Materion (MTRN) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Materion Corporation's unaudited consolidated financial statements, detailed notes, management's discussion and analysis, market risk, and controls and procedures Item 1. Financial Statements This section presents Materion Corporation's unaudited consolidated financial statements for the second quarter and first six months ended June 30, 2023, and July 1, 2022, including statements of income, comprehensive income, balance sheets, cash flows, and shareholders' equity, along with detailed notes on accounting policies, segment reporting, revenue recognition, and other financial disclosures Consolidated Statements of Income This chapter provides key figures from the unaudited consolidated statements of income, including net sales, gross margin, operating profit, net income, and earnings per share Consolidated Statements of Income (Unaudited) - Key Figures (Thousands, except per share amounts): | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--------------------------------- | :------ | :------ | :------------ | :------------ | | Net sales | $398,551 | $445,295 | $841,076 | $894,340 | | Gross margin | $89,055 | $87,427 | $180,391 | $162,718 | | Operating profit | $35,344 | $31,860 | $72,284 | $51,467 | | Net income | $24,082 | $23,255 | $49,670 | $37,274 | | Basic EPS | $1.17 | $1.13 | $2.41 | $1.82 | | Diluted EPS | $1.15 | $1.12 | $2.38 | $1.80 | - Net income increased by 4% to $24.082 million in Q2 2023 compared to $23.255 million in Q2 2022, and by 33% to $49.670 million for the first six months of 2023 compared to $37.274 million in the prior year period[8] - Diluted EPS increased by 3% to $1.15 in Q2 2023 from $1.12 in Q2 2022, and by 32% to $2.38 for the first six months of 2023 from $1.80 in the prior year period[8] Consolidated Statements of Comprehensive Income This chapter outlines the company's comprehensive income, including net income and other comprehensive income (loss) components Consolidated Statements of Comprehensive Income (Unaudited) - Key Figures (Thousands): | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--------------------------------- | :------ | :------ | :------------ | :------------ | | Net income | $24,082 | $23,255 | $49,670 | $37,274 | | Other comprehensive income (loss) | $2,183 | $(4,433) | $2,466 | $(4,450) | | Comprehensive income | $26,265 | $18,822 | $52,136 | $32,824 | - Comprehensive income significantly increased to $26.265 million in Q2 2023 from $18.822 million in Q2 2022, and to $52.136 million for the first six months of 2023 from $32.824 million in the prior year, primarily driven by a positive foreign currency translation adjustment and derivative and hedging activity[11] Consolidated Balance Sheets This chapter presents the company's financial position, detailing total assets, current assets, current liabilities, and shareholders' equity Consolidated Balance Sheets (Unaudited) - Key Figures (Thousands): | Metric | June 30, 2023 | Dec. 31, 2022 | | :--------------------------------- | :------------ | :------------ | | Total Assets | $1,737,711 | $1,691,979 | | Total Current Assets | $697,833 | $690,448 | | Total Current Liabilities | $233,250 | $238,964 | | Total Shareholders' Equity | $847,123 | $799,990 | - Total assets increased by $45.732 million to $1,737.711 million as of June 30, 2023, from $1,691.979 million at December 31, 2022, driven by increases in inventories and property, plant, and equipment, net[15] - Total shareholders' equity increased by $47.133 million to $847.123 million as of June 30, 2023, from $799.990 million at December 31, 2022[15] Consolidated Statements of Cash Flows This chapter details the company's cash flow activities, including operating, investing, and financing, and their impact on cash and cash equivalents Consolidated Statements of Cash Flows (Unaudited) - Key Figures (Thousands) for Six Months Ended: | Metric | June 30, 2023 | July 1, 2022 | | :--------------------------------- | :------------ | :----------- | | Net cash provided by operating activities | $70,522 | $21,415 | | Net cash used in investing activities | $(62,677) | $(40,596) | | Net cash (used in)/provided by financing activities | $(3,835) | $38,418 | | Net change in cash and cash equivalents | $3,473 | $17,713 | - Net cash provided by operating activities significantly increased to $70.522 million for the first six months of 2023, up from $21.415 million in the prior year, primarily due to stronger cash collection and inventory management[17][162] - Net cash used in investing activities increased to $62.677 million, up from $40.596 million in the prior year, due to increased capital expenditures and mine development to support business growth[17][163] - Net cash used in financing activities was $3.835 million for the first six months of 2023, a shift from $38.418 million provided in the prior year, mainly due to debt repayments[17][165] Consolidated Statements of Shareholders' Equity This chapter presents changes in shareholders' equity, including net income, other comprehensive income, dividends, and stock-based compensation activities Consolidated Statements of Shareholders' Equity (Unaudited) - Key Figures (Thousands) as of June 30, 2023: | Metric | Common Stock | Retained Earnings | Common Stock in Treasury | Accumulated Other Comprehensive Loss | Other Equity | Total Shareholders' Equity | | :--------------------------------- | :----------- | :---------------- | :----------------------- | :--------------------------------- | :----------- | :------------------------- | | Balance at Dec 31, 2022 | $288,100 | $769,418 | $(220,864) | $(41,909) | $5,245 | $799,990 | | Net income | — | $49,670 | — | — | — | $49,670 | | Other comprehensive loss | — | — | — | $2,466 | — | $2,466 | | Cash dividends declared | — | $(5,254) | — | — | — | $(5,254) | | Stock-based compensation activity | $15,242 | $(41) | $(10,159) | — | — | $5,042 | | Payments of withholding taxes | — | — | $(4,872) | — | — | $(4,872) | | Directors' deferred compensation | $48 | — | $(528) | — | $561 | $81 | | Balance at June 30, 2023 | $303,390 | $813,793 | $(236,423) | $(39,443) | $5,806 | $847,123 | - Total shareholders' equity increased from $799.990 million at December 31, 2022, to $847.123 million at June 30, 2023, primarily driven by net income of $49.670 million and other comprehensive income of $2.466 million, partially offset by cash dividends and stock-based compensation related activities[20] Note A — Accounting Policies This chapter details the company's significant accounting policies, including the adoption of new accounting standards and their expected impact - The Company adopted ASU 2020-04, Reference Rate Reform (Topic 848), to ease financial reporting burdens related to the transition from LIBOR to alternative reference rates, specifically applied to interest rate swaps[25] - No other recently issued or effective ASUs are expected to have a material effect on the Company's operations, financial condition, or liquidity[26] Note B — Segment Reporting This chapter provides an overview of Materion Corporation's four reportable segments and their respective net sales and EBITDA performance - Materion Corporation operates through four reportable segments: Performance Materials, Electronic Materials, Precision Optics, and Other (unallocated corporate costs)[27][30] Net Sales by Segment (Thousands): | Segment | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :------------------ | :------ | :------ | :------------ | :------------ | | Performance Materials | $182,771 | $154,889 | $369,785 | $304,520 | | Electronic Materials | $190,730 | $260,971 | $419,549 | $531,807 | | Precision Optics | $25,050 | $29,435 | $51,742 | $58,013 | | Total Net Sales | $398,551 | $445,295 | $841,076 | $894,340 | Segment EBITDA (Thousands): | Segment | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :------------------ | :------ | :------ | :------------ | :------------ | | Performance Materials | $44,925 | $27,229 | $87,695 | $52,021 | | Electronic Materials | $13,394 | $22,337 | $27,349 | $34,484 | | Precision Optics | $1,701 | $3,544 | $4,393 | $5,735 | | Other | $(7,598) | $(7,191) | $(14,253) | $(12,366) | | Total Segment EBITDA | $52,422 | $45,919 | $105,184 | $79,874 | - Performance Materials saw significant growth in net sales and EBITDA, while Electronic Materials and Precision Optics experienced declines in both metrics for both the second quarter and first six months of 2023 compared to 2022[32] Note C — Revenue Recognition This chapter explains the company's policies for recognizing revenue from product sales and details contract balances - Revenue is primarily recognized from the sale of specialty metals, alloys, and other products when control is transferred to the customer, typically upon product delivery[37] - The aggregate amount of transaction price allocated to remaining performance obligations (for contracts longer than one year) was approximately $64.1 million as of June 30, 2023[39] Contract Balances (Thousands): | Metric | June 30, 2023 | Dec. 31, 2022 | $ Change | % Change | | :---------------------- | :------------ | :------------ | :------- | :------- | | Accounts receivable, trade | $188,328 | $215,726 | $(27,398) | (13)% | | Unbilled receivables | $11,340 | $10,765 | $575 | 5% | | Unearned revenue | $15,306 | $15,496 | $(190) | (1)% | Note D — Other-net This chapter details the components of Other-net expense, including amortization, consignment fees, and foreign currency impacts Other-net Components (Thousands): | Component | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :-------------------------- | :------ | :------ | :------------ | :------------ | | Amortization of intangible assets | $3,130 | $3,099 | $6,250 | $6,230 | | Metal consignment fees | $2,797 | $2,871 | $5,726 | $5,882 | | Foreign currency (gain) loss | $170 | $28 | $(38) | $(305) | | Other items | $95 | $(70) | $28 | $(6) | | Total | $6,192 | $5,928 | $11,966 | $11,801 | - Total Other-net expense increased marginally to $6.192 million in Q2 2023 from $5.928 million in Q2 2022, and to $11.966 million for the first six months of 2023 from $11.801 million in the prior year[45] Note E — Restructuring This chapter outlines the restructuring expenses incurred by the company to improve operational efficiency across its segments - The Company incurred $1.5 million in restructuring expenses in Q2 2023 and $2.1 million for the first six months of 2023, related to initiatives across Performance Materials, Electronic Materials, and Precision Optics segments to improve operational efficiency[46] - This represents an increase from $1.1 million in restructuring charges recorded in the first six months of 2022[47] Note F — Income Taxes This chapter details the company's effective tax rates and the factors influencing them, including expected tax savings from recent legislation Effective Tax Rates: | Period | 2023 | 2022 | | :------------------ | :--- | :--- | | Second Quarter | 15.3% | 17.9% | | First Six Months | 15.2% | 17.8% | - The lower effective tax rates in 2023 and 2022 were primarily due to percentage depletion, R&D credits, and the foreign derived intangible income deduction[50] - The Company expects to recognize cash savings of at least $8 million for the year ending December 31, 2023, from the new advanced manufacturing production credit introduced by the Inflation Reduction Act of 2022[52] Note G — Earnings Per Share (EPS) This chapter provides a breakdown of basic and diluted earnings per share, along with the weighted-average shares outstanding Earnings Per Share (EPS) (Thousands, except per share amounts): | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--------------------------------- | :------ | :------ | :------------ | :------------ | | Net income | $24,082 | $23,255 | $49,670 | $37,274 | | Basic EPS | $1.17 | $1.13 | $2.41 | $1.82 | | Diluted EPS | $1.15 | $1.12 | $2.38 | $1.80 | | Weighted-average shares outstanding (Basic) | 20,625 | 20,517 | 20,596 | 20,491 | | Adjusted weighted-average shares outstanding (Diluted) | 20,896 | 20,723 | 20,892 | 20,743 | - Diluted EPS increased by $0.03 in Q2 2023 and $0.58 for the first six months of 2023, reflecting higher net income[54] Note H — Inventories This chapter details the composition of inventories, net, and the notional value of off-balance sheet precious metals and copper Inventories, Net (Thousands): | Component | June 30, 2023 | Dec. 31, 2022 | | :---------------------- | :------------ | :------------ | | Raw materials and supplies | $114,942 | $113,694 | | Work in process | $263,604 | $249,105 | | Finished goods | $76,797 | $60,281 | | Inventories, net | $455,343 | $423,080 | - Inventories, net, increased to $455.343 million at June 30, 2023, from $423.080 million at December 31, 2022, primarily due to increases in work in process and finished goods[57] - The notional value of off-balance sheet precious metals and copper held on a consignment basis decreased to $321.3 million at June 30, 2023, from $373.1 million at December 31, 2022[57] Note I — Customer Prepayments This chapter discusses customer prepayments received for equipment to manufacture products and their classification on the balance sheet - The Company received approximately $37.0 million in customer prepayments for equipment to manufacture products, with $15.1 million received during the first six months of 2023[60] - As of June 30, 2023, $91.4 million of prepayments are classified as Unearned income, and $6.7 million as Unearned revenue, reflecting amounts received in advance of performance obligations[61] Note J — Pensions and Other Post-employment Benefits This chapter details the net periodic benefit (credit) cost for pension and other post-employment benefits, highlighting key components Net Periodic Benefit (Credit) Cost (Thousands): | Metric | Q2 2023 (Pension) | Q2 2022 (Pension) | Q2 2023 (Other) | Q2 2022 (Other) | | :--------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Service cost | $211 | $292 | $13 | $20 | | Interest cost | $1,970 | $1,213 | $68 | $39 | | Expected return on plan assets | $(2,422) | $(2,378) | — | — | | Amortization of prior service (benefit) cost | $(21) | $(18) | $(139) | $(374) | | Amortization of net loss (gain) | $(75) | $420 | $(95) | $(68) | | Net periodic benefit (credit) cost | $(337) | $(471) | $(153) | $(383) | - The Company reported a net periodic benefit credit for both pension and other benefits in Q2 2023 and the first six months of 2023, primarily due to expected returns on plan assets and amortization of prior service benefit[65] Note K — Accumulated Other Comprehensive Income (Loss) This chapter presents the changes in accumulated other comprehensive income (loss), including foreign currency, hedging, and pension adjustments Accumulated Other Comprehensive Income (Loss) (Thousands): | Component | Balance at Dec 31, 2022 | Net current period other comprehensive (loss) income after tax (6 Months 2023) | Balance at June 30, 2023 | | :--------------------------------- | :---------------------- | :---------------------------------------------------------------- | :----------------------- | | Foreign Currency | $1,243 | $47 | $1,290 | | Interest Rate Hedges | $6,055 | $1,014 | $7,069 | | Precious Metals Hedges | $(223) | $(220) | $(443) | | Total Gains and Losses on Cash Flow Hedges | $7,075 | $841 | $7,916 | | Pension and Post Employment Benefits | $(40,228) | $(321) | $(40,549) | | Foreign Currency Translation | $(8,756) | $1,946 | $(6,810) | | Total | $(41,909) | $2,466 | $(39,443) | - Accumulated other comprehensive loss improved from $(41.909) million at December 31, 2022, to $(39.443) million at June 30, 2023, primarily due to positive foreign currency translation adjustments and gains on cash flow hedges[72] Note L — Stock-based Compensation Expense This chapter details the stock-based compensation expense recognized by the company and the unrecognized compensation cost for unvested awards Stock-based Compensation Expense (Thousands): | Period | 2023 | 2022 | | :------------------ | :----- | :----- | | Second Quarter | $2,800 | $2,000 | | First Six Months | $5,200 | $3,800 | - Stock-based compensation expense increased in both the second quarter and first six months of 2023 compared to 2022, reflecting new grants of SARs, stock-settled RSUs, and performance-based RSUs[75][76][77] - Unrecognized compensation cost related to unvested awards was approximately $20.7 million at June 30, 2023, to be recognized over the remaining vesting period[78] Note M — Fair Value of Financial Instruments This chapter outlines the fair value measurement of financial instruments, categorizing them by valuation inputs (Level 1 and Level 2) Financial Instruments Measured at Fair Value (Thousands): | Instrument | Total Carrying Value (June 30, 2023) | Total Carrying Value (Dec 31, 2022) | Level 1 (June 30, 2023) | Level 2 (June 30, 2023) | | :--------------------------------- | :----------------------------------- | :----------------------------------- | :---------------------- | :---------------------- | | Financial Assets: | | | | | | Deferred compensation investments | $4,451 | $3,001 | $4,451 | — | | Foreign currency forward contracts | $512 | $1,291 | — | $512 | | Interest rate swap | $9,736 | $7,863 | — | $9,736 | | Precious metal swaps | $1 | $118 | — | $1 | | Financial Liabilities: | | | | | | Deferred compensation liability | $4,451 | $3,001 | $4,451 | — | | Foreign currency forward contracts | $946 | $1,757 | — | $946 | | Interest rate swap | $556 | — | — | $556 | | Precious metal swaps | $580 | $411 | — | $580 | - The Company uses a market approach to value financial instruments, primarily utilizing Level 1 (quoted prices in active markets) for deferred compensation investments and Level 2 (observable inputs) for derivative contracts[79][82] Note N — Derivative Instruments and Hedging Activity This chapter describes the company's use of derivative contracts to manage exposure to interest rate, foreign currency, and commodity price risks - The Company uses derivative contracts (interest rate swaps, foreign currency forward contracts/options, precious metal forward contracts/swaps) to hedge exposure to interest rate movements, foreign currency fluctuations, and precious metal/copper price changes[83][84][89] - All derivatives are recorded at fair value on the balance sheet; changes in fair value for effective cash flow hedges are recognized in OCI and reclassified to income when the hedged transaction affects earnings[96] Notional Amount and Fair Value of Cash Flow Hedges (Thousands) as of June 30, 2023: | Instrument | Notional Amount | Fair Value (Assets) | Fair Value (Liabilities) | | :--------------------------------- | :-------------- | :------------------ | :----------------------- | | Foreign currency forward contracts - yen | $2,369 | $148 | $1 | | Foreign currency forward contracts - euro | $29,155 | $129 | $411 | | Precious metal swaps | $7,125 | $1 | $580 | | Interest rate swap | $200,000 | $9,736 | $556 | | Total | $238,649 | $10,014 | $1,548 | - The Company expects to reclassify $4.1 million of net gains from cash flow hedges into earnings within the next 12 months[100] Note O — Contingencies This chapter provides updates on legal proceedings, including a beryllium case and a wage and hour class action lawsuit, and environmental remediation reserves - One beryllium case was outstanding as of June 30, 2023, but the Company has entered into a confidential settlement agreement, subject to court approval, which is not expected to have a material impact on financial statements[105] - A wage and hour class action lawsuit (Garett Lucyk, et al. v. Materion Brush Inc., et. al.) was settled and approved by the court on July 7, 2023, for an amount approximating the previously reserved amount[107] - Environmental remediation reserves were $4.4 million at June 30, 2023, slightly down from $4.5 million at December 31, 2022[108] Note P — Debt This chapter details the company's debt outstanding, including borrowings under credit agreements and foreign debt, and confirms compliance with debt covenants Debt Outstanding (Thousands): | Metric | June 30, 2023 | Dec. 31, 2022 | | :--------------------------------- | :------------ | :------------ | | Borrowings under Credit Agreement | $159,750 | $143,250 | | Borrowings under the Term Loan Facility | $277,500 | $285,000 | | Overdraft Sweep Facility | $495 | — | | Foreign debt | $5,774 | $7,541 | | Total debt outstanding | $443,519 | $435,791 | | Long-term debt | $412,733 | $410,876 | - Total debt outstanding increased to $443.519 million at June 30, 2023, from $435.791 million at December 31, 2022, primarily due to increased borrowings under the revolving credit facility[110] - The Company was in compliance with all debt covenants as of June 30, 2023[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Materion Corporation's financial performance and condition for the second quarter and first six months of 2023, highlighting key drivers of revenue, profitability, cash flow, and liquidity, including segment-specific results and the impact of non-GAAP measures like value-added sales Overview This chapter provides a brief overview of Materion Corporation's business as an integrated producer of high-performance advanced engineered materials for diverse end markets - Materion Corporation is an integrated producer of high-performance advanced engineered materials for diverse end markets including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data centers[112] Results of Operations This chapter analyzes the company's financial performance, including net sales, value-added sales, gross margin, operating profit, net income, and diluted EPS Key Financial Highlights (Thousands, except per share data): | Metric | Q2 2023 | Q2 2022 | % Change (QoQ) | 6 Months 2023 | 6 Months 2022 | % Change (YoY) | | :--------------------------------- | :------ | :------ | :------------- | :------------ | :------------ | :------------- | | Net sales | $398,551 | $445,295 | (10)% | $841,076 | $894,340 | (6)% | | Value-added sales | $268,261 | $268,797 | (0.2)% | $566,819 | $527,919 | 7% | | Gross margin | $89,055 | $87,427 | 2% | $180,391 | $162,718 | 11% | | Operating profit | $35,344 | $31,860 | 11% | $72,284 | $51,467 | 40% | | Net income | $24,082 | $23,255 | 4% | $49,670 | $37,274 | 33% | | Diluted EPS | $1.15 | $1.12 | 3% | $2.38 | $1.80 | 32% | - Net sales decreased by 10% in Q2 2023 and 6% for the first six months of 2023, primarily due to volume decreases in semiconductor and consumer electronics, partially offset by growth in aerospace and defense and incremental clad strip project sales[113][123] - Value-added sales remained flat in Q2 2023 but increased by 7% for the first six months of 2023, driven by aerospace and defense growth and clad strip project sales, offsetting declines in semiconductor and consumer electronics[115][125] - Operating profit increased significantly by 11% in Q2 2023 and 40% for the first six months of 2023, benefiting from higher gross margin and lower SG&A expenses[113][116][117][123][126][127] Value-Added Sales - Reconciliation of Non-GAAP Financial Measure This chapter explains the non-GAAP measure of value-added sales and provides a reconciliation to net sales by segment - Value-added sales, a non-GAAP measure, deducts pass-through precious metal market costs from net sales to provide a clearer view of core business performance, unaffected by metal price volatility or customer-supplied material[115][134][135][136] Value-Added Sales Reconciliation (Thousands): | Segment | Net Sales (6 Months 2023) | Less: Pass-through Metal Costs (6 Months 2023) | Value-added Sales (6 Months 2023) | | :------------------ | :------------------------ | :--------------------------------------------- | :-------------------------------- | | Performance Materials | $369,785 | $36,157 | $333,628 | | Electronic Materials | $419,549 | $238,056 | $181,493 | | Precision Optics | $51,742 | $44 | $51,698 | | Other | — | — | — | | Total | $841,076 | $274,257 | $566,819 | Segment Results This chapter analyzes the performance of each operating segment, including net sales, value-added sales, and EBITDA, comparing current periods to prior years Segment Performance (Q2 2023 vs Q2 2022, Thousands): | Segment | Net Sales (Q2 2023) | Net Sales (Q2 2022) | % Change | Value-added Sales (Q2 2023) | Value-added Sales (Q2 2022) | % Change | EBITDA (Q2 2023) | EBITDA (Q2 2022) | % Change | | :------------------ | :------------------ | :------------------ | :------- | :-------------------------- | :-------------------------- | :------- | :--------------- | :--------------- | :------- | | Performance Materials | $182,771 | $154,889 | 18% | $165,618 | $133,966 | 24% | $44,925 | $27,229 | 65% | | Electronic Materials | $190,730 | $260,971 | (27)% | $77,615 | $105,763 | (27)% | $13,394 | $22,337 | (40)% | | Precision Optics | $25,050 | $29,435 | (15)% | $25,028 | $29,417 | (15)% | $1,701 | $3,544 | (52)% | | Other | — | — | — | — | $(349) | (100)% | $(7,598) | $(7,191) | 6% | Segment Performance (6 Months 2023 vs 6 Months 2022, Thousands): | Segment | Net Sales (6 Months 2023) | Net Sales (6 Months 2022) | % Change | Value-added Sales (6 Months 2023) | Value-added Sales (6 Months 2022) | % Change | EBITDA (6 Months 2023) | EBITDA (6 Months 2022) | % Change | | :------------------ | :------------------------ | :------------------------ | :------- | :-------------------------------- | :-------------------------------- | :------- | :--------------------- | :--------------------- | :------- | | Performance Materials | $369,785 | $304,520 | 21% | $333,628 | $263,084 | 27% | $87,695 | $52,021 | 69% | | Electronic Materials | $419,549 | $531,807 | (21)% | $181,493 | $207,994 | (13)% | $27,349 | $34,484 | (21)% | | Precision Optics | $51,742 | $58,013 | (11)% | $51,698 | $57,946 | (11)% | $4,393 | $5,735 | (23)% | | Other | — | — | — | — | $(1,105) | (100)% | $(14,253) | $(12,366) | 15% | - Performance Materials' growth was driven by the clad strip project and aerospace and defense, while Electronic Materials and Precision Optics faced headwinds from semiconductor and consumer electronics market declines, respectively[139][142][145][148][152][155] Financial Position This chapter assesses the company's liquidity, including cash, debt, and borrowing capacity, and discusses its ability to meet future financial obligations Liquidity Key Data (Thousands): | Metric | June 30, 2023 | Dec. 31, 2022 | | :-------------------------- | :------------ | :------------ | | Cash and cash equivalents | $16,574 | $13,101 | | Total outstanding debt | $440,204 | $431,981 | | Net debt | $(423,630) | $(418,880) | | Available borrowing capacity | $168,904 | $185,294 | - Net cash provided by operating activities increased significantly to $70.5 million for the first six months of 2023, up from $21.4 million in the prior year, due to improved working capital management[162] - The Company believes its cash flow, available borrowing capacity, and current cash balance are sufficient to meet operational needs, capital expenditures, and strategic initiatives for the foreseeable future[166] - The Credit Agreement was amended in January 2023 to transition U.S. dollar borrowings from LIBOR to SOFR and increase the cap on the precious metals consignment line from $600 million to $615 million[169] Off-Balance Sheet Arrangements and Cash Obligations This chapter discusses the notional value of off-balance sheet precious metals and copper held on a consignment basis and compliance with related covenants - The notional value of off-balance sheet precious metals and copper held on a consignment basis was $321.3 million at June 30, 2023, down from $373.1 million at December 31, 2022[176] - The Company was in compliance with all covenants in its consignment agreements as of June 30, 2023[176] Critical Accounting Policies This chapter highlights that the preparation of financial statements involves significant estimates and management judgment, with further details available in the annual report - The preparation of financial statements requires significant estimates and management judgment, with further details available in the Company's 2022 Annual Report on Form 10-K[177] Forward-looking Statements This chapter advises that the report contains forward-looking statements, and actual future performance may differ due to various risk factors - The report contains forward-looking statements, and actual future performance may differ materially due to various factors including global economic conditions, market conditions, product development, raw material costs, acquisitions, strategic plans, and regulatory changes[178] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the Company's 2022 Annual Report on Form 10-K for detailed information on market risks, stating no material changes have occurred since that filing - There have been no material changes in the Company's market risks since the inclusion of the discussion in its 2022 Annual Report on Form 10-K[179] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023, and reported no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[181] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023[182] PART II - OTHER INFORMATION This section covers legal proceedings, equity sales, mine safety, other disclosures, and a comprehensive list of exhibits Item 1. Legal Proceedings This section details ongoing legal proceedings, including a beryllium case that has reached a confidential settlement and a wage and hour class action that was preliminarily approved and finalized, with no material financial impact expected - One beryllium case was outstanding as of June 30, 2023, but a confidential settlement agreement has been reached, subject to court approval, with no material financial impact expected[186] - A wage and hour class action lawsuit (Garett Lucyk, et al. v. Materion Brush Inc., et. al.) was settled for an immaterial amount, with final court approval on July 7, 2023[189] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any shares under its authorized $50.0 million common stock repurchase program during the second quarter of 2023, with $8.3 million remaining available under the program - The Company did not repurchase any shares under its $50.0 million common stock repurchase program during the second quarter or first six months of 2023[174][191] - As of June 30, 2023, $8.3 million may still be purchased under the repurchase program[191] - Shares surrendered by employees to satisfy tax withholding obligations on equity awards totaled 12,117 shares at an average price of $103.47 during the three months ended June 30, 2023[191] Item 4. Mine Safety Disclosures Information regarding mine safety violations and regulatory matters is included in Exhibit 95 of this quarterly report, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act - Mine safety disclosures are provided in Exhibit 95 of the Form 10-Q, as mandated by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act[192] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2023 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2023[194] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, mine safety disclosures, and XBRL interactive data files - Exhibits include CEO and CFO certifications (31.1, 31.2, 32), Mine Safety Disclosure (95), and various XBRL Instance and Taxonomy Extension Documents (101.INS, 101.SCH, 101.DEF, 101.CAL, 101.LAB, 101.PRE, 104)[195] SIGNATURES This section provides the official signature for the report's submission Signature The report is duly signed on behalf of Materion Corporation by Shelly M. Chadwick, Vice President, Finance and Chief Financial Officer, on August 2, 2023 - The report was signed by Shelly M. Chadwick, Vice President, Finance and Chief Financial Officer, on August 2, 2023[200]