Presuming that the cost of materials was deducted in 2005 then the return of those costs does have to be counted as a reduction of material costs in 2011 for the company.
Technically it is not income but is a contra-expense. That is, it is a refund of expenses that were deducted. The result is the same whether it is listed as income or as a contra-expense since the income for the year will increase.
If for some reason these costs were not deducted in the past, they would not be included as a reduction of expenses when you got the check.
"Recovery of amount deducted (tax benefit rule).
If you recover part of an expense in the same tax year in which you would have claimed a deduction
, reduce your current year expense by the amount of the recovery. If you have a recovery in a later year, include the recovered amount in income in that year. However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. "
To the extent that the amount was deducted previously to reduce income it will have to be included when recovered to increase income. Otherwise, you would get the benefit of deducting an amount that you eventually had been reimbursed and was not out of pocket.
Whether you used the reimbursement or not does not change that the company will include it to the extent it was deducted. Taking the money from the S corporation will mean that it will be shown as a distribution from the company to the shareholder; but that does not change having it increase the company income and the profit that will be passed to shareholders via the K-1 for 2011.
Please ask if you need clarification or have any further question.