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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-04-28 · 197 added, 114 removed, 152 unchanged (67% 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 electrical, electronic, thermal, and structural applications.

We are an integrated producer of high-performance advanced engineered materials used in a variety of 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.

Coronavirus (COVID-19) First Quarter 2022 Update

Coronavirus (COVID-19) Second 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

First Quarter

First Quarter Ended

April 1, April 2, $ %

Second Quarter

Second Quarter Ended

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

Restructuring expense — — — — %

Other—net 5,928 4,194 1,734 41 %

3 unchanged sentences

Income before income taxes 28,327 21,142 7,185 34 %

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

Income tax expense 5,072 3,274 1,798 55 %

Net income $ 23,255 $ 17,868 $ 5,387 30 %

Diluted earnings per share $ 1.12 $ 0.87 $ 0.25 29 %

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.

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.

Net sales of $445.3 million in the second quarter of 2022 increased $74.3 million from $371.0 million in the second quarter of 2021.

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

Volume and price increases drove growth in our semiconductor (29%), industrial (26%), telecom (24%), consumer electronic (24%), energy (24%) and defense (23%) end markets when compared to the same period last year.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $43.6 million of the net sales increase, most of which are sales into the semiconductor end market.

See Note C to the Consolidated Financial Statements 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 second quarter of 2022 by $1.3 million compared to prior year.

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

Value-added sales of $277.2 million in the second quarter of 2022 increased $69.3 million, or 33%, compared to the second quarter of 2021.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $43.6 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.

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.

The remaining value-added sales increase was driven by increased value-added sales into the energy (43%), semiconductor (23%) and industrial (13%) end markets.

Gross margin in the second quarter of 2022 was $87.4 million, which was up 26% compared to the second quarter of 2021.

Gross margin expressed as a percentage of value-added sales decreased to 32% in the second quarter of 2022 from 33% in the second quarter of 2021.

The decrease was driven by higher pre-production costs associated with the production ramp of the new wide area clad facility and higher costs due to supply chain pressures.

SG&A expense was $42.0 million in the second quarter of 2022, compared to $38.1 million in the second quarter of 2021.

The increase in SG&A expense is due to higher HCS-Electronic Materials and Optics Balzers integration cost of $1.0 million, ongoing HCS-Electronic Materials cost of $2.4 million and increased business support investment and increased travel.

Despite the higher cost, SG&A expense as a percentage of value-added sales decreased from 18% to 15% year over year.

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 2022 and 2021.

Other-net was $5.9 million of expense in the second quarter of 2022, or a $1.7 million increase from the second quarter of 2021, primarily driven $2.1 million of increased intangible asset amortization expense, related to the acquisition of HCS-Electronic Materials.

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

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

Other non-operating (income)-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.

Interest expense-net was $4.7 million and $0.9 million in the second 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.

Income tax expense for the second quarter of 2022 was $5.1 million, compared to $3.3 million in the second quarter of 2021.

The effective tax rate for the second quarter of 2022 and 2021 was 17.9% and 15.5%, respectively.

The effective tax rate for the second quarter of both 2022 and 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.

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

Six Months Ended

July 1, July 2, $ %

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

Net sales $ 894,340 $ 725,385 $ 168,955 23 %

Value-added sales 543,994 406,469 137,525 34 %

Gross margin 162,718 136,377 26,341 19 %

Gross margin as a % of value-added sales 30 % 34 %

SG&A expense 83,708 74,836 8,872 12 %

SG&A expense as a % of value-added sales 15 % 18 %

R&D expense 14,666 12,810 1,856 14 %

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

Restructuring (income) expense 1,076 (378) 1,454 (385) %

Other—net 11,801 8,668 3,133 36 %

Operating profit 51,467 40,441 11,026 27 %

Other non-operating (income)—net (2,337) (2,553) 216 (8) %

Interest expense—net 8,437 1,619 6,818 421 %

Income before income taxes 45,367 41,375 3,992 10 %

Income tax expense 8,093 6,740 1,353 20 %

Net income $ 37,274 $ 34,635 $ 2,639 8 %

Diluted earnings per share $ 1.80 $ 1.68 $ 0.12 7 %

Net sales of $894.3 million in the first six months of 2022 increased $169.0 million from $725.4 million in the first six months of 2021.

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

Volume and price increases drove growth in our semiconductor (34%), industrial (37%), telecom (32%) and energy (25%) end markets when compared to the same period last year.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $86.9 million of the net sales increase, most of which are sales into the semiconductor end market.

See Note C to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper market prices favorably impacted net sales during the first six months of 2022 by $6.5 million compared to prior year.

Value-added sales of $544.0 million in the first six months of 2022 increased $137.5 million, or 34%, compared to the first six months of 2021.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $86.9 million of the increase.

The remaining value-added sales increase was driven by increased value-added sales into the energy (52%), industrial (24%), telecom (24%) and semiconductor (22%) end markets.

Gross margin in the first half of 2022 was $162.7 million, which was up 19% compared to the first half of 2021.

Gross margin expressed as a percentage of value-added sales decreased to 30% in the first six months of 2022 from 34% in the first six months 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 pre-production costs associated with the set-up of the new wide area clad facility.

SG&A expense was $83.7 million in the first six months of 2022, compared to $74.8 million in the first six months of 2021.

The increase in SG&A expense for the first six months of 2022 was driven by $2.8 million of integration costs, $4.9 million of HCS-Electronic Materials ongoing spend and the remainder due to increased business support investment and increased travel.

Expressed as a percentage of value-added sales, SG&A expense was 15% and 18% in the first half of 2022 and 2021, respectively.

R&D expense accounted for 3% of value-added sales in the first half of both 2022 and 2021.

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

In the first six months 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 six months 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 $11.8 million of expense in the first six months of 2022, or a $3.1 million increase from the first six months of 2021, primarily driven $4.1 million of increased intangible asset amortization expense, related to the acquisition of HCS-Electronic Materials.

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

Interest expense-net was $8.4 million and $1.6 million in the first six months of 2022 and 2021, respectively.

Income tax expense for the first half of 2022 was $8.1 million, compared to $6.7 million in the first half of 2021.

The Company's effective tax rate for the first six months of 2022 and 2021 was 17.8% and 16.3%, respectively.

The effective tax rate for each period in 2022 and 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 six months of 2022 included a net discrete income tax benefit of $0.4 million, primarily related to excess tax benefits from stock-based compensation awards.

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

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 first quarter of 2022 and 2021 is as follows:

First Quarter Ended

April 1, April 2,

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 2022 and 2021 is as follows:

Second Quarter Ended Six Months Ended

July 1, July 2, July 1, July 2,

(Thousands) 2022 2021 2022 2021

2 unchanged sentences

Precision Optics 29,435 32,591 58,013 68,190

Other — — — —

Total $ 445,295 $ 370,999 $ 894,340 $ 725,385

12 unchanged sentences

Internally, management reviews net sales on a value-added basis.

Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales.

Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs.

Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through precious metal market costs from net sales.

The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation.

2 unchanged sentences

The cost of gold, silver, platinum, palladium, copper, ruthenium, iridium, rhodium, rhenium, and osmium can be quite volatile.

Our pricing policy is to directly pass the cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations.

Our pricing policy is to directly pass the market cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations.

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.

7 unchanged sentences

The Company consists of four reportable segments:

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

Performance Materials, Electronic Materials, Precision Optics, and Other.

The Other reportable segment includes unallocated corporate costs.

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, $ %

Second Quarter

Second Quarter Ended

July 1, July 2, $ %

(Thousands) 2022 2021 Change Change

2 unchanged sentences

EBITDA 27,229 22,318 4,911 22 %

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.

Net sales from the Performance Materials segment of $154.9 million in the second quarter of 2022 increased 24% compared to net sales of $125.3 million in the second quarter of 2021.

The increase in sales was primarily due to higher volume in energy, industrial and aerospace markets.

In addition, sales attributable to the HCS-Electronic Materials acquisition increased sales in this segment by $7.9 million.

Value-added sales of $134.0 million in the second quarter of 2022 were 23% higher than value-added sales of $108.6 million in the second 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 $27.2 million in the second quarter of 2022 compared to $22.3 million in the second quarter of 2021.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales, partially offset by $4.6 million of incremental start up costs for the new facility and manufacturing inefficiencies.

Six Months Ended

July 1, July 2, $ %

(Thousands) 2022 2021 Change Change

Net sales $ 304,520 $ 239,437 $ 65,083 27 %

Value-added sales 263,084 209,430 53,654 26 %

EBITDA 52,021 39,110 12,911 33 %

Net sales from the Performance Materials segment of $304.5 million in the first six months of 2022 increased 27% compared to net sales of $239.4 million in the first six months of 2021.

The increase in sales was due to higher volume in industrial, defense and energy end markets.

In addition, sales from HCS-Electronic Materials increased sales in this segment by $14.6 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.

Value-added sales of $263.1 million in the first six months of 2022 were 26% higher than value-added sales of $209.4 million in the first six months 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.

EBITDA for the Performance Materials segment was $52.0 million in the first six months of 2022 compared to $39.1 million in the first six months 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, as well as $8.2 million of incremental start up costs for the new facility and manufacturing inefficiencies.

Electronic Materials

First Quarter

First Quarter Ended

April 1, April 2, $ %

Second Quarter

Second Quarter Ended

July 1, July 2, $ %

(Thousands) 2022 2021 Change Change

2 unchanged sentences

EBITDA 22,337 10,412 11,925 115 %

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.

Net sales from the Electronic Materials segment of $261.0 million in the second quarter of 2022 were 22% higher than net sales of $213.1 million in the second quarter of 2021.

The increase in net sales was primarily due to $35.7 million in net sales from the HCS-Electronic Materials acquisition and higher organic sales volumes in the semiconductor, energy and industrial markets.

Increase in sales were partially offset by $0.7 million due to lower pass-through metal market prices.

Value-added sales of $114.2 million in the second quarter of 2022 increased 71% compared to value-added sales of $66.9 million in the second quarter of 2021.

The increase was primarily driven by $35.7 million in value-added sales from the HCS-Electronic Materials acquisition as well as higher organic sales volumes into the semiconductor, industrial, energy and other markets.

EBITDA for the Performance Materials segment was $22.3 million in the second quarter of 2022 compared to $10.4 million in the second quarter of 2021.

The increase in EBITDA is due to increased sales volumes, partially offset by increases in SG&A expense, mainly driven by R&D expense as the business continues to invest in developing future customer solutions.

Six Months Ended

July 1, July 2, $ %

(Thousands) 2022 2021 Change Change

Net sales $ 531,807 $ 417,758 114,049 27 %

Value-added sales 224,069 129,849 94,220 73 %

EBITDA 34,484 21,342 13,142 62 %

Net sales from the Electronic Materials segment of $531.8 million in the first six months of 2022 were 27% higher than net sales of $417.8 million in the first six months of 2021.

The increase in net sales was primarily due to $72.3 million from the HCS-Electronic Materials acquisition and higher organic sales volumes in the semiconductor, industrial, energy and other markets, as well as the sales impact of higher pass-through metal prices of $1.4 million.

Value-added sales of $224.1 million in the first half of 2022 increased 73% compared to value-added sales of $129.8 million in the first half of 2021.

The increase was primarily driven by $72.3 million in value-added sales from the HCS-Electronic Materials acquisition as well as higher organic sales volumes into the semiconductor, industrial, energy and other markets.

EBITDA for the Electronic Materials segment was $34.5 million in the first six months of 2022 compared to $21.3 million in the first six months of 2021.

The increase in EBITDA is due to increased sales volumes, partially offset by the amortization of the HCS-Electronic Material inventory step up of $5.0 million.

Precision Optics

First Quarter

(Thousands) First Quarter Ended

April 1, April 2, $ %

Second Quarter

(Thousands) Second Quarter Ended

July 1, July 2, $ %

2022 2021 Change Change

2 unchanged sentences

EBITDA 3,544 5,547 (2,003) (36) %

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.

Net sales from the Precision Optics segment of $29.4 million in the second quarter of 2022 decreased 10% compared to net sales of $32.6 million in the second 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, foreign currency headwinds and the temporary government-mandated shut down of our Shanghai facility due to COVID-19.

Value-added sales of $29.4 million in the second quarter of 2022 decreased 10% compared to value-added sales of $32.6 million in the second 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, $ %

EBITDA for the Precision Optics segment was $3.5 million in the second quarter of 2022 compared to $5.5 million in the second quarter of 2021.

The decrease in EBITDA was driven by decreased volumes, the temporary shut down of the Shanghai facility, and related unabsorbed costs.

(Thousands) Six Months Ended

July 1, July 2, $ %

2022 2021 Change Change

2 unchanged sentences

EBITDA 5,735 13,018 (7,283) (56) %

Net sales from the Precision Optics segment of $58.0 million in the first half of 2022 decreased 15% compared to net sales of $68.2 million in the first half of 2021.

Value-added sales of $57.9 million in the first half of 2022 decreased 15% compared to value-added sales of $68.1 million in the first half 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 $5.7 million in the first six months of 2022 compared to $13.0 million in the first six months of 2021.

The decrease in EBITDA was driven by decreased volumes, the temporary shut down of the Shanghai facility, related unabsorbed costs and restructuring charges incurred during the first six months of 2022.

Second Quarter

(Thousands) Second Quarter Ended

July 1, July 2, $ %

2022 2021 Change Change

Net sales $ — $ — — — %

Value-added sales (349) (193) (156) 81 %

EBITDA (7,191) (5,813) (1,378) 24 %

The Other reportable segment in total includes unallocated corporate costs.

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.

Corporate costs were $7.2 million in the second quarter of 2022 compared to $5.8 million in the second quarter of 2021.

Corporate costs accounted for 3% of Company-wide value-added sales in the second quarter of both 2022 and 2021.

increase in corporate costs in the second quarter of 2022 compared to the second quarter of 2021 is primarily related to increased employee related costs due to business support investments and HCS-Electronic Materials integration costs.

(Thousands) Six Months Ended

July 1, July 2, $ %

2022 2021 Change Change

Net sales $ — $ — — — %

Value-added sales (1,105) (957) (148) 15 %

EBITDA (12,366) (11,413) (953) 8 %

Corporate costs were $12.4 million in the first half of 2022 compared to $11.4 million in the first half of 2021.

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

The increase in corporate costs in the first half of 2022 compared to the first half of 2021 is primarily related to HCS-Electronic Material integration costs and increased business support investments.

FINANCIAL POSITION

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

Three Months Ended

April 1, April 2, $

Six Months Ended

July 1, July 2, $

(Thousands) 2022 2021 Change

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

Net cash provided by operating activities $ 21,415 $ 44,065 $ (22,650)

Net cash used in investing activities (40,596) (57,109) 16,513

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Net change in cash and cash equivalents $ 17,713 $ (1,533) $ 19,246

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.

Net cash provided by operating activities totaled $21.4 million in the first six months of 2022 versus $44.1 million in the prior-year period.

The decrease in operating cash flow was primarily due to cash used to fund higher working capital due to higher inventory to support increasing demand and sales and higher incentive compensation paid out in the first quarter, partially offset by a higher net income and an increase in unearned income due to customer prepayments of $13.1 million received in the second quarter.

Net cash used in investing activities was $40.6 million in the first six months of 2022 compared to $57.1 million in the prior-year period due to decrease in 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.

Additionally, the Company paid a working capital true-up of approximately $3.0 million during the second quarter of 2022 related to the HCS-Electronic Materials acquisition.

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

Capital expenditures are primarily driven by customer partnerships like the precision clad strip project and investments within our HCS-Electronic Materials acquisition as well as infrastructure 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 $100 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.

Net cash provided by financing activities totaled $38.4 million in the first six months of 2022 and $11.5 million in the comparable prior-year period.

The increase is primarily due to increased net borrowings of $52.8 million under our revolving credit facility in the first half of 2022, compared to an increase in borrowings of $22.5 million in the same period in the prior year.

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 for at least the next twelve months and for the foreseeable future thereafter.

At April 1, 2022, cash and cash equivalents held by our foreign operations totaled $16.8 million.

At July 1, 2022, cash and cash equivalents held by our foreign operations totaled $29.7 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 April 1, 2022 and December 31, 2021 is as follows:

April 1, December 31,

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

July 1, December 31,

(Thousands) 2022 2021

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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.

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

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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 available and unused capacity under the metal consignment lines totaled approximately $200.0 million as of July 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 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 did not repurchase any shares under this program in the second quarter or first six months of 2022.

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 $2.6 million and $5.1 million on our common stock in the second quarter and first six months 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.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

OFF-BALANCE SHEET ARRANGEMENTS AND CASH OBLIGATIONS

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 $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.

The notional value of off-balance sheet precious metals and copper was $415.0 million and $480.2 million as of July 1, 2022 and December 31, 2021, respectively.

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

For additional information on our material cash 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 2021 Annual Report on Form 10-K.

Forward-looking Statements:

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These factors include, in addition to those mentioned elsewhere herein:

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

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

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 global economy, including inflationary pressures, potential future recessionary conditions and the impact of tariffs and trade agreements;

the impact of any U.S.

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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;

the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions;

our success in implementing our strategic plans and the timely and successful start-up and completion 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