6070 Parkland Boulevard, Mayfield Heights, Ohio 44124
216.486.4200 www.materion.com
2018 Annual Report
To Our Shareholders
As I look back on last year, in fact the last two years, it is
remarkable how well our company has performed.
We have an extraordinary heritage as a leading provider of
high performance advanced materials, and our unwavering
commitment to customers, employees, shareholders and
leveraging One Materion has helped us to deliver what is
arguably the best year in the Company’s 88-year history.
In 2018, we continued to deliver strong and consistent results, with some impressive highlights:
• Value-added (VA) sales reached an all-time record of $739 million, representing 9% growth over prior
year
• Achieved record adjusted earnings of $2.38 per share, a 38% improvement over prior year
• Reached eight consecutive quarters of both top and bottom line growth
• Delivered best safety performance on record, including 19 injury-free sites
• Completed relocation and full integration of the Heraeus high-performance target materials business
Value-Added Sales ($ in millions)
w t h
% G r o
3
2
$678
$739
• Ten consecutive quarters of VA sales growth
• International VA sales have grown to 40% of total
$600
• New product VA sales of 16%
2016
2017
2018
record in VA sales of $425 million
• Performance Alloys and Composites reached an all-time
Adjusted Earnings Per Share (EPS)
• Two consecutive years of greater than 30% adjusted
EPS growth
• Record operating profit margins for Performance
Alloys and Composites and Precision Coatings
businesses
$1.32
h
o w t
0 % G r
8
$1.72
$2.38
• Adjusted operating profit margin reached 9%, an
all-time record
2016
2017
2018
Net Cash ($ in millions)
w t h
% G r o
1
5
1
$38
$27
• Ended 2018 in a net cash position of $68 million, an
$68
all-time record
• Unfunded U.S. defined benefit pension liability decreased
by $52 million; > 40% of total liability was annuitized
2016
2017
2018
• Increased dividend for the sixth consecutive year;
returned $9 million to shareholders in dividends and
stock buybacks
We continued to establish our pillars of commercial excellence, operational excellence, innovation,
inorganic growth, and digital transformation, underpinned by a laser-like focus on performance-based
culture. Our people around the world have made substantial progress strengthening these pillars as
evidenced by the above results.
In commercial excellence, a focus on solution-selling, improving sales mix, addressing under-performing
businesses, and creating a global sales force has led to record value-added sales and operating profit. We
are leveraging product and sales training across the globe and are determined to build a world class sales
organization which will be instrumental in consistently delivering profitable growth.
Operational excellence remains a top priority for us, not just on the factory floor, but in every part of the
company. Streamlining processes and producing better products at an improved cost structure has served
us well so far and will be essential as we continue on our journey. As part of operational excellence, we
have an unwavering commitment to safety – making sure every Materion employee can come to work
and expect to be safe in whatever role they fill. With our focus on delivering quality products, we earned
supplier of the year awards from Texas Instruments and Skyworks.
As part of the innovation pillar, we have established global technology and innovation centers within
each of our business units. Materion’s highly creative, agile and collaborative innovation culture is being
channeled toward working with customers and partners in developing system solutions. We increased
R&D spending by 9% and will continue to translate our engineering acumen and technological innovation
capabilities into real-world solutions that drive revenue generation and delight customers.
Within the inorganic growth pillar, we have been active in evaluating acquisition opportunities. But, as
we have emphasized before, we will not do M&A just for the sake of doing M&A. While we did not
identify an acquisition in 2018 that aligned to our strategic and financial priorities, we will continue to
focus on M&A in 2019. Strong cash flow generation and available liquidity give us the flexibility to act as
we continue to evaluate potential opportunities.
As part of the digital pillar, we are leveraging digital systems and tools to improve business processes and
associated competitiveness. We continue to convert sites to a common ERP platform and standardize
master data to fully embrace and leverage digital tools. This will continue to be a major pillar going into
2019 as we see opportunities to further improve our cost structure and customer support.
This pillar framework is supported by the ongoing implementation of our One Materion strategy, which
emphasizes unified and focused core competencies spanning all of our global functions, regions and
businesses. One Materion focus is helping to improve our cost structure, identify solutions for our
customers, and deliver strong results for our stakeholders.
On behalf of all our talented and dedicated Materion employees worldwide, thank you for your continued
investment and trust in our Company.
Best regards,
Jugal Vijayvargiya
President and Chief Executive Officer
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Item 4.
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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5
11
12
13
13
14
16
17
30
32
74
74
74
75
75
76
76
76
77
80
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Forward-looking Statements
Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking
statements. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a
result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein:
Actual net sales, operating rates, and margins for 2019;
The global economy, including the impact of tariffs and trade agreements;
The impact of any U.S. Federal Government shutdowns and sequestrations;
The condition of the markets which we serve, whether defined geographically or by segment, with the major market
segments being: consumer electronics, industrial components, medical, automotive electronics, defense,
telecommunications infrastructure, energy, commercial aerospace, and science;
Changes in product mix and the financial condition of customers;
Our success in developing and introducing new products and new product ramp-up rates;
Our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices
for those materials, including the impact of fluctuating prices on inventory values;
Our success in identifying acquisition candidates and in acquiring and integrating such businesses;
The impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related
to these acquisitions;
Our success in implementing our strategic plans and the timely and successful completion and start-up of any
capital projects;
Other financial and economic factors, including the cost and availability of raw materials (both base and precious
metals), physical inventory valuations, metal financing fees, tax rates, exchange rates, interest rates, pension costs
and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the
cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of
incentive compensation plans;
The uncertainties related to the impact of war, terrorist activities, and acts of God;
Changes in government regulatory requirements and the enactment of new legislation that impacts our obligations
and operations;
The conclusion of pending litigation matters in accordance with our expectation that there will be no material
adverse effects; and
•
The risk factors set forth elsewhere in Item 1A of this Form 10-K.
1
Item 1.
BUSINESS
THE COMPANY
Materion Corporation (referred to herein as the Company, our, we, or us), through its wholly owned subsidiaries, is an integrated
producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural
applications with $1.2 billion in net sales in 2018. The Company was incorporated in Ohio in 1931 and has approximately 2,700
employees. Our products are sold into numerous end markets, including consumer electronics, industrial components, defense,
medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and
appliance.
SEGMENT INFORMATION
Our businesses are organized under four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision
Coatings, and Other. Our Other reportable segment includes unallocated corporate costs. Additional information regarding our
segments and business is presented below.
Performance Alloys and Composites
Performance Alloys and Composites (PAC) provides advanced engineered solutions comprised of beryllium and non-beryllium
containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, and other customized shapes at manufacturing
facilities located throughout the United States and Europe. This segment operates the world's largest bertrandite ore mine and
refinery, which is located in Utah, providing feedstock hydroxide for its beryllium businesses and external sales. In addition to
the products described below, this segment provides engineering and product development services to help our customers and
partners with product design, including delivering prototype parts and other data to demonstrate that the products will perform
under the specified design conditions.
• Bulk products are made with copper and nickel (with or without beryllium) in plate, rod, bar, tube, and wire product forms
and other customized shapes. Depending upon the application, they may provide superior strength, corrosion/wear
resistance, thermal conductivity, or lubricity. Applications for bulk products include oil & gas drilling and production
components, bearings, bushings, welding rods, plastic mold tooling, and undersea telecommunications housing
equipment. Major end markets for bulk products include industrial components, commercial aerospace, energy, and
telecommunications infrastructure. Bulk products compete with companies around the world that produce alloys with
similar properties. Key competitors include NGK Insulators, IBC Advanced Alloys Corp., Ningxia Orient Tantalum
Industry Co., Ltd., Ulba Metallurgical, Le Bronze Industriel, KME AG & Co. KG, Aurubis AG, MKM Mansfelder Kupfer
und Messing GmbH, AMPCO Metal, and Chuetsu Metal Works Ltd.
•
•
Strip products include various thicknesses of precision strip. These beryllium and non-beryllium containing alloy products
are made primarily with copper and nickel to provide unique combinations of high conductivity, high reliability, and
formability for use as connectors, contacts, springs, switches, relays, shielding, and bearings. Major end markets for strip
products include consumer electronics, telecommunications infrastructure, automotive electronics, aerospace, industrial
components, appliance, and medical. Strip products compete with companies around the world that produce alloys with
similar properties as beryllium and non-beryllium containing alloys. Key competitors include NGK Insulators, Global
Brass and Copper, Inc., Wieland Electric, Inc., Aurubis Stolberg GmbH, Diehl Metall Stiftung & Co. KG, Nippon Mining,
and PMX Industries, Inc.
Technical Materials produces engineered strip metal products with clad inlay and overlay metals, including precious and
base metal electroplated systems, electron beam welded systems, contour profiled systems, and solder-coated metal
systems. These engineered strip metal products provide a variety of thermal, electrical, or mechanical properties from a
surface area or particular section of the material. Our precision cladding and plating capabilities allow for a precious
metal or other base metal to be applied in continuous strip form, only where it is needed, reducing the material cost to
our customers as well as providing design flexibility and performance. Major end markets are automotive electronics,
consumer electronics, energy, and medical. Technical Materials' major competitors include Heraeus Inc., AMI Doduco,
Inc., and other North American continuous strip and plating companies.
• Beryllium Metals primarily manufactures beryllium-containing products in customized shapes and engineered forms.
These materials are used in applications that require high stiffness and/or low density due to their unique combination
of properties. Defense and science are the largest end markets for beryllium products, while other end markets served
2
include industrial components, commercial aerospace, energy, and telecommunications infrastructure. Direct competitors
include American Beryllia Inc., CBL Ceramics Limited, and CoorsTek, Inc.
• Beryllium hydroxide is produced at our milling operations in Utah from our bertrandite ore mine and purchased beryl
ore. The hydroxide is used primarily as a raw material input for strip and bulk products and, to a lesser extent, beryllium
products.
PAC's products are primarily sold directly from its facilities throughout the United States, Asia, and Europe, as well as distributed
internationally through a network of company-owned service centers, outside distributors, and agents.
Advanced Materials
Advanced Materials produces advanced chemicals, microelectronics packaging, precious metal, non-precious metal, and specialty
metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal pre-forms, high temperature
braze materials, and ultra-pure wire. These products are used in semiconductor logic and memory, medical, energy, lighting,
defense, optics, and wireless communications applications within the consumer electronics, industrial components, and
telecommunications infrastructure end markets. Advanced Materials also has metal recovery operations and in-house refining that
allow for the recycling of precious metals.
Advanced Materials products are sold directly from its facilities throughout the United States, Asia, and Europe, as well as through
direct sales offices and independent sales representatives throughout the world. Principal competition includes companies such
as Honeywell International, Inc., Praxair, Inc., Solar Applied Materials Technology Corp., Grikin, Solaris, Ametek Electronic
Components and Packaging, Sumitomo Metals Industries, Ltd., and Tanaka Holding Co., Ltd., as well as a number of smaller
regional and national suppliers.
The majority of the sales into the consumer electronics end market from this segment are vapor deposition targets, lids, wire, other
related precious and non-precious metal products, and advanced chemicals for semiconductors and other microelectronic
applications. These materials are used in wireless, light-emitting diode (LED), handheld devices and other applications, as well
as in a number of applications within the defense end market. Since we are an up-front material supplier, changes in our consumer
electronics sales levels do not necessarily correspond to changes in the end-use consumer demand in the same period due to down-
stream inventory positions, the time to develop and deploy new products, and manufacturing lead times and scheduling. While
our product and market development efforts allow us to capture new applications, we may lose existing applications and customers
from time to time due to the rapid change in technologies and other factors.
Precision Coatings
The Precision Coatings segment includes the following reporting units:
Precision Optics produces sputter-coated precision thin film coatings and optical filter materials. Based in Westford,
Massachusetts, the group has manufacturing facilities in the United States and China.
Large Area Coatings produces high-performance sputter-coated precision flexible thin film materials. Based in Windsor,
Connecticut, the business manufactures and distributes coated and converted thin film material solutions primarily for medical
testing and diagnosis applications.
Precision Coatings' products are sold directly from its facilities throughout the United States and Asia, as well as through direct
sales offices and independent sales representatives throughout the world. Principal competition includes companies such as Viavi
Corporation and Eastman Chemical Company and a number of smaller regional and national suppliers.
Other
The Other segment is comprised of unallocated corporate costs.
OTHER GENERAL INFORMATION
Products
We are committed to providing high-quality, innovative, and reliable products that will enable our customers’ technologies and
fuel their own technological breakthroughs and growth.
Our products include precious and non-precious specialty metals, inorganic chemicals and powders, specialty coatings, specialty
engineered beryllium and copper-based alloys, beryllium composites, ceramics and engineered clad, and plated metal systems.
3
We are constantly looking ahead to realign product and service portfolios toward the latest market and technology trends so that
we are able to provide customers with an even broader scope of products, services, and specialized expertise. We believe we are
an established leader in our markets, from consumer electronics to medical devices to highly engineered bushings and bearings
for heavy industrial equipment.
Approximately 800 customers purchase our products throughout the consumer electronics, industrial components, defense,
medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science, services, and
appliance end markets. No single customer accounted for more than 10% of our total net sales for 2018.
Availability of Raw Materials
The principal raw materials we use are aluminum, beryllium, cobalt, copper, gold, nickel, palladium, platinum, ruthenium, silver,
and tin. Ore reserve data can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The availability of these raw materials, as well as other materials used by us, is adequate and generally not dependent
on any one supplier.
Patents and Licenses
We own patents, patent applications, and licenses relating to certain of our products and processes. While our rights under these
patents and licenses are of some importance to our operations, our business is not materially dependent on any one patent or license
or on all of our patents and licenses as a group.
Backlog
The backlog of unshipped orders as of December 31, 2018, 2017, and 2016 was $266.0 million, $204.0 million, and $175.5 million,
respectively. Backlog is generally represented by purchase orders that may be terminated under certain conditions. We expect that
substantially all of our backlog of orders at December 31, 2018 will be filled over the next 18 months.
Regulatory Matters
We are subject to a variety of laws that regulate the manufacturing, processing, use, handling, storage, transport, treatment, emission,
release, and disposal of substances and wastes used or generated in manufacturing. For decades, we have operated our facilities
under applicable standards of inplant and outplant emissions and releases. The inhalation of airborne beryllium particulate may
present a health hazard to certain individuals.
On January 9, 2017, the U.S. Occupational Safety and Health Administration (OSHA) published a new standard for workplace
exposure to beryllium that, among other things, lowered the permissible exposure by a factor of ten and established new requirements
for respiratory protection, personal protective clothing and equipment, medical surveillance, hazard communication, and record
keeping. On July 6, 2018, OSHA issued a Direct Final Rule that amended the text of the new standard to clarify OSHA’s intent
with respect to certain terms and provisions of the standard, and on December 11, 2018, OSHA issued a Notice of Proposed
Rulemaking concerning additional modifications to the standard “to clarify certain provisions and to simplify or improve
compliance.” Other government and standard-setting organizations are also reviewing beryllium-related worker safety rules and
standards, and will likely make them more stringent. The development, proposal, or adoption of more stringent standards may
affect the buying decisions by the users of beryllium-containing products. If the standards are made more stringent and/or our
customers or other downstream users decide to reduce their use of beryllium-containing products, our results of operations, liquidity,
and financial condition could be materially adversely affected. The impact of this potential adverse effect would depend on the
nature and extent of the changes to the standards, the cost and ability to meet the new standards, the extent of any reduction in
customer use, and other factors. The magnitude of this potential adverse effect cannot be estimated.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file periodic reports, proxy
statements, and other information with the Securities and Exchange Commission (SEC). The SEC maintains an Internet site (http://
www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file
electronically.
We use our Investor Relations website, http://investor.shareholder.com/materion/index.cfm, as a channel for routine distribution
of important information, including news releases, analyst presentations, and financial information. As soon as reasonably
practicable, we make all documents that we file with, or furnish to, the SEC, including our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, available free of charge via this website.
The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly
noted.
4
Executive Officers of the Registrant
Incorporated by reference from information with respect to executive officers of Materion Corporation set forth in Item 10 in Part
III of this Form 10-K.
Item 1A.
RISK FACTORS
Our business, financial condition, results of operations, and cash flows can be affected by a number of factors, including, but not
limited to, those set forth below and elsewhere in this Form 10-K, any one of which could cause our actual results to vary materially
from recent results or from our anticipated future results. Therefore, an investment in us involves some risks, including the risks
described below. The risks discussed below are not the only risks that we may experience. If any of the following risks occur, our
business, results of operations, or financial condition could be negatively impacted.
The businesses of many of our customers are subject to significant fluctuations as a result of the cyclical nature of their
industries and their sensitivity to general economic conditions, which could adversely affect their demand for our products
and reduce our sales and profitability.
A substantial number of our customers are in the consumer electronics, industrial components, medical, automotive electronics,
defense, telecommunications infrastructure, energy, commercial aerospace, and science markets. Each of these markets is cyclical
in nature, influenced by a combination of factors which could have a negative impact on our business, including, among other
things, periods of economic growth or recession, strength or weakness of the U.S. dollar, the strength of the consumer electronics,
automotive electronics, and oil and gas industries, the rate of construction of telecommunications infrastructure equipment, and
government spending on defense.
Also, in times when growth rates in our markets are lower, or negative, there may be temporary inventory adjustments by our
customers that may negatively affect our business.
Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate, and our annual performance
will be affected by the fluctuations.
We expect seasonal patterns to continue, which may cause our quarterly results to fluctuate. For example, the Christmas season
generates increased demand from our customers that manufacture consumer products. If our revenue during any quarter were to
fall below the expectations of investors or securities analysts, our share price could decline, perhaps significantly. Unfavorable
economic conditions, lower than normal levels of demand, and other occurrences in any quarter could also harm our results of
operations. For example, we have experienced customers building inventory in anticipation of increased demand, whereas in other
periods, demand decreased because our customers had excess inventory.
A portion of our revenue is derived from the sale of defense-related products through various contracts and subcontracts. These
contracts may be suspended, canceled, or delayed, which could have an adverse impact on our revenues.
In 2018, 10% of our value-added sales was derived from sales to customers in the defense end market. A portion of these customers
operate under contracts with the U.S. Government, which are vulnerable to termination at any time, for convenience or default.
Some of the reasons for cancellation include, but are not limited to, budgetary constraints or re-appropriation of government funds,
timing of contract awards, violations of legal or regulatory requirements, and changes in political agenda. If cancellations were
to occur, it would result in a reduction in our revenue. Furthermore, significant reductions to defense spending could occur over
the next several years due to government spending cuts, which could have a significant adverse impact on us. For example, high-
margin defense application delays and/or push-outs may adversely impact our results of operations, including quarterly earnings.
The markets for our products are experiencing rapid changes in technology.
We operate in markets characterized by rapidly changing technology and evolving customer specifications and industry standards.
New products may quickly render an existing product obsolete and unmarketable. For example, for many years thermal and
mechanical performance have been at the forefront of device packaging for wireless communications infrastructure devices. In
recent years, a tremendous effort has been put into developing simpler packaging solutions comprised of copper and other similar
components. Our growth and future results of operations depend in part upon our ability to enhance existing products and introduce
newly developed products on a timely basis that conform to prevailing and evolving industry standards, meet or exceed technological
advances in the marketplace, meet changing customer specifications, achieve market acceptance, and respond to our competitors’
products.
5
The process of developing new products can be technologically challenging and requires the accurate anticipation of technological
and market trends. We may not be able to introduce new products successfully or do so on a timely basis. If we fail to develop
new products that are appealing to our customers or fail to develop products on time and within budgeted amounts, we may be
unable to recover our research and development costs, which could adversely affect our margins and profitability.
The availability of competitive substitute materials for beryllium-containing products may reduce our customers’ demand for
these products and reduce our sales.
In certain product applications, we compete with manufacturers of non-beryllium-containing products, including organic
composites, metal alloys or composites, titanium, and aluminum. Our customers may choose to use substitutes for beryllium-
containing products in their products for a variety of reasons, including, among other things, the lower costs of those substitutes,
the health and safety concerns relating to these products, and the risk of litigation relating to beryllium-containing products. If our
customers use substitutes for beryllium-containing materials in their products, the demand for beryllium-containing products may
decrease, which could reduce our sales.
Our long and variable sales and development cycle makes it difficult for us to predict if and when a new product will be sold
to customers.
Our sales and development cycle, which is the period from the generation of a sales lead or new product idea through the development
of the product and the recording of sales, may typically take several years, making it very difficult to forecast sales and results of
operations. Our inability to accurately predict the timing and magnitude of sales of our products, especially newly introduced
products, could affect our ability to meet our customers’ product delivery requirements or cause our results of operations to suffer
if we incur expenses in a particular period that do not translate into sales during that period, or at all. In addition, these failures
would make it difficult to plan future capital expenditure needs and could cause us to fail to meet our cash flow requirements.
The availability and prices of some raw materials we use in our manufacturing operations fluctuate, and increases in raw
material costs can adversely affect our operating results and our financial condition.
We manufacture advanced engineered materials using various precious and non-precious metals, including aluminum, beryllium,
cobalt, copper, gold, nickel, palladium, platinum, ruthenium, silver, and tin. The availability of, and prices for, these raw materials
are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand
balances, inventory levels, availability of substitute metals, the U.S. dollar exchange rate, production costs of U.S. and foreign
competitors, anticipated or perceived shortages, and other factors. Precious metal prices, including prices for gold and silver, have
fluctuated significantly in recent years. Higher prices can cause adjustments to our inventory carrying values, whether as a result
of quantity discrepancies, normal manufacturing losses, differences in scrap rates, theft or other factors, which could have a
negative impact on our profitability and cash flows. Also, the price of our products will generally increase in tandem with rising
metal prices, as a result of changes in precious metal prices that are passed through to our customers, which could deter them from
purchasing our products and adversely affect our net sales and operating profit.
Further, we maintain some precious metals and copper on a consigned inventory basis. The owners of the precious metals and
copper charge a fee that fluctuates based on the market price of those metals and other factors. A significant increase in the market
price or the consignment fee of precious metals, and/or copper, could increase our financing costs, which could increase our
operating costs.
Utilizing precious metals in the manufacturing process creates challenges in physical inventory valuations that may impact
earnings.
We manufacture precious, non-precious, and specialty metal products and also have metal cleaning operations and in-house
refineries that allow for the reclaim of precious metals from internally generated or customer scrap. We refine that scrap through
our internal operations and externally through outside vendors.
When taking periodic physical inventories in our refinery operations, we reconcile the actual precious metals to what was estimated
prior to the physical inventory count. Those estimates are based in part on assays or samples of precious metals taken during the
refining process. If those estimates are inaccurate, we may have an inventory long (more physical precious metal than what we
had estimated) or short (less physical precious metal than what we had estimated). These fluctuations could have a material impact
on our financial statements and may impact earnings. In the past, our gross margin has been reduced by a net quarterly physical
inventory adjustment. Higher precious metal prices may magnify the value of any potential inventory long or short.
6
Because we maintain a significant inventory of precious metals, we may experience losses due to employee error or theft.
Because we manufacture products that contain precious metals, we maintain a significant amount of precious metals at certain of
our manufacturing facilities. Accordingly, we are subject to the risk of precious metal shortages resulting from employee error
or theft. In the past, we have had precious metal shortages resulting from employee error and theft, which could reoccur in the
future.
While we maintain controls to prevent theft, including physical security measures, if our controls do not operate effectively or are
structured ineffectively, our profitability could be adversely affected, including any charges that we might incur as a result of the
shortage of our inventory and by costs associated with increased security, preventative measures, and insurance.
We have a limited number of manufacturing facilities, and damage to those facilities, or to critical pieces of equipment in these
facilities, could interrupt our operations, increase our costs of doing business, and impair our ability to deliver our products
on a timely basis.
Some of our facilities are interdependent. For instance, our manufacturing facility in Elmore, Ohio relies on our mining operation
for its supply of beryllium hydroxide used in production of most of its beryllium-containing materials. Additionally, our Reading,
Pennsylvania; Fremont, California; and Tucson, Arizona manufacturing facilities are dependent on materials produced by our
Elmore, Ohio manufacturing facility, and our Wheatfield, New York manufacturing facility is dependent on our Buffalo, New
York manufacturing facility. The destruction or closure of our mine, any of our manufacturing facilities, or to critical pieces of
equipment within these facilities for a significant period of time as a result of harsh weather, fire, explosion, act of war or terrorism,
or other natural disaster or unexpected event may interrupt our manufacturing capabilities, increase our capital expenditures and
our costs of doing business, and impair our ability to deliver our products on a timely basis. In addition, many of our manufacturing
facilities depend on one source for electric power and natural gas, which could be interrupted due to equipment failures, terrorism,
or another cause.
If such events occur, we may need to resort to an alternative source of manufacturing or to delay production, which could increase
our costs of doing business and/or result in lost sales. Our property damage and business interruption insurance may not cover all
of our potential losses and may not continue to be available to us on acceptable terms, if at all.
Disruptions or volatility in global financial markets could adversely impact our financial performance.
Global economic conditions may cause volatility and disruptions in the capital and credit markets. Should global economic
conditions deteriorate or access to credit markets be reduced, customers may experience difficulty in obtaining adequate financing,
thereby impacting our sales. Our exposure to bad debt losses may also increase if customers are unable to pay for products previously
ordered and/or delivered. Negative or uncertain financial and macroeconomic conditions may have a significant adverse impact
on our sales, profitability, and results of operations. If current global economic conditions deteriorate, it could trigger an economic
downturn of the same or greater severity as the one experienced in 2008 and 2009. This could have a negative impact on our sales
and result in potential non-cash goodwill and asset impairment charges.
Our defined benefit pension plans and other post-employment benefit plans are subject to financial market risks that could
adversely impact our financial performance.
We provide defined benefit pension plans to eligible employees. Our pension expense and our required contributions to our pension
plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan
assets, and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the rate at which
future obligations are discounted to a present value, or the discount rate. Significant changes in market interest rates and decreases
in the fair value of plan assets and investment losses on plan assets would increase funding requirements and expenses and may
adversely impact our results of operations.
We provide post-employment health benefits to eligible employees. Our retiree health expense is directly affected by the
assumptions we use to measure our retiree health plan obligations, including the assumed rate at which health care costs will
increase and the discount rate used to calculate future obligations. For retiree health accounting purposes, we have used a graded
assumption schedule to assume the rate at which health care costs will increase. We cannot predict whether changing market or
economic conditions, regulatory changes, or other factors will further increase our retiree health care expenses or obligations,
diverting funds we would otherwise apply to other uses.
A major portion of our bank debt consists of variable-rate obligations, which subjects us to interest rate fluctuations.
Our credit facilities are secured by substantially all of our assets (other than non-mining real property and certain other assets).
Our working capital line of credit includes variable-rate obligations, which expose us to interest rate risks. If interest rates increase,
7
our debt service obligations on our variable-rate indebtedness would increase even if the amount borrowed remained the same,
resulting in a decrease in our net income. Additional information regarding our market risks is contained in Item 7A "Quantitative
and Qualitative Disclosures About Market Risk."
Our failure to comply with the covenants contained in the terms of our indebtedness could result in an event of default, which
could materially and adversely affect our operating results and our financial condition.
The terms of our credit facilities require us to comply with various covenants, including financial covenants. In the event of a
global economic downturn, it could have a material adverse impact on our earnings and cash flow, which could adversely affect
our ability to comply with our financial covenants and could limit our borrowing capacity. Our ability to comply with these
covenants depends, in part, on factors over that we may have no control. A breach of any of these covenants could result in an
event of default under one or more of the agreements governing our indebtedness which, if not cured or waived, could give the
holders of the defaulted indebtedness the right to terminate commitments to lend and cause all amounts outstanding with respect
to the indebtedness to be due and payable immediately. Acceleration of any of our indebtedness could result in cross-defaults
under our other debt instruments. Our assets and cash flow may be insufficient to fully repay borrowings under all of our outstanding
debt instruments if some or all of these instruments are accelerated upon an event of default, in which case we may be required
to seek legal protection from our creditors.
The terms of our indebtedness may restrict our operations, including our ability to pursue our growth and acquisition strategies.
The terms of our credit facilities contain a number of restrictive covenants, including restrictions in our ability to, among other
things, borrow and make investments, acquire other businesses, and consign additional precious metals. These covenants could
adversely affect our business by limiting our ability to plan for or react to market conditions or to meet our capital needs, as well
as adversely affect our ability to pursue our growth, acquisition strategies, and other strategic initiatives.
We may not be able to complete our acquisition strategy or successfully integrate acquired businesses.
We are active in pursuing acquisitions. We intend to continue to consider further growth opportunities through the acquisition of
assets or companies and routinely review acquisition opportunities. We cannot predict whether we will be successful in pursuing
any acquisition opportunities or what the consequences of any acquisition would be. Future acquisitions may involve the expenditure
of significant funds and management time. Depending upon the nature, size, and timing of future acquisitions, we may be required
to raise additional financing, which may not be available to us on acceptable terms, or at all. Further, we may not be able to
successfully integrate any acquired business with our existing businesses or recognize any expected advantages from any completed
acquisition.
In addition, there may be liabilities that we fail, or are unable, to discover in the course of performing due diligence investigations
on the assets or companies we have already acquired or may acquire in the future. We cannot assure that rights to indemnification
by the sellers of these assets or companies to us, even if obtained, will be enforceable, collectible, or sufficient in amount, scope,
or duration to fully offset the possible liabilities associated with the business or property acquired. Any such liabilities, individually
or in the aggregate, could have a materially adverse effect on our business, financial condition, and results of operations.
Our products are deployed in complex applications and may have errors or defects that we find only after deployment.
Our products are highly complex, designed to be deployed in complicated applications, and may contain undetected defects, errors,
or failures. Although our products are generally tested during manufacturing, prior to deployment, they can only be fully tested
when deployed in specific applications. For example, we sell beryllium-copper alloy strip products in a coil form to some customers,
who then stamp the alloy for its specific purpose. On occasion, it is not until such customer stamps the alloy that a defect in the
alloy is detected. Consequently, our customers may discover errors after the products have been deployed. The occurrence of any
defects, errors, or failures could result in installation delays, product returns, termination of contracts with our customers, diversion
of our resources, increased service and warranty costs, and other losses to our customers, end users, or to us. Any of these occurrences
could also result in the loss of, or delay in, market acceptance of our products, and could damage our reputation, which could
reduce our sales.
In addition to the risk of unanticipated warranty or recall expenses, our customer contracts may contain provisions that could cause
us to incur penalties, be liable for damages, including liquidated damages, or incur other expenses, if we experience difficulties
with respect to the functionality, deployment, operation, and availability of our products and services. In the event of late deliveries,
late or improper installations or operations, failure to meet product or performance specifications or other product defects, or
interruptions or delays in our managed service offerings, our customer contracts may expose us to penalties, liquidated damages,
and other liabilities. In the event we were to incur contractual penalties, such as liquidated damages or other related costs that
exceed our expectations, our business, financial condition, and operating results could be materially and adversely affected.
8
We conduct our sales and distribution operations on a worldwide basis and are subject to the risks associated with doing business
outside the United States.
We sell to customers outside of the United States from our United States and international operations. Revenue from international
operations (principally Europe and Asia) accounted for approximately 40% in 2018, 44% in 2017, and 34% in 2016 of Net sales.
We anticipate that international shipments will account for a significant portion of our sales for the foreseeable future. There are
a number of risks associated with international business activities, including:
• burdens to comply with multiple and potentially conflicting foreign laws and regulations, including export requirements,
tariffs and other barriers, environmental health and safety requirements, increasingly complex requirements concerning
privacy and data security, including the European Union's General Data Protection Regulation, and unexpected changes
in any of these factors;
• difficulty in obtaining export licenses from the U.S. Government;
• political and economic instability and disruptions, including terrorist attacks;
• disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including
the Foreign Corrupt Practices Act (FCPA);
• potentially adverse tax consequences due to overlapping or differing tax structures; and
•
fluctuations in currency exchange rates.
Any of these risks could have an adverse effect on our international operations by reducing the demand for our products or reducing
the prices at which we can sell our products, which could result in an adverse effect on our business, financial position, results of
operations, or cash flows. We may hedge our currency transactions to mitigate the impact of currency price volatility on our
earnings; however, hedging activities may not be successful. For example, hedging activities may not cover the Company’s net
euro and yen exposure, which could have an unfavorable impact on our results of operations.
In addition, we could be adversely affected by violations of the FCPA and similar worldwide anti-bribery laws. The FCPA and
similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper
payments to non-U.S. officials for the purpose of obtaining or retaining business. While policies mandate compliance with these
anti-bribery laws, we operate in many parts of the world that have experienced governmental corruption to some degree and, in
certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We cannot assure
that our internal controls and procedures will always protect us from the reckless or criminal acts committed by our employees
or agents. If we are found to be liable for FCPA violations or other anti-bribery laws, we could suffer from criminal or civil penalties
or other sanctions, which could have a material adverse effect on our business.
Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial
performance and restrict our ability to operate our business or execute our strategies.
New laws or regulations, or changes in existing laws or regulations, or the manner of their interpretation or enforcement, could
increase our cost of doing business and restrict our ability to operate our business or execute our strategies. In particular, there
may be significant changes in U.S. laws and regulations and existing international trade agreements by the current U.S. presidential
administration that could affect a wide variety of industries and businesses, including those businesses we own and operate. If the
current U.S. presidential administration materially modifies U.S. laws and regulations and international trade agreements, our
business, financial condition, and results of operations could be adversely affected.
We are exposed to lawsuits in the normal course of business, which could harm our business.
During the ordinary conduct of our business, we may become involved in certain legal proceedings, including those involving
product liability claims, third-party lawsuits relating to exposure to beryllium, claims against us of infringement of intellectual
property rights of third parties, or other litigation matters. Due to the uncertainties of litigation, we can give no assurance that we
will prevail at the resolution of future claims. Certain of these matters involve types of claims that, if they result in an adverse
ruling to us, could give rise to substantial liability, which could have a material adverse effect on our business, operating results,
or financial condition.
Although we have insurance which may be applicable in certain circumstances, some jurisdictions preclude insurance coverage
for punitive damage awards. Accordingly, our profitability could be adversely affected if any current or future claimants obtain
9
judgments for any uninsured compensatory or punitive damages. Further, an unfavorable outcome or settlement of a pending
beryllium case or adverse media coverage could encourage the commencement of additional similar litigation.
Health issues, litigation, and government regulations relating to our beryllium operations could significantly reduce demand
for our products, limit our ability to operate, and adversely affect our profitability.
If exposed to respirable beryllium fumes, dusts, or powder, some individuals may demonstrate an allergic reaction to beryllium
and may later develop a chronic lung disease known as chronic beryllium disease (CBD). Some people who are diagnosed with
CBD do not develop clinical symptoms at all. In others, the disease can lead to scarring and damage of lung tissue, causing clinical
symptoms that include shortness of breath, wheezing, and coughing. Severe cases of CBD can cause disability or death.
Further, some scientists claim there is evidence of an association between beryllium exposure and lung cancer, and certain standard-
setting organizations have classified beryllium and beryllium compounds as human carcinogens.
The health risks relating to exposure to beryllium have been, and will continue to be, a significant issue confronting the beryllium-
containing products industry. The health risks associated with beryllium have resulted in product liability claims, employee, and
third-party lawsuits. As of December 31, 2018, we had one CBD case outstanding.
The increased levels of scrutiny by federal, state, foreign, and international regulatory authorities could lead to regulatory decisions
relating to the approval or prohibition of the use of beryllium-containing materials for various uses. Concerns over CBD and other
potential adverse health effects relating to beryllium, as well as concerns regarding potential liability from the use of beryllium,
may discourage our customers’ use of our beryllium-containing products and significantly reduce demand for our products. In
addition, adverse media coverage relating to our beryllium-containing products could damage our reputation or cause a decrease
in demand for beryllium-containing products, which could adversely affect our profitability.
Our bertrandite ore mining and beryllium-related manufacturing operations and some of our customers’ businesses are subject
to extensive health and safety regulations that impose, and will continue to impose, significant costs and liabilities, and future
regulation could increase those costs and liabilities, or effectively prohibit production or use of beryllium-containing products.
We, as well as our customers, are subject to laws regulating worker exposure to beryllium. OSHA has published a new standard
for workplace exposure to beryllium that, among other things, lowered the permissible exposure by a factor of ten and established
new requirements for respiratory protection, personal protective clothing and equipment, medical surveillance, hazard
communication, and recordkeeping. Materion was a participant in the development of the new standards, which fundamentally
represent our current health and safety operating practices. Other government and standard-setting organizations are also reviewing
beryllium-related worker safety rules and standards, and will likely make them more stringent. The development, proposal, or
adoption of more stringent standards may affect buying decisions by the users of beryllium-containing products. If the standards
are made more stringent and/or our customers or other downstream users decide to reduce their use of beryllium-containing
products, our results of operations, liquidity, and financial condition could be materially adversely affected. The impact of this
potential adverse effect would depend on the nature and extent of the changes to the standards, the cost and ability to meet the
new standards, the extent of any reduction in customer use, and other factors. The magnitude of this potential adverse effect cannot
be estimated.
Our bertrandite ore mining and manufacturing operations are subject to extensive environmental regulations that impose, and
will continue to impose, significant costs and liabilities on us, and future regulation could increase these costs and liabilities
or prevent production of beryllium-containing products.
We are subject to a variety of governmental regulations relating to the environment, including those relating to our handling of
hazardous materials and air and wastewater emissions. Some environmental laws impose substantial penalties for non-compliance.
Others, such as the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), impose strict,
retroactive, and joint and several liability upon entities responsible for releases of hazardous substances. Bertrandite ore mining
is also subject to extensive governmental regulation on matters such as permitting and licensing requirements, plant and wildlife
protection, reclamation and restoration of mining properties, the discharge of materials into the environment, and the effects that
mining has on groundwater quality and availability. Future requirements could impose on us significant additional costs or
obligations with respect to our extraction, milling, and processing of ore. If we fail to comply with present and future environmental
laws and regulations, we could be subject to liabilities or our operations could be interrupted. In addition, future environmental
laws and regulations could restrict our ability to expand our facilities or extract our bertrandite ore deposits. These environmental
laws and regulations could also require us to acquire costly equipment, obtain additional financial assurance, or incur other
significant expenses in connection with our business, which would increase our costs of production.
10
Unexpected events and natural disasters at our mine could increase the cost of operating our business.
A portion of our production costs at our mine are fixed regardless of current operating levels. Our operating levels are subject to
conditions beyond our control that may increase the cost of mining for varying lengths of time. These conditions include, among
other things, weather, fire, natural disasters, pit wall failures, and ore processing changes. Our mining operations also involve the
handling and production of potentially explosive materials. It is possible that an explosion could result in death or injuries to
employees and others and material property damage to third parties and us. Any explosion could expose us to adverse publicity
or liability for damages and materially adversely affect our operations. Any of these events could increase our cost of operations.
A security breach of customer, employee, supplier, or company information may have a material adverse effect on our business,
financial condition, and results of operations.
In the conduct of our business, we collect, use, transmit, store, and report data on information systems and interact with customers,
vendors, and employees. Increased global information technology (IT) security threats and more sophisticated and targeted
computer crime pose a risk to the security of our systems and networks and the confidentiality, availability, and integrity of our
data. Despite our security measures, our IT systems and infrastructure may be vulnerable to customer viruses, cyber-attacks,
security breaches caused by employee error or malfeasance, or other disruptions. Any such threat could compromise our networks
and the information stored there could be accessed, publicly disclosed, lost, or stolen. A security breach of our computer systems
could interrupt or damage our operations or harm our reputation, resulting in a loss of sales, operating profits, and assets. In
addition, we could be subject to legal claims or proceedings, liability under laws that protect the privacy of personal information
and regulatory penalties if confidential information relating to customers, suppliers, employees, or other parties is misappropriated
from our computer systems.
Similar security threats exist with respect to the IT systems of our lenders, suppliers, consultants, advisers, and other third parties
with whom we conduct business. A security breach of those computer systems could result in the loss, theft, or disclosure of
confidential information and could also interrupt or damage our operations, harm our reputation, and subject us to legal claims.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
11
Item 2.
PROPERTIES
We operate manufacturing plants, service and distribution centers, and other facilities throughout the world. During 2018, we
made effective use of our productive capacities at our principal facilities. We believe that the quality and production capacity of
our facilities is sufficient to maintain our competitive position for the foreseeable future. Information as of December 31, 2018,
with respect to our facilities that are owned or leased, and the respective segments in which they are included, is set forth below:
Location
Owned or Leased
Approximate
Number of
Square Feet
Corporate and Administrative Offices
Mayfield Heights, Ohio (1)(2)
Manufacturing Facilities
Leased
79,130
Albuquerque, New Mexico (2)
Alzenau, Germany (2)
Bloomfield, Connecticut (3)
Brewster, New York (2)
Buffalo, New York (2)
Delta, Utah (1)
Elmore, Ohio (1)
Farnborough, England (1)
Fremont, California (1)
Limerick, Ireland (2)
Lincoln, Rhode Island (1)
Lorain, Ohio (1)
Milwaukee, Wisconsin (2)
Reading, Pennsylvania (1)
Santa Clara, California (2)
Shanghai, China (3)
Singapore (2)
Subic Bay, Philippines (2)
Suzhou, China (2)
Taoyuan City, Taiwan (2)
Tucson, Arizona (1)
Tyngsboro, Massachusetts (3)
Westford, Massachusetts (3)
Wheatfield, New York (2)
Windsor, Connecticut (3)
Service, Sales, and Distribution Centers
Elmhurst, Illinois (1)
Maastricht, The Netherlands (2)
Seoul, Korea (2)
Singapore (1)
Stuttgart, Germany (1)
Tokyo, Japan (1)
Warren, Michigan (1)
(1) Performance Alloys and Composites
(2) Advanced Materials
(3) Precision Coatings
12
Owned/Leased
Leased
Leased
Leased
Owned
Owned
Owned/Leased
Leased
Leased
Leased
Owned/Leased
Owned/Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
13,000/63,223
136,433
44,800
75,000
97,000
100,836
681,000/191,000
10,000
40,000
23,000
130,000/26,451
55,000/10,000
98,750
128,863
5,800
101,400
24,500
5,000
21,743
32,523
53,000
38,000
53,000
35,000
34,700
28,500
450
13,654
2,500
24,800
7,200
34,500
In addition to the above, the Company holds certain mineral rights on 7,500 acres in Juab County, Utah, from which the beryllium-
bearing ore, bertrandite, is mined by the open pit method. A portion of these mineral rights are held under lease. Ore reserve data
can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Item 3.
LEGAL PROCEEDINGS
Our subsidiaries and our holding company are subject, from time to time, to a variety of civil and administrative proceedings
arising out of our normal operations, including, without limitation, product liability claims, health, safety, and environmental
claims, and employment-related actions. Among such proceedings are cases alleging that plaintiffs have contracted, or have been
placed at risk of contracting, beryllium sensitization or CBD or other lung conditions as a result of exposure to beryllium (beryllium
cases). The plaintiffs in beryllium cases seek recovery under negligence and various other legal theories and demand compensatory
and often punitive damages, in many cases of an unspecified sum. Spouses of some plaintiffs claim loss of consortium.
Beryllium Claims
As of December 31, 2018, our subsidiary, Materion Brush Inc., was a defendant in one beryllium case (involving four
plaintiffs). The case was originally filed and dismissed during 2015, but reversed and remanded in 2016 to the trial court. The
Company does not expect the resolution of this matter to have a material impact on the consolidated financial statements.
The Company was one of six defendants in a case filed on April 7, 2015 in the Superior Court of the State of California, Los
Angeles County, titled Godoy et al. v. The Argen Corporation et al., BC578085. This was a survival and wrongful death complaint.
The complaint alleged that the decedent worked at H. Kramer & Co. in California and alleged that he worked as a dental lab
technician at various dental labs in California, and that he suffered from CBD and other injuries as a result of grinding, melting
and handling beryllium-containing products. The complaint alleged causes of action for negligence, strict liability - failure to
warn, strict liability - design defect, fraudulent concealment, and breach of implied warranties. Plaintiffs other than the personal
representative of the decedent sought compensatory damages. The survival action brought by the decedent's designated personal
representative sought all damages sustained by decedent that he would have been entitled to recover had he lived, including punitive
damages. The Company filed a demurrer on May 29, 2015. At a hearing on September 29, 2015, the court granted the demurrer,
dismissing all claims against the Company, without leave to amend the complaint. On February 3, 2016, the plaintiffs filed a
notice of appeal. On June 23, 2016, the California Supreme Court in a case titled Ramos v. Brenntag Specialties, 2016 WL
3435777, issued a unanimous opinion disapproving the case precedent upon which the Company's successful demurrer had been
based. Based on this decision, the parties stipulated that the judgment entered in favor of the defendants be reversed and the matter
remanded to the trial court for further proceedings. On July 30, 2018, the trial court granted summary adjudication in favor of all
defendants on the survival action on the ground that the action was barred by the statute of limitations. On August 7, 2018, the
Company filed a Notice of Entry of Order Granting Summary Adjudication in Favor of Defendants on Plaintiffs' Survival Action.
The entry of this Order by the trial court eliminated the punitive damages claim from the action. Trial in the Godoy case, which
was originally scheduled for March 12, 2019, has been continued to September 4, 2019.
The Company has insurance coverage, which may respond, subject to an annual deductible.
Item 4.
MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this
Form 10-K.
13
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common shares are listed on the New York Stock Exchange under the symbol “MTRN”. As of February 1, 2019,
there were 792 shareholders of record.
Share Repurchases
The following table presents information with respect to repurchases of common stock made by us during the three months ended
December 31, 2018.
Period
September 29 through November 2, 2018(1)
November 3 through November 30, 2018
December 1 through December 31, 2018
Total
Total
Number of
Shares
Purchased
2,666
—
9,500
12,166
Average
Price Paid
per Share
56.45
$
—
44.47
47.09
$
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (2)
Maximum Dollar
Value that May
Yet Be Purchased
Under the Plans
or Programs (2)
15,703,744
15,703,744
15,281,289
15,281,289
— $
—
9,500
9,500
$
(1) Represents shares surrendered to the Company by employees to satisfy tax withholding obligations on stock appreciation
rights issued under the Company's stock incentive plan.
(2) On January 14, 2014, we announced that our Board of Directors authorized the repurchase of up to $50.0 million of our
common stock; this Board authorization does not have an expiration date. During the three months ended December
31, 2018, we repurchased 9,500 shares at an average price of $44.47 per share, or $0.4 million in the aggregate.
14
Performance Graph
The following graph sets forth the cumulative shareholder return on our common shares as compared to the cumulative total return
of the Russell 2000 Index, the S&P SmallCap 600 Index, and the S&P SmallCap 600 Materials Index, as Materion Corporation
is a component of these indices.
Materion Corporation
Russell 2000
S&P SmallCap 600
S&P SmallCap 600 - Materials
2014
2015
2016
2017
2018
$
$
150
169
174
171
$
120
162
170
127
$
172
196
215
196
$
214
225
244
216
199
200
223
168
The above graph assumes that the value of our common shares and each index was $100 on December 31, 2013 and that all
applicable dividends were reinvested.
15
Item 6.
SELECTED FINANCIAL DATA
Materion Corporation and Subsidiaries
(Thousands except per share data)
For the year
Net sales
Income before income taxes(1)
Income tax (benefit) expense(2)
Net income
Earnings per share of common stock:
Basic
Diluted
Dividends per share of common stock
Depreciation, depletion, and amortization
Capital expenditures
Mine development expenditures
Year-end position
Net current assets
Ratio of current assets to current liabilities
Property, plant, and equipment:
At cost
Cost less depreciation, depletion, and
amortization
Total assets
Long-term liabilities(3)
Long-term debt
Shareholders’ equity
2018
2017
2016
2015
2014
$
$
1,207,815
16,342
(4,504)
20,846
$ 1,139,447
36,396
24,945
11,451
969,236
25,315
(425)
25,740
$ 1,025,272
42,818
10,660
32,158
$ 1,126,890
54,801
12,670
42,131
1.03
1.01
0.415
35,524
27,702
6,558
0.57
0.56
0.395
42,751
27,516
1,560
1.29
1.27
0.375
45,651
27,177
9,861
1.60
1.58
0.355
37,817
29,505
22,585
2.06
2.02
0.335
42,721
29,312
1,247
$
299,573
$
3.1 to 1
$
283,834
3.2 to 1
$
254,907
3.8 to 1
$
249,616
3.6 to 1
282,628
3.7 to 1
898,251
891,789
861,267
833,834
800,671
251,018
800,341
101,401
2,066
553,906
255,578
791,084
161,097
2,827
494,981
252,631
741,298
150,853
3,605
494,089
263,629
742,293
157,182
4,276
482,957
247,588
761,921
173,890
23,196
459,019
(1) Income before income taxes for 2018 includes pension settlement charges totaling $41.4 million. For additional information
refer to Note O of the Consolidated Financial Statements.
(2) Income tax (benefit) expense includes the impact of the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017
totaling expense of $17.1 million and a benefit of $11.1 million in 2017 and 2018, respectively. For additional information refer
to Note H of the Consolidated Financial Statements.
(3) Long-term liabilities include long-term obligations relating to Retirement and post-employment benefits, Unearned income,
Capital lease obligations, and Other long-term liabilities.
16
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic,
thermal, and structural applications. Our products are sold into numerous end markets, including consumer electronics, industrial
components, defense, medical, automotive electronics, telecommunications infrastructure, energy, commercial aerospace, science,
services, and appliance.
RESULTS OF OPERATIONS
(Thousands except per share data)
Net sales
Value-added sales
Gross margin
Gross margin as a % of Value-added sales
Selling, general, and administrative (SG&A) expense
SG&A expense as a % of Value-added sales
Research and development (R&D) expense
R&D expense as a % of Value-added sales
Restructuring expense
Other — net
Operating profit
Interest expense — net
Other non-operating expense — net
Income before income taxes
Income tax (benefit) expense
Net income
Diluted earnings per share
2018 Compared to 2017
$
2018
1,207,815
738,958
251,105
$
2017
1,139,447
677,697
212,829
$
34%
153,489
21%
15,187
2%
5,599
15,334
61,496
2,471
42,683
16,342
(4,504)
20,846
31%
144,280
21%
13,981
2%
644
13,893
40,031
2,183
1,452
36,396
24,945
11,451
2016
969,236
599,910
184,528
31%
128,972
21%
12,802
2%
2,586
11,288
28,880
1,789
1,776
25,315
(425)
25,740
1.01
0.56
1.27
Net sales were $1,207.8 million in 2018, reflecting an increase of 6% from 2017. Net sales in the Performance Alloys and
Composites segment increased $71.1 million due to higher sales volume and improved commercial execution. Net sales in the
Precision Coatings and Advanced Materials segments were relatively flat compared to 2017. Changes in precious metal and copper
prices unfavorably impacted net sales in 2018 by approximately $2.7 million when compared to 2017.
Value-added sales were $739.0 million in 2018, an increase of $61.3 million, or 9%, as compared to 2017 value-added sales of
$677.7 million. Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and
allows for analysis without the distortion of the movement or volatility in metal prices. Internally, we manage our business on
this basis, and a reconciliation of net sales to value-added sales is included herein.
The increase in value-added sales was primarily driven by commercial excellence initiatives, new product introductions, and
stronger demand in the energy, defense, and industrial components end markets. In addition, incremental value-added sales from
the high-performance target materials business of the Heraeus Group (HTB) acquisition totaled approximately $9.4 million.
Gross margin was $251.1 million in 2018, or an 18% increase from the $212.8 million gross margin recorded in 2017. Gross
margin expressed as a percentage of value-added sales increased to 34% in 2018 from 31% in 2017. The increase in gross margin
was primarily due to a combination of higher sales volume and commercial and manufacturing performance improvements.
SG&A expenses totaled $153.5 million in 2018 as compared to $144.3 million in 2017. The increase in SG&A expenses was
driven by investments to execute our strategic initiatives and variable costs associated with driving top-line and profit growth.
Expressed as a percentage of value-added sales, SG&A expenses were 21% in both 2018 and 2017.
R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes,
and applications. R&D expense increased 9% to $15.2 million and remained flat as a percentage of value-added sales at
approximately 2% in both 2018 and 2017.
17
Restructuring expense consists primarily of cost reduction actions taken in order to align costs with commensurate business levels.
These actions are generally accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. In
2018, we recorded $5.6 million of expenses related to restructuring actions taken in our Advanced Materials segment. The Company
anticipates that cost savings realized from the staff reduction measures taken during 2018 will increase 2019 operating profit by
approximately $3.0 million.
In 2017, restructuring charges of $0.6 million were incurred primarily in our Precision Coatings and Other segments. Refer to
Note E of the Consolidated Financial Statements for additional discussion.
Other-net totaled expense of $15.3 million and $13.9 million in 2018 and 2017, respectively. In 2018, metal consignment fees
increased $2.2 million. In addition we recorded $1.5 million of foreign currency losses, compared to $0.7 million of foreign
currency gains recognized in 2017. These increases were partially offset by a $2.4 million decrease in the amortization of intangible
assets. Refer to Note F of the Consolidated Financial Statements for the major components of Other-net.
Interest expense - net was $2.5 million in 2018 and $2.2 million in 2017. The increase is primarily due to a capital lease entered
into in 2017 in connection with the HTB acquisition.
Other non-operating expense-net includes components of pension and post-retirement expense other than service costs. The
increase in other non-operating expense in 2018 compared to 2017 is due to $41.4 million in pension settlements recorded in
2018, primarily related to the purchase of a group annuity contract to relieve the Company of responsibility for certain pension
benefit obligations. Refer to Note O of the Consolidated Financial Statements for details of the components of net periodic
benefit costs.
Income tax (benefit) expense for 2018 was a benefit $4.5 million versus expense of $24.9 million in 2017. The effective tax rate
for 2018 was negative 27.6% compared to an effective tax rate of 68.5% for 2017. The TCJA resulted in an expense of $17.1
million in 2017 and a benefit of $11.1 million in 2018. Refer to Note H to the Consolidated Financial Statements for further details
on income taxes.
2017 Compared to 2016
Net sales were $1,139.4 million in 2017, reflecting an increase of 18% from 2016. Changes in precious metal and copper prices
favorably impacted net sales in 2017 by approximately $13.1 million when compared to 2016. Net sales in the Performance Alloys
and Composites segment increased $41.9 million due to higher sales volume, including shipments of raw material beryllium
hydroxide. Net sales of $119.7 million during 2017 were attributable to the HTB acquisition. Excluding the HTB acquisition, net
sales in the Advanced Materials segment increased $33.9 million due to higher sales volume in the consumer electronics and
industrial components end markets. These favorable impacts were offset by lower sales volume in the medical end market in the
Precision Coatings segment.
Value-added sales were $677.7 million in 2017, an increase of $77.8 million as compared to 2016 value-added sales of $599.9
million. Value-added sales from the HTB acquisition totaled approximately $36.5 million in 2017. Excluding the HTB acquisition,
value-added sales to the consumer electronics end market, which accounted for 30% of our total value-added sales during 2017,
increased $17.2 million from the prior year. Also, value-added sales in the industrial components end market increased $12.3
million from the prior year.
Gross margin was $212.8 million in 2017, or a 15% increase from the $184.5 million gross margin recorded in 2016. Gross margin
expressed as a percentage of value-added sales was 31% in both 2017 and 2016. The increase in gross margin was primarily due
to higher sales volume.
SG&A expenses totaled $144.3 million in 2017 as compared to $129.0 million in 2016. Expressed as a percentage of value-added
sales, SG&A expenses were 21% in both 2017 and 2016. The increase is attributable to normal course of business expenses from
the HTB acquisition of $5.9 million, $4.1 million of CEO transition costs, and higher variable compensation expense related to
improved financial performance.
R&D expense was flat as a percentage of value-added sales at approximately 2% in both 2017 and 2016.
Restructuring expense consists primarily of cost reduction actions taken in order to align costs with commensurate business levels.
These actions are generally accomplished through elimination of vacant positions, consolidation of roles, and staff reduction. In
2017, restructuring charges of $0.6 million were incurred in our Precision Coatings and Other segments. In 2016, we incurred
$2.6 million in restructuring expenses related to the closure of our service center in Fukaya, Japan. Refer to Note E of the
Consolidated Financial Statements for additional discussion.
18
Other-net totaled expense of $13.9 million and $11.3 million in 2017 and 2016, respectively. Refer to Note F of the Consolidated
Financial Statements for the major components of Other-net.
Interest expense - net was $2.2 million in 2017 and $1.8 million in 2016. The lower expense in 2016 resulted from lower average
outstanding debt levels.
Other non-operating expense-net includes components of pension and post-retirement expense other than service costs. Refer
to Note O for details of the components of net periodic benefit costs.
Income tax (benefit) expense for 2017 was $24.9 million versus a benefit of $0.4 million in 2016. The effective tax rate for 2017
was 68.5% compared to a negative effective tax rate of 1.7% for 2016.
On December 22, 2017, the TCJA was signed into law, resulting in an expense of $17.1 million in 2017. The TCJA includes a
number of provisions, including the lowering of the U.S. corporate tax rate from 35 percent to 21 percent, effective January 1,
2018. The TCJA also includes provisions that may partially offset the benefit of such rate reduction, including the repeal of the
deduction for domestic production activities. The international provisions of the TCJA establish a territorial-style system for taxing
foreign-source income of domestic multinational corporations. As a result of the TCJA, we recorded adjustments for the re-
measurement of deferred tax assets (liabilities) and the deemed repatriation tax on unremitted foreign earnings and profits. Refer
to Note H of the Consolidated Financial Statements for a discussion of the impact of compliance with the TCJA and a reconciliation
of the statutory and effective tax rates.
Segment Disclosures
The Company consists of four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Coatings,
and Other. The Other reportable segment includes unallocated corporate costs.
Performance Alloys and Composites
(Thousands)
Net sales
Value-added sales
Operating profit
2018 Compared to 2017
2018
2017
2016
$
$
500,590
425,471
58,832
$
429,442
363,465
21,978
387,539
332,012
6,601
Net sales from the Performance Alloys and Composites segment of $500.6 million in 2018 were 17% higher than net sales of
$429.4 million in 2017 primarily due to higher sales volume principally in the energy, defense, and industrial components end
markets, as well as improved commercial execution. In addition, the impact of higher pass-through metal prices favorably impacted
net sales by approximately $3.9 million.
Value-added sales of $425.5 million in 2018 were 17% higher than value-added sales of $363.5 million in 2017. The increase in
value-added sales was impacted by the same factors driving the net sales increase.
Performance Alloys and Composites generated operating profit of $58.8 million, or 14% of value-added sales, in 2018 as compared
to $22.0 million, or 6% of value-added sales, in 2017. Operating profit in 2018 was favorably impacted by higher sales volume,
favorable product mix, and improved manufacturing performance.
2017 Compared to 2016
Net sales from the Performance Alloys and Composites segment of $429.4 million in 2017 were 11% higher than net sales of
$387.5 million in 2016 primarily due to higher sales volume primarily related to the industrial components, consumer electronics,
and automotive electronics end markets and higher raw material sales of beryllium hydroxide. In addition, the impact of higher
pass-through metal prices favorably impacted net sales by approximately $8.9 million.
Value-added sales of $363.5 million in 2017 were 9% higher than value-added sales of $332.0 million in 2016. Stronger demand
in the consumer electronics and industrial components end markets increased value-added sales by $14.7 million compared to
2016. Also, the increase in value-added sales was driven by higher raw material sales of beryllium hydroxide of approximately
$7.1 million.
Performance Alloys and Composites generated operating profit of $22.0 million, or 6% of value-added sales, in 2017 as compared
to $6.6 million, or 2% of value-added sales, in 2016. Operating profit in 2017 was favorably impacted by higher sales volume,
favorable product mix, and productivity improvements. Additionally, a $1.4 million gain was realized on the sale of our service
19
center located in Fukaya, Japan. Operating profit in 2016 was negatively impacted by unfavorable product mix and manufacturing
yields, the negative impact of foreign exchange rate movements, and a $2.6 million impairment charge relating to the closure of
our service center located in Fukaya, Japan.
Advanced Materials
(Thousands)
Net sales
Value-added sales
Operating profit
2018 Compared to 2017
2018
2017
2016
$
$
586,643
223,714
17,651
$
590,789
228,062
32,763
437,249
176,332
26,282
Net sales from the Advanced Materials segment of $586.6 million in 2018 were 1% lower than net sales of $590.8 million in 2017,
primarily due to the impact of unfavorable pass-through metal prices of $8.9 million.
Value-added sales of $223.7 million were 2% lower than value-added sales of $228.1 million in 2017. During 2018, the HTB
acquisition contributed incremental value-added sales of $9.4 million. Excluding the HTB acquisition, value-added sales decreased
$13.7 million, or 7%, driven by softer demand in the consumer electronics end market.
Advanced Materials generated operating profit of $17.7 million in 2018 as compared to $32.8 million in 2017. Operating profit
in 2018 was impacted by unfavorable product mix, particularly within the consumer electronics end market, as well as integration
and ramp up expenses related to the move of the HTB business in Germany to a new state-of-the-art facility.
2017 Compared to 2016
Net sales from the Advanced Materials segment of $590.8 million in 2017 were 35% higher than net sales of $437.2 million in
2016. Net sales of $119.7 million during 2017 were attributable to the HTB acquisition. Also, net sales increased due to a
combination of new product sales growth and demand in the consumer electronics end market. In addition, the impact of higher
pass-through metal prices favorably impacted net sales by approximately $1.9 million.
Value-added sales of $228.1 million were 29% higher than value-added sales of $176.3 million in 2016. This increase included
value-added sales of $36.5 million attributable to our HTB acquisition. The increase in value-added sales was also driven by higher
value-added sales to the consumer electronics end market. Value-added sales to the consumer electronics end market, which
represents approximately 49% of total segment value-added sales in 2017, increased $11.0 million primarily due to higher demand,
excluding the HTB acquisition.
Advanced Materials generated operating profit of $32.8 million in 2017 as compared to $26.3 million in 2016. Operating profit
as a percentage of value-added sales was 14% in 2017 compared to 15% in 2016. The increase in operating profit in 2017 versus
2016 was primarily due to higher sales volume.
Precision Coatings
(Thousands)
Net sales
Value-added sales
Operating profit
2018 Compared to 2017
2018
2017
2016
$
$
120,582
94,231
11,468
$
119,216
90,678
8,445
144,448
97,700
11,635
Net sales for the Precision Coatings segment were $120.6 million in 2018 as compared to $119.2 million in 2017, and value-added
sales were $94.2 million in 2018 versus $90.7 million in 2017. The increase was primarily due to success in new product sales
and improved end-market demand, principally in the defense end market.
The Precision Coatings segment reported an operating profit of $11.5 million, or 12% of value-added sales, in 2018 versus $8.4
million, or 9% of value-added sales, in 2017. The increase in operating profit was driven by a combination of sales growth, cost
reduction actions, and improved manufacturing performance.
20
2017 Compared to 2016
Net sales for the Precision Coatings segment were $119.2 million in 2017 as compared to $144.4 million in 2016, and value-added
sales were $90.7 million in 2017 versus $97.7 million in 2016. Higher sales from new imaging and sensing applications were
more than offset by lower sales in the medical end market. Sales decreased $8.4 million primarily due to lower volume in the
blood glucose test strip segment of the medical end market.
The Precision Coatings segment reported an operating profit of $8.4 million, or 9% of value-added sales, in 2017 versus $11.6
million, or 12% of value-added sales, in 2016. The decrease in operating profit in 2017 versus 2016 was due to lower sales volume
and the absence of a gain on the sale of equipment of $0.7 million realized during 2016.
Other
(Thousands)
Net sales
Value-added sales
Operating loss
2018 Compared to 2017
2018
2017
2016
$
— $
— $
(4,458)
(26,455)
(4,508)
(23,155)
—
(6,134)
(15,638)
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs of $26.5 million in 2018 increased $3.3 million as compared to $23.2 million in 2017. As a percent of total
Company value-added sales, corporate costs increased to 4% in 2018 from 3% in 2017. The increase is reflective of investments
to execute our strategic initiatives and variable costs associated with improved financial performance.
2017 Compared to 2016
Corporate costs of $23.2 million in 2017 increased $7.6 million as compared to $15.6 million in 2016. Corporate costs were 3%
of total Company value-added sales in both 2017 and 2016. The increase in corporate costs in 2017 compared to 2016 was primarily
due to costs associated with the CEO transition of $4.1 million and higher variable compensation expense relating to improved
performance levels.
21
Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the Company
in total for 2018, 2017, and 2016 is as follows:
(Thousands)
Net sales
Performance Alloys and Composites
Advanced Materials
Precision Coatings
Other
Total
Less: pass-through metal costs
Performance Alloys and Composites
Advanced Materials
Precision Coatings
Other
Total
Value-added sales
Performance Alloys and Composites
Advanced Materials
Precision Coatings
Other
Total
2018
2017
2016
$
500,590
586,643
120,582
—
$ 1,207,815
$
429,442
590,789
119,216
—
$ 1,139,447
$
$
$
$
75,119
362,929
26,351
4,458
468,857
425,471
223,714
94,231
(4,458)
738,958
$
$
$
$
65,977
362,727
28,538
4,508
461,750
363,465
228,062
90,678
(4,508)
677,697
$
$
$
$
$
$
387,539
437,249
144,448
—
969,236
55,527
260,917
46,748
6,134
369,326
332,012
176,332
97,700
(6,134)
599,910
The cost of gold, silver, platinum, palladium, and copper can be quite volatile. Our pricing policy is to directly pass the cost of
these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends
and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal
price movements may not have a proportionate impact on our profitability.
Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts
the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences
in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of
movements in pass-through metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added
sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted
from net sales when calculating value-added sales.
Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product,
the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis,
and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our
fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made
from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net
sales caused by changes in the level of customer-supplied metal.
By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review
our net sales with and without the impact of the pass-through metals.
22
FINANCIAL POSITION
Cash Flow
A summary of cash flows provided from (used in) operating, investing, and financing activities is as follows:
(Thousands)
Net cash provided by operating activities
Net cash (used in) investing activities
Net cash (used in) financing activities
Effects of exchange rate changes
Net change in cash and cash equivalents
2018
2017
2016
$
$
76,374
(33,828)
(13,605)
(140)
28,801
$
$
67,795
(43,358)
(15,445)
1,388
$
10,380
$
68,180
(37,355)
(23,118)
(479)
7,228
Net cash provided by operating activities totaled $76.4 million in 2018 versus $67.8 million in 2017. Higher net income of $9.4
million was due to improved performance, specifically in the Performance Alloys and Composites segment. In conjunction with
our pension annuitization transaction, we remeasured the periodic benefit obligation of our domestic pension plan and recorded
settlement charges totaling $41.4 million during 2018. In addition, we contributed $42.0 million to our domestic pension plan
during 2018.
Working capital requirements provided cash of $5.8 million during 2018 compared to providing $6.5 million in 2017. Cash flows
provided by accounts receivable increased $11.3 million due to increased sales volumes and timing of collections. Three-month
trailing days sales outstanding (DSO) was approximately 41 days at December 31, 2018 versus 37 days at December 31, 2017.
Cash flows used by inventory decreased $13.7 million primarily within the Advanced Materials segment to respond to anticipated
orders and demand. Cash flows from accounts payable and accrued expenses provided cash of approximately $8.8 million compared
to $34.4 million in the prior year primarily resulting from a higher accounts payable balance, due to the timing of payments, and
the HTB acquisition in prior year.
Price movements of precious and base metals are essentially passed to customers. Therefore, while sudden movements in the price
of metals can cause a temporary imbalance in our cash receipts and payments in either direction, once prices stabilize, our cash
flow tends to stabilize as well.
Net cash used in investing activities was $33.8 million in 2018 compared to $43.4 million in 2017, reflecting the $16.5 million
payment for the HTB acquisition in 2017 offset by higher payments for property, plant, and equipment and mine development of
$5.2 million in 2018.
Net cash used in financing activities decreased $1.8 million from 2017 due to lower payments of withholding taxes for stock-
based compensation awards and less repurchases of common stock.
Dividends per common share increased 5% to $0.415 per share in 2018. Total dividend payments to common shareholders were
$8.4 million in 2018 and $7.9 million in 2017. In May 2018, the Board of Directors declared an increase in our quarterly dividend
from $0.100 to $0.105 per share. We intend to pay a quarterly dividend on an ongoing basis, subject to a continuing strong capital
structure and a determination that the dividend remains in the best interest of our shareholders.
Liquidity
We believe that cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to
support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share
repurchase programs, environmental remediation projects, and strategic acquisitions. At December 31, 2018, cash and cash
equivalents held by our foreign operations totaled $14.1 million. We do not expect restrictions on repatriation of cash held outside
of the United States to have a material effect on our overall liquidity, financial condition, or the results of operations for the
foreseeable future.
A summary of key data relative to our liquidity, including the outstanding debt, cash balances, and available borrowing capacity,
as of December 31, 2018 and December 31, 2017 is as follows:
(Thousands)
Cash
Total outstanding debt
Net cash
Available borrowing capacity
December 31,
2018
2017
$
$
70,645
3,041
67,604
275,488
$
$
41,844
3,818
38,026
254,777
23
Net cash is a non-GAAP financial measure. We are providing this information because we believe it is more indicative of our
overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based
on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving
credit facility and other secured lines existing as of the end of each year depicted. The applicable debt covenants have been taken
into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to
a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.
The Company's revolving credit agreement (Credit Agreement) expires in 2020 and is secured by substantially all of the assets of
the Company and its direct subsidiaries, with the exception of non-mining real property and certain other assets. The Credit
Agreement allows us to borrow money at a premium over LIBOR or prime rate and at varying maturities. The premium resets
quarterly according to the terms and conditions available under the agreement. The Credit Agreement includes restrictive covenants
relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases. In addition, the Credit Agreement
includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with
all of our debt covenants as of December 31, 2018 and December 31, 2017. Cash on hand does not affect the covenants or the
borrowing capacity under our debt agreements.
Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements. Expansion of business
volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. As a result we have
negotiated increases in the available capacity under existing lines, added additional lines, and extended the maturity dates of
existing lines in recent years. The most recent amendment, completed in the third quarter of 2016 with our largest precious metals
consignment facility, extended the maturity date from September 30, 2016 to September 30, 2019 and provided for more favorable
pricing for fixed rate consignments. The available and unused capacity under the metal financing lines totaled approximately
$133.9 million as of December 31, 2018. The availability is determined by Board approved levels and actual line capacity.
Contractual Obligations
A summary of payments to be made under long-term debt agreements, operating leases, significant capital leases, pension plan
contributions, and material purchase commitments by year is as follows:
(Millions)
Total debt (1)
Capital lease payments (2)
Interest payments on total debt (3)
Non-cancelable lease payments (4)
Pension plan contribution (5)
Other long-term liabilities (6)
Purchase obligations
Total
2019
2020
2021
2022
2023
There-
after
Total
$
$
0.8
2.2
0.2
7.3
6.0
1.2
0.9
18.6
$
$
0.9
2.2
0.1
6.5
—
2.9
0.3
12.9
$
$
1.3
2.2
—
5.0
—
0.6
0.3
9.4
$
$
— $
2.2
—
3.8
—
0.9
0.3
7.2
$
— $
1.4
—
3.5
—
0.4
1.7
7.0
$
— $
21.0
—
4.3
—
0.5
1.7
27.5
$
3.0
31.2
0.3
30.4
6.0
6.5
5.2
82.6
(1) Total debt relates to installment payments on our fixed rate industrial development revenue bonds that mature in 2021.
(2) The capital lease payments include facilities relating to our Elmore, Ohio and Alzenau, Germany sites.
(3) These amounts represent future interest payments related to our total debt.
(4) The non-cancelable lease payments represent payments under operating leases with initial lease terms in excess of one year
as of December 31, 2018.
(5) Our domestic defined benefit pension plan is underfunded as of December 31, 2018. Contributions in future periods will
be dependent upon regulatory requirements, the plan funded ratio, plan investment performance, discount rates, actuarial
assumptions, plan amendments, our contribution objectives, and other factors. We anticipate funding those contributions
with cash on hand, cash generated from operations, or borrowings under our existing lines of credit. It is not practical to
estimate the required contributions beyond 2019 at the present time.
(6) Other long-term liabilities include environmental remediation costs. We have an active environmental compliance program.
We estimate the probable cost of identified environmental remediation projects and establish reserves accordingly. The
environmental remediation reserve balance was $6.5 million at both December 31, 2018 and December 31, 2017.
Environmental projects tend to be long term, and the associated payments are typically made over a number of years. Refer
to Note S of the Consolidated Financial Statements for further discussion.
24
Off-balance Sheet Obligations
We maintain the majority of the precious metals and copper we use in production on a consignment basis in order to reduce our
exposure to metal price movements and to reduce our working capital investment. Refer to Item 7A “Quantitative and Qualitative
Disclosures about Market Risk.” 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. We were in compliance with all of the covenants contained
in the consignment agreements as of December 31, 2018 and December 31, 2017. Refer to Note J for additional information.
ORE RESERVES
We have proven and probable reserves of beryllium-bearing bertrandite ore in Juab County, Utah. We own approximately 90
percent of the proven reserves, with the remaining reserves leased from the State of Utah. We augment our proven reserves of
bertrandite ore through the purchase of imported beryl ore from time to time. This beryl ore, which is approximately four percent
beryllium, is also processed at the Utah extraction facility. Approximately 88 percent of the beryllium in ore is recovered in the
extraction process. Estimating the quantity and/or grade of ore reserves requires the size, shape, and depth of ore bodies to be
determined by analyzing geological data such as drilling samples. Economic assumptions used to estimate reserves change from
period to period, and as additional geological and operational data is generated during the course of operations, estimates of reserves
may change from period to period.
The term “proven reserves” means reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches,
workings, or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection,
sampling, and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth, and mineral
content of reserves are well-established and (c) for which are commercially recoverable through open-pit methods.
The term “probable reserves” means reserves for which quantity and grade and/or quality are computed from information similar
to that used for proven reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less
adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity
between points of observation.
As of December 31, 2018
Tonnage (in thousands)
Grade (% beryllium)
Beryllium pounds (in millions)
As of December 31, 2017
Tonnage (in thousands)
Grade (% beryllium)
Beryllium pounds (in millions)
Proven
Probable
Total
8,047
0.248%
39.96
8,119
0.248 %
40.34
945
0.257%
4.85
945
0.257 %
4.85
8,992
0.249%
44.81
9,064
0.249 %
45.19
Based upon average production levels in recent years and our near-term production forecasts, proven reserves would last a minimum
of seventy-five years. The table below details our production of beryllium at our Utah location.
(Thousands of Pounds of Beryllium)
Domestic ore
Non-domestic ore
Unyielded total
Annual yield
Beryllium produced
% of mill capacity
2018
2017
2016
368
—
368
88%
324
50%
326
12
338
88%
296
47%
339
23
362
88%
318
42%
25
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
the inherent use of estimates and management’s judgment in establishing those estimates. The following policies are considered
by management to be critical because adherence to these policies relies significantly upon our judgment.
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. We recognize revenue, in an amount that reflects the consideration
to which the Company expects to be entitled, when we satisfy a performance obligation by transferring control of a product to the
customer. The core principle of ASC 606 is supported by five steps which are outlined below with management's judgment in
applying each.
1) Identify the contract with a customer
A contract with a customer exists when the Company enters into an enforceable contract with a customer that identifies each party’s
rights regarding the products to be transferred and the related payment terms related to these services, the contract has commercial
substance, and the Company determines that collection of substantially all consideration for products that are transferred is probable
based on the customer’s intent and ability to pay.
Management exercises judgment in its assessment that it is probable that the Company will collect substantially all of the payment
attributed to products or services that will be transferred to our customers. We regularly review the creditworthiness of our customers
considering such factors as historical collection experience, a customer’s current credit standing, the age of accounts receivable
balances, and general economic conditions that may affect a customer’s ability to pay. If after we have recognized revenue,
collectability of an account receivable becomes doubtful, we establish appropriate allowances and reserves against accounts
receivable with respect to the previously recognized revenue that remains uncollected. Allowances and reserves against accounts
receivable are maintained for estimated probable losses and are sufficient enough to ensure that accounts receivable are stated at
amounts that are considered collectible.
If management forms a judgment that a particular customer’s financial condition has deteriorated but decides to deliver products
or services to the customer, we will defer recognizing revenue relating to products sold to that customer until it is probable that
we will collect substantially all of the consideration to which we are entitled, which typically coincides with the collection of cash.
2) Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the products that will be transferred to the customer that
are both capable of being distinct, whereby the customer can benefit from the product either on its own or together with other
resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby
the transfer of the product is separately identifiable from other promises in the contract.
Certain of the Company’s contracts with customers contain multiple performance obligations. As a result, management utilizes
judgment to determine the appropriate accounting, including whether multiple promised products or services in a contract should
be accounted for separately or as a group, how the consideration should be allocated among the performance obligations, and
when to recognize revenue upon satisfaction of the performance obligations.
3) Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring
services to the customer. The vast majority of our contracts contain fixed consideration terms. However, the Company also has
contracts with customers that include variable consideration. Volume discounts and rebates are offered as an incentive to encourage
additional purchases and customer loyalty. Volume discounts and rebates typically require a customer to purchase a specified
quantity of products, after which the price of additional products decreases. These contracts include variable consideration because
the total amount to be paid by the customer is not known at contract inception and is affected by the quantity of products ultimately
purchased. As a result, management applies judgment to estimate the volume discounts based on experience with similar contracts,
customers, and current sales forecasts. Also, the Company has contracts, primarily relating to its precious metal products, where
the transaction price includes variable consideration at contract inception because it is calculated based on a commodity index at
a specified date. Management exercises judgment to determine the minimum amount to be included in the transaction price.
Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future
reversal of cumulative revenue under the contract will not occur.
4) Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation
based on the relative standalone selling price. The Company typically determines standalone selling price based on the price at
26
which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions,
management uses judgment to estimate the standalone selling price taking into account available information such as market
conditions and internally approved pricing guidelines related to the performance obligations.
5) Recognize revenue when or as the Company satisfies a performance obligation
Management applies the principle of control to determine whether the customer obtains control of a product as it is created and if
revenue should be recognized over time. The vast majority of the Company's performance obligations are satisfied at a point in
time when control of the product transfers to the customer. Control of 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 the customer has accepted the product.
However, for certain contracts, particularly relating to the U.S. government and relating to specialized products with no alternative
use, we generally recognize revenue over time as we procure the product because of continuous transfer of control to the customer.
This continuous transfer of control to the customer is supported by a termination for convenience clause in the contract that allows
the customer to unilaterally terminate the contract, pay the Company for costs incurred plus a reasonable profit, and take control
of any work in process. We generally use the cost-to-cost measure of progress for these contracts because it best depicts the transfer
of control to the customer which occurs as we incur costs on the related contracts. Under the cost-to-cost measure of progress, the
extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at
completion of the performance obligation. Therefore, revenue is recognized proportionally as costs are incurred for these contracts.
The Company recognizes revenue net of reserves for price adjustments, returns, and prompt payment discounts. Management
generally estimates this amount using the expected value method. The Company has sufficient experience with our customers that
provide predictive value that the reserves recorded are appropriate.
Other considerations
We receive payment from customers equal to the invoice price for most of our sales transactions.
Returned products are generally not accepted unless the customer notifies the Company in writing, and we authorize the product
return by the customer.
Unearned revenue is recorded cash consideration from customers in advance of the shipment of the goods, which is a liability on
our Consolidated Balance Sheets. This contract liability is subsequently reversed and the revenue, cost of sales, and gross margin
are recorded when the Company has transferred control of the product to the customer. The related inventory also remains on our
balance sheet until these revenue recognition criteria are met. Advanced billings are typically made in association with products
with long manufacturing times and/or products paid relating to contracts with the government. Billings in advance of the shipments
allow us to collect cash earlier than billing at the time of the shipment and, therefore, the collected cash can be used to reduce our
investment in working capital. Refer to Note B of the Consolidated Financial Statements for additional details on our contract
balances.
Accrued Liabilities
We have various accruals on our balance sheet that are based in part upon our judgment, including accruals for litigation,
environmental remediation, and workers’ compensation costs. When a loss is probable, we establish accrual balances based on
the reasonably estimable loss or range of loss as determined by a review of the available facts and circumstances by management
and independent advisors and specialists, as appropriate. When no point of loss is more likely than another, the accrual is established
at the low end of the estimated reasonable range. Litigation and environmental accruals are established only for identified and/
or asserted claims; future claims, therefore, could give rise to increases to the accruals. The accruals are adjusted as facts and
circumstances change, as well as for changes in our strategies or the pertinent regulatory requirements. Since these accruals are
estimates, the ultimate resolution may be greater or less than the established accrual balance for a variety of reasons, including
court decisions, additional discovery, inflation levels, cost control efforts, and resolution of similar cases. Changes to the accruals
would then result in an additional charge or credit to the income statement in the period when the change is made. Refer to Note
S of the Consolidated Financial Statements.
Legal claims may be subject to partial or complete insurance recovery. The accrued liability is recorded at the gross amount of
the estimated cost and the insurance recoverable, if any, is recorded as an asset and is not netted against the liability. The accrued
legal liability includes the estimated indemnity cost only, if any, to resolve the claim through a settlement or court verdict. The
legal defense costs are not included in the accrual and are expensed in the period incurred, with the level of expense in a given
year affected by the number and types of claims we are actively defending.
Non-employee claims for chronic beryllium disease (CBD) are covered by insurance, subject to certain limitations. The insurance
covers defense costs and indemnity payments (resulting from settlements or court verdicts) and is subject to various levels of
deductibles. In 2018 and 2017, defense and indemnity costs were less than the deductible.
27
Pensions
The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an
actuarial basis. This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets,
increases in compensation levels, and amortization periods for actuarial gains and losses. Assumptions are determined based on
Company data and appropriate market indicators, and are evaluated each year as of the plans' measurement date. Changes in the
assumptions to reflect actual experience as well as the amortization of actuarial gains and losses could result in a material change
in the annual net periodic expense and benefit obligations reported in the financial statements.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest cost components of
net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates (along the
yield curve) for each projected benefit payment in the calculation. Historically, the Company used a weighted-average approach
to determine the service and interest components of its net periodic benefit costs. The change was accounted for as a change in
estimate and, accordingly, has been accounted for prospectively starting in 2017.
Our pension plan investment strategies are governed by a policy adopted by the Board of Directors. A senior management team
oversees a group of outside investment analysts and brokerage firms that implement these strategies. The future return on pension
assets is dependent upon the plan’s asset allocation, which changes from time to time, and the performance of the underlying
investments. As a result of our review of various factors, we used an expected rate of return on plan assets assumption of 6.75%
at December 31, 2018 and 7.00% at December 31, 2017. This assumption is reflective of management’s view of the long-term
returns in the marketplace, as well as changes in risk profiles and available investments. Should the assets earn an average return
less than the expected return assumption over time, in all likelihood the future pension expense would increase.
The impact of a change in the discount rate or expected rate of return assumption on pension expense can vary from year to year
depending upon the undiscounted liability level, the current discount rate, the asset balance, other changes to the plan, and other
factors. A 0.25 percentage point decrease to the discount rate would increase the 2019 projected pension expense approximately
$0.7 million. A 0.25 percentage point decrease in the expected rate of return assumption would increase the 2019 projected pension
expense by approximately $0.4 million.
Refer to Note O of the Consolidated Financial Statements for additional details on our pension and other post-employment benefit
plans.
Last In, First Out (LIFO) Inventory
The prices of certain major raw materials that we use, including copper, nickel, gold, silver, and other precious metals, fluctuate
during a given year. Where possible, such changes in material costs, in either direction, are generally reflected in selling price
adjustments, particularly with precious metals and copper.
The prices of labor and other factors of production, including supplies and utilities, generally increase with inflation. Portions of
these cost increases may be offset by manufacturing improvements and other efficiencies. From time to time, we will revise our
billing practices to include an energy surcharge in an attempt to recover a portion of our higher energy costs from our customers.
However, market factors, alternative materials, and competitive pricing may limit our ability to offset all or a portion of a cost
increase with higher prices.
We use the LIFO method for costing the majority of our domestic inventories. Under the LIFO method, inflationary cost increases
are charged against the current period cost of goods sold in order to more closely match the cost with the associated revenue. The
carrying value of the inventory is based upon older costs and, as a result, the LIFO cost of the inventory on the balance sheet is
typically, but not always, lower than it would be under most alternative costing methods. The LIFO cost may also be lower than
the current replacement cost of the inventory. The LIFO inventory value tends to be less volatile during years of fluctuating costs
than the inventory value would be using other costing methods.
The LIFO impact on the income statement in any given year is dependent upon the inflation rate effect on raw material purchases
and manufacturing conversion costs, the level of purchases in a given year, and changes in the inventory mix and quantities.
Deferred Taxes
We record deferred tax assets and liabilities based upon the temporary difference between the financial reporting and tax basis of
assets and liabilities. If it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation
allowance is established. All available evidence, both positive and negative, is considered to determine whether a valuation
allowance is needed. We review the expiration dates of certain deferred tax assets against projected income levels to determine
if a valuation allowance is needed. Certain deferred tax assets do not have an expiration date. We also evaluate deferred tax
assets for realizability due to cumulative operating losses by jurisdiction and record a valuation allowance as warranted. A valuation
28
allowance may increase tax expense and reduce net income in the period it is recorded. If a valuation allowance is no longer
required, it will reduce tax expense and increase net income in the period that it is reversed.
We had valuation allowances of $15.9 million associated with certain federal, state, and foreign deferred tax assets as of year-end
2018, primarily for net operating loss carryforwards.
Refer to Note H of the Consolidated Financial Statements for additional deferred tax details.
Precious Metal Physical Inventory Counts
We take and record the results of a physical inventory count of our precious metals on a quarterly basis. Our precious metal
operations include a refinery that processes precious metal-containing scrap and other materials from our customers, as well as
our own internally generated scrap. We also outsource portions of our refining requirements to other vendors, particularly those
materials with longer processing times. The precious metal content within these various refine streams may be in solutions, sludges,
and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters.
The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count
requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical
data and other analyses, the total estimated volumes of solutions and other materials within the refinery, data from our refine
vendors, and other factors. The resulting calculated weight of the precious metals in our refine operations may differ, in either
direction, from what our records indicate that we should have on hand, which would then result in an adjustment to our pre-tax
income in the period when the physical inventory was taken and the related estimates were made.
Impairment of Goodwill and Long-Lived Assets
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducted its
annual goodwill impairment assessment as of first day of the fourth quarter.
Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Goodwill
within the Advanced Materials segment totaled $50.3 million as of December 31, 2018. Within the Precision Coatings segment,
goodwill totaled $17.9 million and $20.6 million relating to the Precision Optics and Large Area Coatings reporting units,
respectively, as of December 31, 2018. The remaining $1.9 million is related to the Beryllium reporting unit within the Performance
Alloys and Composites segment.
For the purpose of the goodwill impairment assessment, we have the option to perform a qualitative assessment (commonly referred
to as "step zero") to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets
is necessary. We opted to bypass step zero and proceeded to perform a "step one" quantitative assessment for each of our reporting
units. The results of the step one indicated that no goodwill impairment existed.
In the step one, we estimated the fair value of each of our reporting units using a discounted cash flow (DCF) model. Each reporting
unit prepared operating forecasts which include several assumptions including future sales growth from new products and
applications, as well as assumptions regarding future industry-specific market conditions, capital expenditures, and working capital
changes. These forecasts are reviewed and approved by management and serve as the basis for the assumptions used in the DCF.
The DCF included three years of forecasted cash flows from this process, plus cash flows projected to be generated from the end
of the forecasted period into perpetuity. In addition to the estimates of future cash flows, other significant estimates involved in
the determination of fair value of the reporting units were the discount rates and growth rates used in the DCF model. The discount
rates used in the DCF model consider market and industry data as well as specific risk premiums for each reporting unit. The
growth rate for each reporting unit, for the purpose of calculating cash flows through perpetuity, was set after the forecasted period.
Changes in market conditions could increase the discount rate in the future, thus decreasing the fair value of the reporting unit. A
hypothetical 1% increase in the discount rate, holding all other assumptions constant, would not have decreased the fair value of
any reporting unit below that of its carrying value.
The sales growth assumption for each reporting unit was based on future secured orders, as well as growth in certain markets due
to the introduction of new products. The key uncertainty in the sales growth assumption, as discussed in Item 1A "Risk Factors,"
is our inability to accurately predict the timing and magnitude of sales of our products, especially newly introduced products. The
assumed growth rate for cash flows beyond the forecast period was approximately 3%. A hypothetical 1% decrease in the growth
rate, holding all other assumptions constant, would not have decreased the fair value of any reporting unit below that of its carrying
value.
Precious metal prices, particularly palladium used by our Large Area Coatings reporting unit, have fluctuated significantly in
recent years. The key risks with the precious metal pricing assumption, as discussed in Item 1A "Risk Factors," is our inability
to pass the higher raw material costs to the customer along with the possibility that rising prices could deter our customers from
purchasing our products and adversely affect our net sales and operating profit.
29
We also compared the market capitalization as of December 31, 2018 to the carrying value of our equity, noting no impairment
indicators or triggering events.
We are unaware of any current market trends that are contrary to the assumptions made in the valuation of our reporting units. If
actual results are not consistent with the assumptions made in the determination of the fair value of our reporting units, especially
assumptions regarding future sales growth from new products and applications, it is possible that the estimated fair value of certain
reporting units could fall below their carrying value and cause the reporting unit to fail step one of the goodwill impairment test.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to precious metal and commodity price, interest rate, foreign exchange rate, and utility cost differences. While
the degree of exposure varies from year to year, our methods and policies designed to manage these exposures have remained
fairly consistent over time. Generally, we attempt to minimize the effects of these exposures on our pre-tax income and cash flows
through the use of natural hedges, which include pricing strategies, borrowings denominated in the same terms as the exposed
asset, off-balance sheet financing arrangements, and other methods. Where we cannot use a natural hedge, we may use derivative
financial instruments to minimize the effects of these exposures when practical and cost efficient. The use of off-balance sheet
financing arrangements and derivative financial instruments is subject to policies approved by the Audit Committee of the Board
of Directors with oversight provided by a group of senior financial managers at our corporate office.
Precious metals. We use gold and other precious metals in manufacturing various products. To reduce the exposure to market
price changes, the majority of our precious metal requirements are maintained on a consigned inventory basis. We purchase the
metal out of consignment from our suppliers when it is ready to ship to a customer as a finished product. Our purchase price forms
the basis for the price charged to the customer for the precious metal content and, therefore, the current cost is matched to the
selling price, and the price exposure is minimized.
We are charged a consignment fee by the financial institutions that own the precious metals. This fee is a function of the market
price of the metal, the quantity of metal we have on hand, and the rate charged by the institution. Because of market forces and
competition, the fee can only be charged to customers in a limited case-by-case basis. Should the market price of precious metals
that we have on consignment increase by 20% from the prices on December 31, 2018, the additional pre-tax cost to us as a result
of an increase in the consignment fee would be approximately $4.5 million on an annual basis. This calculation assumes no
changes in the quantity of metal held on consignment or the underlying fee and that none of the additional fees are charged to
customers.
To further limit price and financing rate exposures, under some circumstances, we will require customers to furnish their own
metal for processing. Customers may also elect to provide their own material for us to process on a toll basis as opposed to
purchasing our material.
The available capacity of our existing credit lines to consign precious metals is a function of the quantity and price of the metals
on hand. As prices increase, a given quantity of metal will utilize a larger proportion of the existing credit lines. A significant
prolonged increase in metal prices could result in our credit lines being fully utilized, and, absent securing additional credit line
capacity from financial institutions, could require us to purchase precious metals rather than consign them, require customers to
supply their own metal, and/or force us to turn down additional business opportunities. If we were in a significant precious metal
ownership position, we might elect to use derivative financial instruments to hedge the potential price exposure. The cost to
finance and potentially hedge the purchased inventory may also be higher than the consignment fee. The financial statement
impact of the risk from rising metal prices impacting our credit availability cannot be estimated at the present time.
In certain circumstances, we may elect to fix the price of precious metals for a customer for a stated quantity over a specified
period of time. In those cases, we may secure hedge contracts whose terms match the terms in the agreement with our customer
so that the gain or loss on the contract with the customer due to subsequent movements in the precious metal price will generally
be offset by a gain or loss on the hedge contract. At December 31, 2018, we had no such hedge contracts outstanding.
Copper. We also use copper in our production processes. When possible, fluctuations in the purchase price of copper are passed
on to customers in the form of price adders or reductions. While over time our price exposure to copper is generally in balance,
there can be a lag between the change in our cost and the pass-through to our customers, resulting in higher or lower margins in
a given period. To mitigate this impact, we hedge a portion of this pricing risk.
We consign the majority of our copper inventory requirements. As with precious metals, the available capacity under the existing
lines is a function of the quantity and price of metal on hand. Should the market cost of copper increase by 20% from the price
as of December 31, 2018, the additional pre-tax cost to us as a result of an increase in the consignment fee would be approximately
$0.2 million on an annual basis. This calculation assumes no changes in the quantity of inventory or the underlying fee and that
none of the additional fees are charged to customers.
30
Lower of cost or net realizable value. In our manufacturing processes, we use various metals that are not widely used by others
or actively traded and, therefore, there is no established efficient market for derivative financial instruments that could be used to
effectively hedge the related price exposures. For certain applications, our pricing practice with respect to these metals is to
establish the selling price based upon our cost to purchase the material, limiting our price exposure. However, the inventory
carrying value may be exposed to market fluctuations. The inventory value is maintained at the lower of cost or net realizable
value and if the market value were to drop below the carrying value, the inventory would have to be reduced accordingly and a
charge recorded against cost of sales. This risk is mainly associated with long manufacturing lead-time items and with sludges
and scrap materials, which generally have longer processing times to be refined or processed into a usable form for further
manufacturing and are typically not covered by specific sales orders from customers. We did not record any material lower of
cost or net realizable value charges in 2018, 2017, or 2016 as a result of market price fluctuations of metals in our inventories.
Interest rates. We are exposed to changes in interest rates on our cash balances. We may also be exposed to changes in interest
rates if we incur future borrowings under our Credit Agreement. We may manage this interest rate exposure by maintaining a
combination of short-term and long-term debt and variable and fixed rate instruments. We may also use interest rate swaps to fix
the interest rate on variable rate obligations, as we deem appropriate. There were no interest rate derivatives outstanding as of
December 31, 2018. Excess cash is typically invested in high quality instruments that mature in 90 days or less. Investments are
made in compliance with policies approved by the Board of Directors.
Foreign currencies. Portions of our international operations sell products priced in foreign currencies, mainly the euro and yen,
while the majority of these products’ costs are incurred in U.S. dollars. We are exposed to currency movements in that if the U.S.
dollar strengthens, the translated value of the foreign currency sale and the resulting margin on that sale will be reduced. To
minimize this exposure, we may purchase foreign currency forward contracts, options, and collars in compliance with approved
policies. If the dollar strengthened, the decline in the translated value of our margins would be at least partially offset by a gain
on the hedge contract. A decrease in the value of the dollar would result in larger margins but potentially a loss on the contract,
depending upon the method used to hedge the exposure. Our current policy limits our hedges to 80% or less of the forecasted
exposure.
The notional value of outstanding currency contracts was $38.7 million as of December 31, 2018. If the dollar weakened 10%
against the currencies we have hedged from the December 31, 2018 exchange rates, the reduced gain and/or increased loss on the
outstanding contracts as of December 31, 2018 would reduce pre-tax profits by approximately $3.9 million in 2018. This calculation
does not take into account the increase in margins as a result of translating foreign currency sales at the more favorable exchange
rates, any changes in margins from potential volume fluctuations caused by currency movements, or the translation effects on any
other foreign currency denominated income statement or balance sheet item.
Utilities. The cost of natural gas and electricity used in our operations may vary from year to year and from season to season.
We attempt to minimize these fluctuations and the exposure to higher costs by utilizing fixed price agreements of set durations,
when deemed appropriate, obtaining competitive bidding between regional energy suppliers, and other methods.
Economy. We are exposed to changes in global economic conditions and the potential impact those changes may have on various
facets of our business. We have a program in place to closely monitor the credit worthiness and financial condition of our key
providers of financial services, including our bank group and insurance carriers, as well as the credit worthiness of customers and
vendors, and have various contingency plans in place.
Our bank lines are established with a number of different banks in order to mitigate our exposure with any one financial institution.
All of the banks in our bank group had credit in good standing as of year-end 2018. The financial statement impact from the risk
of one or more of the banks in our bank group reducing our lines due to their insolvency or other causes cannot be estimated at
the present time.
31
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
Page
33
34
36
37
38
39
40
41
81
32
Management’s Report on Internal Control over Financial Reporting
The management of Materion Corporation and subsidiaries is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Materion Corporation and
subsidiaries’ internal control system was designed to provide reasonable assurance to the Company’s management and Board of
Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Materion Corporation and subsidiaries’ management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2018. In making this assessment, it used the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria) in Internal Control - Integrated Framework (2013).
Based on our assessment we believe that, as of December 31, 2018, the Company’s internal control over financial reporting is
effective.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their report.
33
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Materion Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Materion Corporation and subsidiaries as of December 31,
2018 and 2017, and the related consolidated statements of income, comprehensive income (loss), shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2018 and the related notes and financial statement schedule
listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017,
and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since at least 1958, but we are unable to determine the specific year.
Cleveland, Ohio
February 14, 2019
34
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Materion Corporation
Opinion on Internal Control over Financial Reporting
We have audited Materion Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2018, based
on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Materion Corporation and subsidiaries (the
Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of Materion Corporation and subsidiaries as of December 31, 2018 and 2017, and the
related consolidated statements of income, comprehensive income (loss), shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2018 and the related notes and financial statement schedule listed in the Index at Item
15(a) (collectively referred to as the “consolidated financial statements”) of the Company and our report dated February 14, 2019
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 14, 2019
35
Materion Corporation and Subsidiaries
Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Income
(Thousands except per share amounts)
Net sales
Cost of sales
Gross margin
Selling, general, and administrative expense
Research and development expense
Restructuring expense (Note E)
Other — net (Note F)
Operating profit
Interest expense — net (Note G)
Other non-operating expense — net (Note O)
Income before income taxes
Income tax (benefit) expense (Note H)
Net income
Basic earnings per share:
Net income per share of common stock
Diluted earnings per share:
Net income per share of common stock
Cash dividends per share
Weighted-average number of shares of common stock outstanding:
Basic
Diluted
2018
$ 1,207,815
2017
2016
$ 1,139,447
$
969,236
956,710
251,105
153,489
15,187
5,599
15,334
61,496
2,471
42,683
16,342
(4,504)
20,846
1.03
1.01
0.415
$
$
$
$
926,618
212,829
144,280
13,981
644
13,893
40,031
2,183
1,452
36,396
24,945
11,451
0.57
0.56
0.395
$
$
$
$
784,708
184,528
128,972
12,802
2,586
11,288
28,880
1,789
1,776
25,315
(425)
25,740
1.29
1.27
0.375
$
$
$
$
20,212
20,613
20,027
20,415
19,983
20,213
The accompanying notes are an integral part of the consolidated financial statements.
36
Materion Corporation and Subsidiaries
Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income (Loss)
(Thousands)
Net income
Other comprehensive income:
Foreign currency translation adjustment
Derivative and hedging activity, net of tax benefit (expense) of $672, ($271),
and ($149)
Pension and post-employment benefit adjustment, net of tax (expense) benefit
of ($13,300), ($13,820), and $4,555
Other comprehensive income (loss)
Comprehensive income (loss)
2018
2017
2016
$
20,846
$
11,451
$
25,740
(484)
138
45,049
44,703
$
65,549
$
1,552
(1,074)
(17,234)
(16,756)
(5,305) $
(172)
258
(5,562)
(5,476)
20,264
The accompanying notes are an integral part of the consolidated financial statements.
37
Materion Corporation and Subsidiaries
Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows
(Thousands)
Cash flows from operating activities:
Net income
2018
2017
2016
$
20,846
$
11,451
$
25,740
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, and amortization
Amortization of deferred financing costs in interest expense
Stock-based compensation expense (non-cash)
Amortization of pension and post-retirement costs
Loss (gain) on sale of property, plant, and equipment
Deferred income tax (benefit) expense
Pension settlement charges
Changes in assets and liabilities net of acquired assets and liabilities:
Decrease (increase) in accounts receivable
Decrease (increase) in inventory
Decrease (increase) in prepaid and other current assets
Increase (decrease) in accounts payable and accrued expenses
Increase (decrease) in unearned revenue
Increase (decrease) in interest and taxes payable
Domestic pension plan contributions
Other — net
Net cash provided by operating activities
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment
Payments for mine development
Payments for acquisition
Proceeds from sale of property, plant, and equipment
Net cash (used in) investing activities
Cash flows from financing activities:
Repayment of short-term debt
Proceeds from issuance of long-term debt
Repayment of long-term debt
Principal payments under capital lease obligations
Cash dividends paid
Deferred financing costs
Repurchase of common stock
Payments of withholding taxes for stock-based compensation awards
Net cash (used in) financing activities
Effects of exchange rate changes
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
35,524
1,009
5,313
5,551
518
(1,318)
41,406
(7,219)
4,234
1,162
8,820
477
435
(42,000)
1,616
76,374
(27,702)
(6,558)
—
432
(33,828)
—
—
(777)
(861)
(8,389)
—
(422)
(3,156)
(13,605)
(140)
28,801
41,844
$
70,645
$
42,751
919
4,957
4,865
234
20,256
—
(18,484)
(9,462)
(11,606)
34,433
4,336
(514)
(16,000)
(341)
67,795
(27,516)
(1,560)
(16,504)
2,222
(43,358)
—
55,000
(55,797)
(843)
(7,913)
(300)
(1,086)
(4,506)
(15,445)
1,388
10,380
31,464
41,844
$
45,651
666
3,174
4,060
(648)
(9,010)
120
(4,096)
10,791
658
2,758
(2,590)
2,511
(16,000)
4,395
68,180
(27,177)
(9,861)
(1,750)
1,433
(37,355)
(8,305)
10,000
(10,694)
(736)
(7,496)
(1,000)
(3,798)
(1,089)
(23,118)
(479)
7,228
24,236
31,464
The accompanying notes are an integral part of the consolidated financial statements.
38
Materion Corporation and Subsidiaries
December 31, 2018 and 2017
Consolidated Balance Sheets
(Thousands)
Assets
Current assets
Cash and cash equivalents (Note A)
Accounts receivable (Note A)
Inventories, net (Notes A and J)
Prepaid and other current assets
Total current assets
Deferred income taxes (Notes A and H)
Property, plant, and equipment (Notes A and K)
Less allowances for depreciation, depletion, and amortization
Property, plant, and equipment — net
Intangible assets (Notes A and L)
Other assets
Goodwill (Notes A and L)
Total Assets
Liabilities and Shareholders’ Equity
Current liabilities
Short-term debt (Note M)
Accounts payable
Salaries and wages
Other liabilities and accrued items
Income taxes (Notes A and H)
Unearned revenue
Total current liabilities
Other long-term liabilities
Capital lease obligations
Retirement and post-employment benefits (Note O)
Unearned income (Note A)
Long-term income taxes (Notes A and H)
Deferred income taxes (Notes A and H)
Long-term debt (Note M)
Shareholders’ equity
Serial preferred stock (no par value; 5,000 authorized shares, none issued)
Common stock (no par value; 60,000 authorized shares, issued shares of 27,148 for both 2018
and 2017)
Retained earnings
Common stock in treasury (6,906 shares for 2018 and 7,042 shares for 2017)
Accumulated other comprehensive loss (Note P)
Other equity
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
$
$
$
2018
2017
$
$
$
70,645
130,538
214,871
23,299
439,353
5,616
898,251
(647,233)
251,018
6,461
7,236
90,657
800,341
823
49,622
47,501
33,301
2,615
5,918
139,780
14,764
15,221
38,853
32,563
2,993
195
2,066
41,844
124,014
220,352
24,733
410,943
17,047
891,789
(636,211)
255,578
9,847
6,992
90,677
791,084
777
49,059
42,694
28,044
1,084
5,451
127,109
14,895
16,072
93,225
36,905
4,857
213
2,827
—
—
234,704
548,374
(175,426)
(58,234)
4,488
553,906
800,341
$
223,484
536,116
(166,128)
(102,937)
4,446
494,981
791,084
$
The accompanying notes are an integral part of the consolidated financial statements.
39
Materion Corporation and Subsidiaries
Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Shareholders’ Equity
Common
Stock In
Treasury
Accumulated
Other
Comprehensive
Income (Loss)
Other
Equity
(Thousands)
Balance at January 1, 2016
Net income
Other comprehensive income (loss)
Cash dividends declared
Stock-based compensation activity
Repurchase of 147 shares
Directors' deferred compensation
Balance at December 31, 2016
Net income
Other comprehensive income (loss)
Tax Cuts and Jobs Act Reclassification
Cash dividends declared
Stock-based compensation activity
Repurchase of 32 shares
Directors’ deferred compensation
Balance at December 31, 2017
Net income
Other comprehensive income (loss)
Pension settlement charges
Tax Cuts and Jobs Act Reclassification
Cumulative effect of accounting change
Cash dividends declared
Stock-based compensation activity
Repurchase of 10 shares
Directors’ deferred compensation
Balance at December 31, 2018
Common
Stock
$ 208,967
—
—
—
3,764
—
(29)
$ 212,702
—
—
—
—
10,750
—
32
$ 223,484
—
Retained
Earnings
$ 499,659
25,740
—
(7,496)
—
—
—
$ 517,903
11,451
—
14,675
(7,913)
—
—
—
$ 536,116
20,846
—
—
—
—
—
11,131
—
—
—
(575)
425
(8,389)
(49)
—
89
$ 234,704
—
$ 548,374
$ (148,559) $
—
—
—
(1,762)
(3,798)
(280)
$ (154,399) $
—
—
—
—
(10,300)
(1,086)
(343)
(80,705) $
—
(5,476)
—
—
—
—
(86,181) $
—
(2,081)
(14,675)
—
—
—
—
$ (166,128) $
(102,937) $
—
2,722
41,406
575
—
—
—
—
—
—
—
—
—
—
(8,924)
(422)
48
$ (175,426) $
3,595
—
—
—
—
—
469
4,064
—
—
—
—
—
—
382
4,446
—
—
—
—
—
—
—
—
Total
$ 482,957
25,740
(5,476)
(7,496)
2,002
(3,798)
160
$ 494,089
11,451
(2,081)
—
(7,913)
450
(1,086)
71
$ 494,981
20,846
2,722
41,406
—
425
(8,389)
2,158
(422)
179
$ 553,906
—
(58,234) $
42
4,488
The accompanying notes are an integral part of the consolidated financial statements.
40
Materion Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note A — 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.
41
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:
Land improvements
Buildings
Leasehold improvements
Machinery and equipment
Furniture and fixtures
Automobiles and trucks
Research equipment
Computer hardware
Computer software
Years
10 to 20
20 to 40
Life of lease
3 to 15
4 to 10
3 to 8
3 to 10
3 to 10
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
42
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
43
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)
Assets
Unbilled receivables
Inventories
Liabilities and Shareholders’ Equity
Other liabilities and accrued items
Deferred income taxes
Retained earnings
December 31,
2017
Adjustments
due to ASC 606
January 1,
2018
$
$
— $
220,352
$
2,658
(2,059)
2,658
218,293
28,044
213
536,116
61
113
425
28,105
326
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.
Note B — 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.
44
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
$
Unbilled receivables
Unearned revenue
4,619
5,918
2,658
5,451
2,105
1,961
467
2%
74%
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.
Note C — 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.
45
The final purchase price allocation for the acquisition is as follows:
(Thousands)
Assets:
Inventories
Prepaid and other current assets
Deferred income taxes
Property, plant, and equipment
Intangible assets
Goodwill
Total assets acquired
Liabilities:
Other liabilities and accrued items
Other long-term liabilities
Retirement and post-employment benefits
Total liabilities assumed
Total purchase price
Amount
7,221
2,270
14
6,501
3,649
3,574
23,229
984
449
5,292
6,725
16,504
$
$
$
$
$
No material measurement period adjustments were recorded upon finalizing the purchase price allocation in the first quarter of
2018.
Note D — 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.
46
Financial information for reportable segments was as follows:
(Thousands)
2018
Net sales
Intersegment sales
Operating profit (loss)
Depreciation, depletion, and amortization
Expenditures for long-lived assets
Assets
2017
Net sales
Intersegment sales
Operating profit (loss)
Depreciation, depletion, and amortization
Expenditures for long-lived assets
Assets
2016
Net sales
Intersegment sales
Operating profit (loss)
Depreciation, depletion, and amortization
Expenditures for long-lived assets
Assets
Intersegment sales are eliminated in consolidation.
Performance
Alloys and
Composites
Advanced
Materials
Precision
Coatings
Other
Total
$ 500,590
$ 586,643
$ 120,582
$
— $ 1,207,815
37
58,832
17,434
15,396
50,460
17,651
8,575
15,523
410,239
207,183
—
11,468
7,066
1,983
90,537
—
(26,455)
2,449
1,358
92,382
50,497
61,496
35,524
34,260
800,341
$ 429,442
$ 590,789
$ 119,216
$
— $ 1,139,447
114
21,978
23,209
10,427
58,056
32,763
7,354
13,318
—
8,445
9,721
3,048
418,798
202,389
97,504
—
(23,155)
2,467
2,283
72,393
58,170
40,031
42,751
29,076
791,084
$ 387,539
$ 437,249
$ 144,448
$
— $
969,236
240
6,601
27,059
26,604
70,457
26,282
6,644
4,931
—
11,635
9,945
3,176
422,787
133,682
108,788
—
(15,638)
2,003
2,327
76,041
70,697
28,880
45,651
37,038
741,298
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)
Net sales
United States
Asia
Europe
All other
Total
Long-lived assets by country deployed
United States
All other
Total
2018
2017
2016
$
$
$
$
726,881
270,672
186,081
24,181
1,207,815
215,395
35,623
251,018
$
$
$
$
650,675
265,991
205,118
17,663
1,139,447
227,412
28,166
255,578
$
$
$
$
639,675
193,739
121,648
14,174
969,236
240,309
12,322
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.
47
The following table disaggregates revenue for each segment by end market for 2018:
(Thousands)
2018
End Market
Consumer Electronics
Industrial Components
Energy
Automotive Electronics
Defense
Medical
Telecom Infrastructure
Other
Total
Intersegment sales are eliminated in consolidation.
Note E — Restructuring
Performance
Alloys and
Composites
Advanced
Materials
Precision
Coatings
Other
Total
$
$
103,339
101,646
41,474
78,963
45,162
8,349
38,526
83,131
500,590
$
$
327,355
46,988
77,248
—
15,233
17,627
28,437
73,755
586,643
$
$
18,886
11,139
12
1,521
20,077
65,125
59
3,763
120,582
$
$
449,580
— $
159,773
—
118,734
—
80,484
—
80,472
—
91,101
—
67,022
—
—
160,649
— $ 1,207,815
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)
Performance Alloys & Composites
Advanced Materials
Precision Coatings
Other
Total
2018
2017
2016
$
$
— $
5,599
—
—
5,599
$
(16) $
—
431
229
644
$
2,586
—
—
—
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.
48
Note F — Other-net
Other-net is summarized for 2018, 2017, and 2016 as follows:
(Thousands)
Metal consignment fees
Amortization of intangible assets
Foreign currency loss (gain)
Net loss (gain) on disposal of fixed assets
Rental income
Other items
Total other-net
Note G — Interest
(Income) Expense
2018
2017
2016
$
$
10,999
2,265
1,487
518
(416)
481
15,334
$
$
8,782
4,629
(722)
234
(168)
1,138
13,893
$
$
6,409
4,498
1,525
(648)
(21)
(475)
11,288
The following chart summarizes the interest incurred, capitalized, and paid for 2018, 2017, and 2016:
(Thousands)
Interest incurred
Less: Capitalized interest
Total net expense
Interest paid
2018
2017
2016
$
$
$
2,870
399
2,471
1,436
$
$
$
2,608
425
2,183
1,646
$
$
$
2,219
430
1,789
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.
Note H — 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
49
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.
50
Income (loss) before income taxes and income tax expense (benefit) are comprised of the following:
(Thousands)
Income before income taxes:
Domestic
Foreign
Total income before income taxes
Income tax expense:
Current income tax expense:
Domestic
Foreign
Total current
Deferred income tax (benefit) expense:
Domestic
Foreign
Total deferred
Total income tax (benefit) expense
2018
2017
2016
$
$
$
$
$
$
$
20,272
(3,930)
16,342
$
$
(5,896) $
2,710
(3,186) $
(4,083) $
2,765
(1,318) $
(4,504) $
28,327
8,069
36,396
1,912
2,777
4,689
19,935
321
20,256
24,945
$
$
$
$
$
$
$
13,934
11,381
25,315
6,505
2,080
8,585
(8,842)
(168)
(9,010)
(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
State and local income taxes, net of federal tax effect
Effect of excess of percentage depletion over cost depletion
Manufacturing production deduction, including impact of NOL carryback
Foreign derived intangible income deduction
Tax Cuts and Jobs Act impact
Foreign rate differential
Research and development tax credit
Foreign tax credit
Foreign repatriation
Incremental fixed asset basis
Adjustment to unrecognized tax benefits
Stock compensation - excess tax benefits
Valuation allowance
Other items
Effective tax rate
21.0 %
0.1
(17.8)
6.3
(2.9)
(67.8)
1.5
(7.6)
(1.9)
2.0
—
2.7
(4.4)
38.7
2.5
(27.6)%
35.0%
2.3
(10.0)
(0.8)
—
47.1
(3.4)
(2.6)
(1.1)
1.3
(3.4)
2.8
(1.9)
2.4
0.8
68.5%
35.0 %
(0.4)
(10.6)
(3.3)
—
—
(5.9)
(6.6)
(28.1)
13.7
—
3.2
—
0.1
1.2
(1.7)%
51
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:
(Thousands)
Asset (liability)
Post-employment benefits other than pensions
Other reserves
Deferred compensation
Environmental reserves
Inventory
Pensions
Accrued compensation expense
Net operating loss and credit carryforwards
Research and development tax credit carryforward
Foreign tax credit carryforward
Subtotal
Valuation allowance
Total deferred tax assets
Depreciation
Amortization
Mine development
Capitalized interest expense
Derivative instruments and hedging activities
Total deferred tax liabilities
Net deferred tax asset
December 31,
2018
2017
$
$
2,198
693
3,539
1,463
3,032
8,105
6,215
12,002
744
2,385
40,376
(15,917)
24,459
(10,280)
(3,635)
(5,123)
—
—
(19,038)
5,421
$
$
2,787
1,371
5,054
1,452
4,636
14,307
2,852
6,374
2,466
9,481
50,780
(16,246)
34,534
(10,250)
(2,900)
(3,621)
(112)
(817)
(17,700)
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.
52
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)
Balance at January 1
Additions to tax provisions related to the current year
Additions to tax positions related to prior years
Reduction to tax positions related to prior years
Lapses on statutes of limitations
Balance at December 31
2018
2017
$
$
2,944
443
4
(508)
—
2,883
$
$
2,048
163
1,210
(121)
(356)
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 $2.6 million, $8.1 million, and $3.0 million, respectively.
Note I — Earnings Per Share
The following table sets forth the computation of basic and diluted EPS:
(Thousands except per share amounts)
Numerator for basic and diluted EPS:
Net income
Denominator:
Denominator for basic EPS:
Weighted-average shares outstanding
Effect of dilutive securities:
Stock appreciation rights
Restricted stock units
Performance-based restricted stock units
Diluted potential common shares
Denominator for diluted EPS:
2018
2017
2016
$
20,846
$
11,451
$
25,740
20,212
20,027
19,983
170
85
146
401
174
96
118
388
74
88
68
230
Adjusted weighted-average shares outstanding
Basic EPS
Diluted EPS
20,613
1.03
1.01
$
$
20,415
0.57
0.56
$
$
20,213
1.29
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.
53
Note J — Inventories, net
Inventories in the Consolidated Balance Sheets are summarized as follows:
(Thousands)
Raw materials and supplies
Work in process
Finished goods
Subtotal
Less: LIFO reserve balance
Inventories
December 31,
2018
2017
$
$
33,182
195,879
30,643
259,704
44,833
214,871
$
$
42,958
187,719
34,418
265,095
44,743
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.
Note K — Property, Plant, and Equipment
Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows:
(Thousands)
Land
Buildings
Machinery and equipment
Software
Construction in progress
Allowances for depreciation
Subtotal
Capital leases
Allowances for depreciation
Subtotal
Mineral resources
Mine development
Allowances for amortization and depletion
Subtotal
Property, plant, and equipment — net
December 31,
2018
4,874
149,701
631,421
42,678
14,468
(642,365)
200,777
22,150
(2,412)
19,738
4,980
27,979
(2,456)
30,503
251,018
$
$
2017
4,874
137,196
626,186
40,575
29,963
(615,134)
223,660
10,912
(2,741)
8,171
4,979
37,103
(18,335)
23,747
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
54
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.
Note L — 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:
(Thousands)
Customer relationships
Technology
Licenses and other
Total
2018
2017
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$
$
39,601
13,377
4,257
57,235
$
$
(37,077) $
(12,238)
(2,725)
(52,040) $
40,751
13,467
4,519
58,737
$
$
(36,949)
(11,495)
(2,672)
(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:
(Thousands)
2018
2019
2020
2021
2022
2023
Amortization
Expense
$
2,265
1,366
603
485
485
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)
Performance Alloys and Composites
Advanced Materials
Precision Coatings
Total
2018
2017
$
1,899
50,276
38,482
$ 90,657
$
1,899
50,296
38,482
$ 90,677
The results of the Company's 2018, 2017, and 2016 goodwill impairment assessments indicated that no goodwill impairment
existed.
55
Note M — Debt
Long-term debt in the Consolidated Balance Sheets is summarized as follows:
(Thousands)
Fixed rate industrial development revenue bonds payable in annual installments through 2021
Total debt outstanding
Current portion of long-term debt
Gross long-term debt
Unamortized deferred financing fees
Long-term debt
Maturities on long-term debt instruments as of December 31, 2018 are as follows:
(Thousands)
2019
2020
2021
2022
2023
Thereafter
Total
December 31,
2018
2017
$
3,041
$
3,041
(823)
2,218
(152)
2,066
$
$
3,818
3,818
(777)
3,041
(214)
2,827
$
$
823
868
1,350
—
—
—
3,041
In 2015, the Company entered into an Amended and Restated Credit Agreement (Credit Agreement) that matures in 2020 and
provides for a $375.0 million revolving credit facility comprised of sub-facilities for revolving loans, swing-line loans, letters of
credit, and foreign borrowings. The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter
into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to
finance acquisitions and other strategic initiatives. The Credit Agreement also provides for an uncommitted incremental facility
whereby, under certain conditions, the Company may be able to borrow additional term loans in an aggregate amount not to exceed
$300.0 million. The Credit Agreement is secured by substantially all of the assets of the Company and its direct subsidiaries, with
the exception of non-mining real property and certain other assets. The Credit Agreement allows the Company to borrow money
at a premium over LIBOR or prime rate and at varying maturities. The premium resets quarterly according to the terms and
conditions available under the Credit Agreement.
The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends,
and stock repurchases. In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum
fixed charge coverage ratio. The Company was in compliance with all of its debt covenants as of December 31, 2018 and
December 31, 2017.
At December 31, 2018 and 2017, respectively, there was $27.2 million and $27.3 million outstanding against the letters of credit
sub-facility. The Company pays a variable commitment fee that may reset quarterly (0.2% as of December 31, 2018) of the available
and unborrowed amounts under the revolving credit line.
While the available borrowings under the individual existing credit lines total $355.4 million, the covenants in the Credit Agreement
restrict the aggregate borrowings to $275.5 million as of December 31, 2018.
In April 2011, the Company entered into an agreement with the Toledo-Lucas County Port Authority and the Dayton–Montgomery
County Port Authority in Ohio to co-issue $8.0 million in taxable development revenue bonds, with a fixed amortization term that
will mature in 2021. The interest rate on these bonds was fixed at 4.90%, and the unamortized balance of the bonds was $3.0
million at December 31, 2018.
56
Note N — Leasing Arrangements
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases
with terms ranging up to 25 years. Operating lease expense amounted to $11.6 million, $9.3 million, and $8.6 million during 2018,
2017, and 2016, respectively. The future estimated minimum payments under capital leases and non-cancelable operating leases
with initial lease terms in excess of one year at December 31, 2018, are as follows:
(Thousands)
2019
2020
2021
2022
2023
2024 and thereafter
Total minimum lease payments
Amounts representing interest
Present value of net minimum lease payments
Capital
Leases
Operating
Leases
$
$
$
$
2,172
2,172
2,172
2,172
1,463
21,056
31,207
19,338
11,869
7,287
6,525
4,966
3,790
3,532
4,287
30,387
During 2017, in connection with the HTB acquisition, the Company entered into an agreement to relocate the German operations
from Hanau, Germany to a new, leased facility in Alzenau, Germany. In order for this manufacturing facility to meet the Company's
operating specifications, both the landlord and the Company are making structural improvements to the facility, and as a result,
the Company has concluded that it is the deemed owner of the building for accounting purposes only during the construction
period. At December 31, 2018, the Company recorded an asset of $12 million, which is reflected in Property, Plant, and Equipment
and a corresponding liability, recorded as Capital lease obligations. The future estimated minimum payments related to this lease
are included in the above table under the caption of Capital Leases.
57
Note O — Pensions and Other Post-Employment Benefits
The obligation and funded status of the Company’s pension and other post-employment benefit plans are shown below. The Pension
Benefits column aggregates defined benefit pension plans in the U.S., Germany, and England, and the U.S. supplemental retirement
plans. The Other Benefits column includes the domestic retiree medical and life insurance plan.
(Thousands)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Settlements
Acquisition
Plan amendments
Actuarial loss (gain)
Benefit payments
Foreign currency exchange rate changes and other
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Plan settlements
Acquisition
Actual return on plan assets
Employer contributions
Employee contributions
Benefit payments from fund
Expenses paid from assets
Foreign currency exchange rate changes and other
Fair value of plan assets at end of year
Funded status at end of year
Amounts recognized in the Consolidated
Balance Sheets consist of:
Other assets
Other liabilities and accrued items
Retirement and post-employment benefits
Pension Benefits
Other Benefits
2018
2017
2018
2017
$
313,728
$
276,801
$
14,166
$
14,334
6,953
9,554
(112,644)
—
—
(31,824)
(13,700)
(1,931)
170,136
234,976
(111,542)
—
(8,570)
42,227
146
(10,826)
(890)
(475)
145,046
7,587
9,949
—
7,645
3,804
18,549
(13,459)
2,852
313,728
199,992
—
2,353
29,428
16,338
162
(13,072)
(1,133)
908
234,976
111
396
—
—
—
(2,453)
(876)
31
11,375
—
—
—
—
—
—
—
—
—
—
91
398
—
—
—
444
(1,107)
6
14,166
—
—
—
—
—
—
—
—
—
—
$
$
$
(25,090) $
(78,752) $
(11,375) $
(14,166)
1,948
$
1,797
$
— $
(411)
(26,627)
(2,490)
(78,059)
(1,258)
(10,117)
(25,090) $
(78,752) $
(11,375) $
—
(1,412)
(12,754)
(14,166)
During 2018, the Company completed a partial plan settlement transaction relating to its U.S. pension plan wherein plan assets
amounting to $111.5 million were used to purchase a group annuity contract from Mutual of America. This transaction relieved
the Company of responsibility for the pension benefit obligation and consequently transferred the obligation and payment
responsibility to Mutual of America for retirement benefits owed to approximately 1,150 retirees, beneficiaries, and other
participants. The annuity contract covered retirees who commenced receiving benefits on or before June 1, 2018. The monthly
retirement benefit payment amounts currently received by retirees and their beneficiaries did not change as a result of this
transaction. Those plan participants not included in the transaction remain in the Plan, and responsibility for payment of the
retirement benefits remains with the Company.
58
The following amounts are included within accumulated other comprehensive loss at December 31, 2018 and are expected to be
recognized as components of net periodic benefit cost during 2019:
(Thousands)
Amounts recognized in other comprehensive income (before tax)
consist of:
Net actuarial loss (gain)
Net prior service cost (credit)
Amortizations expected to be recognized during next fiscal year
(before tax):
Amortization of net loss
Net prior service cost (credit)
Pension Benefits
Other Benefits
2018
2017
2018
2017
$
$
$
$
61,599
3,810
65,409
3,769
482
4,251
$
$
$
$
119,114
3,688
122,802
8,077
(123)
7,954
$
$
$
$
(2,429) $
(6,546)
(8,975) $
— $
(1,497)
(1,497) $
24
(8,044)
(8,020)
—
(1,497)
(1,497)
The following table provides information regarding the accumulated benefit obligation:
(Thousands)
Additional information
Pension Benefits
Other Benefits
2018
2017
2018
2017
Accumulated benefit obligation for all defined benefit pension plans
$
161,169
$
302,942
$
— $
For defined benefit pension plans with benefit obligations in excess of
plan assets:
Aggregate benefit obligation
Aggregate fair value of plan assets
For defined benefit pension plans with accumulated benefit
obligations in excess of plan assets:
Aggregate accumulated benefit obligation
Aggregate fair value of plan assets
165,344
138,305
156,639
138,305
304,814
227,115
296,878
227,115
—
—
—
—
—
—
—
—
—
The following table summarizes components of net benefit cost:
(Thousands)
Net benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Recognized net actuarial loss
Net periodic cost
Settlements
Total net benefit cost
Pension Benefits
Other Benefits
2018
2017
2016
2018
2017
2016
$
$
6,953
9,554
(14,231)
(123)
7,171
9,324
41,406
50,730
$
$
7,587
9,949
(13,760)
(274)
6,636
10,138
—
10,138
$
$
7,473
10,820
(13,654)
(460)
6,005
10,184
120
10,304
$
$
$
111
396
—
(1,497)
—
(990)
—
(990) $
$
91
398
—
(1,497)
—
(1,008)
—
(1,008) $
105
562
—
(1,497)
—
(830)
—
(830)
Beginning in 2018, the Company reports the service cost component of net benefit cost in the same line item as other compensation
costs in operating expenses and the non-service cost components of net benefit cost in Other non-operating expenses. Additionally,
Pension Benefit Guaranty Corporation premiums are reported within expected return on plan assets. In conjunction with the
pension annuity and other lump-sum payments, the Company remeasured the periodic benefit obligation of its U.S. plans in the
period payments were made and recorded settlement charges totaling $41.4 million during 2018.
59
The following table summarizes amounts recognized in other comprehensive income (OCI):
(Thousands)
Change in other comprehensive
income
OCI at beginning of year
Increase (decrease) in OCI:
Recognized during year — prior
service cost (credit)
Recognized during year — net
actuarial (losses) gains
Occurring during year — prior
service cost
Occurring during year — net
actuarial losses (gains)
Other adjustments
Foreign currency exchange rate
changes
Pension Benefits
Other Benefits
2018
2017
2016
2018
2017
2016
$
122,802
$
121,329
$
112,518
$
(8,020) $
(9,961) $
(11,267)
123
274
460
1,497
1,497
1,497
(7,171)
(6,636)
(6,005)
3,804
4,055
—
—
14,279
120
—
(8,997)
(41,406)
58
—
—
(2,453)
—
—
—
444
—
—
—
(191)
—
OCI at end of year
$
65,409
$
(24)
122,802
$
(43)
121,329
$
—
(8,976) $
—
(8,020) $
—
(9,961)
In determining the projected benefit obligation and the net benefit cost, as of a December 31 measurement date, the Company
used the following weighted-average assumptions:
Pension Benefits
Other Benefits
2018
2017
2016
2018
2017
2016
Weighted-average assumptions
used to determine benefit
obligations at fiscal year end
Discount rate
Rate of compensation increase
Weighted-average assumptions
used to determine net cost for the
fiscal year
Discount rate
Expected long-term return on plan
assets
Rate of compensation increase
4.07%
3.87%
3.53%
3.93%
4.02%
4.04%
4.11%
4.00%
3.43%
4.00%
3.68%
4.00%
3.63%
3.93%
4.22%
3.43%
3.68%
3.88%
6.63%
3.98%
6.89%
3.91%
6.90%
3.93%
N/A
4.00%
N/A
4.00%
N/A
4.00%
Discount Rate. The discount rate used to determine the present value of the projected and accumulated benefit obligation at the
end of each year is established based upon the available market rates for high quality, fixed income investments whose maturities
match the plan’s projected cash flows.
Beginning in 2017, the Company has elected to use a spot-rate approach to estimate the service and interest cost components of
net periodic benefit cost for its defined benefit pension plans. The spot-rate approach applies separate discount rates for each
projected benefit payment in the calculation. Historically, the Company used a weighted-average approach to determine the service
and interest cost components. The change was accounted for as a change in estimate and, accordingly, was accounted for
prospectively starting in 2017. The reductions in service and interest costs for 2017 associated with this change in estimate totaled
approximately $1.0 million.
Expected Long-Term Return on Plan Assets. Management establishes the domestic expected long-term rate of return assumption
by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation
and risk management objectives. Consideration is given to both recent plan asset performance as well as plan asset performance
over various long-term periods of time, with an emphasis on the assumption being a prospective, long-term rate of return.
Management consults with and considers the opinions of its outside investment advisers and actuaries when establishing the rate
and reviews assumptions with the Audit Committee of the Board of Directors.
Rate of Compensation Increase. The rate of compensation increase assumption was 4.0% in both 2018 and 2017 for the domestic
defined benefit pension plan and the domestic retiree medical plan.
60
Assumptions for the defined benefit pension plans in Germany and England are determined separately from the U.S. plan
assumptions, based on historical trends and current and projected market conditions in Germany and England. One plan in Germany
is unfunded.
Assumed health care trend rates at fiscal year end
Health care trend rate assumed for next year
Rate that the trend rate gradually declines to (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2018
6.50%
5.00%
2025
2017
6.75%
5.00%
2025
Assumed health care cost trend rates can have an effect on the amounts reported for the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
(Thousands)
Effect on total of service and interest cost components
Effect on post-employment benefit obligation
$
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
2018
2017
2018
2017
$
6
163
$
8
212
(6) $
(152)
(8)
(198)
Plan Assets
The following tables present the fair values of the Company’s defined benefit pension plan assets as of December 31, 2018 and
2017 by asset category. The Company has some investments that are valued using net asset value (NAV) as the practical expedient
and have not been classified in the fair value hierarchy. Refer to Note R for definitions of the fair value hierarchy.
61
(Thousands)
Cash
Equity securities (a)
Fixed-income securities (b)
Other types of investments:
Real estate fund (c)
Alternative strategies (d)
Accrued interest and dividends
Total
Investments measured at NAV: (e)
Pooled investment fund (f)
Multi-strategy hedge funds (g)
Common/Collective trusts (h)
Intermediate-term bonds (i)
Private equity funds
Total assets at fair value
(Thousands)
Cash
Equity securities (a)
Fixed-income securities (b)
Other types of investments:
Real estate fund (c)
Alternative strategies (d)
Accrued interest and dividends
Total
Investments measured at NAV: (e)
Pooled investment fund (f)
Multi-strategy hedge funds (g)
Common/Collective trusts (h)
Intermediate-term bonds (i)
Private equity funds
Total assets at fair value
Total
Level 1
Level 2
Level 3
December 31, 2018
$
21,881
50,862
18,211
3,257
—
—
94,211
— $
—
—
—
—
—
—
$
21,881
50,862
18,211
3,257
—
—
94,211
24,947
4,113
—
21,678
97
145,046
Total
Level 1
Level 2
Level 3
December 31, 2017
10,604
104,261
30,639
6,284
9,893
114
161,795
$
— $
4,968
11,652
333
55
—
17,008
$
10,604
109,229
42,291
6,617
9,948
114
178,803
21,378
3,970
8,942
21,771
112
234,976
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
(a) Equity securities are primarily comprised of corporate stock and mutual funds directly held by the plans. Equity securities
are valued using the closing price reported on the active market on which the individual securities are traded.
(b) Fixed income securities are primarily comprised of governmental and corporate bonds directly held by the plans.
Governmental and corporate bonds are valued using both market observable inputs for similar assets that are traded on an
active market and the closing price on the active market on which the individual securities are traded.
(c) Includes a mutual fund that typically invests at least 80% of its assets in equity and debt securities of companies in the real
estate industry or related industries or in companies which own significant real estate assets at the time of investment.
(d) Includes a mutual fund that tactically allocates assets to global equity, fixed income, and alternative strategies.
(e) Certain assets that are measured at fair value using the net asset value (NAV) practical expedient have not been classified
in the fair value hierarchy.
(f) Pooled investment fund consists of various investment types including equity investments covering a range of geographies
and including investment managers that hold long and short positions, property investments, and other multi-strategy
funds which combine a range of different credit, equity, and macro-orientated ideas and dynamically allocate funds across
asset classes.
(g) Includes a fund that invests in a broad portfolio of hedge funds.
(h) The common/collective trusts are comprised of a number of investment funds that invest in a diverse portfolio of assets
including equity securities, corporate and governmental bonds, equity and credit indexes, and money markets. Trusts are
62
valued at the NAV as determined by their custodian. NAV represents the accumulation of the unadjusted quoted close
prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates.
(i) Includes a mutual fund that employs a value-oriented approach to fixed income investment management and a mutual
fund that invests primarily in investment-grade debt securities.
The Company’s domestic defined benefit pension plan investment strategy, as approved by the Governance and Organization
Committee of the Board of Directors, is to employ an allocation of investments that will generate returns equal to or better than
the projected long-term growth of pension liabilities so that the plan will be self-funding. The return objective is to maximize
investment return to achieve and maintain a 100% funded status over time, taking into consideration required cash contributions.
The allocation of investments is designed to maximize the advantages of diversification while mitigating the risk and overall
portfolio volatility to achieve the return objective. Risk is defined as the annual variability in value and is measured in terms of
the standard deviation of investment return. Under the Company’s investment policies, allowable investments include domestic
equities, international equities, fixed income securities, cash equivalents, and alternative securities (which include real estate,
private venture capital investments, hedge funds, and tactical asset allocation). Ranges, in terms of a percentage of the total assets,
are established for each allowable class of security. Derivatives may be used to hedge an existing security or as a risk reduction
strategy. Current asset allocation guidelines are to invest 20% to 50% in equity securities, 30% to 70% in fixed income securities
and cash, and up to 20% in alternative securities. Management reviews the asset allocation on a quarterly or more frequent basis
and makes revisions as deemed necessary.
None of the plan assets noted above are invested in the Company’s common stock.
Cash Flows
Employer Contributions. The Company expects to contribute $6.0 million to its domestic defined benefit pension plan and $1.3
million to its other benefit plans in 2019.
Effective in 2016, all plan participants with an accrued benefit may elect an immediate payout in lieu of their future monthly
annuity if the lump sum amount does not exceed $100,000.
Estimated Future Benefit Payments. The following benefit payments, which reflect expected future service, as appropriate, are
expected to be paid:
(Thousands)
2019
2020
2021
2022
2023
2024 through 2028
Other Benefit Plans
Other Benefits
Pension Benefits
Gross Benefit
Payment
$
$
3,203
3,619
4,457
6,051
6,293
44,444
$
1,258
1,367
1,334
1,203
1,192
4,155
Net of
Medicare
Part D
Subsidy
1,241
1,352
1,321
1,192
1,182
4,125
In addition to the plans shown above, the Company also has certain foreign subsidiaries with accrued unfunded pension and other
post-employment arrangements. The liability for these arrangements was $1.6 million at December 31, 2018 and $2.1 million at
December 31, 2017, and was included in retirement and post-employment benefits in the Consolidated Balance Sheets.
The Company also sponsors defined contribution plans available to substantially all U.S. employees. The Company’s annual
defined contribution expense, including the expense for the enhanced defined contribution plan, was $5.2 million in 2018, $4.5
million in 2017, and $3.6 million in 2016.
63
Note P — Accumulated Other Comprehensive Income
Changes in the components of accumulated other comprehensive income, including amounts reclassified out, for 2018, 2017, and
2016, and the balances in accumulated other comprehensive income as of December 31, 2018, 2017, and 2016 are as follows:
(Thousands)
Gains and Losses
On Cash Flow Hedges
Foreign
Currency
Precious
Metals
Copper
Total
Pension and
Post-
Employment
Benefits
Foreign
Currency
Translation
Total
Balance at December 31, 2015
$ 1,579
$
— $
— $ 1,579
$
(76,796) $
(5,488) $ (80,705)
(377)
(14,165)
(172)
(14,714)
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Other comprehensive income (loss)
before tax
Deferred taxes on current period
activity
Other comprehensive income (loss)
after tax
(377)
784
407
149
258
—
—
—
—
—
—
—
—
—
—
784
407
149
258
Balance at December 31, 2016
$ 1,837
Balance at December 31, 2016
$ 1,837
$
$
— $
— $ 1,837
— $
— $ 1,837
$
$
4,048
—
4,832
(10,117)
(172)
(9,882)
(4,555)
—
(4,406)
(5,562)
(172)
(5,476)
(82,358) $
(5,660) $ (86,181)
(82,358) $
(5,660) $ (86,181)
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Other comprehensive income (loss)
before tax
Deferred taxes on current period
activity
Other comprehensive income (loss)
after tax
Balance at December 31, 2017
Balance at December 31, 2017
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from accumulated
other comprehensive income
Other comprehensive income (loss)
before tax
Deferred taxes on current period
activity
Other comprehensive income (loss)
after tax
(1,180)
(463)
632
208
(548)
(255)
330
(59)
(196)
(878)
959
959
$
$
$
$
—
—
—
—
—
(1,643)
(8,279)
1,552
(8,370)
840
4,865
—
5,705
(803)
(3,414)
1,552
(2,665)
271
13,820
—
14,091
(1,074)
(17,234)
1,552
(16,756)
(196) $
— $
763
(196) $
— $
763
$
$
(99,592) $
(4,108) $(102,937)
(99,592) $
(4,108) $(102,937)
(333)
467
(569)
(435)
11,396
(484)
10,477
10
(109)
—
(99)
46,953
—
46,854
(323)
358
(569)
(534)
58,349
(484)
57,331
Balance at December 31, 2018
$ 1,263
$
79
$
(441) $
(627)
304
83
275
(128)
(672)
13,300
—
12,628
(441)
138
901
45,049
(484)
44,703
$
(54,543) $
(4,592) $ (58,234)
Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are
recorded in Other-net in the Consolidated Statements of Income while gains and losses on precious metal cash flow hedges are
recorded in Cost of sales in the Consolidated Statements of Income. Refer to Note R 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 O for additional details on pension
and other post-employment expenses.
64
Note Q — Stock-based Compensation
Stock incentive plans (the 2006 Stock Incentive Plan and the 2006 Non-employee Director Equity Plan) were approved at the
May 2006 annual meeting of shareholders. These plans authorize the granting of option rights, stock appreciation rights (SARs),
performance-restricted shares, performance shares, performance units, and restricted shares. The 2006 Stock Incentive Plan and
the 2006 Non-employee Director Equity Plan were amended to, among other things, add additional shares to the plans. These
amendments were last approved by shareholders at the May 2017 annual meeting.
Stock-based compensation expense, which includes awards settled in shares and in cash and is recognized as a component of
selling, general, and administrative expenses (SG&A) expenses, was $11.4 million, $7.7 million, and $6.7 million in 2018, 2017,
and 2016, respectively. The Company derives a tax deduction measured by the excess of the market value over the grant price at
the date stock-based awards vest or are exercised. The Company recognized $1.2 million and $2.0 million of tax benefits in 2018
and 2017, respectively, compared to less than $0.1 million of tax expense in 2016 relating to the issuance of common stock for
the exercise/vesting of equity awards.
The following sections provide information on awards settled in shares.
SARs. The Company grants SARs to certain employees. Upon exercise of vested SARs, the participant will receive a number of
shares of common stock equal to the spread (the difference between the market price of the Company’s common shares at the time
of exercise and the strike price established on the grant date) divided by the common share price. The strike price of the SARs is
equal to the market value of the Company’s common shares on the day of the grant. The number of SARs available to be issued
is established by plans approved by the shareholders. The vesting period and the life of the SARs are established at the time of
grant. The exercise of the SARs is generally satisfied by the issuance of treasury shares. SARs granted in 2018 vest in equal
installments annually over three years, while SARs granted prior to 2018 generally vest three years from the date of grant. SARs
granted prior to 2011 expire in ten years, while the SARs granted in 2011 and later expire in seven years.
The following table summarizes the Company's SARs activity during 2018:
(Shares in thousands)
Outstanding at December 31, 2017
Granted
Exercised
Cancelled
Outstanding at December 31, 2018
Vested and expected to vest as of December 31, 2018
Exercisable at December 31, 2018
Number of
SARs
Weighted-
average
Exercise
Price Per
Share
Aggregate
Intrinsic
Value
(thousands)
Weighted-
average
Remaining
Term (Years)
$
616
65
(277)
(25)
379
379
60
30.97
50.35
33.03
27.58
33.01
33.01
34.10
$
4,894
4,894
659
4.5
4.5
3.0
A summary of the status and changes of shares subject to SARs and the related average price per share follows:
(Shares in thousands)
Nonvested as of December 31, 2017
Granted
Vested
Cancelled
Nonvested as of December 31, 2018
Number of
SARs
Weighted-
average
Grant
Date
Fair Value
426
65
(147)
(25)
319
$
$
10.54
15.73
13.11
8.73
10.33
As of December 31, 2018, $1.0 million of expense with respect to non-vested SARs has yet to be recognized as expense over a
weighted-average period of approximately 22 months. The total fair value of shares vested during 2018 was $1.9 million, compared
to $1.7 million in both 2017 and 2016.
The weighted-average grant date fair value for 2018, 2017, and 2016 was $15.73, $10.89, and $8.07, respectively. The fair value
will be amortized to compensation cost on a straight-line basis over the three-year vesting period, or earlier if the employee is
65
retirement eligible as defined in the Plan. Stock-based compensation expense relating to SARs was $0.7 million in 2018, $1.4
million in 2017, and $0.9 million in 2016.
The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions:
Risk-free interest rate
Dividend yield
Volatility
Expected lives (in years)
2018
2017
2016
2.58%
0.8%
31.9%
5.5
1.92%
1.1%
34.0%
5.6
1.25%
1.4%
38.0%
5.7
The risk-free rate of return was based on U.S. Treasury yields with a maturity equal to the expected life of the award. The dividend
yield was based on the Company's historical dividend rate and stock price. The expected volatility of stock was derived by referring
to changes in the Company's historical common stock prices over a time-frame similar to the expected life of the award. In addition
to considering the vesting period and contractual term of the award for the expected life assumption, the Company analyzes actual
historical exercise experience for previously granted awards.
Restricted Stock Units (RSUs) - Employees. The Company may grant RSUs to employees of the Company. These units constitute
an agreement to deliver shares of common stock to the participant at the end of the vesting period, which is defined at the date of
the grant, and are forfeited should the holder’s employment terminate during the restriction period. The fair market value of the
RSUs is determined on the date of the grant and is amortized over the vesting period. The vesting period is typically three years
unless the recipient is retirement eligible and continued vesting is approved by the Board of Directors.
The fair value of the RSUs settled in stock is based on the closing stock price on the date of grant. The weighted-average grant
date fair value for 2018, 2017, and 2016 was $50.35, $35.24, and $25.19, respectively. Cash-settled RSUs are accounted for as
liability-based compensation awards and adjusted based on the closing price of Materion’s common stock over the vesting period
of three years.
Stock-based compensation expense relating to RSUs was $1.2 million in 2018, $1.4 million in 2017, and $0.6 million in 2016.
The unamortized compensation cost on the outstanding RSUs was $2.5 million as of December 31, 2018 and is expected to be
amortized over a weighted-average period of 24 months. The total fair value of shares vested during 2018 was $1.4 million,
compared to $1.2 million in both 2017 and 2016.
The following table summarizes the stock-settled restricted stock unit activity during 2018:
(Shares in thousands)
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
Number of
Shares
Weighted-
average
Grant Date
Fair Value
119
59
(38)
(10)
130
$
$
32.16
50.35
36.69
34.07
38.99
RSUs - Non-Employee Directors. In 2018, 2017, and 2016, 14,728, 18,656, and 26,469 RSUs, with a one year vesting period,
were granted to certain non-employee members of the Board of Directors. The weighted-average grant date fair value of these
RSUs were $51.60, $34.30, and $27.20 in 2018, 2017, and 2016, respectively. The Company recognized $0.7 million of expense
with respect to these awards in each of the last three years. At December 31, 2018, $0.3 million of expense with respect to non-
vested RSU awards granted to the Board of Directors has yet to be recognized and will be amortized into expense over a weighted-
average period of approximately four months.
Long-term Incentive Plans. Under long-term incentive compensation plans, executive officers and selected other employees
receive restricted stock unit awards based upon the Company’s performance over the defined period, typically three years. Total
units earned for grants made in 2018, 2017, and 2016, may vary between 0% and 200% of the units granted based on the attainment
of performance targets during the related three-year period. All grants made in 2018 will be settled in Materion common shares
and are equity classified. For grants made to executive officers prior to 2018, attainment up to 100% is paid in Materion common
shares and equity classified, while the remainder are classified as liability awards and settled in cash. Grants made to all other
66
employees prior to 2018 are settled in cash. Vesting of performance-based awards is contingent upon the attainment of threshold
performance objectives.
The following table summarizes the activity related to equity-based, performance-based restricted stock units during 2018:
(Shares in thousands)
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
Number of
Shares
Weighted-
average
Grant Date
Fair Value
223
55
(75)
(1)
202
$
$
28.49
62.44
33.31
62.44
35.76
Compensation expense is based upon the performance projections for the three-year plan period, the percentage of requisite service
rendered, and the fair market value of the Company’s common shares on the date of grant. The offset to the compensation expense
for the portion of the award to be settled in shares is recorded within shareholders’ equity and was $2.7 million for 2018, $1.5
million for 2017, and $1.0 million for 2016.
Directors' Deferred Compensation. Non-employee directors may defer all or part of their compensation into the Company’s
common stock. The fair value of the deferred shares is determined at the share acquisition date and is recorded within shareholders’
equity. Subsequent changes in the fair value of the Company’s common shares do not impact the recorded values of the shares.
The following table summarizes the stock activity for the directors' deferred compensation plan during 2018:
(Shares in thousands)
Outstanding at December 31, 2017
Granted
Distributed
Outstanding at December 31, 2018
Number of
Shares
Weighted-
average
Grant Date
Fair Value
164
12
(24)
152
$
$
25.96
53.11
54.71
23.55
During the years ended December 31, 2018, 2017, and 2016, the weighted-average grant date fair value was $53.11, $35.34, and
$24.46, respectively.
Note R — Fair Value Information and Derivative 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 upon 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.
67
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets at
December 31, 2018 and 2017:
(Thousands)
December 31, 2018
Financial Assets
Deferred compensation investments
Foreign currency forward contracts
Precious metal swaps
Total
Financial Liabilities
Deferred compensation liability
Foreign currency forward contracts
Precious metal swaps
Copper swaps
Total
December 31, 2017
Financial Assets
Deferred compensation investments
Foreign currency forward contracts
Precious metal swaps
Total
Financial Liabilities
Deferred compensation liability
Foreign currency forward contracts
Precious metal swaps
Total
Fair Value Measurements
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Other
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
$
$
$
$
2,156
246
237
2,639
2,156
432
135
569
3,292
2,310
254
14
2,578
2,310
201
269
2,780
$
$
$
$
$
$
$
$
2,156
—
—
2,156
2,156
—
—
—
2,156
2,310
—
—
2,310
2,310
—
—
2,310
$
$
$
$
$
$
$
$
— $
246
237
483
$
— $
432
135
569
1,136
$
— $
254
14
268
$
— $
201
269
470
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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 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.
The carrying values of the other working capital items and debt in the Consolidated Balance Sheets approximate fair values at
December 31, 2018 and 2017.
The Company uses derivative contracts to hedge portions of its foreign currency exposures and may also use derivatives to hedge
a portion of its precious metal exposures. The objectives and strategies for using derivatives in these areas are as follows:
Foreign Currency. The Company sells a portion of its products to overseas customers in their local currencies, primarily
the euro and yen. The Company secures foreign currency derivatives, mainly forward contracts and options, to hedge these
anticipated sales transactions. The purpose of the hedge program is to protect against the reduction in the dollar value of
foreign currency sales from adverse exchange rate movements. Should the dollar strengthen significantly, the decrease in
the translated value of the foreign currency sales should be partially offset by gains on the hedge contracts. Depending
upon the methods used, 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
68
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.
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 who 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 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 maintains a portion of its copper production requirements on consignment in order to reduce its
working capital investment and the exposure to metal price movements. The consigned metal is owned by financial
institutions who charge the Company a financing fee based upon the current value of the metal on hand.
Swap contracts on copper are used to manage the price risk associated with forecasted purchases of materials used in the
company's manufacturing process and better enable matching of expense and revenue amounts.
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.
The use of derivatives is governed by policies adopted by the Audit Committee of the Board of Directors. 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.
69
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated
as hedging instruments and balance sheet classification as of December 31, 2018 and 2017:
(Thousands)
Foreign currency forward contracts- euro
Prepaid expenses
Other liabilities and accrued items
Total
December 31, 2018
December 31, 2017
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
$
$
8,767
8,771
17,538
$
$
244
249
5
$
$
13,981
—
13,981
$
$
127
—
127
These outstanding foreign currency derivatives were related to intercompany loans. Other-net included foreign currency gains
relating to these derivatives of $0.9 million in 2018 and $1.1 million of foreign currency losses in 2017.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as
cash flow hedges and balance sheet classification at December 31, 2018 and 2017:
(Thousands)
Prepaid expenses
Foreign currency forward contracts - yen
Foreign currency forward contracts - euro
Precious metal swaps
$
December 31, 2018
December 31, 2017
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
— $
725
4,533
5,258
— $
2
237
239
$
5,673
5,026
—
10,699
Other assets
Precious metal swaps
Other liabilities and accrued items
Foreign currency forward contracts - yen
Foreign currency forward contracts - euro
Precious metal swaps
Copper swaps
Other long-term liabilities
Precious metal swaps
—
1,264
19,158
2,864
11,170
34,456
—
—
17
166
135
569
887
—
880
—
13,583
10,067
—
23,650
789
Total
$
39,714
$
648
$
36,018
$
91
36
—
127
14
—
201
255
—
456
14
329
All of these contracts were designated and effective as cash flow hedges. No ineffectiveness expense was recorded in 2018, 2017,
or 2016.
The fair value of derivative contracts recorded in accumulated other comprehensive loss totaled $0.6 million and $0.3 million as
of December 31, 2018 and December 31, 2017, respectively. Deferred losses of $0.6 million at December 31, 2018 are expected
to be reclassified to earnings within the next 18-month period.
70
Note S — Contingencies and Commitments
Beryllium Cases
The Company is a defendant from time to time in proceedings in various state and federal courts brought by plaintiffs alleging
that they have contracted, or have been placed at risk of contracting, beryllium sensitization or Chronic Beryllium Disease (CBD)
or related ailments as a result of exposure to beryllium. Plaintiffs in beryllium cases seek recovery under theories of negligence
and various other legal theories and seek compensatory and punitive damages, in many cases of an unspecified sum. Spouses, if
any, often claim loss of consortium.
Employee cases, in which plaintiffs have a high burden of proof, have historically involved relatively small losses to the Company.
Third-party plaintiffs (typically employees of customers) face a lower burden of proof than do the Company’s employees, but
these cases have generally been covered by varying levels of insurance. Management has vigorously contested the beryllium cases
brought against the Company.
Non-employee beryllium cases are covered by insurance, subject to certain limitations. The insurance covers defense costs and
indemnity payments (resulting from settlements or court verdicts) and is subject to various levels of deductibles. In 2018 and
2017, defense and indemnity costs were less than or equal to the deductible.
One beryllium case, originally filed and dismissed during 2015, but reversed and remanded in 2016 to the trial court, was outstanding
as of December 31, 2018 and 2017. The Company does not expect the resolution of this matter to have a material impact on the
consolidated financial statements.
Although it is not possible to predict the outcome of any pending litigation, the Company provides for costs related to litigation
matters when a loss is probable, and the amount is reasonably estimable. Litigation is subject to many uncertainties, and it is
possible that some of the actions could be decided unfavorably in amounts exceeding the Company’s reserves. An unfavorable
outcome or settlement of a beryllium case or adverse media coverage could encourage the commencement of additional similar
litigation. The Company is unable to estimate its potential exposure to unasserted claims.
Based upon currently known facts and assuming collectibility of insurance, the Company does not believe that resolution of the
current or potential future beryllium proceedings will have a material adverse effect on the financial condition or cash flow of the
Company. However, the Company’s results of operations could be materially affected by unfavorable results in one or more cases.
Environmental Proceedings
The Company has an active program for environmental compliance that includes the identification of environmental projects and
estimating the impact on the Company’s financial performance and available resources. Environmental expenditures that relate
to current operations, such as wastewater treatment and control of airborne emissions, are either expensed or capitalized as
appropriate. The Company records reserves for the probable costs for identified environmental remediation projects. The
Company’s environmental engineers perform routine ongoing analyses of the remediation sites and will use outside consultants
to assist in their analyses from time to time. Accruals are based upon their analyses and are established based on the reasonably
estimable loss or range of loss. The accruals are revised for the results of ongoing studies, changes in strategies, inflation, and for
differences between actual and projected costs. The accruals may also be affected by rulings and negotiations with regulatory
agencies. The timing of payments often lags the accrual, as environmental projects typically require a number of years to complete.
The environmental reserves recorded represent the Company's best estimate of what is reasonably possible and cover existing or
currently foreseen projects based upon current facts and circumstances. The Company does not believe that it is reasonably
possible that the cost to resolve environmental matters for sites where the investigative work and work plan development are
substantially complete will be materially different than what has been accrued while the ultimate loss contingencies for sites that
are in the preliminary stages of investigation cannot be reasonably determined at the present time. As facts and circumstances
change, the ultimate cost may be revised, and the recording of additional costs may be material in the period in which the additional
costs are accrued. The Company does not believe that the ultimate liability for environmental matters will have a material impact
on its financial condition or liquidity due to the nature of known environmental matters and the extended period of time during
which environmental remediation normally takes place.
71
The undiscounted reserve balance at the beginning of the year, the amounts expensed and paid, and the balance at December 31,
2018 and 2017 are as follows:
(Thousands)
Reserve balance at beginning of year
Expensed
Paid
Reserve balance at end of year
Ending balance recorded in:
Other liabilities and accrued items
Other long-term liabilities
2018
2017
$
$
$
$
$
$
6,499
718
(696)
6,521
1,168
5,353
6,041
1,006
(548)
6,499
987
5,512
The majority of spending in 2018 and 2017 was for various remediation projects at the Elmore, Ohio plant site.
Asset Retirement Obligations
The following represents a roll forward of our asset retirement obligation liability related to our mine located in Utah for the years
ended December 31, 2018 and 2017:
(Thousands)
Asset retirement obligation at beginning of period
Accretion expense
Change in liability
Asset retirement obligation at end of period
2018
2017
$
$
1,167
89
—
1,256
$
$
1,084
83
—
1,167
This balance is reported in Other long-term liabilities in the Consolidated Balance Sheets.
Other
The Company is subject to various legal or other proceedings that relate to the ordinary course of its business. The Company
believes that the resolution of these proceedings, individually or in the aggregate, will not have a material adverse impact upon
the Company’s consolidated financial statements.
At December 31, 2018, the Company had outstanding letters of credit totaling $27.2 million related to workers’ compensation,
consigned precious metal guarantees, environmental remediation issues, and other matters. The majority of the Company's
outstanding letters of credit expire in 2020 and are expected to be renewed.
72
Note T — Quarterly Data (Unaudited)
The following tables summarize selected quarterly financial data for the years ended December 31, 2018 and 2017:
(Thousands except per share amounts)
Net sales
Gross margin
Percent of net sales
Net income (loss)
Net income (loss) per share of common stock:
Basic(1)
Diluted(1)(3)
Net sales
Gross margin
Percent of net sales
Net income (loss)
Net income (loss) per share of common stock:
Basic(2)
Diluted(2)(3)
First
Quarter
$ 303,467
58,280
Second
Quarter
$ 309,085
61,838
$
$
19.2%
10,564
0.52
0.51
$
$
20.0%
11,144
0.55
0.54
First
Quarter
$ 240,669
43,156
Second
Quarter
$ 295,842
54,895
$
$
17.9 %
3,050
0.15
0.15
$
$
18.6 %
7,313
0.37
0.36
2018
Third
Quarter
297,193
64,935
21.8%
19,966
0.99
0.97
2017
Third
Quarter
294,268
55,793
19.0 %
9,320
0.47
0.46
$
$
$
$
$
$
$
$
$
$
$
$
Fourth
Quarter
298,070
66,052
22.2%
(20,828)
(1.03)
(1.03)
Total
$ 1,207,815
251,105
$
$
20.8%
20,846
1.03
1.01
Fourth
Quarter
308,668
58,985
19.1 %
(8,232)
(0.41)
(0.41)
Total
$ 1,139,447
212,829
$
$
18.7 %
11,451
0.57
0.56
(1) Net income (loss) per basic and diluted share for the fourth quarter 2018 includes the impact of $41.4 million in pension settlement
charges. For additional information refer to Note O.
(2) Net income (loss) per basic and diluted share for the fourth quarter of 2017 and 2018 includes the impact of $17.1 million in
income tax expense and $11.1 million of income tax benefits, respectively, as a result of the TCJA signed into law on December
22, 2017. For additional information refer to Note H.
(3) Since the Company reported a net loss for the fourth quarter of both 2018 and 2017, the effects of potential common shares
were excluded from diluted earnings per share, as their inclusion would have been anti-dilutive.
The Company follows a 13-week quarterly accounting cycle pursuant to which the first three fiscal quarters end on a Friday and
the fiscal year always ends on December 31.
73
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
a)
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with participation of the Company's management, including
the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and
procedures as of December 31, 2018 pursuant to Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as
amended (Exchange Act). Based on that evaluation, management, including the chief executive officer and chief financial officer,
concluded that disclosure controls and procedures are effective as of December 31, 2018.
b)
Management’s Report on Internal Control over Financial Reporting
The Report of Management on Internal Control over Financial Reporting and of the Report of Independent Registered Public
Accounting Firm thereon are set forth in Item 8 of this Form 10-K and are incorporated herein by reference.
c)
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required
by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2018 that has
materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company adopted the new revenue recognition guidance under ASC 606 on January 1, 2018. Although the adoption of ASC
606 did not have a material impact on the Company’s financial results, changes to the Company’s processes and controls related
to revenue recognition were implemented. These changes included creating new accounting policies based on the five-step model
of ASC 606, implementing ongoing contract review requirements, and gathering information necessary for disclosures.
Item 9B. OTHER INFORMATION
None.
74
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under “Election of Directors” in Materion Corporation's Proxy Statement for the 2019 Annual Meeting of
Shareholders (Proxy Statement), to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, is
incorporated herein by reference.
A listing of executive officers, their ages, positions, and offices held over the past five years, is as follows:
Name
Jugal K. Vijayvargiya
Age
50
Joseph P. Kelley
46
Positions and Offices Held
President and Chief Executive Officer (March 2017-Present); President Delphi Electronics
and Safety, a global technology solutions provider to the automotive and transportation sectors
(prior to March 2017)
Vice President, Finance and Chief Financial Officer (January 2015-Present); Vice President,
Finance (October 2013-Present); Vice President, Finance for the Advanced Materials Group
(prior to October 2013)
Gregory R. Chemnitz
61
Vice President, General Counsel and Secretary (January 2017-Present); Vice President,
General Counsel (prior to January 2017)
The information required by Item 10 with respect to directors, the Audit Committee of the Board of Directors, and Audit Committee
financial experts is incorporated herein by reference from the section entitled “Corporate Governance; Committees of the Board
of Directors — Audit Committee” and “— Audit Committee Expert, Financial Literacy and Independence” in the Proxy Statement.
The information required by Item 10 regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by
reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
We have adopted a Policy Statement on Significant Corporate Governance Issues and a Code of Conduct Policy that applies to
our chief executive officer and senior financial officers, including the principal financial and accounting officer, controller, and
other persons performing similar functions, in compliance with applicable New York Stock Exchange and Securities and Exchange
Commission requirements. The aforementioned materials and any amendments thereto, along with the charters of the Audit,
Governance and Organization, and Compensation Committees of our Board of Directors, which also comply with applicable
requirements, are available on our website at http://materion.com, and copies are also available upon request by any shareholder
to Secretary, Materion Corporation, 6070 Parkland Boulevard, Mayfield Heights, Ohio 44124.
Item 11.
EXECUTIVE COMPENSATION
Incorporated by reference from the sections of the Proxy Statement entitled “Executive Compensation” and “2018 Director
Compensation."
75
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required under Item 12 regarding security ownership is incorporated by reference from the section of the Proxy
Statement entitled “Security Ownership of Certain Beneficial Owners and Management." The information required by Item 12
regarding securities authorized for issuance under equity compensation plans is incorporated by reference from the section of the
Proxy Statement entitled "Equity Compensation Plan Information."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from the sections of the Proxy Statement entitled “Related Party Transactions” and “Corporate
Governance; Committees of the Board of Directors — Director Independence.”
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from the section of the Proxy Statement entitled “Ratification of Independent Registered Public
Accounting Firm.”
76
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements and Supplemental Information
See Index to Consolidated Financial Statements in Item 8 of this Form 10-K.
(a) 2. Financial Statement Schedules
The following consolidated financial information for the years ended December 31, 2018, 2017, and 2016 is submitted herewith:
Schedule II — Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) 3. Exhibits
All documents referenced below were filed pursuant to the Exchange Act by Materion Corporation, file number 001-15885, unless
otherwise noted.
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Articles of Incorporation of Materion Corporation (filed as Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the period ended on June 27, 2014), incorporated herein by reference.
Amended and Restated Code of Regulations (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-
Q for the period ended June 27, 2014), incorporated herein by reference.
Second Amended and Restated Credit Agreement dated June 20, 2013, among Materion Corporation, Materion
Advanced Materials Technologies and Services Netherlands B.V., JPMorgan Chase Bank, N.A. and other lenders
from time to time party thereto (filed as Exhibit 10.1 to the Company's Form 8-K filed on June 25, 2013),
incorporated herein by reference.
Amendment No. 1 to the Second Amended and Restated Credit Agreement dated December 18, 2015, among
Materion Corporation, Materion Advanced Materials Technologies and Services Netherlands B.V., JPMorgan Chase
Bank, N.A. and other lenders from time to time party thereto (filed as Exhibit 10.1 to the Company's Form 8-K
filed on December 21, 2015), incorporated herein by reference.
Pursuant to Regulation S-K, Item 601(b)(4), the Company agrees to furnish to the Securities and Exchange
Commission, upon its request, a copy of the instruments defining the rights of holders of long-term debt of the
Company that are not being filed with this report.
Third Amended and Restated Precious Metals Agreement dated October 1, 2010, between Brush Engineered
Materials Inc. and other borrowers and The Bank of Nova Scotia (filed as Exhibit 4.2 to the Company’s Form 8-
K filed on October 4, 2010), incorporated herein by reference.
Amendment No. 1 to the Third Amended and Restated Precious Metals Agreement dated March 31, 2011, among
Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 10.1 to the Company’s
Form 8-K filed on April 6, 2011), incorporated herein by reference.
Amendment No. 2 to the Third Amended and Restated Precious Metals Agreement dated August 18, 2011, among
Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 10.1 to the Company’s
Form 8-K filed on August 22, 2011), incorporated herein by reference.
Amendment No. 3 to the Third Amended and Restated Precious Metals Agreement dated October 17, 2011, among
Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 10.1 to the Company’s
Form 8-K filed on October 18, 2011), incorporated herein by reference.
Amendment No. 4 to the Third Amended and Restated Precious Metals Agreement dated September 13, 2013,
among Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 10.1 to the
Company's Form 8-K filed on September 18, 2013), incorporated herein by reference.
Amendment No. 5 to the Third Amended and Restated Precious Metals Agreement dated January 13, 2015, among
Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 4i to the Company's
Annual Report on Form 10-K for the year ended December 31, 2014), incorporated herein by reference.
Amendment No. 6 to the Third Amended and Restated Precious Metals Agreement dated April 10, 2015, among
Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 4.1 to the Company's
Form 10-Q for the period ended April 3, 2015), incorporated herein by reference.
Amendment No. 7 to Third Amended and Restated Precious Metals Agreement dated as of September 30, 2016,
among Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 10.1 to the
Company's Form 8-K filed on October 6, 2016), incorporated herein by reference.
77
10.9
10.10
10.11
10.12
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.30*
10.32*
10.33*
10.34*
10.35*
10.36*
Amendment No. 8 to Third Amended and Restated Precious Metals Agreement dated as of February 28, 2017,
among Materion Corporation and other borrowers and The Bank of Nova Scotia (filed as Exhibit 99.2 to the
Company's Form 8-K filed on March 1, 2017), incorporated herein by reference.
The Bank of Nova Scotia Consignment Agreement with Materion Advanced Materials Germany GMBH dated as
of February 28, 2017 (filed as Exhibit 99.1 to the Company's Form 8-K filed on March 1, 2017), incorporated
herein by reference.
Form of Indemnification Agreement entered into by the Company and its executive officers (filed as Exhibit 10a
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008), incorporated herein by
reference.
Form of Indemnification Agreement entered into by the Company and its directors (filed as Exhibit 10b to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008), incorporated herein by reference.
Amended and Restated Form of Severance Agreement for Executive Officers (filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the period ended June 27, 2008), incorporated herein by reference.
Amendment No. 1 to Amended and Restated Severance Agreement, dated May 4, 2011 (filed as Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the period ended July 1, 2011), incorporated herein by reference.
Amended and Restated Form of Severance Agreement for Key Employees (filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the period ended June 27, 2008), incorporated herein by reference.
Form of Severance Agreement for Key Employees (filed as Exhibit 10f to the Company's Annual Report on Form
10-K for the year ended December 31, 2015), incorporated herein by reference.
Severance Agreement for Jugal Vijayvargiya dated as of March 3, 2017 (filed as Exhibit 10.2 to the Company's
Form 8-K filed on March 3, 2017), incorporated herein by reference.
CEO Offer Letter for Jugal Vijayvargiya dated as of March 1, 2017 (filed as Exhibit 10.1 to the Company's Form
8-K filed on March 3, 2017), incorporated herein by reference.
Form of Trust Agreement between the Company and Key Trust Company of Ohio, N.A. (formerly Ameritrust
Company National Association) on behalf of the Company’s executive officers (filed as Exhibit 10e to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1994), incorporated herein by reference.
2015 Management Incentive Plan (filed as Exhibit 10i to the Company's Annual Report on Form 10-K filed for the
year ended December 31, 2014), incorporated herein by reference.
2016 Management Incentive Plan (filed as Exhibit 10j to the Company's Annual Report on Form 10-K filed for the
year ended December 31, 2015), incorporated herein by reference.
Materion Corporation 2006 Stock Incentive Plan (as Amended and Restated as of May 3, 2017) (filed as Exhibit 4.3
to the Registration Statement on Form S-8 (Registration No. 333-217633), incorporated herein by reference.
Form of 2014 Performance-Based Restricted Stock Units (Cash-settled) (filed as Exhibit 10y to the Company's
Annual Report on Form 10-K for the year ended December 31, 2013), incorporated herein by reference.
Form of 2014 Performance-Based Restricted Stock Units (Stock-settled) (filed as Exhibit 10z to the Company's
Annual Report on Form 10-K for the year ended December 31, 2013), incorporated herein by reference.
Form of 2016 Restricted Stock Units Agreement (Cash-settled) (filed as Exhibit 10t to the Company's Annual
Report on Form 10-K for the year ended December 31, 2015), incorporated herein by reference.
Form of 2016 Restricted Stock Units Agreement (Stock-settled) (filed as Exhibit 10u to the Company's Annual
Report on Form 10-K for the year ended December 31, 2015), incorporated herein by reference.
.
Form of 2016 Performance-Based Restricted Stock Units (Cash-settled) (filed as Exhibit 10v to the Company's
Annual Report on Form 10-K for the year ended December 31, 2015), incorporated herein by reference.
.
Form of 2016 Performance-Based Restricted Stock Units (Stock-settled) (filed as Exhibit 10w to the Company's
Annual Report on Form 10-K for the year ended December 31, 2015), incorporated herein by reference.
.
Form of 2010 Stock Appreciation Rights Agreement (filed as Exhibit 10.34 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009), incorporated herein by reference.
Form of 2016 Stock Appreciation Rights Agreement (filed as Exhibit 10ad to the Company's Annual Report on
Form 10-K for the year ended December 31, 2015), incorporated herein by reference.
.
Materion Corporation Supplemental Retirement Benefit Plan (filed as Exhibit 10.1 to the Company’s Form 8-K
filed on September 19, 2011), incorporated herein by reference.
Amendment No. 1 to the Supplemental Retirement Benefit Plan (filed as Exhibit 10al to the Company's Annual
Report on Form 10-K for the year ended December 31, 2012), incorporated herein by reference.
Amendment No. 2 to the Supplemental Retirement Benefit Plan (filed as Exhibit 10ah to the Company's Annual
Report on Form 10-K for the year ended December 31, 2013), incorporated herein by reference.
Materion Corporation 2006 Non-employee Director Equity Plan (as Amended and Restated as of May 3, 2017)
(filed as Exhibit 4.3 to the Registration Statement on Form S-8 (Registration No. 333-217618), incorporated herein
by reference.
78
10.37*
10.38*
10.39*
10.40*
10.41*
10.42*
10.43*
10.44*
10.45*
10.46*
(21)#
(23)#
(24)#
(31.1)#
(31.2)#
(32)#
(95)#
Amended and Restated Executive Deferred Compensation Plan II (filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the period ended March 28, 2008), incorporated herein by reference.
Amendment No. 1 to the Amended and Restated Executive Deferred Compensation Plan II (filed as Exhibit 10bf
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008), incorporated herein by
reference.
Amendment No. 2 to the Amended and Restated Executive Deferred Compensation Plan II (filed as Exhibit 10.2
to the Company’s Quarterly Report on Form 10-Q for the period ended July 3, 2009), incorporated herein by
reference.
Amendment No. 3 to the Amended and Restated Executive Deferred Compensation Plan II, dated July 6, 2011
(filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended July 1, 2011),
incorporated herein by reference.
Materion Corporation Restoration & Deferred Compensation Plan, dated March 4, 2015 (filed as Exhibit 10.1 to
the Company's Form 8-K filed on March 10, 2015), incorporated herein by reference.
Trust Agreement between the Company and Fidelity Investments dated September 26, 2006 for certain deferred
compensation plans for Non-employee Directors of the Company (filed as Exhibit 99.4 to the Current Report on
Form 8-K filed by the Company on September 29, 2006), incorporated herein by reference.
Trust Agreement between the Company and Fidelity Management Trust Company, dated June 25, 2009 relating to
the Executive Deferred Compensation Plan II (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the period ended July 3, 2009), incorporated herein by reference.
Form of 2018 Non-Employee Directors Restricted Stock Unit Agreement (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 29, 2018), incorporated herein by reference.
Form of 2018 Restricted Stock Unit Agreement (filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 30, 2018), incorporated herein by reference.
Form of 2018 Performance-Based Restricted Stock Unit Agreement (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the period ended March 30, 2018), incorporated herein by reference.
Subsidiaries of the Registrant.
Consent of Ernst & Young LLP.
Powers of Attorney.
Certification of Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a).
Certification of Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a).
Certifications of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350.
Mine Safety Disclosure Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection
Act for the Fiscal Year Ended December 31, 2018.
XBRL Instance Document.
(101.INS)#
(101.SCH)# XBRL Taxonomy Extension Schema Document.
(101.CAL)# XBRL Taxonomy Extension Calculation Linkbase Document.
(101.DEF)# XBRL Taxonomy Extension Definition Linkbase Document.
(101.LAB)# XBRL Taxonomy Extension Label Linkbase Document.
(101.PRE)# XBRL Taxonomy Extension Presentation Linkbase Document.
Denotes a compensatory plan or arrangement.
*
Filed herewith.
#
79
Item 16.
FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
MATERION CORPORATION
By:
/s/ Jugal K. Vijayvargiya
Jugal K. Vijayvargiya
President and Chief Executive Officer
February 14, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Jugal K. Vijayvargiya
Jugal K. Vijayvargiya
/s/ Joseph P. Kelley
Joseph P. Kelley
Vinod M. Khilnani
William B. Lawrence
Robert J. Phillippy
N. Mohan Reddy
Craig S. Shular
Darlene J. S. Solomon
Robert B. Toth
Geoffrey Wild
*
*
*
*
*
*
*
*
President and Chief Executive Officer
and Director (Principal Executive
Officer)
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
*
Joseph P. Kelley, by signing his name hereto, does sign and execute this report on behalf of each of the above-named
officers and directors of Materion Corporation, pursuant to Powers of Attorney executed by each such officer and director
filed with the Securities and Exchange Commission.
February 14, 2019
By:
/s/ Joseph P. Kelley
Joseph P. Kelley
Attorney-in-Fact
80
Materion Corporation and Subsidiaries
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2018, 2017, and 2016
Column A
Column B
Column C
ADDITIONS
Column D
Column E
Balance at
Beginning of
Period
Charged to
Costs
and Expenses
Charged to
Other
Accounts
Deduction
Balance at End
of Period
616
12,026
640
13,176
857
14,407
(Thousands)
Year ended December 31, 2018
Deducted from asset accounts:
Allowance for doubtful accounts
receivable
$
640
$
271
$
— $
295 (A) $
Inventory reserves and obsolescence
13,176
3,341
—
4,491 (B)
Year ended December 31, 2017
Deducted from asset accounts:
Allowance for doubtful accounts
receivable
$
857
$
84
$
— $
301 (A) $
Inventory reserves and obsolescence
14,407
3,521
—
4,752 (B)
Year ended December 31, 2016
Deducted from asset accounts:
Allowance for doubtful accounts
receivable
$
1,197
$
(34) $
— $
306 (A) $
Inventory reserves and obsolescence
7,869
10,564
—
4,026 (B)
Note (A) - Bad debts written-off, net of recoveries
Note (B) - Inventory write-off
81
CORPORATE DATA
Annual Meeting
The Annual Meeting of Shareholders will be held on
Wednesday, May 8, 2019 at 8:00 a.m. CDT at the
Westin Milwaukee, 550 North Van Buren Street
Milwaukee, WI 53202.
Investor Information
Materion Corporation maintains an active program of
communication with shareholders, securities analysts and
other members of the investment community. Upon
written request, Materion Corporation will provide, without
charge, a copy of Materion’s annual report on Form 10-K
for the year ended December 31, 2018, as well as any
Securities and Exchange Commission (SEC) filings.
For such documents, please contact:
Stephen F. Shamrock
Vice President, Corporate Controller
and Investor Relations
(216) 486-4200
Auditors
Ernst & Young LLP
950 Main Avenue, Suite 1800
Cleveland, Ohio 44113
Transfer Agent and Registrar
Equiniti Trust Company
P.O. Box 64854
St. Paul, Minnesota 55164-0854
For shareholder inquiries, call: (800) 468-9716
www.shareowneronline.com
Stock Listing
New York Stock Exchange/Symbol: MTRN
Corporate Headquarters
Materion Corporation
6070 Parkland Boulevard
Mayfield Heights, Ohio 44124
(216) 486-4200
Facsimile: (216) 383-4091
Website
Materion Corporation’s website offers financial and
investor information, news and facts about the Company,
its businesses, markets and products.
Visit the site at: www.materion.com
Governance
The Company has adopted corporate governance guidelines
and a Code of Conduct Policy, in compliance with applicable
New York Stock Exchange and SEC requirements. These
materials, along with the charters of the Audit,
Compensation and Governance and Organization
Committees of the Company’s Board of Directors, which
also comply with applicable requirements, are available on
the Company’s website.
DIRECTORS and EXECUTIVE OFFICERS
Executive Officers
Jugal K. Vijayvargiya
President and Chief Executive Officer
Joseph P. Kelley
Vice President, Finance and Chief Financial Officer
Gregory R. Chemnitz
Vice President, General Counsel and Secretary
Board of Directors and
Committees of the Board
Vinod M. Khilnani 2, 3, 4
Non-Executive Chairman of the Board
Retired Executive Chairman
CTS Corporation
William B. Lawrence 2, 4
Former Non-executive
Chairman of the Board
Ferro Corporation
Robert J. Phillippy 1, 4
Former Chief Executive Officer
Newport Corporation
N. Mohan Reddy, Ph.D. 1, 3, 4
B. Charles Ames Professor of Management
Case Western Reserve University
Craig S. Shular 1, 3, 4
Former Executive
Chairman of the Board
GrafTech International Ltd.
Darlene J. S. Solomon, Ph.D. 2, 4
Senior Vice President and Chief Technology Officer
Agilent Technologies, Inc.
Robert B. Toth 2, 4
Managing Director
CCMP Capital Advisors, LLC
Jugal K. Vijayvargiya 3
President and Chief Executive Officer
Materion Corporation
Geoffrey Wild 1, 3, 4
Chief Executive Officer
Atotech
1
2
3
4
Audit Committee
Compensation Committee
Executive Committee
Governance and Organization Committee
[This page intentionally left blank.]
6070 Parkland Boulevard, Mayfield Heights, Ohio 44124
216.486.4200 www.materion.com
2018 Annual Report