Acquisition

12 Months Ended

Dec. 31, 2021

Acquisition

On November 1, 2021, the Company acquired the industry-leading electronic materials business of H.C. Starck Group GmbH (HCS-Electronic Materials) for a cash purchase price of approximately $395.9 million, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism. Acquisition-related transaction and integration costs totaled $11.8 million in 2021. These costs are included in selling, general, and administrative expenses in the Consolidated Statements of Income. Acquisition-related inventory step-up expense during the fourth quarter of 2021 was $5.0M and are recorded in cost of sales in the Consolidated Statements of Income. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility entered during October 2021 and $103 million of borrowings under its amended revolving credit facility, which was also extended to expire five years in October 2026. The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio. This acquired business operates within the Performance Alloys and Composites and Advanced Materials segments, and the results of operations are included as of the date of acquisition. The combination of Materion and HCS-Electronic Materials enhances the Company's position as the leading supplier to the high growth semiconductor industry.

The preliminary purchase price allocation for the acquisition is as follows:


(Thousands)	November 1, 2021
Assets:
Cash and cash equivalents	$	3,685
Accounts receivable	28,352
Inventories	70,681
Prepaid and other current assets	660
Property, plant, and equipment	44,681
Operating lease, right-of-use assets	6,120
Intangible assets	107,800
Other long-term assets	4,528
Goodwill	178,181
Total assets acquired	$	444,688

Liabilities:
Accounts payable	$	12,139
Salaries and wages	2,516
Other liabilities and accrued items	28
Income taxes	2,183
Other long-term liabilities	5,543
Operating lease liabilities	6,042
Deferred income taxes	20,300
Total liabilities assumed	$	48,751
Net assets acquired	$	395,937

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 inventories, property, plant, and equipment, and intangible assets. 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 analyses are performed. The purchase price allocation is preliminary as a result of the proximity of the acquisition date to December 31, 2021, and as a result, no elements of the purchase price allocation have been finalized. During the measurement period for each acquisition, we will adjust assets and liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. The effect of measurement period adjustments to the estimated fair values will be reflected as if the adjustments had been completed on the acquisition date.

In determining the fair value of the amounts above, inventory is fair valued based on the comparative sales method for work in process and finished goods at the selling price less cost to dispose and remaining manufacturing effort. The remaining working capital accounts' carrying values approximate fair value. For property, plant and equipment and intangible asset values, the Company utilized various forms of the income, cost and market approaches depending on the asset being valued. The Company used a relief from royalty method under the income approach to value its trade names and developed technology and the multi-period excess earnings method under the income approach to value customer relationships. The significant assumptions used to estimate the fair value of these intangible assets included the discount rate and certain assumptions that form the basis of future cash flows (including revenue growth rates, royalty rates for trade names and developed technology, and attrition rates for customer relationships). Inputs were generally determined by taking into account independent appraisals and historical data, supplemented by current and anticipated market conditions and are considered Level 3 assets as the assumptions are unobservable inputs developed by the Company.

The Company's consolidated financial statements include the results of operations of HCS-Electronic Materials from the acquisition date through December 31, 2021.

As part of the acquisition, the Company recorded approximately $178.2 million of goodwill allocated between its Advance Materials and Performance Alloys and Composites segments based on the relative fair values. 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

Useful Life

Customer relationships

50,200

13 years

Technology

35,300

13 years

Trade name

22,300

15 years

Total

107,800

The amounts of revenue and income (loss) before taxes of HCS-Electronic Materials since the acquisition date in the consolidated statements are $26.7 million and ($2.8) million, respectively and include two months of the purchase accounting inventory step-up expense. Had the HCS-Electronic Materials acquisition occurred as of the beginning of fiscal 2020, the Company's sales and income (loss) before taxes would have been as follows:


	(Unaudited)
	Year Ended December 31,
	2021		2020
Net Sales	$	1,659,620	$	1,308,300
Profit income (loss) before taxes	$	91,551	$	(17,761)

The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the acquisition occurred on January 1, 2020. These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results. The transaction accounting adjustments and other adjustments are based on available information and assumptions that the Company’s management believes are reasonable. Such adjustments are estimates and actual experience may differ from expectations. The amortization of inventory step-up from the preliminary purchase price allocation of approximately $15 million of expense is reflected in the 2020 unaudited pro forma income (loss) before taxes above. Additionally, the 2020 pro forma income (loss) before taxes includes approximately $10 million of additional interest expense related to committed financing to fund the acquisition, annual acquisition-related intangible asset amortization expense of $8.2 million, and transaction expenses of $5.5 million as if it occurred on January 1, 2020.

On July 17, 2020, the Company completed the acquisition of Optics Balzers AG (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. Based on the fair value of assets acquired and liabilities assumed, goodwill of $70.6 million and identifiable intangible assets of $49.3 million were recorded. Goodwill associated with this acquisition is not tax deductible. This acquisition is being reported in the Company's Precision Optics segment and the results of Optics Balzers are not material to the Company's Consolidated Financial Statements. No material measurement period adjustments have been recorded during 2021, and as of October 1, 2021, the purchase price allocation is complete.