What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 152 added, 140 removed, 214 unchanged (58% of the section changed)

2 unchanged sentences

Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data center.

Coronavirus (COVID-19) Second Quarter 2021 Update

On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire the industry-leading electronic materials business of H.C.

Starck (HCS) for a purchase price of approximately $380 million in cash, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism.

Acquisition-related transaction and integration costs totaled $5.3 million in the third quarter of 2021.

These costs are included in selling, general, and administrative expenses in the Consolidated Statement of Income.

On November 1, 2021, the Company completed the acquisition.

The Company financed the purchase price for the HCS 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.

Coronavirus (COVID-19) Third Quarter 2021 Update

The significant macroeconomic impact of the ongoing COVID-19 pandemic impacted several of our end markets throughout 2020 primarily in the first half of the year in the form of reduced demand, particularly in the consumer electronics, automotive, energy, aerospace and defense, and industrial end markets.

During the first six months of 2021, we continued to see improvements in demand as global government-imposed restrictions continued to be lifted and many country vaccination programs gained further momentum.

During the first nine months of 2021, we continued to see improvements in demand as global government-imposed restrictions continued to be lifted and many country vaccination programs gained further momentum.

However, the world continues to be impacted by the COVID-19 pandemic and the impact on our operations and the markets we serve is fluid and will depend largely on future developments, including the availability and effectiveness of vaccines globally, new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or mitigate its economic, public health, and other impacts.

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RESULTS OF OPERATIONS

Second Quarter

Second Quarter Ended

July 2, June 26, $ %

Third Quarter

Third Quarter Ended

October 1, September 25, $ %

(Thousands, except per share data) 2021 2020 Change Change

7 unchanged sentences

R&D expense as a % of value-added sales 3 % 3 %

Restructuring expense — 2,387 (2,387) (100) %

Restructuring expense — 2,593 (2,593) n.m.

Other—net 3,604 2,221 1,383 62 %

Operating profit 20,723 7,571 13,152 174 %

Operating profit (loss) 21,160 (616) 21,776 n.m.

Other non-operating (income)—net (1,279) (1,076) (203) 19 %

Interest expense—net 861 1,334 (473) (35) %

Income before income taxes 21,142 7,163 13,979 195 %

Income tax expense 3,274 1,360 1,914 141 %

Income (Loss) before income taxes 21,578 (874) 22,452 n.m.

Income tax expense (benefit) 3,422 (6,345) 9,767 n.m.

Net income $ 18,156 $ 5,471 $ 12,685 232 %

Diluted earnings per share $ 0.88 $ 0.27 $ 0.61 226 %

Net sales of $371.0 million in the second quarter of 2021 increased $99.5 million from $271.5 million in the second quarter of 2020.

= not meaningful

Net sales of $388.0 million in the third quarter of 2021 increased $100.9 million from $287.2 million in the third quarter of 2020.

Net sales increased in all of our segments primarily due to increased volumes, as well as due to sales attributable to our Optics Balzers acquisition, which was completed during the third quarter of 2020.

The change in precious metal and copper prices favorably impacted net sales during the second quarter of 2021 by $19.8 million.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices and changes in mix due to customer-supplied material.

Internally, we manage our business on this basis, and a reconciliation of net sales, the most directly comparable GAAP financial measure, to value-added sales is included herein.

Value-added sales of $207.9 million in the second quarter of 2021 increased $48.8 million, or 31%, compared to the second quarter of 2020.

Value-added sales of $215.8 million in the third quarter of 2021 increased $50.9 million, or 31%, compared to the third quarter of 2020.

The increase is primarily driven by increased value-added sales into the semiconductor, industrial, and automotive end markets, as well as value-added sales from our Optics Balzers acquisition.

Gross margin in the second quarter of 2021 was $69.6 million, which was up 48% compared to the second quarter of 2020.

Gross margin expressed as a percentage of value-added sales increased to 33% in the second quarter of 2021 from 30% in the second quarter of 2020.

The increase was primarily driven by increased sales volumes in the second quarter of 2021.

SG&A expense was $38.1 million in the second quarter of 2021, compared to $32.9 million in the second quarter of 2020.

The increase in SG&A expense for the second quarter of 2021 was primarily driven by increased variable compensation expense, as well as costs attributable to our Optics Balzers acquisition.

Expressed as a percentage of value-added sales, SG&A expense was 18% and 21% in the second quarter of 2021 and 2020, respectively.

Gross margin in the third quarter of 2021 was $74.3 million, which was up 64% compared to the third quarter of 2020.

Gross margin expressed as a percentage of value-added sales increased to 34% in the third quarter of 2021 from 27% in the third quarter of 2020.

The increase was primarily driven by increased sales volumes in the third quarter of 2021, as well as the absence of $7.3 million of mine development costs recorded in the third quarter of 2020.

SG&A expense was $43.2 million in the third quarter of 2021, compared to $35.7 million in the third quarter of 2020.

The increase in SG&A expense for the third quarter of 2021 was primarily driven by increased variable compensation expense, as well as costs attributable to our Optics Balzers acquisition.

Expressed as a percentage of value-added sales, SG&A expense was 20% and 22% in the third quarter of 2021 and 2020, respectively.

R&D expense consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications to deliver new high performing advanced materials to our customers.

R&D expense accounted for 3% of value-added sales in the second quarter of both 2021 and 2020.

R&D expense accounted for 3% of value-added sales in the third quarter of both 2021 and 2020.

Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure.

In the second quarter of 2020, we recorded $2.4 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities.

In the third quarter of 2020, we recorded $2.2 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities.

Refer to Note F to the Consolidated Financial Statements for additional discussion.

Other-net was $4.2 million of expense in the second quarter of 2021, or a $4.6 million increase from the second quarter of 2020, which was primarily driven by $2.5 million of decreased foreign exchange gains, primarily related to a $2.2 million foreign exchange hedge gain realized in the second quarter of 2020, and $0.9 million of increased intangible asset amortization expense, both related to the acquisition of Optics Balzers.

Other-net was $3.6 million of expense in the third quarter of 2021, or a $1.4 million increase from the third quarter of 2020, which was primarily driven by $1.4 million of decreased foreign exchange gains.

Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

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Refer to Note K to the Consolidated Financial Statements for details of the components.

Interest expense-net was $0.9 million and $1.3 million in the second quarter of 2021 and 2020, respectively.

The decrease in interest expense is primarily due to reduced borrowings under our revolving credit facility in the second quarter of 2021, compared to the second quarter of 2020.

Income tax expense for the second quarter of 2021 was $3.3 million, compared to $1.4 million in the second quarter of 2020.

The effective tax rate for the second quarter of 2021 and 2020 was 15.5% and 19.0%, respectively.

The effective tax rate for the second quarter of both 2021 and 2020 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction.

Interest expense-net was $0.9 million and $1.3 million in the third quarter of 2021 and 2020, respectively.

The decrease in interest expense is primarily due to reduced borrowings under our revolving credit facility in the third quarter of 2021, compared to the third quarter of 2020.

Income tax expense (benefit) for the third quarter of 2021 was $3.4 million, compared to a $6.3 million benefit in the third quarter of 2020.

The effective tax rate for the third quarter of 2021 and 2020 was 15.9% and 726.0%, respectively.

The effective tax rate for the third quarter of 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction.

The effective tax rate for the third quarter of 2020 was higher than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on a loss for the period.

See Note G to the Consolidated Financial Statements for additional discussion.

Six Months Ended

July 2, June 26, $ %

Nine Months Ended

October 1, September 25, $ %

(Thousands, except per share data) 2021 2020 Change Change

8 unchanged sentences

Impairment charges — 10,766 (10,766) (100) %

Restructuring (income) expense (378) 4,551 (4,929) (108) %

Restructuring (income) expense (378) 7,144 (7,522) n.m.

Other—net 12,272 4,143 8,129 196 %

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Income before income taxes 62,953 1,419 61,534 4,336 %

Income tax expense 6,740 368 6,372 1,732 %

Income tax expense (benefit) 10,162 (5,977) 16,139 n.m.

Net income $ 52,791 $ 7,396 $ 45,395 614 %

Diluted earnings per share $ 2.56 $ 0.36 $ 2.20 611 %

Net sales of $725.4 million in the first six months of 2021 increased $176.0 million from $549.4 million in the first six months of 2020.

= not meaningful

Net sales of $1.1 billion in the first nine months of 2021 increased $276.8 million from $836.6 million in the first nine months of 2020.

The change in precious metal and copper prices favorably impacted net sales during the first six months of 2021 by $37.6 million.

Value-added sales of $406.5 million in the first six months of 2021 increased $93.0 million, or 30%, compared to the first six months of 2020.

The increase is primarily driven by increased value-added sales into the semiconductor, automotive, aerospace and defense, and industrial end markets, as well as value-added sales from our Optics Balzers acquisition.

Gross margin in the first half of 2021 was $136.4 million, which was up 49% compared to the first half of 2020.

Gross margin expressed as a percentage of value-added sales increased to 34% in the first six months of 2021 from 29% in the first six months of 2020.

The increase was primarily driven by increased sales volumes in the first half of 2021.

SG&A expense was $74.8 million in the first six months of 2021, compared to $63.6 million in the first six months of 2020.

The increase in SG&A expense for the first half of 2021 was primarily driven by increased variable compensation expense, as well as costs attributable to our Optics Balzers acquisition.

Expressed as a percentage of value-added sales, SG&A expense was 18% and 20% in the first half of 2021 and 2020, respectively.

The change in precious metal and copper prices favorably impacted net sales during the first nine months of 2021 by $42.2 million.

Value-added sales of $622.3 million in the first nine months of 2021 increased $144.4 million, or 30%, compared to the first nine months of 2020.

The increase is primarily driven by increased value-added sales into the semiconductor, automotive, industrial, and aerospace and defense end markets, as well as value-added sales from our Optics Balzers acquisition.

Gross margin in the first nine months of 2021 was $210.7 million, which was up 54% compared to the first nine months of 2020.

Gross margin expressed as a percentage of value-added sales increased to 34% in the first nine months of 2021 from 29% in the first nine months of 2020.

The increase was primarily driven by increased sales volumes in the first nine months of 2021, as well as the absence in 2021 of $7.3 million of mine development costs and a $1.3 million charge to reserve for slow moving and excess inventory related to the collapse in demand in the oil and gas industry, both recorded in the first nine months of 2020.

SG&A expense was $118.0 million in the first nine months of 2021, compared to $99.3 million in the first nine months of 2020.

The increase in SG&A expense for the first nine months of 2021 was primarily driven by increased variable compensation expense, as well as costs attributable to our Optics Balzers acquisition.

Expressed as a percentage of value-added sales, SG&A expense was 19% and 21% in the first nine months of 2021 and 2020, respectively.

R&D expense accounted for 3% of value-added sales in the first half of both 2021 and 2020.

Impairment charges include non-recurring charges relating to goodwill and other assets recorded in the first six months of 2020 in our Precision Optics segment.

R&D expense accounted for 3% of value-added sales in the first nine months of both 2021 and 2020.

Impairment charges include non-recurring charges relating to goodwill and other assets recorded in the first nine months of 2020 in our Precision Optics segment.

Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure.

During the first quarter of 2021, we substantially completed the closure of our LAC business.

In the first half of 2020, we recorded $4.6 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities.

In the first nine months of 2020, we recorded $6.8 million of restructuring charges in our Performance Alloys and Composites segment related to the closure of our Warren, Michigan and Fremont, California facilities.

Refer to Note F to the Consolidated Financial Statements for additional discussion.

Other-net was $8.7 million of expense in the first six months of 2021, or a $6.7 million increase from the first six months of 2020, which was primarily driven by $2.5 million of foreign exchange gains realized during the first six months of 2020 compared to $1.2 million of foreign exchange losses realized in the first six months of 2021, as well as $1.9 million of increased intangible asset amortization expense, both of which were primarily related to the acquisition of Optics Balzers in third quarter of 2020.

Other-net was $12.3 million of expense in the first nine months of 2021, or a $8.1 million increase from the first nine months of 2020, which was primarily driven by $3.6 million of foreign exchange gains realized during the first nine months of 2020 compared to $1.6 million of foreign exchange losses realized in the first nine months of 2021, as well as $2.3 million of increased intangible asset amortization expense, both of which were primarily related to the acquisition of Optics Balzers in third quarter of 2020.

Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.

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Refer to Note K to the Consolidated Financial Statements for details of the components.

Interest expense-net was $1.6 million and $1.5 million in the first six months of 2021 and 2020, respectively.

Income tax expense for the first half of 2021 was $6.7 million, compared to $0.4 million in the first half of 2020.

The effective tax rate for the first half of 2021 and 2020 was 16.3% and 16.0%, respectively.

The effective tax rate for the first six months of both 2021 and 2020 was lower than the statutory tax rate primarily due to the impact of percentage depletion and research and development credits.

The effective tax rate for the first six months of 2021 included a net discrete income tax benefit of $0.5 million, primarily related to excess tax benefits from stock-based compensation awards.

The effective tax rate for the first six months of 2020 included a net discrete income tax expense of $0.8 million, primarily related to an impairment of goodwill.

Interest expense-net was $2.5 million and $2.8 million in the first nine months of 2021 and 2020, respectively.

Income tax expense (benefit) for the first nine months of 2021 was $10.2 million of expense, compared to a benefit of $6.0 million in the first nine months of 2020.

The effective tax rate for the first nine months of 2021 and 2020 was 16.1% and (421.2)%, respectively.

The effective tax rate for the first nine months of 2021 was lower than the statutory tax rate primarily due to the impact of percentage depletion, research and development credits, and the foreign derived intangible income deduction.

The effective tax rate for the first nine months of 2020 was lower than the statutory tax rate primarily due to the release of a significant valuation allowance, which generated a tax benefit on income for the period.

The effective tax rate for the first nine months of 2021 included a net discrete income tax benefit of $0.9 million, primarily related to excess tax benefits from stock-based compensation awards and return to provision adjustments recorded.

The effective tax rate for the first nine months of 2020 included a net discrete income tax benefit of $3.8 million, primarily related to the release of a valuation allowance.

See Note G to the Consolidated Financial Statements for additional discussion.

Value-Added Sales - Reconciliation of Non-GAAP Financial Measure

A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the second quarter and first six months of 2021 and 2020 is as follows:

Second Quarter Ended Six Months Ended

July 2, June 26, July 2, June 26,

A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the third quarter and first nine months of 2021 and 2020 is as follows:

Third Quarter Ended Nine Months Ended

October 1, September 25, October 1, September 25,

(Thousands) 2021 2020 2021 2020

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In either case, we generally earn our margin based upon our fabrication efforts.

The relationship of this margin to net sales can change depending upon whether or not the

product was made from our metal or the customer’s metal.

The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal.

The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal.

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Performance Alloys and Composites

Second Quarter

Second Quarter Ended

July 2, June 26, $ %

Third Quarter

Third Quarter Ended

October 1, September 25, $ %

(Thousands) 2021 2020 Change Change

1 unchanged sentence

Value-added sales 115,167 81,882 33,285 41 %

Operating profit 17,314 6,824 10,490 154 %

Net sales from the Performance Alloys and Composites segment of $125.3 million in the second quarter of 2021 increased 23% compared to net sales of $101.6 million in the second quarter of 2020.

The increase was due to sales related to our new precision clad engineered strip project, as well as increased sales into the automotive and industrial end markets.

Value-added sales of $108.6 million in the second quarter of 2021 were 21% higher than value-added sales of $89.8 million in the second quarter of 2020.

Performance Alloys and Composites generated operating profit of $17.3 million in the second quarter of 2021 compared to $6.8 million in the second quarter of 2020.

Operating profit (loss) 20,928 (437) 21,365 4,889 %

Net sales from the Performance Alloys and Composites segment of $136.1 million in the third quarter of 2021 increased 49% compared to net sales of $91.2 million in the third quarter of 2020.

The increase was due to sales related to our new precision clad engineered strip project and the timing of beryllium hydroxide sales, as well as increased sales into the automotive, industrial, and aerospace and defense end markets.

Value-added sales of $115.2 million in the third quarter of 2021 were 41% higher than value-added sales of $81.9 million in the third quarter of 2020.

Performance Alloys and Composites generated operating profit of $20.9 million in the third quarter of 2021 compared to an operating loss of $0.4 million in the third quarter of 2020.

The increase in operating profit was primarily due to increased sales volumes and improved operating performance.

Operating profit for the second quarter of 2020 included restructuring charges of $2.4 million related to the closure of our Warren, Michigan and Fremont, California facilities.

Six Months Ended

July 2, June 26, $ %

The operating loss for the third quarter of 2020 included $7.3 million of mine development costs, as well as restructuring charges of $2.2 million related to the closure of our Warren, Michigan and Fremont, California facilities.

Nine Months Ended

October 1, September 25, $ %

(Thousands) 2021 2020 Change Change

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Operating profit 51,733 9,910 41,823 422 %

Net sales from the Performance Alloys and Composites segment of $239.4 million in the first six months of 2021 increased 19% compared to net sales of $200.7 million in the first six months of 2020.

The increase was due to sales related to our new precision clad engineered strip project, as well as increased sales into the automotive and aerospace and defense end markets.

Value-added sales of $209.4 million in the first six months of 2021 were 21% higher than value-added sales of $173.5 million in the first six months of 2020.

Performance Alloys and Composites generated operating profit of $30.8 million in the first six months of 2021 compared to $10.3 million in the first six months of 2020.

Net sales from the Performance Alloys and Composites segment of $375.5 million in the first nine months of 2021 increased 29% compared to net sales of $291.9 million in the first nine months of 2020.

The increase was due to sales related to our new precision clad engineered strip project, as well as increased sales into the automotive and industrial end markets.

Value-added sales of $324.6 million in the first nine months of 2021 were 27% higher than value-added sales of $255.4 million in the first nine months of 2020.

Performance Alloys and Composites generated operating profit of $51.7 million in the first nine months of 2021 compared to $9.9 million in the first nine months of 2020.

The increase in operating profit was primarily due to increased sales volumes.

Operating profit for the first half of 2020 included restructuring charges of $4.6 million related to the closure of our Warren, Michigan and Fremont, California facilities.

Operating profit for the first nine months of 2020 included $7.3 million of mine development costs, as well as restructuring charges of $6.8 million related to the closure of our Warren, Michigan and Fremont, California facilities.

Advanced Materials

Second Quarter

Second Quarter Ended

July 2, June 26, $ %

Third Quarter

Third Quarter Ended

October 1, September 25, $ %

(Thousands) 2021 2020 Change Change

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Operating profit 9,281 5,749 3,532 61 %

Net sales from the Advanced Materials segment of $213.1 million in the second quarter of 2021 were 42% higher than net sales of $150.1 million in the second quarter of 2020.

The increase in net sales was primarily due to increased sales volumes, as well as the impact of higher pass-through metal prices of $20.8 million.

Value-added sales of $66.9 million in the second quarter of 2021 increased 28% compared to value-added sales of $52.2 million in the second quarter of 2020.

Net sales from the Advanced Materials segment of $220.7 million in the third quarter of 2021 were 33% higher than net sales of $165.6 million in the third quarter of 2020.

The increase in net sales was primarily due to increased sales volumes in the semiconductor end market, partially offset by the impact of pass-through metal prices of $5.3 million.

Value-added sales of $69.7 million in the third quarter of 2021 increased 27% compared to value-added sales of $55.0 million in the third quarter of 2020.

The increase was primarily driven by increased value-added sales into the semiconductor end market.

The Advanced Materials segment generated operating profit of $8.3 million in the second quarter of 2021 compared to $4.7 million in the second quarter of 2020.

The Advanced Materials segment generated operating profit of $9.3 million in the third quarter of 2021 compared to $5.7 million in the third quarter of 2020.

The increase in operating profit is due to increased sales volumes, as well as improved operating performance.

Six Months Ended

July 2, June 26, $ %

Nine Months Ended

October 1, September 25, $ %

(Thousands) 2021 2020 Change Change

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Operating profit 26,547 15,452 11,095 72 %

Net sales from the Advanced Materials segment of $417.8 million in the first six months of 2021 were 35% higher than net sales of $310.3 million in the first six months of 2020.

Net sales from the Advanced Materials segment of $638.5 million in the first nine months of 2021 were 34% higher than net sales of $475.9 million in the first nine months of 2020.

The increase in net sales was primarily due to increased sales volumes, as well as the impact of higher pass-through metal prices of $34.6 million.

Value-added sales of $129.8 million in the first half of 2021 increased 22% compared to value-added sales of $106.7 million in the first half of 2020.

Value-added sales of $199.6 million in the first nine months of 2021 increased 23% compared to value-added sales of $161.7 million in the first nine months of 2020.

The increase was primarily driven by increased value-added sales into the semiconductor end market.

The Advanced Materials segment generated operating profit of $17.3 million in the first half of 2021 compared to $9.7 million in the first half of 2020.

The Advanced Materials segment generated operating profit of $26.5 million in the first nine months of 2021 compared to $15.5 million in the first nine months of 2020.

The increase in operating profit is due to increased sales volumes, as well as improved operating performance.

Precision Optics

Second Quarter

(Thousands) Second Quarter Ended

July 2, June 26, $ %

Third Quarter

(Thousands) Third Quarter Ended

October 1, September 25, $ %

2021 2020 Change Change

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Operating profit 3,329 1,421 1,908 134 %

Net sales from the Precision Optics segment of $32.6 million in the second quarter of 2021 increased 65% compared to net sales of $19.7 million in the second quarter of 2020.

The increase was primarily due to sales attributable to our Optics Balzers acquisition, partially offset by no sales related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021.

In addition the base business increased slightly compared to the same period last year.

Value-added sales of $32.6 million in the second quarter of 2021 increased 83% compared to value-added sales of $17.8 million in the second quarter of 2020.

Net sales from the Precision Optics segment of $31.2 million in the third quarter of 2021 increased 3% compared to net sales of $30.4 million in the third quarter of 2020.

The increase was primarily due to to a full quarter of sales attributable to our Optics Balzers acquisition compared to only two months in the prior-year same period, partially offset by no sales related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021.

Value-added sales of $31.2 million in the third quarter of 2021 increased 10% compared to value-added sales of $28.3 million in the third quarter of 2020.

The increase in value-added sales was due to the same factors driving the increase in net sales.

The Precision Optics segment generated an operating profit of $2.6 million in the second quarter of 2021, compared to an operating profit of $2.1 million in the second quarter of 2020.

The Precision Optics segment generated an operating profit of $3.3 million in the third quarter of 2021, compared to an operating profit of $1.4 million in the third quarter of 2020.

The increase was driven by our Optics Balzers acquisition.

(Thousands) Six Months Ended

July 2, June 26, $ %

(Thousands) Nine Months Ended

October 1, September 25, $ %

2021 2020 Change Change

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NM = Not Meaningful

Net sales from the Precision Optics segment of $68.2 million in the first half of 2021 increased 77% compared to net sales of $38.5 million in the first half of 2020.

Net sales from the Precision Optics segment of $99.4 million in the first nine months of 2021 increased 44% compared to net sales of $68.8 million in the first nine months of 2020.

The increase was primarily due to sales attributable to our Optics Balzers acquisition, partially offset by lower sales related to our LAC reporting unit, whose closure was finalized in the first quarter of 2021.

Value-added sales of $68.1 million in the first half of 2021 increased 96% compared to value-added sales of $34.8 million in the first half of 2020.

In addition, sales from our base Precision Optics business increased, compared to the first nine months of 2020.

Value-added sales of $99.4 million in the first nine months of 2021 increased 58% compared to value-added sales of $63.1 million in the first nine months of 2020.

The increase in value-added sales was due to the same factors driving the increase in net sales.

The Precision Optics segment generated an operating profit of $7.2 million in the first six months of 2021, compared to an operating loss of $7.5 million in the first six months of 2020.

The operating profit in the first six months of 2021 was driven by our Optics Balzers acquisition.

The operating loss in the first six months of 2020 included impairment charges of $10.8 million related to our LAC reporting unit.

Second Quarter

(Thousands) Second Quarter Ended

July 2, June 26, $ %

The Precision Optics segment generated an operating profit of $10.5 million in the first nine months of 2021, compared to an operating loss of $6.1 million in the first nine months of 2020.

The increased operating profit in the first nine months of 2021 was driven by our Optics Balzers acquisition.

The operating loss in the first nine months of 2020 included impairment charges of $10.8 million related to our LAC reporting unit.

Third Quarter

(Thousands) Third Quarter Ended

October 1, September 25, $ %

2021 2020 Change Change

3 unchanged sentences

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs were $7.6 million in the second quarter of 2021 compared to $6.0 million in the second quarter of 2020.

Corporate costs accounted for 4% of Company-wide value-added sales in the second quarter of both 2021 and 2020.

increase in corporate costs in the second quarter of 2021 compared to the second quarter of 2020 is primarily related to increased variable compensation expenses.

(Thousands) Six Months Ended

July 2, June 26, $ %

Corporate costs were $12.4 million in the third quarter of 2021 compared to $7.3 million in the third quarter of 2020.

Corporate costs accounted for 6% and 4% of Company-wide value-added sales in the third quarter of 2021 and 2020,

respectively.

The increase in corporate costs in the third quarter of 2021 compared to the third quarter of 2020 is primarily related to increased variable compensation expenses, foreign exchange losses in the third quarter of 2021 compared to foreign exchange gains in the third quarter of 2020, as well as increased acquisition costs.

(Thousands) Nine Months Ended

October 1, September 25, $ %

2021 2020 Change Change

2 unchanged sentences

Operating loss (27,192) (17,895) (9,297) 52 %

Corporate costs were $14.8 million in the first half of 2021 compared to $10.5 million in the first half of 2020.

Corporate costs accounted for 4% and 3% of Company-wide value-added sales in the first half of 2021 and 2020, respectively.

The increase in corporate costs in the first half of 2021 compared to the first half of 2020 is primarily related to increased variable compensation expenses.

Corporate costs were $27.2 million in the first nine months of 2021 compared to $17.9 million in the first nine months of 2020.

Corporate costs accounted for 4% of Company-wide value-added sales in the first nine months of both 2021 and 2020.

The increase in corporate costs in the first nine months of 2021 compared to the first nine months of 2020 is primarily related to foreign exchange losses in the first nine months of 2021 compared to foreign exchange gains in the first nine months of 2020, as well as increased variable compensation expenses.

FINANCIAL POSITION

A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:

Six Months Ended

July 2, June 26, $

Nine Months Ended

October 1, September 25, $

(Thousands) 2021 2020 Change

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Net change in cash and cash equivalents $ (7,869) $ (7,253) $ (616)

Net cash provided by operating activities totaled $44.1 million in the first six months of 2021 versus $36.4 million in the prior-year period.

The increase in operating cash flow was primarily due to increased net income of $32.7 million, partially offset by a usage in working capital change of $5.4 million discussed below and less unearned income due to customer prepayments of $18.7 million.

The following table displays the impact of working capital items on cash during the first six months of 2021 and 2020, respectively:

Six Months Ended

July 2, June 26, $

Net cash provided by operating activities totaled $40.5 million in the first nine months of 2021 versus $79.4 million in the prior-year period.

The decrease in operating cash flow was primarily due the usage in working capital change of $87.3 million (displayed below) and less unearned income due to customer prepayments of $31.4 million, partially offset by increased net income of $45.4 million.

The following table displays the impact of working capital items on cash during the first nine months of 2021 and 2020, respectively:

Nine Months Ended

October 1, September 25, $

(Thousands) 2021 2020 Change

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Inventory (62,353) (6,414) (55,939)

Accounts payable and accrued expenses 28,403 (7,634) 36,037

Cash used in working capital items $ (26,189) $ (20,749) $ (5,440)

Three-month trailing days sales outstanding was approximately 42 days at July 2, 2021 and 41 days at December 31, 2020.

Net cash used in investing activities was $57.1 million in the first six months of 2021 compared to $32.0 million in the prior-year period due to increased capital expenditures, primarily related to investments in new equipment funded by customer prepayments.

Accounts payable 14,863 6,281 8,582

Cash (used in) provided by working capital items $ (73,531) $ 13,766 $ (87,297)

Three-month trailing days sales outstanding was approximately 42 days at October 1, 2021 and 41 days at December 31, 2020.

Net cash used in investing activities was $77.0 million in the first nine months of 2021 compared to $173.7 million in the prior-year period.

The decrease is primarily due to $130.7 million paid in the first nine months of 2020 for the acquisition of Optics Balzers, partially offset by increased capital expenditures, primarily related to investments in new equipment funded by customer prepayments.

See Note J to the Consolidated Financial Statements for additional discussion.

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For the full year 2021, the Company expects payments for property, plant, and equipment to be approximately $100.0 million.

Net cash provided by financing activities totaled $11.5 million in the first six months of 2021 and $135.6 million in the comparable prior-year period.

The decrease is primarily due to decreased net borrowings of $127.5 million under our revolving credit facility in the first six months of 2021, partially offset by no repurchases of common stock in the first six months of 2021 compared to $6.8 million in the first six months of 2020.

Net cash provided by financing activities totaled $28.8 million in the first nine months of 2021 and $86.3 million in the comparable prior-year period.

The decrease is primarily due to decreased net borrowings of $77.0 million under our revolving credit facility in the first nine months of 2021, partially offset by no repurchases of common stock in the first nine months of 2021 compared to $6.8 million in the first nine months of 2020.

We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend program, environmental remediation projects, and strategic acquisitions.

At July 2, 2021, cash and cash equivalents held by our foreign operations totaled $22.5 million.

At October 1, 2021, cash and cash equivalents held by our foreign operations totaled $16.6 million.

We do not expect restrictions on repatriation of cash held outside of the United States to have a material effect on our overall liquidity, financial condition, or results of operations for the foreseeable future.

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of July 2, 2021 and December 31, 2020 is as follows:

July 2, December 31,

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of October 1, 2021 and December 31, 2020 is as follows:

October 1, December 31,

(Thousands) 2021 2020

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The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.

In 2019, we amended and restated the agreement governing our $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.

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.

In September and October 2021, we amended and then amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement) to, among other things, (i) include an increase in the maximum leverage ratio covenant on a temporary basis in connection with the HCS acquisition and permit the incurrence of certain debt in connection with the HCS acquisition, (ii) provide for a $300 million delayed draw term loan facility and (iii) extend the maturity of revolving credit facility to October 2026.

We financed the purchase price for the HCS acquisition with the new $300 million term loan and $103 million of borrowings under the amended revolving credit facility.

The Credit Agreement provides more favorable interest rates under certain circumstances.

In addition, the Credit Agreement provides enhanced flexibility to finance acquisitions and other strategic initiatives.

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, certain precious metals and certain other assets.

The Credit Agreement allows the Company to borrow money at a premium over LIBOR or a prime rate and at varying maturities.

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The Credit Agreement includes restrictive covenants relating to restrictions on additional indebtedness, acquisitions, dividends, and stock repurchases.

In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and a minimum fixed charge coverage ratio.

We were in compliance with all of our debt covenants as of July 2, 2021.

Cash on hand does not affect the covenants or the borrowing capacity under our debt agreements.

In addition, the Credit Agreement includes covenants subject to a maximum leverage ratio and an interest coverage ratio.

We were in compliance with all of our debt covenants as of October 1, 2021.

Portions of our business utilize off-balance sheet consignment arrangements to finance metal requirements.

Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time.

In 2019, we entered into a precious metals consignment agreement, maturing on August 27, 2022, which replaced the consignment agreement that would have matured on September 30, 2019.

The available and unused capacity under the metal financing lines expiring in August 2022 totaled approximately $93.7 million as of July 2, 2021, compared to $50.0 million as of December 31, 2020.

In 2019, we entered into a precious metals consignment agreement, maturing on August 27, 2022.

The available and unused capacity under the metal financing lines expiring in August 2022 totaled approximately $97.1 million as of October 1, 2021, compared to $50.0 million as of December 31, 2020.

The availability is determined by Board approved levels and actual line capacity.

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There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time.

We did not repurchase any shares under this program in the second quarter or first six months of 2021.

We did not repurchase any shares under this program in the third quarter or first nine months of 2021.

Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million.

We paid cash dividends of $2.5 million and $4.8 million on our common stock in the second quarter and first six months of 2021, respectively.

We paid cash dividends of $2.4 million and $7.2 million on our common stock in the third quarter and first nine months of 2021, respectively.

We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.

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We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment.

The notional value of off-balance sheet precious metals and copper was $456.3 million and $400.0 million as of July 2, 2021 and December 31, 2020, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of July 2, 2021.

The notional value of off-balance sheet precious metals and copper was $452.9 million and $400.0 million as of October 1, 2021 and December 31, 2020, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of October 1, 2021.

For additional information on our contractual obligations, refer to our 2020 Annual Report on Form 10-K.

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the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition, and liquidity;

our ability to achieve the strategic and other objectives related to the HCS acquisition, included any expected synergies;

the global economy, including the impact of tariffs and trade agreements;

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our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values;

our success in identifying acquisition candidates and in acquiring and integrating such businesses, including the integration of Optics Balzers;

the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions, including, without limitation, the acquisition of Optics Balzers being accretive in the expected timeframe or at all;

our success in identifying acquisition candidates and in acquiring and integrating such businesses, including the integration of the HCS business;

the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions, including, without limitation, the HCS acquisition being accretive in the expected timeframe or at all;

our success in implementing our strategic plans and the timely and successful completion and start-up of any capital projects;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis