What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-11-02 · 154 added, 254 removed, 112 unchanged (78% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are an integrated producer of high-performance advanced engineered materials used in a variety of electronic, thermal, and structural applications.

We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications.

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

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 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.

These developments are constantly evolving and cannot be accurately predicted.

We continue to invest in the business, people, and strategies necessary to achieve our long-term priorities as we focus on driving profitable growth.

We have continued to operate during the course of the COVID-19 pandemic in all our production facilities, having taken the recommended public health measures to ensure worker and workplace safety.

Coronavirus (COVID-19) First Quarter 2022 Update

In March 2020, the World Health Organization characterized a novel strain of the coronavirus, known as COVID-19, as a pandemic.

The duration of the COVID-19 pandemic and the long-term impacts on the economy are uncertain and could impact the Company’s estimates.

Management continues to manage global macroeconomic impacts on supply chains, inflationary costs, and temporary plant shutdowns, labor availability and costs, all of which impacted the Company during the first quarter of 2022.

RESULTS OF OPERATIONS

Third Quarter

Third Quarter Ended

October 1, September 25, $ %

First Quarter

First Quarter Ended

April 1, April 2, $ %

(Thousands, except per share data) 2022 2021 Change Change

7 unchanged sentences

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

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

Other—net 3,604 2,221 1,383 62 %

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 (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 %

= 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.

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 $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 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 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 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 $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.

Other non-operating (income)-net includes components of pension and post-retirement expense other than service costs.

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 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.

Nine Months Ended

October 1, September 25, $ %

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

Net sales $ 1,113,413 $ 836,585 $ 276,828 33 %

Value-added sales 622,295 477,944 144,351 30 %

Gross margin 210,690 136,836 73,854 54 %

Gross margin as a % of value-added sales 34 % 29 %

SG&A expense 118,031 99,292 18,739 19 %

SG&A expense as a % of value-added sales 19 % 21 %

R&D expense 19,164 14,104 5,060 36 %

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

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

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

Restructuring (income) expense 1,076 (378) 1,454 NM

Other—net 5,873 4,474 1,399 31 %

3 unchanged sentences

Income before income taxes 17,040 20,233 (3,193) (16) %

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

Income tax expense (benefit) 3,021 3,466 (445) (13) %

Net income $ 14,019 $ 16,767 $ (2,748) (16) %

Diluted earnings per share $ 0.68 $ 0.81 $ (0.13) (16) %

= 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 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 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.

NM = Not Meaningful

Net sales of $449.0 million in the first quarter of 2022 increased $94.7 million from $354.4 million in the first quarter of 2021.

Increased net sales in the Performance Materials and Electronic Materials segments was partially offset by net sales decrease in the Precision Optics segment.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021 accounted for $43.1 million of the net sales increase.

Additionally, volume and price increases drove double digit growth in our semiconductor (16% excluding HCS-Electronic Materials), energy (25%), industrial (48%) and telecom (41%) end markets when compared to the same period last year.

See Note C - Segment Reporting for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper prices favorably impacted net sales during the first quarter of 2022 by $5.2 million .

In addition, there was an increase in the volume of raw material beryllium hydroxide sales in the first quarter of 2022 of $4.1 million.

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 $266.8 million in the first quarter of 2022 increased $68.2 million, or 34%, compared to the first quarter of 2021.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $43.1 million of the increase.

The remaining value-added sales increase was driven by increased value-added sales into the industrial (36%) and semiconductor (20%) end markets as well as the increase in the volume of raw material beryllium hydroxide sales in the first quarter of 2022 of $4.1 million.

Gross margin in the first quarter of 2022 was $75.3 million, which was up 13% compared to the first quarter of 2021.

Gross margin expressed as a percentage of value-added sales decreased to 28% in the first quarter of 2022 from 34% in the first quarter of 2021.

The decrease was primarily driven by $7.5 million of amortization of the inventory step up from the HCS-Electronic Material acquisition made in the fourth quarter of 2021, and preproduction costs associated with the set-up of the new wide area clad facility.

SG&A expense was $41.7 million in the first quarter of 2022, compared to $36.8 million in the first quarter of 2021.

The increase in SG&A expense for the first quarter of 2021 was primarily driven by $2.1 million of merger and acquisition costs

related to the acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021.

Expressed as a percentage of value-added sales, SG&A expense was 16% and 19% in the first quarter of 2022 and 2021, respectively.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications.

R&D spend was 3% of value-added sales in both the first quarter of 2022 and 2021.

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 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 $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.

In the first quarter of 2022, we recorded a combined total of $1.1 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments.

During the first quarter of 2021, we substantially completed the closure of our Large Area Coatings business and recorded $0.4 million of income related to lower than expected facility closure costs that were recorded in 2020.

Other-net was $5.9 million of expense in the first quarter of 2022, or a $1.4 million increase from the first quarter of 2021, primarily driven $2.0 million of increased intangible asset amortization expense, related to the acquisition of HCS-Electronic Materials, and a $0.9 million increase in metal consignment fees.

These increases were partially offset by a favorable variance of $1.6 million due to foreign exchange gains in 2022 compared to losses in 2021.

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

Other non-operating (income)-net includes components of pension and post-retirement expense other than service costs.

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

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.

Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs.

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

Interest expense-net was $3.7 million and $0.8 million in the first quarter of 2022 and 2021, respectively.

The increase in interest expense is primarily due to increased borrowings under our revolving credit facility and interest owed on our new term loan, the proceeds of which were used to fund the purchase price for the acquisition of HCS-Electronic Materials.

Income tax expense for the first quarter of 2022 was expense of $3.0 million, compared to $3.5 million in the first quarter of 2021.

The effective tax rate for the first quarter of 2022 and 2021 was 17.7% and 17.1%, respectively.

The effective tax rate for the first quarter of 2022 was lower than the statutory tax rate primarily due to the impact of percentage depletion and research and development credits.

See Note F 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 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,

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 first quarter of 2022 and 2021 is as follows:

First Quarter Ended

April 1, April 2,

(Thousands) 2022 2021

Performance Alloys and Composites $ 136,096 $ 91,203 $ 375,533 $ 291,884

Advanced Materials 220,723 165,582 638,481 475,855

Performance Materials 149,630 114,143

Electronic Materials 270,836 204,644

Precision Optics 28,579 35,599

Other — — — —

Total $ 449,045 $ 354,386

pass-through metal costs

Performance Alloys and Composites $ 20,929 $ 9,321 $ 50,936 $ 36,531

Advanced Materials 151,019 110,556 438,928 314,172

Performance Materials $ 20,512 $ 13,311

Electronic Materials 160,960 141,695

Precision Optics 49 34

2 unchanged sentences

Value-added sales

Performance Alloys and Composites $ 115,167 $ 81,882 $ 324,597 $ 255,353

Advanced Materials 69,704 55,026 199,553 161,683

Performance Materials $ 129,118 $ 100,832

Electronic Materials 109,876 62,949

Precision Optics 28,530 35,565

10 unchanged sentences

Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.

During the first quarter of 2021, we added ruthenium, iridium, rhodium, rhenium, and osmium to our definition of value-added sales as the costs of these materials are treated as pass-through and the business use and price volatility of these materials has increased in recent periods.

Prior period value-added sales amounts have been recast to reflect this change.

Our net sales are also affected by changes in the use of customer-supplied metal.

6 unchanged sentences

The Company consists of four reportable segments:

Performance Alloys and Composites, Advanced Materials, Precision Optics, and Other.

Performance Materials (previously Performance Alloys and Composites), Electronic Materials (previously Advanced Materials), Precision Optics, and Other.

The Other reportable segment includes unallocated corporate costs.

Performance Alloys and Composites

Third Quarter

Third Quarter Ended

October 1, September 25, $ %

(Thousands) 2021 2020 Change Change

Net sales $ 136,096 $ 91,203 $ 44,893 49 %

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

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.

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

Net sales $ 375,533 $ 291,884 $ 83,649 29 %

Value-added sales 324,597 255,353 69,244 27 %

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

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 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

Third Quarter

Third Quarter Ended

October 1, September 25, $ %

The Company changed two segment names during the first quarter of 2022.

The Company believes these names better represent the markets served and the advanced, next generation product solutions provided to our customers.

Beginning in the first quarter of 2022, the main operating income metric used by management to measure the financial performance of each segment was earnings before interest, taxes, depreciation, depletion and amortization (EBITDA).

Although EBITDA is a non-GAAP measure, it allows for better comparability of results across periods in comparison to other companies as recent acquisitions have resulted in an increased amount of purchase accounting amortization expense.

The primary measurement used by management to measure the financial performance of each segment prior to the first quarter of 2022 was Operating Profit.

Segment results have been revised for all periods presented to be consistent with new measure of segment performance.

Refer to Note C - Segment Reporting in the Notes to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated net income.

Performance Materials

First Quarter

First Quarter Ended

April 1, April 2, $ %

(Thousands) 2022 2021 Change Change

1 unchanged sentence

Value-added sales 129,118 100,832 28,286 28 %

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

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 $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.

Nine Months Ended

October 1, September 25, $ %

EBITDA 24,792 16,792 8,000 48 %

Net sales from the Performance Materials segment of $149.6 million in the first quarter of 2022 increased 31% compared to net sales of $114.1 million in the first quarter of 2021.

The increase in sales was due to higher volume in industrial and aerospace markets and an increase of $4.1 million due to sales volume increases of raw material beryllium hydroxide.

In addition, sales attributable to the HCS-Electronic Materials acquisition increased sales in this segment by $6.5 million.

These impacts were slightly offset by a sale to a defense customer in 2021 that did not repeat in 2022 and a slight decrease in automotive market sales as a result of the global chip shortage impacting the timing of demand.

Value-added sales of $129.1 million in the first quarter of 2022 were 28% higher than value-added sales of $100.8 million in the first quarter of 2021.

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

EBITDA for the Performance Materials segment was $24.8 million in the first quarter of 2022 compared to $16.8 million in the first quarter of 2021.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales partially offset by acquisition costs of $2.7 million, primarily related to purchase accounting inventory step up charges.

Electronic Materials

First Quarter

First Quarter Ended

April 1, April 2, $ %

(Thousands) 2022 2021 Change Change

1 unchanged sentence

Value-added sales 109,876 62,949 46,927 75 %

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

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 $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 $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.

EBITDA 12,148 10,930 1,218 11 %

Net sales from the Electronic Materials segment of $270.8 million in the first quarter of 2022 were 32% higher than net sales of $204.6 million in the first quarter of 2021.

The increase in net sales was primarily due to $36.6 million in net sales from the HCS-Electronic Materials acquisition and higher sales volumes in the semiconductor, energy and industrial markets, as well as the sales impact of higher pass-through metal prices of $2.1 million.

Value-added sales of $109.9 million in the first quarter of 2022 increased 75% compared to value-added sales of $62.9 million in the first quarter of 2021.

The increase was primarily driven by $36.6 million in value-added sales from the HCS-Electronic Materials acquisition as well as higher organic sales volumes into the semiconductor, energy and industrial markets.

EBITDA for the Electronic Materials segment was $12.1 million in the first quarter of 2022 compared to $10.9 million in the first quarter of 2021.

The increase in EBITDA is due to increased sales volumes partially offset by restructuring charges of $0.8 million incurred during the quarter and acquisition and integration costs of $6.0 million, primarily related to purchase accounting inventory step up charges.

Precision Optics

Third Quarter

(Thousands) Third Quarter Ended

October 1, September 25, $ %

2021 2020 Change Change

Net sales $ 31,209 $ 30,386 823 3 %

Value-added sales 31,209 28,310 2,899 10 %

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

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 $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) Nine Months Ended

October 1, September 25, $ %

First Quarter

(Thousands) First Quarter Ended

April 1, April 2, $ %

2022 2021 Change Change

1 unchanged sentence

Value-added sales 28,530 35,565 (7,035) (20) %

Operating profit (loss) 10,513 (6,080) 16,593 NM

NM = Not Meaningful

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.

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 $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, $ %

EBITDA 2,191 7,471 (5,280) (71) %

Net sales from the Precision Optics segment of $28.6 million in the first quarter of 2022 decreased 20% compared to net sales of $35.6 million in the first quarter of 2021.

The change was primarily driven by a reduction in sales related to COVID-19 PCR testing programs, the discontinuation of a consumer electronic application, as well as a temporary government-mandated shut down of our Shanghai facility due to COVID-19 at the end of the quarter.

Value-added sales of $28.5 million in the first quarter of 2022 decreased 20% compared to value-added sales of $35.6 million in the first quarter of 2021.

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

EBITDA for the Precision Optics segment was $2.2 million in the first quarter of 2022, compared to EBITDA of $7.5 million in the first quarter of 2021.

The decrease in EBITDA was driven by decreased volumes and related unabsorbed cost and restructuring charges incurred during the quarter.

First Quarter

(Thousands) First Quarter Ended

April 1, April 2, $ %

2022 2021 Change Change

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Value-added sales (756) (764) 8 (1) %

Operating loss (12,378) (7,349) (5,029) 68 %

EBITDA (5,177) (5,600) 423 (8) %

The Other reportable segment in total includes unallocated corporate costs.

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

Net sales $ — $ — — — %

Value-added sales (1,211) (2,169) 958 (44) %

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

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.

Corporate costs were $5.2 million in the first quarter of 2022 compared to $5.6 million in the first quarter of 2021.

Corporate costs accounted for 2% and 3% of Company-wide value-added sales in the first quarter of 2022 and 2021, respectively.

The decrease in corporate costs in the first quarter of 2022 compared to the first quarter of 2021 is primarily related to favorable foreign currency impacts and a decrease in incentive compensation expense.

FINANCIAL POSITION

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

Nine Months Ended

October 1, September 25, $

Three Months Ended

April 1, April 2, $

(Thousands) 2022 2021 Change

Net cash provided by operating activities $ 40,518 $ 79,444 $ (38,926)

Net cash (used in) provided by operating activities $ (14,304) $ 15,450 $ (29,754)

Net cash used in investing activities (18,966) (30,675) 11,709

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Net change in cash and cash equivalents $ 5,775 $ (6,944) $ 12,719

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

Cash provided (used):

Accounts receivable $ (26,041) $ 13,899 $ (39,940)

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

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.

Net cash used in operating activities totaled $14.3 million in the first three months of 2022 versus $15.5 million provided by operating activities in the prior-year period.

Working capital requirements used cash of $47.4 million and $19.7 million during the first three months of 2022 and 2021, respectively.

This was primarily driven by incremental cash outflow of $25.7 million used for incentive compensation payments in the first quarter of 2022 compared to the same period in the prior year.

Cash flows used for inventory were $28.1 million in the first quarter of 2022, compared to $23.2 million in the prior-year period.

Inventory levels have increased to support higher sales volumes as well as metal price increases and inventory build related to the ramp up of our new precision clad engineered strip operations.

Net cash used in investing activities was $18.9 million in the first quarter of 2022 compared to $30.7 million in the prior-year period.

The decrease in cash used in investing activities is due to decreased capital expenditures, primarily related to investments in new equipment funded by customer prepayments in 2021.

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

Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives.

For the full year 2022, the Company expects payments for property, plant, and equipment to be approximately $75 million.

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

Net cash provided by financing activities totaled $39.3 million in the first three months of 2022 versus $8.7 million in the prior-year period.

The increase is primarily due to increased net borrowings of $49.1 million under our revolving credit facility in the first quarter of 2022, compared to an increase in borrowings of $15.0 million in the same period in the prior year.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates.

For additional information regarding critical accounting policies, please refer to our 2021 Annual Report on Form 10-K.

At April 1, 2022, cash and cash equivalents held by our foreign operations totaled $16.8 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 October 1, 2021 and December 31, 2020 is as follows:

October 1, December 31,

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of April 1, 2022 and December 31, 2021 is as follows:

April 1, December 31,

(Thousands) 2022 2021

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Available borrowing capacity $ 127,356 $ 176,419

Net (debt) cash is a non-GAAP financial measure.

Net debt is a non-GAAP financial measure.

We are providing this information because we believe it is more indicative of our overall financial position.

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The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted.

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 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.

The premium resets quarterly according to the terms and conditions available under the agreement.

In 2021, we amended and restated the agreement governing our $375.0 million revolving credit facility (Credit Agreement) in connection with the HCS-Electronic Materials acquisition.

A $300.0 million delayed draw term loan facility was added to the Credit Agreement and the maturity date of the Credit Agreement was extended from 2024 to 2026.

Moreover, 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 $150.0 million.

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 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 stipulated in the agreement.

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 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.

In addition, the Credit Agreement includes covenants that limit the Company to a maximum leverage ratio and a maximum interest coverage ratio.

We were in compliance with all of our debt covenants as of April 1, 2022 and December 31, 2021.

Cash on hand up to $25.0 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement.

In November 2021, we completed the acquisition of HCS-Electronic Materials.

The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300.0 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103.0 million of borrowings under its amended revolving credit facility.

The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio.

Portions of our business utilize off-balance sheet consignment arrangements allowing us to use bank owned metal as we manufacture product for customers.

Metal is purchased from the consignee and sold to our customer at the time of product shipment.

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.

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 precious metal consignment agreements, including our largest such agreement entered into in 2019 and maturing on August 27, 2022, were amended in 2021 to be more consistent with the Credit Agreement.

The available and unused capacity under the metal consignment lines totaled approximately $79.5 million as of April 1, 2022, compared to $69.8 million as of December 31, 2021.

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

We did not repurchase any shares under this program in the first quarter of 2022.

Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million, or an average of $33.23 per share.

We paid cash dividends of $2.5 million on our common stock in the first quarter of 2022.

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 $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.

The notional value of off-balance sheet precious metals and copper was $485.5 million and $480.2 million as of April 1, 2022 and December 31, 2021, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of April 1, 2022.

For additional information on our contractual obligations, refer to our 2021 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

For additional information regarding critical accounting policies, please refer to our 2020 Annual Report on Form 10-K.

Forward-looking Statements:

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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;

our ability to achieve the strategic and other objectives related to the HCS-Electronic Materials (defined herein) acquisition, including any expected synergies;

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

the impact of any U.S.

Federal Government shutdowns and sequestrations;

Federal Government shutdowns or sequestrations;

the condition of the markets which we serve, whether defined geographically or by segment;

2 unchanged sentences

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 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;

other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal financing fees, tax rates, exchange rates, interest rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans;

the uncertainties related to the impact of war, terrorist activities, and acts of God;

our success in identifying acquisition candidates and in acquiring and integrating such businesses, including the integration of the HCS-Electronic Materials 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-Electronic Materials acquisition being accretive in the expected timeframe or at all;

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

other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal consignment fees, tax rates, exchange rates, interest rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans;

the uncertainties related to the impact of war, including the conflict between Russia and Ukraine, terrorist activities, and acts of God;

changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations;

the conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects;

the disruptions on operations from, and other effects of, catastrophic and other extraordinary events including the COVID-19 pandemic;

the disruptions in operations from, and other effects of, catastrophic and other extraordinary events including the COVID-19 pandemic;

and the risk factors set forth in Part 1, Item 1A of the Company's 2021 Annual Report on Form 10-K.

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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