MATERION CORP, 10-Q filed on 4/23/2020
Quarterly Report
v3.20.1
Document and Entity Information
3 Months Ended
Mar. 27, 2020
shares
Document and Entity Information [Abstract]  
Document Type 10-Q
Document Quarterly Report true
Document Period End Date Mar. 27, 2020
Document Transition Report false
Entity File Number 001-15885
Entity Registrant Name MATERION CORPORATION
Local Phone Number 486-4200
Title of 12(b) Security Common Stock, no par value
Entity Incorporation, State or Country Code OH
Entity Tax Identification Number 34-1919973
Entity Address, Address Line One 6070 Parkland Blvd
Entity Address, City or Town Mayfield Heights
Entity Address, State or Province OH
City Area Code 216
Entity Current Reporting Status Yes
Entity Interactive Data Current Yes
Entity Address, Postal Zip Code 44124
Entity Central Index Key 0001104657
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Document Fiscal Year Focus 2020
Document Fiscal Period Focus Q1
Trading Symbol MTRN
Amendment Flag false
Entity Emerging Growth Company false
Entity Shell Company false
Entity Small Business false
Entity Common Stock, Shares Outstanding 20,309,846
Security Exchange Name NYSE
v3.20.1
Consolidated Statements of (Loss) Income - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Income Statement [Abstract]    
Net sales $ 277,946 $ 301,441
Cost of sales 232,371 232,129
Gross margin 45,575 69,312
Selling, general, and administrative expense 30,744 40,064
Research and development expense 4,185 3,740
Goodwill impairment charges 9,053 0
Held-for-sale impairment charges 1,713 0
Restructuring charges 2,164 0
Other - net 2,279 4,121
Operating (loss) profit (4,563) 21,387
Other non-operating (income) expense - net (944) 245
Interest expense—net 246 466
(Loss) Income before income taxes (3,865) 20,676
Income tax (benefit) expense (762) 3,770
Net (loss) income $ (3,103) $ 16,906
Basic earnings per share:    
Net (loss) income per share of common stock (in dollars per share) $ (0.15) $ 0.83
Diluted earnings per share:    
Net (loss) income per share of common stock (in dollars per share) $ (0.15) $ 0.82
Weighted-average number of shares of common stock outstanding:    
Basic (in shares) 20,384 20,267
Diluted (in shares) 20,384 20,606
v3.20.1
Consolidated Statements of Comprehensive (Loss) Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Statement of Comprehensive Income [Abstract]    
Net (loss) income $ (3,103) $ 16,906
Other comprehensive (loss) income:    
Foreign currency translation adjustment (873) (503)
Derivative and hedging activity, net of tax (854) 927
Pension and post-employment benefit adjustment, net of tax 16 540
Net current period other comprehensive (loss) income after tax (1,711) 964
Comprehensive (loss) income $ (4,814) $ 17,870
v3.20.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 27, 2020
Dec. 31, 2019
Current assets    
Cash and cash equivalents $ 107,576 $ 125,007
Accounts receivable 138,803 154,751
Inventories, net 204,702 190,390
Prepaid and other current assets 20,515 21,839
Assets held for sale 7,188 0
Total current assets 478,784 491,987
Deferred income taxes 1,648 1,666
Property, Plant and Equipment 910,050 916,965
Less allowances for depreciation, depletion, and amortization (675,074) (684,689)
Property, plant, and equipment—net 234,976 232,276
Operating lease, right-of-use asset 36,465 23,413
Intangible assets 5,972 6,380
Other assets 18,399 17,937
Goodwill 69,832 79,011
Total Assets 846,076 852,670
Current liabilities    
Short-term debt 877 868
Accounts payable 54,145 43,206
Salaries and wages 18,820 41,167
Other liabilities and accrued items 32,920 32,477
Income taxes 1,387 1,342
Unearned revenue 2,317 3,380
Liabilities held for sale 3,204 0
Total current liabilities 113,670 122,440
Other long-term liabilities 10,575 11,560
Operating lease liabilities 32,374 18,091
Finance lease liabilities 16,652 17,424
Retirement and post-employment benefits 31,444 32,466
Unearned income 39,091 32,891
Long-term income taxes 3,480 3,451
Deferred income taxes 1,186 2,410
Long-term debt 1,126 1,260
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 27 and December 31) 253,967 249,674
Retained earnings 584,505 589,888
Common stock in treasury (198,311) (186,845)
Accumulated other comprehensive loss (47,173) (45,462)
Other equity 3,490 3,422
Total shareholders' equity 596,478 610,677
Total Liabilities and Shareholders’ Equity $ 846,076 $ 852,670
v3.20.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands, $ / shares in Thousands
Mar. 27, 2020
Dec. 31, 2019
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
v3.20.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Cash flows from operating activities:    
Net (loss) income $ (3,103) $ 16,906
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Depreciation, depletion, and amortization 14,274 9,067
Amortization of deferred financing costs in interest expense 182 236
Stock-based compensation expense (non-cash) 1,492 1,547
Deferred income tax expense (benefit) (1,227) 371
Held-for-sale impairment charges 10,766 0
Changes in assets and liabilities:    
Decrease (increase) in accounts receivable 11,049 (14,698)
Decrease (increase) in inventory (16,723) (9,561)
Decrease (increase) in prepaid and other current assets 1,127 (556)
Increase (decrease) in accounts payable and accrued expenses (13,002) (16,030)
Increase (decrease) in unearned revenue (938) (724)
Increase (decrease) in interest and taxes payable 368 2,525
Domestic pension plan contributions 0 (1,500)
Other-net 4,865 (200)
Net cash used in operating activities 9,130 (12,617)
Cash flows from investing activities:    
Payments for purchase of property, plant, and equipment (14,789) (8,027)
Payments for mine development 0 1,352
Proceeds from sale of property, plant, and equipment 10 58
Net cash used in investing activities (14,779) (9,321)
Cash flows from financing activities:    
Repayment of long-term debt (142) (197)
Principal payments under finance lease obligations 233 298
Cash dividends paid (2,245) (2,125)
Repurchase of common stock (6,766) (199)
Payments of withholding taxes for stock-based compensation awards (2,015) (3,978)
Net cash used in financing activities (11,401) (6,797)
Effects of exchange rate changes (381) (46)
Net change in cash and cash equivalents (17,431) (28,781)
Cash and cash equivalents at beginning of period 125,007 70,645
Cash and cash equivalents at end of period $ 107,576 $ 41,864
v3.20.1
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, 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 (loss) 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
Beginning balance (in shares) at Dec. 31, 2019   20,404            
Beginning balances (in Treasury shares) at Dec. 31, 2019     (6,744)          
Beginning balances at Dec. 31, 2019 610,677     249,674 589,888 (186,845) (45,462) 3,422
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net (loss) income (3,103)     0 (3,103) 0 0 0
Other comprehensive income (loss) (1,711)     0 0 0 (1,711) 0
Cash dividends declared (2,245)     0 (2,245) 0 0 0
Stock-based compensation activity (in shares)   99 99          
Stock-based compensation activity 1,584     4,262 (35) (2,643) 0 0
Payments of withholding taxes for stock-based compensation awards (in shares)   (36) (36)          
Payments of withholding taxes for stock-based compensation awards (2,015)     0 0 (2,015) 0 0
Repurchase of shares (in shares)   158 158          
Repurchase of shares (6,766)     0 0 (6,766) 0 0
Directors' deferred compensation 57 $ 1 $ 1 31 0 (42) 0 68
Ending balance (in shares) at Mar. 27, 2020   20,310            
Ending balances (in Treasury shares) at Mar. 27, 2020     (6,838)          
Ending balances at Mar. 27, 2020 $ 596,478     $ 253,967 $ 584,505 $ (198,311) $ (47,173) $ 3,490
v3.20.1
Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares
3 Months Ended
Mar. 27, 2020
Mar. 29, 2019
Statement of Stockholders' Equity [Abstract]    
Cash dividends declared (per share) $ 0.110 $ 0.105
v3.20.1
Accounting Policies
3 Months Ended
Mar. 27, 2020
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 2020 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 2019 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 June 2016, the FASB issued Accounting Standards Update (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 is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements.
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.
v3.20.1
Segment Reporting
3 Months Ended
Mar. 27, 2020
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 2020
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
99,067

 
$
160,165

 
$
18,714

 
$

 
$
277,946

Intersegment sales 
 
215

 
9,191

 

 

 
9,406

Operating profit (loss)
 
4,791

 
4,785

 
(9,592
)
 
(4,547
)
 
(4,563
)
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



The following table disaggregates revenue for each segment by end market for the first quarter of 2020 and 2019:
 (Thousands)

Performance Alloys and Composites

Advanced Materials

Precision Coatings

Other

Total
First Quarter 2020










End Market










Semiconductor

$
906


$
120,819


$
11


$


$
121,736

Industrial

23,340


8,362


3,097




34,799

Aerospace and Defense

14,206


1,426


5,109




20,741

Consumer Electronics

14,695


118


3,541




18,354

Automotive

18,163


2,080


17




20,260

Energy

5,429


23,468






28,897

Telecom and Data Center

9,989


871






10,860

Other

12,339


3,021


6,939




22,299

    Total

$
99,067


$
160,165


$
18,714


$


$
277,946












First Quarter 2019










End Market










Semiconductor

$
1,965


$
105,090


$
112


$


$
107,167

Industrial

26,430


7,928


4,150




38,508

Aerospace and Defense

27,074


1,493


4,871




33,438

Consumer Electronics

13,555


205


3,486




17,246

Automotive

20,713


1,353


221




22,287

Energy

11,094


22,197






33,291

Telecom and Data Center

17,592


202






17,794

Other

8,690


5,557


17,463




31,710

    Total

$
127,113


$
144,025


$
30,303


$


$
301,441



Intersegment sales are eliminated in consolidation.
v3.20.1
Revenue Recognition
3 Months Ended
Mar. 27, 2020
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 27, 2020. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

After considering the practical expedient at March 27, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $37.0 million.

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

(Thousands)
 
March 27, 2020
 
December 31, 2019
 
$ change
 
% change
Accounts receivable, trade
 
$
129,139

 
$
141,168

 
$
(12,029
)
 
(9
)%
Unbilled receivables
 
9,265

 
13,583

 
(4,318
)
 
(32
)%
Unearned revenue
 
2,317

 
3,380

 
(1,063
)
 
(31
)%


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 2020.

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

Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $2.1 million of the unearned amounts as revenue during the first quarter of 2020.

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.
v3.20.1
Other-net
3 Months Ended
Mar. 27, 2020
Other Income and Expenses [Abstract]  
Other-net Other-net
Other-net for the first quarter of 2020 and 2019 is summarized as follows: 
 
 
First Quarter Ended
 
 
March 27,
 
March 29,
(Thousands)
 
2020
 
2019
Metal consignment fees
 
$
2,229

 
$
3,091

Amortization of intangible assets
 
188

 
390

Foreign currency (gain) loss
 
(62
)
 
77

Net loss on disposal of fixed assets
 
46

 
24

Other items
 
(122
)
 
539

Total
 
$
2,279

 
$
4,121


v3.20.1
Restructuring
3 Months Ended
Mar. 27, 2020
Restructuring and Related Activities [Abstract]  
Restructuring and Related Activities Disclosure [Text Block] Restructuring

In the first quarter of 2020, the Company initiated a restructuring plan in its Performance Alloys and Composites (PAC) segment to close its Warren, Michigan and Fremont, California locations. Costs associated with the plan totaled $2.2 million in the first quarter of 2020 and included $0.5 million of severance associated with approximately 63 employees, $1.3 million of facility and other related costs.
Remaining severance payments of $0.5 million and facility costs of $1.3 million related to these initiatives are reflected within Other liabilities and accrued items in the Consolidated Balance Sheets. The Company expects to incur additional costs related to these initiatives of approximately $6 million in the remainder of 2020.
v3.20.1
Income Taxes
3 Months Ended
Mar. 27, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes

The Company's effective tax rate for the first quarter of 2020 and 2019 was 19.7% and 18.2%, 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. The effective tax rate for the first quarter of 2020 included discrete income tax expense of $0.2 million, primarily related to $0.7 million of tax expense from an impairment of goodwill and $0.4 million of tax benefit related to excess tax benefits from stock-based compensation awards. The effective tax rate for the first quarter of 2019 included a discrete income tax benefit of $0.9 million, primarily related to excess tax benefits from stock-based compensation awards.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act.  The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations.  While the Company continues to examine the impacts the CARES Act may have on its business, it does not expect it will have a material impact to its consolidated financial statements.
v3.20.1
Earnings Per Share
3 Months Ended
Mar. 27, 2020
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 27,
 
March 29,
(Thousands, except per share amounts)
 
2020
 
2019
Numerator for basic and diluted EPS:
 
 
 
 
Net (loss) income
 
$
(3,103
)
 
$
16,906

Denominator:
 
 
 
 
Denominator for basic EPS:
 
 
 
 
Weighted-average shares outstanding
 
20,384

 
20,267

Effect of dilutive securities:
 
 
 
 
Stock appreciation rights
 

 
107

Restricted stock units
 

 
83

Performance-based restricted stock units
 

 
149

Diluted potential common shares
 

 
339

Denominator for diluted EPS:
 

 

Adjusted weighted-average shares outstanding
 
20,384

 
20,606

Basic EPS
 
$
(0.15
)
 
$
0.83

Diluted EPS
 
$
(0.15
)
 
$
0.82



Adjusted weighted-average shares outstanding - diluted for the three months ended March 27, 2020 excludes the dilutive effect of approximately 239,000 shares, primarily related to restricted stock units and stock appreciation rights, as their inclusion would have been anti-dilutive due to the Company's net loss. 

Additionally, weighted average shares outstanding - diluted exclude securities totaling 302,573 and 201,394 for the quarters ended March 27, 2020 and March 29, 2019, respectively. These securities primarily related to restricted stock units and stock appreciation rights with fair market values and exercise prices less than the average market price of the Company's common shares and were excluded from the dilution calculation as the effect would have been anti-dilutive.
v3.20.1
Inventories
3 Months Ended
Mar. 27, 2020
Inventory Disclosure [Abstract]  
Inventories Inventories
Inventories on the Consolidated Balance Sheets are summarized as follows:
 
 
March 27,
 
December 31,
(Thousands)
 
2020
 
2019
Raw materials and supplies
 
$
46,843

 
$
35,612

Work in process
 
180,123

 
177,780

Finished goods
 
26,144

 
25,506

Subtotal
 
$
253,110

 
$
238,898

Less: LIFO reserve balance
 
48,408

 
48,508

Inventories
 
$
204,702

 
$
190,390


The liquidation of last in, first out (LIFO) inventory layers had no impact to cost of sales in the first quarter of 2020 or 2019.
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 $338.5 million as of March 27, 2020 versus $309.3 million as of December 31, 2019.
v3.20.1
Held for Sale
3 Months Ended
Mar. 27, 2020
Discontinued Operations and Disposal Groups [Abstract]  
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
As of March 27, 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) reporting unit within the Precision Coatings segment and determined that it met the criteria to be classified as held for sale. Therefore, its assets and liabilities have been presented as held for sale in the Consolidated Balance Sheet as of March 27, 2020. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell. The Company entered into a letter of intent to sell the LAC reporting unit in March 2020.
Before measuring the fair value less costs to sell of the disposal group as a whole, the Company first reviewed individual assets and liabilities to determine if any fair value adjustments were required. Based on the letter of intent entered into by the Company and the prospective buyer, the Company recorded a goodwill impairment charge of $9.1 million to write-off the remaining balance of goodwill for the LAC reporting unit. The Company determined fair value based on its expected proceeds to be received, which it concluded is most representative of the value of the assets.
The Company then estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value. Based on this review, the Company recorded an additional $1.7 million asset impairment loss.
The assets and liabilities of the LAC reporting unit classified as held for sale at March 27, 2020 were as follows:
(Thousands)
 
 
Accounts receivable, net
 
$
3,902

Inventories, net
 
1,650

Prepaid and other current assets
 
56

Property, plant, and equipment - net
 
2,516

Operating lease, right-of-use assets
 
777

Impairment on carrying value
 
$
(1,713
)
Assets held for sale
 
$
7,188

 
 
 
Accounts payable
 
$
1,528

Salaries and wages
 
236

Other liabilities and accrued items
 
808

Operating lease liabilities
 
588

Other long term liabilities
 
44

Liabilities held for sale
 
$
3,204



The pending transaction is subject to the entry into a definitive agreement and customary closing conditions and is expected to close no later than the third quarter of 2020.
Excluding the $9.1 million goodwill impairment charge and $1.7 million asset impairment charge recorded in the first quarter of 2020, the operating results of the LAC reporting unit were not material to the Company for any period presented.
v3.20.1
Goodwill
3 Months Ended
Mar. 27, 2020
Goodwill Disclosure [Abstract]  
Goodwill Goodwill
A summary of changes in goodwill by reportable segment is as follows:
(Thousands)
 
Performance Alloys and Composites
 
Advanced Materials
 
Precision Coatings
 
Total
Balance at December 31, 2019
 
$
1,899

 
$
50,190

 
$
26,922

 
$
79,011

Impairment charge
 

 

 
(9,053
)
 
(9,053
)
Other
 

 
(126
)
 

 
(126
)
Balance at March 27, 2020
 
$
1,899

 
$
50,064

 
$
17,869

 
$
69,832


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.
To date the Company has recorded $20.6 million of impairment charges related to goodwill in the LAC reporting unit. See Note I for additional information.
v3.20.1
Customer Prepayments
3 Months Ended
Mar. 27, 2020
Customer Prepayments [Abstract]  
Customer Prepayments Investment Agreement [Text Block] Customer Prepayments
As of the end of the first quarter of 2020, the Company has received $11.8 million of prepayments from a customer to enable the Company to establish a new manufacturing facility to supply product to the customer.  The Company expects to finalize a long-term supply agreement later this year.  The prepayments from the customer are expected to be applied when commercial production of the product is sold and delivered to the customer.  Accordingly, the $11.8 million of prepayments are classified as Unearned Income in the Consolidated Balance Sheet, and the liability is expected to be settled as commercial shipments are made.
v3.20.1
Pensions and Other Post-employment Benefits
3 Months Ended
Mar. 27, 2020
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 2020 and 2019 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 27,

March 29,

March 27,

March 29,
(Thousands)

2020

2019

2020

2019
Components of net periodic benefit cost (benefit)








Service cost

$


$
1,340


$
15


$
17

Interest cost

1,215


1,557


53


100

Expected return on plan assets

(2,205
)

(2,123
)




Amortization of prior service cost (benefit)



120


(374
)

(374
)
Amortization of net loss (gain)

284


804


(83
)

(23
)
Net periodic benefit (benefit) cost

$
(706
)

$
1,698


$
(389
)

$
(280
)

The Company did not make any contributions to its domestic defined benefit plan in the first quarter of 2020 and made contributions of $1.5 million in the first quarter of 2019.
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs in operating expenses and the non-service cost components of net periodic benefit cost in Other non-operating (income) expense.
In May 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plan. The Company froze the pay and service amounts used to calculate pension benefits for active participants in the pension plan as of January 1, 2020.
v3.20.1
Accumulated Other Comprehensive Income
3 Months Ended
Mar. 27, 2020
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 2020 and 2019 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, 2019

$
1,324


$
(452
)

$
25

 
$
897


$
(41,346
)

$
(5,013
)

$
(45,462
)
Other comprehensive (loss) income before reclassifications

(142
)

(823
)

(778
)
 
(1,743
)



(873
)

(2,616
)
Amounts reclassified from accumulated other comprehensive income

(1
)

318


321

 
638


(24
)



614

Net current period other comprehensive income (loss) before tax

(143
)

(505
)

(457
)
 
(1,105
)

(24
)

(873
)

(2,002
)
Deferred taxes

(33
)

(116
)

(102
)
 
(251
)

(40
)



(291
)
Net current period other comprehensive income (loss) after tax

(110
)

(389
)

(355
)
 
(854
)

16


(873
)

(1,711
)
Balance at March 27, 2020

$
1,214


$
(841
)

$
(330
)
 
$
43


$
(41,330
)

$
(5,886
)

$
(47,173
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
$
1,263

 
$
79

 
$
(441
)
 
$
901

 
$
(54,543
)
 
$
(4,592
)
 
$
(58,234
)
Other comprehensive income (loss) 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
)

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 (Loss) 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 (Loss) Income. Refer to Note P 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 L for additional details on pension and post-employment expenses.
v3.20.1
Stock-based Compensation Expense
3 Months Ended
Mar. 27, 2020
Share-based Payment Arrangement [Abstract]  
Stock-based Compensation Expense Stock-based Compensation Expense
Stock-based compensation expense, which includes awards settled in shares and in cash, was $1.0 million and $2.7 million in the first quarter of 2020 and 2019, respectively.
The Company granted 64,636 stock appreciation rights (SARs) to certain employees during the first three months of 2020. The weighted-average exercise price per share and weighted-average fair value per share of the SARs granted during the three months ended March 27, 2020 were $50.95 and $13.67, respectively. The Company estimated the fair value of the SARs using the following weighted-average assumptions in the Black-Scholes model:
Risk-free interest rate
 
1.41
%
Dividend yield
 
0.9
%
Volatility
 
31.8
%
Expected term (in years)
 
4.8


The Company granted 60,652 stock-settled restricted stock units (RSUs) to certain employees during the first three months of 2020. 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 $49.53 for stock-settled RSUs granted to employees during the three months ended March 27, 2020. 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 2020. The weighted-average fair value of the stock-settled PRSUs was $57.65 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 27, 2020, unamortized compensation cost related to the unvested portion of all stock-based awards was approximately $13.7 million, and is expected to be recognized over the remaining vesting period of the respective grants.
v3.20.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 27, 2020
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 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 27, 2020 and December 31, 2019: 
 
 
 
 
 
 
 
 
 
(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)
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation investments
 
$
2,719

 
$
3,391

 
$
2,719

 
$
3,391

 
$

 
$

 
$

 
$

Foreign currency forward contracts
 
175

 
188

 

 

 
175

 
188

 

 

Precious metal swaps
 

 
35

 

 

 

 
35

 

 

Copper swaps
 

 
61

 

 

 

 
61

 

 

Total
 
$
2,894

 
$
3,675

 
$
2,719

 
$
3,391

 
$
175

 
$
284


$


$

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liability
 
$
2,719

 
$
3,391

 
$
2,719

 
$
3,391

 
$

 
$

 
$

 
$

Foreign currency forward contracts
 
438

 
211

 

 

 
438

 
211

 

 

Precious metal swaps
 
1,093

 
623

 

 

 
1,093

 
623

 

 

Copper swaps
 
424

 
28

 

 

 
424

 
28

 

 

Total
 
$
4,674

 
$
4,253

 
$
2,719

 
$
3,391

 
$
1,955

 
$
862

 
$

 
$


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 27, 2020 and December 31, 2019. The Company's deferred compensation investments and liabilities are based on the fair value of the investments corresponding to the employees’ investment selections, primarily in mutual funds, based on quoted prices in active markets for identical assets. Deferred compensation investments are primarily presented in Other assets. Deferred compensation liabilities are primarily presented in Other long-term liabilities.
v3.20.1
Derivative Instruments and Hedging Activity
3 Months Ended
Mar. 27, 2020
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, the 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 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 exposures. 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. Foreign currency contracts are typically layered in at different times for a specified exposure period in order to minimize the impact of market 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. The Company may also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine.
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. The Company also uses copper in its 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 the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges 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 to maturity. The Company does not engage in derivative trading activities and does not use derivatives for speculative purposes. The Company only uses hedge contracts that are denominated in the same currency or metal as the underlying exposure.
All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income (OCI) until the hedged item is recognized in earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded
on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.
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 27, 2020 and December 31, 2019:
 
 
March 27, 2020
 
December 31, 2019
(Thousands)
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Foreign currency forward contracts
 
 
 
 
 
 
 
 
Prepaid expenses
 
$
1,297

 
$
3

 
$
13,734

 
$
95

Other liabilities and accrued items
 
12,471

 
21

 
5,757

 
16


These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included $0.6 million of foreign currency gains relating to these derivatives during the first quarter of 2020 and included no foreign currency impact in the first quarter of 2019.
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 27, 2020 and December 31, 2019:
 
 
March 27, 2020
 
December 31, 2019
(Thousands)
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Prepaid expenses
 
 
 
 
 
 
 
 
Foreign currency forward contracts - yen
 
$
807

 
$
16

 
$
1,025

 
$
10

Foreign currency forward contracts - euro
 
12,434

 
156

 
3,466

 
83

Precious metal swaps
 

 

 
1,116

 
34

Copper swaps
 

 

 
1,951

 
61

Total
 
13,241

 
172

 
7,558

 
188

 
 
 
 
 
 
 
 
 
Other assets
 
 
 
 
 
 
 
 
Precious metal swaps
 

 

 
157

 
1

 
 
 
 
 
 
 
 
 
Other liabilities and accrued items
 
 
 
 
 
 
 
 
Foreign currency forward contracts - yen
 
2,780

 
32

 
2,355

 
12

Foreign currency forward contracts - euro
 
6,956

 
328

 
15,686

 
183

Precious metal swaps
 
8,441

 
1,093

 
7,034

 
618

Copper swaps
 
3,140

 
424

 
1,266

 
28

Total
 
21,317

 
1,877

 
26,341

 
841

 
 
 
 
 
 
 
 
 
Other long-term liabilities
 
 
 
 
 
 
 
 
Foreign currency forward contracts - yen
 
109

 
4

 

 

Foreign currency forward contracts - euro
 
1,075

 
53

 

 

Precious metal swaps
 

 

 
149

 
5

Total
 
1,184

 
57

 
149

 
5

 
 
 
 
 
 
 
 
 
Total
 
$
35,742

 
$
1,762

 
$
34,205

 
$
657


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 27, 2020 to the Consolidated Statements of Income within the next 15-month period. Refer to Note M 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 the first quarter of 2020 and 2019: 
 
 
 
 
First Quarter Ended
 
First Quarter Ended
(Thousands)
 
 
 
March 27, 2020
 
March 29, 2019
Hedging relationship
 
Line item
 
 
 
 
Foreign currency forward contracts
 
Net sales
 
$
(1
)
 
$
2

Precious metal swaps
 
Cost of sales
 
318

 
(61
)
Copper swaps
 
Cost of sales
 
321

 
(71
)
Total
 
 
 
$
638

 
$
(130
)

v3.20.1
Contingencies
3 Months Ended
Mar. 27, 2020
Loss Contingency [Abstract]  
Commitments and Contingencies Disclosure [Text Block] Contingencies
Legal Proceedings. For general information regarding legal proceedings relating to Chronic Beryllium Disease Claims, refer to Note R ("Contingencies and Commitments") in the Company's 2019 Annual Report on Form 10-K.
One beryllium case was filed in 2019 and was outstanding as of March 27, 2020. The Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
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 $5.8 million and $5.9 million at March 27, 2020 and December 31, 2019, respectively. Environmental projects tend to be long-term, and the final actual remediation costs may differ from the amounts currently recorded.
v3.20.1
Basis of Accounting (Policies)
3 Months Ended
Mar. 27, 2020
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 2020 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 2019 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year.
v3.20.1
New Pronouncements (Policies)
3 Months Ended
Mar. 27, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
New Accounting Pronouncements
New Pronouncements Adopted: In June 2016, the FASB issued Accounting Standards Update (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 is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. Early adoption is permitted. The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements.
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.