Notes to Consolidated Financial Statements
Note A — Significant Accounting Policies
Organization: Materion Corporation (the Company) is a holding company with subsidiaries that have operations in the United States, Europe, and Asia. These operations manufacture advanced engineered materials used in a variety of end markets, including semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center. The Company has four reportable segments: Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other. Other includes unallocated corporate costs.
Refer to Note C for additional segment details. The Company 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. 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 B to the Consolidated Financial Statements are the results of the preliminary purchase price allocation for the Optics Balzers acquisition and will be updated upon completion of the final valuation. The Company is required to complete the purchase price allocation within 12 months of the acquisition date. If such completion of the allocation results in a change in the preliminary values, the measurement period adjustment will be recognized in the period in which the adjustment amount is determined.
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.
Change in Accounting Principle: During the fourth quarter of 2020, the Company changed its method of accounting for certain domestic inventory from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. All prior periods presented have been retroactively adjusted to apply the new method of accounting.
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, 2020. 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.
Accounts Receivable: An allowance for doubtful accounts is maintained for the expected losses resulting from the inability of customers to pay amounts due. The Company considers the current market conditions and credit losses related to the Company's trade receivables based on the macroeconomic environment, geographic considerations, and other expected market trends. Additionally, the allowance is based upon identified delinquent accounts, customer payment patterns, and other analyses of historical data and trends. Accounts receivable were net of an allowance for credit losses of $0.5 million and $0.4 million at December 31, 2020 and 2019, respectively. The change in the allowance for credit losses includes expense and net write-offs, none of which are material. The Company extends credit to customers based upon their financial condition, and collateral is not generally required.
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:
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Years
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Land improvements
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10 to 20
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Buildings
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20 to 40
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Leasehold improvements
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Life of lease
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Machinery and equipment
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3 to 15
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Furniture and fixtures
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4 to 10
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Automobiles and trucks
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3 to 8
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Research equipment
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3 to 10
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Computer hardware
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3 to 10
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Computer software
|
3 to 10
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An asset acquired under a finance lease will be recorded at the lesser of the present value of the projected lease payments or the fair value of the asset and will be depreciated in accordance with the above schedule. Leasehold improvements will be depreciated over the life of the improvement if it is shorter than the life of the lease. Repair and maintenance costs are expensed as incurred.
Mineral Resources and Mine Development: Property acquisition costs are capitalized as mineral resources on the balance sheet and are depleted using the units-of-production method based upon total estimated recoverable proven reserves of the beryllium-bearing bertrandite ore body. The Company uses beryllium pounds as the unit of accounting measure, and depletion expense is recorded on a pro-rata basis based upon the amount of beryllium pounds extracted as a percentage of total estimated beryllium pounds contained in all ore bodies.
Mine development costs at the Company's open pit surface mine include drilling, infrastructure, and 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.
Historically, the Company’s mine development costs involved the development of a new source of ore, and, as such, mine development costs incurred were capitalized during the pre-production phase of a mine and amortized into inventory as the ore was extracted. In 2020, the Company expanded a mine to further develop an ore body. Since the pre-production phase ended when ore was first extracted from this mine, the Company recognized approximately $12.9 million of mine development costs in 2020 as a component of cost of sales. This expansion is expected to benefit future periods.
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. For the purpose of the goodwill impairment assessment, the Company has 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 or a quantitative assessment ("step one") where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach). Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Intangible assets with finite lives are amortized using the straight-line method or effective interest
method, as applicable, over the periods estimated to be benefited, which is generally 20 years or less. Finite-lived intangible assets are also reviewed for impairment if facts and circumstances warrant.
Long-Lived Asset Impairment: Management performs impairment tests of long-lived assets, including property and equipment, whenever an event occurs or circumstances change that indicate that the carrying value may not be recoverable or the useful life of the asset has changed. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future undiscounted cash flows generated by the asset group are less than its carrying value. If such undiscounted cash flows indicate that the carrying value of the asset group is not recoverable, impairment losses are measured by comparing the estimated fair value of the asset group to its carrying amount.
Derivatives: The Company recognizes all derivatives on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in other comprehensive income, a component of shareholders’ equity, until the hedged item is recognized in earnings. If the derivative is designated as a fair value hedge, changes in fair value are offset against the change in the fair value of the hedged asset, liability, or commitment through earnings. The ineffective portion of a derivative’s change in fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in its fair value are adjusted through the income statement.
Asset Retirement Obligation: The Company records a liability to recognize the legal obligation to remove an asset at the time the asset is acquired or when the legal liability arises. The liability is recorded for the present value of the ultimate obligation by discounting the estimated future cash flows using a credit-adjusted risk-free interest rate. The liability is accreted over time, with the accretion charged to expense. An asset equal to the fair value of the liability is recorded concurrent with the liability and depreciated over the life of the underlying asset.
Unearned Income: Expenditures for capital equipment to be reimbursed under government contracts are recorded in property, plant, and equipment, while the reimbursements for those expenditures are recorded in unearned income, a liability on the balance sheet. When the assets subject to reimbursement are placed in service, the total cost is depreciated over the useful lives, and the unearned income liability is reduced and credited to cost of sales on the Consolidated Statements of Income ratably with the annual depreciation expense.
Also included in Unearned Income as of December 31, 2020 are $58.8 million of customer prepayments. See Note L for additional discussion.
Advertising Costs: The Company expenses all advertising costs as incurred. Advertising costs were $0.3 million in 2020, $0.7 million in 2019, and $1.2 million in 2018.
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. Stock-based awards include performance-based restricted stock units (PRSUs), restricted stock units (RSUs), and stock appreciation rights (SARs). The fair value of PRSUs and RSUs is primarily based on the closing market price of a share of the Company's common stock on the date of grant, modified as appropriate to take into account the features of such grants. 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 R 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 June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses. This ASU requires an entity to change its accounting
approach in determining impairment of certain financial instruments, including trade receivables, from an “incurred loss” to a “current expected credit loss” model. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. The Company adopted this guidance as of January 1, 2020, and the adoption did not have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14 Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans, which intends to improve disclosure effectiveness by adding, removing, or clarifying certain disclosure requirements related to defined benefit pension or other postretirement plans. The standard is effective for fiscal years ending after December 15, 2020. The Company adopted this guidance as of December 31, 2020. The effect of the adoption did not materially impact the Company's financial statements or related disclosures.
No other recently issued or effective ASUs had, or are expected to have, a material effect on the Company's results of operations, financial condition, or liquidity.
Inventories: Inventories are stated at the lower of cost or net realizable value. In the fourth quarter of 2020, the Company voluntarily changed its method of inventory costing for the majority of its domestic inventories to the FIFO method from the LIFO method. Except for its bertrandite ore mine which values inventory using a weighted average cost method, the Company's remaining inventories are valued using the FIFO method. The Company believes that a current costing method is preferable as it improves comparability with its most similar peers, it more closely resembles the physical flow of its inventory (i.e., it provides better matching of revenues and expenses), and it results in uniformity across a significant majority of the Company’s inventory. Prior to the change in method, inventories valued on the LIFO cost method were approximately 45% of the Company's total inventories as of December 31, 2020.
The effects of the change in accounting principle from LIFO to FIFO have been retrospectively applied to all periods presented. As a result of the retrospective application of the change in accounting principle, certain financial statement line items in the Company’s consolidated balance sheets as of December 31, 2019 and the consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2019 and 2018 were adjusted as necessary.
As a result of the retrospective application of this change in accounting method, the following financial statement line items within the accompanying financial statements were adjusted, as follows:
Consolidated Statements of Income
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(Thousands except per share amounts)
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|
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|
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2020
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2019
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2018
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Selected Items
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As Computed Under LIFO
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|
As Reported Under FIFO
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|
Difference
|
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Previously Reported
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|
As Adjusted
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Adjustment
|
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Previously Reported
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|
As Adjusted
|
|
Adjustment
|
|
Cost of sales
|
|
$
|
981,722
|
|
|
$
|
983,641
|
|
|
$
|
1,919
|
|
|
$
|
926,280
|
|
|
$
|
922,734
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|
|
$
|
(3,546)
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|
|
$
|
956,710
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|
|
$
|
956,454
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|
|
$
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(256)
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|
Gross margin
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|
194,552
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|
|
192,633
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|
(1,919)
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|
|
259,144
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|
|
262,690
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|
|
3,546
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|
|
251,105
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|
|
251,361
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|
|
256
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|
|
Operating profit
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|
10,134
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|
|
8,215
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|
|
(1,919)
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|
|
67,000
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|
|
70,546
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|
|
3,546
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|
|
61,496
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|
|
61,752
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|
|
256
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|
|
Income before income taxes
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|
10,194
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|
|
8,275
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|
|
(1,919)
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|
|
61,990
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|
|
65,536
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|
|
3,546
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|
|
16,342
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|
|
16,598
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|
|
256
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|
|
Income tax (benefit) expense
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|
(6,748)
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|
|
(7,187)
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|
|
(439)
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|
|
11,330
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|
|
12,142
|
|
|
812
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|
|
(4,504)
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|
|
(4,446)
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|
|
58
|
|
|
Net income
|
|
16,942
|
|
|
15,462
|
|
|
(1,480)
|
|
|
50,660
|
|
|
53,394
|
|
|
2,734
|
|
|
20,846
|
|
|
21,044
|
|
|
198
|
|
|
Basic earnings per share:
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|
|
|
|
|
|
|
|
|
|
|
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|
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Net income per share of common stock
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|
$
|
0.83
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|
|
$
|
0.76
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|
|
$
|
(0.07)
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|
|
$
|
2.49
|
|
|
$
|
2.62
|
|
|
$
|
0.13
|
|
|
$
|
1.03
|
|
|
$
|
1.04
|
|
|
$
|
0.01
|
|
|
Diluted earnings per share:
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|
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|
|
|
|
|
|
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Net income per share of common stock
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|
$
|
0.82
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|
|
$
|
0.75
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|
|
$
|
(0.07)
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|
|
$
|
2.45
|
|
|
$
|
2.59
|
|
|
$
|
0.14
|
|
|
$
|
1.01
|
|
|
$
|
1.02
|
|
|
$
|
0.01
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|
Consolidated Statements of Comprehensive Income
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|
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(Thousands)
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|
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|
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|
|
|
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|
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|
|
|
2020
|
|
2019
|
|
2018
|
|
Selected Items
|
|
As Computed Under LIFO
|
|
As Reported Under FIFO
|
|
Difference
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Net income
|
|
$
|
16,942
|
|
|
$
|
15,462
|
|
|
$
|
(1,480)
|
|
|
$
|
50,660
|
|
|
$
|
53,394
|
|
|
$
|
2,734
|
|
|
$
|
20,846
|
|
|
$
|
21,044
|
|
|
$
|
198
|
|
|
Comprehensive income
|
|
23,765
|
|
|
22,285
|
|
|
(1,480)
|
|
|
63,432
|
|
|
66,166
|
|
|
2,734
|
|
|
65,549
|
|
|
65,747
|
|
|
198
|
|
Consolidated Balance Sheets
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|
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|
|
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|
(Thousands)
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|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Selected Items
|
|
As Computed Under LIFO
|
|
As Reported Under FIFO
|
|
Difference
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Inventories, net
|
|
$
|
206,834
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|
|
$
|
250,778
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|
|
$
|
43,944
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|
|
$
|
190,390
|
|
|
$
|
236,253
|
|
|
$
|
45,863
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|
|
Prepaid and other current assets
|
|
23,470
|
|
|
20,896
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|
|
(2,574)
|
|
|
21,839
|
|
|
21,736
|
|
|
(103)
|
|
|
Deferred income taxes (liability)
|
|
8,081
|
|
|
15,864
|
|
|
7,783
|
|
|
2,410
|
|
|
13,104
|
|
|
10,694
|
|
|
Retained earnings
|
|
597,471
|
|
|
631,058
|
|
|
33,587
|
|
|
589,888
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|
|
624,954
|
|
|
35,066
|
|
Consolidated Statements of Cash Flows
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Selected Items
|
|
As Computed Under LIFO
|
|
As Reported Under FIFO
|
|
Difference
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Net income
|
|
$
|
16,942
|
|
|
$
|
15,462
|
|
|
$
|
(1,480)
|
|
|
$
|
50,660
|
|
|
$
|
53,394
|
|
|
$
|
2,734
|
|
|
$
|
20,846
|
|
|
$
|
21,044
|
|
|
$
|
198
|
|
|
Deferred income tax (benefit) expense
|
|
(6,940)
|
|
|
(9,850)
|
|
|
(2,910)
|
|
|
2,584
|
|
|
3,945
|
|
|
1,361
|
|
|
(1,318)
|
|
|
(1,912)
|
|
|
(594)
|
|
|
Decrease (increase) in inventory
|
|
(3,207)
|
|
|
(1,288)
|
|
|
1,919
|
|
|
24,031
|
|
|
20,485
|
|
|
(3,546)
|
|
|
4,234
|
|
|
3,978
|
|
|
(256)
|
|
|
Decrease (increase) in prepaid and other current assets
|
|
4
|
|
|
2,475
|
|
|
2,471
|
|
|
1,418
|
|
|
869
|
|
|
(549)
|
|
|
1,162
|
|
|
1,814
|
|
|
652
|
|
As a result of the retrospective application of this change in accounting principle, the following financial statement line items within the unaudited interim 2020 and 2019 quarterly condensed consolidated financial statements were adjusted, as follows:
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Selected Items
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Cost of sales
|
|
$
|
232,371
|
|
|
$
|
233,376
|
|
|
$
|
1,005
|
|
|
$
|
223,378
|
|
|
$
|
224,513
|
|
|
$
|
1,135
|
|
|
Gross margin
|
|
45,575
|
|
|
44,570
|
|
|
(1,005)
|
|
|
48,090
|
|
|
46,955
|
|
|
(1,135)
|
|
|
Operating (loss) profit
|
|
(4,563)
|
|
|
(5,568)
|
|
|
(1,005)
|
|
|
8,706
|
|
|
7,571
|
|
|
(1,135)
|
|
|
(Loss) Income before income taxes
|
|
(3,865)
|
|
|
(4,870)
|
|
|
(1,005)
|
|
|
8,298
|
|
|
7,163
|
|
|
(1,135)
|
|
|
Income tax (benefit) expense
|
|
(762)
|
|
|
(992)
|
|
|
(230)
|
|
|
1,620
|
|
|
1,360
|
|
|
(260)
|
|
|
Net (loss) income
|
|
(3,103)
|
|
|
(3,878)
|
|
|
(775)
|
|
|
6,678
|
|
|
5,803
|
|
|
(875)
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock
|
|
$
|
(0.15)
|
|
|
$
|
(0.19)
|
|
|
$
|
(0.04)
|
|
|
$
|
0.33
|
|
|
$
|
0.29
|
|
|
$
|
(0.04)
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock
|
|
$
|
(0.15)
|
|
|
$
|
(0.19)
|
|
|
$
|
(0.04)
|
|
|
$
|
0.32
|
|
|
$
|
0.28
|
|
|
$
|
(0.04)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Selected Items
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
As Computed Under LIFO
|
|
As Reported
|
|
Difference
|
|
Cost of sales
|
|
$
|
240,531
|
|
|
$
|
241,860
|
|
|
$
|
1,329
|
|
|
$
|
285,442
|
|
|
$
|
283,892
|
|
|
$
|
(1,550)
|
|
|
Gross margin
|
|
46,640
|
|
|
45,311
|
|
|
(1,329)
|
|
|
54,247
|
|
|
55,797
|
|
|
1,550
|
|
|
Operating (loss) profit
|
|
713
|
|
|
(616)
|
|
|
(1,329)
|
|
|
5,278
|
|
|
6,828
|
|
|
1,550
|
|
|
(Loss) Income before income taxes
|
|
455
|
|
|
(874)
|
|
|
(1,329)
|
|
|
5,306
|
|
|
6,856
|
|
|
1,550
|
|
|
Income tax (benefit) expense
|
|
(6,041)
|
|
|
(6,345)
|
|
|
(304)
|
|
|
(1,565)
|
|
|
(1,210)
|
|
|
355
|
|
|
Net income
|
|
6,496
|
|
|
5,471
|
|
|
(1,025)
|
|
|
6,871
|
|
|
8,066
|
|
|
1,195
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
$
|
(0.05)
|
|
|
$
|
0.34
|
|
|
$
|
0.40
|
|
|
$
|
0.06
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$
|
0.32
|
|
|
$
|
0.27
|
|
|
$
|
(0.05)
|
|
|
$
|
0.33
|
|
|
$
|
0.39
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Selected Items
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Cost of sales
|
|
$
|
232,129
|
|
|
$
|
231,835
|
|
|
$
|
(294)
|
|
|
$
|
228,249
|
|
|
$
|
225,846
|
|
|
$
|
(2,403)
|
|
|
Gross margin
|
|
69,312
|
|
|
69,606
|
|
|
294
|
|
|
69,594
|
|
|
71,997
|
|
|
2,403
|
|
|
Operating profit
|
|
21,387
|
|
|
21,681
|
|
|
294
|
|
|
22,750
|
|
|
25,153
|
|
|
2,403
|
|
|
Income before income taxes
|
|
20,676
|
|
|
20,970
|
|
|
294
|
|
|
19,138
|
|
|
21,541
|
|
|
2,403
|
|
|
Income tax expense
|
|
3,770
|
|
|
3,837
|
|
|
67
|
|
|
3,598
|
|
|
4,148
|
|
|
550
|
|
|
Net income
|
|
16,906
|
|
|
17,133
|
|
|
227
|
|
|
15,540
|
|
|
17,393
|
|
|
1,853
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$
|
0.83
|
|
|
$
|
0.85
|
|
|
$
|
0.02
|
|
|
$
|
0.76
|
|
|
$
|
0.85
|
|
|
$
|
0.09
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$
|
0.82
|
|
|
$
|
0.83
|
|
|
$
|
0.01
|
|
|
$
|
0.75
|
|
|
$
|
0.84
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Selected Items
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Previously Reported
|
|
As Adjusted
|
|
Adjustment
|
|
Cost of sales
|
|
$
|
240,748
|
|
|
$
|
239,374
|
|
|
$
|
(1,374)
|
|
|
$
|
225,154
|
|
|
$
|
225,679
|
|
|
$
|
525
|
|
|
Gross margin
|
|
65,231
|
|
|
66,605
|
|
|
1,374
|
|
|
55,007
|
|
|
54,482
|
|
|
(525)
|
|
|
Operating profit
|
|
6,289
|
|
|
7,663
|
|
|
1,374
|
|
|
16,574
|
|
|
16,049
|
|
|
(525)
|
|
|
Income before income taxes
|
|
5,726
|
|
|
7,100
|
|
|
1,374
|
|
|
16,450
|
|
|
15,925
|
|
|
(525)
|
|
|
Income tax expense
|
|
2,263
|
|
|
2,578
|
|
|
315
|
|
|
1,699
|
|
|
1,579
|
|
|
(120)
|
|
|
Net income
|
|
3,463
|
|
|
4,522
|
|
|
1,059
|
|
|
14,751
|
|
|
14,346
|
|
|
(405)
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$
|
0.17
|
|
|
$
|
0.22
|
|
|
$
|
0.05
|
|
|
$
|
0.72
|
|
|
$
|
0.70
|
|
|
$
|
(0.02)
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
$
|
0.17
|
|
|
$
|
0.22
|
|
|
$
|
0.05
|
|
|
$
|
0.71
|
|
|
$
|
0.69
|
|
|
$
|
(0.02)
|
|
Note B — Acquisition
On July 17, 2020, the Company acquired 100% of the capital stock of Optics Balzers, an industry leader in thin film optical coatings. The purchase price for Optics Balzers was $136.1 million, including the assumption of $22.5 million of debt. The transaction was funded with cash on hand, including a portion of the $150.0 million borrowed under our revolving credit facility during the first half of 2020. This business operates within the Precision Optics segment, and the results of operations are included as of the date of acquisition. The combination of Materion and Optics Balzers creates a premier optical thin film coating solutions provider with a highly complementary geographic, product, and end market portfolio.
The preliminary purchase price allocation for the acquisition is as follows:
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
July 17, 2020
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,390
|
|
|
Accounts receivable
|
|
8,484
|
|
|
Inventories
|
|
10,715
|
|
|
Prepaid and other current assets
|
|
937
|
|
|
Property, plant, and equipment
|
|
46,791
|
|
|
Operating lease, right-of-use assets
|
|
13,357
|
|
|
Intangible assets
|
|
49,300
|
|
|
Goodwill
|
|
70,639
|
|
|
Total assets acquired
|
|
$
|
205,613
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Short-term debt
|
|
$
|
600
|
|
|
Accounts payable
|
|
2,851
|
|
|
Salaries and wages
|
|
4,392
|
|
|
Other liabilities and accrued items
|
|
3,678
|
|
|
Income taxes
|
|
61
|
|
|
Unearned revenue
|
|
1,259
|
|
|
Other long-term liabilities
|
|
207
|
|
|
Operating lease liabilities
|
|
12,356
|
|
|
Finance lease liabilities
|
|
2,642
|
|
|
Retirement and post-employment benefits
|
|
6,586
|
|
|
Unearned income
|
|
1,835
|
|
|
Long-term income taxes
|
|
181
|
|
|
Deferred income taxes
|
|
10,934
|
|
|
Long-term debt
|
|
21,926
|
|
|
Total liabilities assumed
|
|
$
|
69,508
|
|
|
Net assets acquired
|
|
$
|
136,105
|
|
Assets acquired and liabilities assumed are recognized at their respective fair values as of the acquisition date. The Company engaged specialists to assist in the valuation of property, plant, and equipment, intangible assets, and retirement and post-employment benefits. The estimates in the purchase price allocation are based on available information and will be revised during the measurement period, not to exceed 12 months, as additional information becomes available on tax-related items, and as additional analysis is performed. Such revisions are not expected to have a material impact on the Company's results of operations and financial position. No material measurement period adjustments have been recorded since the acquisition date.
The Company's consolidated financial statements include the results of operations of Optics Balzers from the acquisition date through December 31, 2020. The amount of Net sales and operating results attributable to the acquisition during this period were not material.
Acquisition-related transaction and integration costs totaled $6.5 million in 2020. These costs are included in selling, general, and administrative expense in the Consolidated Statements of Income.
As part of the acquisition, the Company recorded approximately $70.6 million of goodwill in its Precision Optics segment. Goodwill was calculated as the excess of the purchase price over the estimated fair values of the tangible net assets and intangible assets acquired and primarily attributable to the synergies expected to arise after the acquisition dates. The goodwill is not expected to be deductible for U.S. tax purposes.
The following table reports the intangible assets by asset category as of the closing date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Value at Acquisition
|
|
Weighted Average Life
|
|
Customer relationships
|
|
$
|
40,141
|
|
|
18 years
|
|
Technology
|
|
4,059
|
|
|
5 years
|
|
Licenses and other
|
|
5,100
|
|
|
5 years
|
|
Total
|
|
$
|
49,300
|
|
|
|
Note C — Segment Reporting and Geographic Information
Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Note A.
The Company has the following operating segments: Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other. The Company’s operating segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the Chief Executive Officer, the Company's Chief Operating Decision Maker, in determining how to allocate the Company’s resources and evaluate performance. The segments are determined based on several factors, including the availability of discrete financial information and the Company’s organizational and management structure.
Performance Alloys and Composites provides advanced engineered solutions comprised of beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes.
Advanced Materials produces advanced chemicals, microelectric packaging, precious metal, non-precious metal, and specialty metal products, including vapor deposition targets, frame lid assemblies, clad and precious metal preforms, high temperature braze materials, and ultra-fine wire.
Precision Optics produces thin film coatings, optical filter materials, sputter-coated, and precision-converted thin film materials.
The Other reportable segment includes unallocated corporate costs and assets.
Financial information for reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance
Alloys and
Composites
|
|
Advanced Materials
|
|
Precision Optics
|
|
Other
|
|
Total
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
394,195
|
|
|
$
|
670,867
|
|
|
$
|
111,212
|
|
|
$
|
—
|
|
|
$
|
1,176,274
|
|
|
Intersegment sales
|
|
6
|
|
|
35,912
|
|
|
—
|
|
|
—
|
|
|
35,918
|
|
|
Operating profit (loss)
|
|
13,597
|
|
|
22,120
|
|
|
(4,382)
|
|
|
(23,120)
|
|
|
8,215
|
|
|
Depreciation, depletion, and amortization
|
|
25,782
|
|
|
8,061
|
|
|
6,564
|
|
|
1,977
|
|
|
42,384
|
|
|
Expenditures for long-lived assets
|
|
53,841
|
|
|
9,003
|
|
|
908
|
|
|
3,522
|
|
|
67,274
|
|
|
Total Assets
|
|
477,892
|
|
|
251,637
|
|
|
268,004
|
|
|
60,327
|
|
|
1,057,860
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
500,201
|
|
|
$
|
573,763
|
|
|
$
|
111,460
|
|
|
$
|
—
|
|
|
$
|
1,185,424
|
|
|
Intersegment sales
|
|
38
|
|
|
70,047
|
|
|
—
|
|
|
—
|
|
|
70,085
|
|
|
Operating profit (loss)
|
|
73,815
|
|
|
25,124
|
|
|
(3,550)
|
|
|
(24,843)
|
|
|
70,546
|
|
|
Depreciation, depletion, and amortization
|
|
24,437
|
|
|
8,955
|
|
|
5,695
|
|
|
2,029
|
|
|
41,116
|
|
|
Expenditures for long-lived assets
|
|
15,520
|
|
|
7,572
|
|
|
1,045
|
|
|
2,391
|
|
|
26,528
|
|
|
Total Assets
|
|
442,885
|
|
|
214,961
|
|
|
78,981
|
|
|
161,603
|
|
|
898,430
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
500,590
|
|
|
$
|
586,643
|
|
|
$
|
120,582
|
|
|
$
|
—
|
|
|
$
|
1,207,815
|
|
|
Intersegment sales
|
|
37
|
|
|
50,460
|
|
|
—
|
|
|
—
|
|
|
50,497
|
|
|
Operating profit (loss)
|
|
60,008
|
|
|
16,732
|
|
|
10,707
|
|
|
(25,695)
|
|
|
61,752
|
|
|
Depreciation, depletion, and amortization
|
|
17,434
|
|
|
8,575
|
|
|
7,066
|
|
|
2,449
|
|
|
35,524
|
|
|
Expenditures for long-lived assets
|
|
15,396
|
|
|
15,523
|
|
|
1,983
|
|
|
1,358
|
|
|
34,260
|
|
|
Total Assets
|
|
453,345
|
|
|
206,393
|
|
|
90,537
|
|
|
93,035
|
|
|
843,310
|
|
Intersegment sales are eliminated in consolidation.
The primary measure of evaluating segment performance is operating profit. From an assets perspective, segments are evaluated based upon a return on invested capital metric, which includes inventory, accounts receivable, and property, plant, and equipment.
A reconciliation of total segment operating profit to total consolidated income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Total operating profit for reportable segments
|
|
8,215
|
|
|
70,546
|
|
|
61,752
|
|
|
Other non-operating (income) expense - net
|
|
(3,939)
|
|
|
3,431
|
|
|
42,683
|
|
|
Interest expense - net
|
|
3,879
|
|
|
1,579
|
|
|
2,471
|
|
|
Income before income taxes
|
|
$
|
8,275
|
|
|
$
|
65,536
|
|
|
$
|
16,598
|
|
Other geographic information includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Net sales
|
|
|
|
|
|
|
|
United States
|
|
$
|
641,727
|
|
|
$
|
743,345
|
|
|
$
|
726,881
|
|
|
Asia
|
|
329,968
|
|
|
256,114
|
|
|
270,672
|
|
|
Europe
|
|
189,281
|
|
|
169,132
|
|
|
186,081
|
|
|
All other
|
|
15,298
|
|
|
16,833
|
|
|
24,181
|
|
|
Total
|
|
$
|
1,176,274
|
|
|
$
|
1,185,424
|
|
|
$
|
1,207,815
|
|
|
Property, plant, and equipment, net by country deployed
|
|
|
|
|
|
|
|
United States
|
|
$
|
223,340
|
|
|
$
|
194,596
|
|
|
$
|
215,395
|
|
|
All other
|
|
86,346
|
|
|
37,680
|
|
|
35,623
|
|
|
Total
|
|
$
|
309,686
|
|
|
$
|
232,276
|
|
|
$
|
251,018
|
|
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.
The following table disaggregates revenue for each segment by end market for 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance Alloys and Composites
|
|
Advanced Materials
|
|
Precision Optics
|
|
Other
|
|
Total
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$
|
4,626
|
|
|
$
|
526,553
|
|
|
$
|
456
|
|
|
$
|
—
|
|
|
$
|
531,635
|
|
|
Industrial
|
|
90,884
|
|
|
38,052
|
|
|
18,096
|
|
|
—
|
|
|
147,032
|
|
|
Aerospace and Defense
|
|
67,173
|
|
|
6,241
|
|
|
19,539
|
|
|
—
|
|
|
92,953
|
|
|
Consumer Electronics
|
|
47,983
|
|
|
479
|
|
|
21,566
|
|
|
—
|
|
|
70,028
|
|
|
Automotive
|
|
66,489
|
|
|
6,262
|
|
|
3,532
|
|
|
—
|
|
|
76,283
|
|
|
Energy
|
|
20,587
|
|
|
75,768
|
|
|
—
|
|
|
—
|
|
|
96,355
|
|
|
Telecom and Data Center
|
|
44,313
|
|
|
2,183
|
|
|
—
|
|
|
—
|
|
|
46,496
|
|
|
Other
|
|
52,140
|
|
|
15,329
|
|
|
48,023
|
|
|
—
|
|
|
115,492
|
|
|
Total
|
|
$
|
394,195
|
|
|
$
|
670,867
|
|
|
$
|
111,212
|
|
|
$
|
—
|
|
|
$
|
1,176,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
End Market
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor
|
|
$
|
5,353
|
|
|
$
|
432,658
|
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
438,722
|
|
|
Industrial
|
|
106,334
|
|
|
29,917
|
|
|
14,253
|
|
|
—
|
|
|
150,504
|
|
|
Aerospace and Defense
|
|
109,717
|
|
|
5,647
|
|
|
20,731
|
|
|
—
|
|
|
136,095
|
|
|
Consumer Electronics
|
|
72,360
|
|
|
1,254
|
|
|
18,201
|
|
|
—
|
|
|
91,815
|
|
|
Automotive
|
|
69,057
|
|
|
8,179
|
|
|
969
|
|
|
—
|
|
|
78,205
|
|
|
Energy
|
|
41,101
|
|
|
74,613
|
|
|
—
|
|
|
—
|
|
|
115,714
|
|
|
Telecom and Data Center
|
|
61,344
|
|
|
2,981
|
|
|
—
|
|
|
—
|
|
|
64,325
|
|
|
Other
|
|
34,935
|
|
|
18,514
|
|
|
56,595
|
|
|
—
|
|
|
110,044
|
|
|
Total
|
|
$
|
500,201
|
|
|
$
|
573,763
|
|
|
$
|
111,460
|
|
|
$
|
—
|
|
|
$
|
1,185,424
|
|
Note D — Revenue Recognition
Net sales consist primarily of revenue from the sale of precious and non-precious specialty metals, beryllium and copper-based alloys, beryllium composites, and other products into numerous end markets. The Company requires an agreement with a customer that creates enforceable rights and performance obligations. The Company generally recognizes revenue, in an amount that reflects the consideration to which it expects to be entitled, upon satisfaction of a performance obligation by transferring control over a product to the customer. Control over the product is generally transferred to the customer when the
Company has a present right to payment, the customer has legal title, the customer has physical possession, the customer has the significant risks and rewards of ownership, and/or the customer has accepted the product.
Shipping and Handling Costs: The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill its promise to transfer the associated products. Accordingly, customer payments for 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, 2020. Remaining performance obligations include non-cancelable purchase orders and customer contracts. The guidance provides certain practical expedients that limit this requirement. As such, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. After considering the practical expedient, at December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $10.2 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, 2020
|
|
December 31, 2019
|
|
$ change
|
|
% change
|
|
Accounts receivable, trade
|
|
$
|
156,821
|
|
|
$
|
141,168
|
|
|
$
|
15,653
|
|
|
11
|
%
|
|
Unbilled receivables
|
|
8,832
|
|
|
13,583
|
|
|
(4,751)
|
|
|
(35)
|
%
|
|
Unearned revenue
|
|
7,713
|
|
|
3,380
|
|
|
4,333
|
|
|
128
|
%
|
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 2020.
Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed. Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded as a reduction of unbilled receivables.
Unearned revenue is recorded for consideration received from customers in advance of satisfaction of the related performance obligations. The Company recognized approximately $3.2 million of the December 31, 2019 unearned amounts as revenue during 2020.
As a practical expedient, the Company does not adjust the promised amount of consideration for the effects of a significant financing component because the period between the transfer of a product or service to a customer and when the customer pays for that product or service will be one year or less. The Company does not include extended payment terms in its contracts with customers.
Note E — Restructuring
During 2020, the Company committed to a plan to sell its Large Area Coatings (LAC) business (a reporting unit within the Precision Optics segment) and determined that it met the criteria to be classified as held for sale. The Company recorded a goodwill impairment charge of $9.1 million in the first quarter of 2020 to write-off the remaining balance of goodwill for the LAC reporting unit. In addition, the Company estimated the fair value of the disposal group as a whole, less costs to sell, and compared the fair value to the remaining carrying value. Based on this review, the Company recorded an additional $1.4 million asset impairment loss. During the third quarter of 2020, the Company concluded that it intended to close its LAC business and, as a result, only a portion of the fixed assets of the LAC business are classified as held for sale. At December 31, 2020, fixed assets totaling $0.2 million were classified as held for sale and reflected within Prepaid and other current assets in the Consolidated Balance Sheet.
Costs associated with the closure of the LAC business totaled $1.7 million in 2020 and included $0.7 million of severance associated with approximately 20 employees and $1.0 million of facility and other related costs.
Remaining severance payments of $0.6 million and facility costs of $1.0 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items, respectively, in the Consolidated Balance Sheet. The Company expects to incur additional costs related to these initiatives of approximately $0.2 million in the first quarter of 2021.
In addition, in 2020, the Company completed additional cost reduction actions in order to align costs with commensurate business levels in its Precision Optics segment. These actions were accomplished through elimination of vacant positions, consolidation of roles, and staff reductions. Costs associated with these actions totaled $0.4 million and included severance associated with approximately 28 employees and other related costs, all of which was paid during 2020.
Also, in 2020, the Company initiated a restructuring plan in its PAC segment to close its Warren, Michigan and Fremont, California locations. Costs associated with the plan totaled $8.8 million in 2020 and included $2.1 million of severance associated with approximately 63 employees, and $5.3 million of facility and other related costs.
Remaining severance payments of $0.5 million and facility costs of $0.5 million related to these initiatives are reflected within Salaries and wages and Other liabilities and accrued items in the Consolidated Balance Sheet as of December 31, 2020. The Company does not expect to incur any additional costs associated with these initiatives.
In 2019, the Company initiated a restructuring plan in its LAC business to reduce headcount, idle certain machinery and equipment, and exit a facility in Windsor, Connecticut. Costs associated with this plan also included severance and related costs for 19 employees, all of which was paid out by the end of 2020.
In addition, in 2019, 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 were in the Other segment and included severance associated with seven employees and other related costs. All severance payments were paid by the end of 2020.
Costs associated with cost reduction actions in 2018 were in the Advanced Materials segment and included severance associated with approximately forty employees and other related costs. Remaining severance payments amount to approximately $0.3 million as of December 31, 2020.
These costs are presented in the Company's segment results as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Performance Alloys and Composites
|
|
$
|
8,763
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Advanced Materials
|
|
—
|
|
|
—
|
|
|
5,599
|
|
|
Precision Optics
|
|
2,052
|
|
|
328
|
|
|
—
|
|
|
Other
|
|
422
|
|
|
457
|
|
|
—
|
|
|
Total
|
|
$
|
11,237
|
|
|
$
|
785
|
|
|
$
|
5,599
|
|
Note F — Other-net
Other-net is summarized for 2020, 2019, and 2018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) Expense
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Metal consignment fees
|
|
$
|
8,587
|
|
|
$
|
9,247
|
|
|
$
|
10,999
|
|
|
Amortization of intangible assets
|
|
2,377
|
|
|
1,400
|
|
|
2,265
|
|
|
Foreign currency (gain) loss
|
|
(2,569)
|
|
|
666
|
|
|
1,487
|
|
|
Net loss on disposal of fixed assets
|
|
466
|
|
|
344
|
|
|
518
|
|
|
Rental income
|
|
—
|
|
|
(87)
|
|
|
(416)
|
|
|
Other items
|
|
(398)
|
|
|
213
|
|
|
481
|
|
|
Total other-net
|
|
$
|
8,463
|
|
|
$
|
11,783
|
|
|
$
|
15,334
|
|
Note G — Interest expense-net
The following chart summarizes the interest incurred, capitalized, and paid for 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Interest incurred, net
|
|
$
|
3,889
|
|
|
$
|
1,641
|
|
|
$
|
2,870
|
|
|
Less: Capitalized interest
|
|
10
|
|
|
62
|
|
|
399
|
|
|
Total net expense
|
|
$
|
3,879
|
|
|
$
|
1,579
|
|
|
$
|
2,471
|
|
|
Interest paid
|
|
$
|
3,442
|
|
|
$
|
1,799
|
|
|
$
|
1,436
|
|
The increase in interest expense for 2020 versus 2019 was primarily due to increased borrowings under our revolving credit facility during 2020. The decrease in interest expense in 2019 compared to 2018 was primarily due to interest income earned on investments held in money market accounts. Amortization of deferred financing costs within interest expense was $0.8 million in 2020 and $1.0 million in both 2019 and 2018.
Note H — Income Taxes
Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Note A.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The Company has examined the impact of the CARES Act on its business and has determined it does not have a material impact to its consolidated financial statements.
On July 9, 2020, the U.S. Treasury Department issued final tax regulations related to the foreign-derived intangible income and global intangible low-taxed income (GILTI) provisions. The U.S. Treasury Department also released final tax regulations on July 20, 2020 permitting a taxpayer to elect to exclude from its GILTI inclusion items of income subject to a high effective rate of foreign tax. On December 31, 2020, the U.S. Treasury Department issued final tax regulations for certain employee renumeration in excess of $1 million under IRC Section 162(m). The Company has applied the new legislation to its consolidated financial statements.
On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA) was enacted in the United States. The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of U.S. GAAP in situations where a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA in 2017 and 2018.
The Company completed its accounting for all of the enactment-date income tax effects of the TCJA in the fourth quarter of 2018. During 2018, the Company recognized adjustments to the provisional amounts recorded as of December 31, 2017 and included the adjustments as a component of income tax expense. In 2018, the Company recorded a $11.1 million net tax benefit related to the enactment-date effects of the TCJA, including a $2.8 million tax benefit for the re-measurement of deferred tax assets and liabilities, a $1.2 million tax benefit for the one-time transition tax on the mandatory deemed repatriation of foreign earnings, and a $7.1 million tax benefit related to the generation of foreign tax credits and the reversal of the valuation allowance related to foreign tax credits.
Income before income taxes and income tax expense (benefit) are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(1,153)
|
|
|
$
|
60,271
|
|
|
$
|
20,528
|
|
|
Foreign
|
|
9,428
|
|
|
5,265
|
|
|
(3,930)
|
|
|
Total income before income taxes
|
|
$
|
8,275
|
|
|
$
|
65,536
|
|
|
$
|
16,598
|
|
|
Income tax expense:
|
|
|
|
|
|
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
812
|
|
|
$
|
6,995
|
|
|
$
|
(5,244)
|
|
|
Foreign
|
|
1,851
|
|
|
1,202
|
|
|
2,710
|
|
|
Total current
|
|
$
|
2,663
|
|
|
$
|
8,197
|
|
|
$
|
(2,534)
|
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(5,641)
|
|
|
$
|
2,687
|
|
|
$
|
(4,677)
|
|
|
Foreign
|
|
(4,209)
|
|
|
1,258
|
|
|
2,765
|
|
|
Total deferred
|
|
$
|
(9,850)
|
|
|
$
|
3,945
|
|
|
$
|
(1,912)
|
|
|
Total income tax (benefit) expense
|
|
$
|
(7,187)
|
|
|
$
|
12,142
|
|
|
$
|
(4,446)
|
|
A reconciliation of the U.S. federal statutory income tax rate to the Company's effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
U.S. federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
|
State and local income taxes, net of federal tax effect
|
|
(10.0)
|
|
|
1.0
|
|
|
0.2
|
|
|
Effect of excess of percentage depletion over cost depletion
|
|
(43.0)
|
|
|
(4.3)
|
|
|
(17.5)
|
|
|
Manufacturing production deduction, including impact of NOL carryback
|
|
—
|
|
|
—
|
|
|
6.2
|
|
|
Foreign derived intangible income deduction
|
|
(1.8)
|
|
|
(3.0)
|
|
|
(2.8)
|
|
|
Non-deductible goodwill impairment
|
|
7.1
|
|
|
1.1
|
|
|
—
|
|
|
Tax Cuts and Jobs Act impact
|
|
—
|
|
|
2.3
|
|
|
(66.7)
|
|
|
Research and development tax credit
|
|
(16.4)
|
|
|
(1.1)
|
|
|
(7.5)
|
|
|
Foreign tax credit
|
|
—
|
|
|
(0.3)
|
|
|
(1.9)
|
|
|
Impact of foreign operations
|
|
(5.3)
|
|
|
0.9
|
|
|
1.8
|
|
|
Non-deductible transaction costs
|
|
6.9
|
|
|
0.2
|
|
|
1.3
|
|
|
Interest from tax authorities
|
|
(3.8)
|
|
|
—
|
|
|
—
|
|
|
Adjustment to unrecognized tax benefits
|
|
1.8
|
|
|
0.2
|
|
|
2.7
|
|
|
Equity compensation
|
|
(5.3)
|
|
|
(3.2)
|
|
|
(4.3)
|
|
|
Non-deductible officers' compensation
|
|
6.8
|
|
|
0.8
|
|
|
—
|
|
|
Valuation allowance
|
|
(45.5)
|
|
|
2.1
|
|
|
38.1
|
|
|
Other items
|
|
0.6
|
|
|
0.8
|
|
|
2.6
|
|
|
Effective tax rate
|
|
(86.9)
|
%
|
|
18.5
|
%
|
|
(26.8)
|
%
|
Deferred tax assets and (liabilities) are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and (liabilities) recorded in the Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Asset (liability)
|
|
|
|
|
|
Post-employment benefits other than pensions
|
|
$
|
1,564
|
|
|
$
|
1,626
|
|
|
Other reserves
|
|
226
|
|
|
543
|
|
|
Deferred compensation
|
|
3,322
|
|
|
3,314
|
|
|
Environmental reserves
|
|
1,301
|
|
|
1,384
|
|
|
Lease liabilities
|
|
10,469
|
|
|
4,614
|
|
|
Pensions
|
|
7,456
|
|
|
5,149
|
|
|
Accrued compensation expense
|
|
2,683
|
|
|
5,364
|
|
|
Net operating loss and credit carryforwards
|
|
12,685
|
|
|
13,513
|
|
|
Research and development tax credit carryforward
|
|
26
|
|
|
25
|
|
|
Subtotal
|
|
39,732
|
|
|
35,532
|
|
|
Valuation allowance
|
|
(14,134)
|
|
|
(17,676)
|
|
|
Total deferred tax assets
|
|
25,598
|
|
|
17,856
|
|
|
Depreciation
|
|
(12,112)
|
|
|
(10,780)
|
|
|
Lease assets
|
|
(10,261)
|
|
|
(4,428)
|
|
|
Inventory
|
|
(3,532)
|
|
|
(7,954)
|
|
|
Amortization
|
|
(10,754)
|
|
|
(2,426)
|
|
|
Mine development
|
|
(1,669)
|
|
|
(3,706)
|
|
|
Total deferred tax liabilities
|
|
(38,328)
|
|
|
(29,294)
|
|
|
Net deferred tax liabilities
|
|
$
|
(12,730)
|
|
|
$
|
(11,438)
|
|
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, 2020, for income tax purposes, the Company had foreign net operating loss carryforwards of $27.8 million that do not expire, and $7.1 million that expire in calendar years 2021 through 2027. The Company also had state net operating loss carryforwards of $20.5 million that expire in calendar years 2021 through 2040 and state tax credits of $3.7 million that expire in calendar years 2021 through 2035. 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 files income tax returns in the U.S. federal jurisdiction, and in various state, local, and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal examinations for years before 2015, state and local examinations for years before 2016, and foreign examinations for tax years before 2011.
We operate under a tax holiday in Malaysia, which is effective through July 31, 2022, and may be extended if certain additional requirements are satisfied. The tax holiday is conditional upon our meeting certain employment, sales, and investment thresholds. The impact of this holiday decreased foreign taxes by $0.5 million in 2020. The benefit of the tax holiday on net income per share (diluted) was $0.03 in 2020.
A reconciliation of the Company’s unrecognized tax benefits (excluding interest and penalties) for the year-to-date periods ended December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Balance at January 1
|
|
$
|
3,221
|
|
|
$
|
2,883
|
|
|
Additions to tax provisions related to the current year
|
|
191
|
|
|
—
|
|
|
Additions to tax positions related to prior years
|
|
—
|
|
|
399
|
|
|
Reduction to tax positions related to prior years
|
|
(349)
|
|
|
—
|
|
|
Lapses on statutes of limitations
|
|
(703)
|
|
|
(61)
|
|
|
Balance at December 31
|
|
$
|
2,360
|
|
|
$
|
3,221
|
|
Included in the balance as of December 31, 2020 and December 31, 2019 are $2.7 million and $2.4 million, respectively, of unrecognized tax benefits that would impact the Company’s effective tax rate if recognized. We believe it is reasonably possible that a decrease of up to $1.6 million of unrecognized tax benefits related to federal exposures may be recognized in the next twelve months as a result of the lapse of the statute of limitations.
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 2020, 2019, and 2018. As of December 31, 2020 and 2019, accrued interest and penalties, net of the related tax benefit, were immaterial.
Income taxes paid during 2020, 2019, and 2018, were approximately $3.9 million, $9.3 million, and $2.6 million, respectively.
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations as of December 31, 2020. The amount of such unrepatriated earnings totaled $98.4 million as of December 31, 2020. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.
Note I — Earnings Per Share
The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands except per share amounts)
|
|
2020
|
|
2019*
|
|
2018*
|
|
Numerator for basic and diluted EPS:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,462
|
|
|
$
|
53,394
|
|
|
$
|
21,044
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic EPS:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
20,338
|
|
|
20,365
|
|
|
20,212
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock appreciation rights
|
|
39
|
|
|
72
|
|
|
170
|
|
|
Restricted stock units
|
|
102
|
|
|
75
|
|
|
85
|
|
|
Performance-based restricted stock units
|
|
124
|
|
|
143
|
|
|
146
|
|
|
Diluted potential common shares
|
|
265
|
|
|
290
|
|
|
401
|
|
|
Denominator for diluted EPS:
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
20,603
|
|
|
20,655
|
|
|
20,613
|
|
|
Basic EPS
|
|
$
|
0.76
|
|
|
$
|
2.62
|
|
|
$
|
1.04
|
|
|
Diluted EPS
|
|
$
|
0.75
|
|
|
$
|
2.59
|
|
|
$
|
1.02
|
|
*Amounts for the years ended December 31, 2019 and 2018 have been adjusted to reflect the change in inventory accounting method, as described in Note A.
Equity awards covering shares of common stock totaling 166,255 in 2020, 71,199 in 2019, and 65,122 in 2018 were excluded from the diluted EPS calculation as their effect would have been anti-dilutive.
Note J — Inventories, net
Inventories are stated at the lower of cost or net realizable value. In the fourth quarter of 2020, the Company voluntarily changed its method of inventory costing for the majority of its domestic inventories to the FIFO method from the LIFO method. The Company believes that the FIFO method is preferable as it results in uniformity across the Company's global operations, provides better matching of revenues and expenses, and improves comparability with the Company's peers.
Inventories in the Consolidated Balance Sheets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(Thousands)
|
|
2020
|
|
2019*
|
|
Raw materials and supplies
|
|
$
|
42,905
|
|
|
$
|
35,612
|
|
|
Work in process
|
|
200,741
|
|
|
175,135
|
|
|
Finished goods
|
|
7,132
|
|
|
25,506
|
|
|
Inventories, net
|
|
250,778
|
|
|
236,253
|
|
*December 31, 2019 amounts have been adjusted to reflect the change in inventory accounting method, as described in Note A.
The Company takes and records the results of a physical inventory count of its precious metals on a quarterly basis. The Company's precious metal operations include a refinery that processes precious metal-containing scrap and other materials from its customers, as well as its own internally generated scrap. The Company also outsources portions of its refining requirements to other vendors, particularly those materials with longer processing times. The precious metal content within these various refine streams may be in solutions, sludges, and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters. The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volumes of solutions and other materials within the refinery, data from the Company's refine vendors, and other factors. The resulting calculated weight of the precious metals in the Company's refine operations may differ, in either direction, from what its records indicate that the Company should have on hand, which would then result in an adjustment to its pre-tax income in the period when the physical inventory was taken, and the related estimates were made.
The Company maintains the majority of the precious metals and copper used in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment. The notional value of off-balance sheet precious metals and copper was $400.0 million as of December 31, 2020 versus $309.3 million as of December 31, 2019.
Note K — Property, Plant, and Equipment
Property, plant, and equipment on the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Land
|
|
$
|
5,686
|
|
|
$
|
4,874
|
|
|
Buildings
|
|
165,144
|
|
|
150,323
|
|
|
Machinery and equipment
|
|
645,195
|
|
|
639,310
|
|
|
Software
|
|
43,652
|
|
|
44,652
|
|
|
Construction in progress
|
|
69,297
|
|
|
16,699
|
|
|
Allowances for depreciation
|
|
(662,724)
|
|
|
(669,250)
|
|
|
Subtotal
|
|
266,250
|
|
|
186,608
|
|
|
Finance leases
|
|
34,301
|
|
|
26,069
|
|
|
Allowances for depreciation
|
|
(4,914)
|
|
|
(3,569)
|
|
|
Subtotal
|
|
29,387
|
|
|
22,500
|
|
|
Mineral resources
|
|
4,979
|
|
|
4,980
|
|
|
Mine development
|
|
30,058
|
|
|
30,058
|
|
|
Allowances for amortization and depletion
|
|
(20,988)
|
|
|
(11,870)
|
|
|
Subtotal
|
|
14,049
|
|
|
23,168
|
|
|
Property, plant, and equipment — net
|
|
$
|
309,686
|
|
|
$
|
232,276
|
|
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 in both 2020 and 2018 and $4.4 million in 2019 and credited to cost of sales in the Consolidated Statements of Income, offsetting the impact of the depreciation expense on the associated equipment on the Company's cost of sales and gross margin.
We recorded depreciation and depletion expense of $30.9 million in 2020, $30.3 million in 2019, and $33.3 million in 2018. 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 2020, 2019, and 2018. The net carrying value of capitalized software was $5.0 million and $7.9 million at December 31, 2020 and December 31, 2019, respectively. Depreciation expense related to software was $1.8 million, $2.4 million, and $2.6 million in 2020, 2019, and 2018, respectively.
Note L — Customer Prepayments
The Company entered into investment and master supply agreements with a customer to procure equipment to manufacture product for the customer. The customer will make prepayments to the Company in the amount of approximately $70 million in the aggregate to enable the Company to purchase and install certain equipment and make necessary infrastructure improvements to supply product to the customer. The Company will own the equipment and be responsible for operating and maintenance costs. The prepayment from the customer will be applied when commercial production of the product is sold and delivered to the customer in connection with a master supply agreement. Accordingly, as of December 31, 2020, $58.8 million of prepayments are classified as Unearned income in the Consolidated Balance Sheet and the liabilities are expected to be settled as commercial shipments are made.
Note M — Leasing Arrangements
The Company leases warehouse and manufacturing real estate, and manufacturing and computer equipment under operating leases with lease terms ranging up to 25 years. Several operating lease agreements contain options to extend the lease term and/or options for early termination. The lease term consists of the non-cancelable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. As of December 31, 2020, we had no material leases that had yet to commence.
The discount rate implicit within the leases is generally not determinable, and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for leases is determined based on the lease term in which lease payments are made, adjusted for impacts of collateral.
The components of operating and finance lease cost for 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Components of lease expense
|
|
|
|
|
|
Operating lease cost
|
|
$
|
10,602
|
|
|
$
|
9,835
|
|
|
|
|
|
|
|
|
Finance lease cost
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
1,324
|
|
|
1,414
|
|
|
Interest on lease liabilities
|
|
1,021
|
|
|
1,028
|
|
|
Total lease cost
|
|
$
|
12,947
|
|
|
$
|
12,277
|
|
Operating lease expense under ASC 840 amounted to $11.6 million during 2018. The Company straight-lines its expense of fixed payments for operating leases over the lease term and expenses the variable lease payments in the period incurred. These variable lease payments are not included in the calculation of right-of-use assets or lease liabilities.
Supplemental balance sheet information related to the Company's operating and finance leases as of December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands, except lease term and discount rate)
|
|
2020
|
|
2019
|
|
Supplemental balance sheet information
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
62,089
|
|
|
$
|
23,413
|
|
|
Other liabilities and accrued items
|
|
6,908
|
|
|
6,542
|
|
|
Operating lease liabilities
|
|
56,761
|
|
|
18,091
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
34,301
|
|
|
$
|
26,069
|
|
|
Allowances for depreciation, depletion, and amortization
|
|
(4,914)
|
|
|
(3,570)
|
|
|
Finance lease assets, net
|
|
$
|
29,387
|
|
|
$
|
22,499
|
|
|
Other liabilities and accrued items
|
|
$
|
2,925
|
|
|
$
|
1,265
|
|
|
Finance lease liabilities
|
|
20,539
|
|
|
17,424
|
|
|
Total principal payable on finance leases
|
|
$
|
23,464
|
|
|
$
|
18,689
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
Operating leases
|
|
12.72
|
|
4.69
|
|
Finance leases
|
|
16.59
|
|
19.47
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
Operating leases
|
|
6.46%
|
|
5.91%
|
|
Finance leases
|
|
4.88%
|
|
5.31%
|
Future maturities of the Company's lease liabilities as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
|
|
Operating
|
|
(Thousands)
|
|
Leases
|
|
Leases
|
|
2021
|
|
$
|
3,877
|
|
|
$
|
10,707
|
|
|
2022
|
|
3,827
|
|
|
9,415
|
|
|
2023
|
|
2,536
|
|
|
8,750
|
|
|
2024
|
|
1,595
|
|
|
6,608
|
|
|
2025
|
|
1,432
|
|
|
6,278
|
|
|
2026 and thereafter
|
|
21,906
|
|
|
53,041
|
|
|
Total lease payments
|
|
35,173
|
|
|
94,799
|
|
|
Less amount of lease payment representing interest
|
|
11,709
|
|
|
31,130
|
|
Total present value of lease payments
|
|
$
|
23,464
|
|
|
$
|
63,669
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Supplemental cash flow information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
16,216
|
|
|
$
|
15,841
|
|
|
Operating cash flows from finance leases
|
|
1,021
|
|
|
1,028
|
|
|
Financing cash flows from finance leases
|
|
2,213
|
|
|
1,200
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
Operating leases
|
|
43,037
|
|
|
32,534
|
|
|
Finance leases
|
|
6,736
|
|
|
3,919
|
|
Note N — Intangible Assets and Goodwill
Intangible Assets
The cost and accumulated amortization of intangible assets subject to amortization as of December 31, 2020 and 2019, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
(Thousands)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Customer relationships
|
|
$
|
81,231
|
|
|
$
|
(38,773)
|
|
|
$
|
42,458
|
|
|
$
|
39,601
|
|
|
$
|
(37,692)
|
|
|
$
|
1,909
|
|
|
Technology
|
|
16,915
|
|
|
(13,290)
|
|
|
3,625
|
|
|
13,377
|
|
|
(12,816)
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses and other
|
|
11,457
|
|
|
(4,840)
|
|
|
6,617
|
|
|
4,257
|
|
|
(3,046)
|
|
|
1,211
|
|
|
Total
|
|
$
|
109,603
|
|
|
$
|
(56,903)
|
|
|
$
|
52,700
|
|
|
$
|
57,235
|
|
|
$
|
(53,554)
|
|
|
$
|
3,681
|
|
During 2020, the Company acquired $40.1 million in customer relationships with a useful life of eighteen years, as well as $4.1 million in technology and $5.1 million in other intangible assets, both of which have a five years useful life.
Amortization expense for 2020, 2019, and 2018 was $2.4 million, $1.4 million, and $2.3 million, respectively.
Estimated amortization expense for each of the five succeeding years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
(Thousands)
|
|
Expense
|
|
2021
|
|
4,596
|
|
|
2022
|
|
4,585
|
|
|
2023
|
|
4,565
|
|
|
2024
|
|
4,563
|
|
|
2025
|
|
4,084
|
|
Intangible assets also includes deferred financing costs relating to the Company's revolving credit and consignments lines of $2.0 million and $2.7 million at December 31, 2020 and 2019, respectively.
Goodwill
In 2020, the Company acquired Optics Balzers for a total purchase price of $136.1 million, including the assumption of debt, and recorded goodwill of $70.6 million. Optics Balzers is included in the Precision Optics segment.
The balance of goodwill at December 31, 2020 and 2019 was $144.9 million and $79.0 million, respectively.
A summary of changes in goodwill by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
Performance Alloys and Composites
|
|
Advanced Materials
|
|
Precision Optics
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
1,899
|
|
|
$
|
50,276
|
|
|
$
|
38,482
|
|
|
$
|
90,657
|
|
|
Impairment charge
|
|
—
|
|
|
—
|
|
|
(11,560)
|
|
|
(11,560)
|
|
|
Other
|
|
—
|
|
|
(86)
|
|
|
—
|
|
|
(86)
|
|
|
Balance at December 31, 2019
|
|
$
|
1,899
|
|
|
$
|
50,190
|
|
|
$
|
26,922
|
|
|
$
|
79,011
|
|
|
Acquisition
|
|
—
|
|
|
—
|
|
|
70,577
|
|
|
70,577
|
|
|
Impairment charge
|
|
—
|
|
|
—
|
|
|
(9,053)
|
|
|
(9,053)
|
|
|
Other
|
|
—
|
|
|
337
|
|
|
4,044
|
|
|
4,381
|
|
|
Balance at December 31, 2020
|
|
$
|
1,899
|
|
|
50,527
|
|
|
$
|
92,490
|
|
|
$
|
144,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2020, the Company recorded a $9.1 million goodwill impairment charge to write-off the remaining balance of goodwill for the LAC reporting unit which was closed as of December 31, 2020. See Note E for additional details of the restructuring plan. During the third quarter of 2019, the LAC reporting unit began to experience a decline in sales volume from a significant customer. Based on an assessment that the decline in sales volume was expected to continue, the Company initiated a restructuring plan at the end of the third quarter to reduce the LAC reporting unit’s cost structure. Refer to Note E for further details of the restructuring plan. The Company considered these factors to be impairment indicators. As a result, the Company performed an interim impairment analysis as of September 27, 2019 using a "step one" quantitative assessment for the LAC reporting unit. The LAC reporting unit prepared an operating forecast that included 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. In addition to the estimates of future cash flows, other significant estimates involved in the determination of fair value of the reporting unit were the weighted average cost of capital (discount rate), annual growth rate, and terminal growth rate used in the discounted cash flow (DCF) model. The discount rates used in the DCF model consider market and industry data as well as specific risk premiums for the LAC reporting unit. The Company first reviewed long-lived assets, which resulted in an impairment charge of $2.6 million in the third quarter of 2019. The Company then performed a goodwill impairment analysis which resulted in an $11.6 million charge in the third quarter of 2019, which represents the excess of the carrying value over the estimated fair value of LAC. The Company estimated fair value using a discounted cash flow analysis for goodwill and estimated market values for other assets. These non-cash charges relating to goodwill and other assets were recorded in Goodwill impairment charges and Asset impairment charges, respectively, in the Consolidated Statements of Income.
The results of the Company's 2020, 2019, and 2018 annual goodwill impairment assessments indicated that no other goodwill impairment existed.
Accumulated impairment losses were $20.6 million and $11.6 million at December 31, 2020 and 2019, respectively, all of which related to the LAC reporting unit.
Note O — Debt
Long-term debt in the Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Borrowings under Credit Agreement with average interest rate of 1.65% at December 31, 2020
|
|
$
|
34,000
|
|
|
$
|
—
|
|
|
Foreign debt
|
|
3,157
|
|
|
—
|
|
|
Fixed rate industrial development revenue bonds
|
|
1,322
|
|
|
2,218
|
|
|
Total long-term debt outstanding
|
|
38,479
|
|
|
2,218
|
|
|
Current portion of long-term debt
|
|
(1,937)
|
|
|
(868)
|
|
|
Gross long-term debt
|
|
36,542
|
|
|
1,350
|
|
|
Unamortized deferred financing fees
|
|
—
|
|
|
(90)
|
|
|
Long-term debt
|
|
$
|
36,542
|
|
|
$
|
1,260
|
|
Maturities on long-term debt instruments as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
2021
|
$
|
1,937
|
|
|
2022
|
500
|
|
|
2023
|
387
|
|
|
2024
|
34,387
|
|
|
2025
|
387
|
|
|
2026 and thereafter
|
881
|
|
|
Total
|
$
|
38,479
|
|
In September 2019, the Company amended and restated the agreement governing its $375.0 million revolving credit facility (Credit Agreement). The maturity date of the Credit Agreement was extended from 2020 to 2024, and the Credit Agreement provides more favorable interest rates under certain circumstances. In addition, 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 $200.0 million. Borrowings under the Credit Agreement are 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 Company borrowed $150.0 million under the Credit Agreement during 2020 as a precaution in light of the COVID-19 pandemic. A portion of the amount borrowed was used to fund the Optics Balzers acquisition. At December 31, 2020, there was $34.0 million outstanding under this Credit Agreement. No amounts were outstanding at December 31, 2019.
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, 2020 and December 31, 2019.
At December 31, 2020 and 2019 there was $48.1 million and $41.8 million outstanding against the letters of credit sub-facility, respectively. The Company pays a variable commitment fee that may reset quarterly (0.2% as of December 31, 2020) of the available and unborrowed amounts under the revolving credit line.
The available borrowings under the individual existing credit lines total $245.8 million as of December 31, 2020.
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 $1.3 million and $2.2 million at December 31, 2020 and 2019, respectively.
Note P — 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, Liechtenstein, and England, and the U.S. supplemental retirement plans. The Other Benefits column includes the domestic retiree medical and life insurance plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
186,760
|
|
|
$
|
170,136
|
|
|
$
|
8,681
|
|
|
$
|
11,375
|
|
|
Service cost
|
|
1,403
|
|
|
5,918
|
|
|
59
|
|
|
67
|
|
|
Interest cost
|
|
5,234
|
|
|
6,292
|
|
|
213
|
|
|
399
|
|
|
Net pension curtailments and settlements
|
|
(609)
|
|
|
(12,212)
|
|
|
—
|
|
|
—
|
|
|
Acquisition
|
|
30,360
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Plan amendments
|
|
(799)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Actuarial loss (gain)
|
|
24,259
|
|
|
20,409
|
|
|
224
|
|
|
(2,192)
|
|
|
Benefit payments
|
|
(4,612)
|
|
|
(3,170)
|
|
|
(989)
|
|
|
(981)
|
|
|
Foreign currency exchange rate changes and other
|
|
4,111
|
|
|
(613)
|
|
|
2
|
|
|
13
|
|
|
Benefit obligation at end of year
|
|
246,107
|
|
|
186,760
|
|
|
8,190
|
|
|
8,681
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
174,046
|
|
|
145,046
|
|
|
—
|
|
|
—
|
|
|
Plan settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Acquisition
|
|
23,774
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Actual return on plan assets
|
|
30,330
|
|
|
27,264
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
|
614
|
|
|
4,702
|
|
|
—
|
|
|
—
|
|
|
Employee contributions
|
|
498
|
|
|
124
|
|
|
—
|
|
|
—
|
|
|
Benefit payments from fund
|
|
(4,720)
|
|
|
(2,933)
|
|
|
—
|
|
|
—
|
|
|
Expenses paid from assets
|
|
(234)
|
|
|
(391)
|
|
|
—
|
|
|
—
|
|
|
Foreign currency exchange rate changes and other
|
|
1,868
|
|
|
234
|
|
|
—
|
|
|
—
|
|
|
Fair value of plan assets at end of year
|
|
226,176
|
|
|
174,046
|
|
|
—
|
|
|
—
|
|
|
Funded status at end of year
|
|
$
|
(19,931)
|
|
|
$
|
(12,714)
|
|
|
$
|
(8,190)
|
|
|
$
|
(8,681)
|
|
Amounts recognized in the Consolidated
Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
13,074
|
|
|
$
|
11,298
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other liabilities and accrued items
|
|
(470)
|
|
|
(997)
|
|
|
(866)
|
|
|
(1,012)
|
|
|
Retirement and post-employment benefits
|
|
(32,535)
|
|
|
(23,015)
|
|
|
(7,324)
|
|
|
(7,669)
|
|
|
Net amount recognized
|
|
$
|
(19,931)
|
|
|
$
|
(12,714)
|
|
|
$
|
(8,190)
|
|
|
$
|
(8,681)
|
|
The benefit obligation increased in 2020 primarily due to the Optics Balzers acquisition, as well as actuarial losses that were driven by decreases in the discount rate as well as participant census data updates.
In 2019, the Company's Board of Directors approved changes to the U.S. defined benefit pension plan. The Company froze the pay and service amounts used to calculate the pension benefits for active participants as of January 1, 2020. The Company recognized a non-cash pretax pension curtailment charge of $3.3 million associated with the plan amendment in 2019.
The following amounts are included within accumulated other comprehensive loss at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Amounts recognized in other comprehensive income (before tax) consist of:
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
49,472
|
|
|
$
|
48,073
|
|
|
$
|
(3,973)
|
|
|
$
|
(4,529)
|
|
|
Net prior service cost (credit)
|
|
(799)
|
|
|
—
|
|
|
(3,552)
|
|
|
(5,049)
|
|
|
Net amount recognized
|
|
$
|
48,673
|
|
|
$
|
48,073
|
|
|
$
|
(7,525)
|
|
|
$
|
(9,578)
|
|
The following table provides information regarding the accumulated benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Additional information
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation for all defined benefit pension plans
|
|
$
|
243,953
|
|
|
$
|
185,402
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
For defined benefit pension plans with benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
Aggregate benefit obligation
|
|
62,012
|
|
|
25,640
|
|
|
—
|
|
|
—
|
|
|
Aggregate fair value of plan assets
|
|
29,938
|
|
|
3,045
|
|
|
—
|
|
|
—
|
|
|
For defined benefit pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
Aggregate accumulated benefit obligation
|
|
59,858
|
|
|
24,482
|
|
|
—
|
|
|
—
|
|
|
Aggregate fair value of plan assets
|
|
29,938
|
|
|
3,045
|
|
|
—
|
|
|
—
|
|
The following table summarizes components of net benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Net benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,403
|
|
|
$
|
5,918
|
|
|
$
|
6,953
|
|
|
$
|
59
|
|
|
$
|
67
|
|
|
$
|
111
|
|
|
Interest cost
|
|
5,234
|
|
|
6,292
|
|
|
9,554
|
|
|
213
|
|
|
399
|
|
|
396
|
|
|
Expected return on plan assets
|
|
(9,333)
|
|
|
(8,777)
|
|
|
(14,231)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service credit
|
|
—
|
|
|
483
|
|
|
(123)
|
|
|
(1,497)
|
|
|
(1,497)
|
|
|
(1,497)
|
|
|
Recognized net actuarial loss (gain)
|
|
1,678
|
|
|
3,304
|
|
|
7,171
|
|
|
(332)
|
|
|
(93)
|
|
|
—
|
|
|
Net periodic benefit (credit) cost
|
|
(1,018)
|
|
|
7,220
|
|
|
9,324
|
|
|
(1,557)
|
|
|
(1,124)
|
|
|
(990)
|
|
|
Net pension curtailments and settlements
|
|
94
|
|
|
3,328
|
|
|
41,406
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total net benefit (credit) cost
|
|
$
|
(924)
|
|
|
$
|
10,548
|
|
|
$
|
50,730
|
|
|
$
|
(1,557)
|
|
|
$
|
(1,124)
|
|
|
$
|
(990)
|
|
In 2019, net benefit cost includes a $3.3 million curtailment charge related to the freeze of our U.S. defined benefit plan effective January 1, 2020.
Net benefit cost for 2018 includes settlement charges of $41.4 million primarily related to the remeasurement of the periodic benefit obligation of the U.S. plans in conjunction with the purchase of a group annuity contract from Mutual of America.
Components of net periodic benefit cost, other than service cost, are included in Other non-operating (income) expense in the Consolidated Statements of Income. Additionally, Pension Benefit Guaranty Corporation premiums are reported within expected return on plan assets.
The following table summarizes amounts recognized in other comprehensive income (OCI):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
(Thousands)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Change in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI at beginning of year
|
$
|
48,073
|
|
|
$
|
65,409
|
|
|
$
|
122,802
|
|
|
$
|
(9,578)
|
|
|
$
|
(8,976)
|
|
|
$
|
(8,020)
|
|
|
Increase (decrease) in OCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized during year — prior service cost (credit)
|
—
|
|
|
(3,811)
|
|
|
123
|
|
|
1,497
|
|
|
1,497
|
|
|
1,497
|
|
|
Recognized during year — net actuarial (losses) gains
|
(1,678)
|
|
|
(3,304)
|
|
|
(7,171)
|
|
|
332
|
|
|
93
|
|
|
—
|
|
|
Occurring during year — prior service cost
|
(799)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Occurring during year — net actuarial losses (gains)
|
3,146
|
|
|
2,062
|
|
|
(8,997)
|
|
|
224
|
|
|
(2,192)
|
|
|
(2,453)
|
|
|
Other adjustments
|
(94)
|
|
|
(12,212)
|
|
|
(41,406)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Foreign currency exchange rate changes
|
25
|
|
|
(71)
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
OCI at end of year
|
$
|
48,673
|
|
|
$
|
48,073
|
|
|
$
|
65,409
|
|
|
$
|
(7,525)
|
|
|
$
|
(9,578)
|
|
|
$
|
(8,976)
|
|
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
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Weighted-average assumptions used to determine benefit obligations at fiscal year end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.14
|
%
|
|
3.12
|
%
|
|
4.07
|
%
|
|
2.45
|
%
|
|
3.20
|
%
|
|
4.11
|
%
|
|
Rate of compensation increase
|
|
2.22
|
%
|
|
3.00
|
%
|
|
3.87
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
4.00
|
%
|
|
Weighted-average assumptions used to determine net cost for the fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
8.37
|
%
|
|
4.16
|
%
|
|
3.63
|
%
|
|
3.20
|
%
|
|
4.11
|
%
|
|
3.43
|
%
|
|
Expected long-term return on plan assets
|
|
5.70
|
%
|
|
6.06
|
%
|
|
6.63
|
%
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Rate of compensation increase
|
|
2.87
|
%
|
|
2.99
|
%
|
|
3.98
|
%
|
|
3.00
|
%
|
|
4.00
|
%
|
|
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.
The Company uses 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.
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 not applicable for the domestic defined benefit plan in 2019 due to the Company freezing the plan effective January 1, 2020. The rate of compensation assumption for the domestic retiree medical plan was 3.0% in 2020 and 4.0% in 2019 for both the domestic defined benefit pension plan and the domestic retiree medical plan.
Assumptions for the defined benefit pension plans in Germany, Liechtenstein, and England are determined separately from the U.S. plan assumptions, based on historical trends and current and projected market conditions in each respective country. One plan in Germany is unfunded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed health care trend rates at fiscal year end
|
|
2020
|
|
2019
|
|
Health care trend rate assumed for next year
|
|
6.00%
|
|
6.25%
|
|
Rate that the trend rate gradually declines to (ultimate trend rate)
|
|
5.00%
|
|
5.00%
|
|
Year that the rate reaches the ultimate trend rate
|
|
2025
|
|
2025
|
Plan Assets
The following tables present the fair values of the Company’s defined benefit pension plan assets as of December 31, 2020 and 2019 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 S for definitions of the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
(Thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Cash
|
|
$
|
2,204
|
|
|
$
|
2,204
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Equity securities (a)
|
|
49,293
|
|
|
49,293
|
|
|
—
|
|
|
—
|
|
|
Fixed-income securities (b)
|
|
20,375
|
|
|
20,375
|
|
|
—
|
|
|
—
|
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
|
Real estate fund (c)
|
|
6,105
|
|
|
6,105
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
77,977
|
|
|
77,977
|
|
|
—
|
|
|
—
|
|
|
Investments measured at NAV: (d)
|
|
|
|
|
|
|
|
|
|
Pooled investment fund (e)
|
|
143,503
|
|
|
|
|
|
|
|
|
Multi-strategy hedge funds (f)
|
|
4,624
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
72
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
226,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
(Thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Cash
|
|
$
|
1,718
|
|
|
$
|
1,718
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Equity securities (a)
|
|
47,722
|
|
|
47,722
|
|
|
—
|
|
|
—
|
|
|
Fixed-income securities (b)
|
|
3,923
|
|
|
3,923
|
|
|
—
|
|
|
—
|
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
|
Real estate fund (c)
|
|
3,121
|
|
|
3,121
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
56,484
|
|
|
56,484
|
|
|
—
|
|
|
—
|
|
|
Investments measured at NAV: (d)
|
|
|
|
|
|
|
|
|
|
Pooled investment fund (e)
|
|
113,187
|
|
|
|
|
|
|
|
|
Multi-strategy hedge funds (f)
|
|
4,277
|
|
|
|
|
|
|
|
|
Private equity funds
|
|
98
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
174,046
|
|
|
|
|
|
|
|
(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)Certain assets that are measured at fair value using the NAV practical expedient have not been classified in the fair value hierarchy.
(e)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.
(f)Includes a fund that invests in a broad portfolio of hedge funds.
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 10% to 40% in equity securities, 60% to 90% 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 does not expect to contribute to its domestic defined benefit pension plan in 2021.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
(Thousands)
|
|
Pension Benefits
|
|
Gross Benefit
Payment
|
|
Net of
Medicare
Part D
Subsidy
|
|
2021
|
|
4,987
|
|
|
867
|
|
|
853
|
|
|
2022
|
|
5,854
|
|
|
812
|
|
|
800
|
|
|
2023
|
|
7,401
|
|
|
746
|
|
|
736
|
|
|
2024
|
|
8,689
|
|
|
667
|
|
|
659
|
|
|
2025
|
|
8,924
|
|
|
603
|
|
|
596
|
|
|
2026 through 2030
|
|
54,116
|
|
|
2,140
|
|
|
2,120
|
|
Other Benefit Plans
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 $1.7 million at December 31, 2020 and $1.4 million at December 31, 2019, 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 $9.8 million in 2020, $7.0 million in 2019, and $5.2 million in 2018.
Note Q — Accumulated Other Comprehensive (Loss) Income
Changes in the components of accumulated other comprehensive (loss) income, including amounts reclassified out, for 2020, 2019, and 2018, and the balances in accumulated other comprehensive (loss) income as of December 31, 2020, 2019, and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and Losses
On Cash Flow Hedges
|
|
Pension and Post- Employment Benefits
|
|
Foreign Currency Translation
|
|
|
|
(Thousands)
|
|
Foreign Currency
|
|
Precious Metals
|
|
Copper
|
|
Total
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
959
|
|
|
$
|
(196)
|
|
|
$
|
—
|
|
|
$
|
763
|
|
|
$
|
(99,592)
|
|
|
$
|
(4,108)
|
|
|
$
|
(102,937)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(333)
|
|
|
467
|
|
|
(569)
|
|
|
(435)
|
|
|
11,396
|
|
|
(484)
|
|
|
10,477
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
10
|
|
|
(109)
|
|
|
—
|
|
|
(99)
|
|
|
46,953
|
|
|
—
|
|
|
46,854
|
|
|
Other comprehensive income (loss) before tax
|
|
(323)
|
|
|
358
|
|
|
(569)
|
|
|
(534)
|
|
|
58,349
|
|
|
(484)
|
|
|
57,331
|
|
|
Deferred taxes on current period activity
|
|
(627)
|
|
|
83
|
|
|
(128)
|
|
|
(672)
|
|
|
13,300
|
|
|
—
|
|
|
12,628
|
|
|
Other comprehensive income (loss) after tax
|
|
304
|
|
|
275
|
|
|
(441)
|
|
|
138
|
|
|
45,049
|
|
|
(484)
|
|
|
44,703
|
|
|
Balance at December 31, 2018
|
|
$
|
1,263
|
|
|
$
|
79
|
|
|
$
|
(441)
|
|
|
$
|
901
|
|
|
$
|
(54,543)
|
|
|
$
|
(4,592)
|
|
|
$
|
(58,234)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
1,263
|
|
|
$
|
79
|
|
|
$
|
(441)
|
|
|
$
|
901
|
|
|
$
|
(54,543)
|
|
|
$
|
(4,592)
|
|
|
$
|
(58,234)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
108
|
|
|
(1,285)
|
|
|
209
|
|
|
(968)
|
|
|
9,085
|
|
|
(421)
|
|
|
7,696
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
(29)
|
|
|
595
|
|
|
393
|
|
|
959
|
|
|
8,853
|
|
|
—
|
|
|
9,812
|
|
|
Other comprehensive income (loss) before tax
|
|
79
|
|
|
(690)
|
|
|
602
|
|
|
(9)
|
|
|
17,938
|
|
|
(421)
|
|
|
17,508
|
|
|
Deferred taxes on current period activity
|
|
18
|
|
|
(159)
|
|
|
136
|
|
|
(5)
|
|
|
4,741
|
|
|
—
|
|
|
4,736
|
|
|
Other comprehensive income (loss) after tax
|
|
61
|
|
|
(531)
|
|
|
466
|
|
|
(4)
|
|
|
13,197
|
|
|
(421)
|
|
|
12,772
|
|
|
Balance at December 31, 2019
|
|
$
|
1,324
|
|
|
$
|
(452)
|
|
|
$
|
25
|
|
|
$
|
897
|
|
|
$
|
(41,346)
|
|
|
$
|
(5,013)
|
|
|
$
|
(45,462)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
1,324
|
|
|
$
|
(452)
|
|
|
$
|
25
|
|
|
$
|
897
|
|
|
$
|
(41,346)
|
|
|
$
|
(5,013)
|
|
|
$
|
(45,462)
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(1,268)
|
|
|
(1,675)
|
|
|
218
|
|
|
(2,725)
|
|
|
(2,721)
|
|
|
9,030
|
|
|
3,584
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
222
|
|
|
2,041
|
|
|
354
|
|
|
2,617
|
|
|
(57)
|
|
|
—
|
|
|
2,560
|
|
|
Other comprehensive income (loss) before tax
|
|
(1,046)
|
|
|
366
|
|
|
572
|
|
|
(108)
|
|
|
(2,778)
|
|
|
9,030
|
|
|
6,144
|
|
|
Deferred taxes on current period activity
|
|
(241)
|
|
|
84
|
|
|
129
|
|
|
(28)
|
|
|
(651)
|
|
|
—
|
|
|
(679)
|
|
|
Other comprehensive income (loss) after tax
|
|
(805)
|
|
|
282
|
|
|
443
|
|
|
(80)
|
|
|
(2,127)
|
|
|
9,030
|
|
|
6,823
|
|
|
Balance at December 31, 2020
|
|
$
|
519
|
|
|
$
|
(170)
|
|
|
$
|
468
|
|
|
$
|
817
|
|
|
$
|
(43,473)
|
|
|
$
|
4,017
|
|
|
$
|
(38,639)
|
|
Reclassifications from accumulated other comprehensive income of gains and losses on foreign currency cash flow hedges are recorded in Net sales in the Consolidated Statements of Income 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 S 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 P for additional details on pension and other post-employment expenses.
Note R — 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, restricted shares, and restricted stock units (RSUs). 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 (SG&A) expenses, was $5.7 million, $11.1 million, and $11.4 million in 2020, 2019, and 2018, 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 $0.5 million, $2.1 million, and $1.2 million of tax benefits in 2020, 2019, and 2018, respectively, 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 vest in equal installments annually over three years. SARs expire in seven years.
The following table summarizes the Company's SARs activity during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
SARs
|
|
Weighted-
average
Exercise
Price Per
Share
|
|
Aggregate
Intrinsic
Value (thousands)
|
|
Weighted-
average
Remaining
Term (Years)
|
|
Outstanding at December 31, 2019
|
|
250
|
|
|
$
|
44.95
|
|
|
|
|
|
|
Granted
|
|
65
|
|
|
50.95
|
|
|
|
|
|
|
Exercised
|
|
(29)
|
|
|
40.70
|
|
|
|
|
|
|
Cancelled
|
|
(32)
|
|
|
51.43
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
254
|
|
|
46.18
|
|
|
$
|
4,454
|
|
|
4.2
|
|
Vested and expected to vest as of December 31, 2020
|
|
254
|
|
|
46.18
|
|
|
4,454
|
|
|
4.2
|
|
Exercisable at December 31, 2020
|
|
148
|
|
|
41.00
|
|
|
3,368
|
|
|
3.4
|
A summary of the status and changes of shares subject to SARs and the related average price per share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
SARs
|
|
Weighted-
average
Grant
Date
Fair Value
|
|
Nonvested as of December 31, 2019
|
|
178
|
|
|
$
|
14.72
|
|
|
Granted
|
|
65
|
|
|
13.67
|
|
|
Vested
|
|
(109)
|
|
|
13.21
|
|
|
Cancelled
|
|
(28)
|
|
|
15.50
|
|
|
Nonvested as of December 31, 2020
|
|
106
|
|
|
$
|
15.46
|
|
As of December 31, 2020, $0.9 million of expense with respect to non-vested SARs has yet to be recognized as expense over a weighted-average period of approximately 20 months. The total fair value of shares vested during 2020 was $1.5 million, compared to $1.9 million in both 2019 and 2018.
The weighted-average grant date fair value for 2020, 2019, and 2018 was $13.67, $17.76, and $15.73, respectively. The fair value will be amortized to compensation cost on a straight-line basis over the vesting period of three years, or earlier if the employee is retirement eligible as defined in the Plan. Stock-based compensation expense relating to SARs was $0.9 million in both 2020 and 2019 and $0.7 million in 2018.
The fair value of the SARs was estimated on the grant date using the Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Risk-free interest rate
|
|
1.41
|
%
|
|
2.47
|
%
|
|
2.58
|
%
|
|
Dividend yield
|
|
0.9
|
%
|
|
0.7
|
%
|
|
0.8
|
%
|
|
Volatility
|
|
31.8
|
%
|
|
31.7
|
%
|
|
31.9
|
%
|
|
Expected lives (in years)
|
|
4.8
|
|
5.2
|
|
5.5
|
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 2020, 2019, and 2018 was $51.55, $58.33, and $50.35, 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 stock-settled RSUs was $2.7 million in 2020, $2.2 million in 2019, and $1.2 million in 2018. The unamortized compensation cost on the outstanding RSUs was $4.3 million as of December 31, 2020 and is expected to be recognized over a weighted-average period of 28 months. The total fair value of shares vested during both 2020 and 2019 was $1.2 million, compared to $1.4 million in 2018.
The following table summarizes the stock-settled RSU activity during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
|
Outstanding at December 31, 2019
|
|
145
|
|
|
$
|
50.79
|
|
|
Granted
|
|
84
|
|
|
51.55
|
|
|
Vested
|
|
(33)
|
|
|
36.39
|
|
|
Forfeited
|
|
(35)
|
|
|
53.52
|
|
|
Outstanding at December 31, 2020
|
|
161
|
|
|
$
|
53.50
|
|
RSUs - Non-Employee Directors. In 2020, 2019, and 2018, 15,976, 11,048, and 14,728 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 $48.42, $68.79, and $51.60 in 2020, 2019, and 2018, respectively. The Company recognized $0.7 million of expense with respect to these awards in each of the last three years. At December 31, 2020, $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 2020, 2019, and 2018, 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 will be settled in Materion common shares and are equity classified. 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 RSUs during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in thousands)
|
|
Number of
Shares
|
|
Weighted-
average
Grant Date
Fair Value
|
|
Outstanding at December 31, 2019
|
|
169
|
|
|
$
|
52.74
|
|
|
Granted
|
|
46
|
|
|
57.65
|
|
|
Vested
|
|
(63)
|
|
|
30.28
|
|
|
Forfeited
|
|
(26)
|
|
|
63.59
|
|
|
Outstanding at December 31, 2020
|
|
126
|
|
|
$
|
63.61
|
|
Compensation expense is based upon the performance projections for the plan period of three years, 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 $2.0 million for 2020, $3.3 million for 2019, and $2.7 million for 2018.
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. At December 31, 2020, shareholders’ equity included 0.1 million shares related to this plan.
Note S — 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.
The following table summarizes the financial instruments measured at fair value in the Consolidated Balance Sheets at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
(Thousands)
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Other
Significant
Unobservable
Inputs
(Level 3)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
3,802
|
|
|
$
|
3,802
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
|
107
|
|
|
—
|
|
|
107
|
|
|
—
|
|
|
Precious metal swaps
|
|
127
|
|
|
—
|
|
|
127
|
|
|
—
|
|
|
Copper swaps
|
|
632
|
|
|
—
|
|
|
632
|
|
|
—
|
|
|
Total
|
|
$
|
4,668
|
|
|
$
|
3,802
|
|
|
$
|
866
|
|
|
$
|
—
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
3,802
|
|
|
$
|
3,802
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
|
1,203
|
|
|
—
|
|
|
1,203
|
|
|
—
|
|
|
Precious metal swaps
|
|
349
|
|
|
—
|
|
|
349
|
|
|
—
|
|
|
Copper swaps
|
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
Total
|
|
$
|
5,381
|
|
|
$
|
3,802
|
|
|
$
|
1,579
|
|
|
$
|
—
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
Deferred compensation investments
|
|
$
|
3,391
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
|
188
|
|
|
—
|
|
|
188
|
|
|
—
|
|
|
Precious metal swaps
|
|
35
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
Copper swaps
|
|
61
|
|
|
—
|
|
|
61
|
|
|
—
|
|
|
Total
|
|
$
|
3,675
|
|
|
$
|
3,391
|
|
|
$
|
284
|
|
|
$
|
—
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
|
$
|
3,391
|
|
|
$
|
3,391
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency forward contracts
|
|
211
|
|
|
—
|
|
|
211
|
|
|
—
|
|
|
Precious metal swaps
|
|
623
|
|
|
—
|
|
|
623
|
|
|
—
|
|
|
Copper swaps
|
|
28
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
Total
|
|
$
|
4,253
|
|
|
$
|
3,391
|
|
|
$
|
862
|
|
|
$
|
—
|
|
The Company uses a market approach to value the assets and liabilities for financial instruments in the table above. Outstanding contracts are valued through models that utilize market observable inputs, including both spot and forward prices, for the same underlying currencies and metals. The 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, 2020 and 2019.
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 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 also enter into hedges to mitigate the risk relating to the prices of the metals which we process or refine.
The Company may from time to time elect to purchase precious metal and hold in inventory rather than on consignment due to potential credit line limitations or other factors. These purchases are typically held for a short duration. A forward contract will be secured at the time of the purchase to fix the price to be used when the metal is transferred back to the consignment line, thereby limiting any price exposure during the time when the metal was owned.
Copper. The Company also uses copper in its production processes. When possible, fluctuations in the purchase price of copper are passed on to customers in the form of price adders or reductions. While over time the Company's price exposure to copper is generally in balance, there can be a lag between the change in the Company's cost and the pass-through to its customers, resulting in higher or lower margins in a given period. To mitigate this impact, the Company hedges a portion of this pricing risk.
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 and Risk 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 OCI until the hedged item is recognized in earnings. The ineffective portion of a derivative’s fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through income. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives not designated as hedging instruments (on a gross basis) and balance sheet classification as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
Foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
62,012
|
|
|
$
|
107
|
|
|
$
|
13,734
|
|
|
$
|
95
|
|
|
Other liabilities and accrued items
|
|
7,695
|
|
|
55
|
|
|
5,757
|
|
|
16
|
|
These outstanding foreign currency derivatives were related to balance sheet hedges and intercompany loans. Other-net included foreign currency gains relating to these derivatives of $2.7 million in 2020, primarily due to a gain realized on the settlement of a foreign currency hedge for the purchase of Optics Balzers. In 2019, Other-net included $0.1 million of foreign currency losses relating to these derivatives.
The following table summarizes the notional amount and the fair value of the Company’s outstanding derivatives designated as cash flow hedges (on a gross basis) and balance sheet classification at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
(Thousands)
|
|
Notional
Amount
|
|
Fair
Value
|
|
Notional
Amount
|
|
Fair
Value
|
|
Prepaid expenses
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,025
|
|
|
$
|
10
|
|
|
Foreign currency forward contracts - euro
|
|
—
|
|
|
—
|
|
|
3,466
|
|
|
83
|
|
|
Precious metal swaps
|
|
2,155
|
|
|
127
|
|
|
1,116
|
|
|
34
|
|
|
Copper swaps
|
|
6,225
|
|
|
632
|
|
|
1,951
|
|
|
61
|
|
|
|
|
8,380
|
|
|
759
|
|
|
7,558
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
Precious metal swaps
|
|
—
|
|
|
—
|
|
|
157
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities and accrued items
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts - yen
|
|
2,668
|
|
|
59
|
|
|
2,355
|
|
|
12
|
|
|
Foreign currency forward contracts - euro
|
|
17,611
|
|
|
1,089
|
|
|
15,686
|
|
|
183
|
|
|
Precious metal swaps
|
|
4,964
|
|
|
349
|
|
|
7,034
|
|
|
618
|
|
|
Copper swaps
|
|
2,445
|
|
|
27
|
|
|
1,266
|
|
|
28
|
|
|
|
|
27,688
|
|
|
1,524
|
|
|
26,341
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
Precious metal swaps
|
|
—
|
|
|
—
|
|
|
149
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,068
|
|
|
$
|
765
|
|
|
$
|
34,205
|
|
|
$
|
657
|
|
All of these contracts were designated and effective as cash flow hedges. No ineffectiveness expense was recorded in 2020, 2019, or 2018.
The fair value of derivative contracts recorded in accumulated other comprehensive loss totaled $0.8 million and $0.7 million as of December 31, 2020 and December 31, 2019, respectively. Deferred losses of $0.8 million at December 31, 2020 are expected to be reclassified to earnings within the next 18-month period.
The following table summarizes the pre-tax amounts reclassified from accumulated other comprehensive income relating to the hedging relationship of the Company’s outstanding derivatives designated as cash flow hedges and income statement classification for years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
|
2020
|
|
2019
|
|
Hedging relationship
|
|
Line item
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Net sales
|
|
$
|
222
|
|
|
$
|
(29)
|
|
|
Precious metal swaps
|
|
Cost of sales
|
|
2,041
|
|
|
595
|
|
|
Copper swaps
|
|
Cost of sales
|
|
354
|
|
|
393
|
|
|
Total
|
|
|
|
$
|
2,617
|
|
|
$
|
959
|
|
The derivative activity in the table above is reflected in cash flows from operating activities.
Note T — 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. Defense and indemnity costs were less than or equal to the deductible in both 2020 and 2019.
As of December 31, 2020, the Company was a defendant in two beryllium litigation cases, one of which was outstanding as of December 31, 2019. The Company does not expect the resolution of these matters to have a material impact on its 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 any 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.
The undiscounted reserve balance at the beginning of the year, the amounts expensed and paid, and the balance at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Reserve balance at beginning of year
|
|
$
|
5,937
|
|
|
$
|
6,521
|
|
|
Expensed
|
|
288
|
|
|
482
|
|
|
Paid
|
|
(749)
|
|
|
(1,066)
|
|
|
Reserve balance at end of year
|
|
$
|
5,476
|
|
|
$
|
5,937
|
|
|
Ending balance recorded in:
|
|
|
|
|
|
Other liabilities and accrued items
|
|
$
|
845
|
|
|
$
|
982
|
|
|
Other long-term liabilities
|
|
4,631
|
|
|
4,955
|
|
The majority of spending in both 2020 and 2019 was for various remediation projects at the Elmore, Ohio plant site.
Asset Retirement Obligations
The Company has asset retirement obligations related to its mine in Utah, as well as for certain leased facilities where the Company is contractually obligated to restore the facility back to its original condition at the end of the lease. The following represents a roll forward of the Company's asset retirement obligation liabilities for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
2020
|
|
2019
|
|
Asset retirement obligation at beginning of period
|
|
$
|
1,421
|
|
|
$
|
1,257
|
|
|
Accretion expense
|
|
137
|
|
|
164
|
|
|
Change in liability
|
|
207
|
|
|
—
|
|
|
Asset retirement obligation at end of period
|
|
$
|
1,765
|
|
|
$
|
1,421
|
|
These obligations are reflected in Other long-term liabilities on the Consolidated Balance Sheet.
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.
On October 14, 2020 Garett Lucyk, et al. v. Materion Brush Inc., et. al., case number 20CV0234, a wage and hour purported collective and class action, was filed in the Northern District of Ohio against the Company and its subsidiary, Materion Brush Inc. (collectively, the Company). Plaintiff, a former hourly production employee at the Company's Elmore, Ohio facility, alleges that he and other similarly situated employees nationwide are not paid for all time they spend donning and doffing personal protective equipment in violation of the Fair Labor Standards Act and Ohio law. Plaintiff also alleges the Company failed to include all remuneration he and others received for premium and bonus pay when computing overtime pay. The case is currently in the preliminary stages. The Company believes that it has substantive defenses and intends to vigorously defend this suit.
At December 31, 2020, the Company had outstanding letters of credit totaling $48.1 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 2021 and are expected to be renewed.