
 
83,131

 
73,755

 
3,763

 

 
160,649

    Total
 
$
500,590

 
$
586,643

 
$
120,582

 
$

 
$
1,207,815

Intersegment sales are eliminated in consolidation.
v3.10.0.1
Other-net
12 Months Ended
Dec. 31, 2018
Other-net [Abstract]  
Other-net
Other-net
Other-net is summarized for 2018, 2017, and 2016 as follows:
 
 
(Income) Expense
(Thousands)
 
2018

2017
 
2016
Metal consignment fees
 
$
10,999


$
8,782

 
$
6,409

Amortization of intangible assets
 
2,265


4,629

 
4,498

Foreign currency loss (gain)
 
1,487


(722
)
 
1,525

Net loss (gain) on disposal of fixed assets
 
518


234

 
(648
)
Rental income
 
(416
)
 
(168
)
 
(21
)
Other items
 
481


1,138

 
(475
)
Total other-net
 
$
15,334

 
$
13,893

 
$
11,288

v3.10.0.1
Restructuring
12 Months Ended
Dec. 31, 2018
Restructuring and Related Activities [Abstract]  
Restructuring
Restructuring
In both 2018 and 2017, 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 2018 were in the Advanced Materials segment and included severance associated with approximately forty employees and other related costs. Remaining severance payments related to these initiatives of $5.3 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 2019 and does not expect to incur additional costs related to these initiatives.
Costs associated with these actions in 2017 were within the Other and Precision Coatings segments and included severance associated with approximately twenty-three employees and other related costs. The severance payments were substantially paid by the end of 2017.
In 2016, the Company closed the Fukaya, Japan service center, which is a part of the Performance Alloys and Composites segment. Costs associated with the plan included severance associated with approximately thirteen employees and related facility exit costs. The severance payments were paid by the end of 2017.
These costs are presented in the Company's segment results as follows:
(Thousands)
 
2018
 
2017
 
2016
Performance Alloys & Composites
 
$

 
$
(16
)
 
$
2,586

Advanced Materials
 
5,599

 

 

Precision Coatings
 

 
431

 

Other
 

 
229

 

Total
 
$
5,599

 
$
644

 
$
2,586


Certain prior-year amounts relating to restructuring have been reclassified in the Consolidated Statements of Income to conform to 2018 presentation. For 2017, Cost of sales and Selling, general, and administrative expense were reduced by $0.5 million and $1.3 million, respectively, while Other-net was increased by $1.1 million, reflecting a $1.4 million gain realized on the sale of the Company's service center in Fukaya, Japan. For 2016, Other-net was reduced by $2.6 million.
Remaining severance payments related to these initiatives of $5.3 million are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company does not expect to incur additional costs related to these initiatives.
v3.10.0.1
Interest
12 Months Ended
Dec. 31, 2018
Interest [Abstract]  
Interest
Interest
The following chart summarizes the interest incurred, capitalized, and paid for 2018, 2017, and 2016:
(Thousands)
 
2018
 
2017
 
2016
Interest incurred
 
$
2,870


$
2,608

 
$
2,219

Less: Capitalized interest
 
399


425

 
430

Total net expense
 
$
2,471

 
$
2,183

 
$
1,789

Interest paid
 
$
1,436

 
$
1,646

 
$
1,611


The increase in interest expense for 2018 was primarily due to a capital lease entered into in 2017 in connection with the HTB acquisition. The higher expense in 2017 compared to 2016 was due to higher average debt levels outstanding. Amortization of deferred financing costs within interest expense was $1.0 million in 2018, $0.9 million in 2017, and $0.7 million in 2016.
v3.10.0.1
Income Taxes
12 Months Ended
Dec. 31, 2018
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 TCJA included a number of changes to the U.S. tax code including, but not limited to, (1) the reduction of the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018; (2) a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) the addition of new taxes on certain foreign sourced earnings; (4) a deduction for foreign-derived intangible income; and (5) the repeal of corporate alternative minimum tax and the domestic production activity deduction.

SAB 118 Measurement Period

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) in deferred taxes. In the year ended December 31, 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.

At December 31, 2018, the Company had completed its accounting for all of the enactment-date income tax effects of the TCJA. 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 for the re-measurement of deferred tax assets and liabilities, the one-time transition tax on the mandatory deemed repatriation of foreign earnings, the generation of foreign tax credits, and the reversal of the valuation allowance related to foreign tax credits.

Deferred Remeasurement

As of December 31, 2017, the Company re-measured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future, which is generally 21%, and recorded a provisional tax expense of $5.0 million. Upon further analysis of certain aspects of the TCJA and refinement of our calculations during the twelve-month period ended December 31, 2018, we reduced our provisional tax expense by $2.8 million, which is included as a component of income tax expense from continuing operations.

Transition Tax

The transition tax is a one-time tax based on the Company's total post-1986 earnings and profits (E&P) that were previously deferred from U.S. income taxes. As of December 31, 2017, the Company recorded a provisional tax expense of $6.1 million for the one-time transition tax. Upon further analysis of the TCJA, as well as Notices and Regulations issued and proposed by the U.S. Department of Treasury and the Internal Revenue Service, the Company finalized the calculations of the transition tax liability in 2018. The Company reduced its provisional tax expense by $1.2 million, which is included as a component of income tax expense.

As of December 31, 2017, the Company recorded a valuation allowance of $9.5 million on foreign tax credits that were determined not to be realizable as a result of the TCJA. In 2018, the Company finalized its calculations and reduced the valuation allowance by $2.4 million due to the generation of less foreign tax credits. The Company released the remaining valuation allowance due to an updated foreign expense methodology and further assessment of Notices and Regulations issued. As of December 31, 2018, the Company has determined that the foreign tax credits can be realized in full and no valuation allowance is recorded, which resulted in a $7.1 million tax benefit during the year.

Consistent with December 31, 2017, 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, 2018.

GILTI

While the TCJA provides for a territorial tax system, beginning in 2018, it includes a new U.S. tax, GILTI. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the period cost method), or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the deferred method). After further analysis, the Company has determined that it has no incremental U.S. tax on GILTI for the year ended December 31, 2018. The Company has elected to use the current period method, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the year ended December 31, 2018.
Income (loss) before income taxes and income tax expense (benefit) are comprised of the following:
(Thousands)
 
2018
 
2017
 
2016
Income before income taxes:
 
 
 
 
 
 
Domestic
 
$
20,272


$
28,327

 
$
13,934

Foreign
 
(3,930
)

8,069

 
11,381

Total income before income taxes
 
$
16,342

 
$
36,396

 
$
25,315

Income tax expense:
 
 
 
 
 
 
Current income tax expense:
 
 
 
 
 
 
Domestic
 
$
(5,896
)

$
1,912

 
$
6,505

Foreign
 
2,710


2,777

 
2,080

Total current
 
$
(3,186
)
 
$
4,689

 
$
8,585

Deferred income tax (benefit) expense:
 
 
 
 
 
 
Domestic
 
$
(4,083
)

$
19,935

 
$
(8,842
)
Foreign
 
2,765


321

 
(168
)
Total deferred
 
$
(1,318
)
 
$
20,256

 
$
(9,010
)
Total income tax (benefit) expense
 
$
(4,504
)
 
$
24,945

 
$
(425
)

A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
 
 
2018
 
2017
 
2016
U.S. federal statutory rate
 
21.0
 %

35.0
 %
 
35.0
 %
State and local income taxes, net of federal tax effect
 
0.1


2.3

 
(0.4
)
Effect of excess of percentage depletion over cost depletion
 
(17.8
)

(10.0
)
 
(10.6
)
Manufacturing production deduction, including impact of NOL carryback
 
6.3


(0.8
)
 
(3.3
)
Foreign derived intangible income deduction
 
(2.9
)
 

 

Tax Cuts and Jobs Act impact
 
(67.8
)
 
47.1

 

Foreign rate differential
 
1.5

 
(3.4
)
 
(5.9
)
Research and development tax credit
 
(7.6
)
 
(2.6
)
 
(6.6
)
Foreign tax credit
 
(1.9
)
 
(1.1
)
 
(28.1
)
Foreign repatriation
 
2.0

 
1.3

 
13.7

Incremental fixed asset basis
 

 
(3.4
)
 

Adjustment to unrecognized tax benefits
 
2.7


2.8

 
3.2

Stock compensation - excess tax benefits
 
(4.4
)

(1.9
)
 

Valuation allowance
 
38.7

 
2.4

 
0.1

Other items
 
2.5


0.8

 
1.2

Effective tax rate
 
(27.6
)%
 
68.5
 %
 
(1.7
)%


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)
 
2018
 
2017
Asset (liability)
 
 
 
 
Post-employment benefits other than pensions
 
$
2,198

 
$
2,787

Other reserves
 
693

 
1,371

Deferred compensation
 
3,539

 
5,054

Environmental reserves
 
1,463

 
1,452

Inventory
 
3,032

 
4,636

Pensions
 
8,105

 
14,307

Accrued compensation expense
 
6,215

 
2,852

Net operating loss and credit carryforwards
 
12,002

 
6,374

Research and development tax credit carryforward
 
744

 
2,466

Foreign tax credit carryforward
 
2,385

 
9,481

Subtotal
 
40,376

 
50,780

Valuation allowance
 
(15,917
)
 
(16,246
)
Total deferred tax assets
 
24,459

 
34,534

Depreciation
 
(10,280
)
 
(10,250
)
Amortization
 
(3,635
)
 
(2,900
)
Mine development
 
(5,123
)
 
(3,621
)
Capitalized interest expense
 

 
(112
)
Derivative instruments and hedging activities
 

 
(817
)
Total deferred tax liabilities
 
(19,038
)
 
(17,700
)
Net deferred tax asset
 
$
5,421

 
$
16,834



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, 2018, for income tax purposes, the Company had foreign net operating loss carryforwards of $22.7 million that do not expire, and $8.0 million that expire in calendar years 2019 through 2027, of which $0.1 million expires within the next twelve months. The Company also had state net operating loss carryforwards of $21.9 million that expire in calendar years 2019 through 2037 and state tax credits of $3.6 million that expire in calendar years 2019 through 2033. A valuation allowance of $9.5 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 has research and development tax credits of $0.7 million that expire in calendar year 2038 and foreign tax credits of $2.4 million which all expire in calendar year 2026.
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 2014, and foreign examinations for tax years before 2010.
A reconciliation of the Company’s unrecognized tax benefits for the year-to-date periods ended December 31, 2018 and 2017 is as follows:
(Thousands)
 
2018
 
2017
Balance at January 1
 
$
2,944

 
$
2,048

Additions to tax provisions related to the current year
 
443

 
163

Additions to tax positions related to prior years
 
4

 
1,210

Reduction to tax positions related to prior years
 
(508
)
 
(121
)
Lapses on statutes of limitations
 

 
(356
)
Balance at December 31
 
$
2,883

 
$
2,944


At December 31, 2018, the Company had $2.9 million of unrecognized tax benefits, of which $2.2 million 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 2018, 2017, and 2016. As of December 31, 2018 and 2017, accrued interest and penalties, net of the related tax benefit, were immaterial.
Income taxes paid during 2018, 2017 and 2016, were approximately $0.0 million, $8.1 million and $3.0 million, respectively.
v3.10.0.1
Earnings Per Share
12 Months Ended
Dec. 31, 2018
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)
 
2018
 
2017
 
2016
Numerator for basic and diluted EPS:
 
 
 
 
 
 
Net income
 
$
20,846


$
11,451

 
$
25,740

Denominator:
 


 
 
 
Denominator for basic EPS:
 


 
 
 
Weighted-average shares outstanding
 
20,212


20,027

 
19,983

Effect of dilutive securities:
 


 
 
 
Stock appreciation rights
 
170


174

 
74

Restricted stock units
 
85


96

 
88

Performance-based restricted stock units
 
146


118

 
68

Diluted potential common shares
 
401

 
388

 
230

Denominator for diluted EPS:
 
 
 
 
 
 
Adjusted weighted-average shares outstanding
 
20,613

 
20,415

 
20,213

Basic EPS
 
$
1.03

 
$
0.57

 
$
1.29

Diluted EPS
 
$
1.01

 
$
0.56

 
$
1.27


Equity awards covering shares of common stock totaling 65,112 in 2018, 124,319 in 2017, and 818,268 in 2016 were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.
v3.10.0.1
Inventories
12 Months Ended
Dec. 31, 2018
Inventory Disclosure [Abstract]  
Inventories
Inventories, net
Inventories in the Consolidated Balance Sheets are summarized as follows:
 
 
December 31,
(Thousands)
 
2018
 
2017
Raw materials and supplies
 
$
33,182

 
$
42,958

Work in process
 
195,879

 
187,719

Finished goods
 
30,643

 
34,418

Subtotal
 
259,704

 
265,095

Less: LIFO reserve balance
 
44,833

 
44,743

Inventories
 
$
214,871

 
$
220,352


The liquidation of LIFO inventory layers increased cost of sales by $1.2 million in 2018, and reduced cost of sales by $0.8 million in 2017 and $4.1 million in 2016.
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 $316.1 million as of December 31, 2018 versus $320.0 million as of December 31, 2017.
v3.10.0.1
Property, Plant, and Equipment
12 Months Ended
Dec. 31, 2018
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)
 
2018
 
2017
Land
 
$
4,874

 
$
4,874

Buildings
 
149,701

 
137,196

Machinery and equipment
 
631,421

 
626,186

Software
 
42,678

 
40,575

Construction in progress
 
14,468

 
29,963

Allowances for depreciation
 
(642,365
)
 
(615,134
)
Subtotal
 
200,777

 
223,660

Capital leases
 
22,150

 
10,912

Allowances for depreciation
 
(2,412
)
 
(2,741
)
Subtotal
 
19,738

 
8,171

Mineral resources
 
4,980

 
4,979

Mine development
 
27,979

 
37,103

Allowances for amortization and depletion
 
(2,456
)
 
(18,335
)
Subtotal
 
30,503

 
23,747

Property, plant, and equipment — net
 
$
251,018

 
$
255,578


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 $4.3 million and $4.5 million in 2018 and 2017, 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 $33.3 million in 2018, $38.1 million in 2017, and $41.2 million in 2016. 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 2018, 2017, and 2016. The net book value of capitalized software was $8.0 million and $8.3 million at December 31, 2018 and December 31, 2017, respectively. Depreciation expense related to software was $2.6 million in 2018, compared to $2.4 million in both 2017 and 2016.
v3.10.0.1
Intangible Assets and Goodwill
12 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Intangible Assets and Goodwill
Intangible Assets and Goodwill
Intangible Assets
The cost and accumulated amortization of intangible assets subject to amortization as of December 31, 2018 and 2017, is as follows:
 
 
2018
 
2017
(Thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Customer relationships
 
$
39,601

 
$
(37,077
)
 
$
40,751

 
$
(36,949
)
Technology
 
13,377

 
(12,238
)
 
13,467

 
(11,495
)
Licenses and other
 
4,257

 
(2,725
)
 
4,519

 
(2,672
)
Total
 
$
57,235

 
$
(52,040
)
 
$
58,737

 
$
(51,116
)

During 2017, the Company acquired $2.3 million in customer relationships and $1.4 million in technology intangible assets, with useful lives of fifteen and three years, respectively.
The aggregate amortization expense relating to intangible assets for the year ended December 31, 2018 and estimated amortization expense for each of the five succeeding years is as follows:
 
 
Amortization
(Thousands)
 
Expense
2018
 
$
2,265

2019
 
1,366

2020
 
603

2021
 
485

2022
 
485

2023
 
485


Intangible assets also includes deferred financing costs relating to the Company's revolving credit and consignments lines of $1.3 million and $2.2 million at December 31, 2018 and 2017, respectively.
Goodwill
Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. In 2017, the Company acquired HTB for total consideration of $16.5 million and recorded goodwill of $3.6 million. HTB is included in the Advanced Materials segment.
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill 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. The balance of goodwill at both December 31, 2018 and 2017 was $90.7 million and assigned to the following segments:
(Thousands)