MATERION Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW 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) 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 six months of 2022. 28 RESULTS OF OPERATIONS Second Quarter Second Quarter Ended July 1, July 2, $ % (Thousands, except per share data) 2022 2021 Change Change Net sales $ 445,295 $ 370,999 $ 74,296 20 % Value-added sales 277,226 207,887 69,339 33 % Gross margin 87,427 69,581 17,846 26 % Gross margin as a % of value-added sales 32 % 33 % Selling, general, and administrative (SG&A) expense 42,047 38,060 3,987 10 % SG&A expense as a % of value-added sales 15 % 18 % Research and development (R&D) expense 7,592 6,604 988 15 % R&D expense as a % of value-added sales 3 % 3 % Restructuring expense — — — — % Other—net 5,928 4,194 1,734 41 % Operating profit 31,860 20,723 11,137 54 % Other non-operating (income)—net (1,168) (1,277) 109 (9) % Interest expense—net 4,701 858 3,843 448 % Income before income taxes 28,327 21,142 7,185 34 % 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 % 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 $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 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. 29 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)-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 $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 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 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. 30 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 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 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. 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 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. 31 Value-Added Sales - Reconciliation of Non-GAAP Financial Measure A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the second quarter and first six months of 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 Net sales Performance Materials $ 154,889 $ 125,294 $ 304,520 $ 239,437 Electronic Materials 260,971 213,114 531,807 417,758 Precision Optics 29,435 32,591 58,013 68,190 Other — — — — Total $ 445,295 $ 370,999 $ 894,340 $ 725,385 Less: pass-through metal costs Performance Materials $ 20,923 $ 16,696 $ 41,436 $ 30,007 Electronic Materials 146,779 146,214 307,738 287,909 Precision Optics 18 9 67 43 Other 349 193 1,105 957 Total $ 168,069 $ 163,112 $ 350,346 $ 318,916 Value-added sales Performance Materials $ 133,966 $ 108,598 $ 263,084 $ 209,430 Electronic Materials 114,192 66,900 224,069 129,849 Precision Optics 29,417 32,582 57,946 68,147 Other (349) (193) (1,105) (957) Total $ 277,226 $ 207,887 $ 543,994 $ 406,469 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 precious metal market 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 market metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. 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 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. Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal. By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals. 32 Segment Results The Company consists of four reportable segments: Performance Materials, Electronic Materials, Precision Optics, and Other. The Other reportable segment includes unallocated corporate costs. Performance Materials Second Quarter Second Quarter Ended July 1, July 2, $ % (Thousands) 2022 2021 Change Change Net sales $ 154,889 $ 125,294 $ 29,595 24 % Value-added sales 133,966 108,598 25,368 23 % EBITDA 27,229 22,318 4,911 22 % 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 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 $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 $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. 33 Electronic Materials Second Quarter Second Quarter Ended July 1, July 2, $ % (Thousands) 2022 2021 Change Change Net sales $ 260,971 $ 213,114 47,857 22 % Value-added sales 114,192 66,900 47,292 71 % EBITDA 22,337 10,412 11,925 115 % 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 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. 34 Precision Optics Second Quarter (Thousands) Second Quarter Ended July 1, July 2, $ % 2022 2021 Change Change Net sales $ 29,435 $ 32,591 (3,156) (10) % Value-added sales 29,417 32,582 (3,165) (10) % EBITDA 3,544 5,547 (2,003) (36) % 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 $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. Six Months (Thousands) Six Months Ended July 1, July 2, $ % 2022 2021 Change Change Net sales $ 58,013 $ 68,190 (10,177) (15) % Value-added sales 57,946 68,147 (10,201) (15) % 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. 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 $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. Other 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 $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. The 35 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. Six Months (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. 36 FINANCIAL POSITION Cash Flow A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows: Six Months Ended July 1, July 2, $ (Thousands) 2022 2021 Change Net cash provided by operating activities $ 21,415 $ 44,065 $ (22,650) Net cash used in investing activities (40,596) (57,109) 16,513 Net cash provided by financing activities 38,418 11,522 26,896 Effects of exchange rate changes (1,524) (11) (1,513) Net change in cash and cash equivalents $ 17,713 $ (1,533) $ 19,246 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. 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 $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. Liquidity 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 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 July 1, 2022 and December 31, 2021 is as follows: July 1, December 31, (Thousands) 2022 2021 Cash and cash equivalents $ 32,175 $ 14,462 Total outstanding debt 497,298 449,747 Net debt $ (465,123) $ (435,285) Available borrowing capacity $ 124,034 $ 176,419 37 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. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods. 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, depletion and amortization, and other adjustments. 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. 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, precious metal, copper and certain other assets. 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 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 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. 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. 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 $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. In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We did not repurchase any shares under this program in the second quarter or first six months of 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. 38 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 $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 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. Forward-looking Statements: Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. 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, 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 inflationary pressures, potential future recessionary conditions and the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns or sequestrations; the condition of the markets which we serve, whether defined geographically or by segment; changes in product mix and the financial condition of customers; our success in developing and introducing new products and new product ramp-up rates; 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-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; 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 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2021 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2021 Annual Report on Form 10-K. 39