What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-03 · 142 added, 129 removed, 220 unchanged (55% of the section changed)

2 unchanged sentences

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

Coronavirus (COVID-19) Second Quarter 2022 Update

Coronavirus (COVID-19) Third 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.

RESULTS OF OPERATIONS

Second Quarter

Second Quarter Ended

July 1, July 2, $ %

Third Quarter

Third Quarter Ended

September 30, October 1, $ %

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

16 unchanged sentences

Diluted earnings per share $ 0.96 $ 0.88 $ 0.08 9 %

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.

Net sales of $428.2 million in the third quarter of 2022 increased $40.2 million from $388.0 million in the third 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.

Volume and price increases drove growth in our industrial (23%), semiconductor (6%), aerospace and defense (25%) and energy (19%) 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 $49.2 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.

The change in precious metal and copper prices unfavorably impacted net sales by $10.2 million during the third quarter of 2022 compared to prior year.

Additionally, net sales were unfavorably impacted by foreign currency headwinds

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.

Value-added sales of $290.4 million in the third quarter of 2022 increased $74.6 million, or 35%, compared to the third quarter of 2021.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $49.2 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.

The remaining value-added sales increase was driven by increased value-added sales into the industrial (10%), energy (27%), aerospace and defense (10%) and semiconductor (7%) end markets.

These increases were partially offset by foreign currency headwinds.

Gross margin in the third quarter of 2022 was $82.7 million, which was up 11% compared to the third quarter of 2021.

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

The favorable impacts of volume and pricing were offset by the unfavorable impacts of product mix, higher pre-production costs associated with the production ramp of the new wide area clad facility and delayed Precision Optics recovery, resulting in an overall decrease in margin.

SG&A expense was $39.0 million in the third quarter of 2022, compared to $43.2 million in the third quarter of 2021.

The decrease in SG&A expense is due to decreased variable compensation expense in 2022 as well as higher legal and due

diligence related cost in the prior year due to the HCS-Electronic Materials acquisition.

SG&A expense as a percentage of value-added sales decreased from 20% to 13% 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.

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

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

In the third quarter of 2022, we recorded $0.5 million of restructuring charges primarily in our Precision Optics segment.

There were no restructuring charges in the third quarter of 2021.

Other-net was $6.8 million of expense in the third quarter of 2022, or a $3.2 million increase from the third quarter of 2021, primarily driven by $1.8 million of increased intangible asset amortization expense, related to the acquisition of HCS-Electronic Materials and $0.9 million of increased metal consignment fees.

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

1 unchanged sentence

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.

Interest expense-net was $5.9 million and $0.9 million in the third 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.

Income tax expense for the third quarter of 2022 was $4.4 million, compared to $3.4 million in the third quarter of 2021.

The effective tax rate for the third quarter of 2022 and 2021 was 18.2% and 15.9%, respectively.

The effective tax rate for the third 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, $ %

Nine Months Ended

September 30, October 1, $ %

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

16 unchanged sentences

Diluted earnings per share $ 2.76 $ 2.56 $ 0.20 8 %

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.

Net sales of $1,322.5 million in the first nine months of 2022 increased $209.1 million from $1,113.4 million in the first nine months 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 (24%),

industrial (32%), energy (22%) and aerospace and defense (17%) 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 $135.7 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 change in precious metal and copper market prices unfavorably impacted net sales by $3.7 million during the first nine months of 2022 compared to the same period in the prior year.

Additionally, net sales were unfavorably impacted by foreign currency headwinds.

Value-added sales of $834.4 million in the first nine months of 2022 increased $212.1 million, or 34%, compared to the first nine months of 2021.

The acquisition of HCS-Electronic Materials, which was completed in the fourth quarter of 2021, accounted for $135.7 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.

The remaining value-added sales increase was driven by increased value-added sales into the industrial (19%), semiconductor (16%), energy (42%) and aerospace and defense (6%) end markets.

Additionally, value-added sales were unfavorably impacted by foreign currency headwinds.

Gross margin in the first nine months of 2022 was $245.5 million, which was up 17% compared to the first nine months of 2021.

Gross margin expressed as a percentage of value-added sales decreased to 29% in the first nine months of 2022 from 34% in the first nine 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, pre-production costs associated with the set-up of the new wide area clad facility and other manufacturing inefficiencies.

SG&A expense was $122.7 million in the first nine months of 2022, compared to $118.0 million in the first nine months of 2021.

The increase in SG&A expense for the first nine months of 2022 was driven by $4.8 million of HCS-Electronic Materials ongoing spend as well as higher costs to support normal growth, partially offset by a decrease of $2.1 million in pre or post HCS acquisition spend.

Expressed as a percentage of value-added sales, SG&A expense was 15% and 19% in the first nine months of 2022 and 2021, respectively.

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

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

In the first nine months of 2022, we recorded a combined total of $1.6 million of restructuring charges in our Precision Optics, Electronic Materials and Other segments.

During the first nine 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 $18.6 million of expense in the first nine months of 2022, or a $6.3 million increase from the first nine months of 2021, primarily driven by $5.9 million of increased intangible asset amortization expense related to the acquisition of HCS-Electronic Materials, as well as $2.1 million of increased metal consignment fees, partially offset by a a $1.7 million decrease in foreign currency losses.

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

1 unchanged sentence

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.

Interest expense-net was $14.3 million and $2.5 million in the first nine 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.

Income tax expense for the first nine months of 2022 was $12.5 million, compared to $10.2 million in the nine months of 2021.

The Company's effective tax rate for the first nine months of 2022 and 2021 was 18.0% and 16.1%, 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.

The effective tax rate for the first nine months of 2022 and 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.

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,

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 2022 and 2021 is as follows:

Third Quarter Ended Nine Months Ended

September 30, October 1, September 30, October 1,

(Thousands) 2022 2021 2022 2021

36 unchanged sentences

Performance Materials

Second Quarter

Second Quarter Ended

July 1, July 2, $ %

Third Quarter

Third Quarter Ended

September 30, October 1, $ %

(Thousands) 2022 2021 Change Change

2 unchanged sentences

EBITDA $ 28,866 $ 28,917 (51) — %

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.

Net sales from the Performance Materials segment of $169.4 million in the third quarter of 2022 increased 24% compared to net sales of $136.1 million in the third quarter of 2021.

The increase in sales was primarily due to favorable pricing and higher volume in the industrial, aerospace and defense as well as energy end markets.

In addition, sales attributable to the HCS-Electronic Materials acquisition increased sales in this segment by $9.4 million and incremental sales from the clad strip project increased sales by $13.1 million.

Additionally, net sales were unfavorably impacted by foreign currency headwinds.

Value-added sales of $148.8 million in the third quarter of 2022 were 29% higher than value-added sales of $115.2 million in the third 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, $ %

EBITDA for the Performance Materials segment was $28.9 million in both the third quarter of 2022 and in the third quarter of 2021.

Despite the increase in net sales, EBITDA remained flat primarily due to $1.6 million of start up costs and $4.1 million of additional resource cost and scrap for the new wide area precision strip clad facility and incremental selling, general and administrative expenses for the the HCS-Electronic Materials business.

Nine Months Ended

September 30, October 1, $ %

(Thousands) 2022 2021 Change Change

2 unchanged sentences

EBITDA $ 80,886 $ 68,027 12,859 19 %

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.

Net sales from the Performance Materials segment of $473.9 million in the first nine months of 2022 increased 26% compared to net sales of $375.5 million in the first nine months of 2021.

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

In addition, sales from HCS-Electronic Materials increased sales in this segment by $24.0 million and incremental sales from the clad strip project increased sales by $15.6 million.

These impacts were slightly offset by a decrease in the defense end market, a slight decrease in automotive market sales as a result of the global chip shortage impacting the timing of demand and foreign currency headwinds

Value-added sales of $411.9 million in the first nine months of 2022 were 27% higher than value-added sales of $324.6 million in the first nine 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.

EBITDA for the Performance Materials segment was $80.9 million in the first nine months of 2022 compared to $68.0 million in the first nine months of 2021.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales, partially offset by acquisition and integration costs of $2.7 million, primarily related to purchase accounting inventory step up charges, as well as $9.8 million of incremental start up costs and $4.1 million of additional resource cost and scrap for the new wide area precision strip clad facility, manufacturing inefficiencies and incremental selling, general and administrative expenses for the HCS-Electronic Materials business.

Electronic Materials

Second Quarter

Second Quarter Ended

July 1, July 2, $ %

Third Quarter

Third Quarter Ended

September 30, October 1, $ %

(Thousands) 2022 2021 Change Change

2 unchanged sentences

EBITDA 16,853 11,326 5,527 49 %

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, $ %

Net sales from the Electronic Materials segment of $230.8 million in the third quarter of 2022 were 5% higher than net sales of $220.7 million in the third quarter of 2021.

The increase in net sales was primarily due to $39.9 million in net sales from the HCS-Electronic Materials acquisition.

The net sales increase from HCS-Electronic Materials was offset by higher customer owned precious metal transactions in the semiconductor market, lower precious metal prices impacting net sales by $8.2 million as well as foreign currency headwinds.

Value-added sales of $113.9 million in the third quarter of 2022 increased 63% compared to value-added sales of $69.7 million in the third quarter of 2021.

The increase was primarily driven by $39.9 million in value-added sales from the HCS-Electronic Materials acquisition and an increase in value-added sales in the semiconductor end market.

The impact of these items were partially offset by foreign currency headwinds.

EBITDA for the Electronic Materials segment was $16.9 million in the third quarter of 2022 compared to $11.3 million in the third quarter of 2021.

The increase in EBITDA is primarily due to incremental EBITDA from HCS-Electronic Materials despite the impact of short term tantalum raw material headwinds, as well as the impacts of increased sales.

Nine Months Ended

September 30, October 1, $ %

(Thousands) 2022 2021 Change Change

2 unchanged sentences

EBITDA 51,338 32,668 18,670 57 %

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.

Net sales from the Electronic Materials segment of $762.6 million in the first nine months of 2022 were 19% higher than net sales of $638.5 million in the first nine months of 2021.

The increase in net sales was primarily due to $112.2 million from the HCS-Electronic Materials acquisition and higher organic sales volumes in the semiconductor, industrial and medical end markets.

These impact of these items were partially offset by $6.8 million in lower precious metal prices and the impact of foreign currency headwinds.

Value-added sales of $337.9 million in the first nine months of 2022 increased 69% compared to value-added sales of $199.6 million in the first nine months of 2021.

The increase was primarily driven by $112.2 million in value-added sales from the HCS-Electronic Materials acquisition as well as higher organic sales volumes into the semiconductor, industrial, and energy end markets.

The impact of these items were partially offset by foreign currency headwinds.

EBITDA for the Electronic Materials segment was $51.3 million in the first nine months of 2022 compared to $32.7 million in the first nine months of 2021.

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

Precision Optics

Second Quarter

(Thousands) Second Quarter Ended

July 1, July 2, $ %

Third Quarter

(Thousands) Third Quarter Ended

September 30, October 1, $ %

2022 2021 Change Change

2 unchanged sentences

EBITDA 3,546 6,228 (2,682) (43) %

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.

Net sales from the Precision Optics segment of $28.0 million in the third quarter of 2022 decreased 10% compared to net sales of $31.2 million in the third quarter of 2021.

The change was primarily driven by a reduction in sales related to lower volumes in the aerospace and defense and industrial end markets, the discontinuation of a consumer electronic application as well as foreign currency headwinds.

Value-added sales of $28.0 million in the third quarter of 2022 decreased 10% compared to value-added sales of $31.2 million in the third 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.

(Thousands) Six Months Ended

July 1, July 2, $ %

EBITDA for the Precision Optics segment was $3.5 million in the third quarter of 2022 compared to $6.2 million in the third quarter of 2021.

The decrease in EBITDA was driven by decreased volumes, unfavorable product mix, and restructuring charges taken during the quarter.

(Thousands) Nine Months Ended

September 30, October 1, $ %

2022 2021 Change Change

2 unchanged sentences

EBITDA 9,281 19,246 (9,965) (52) %

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.

Net sales from the Precision Optics segment of $86.0 million in the first nine months of 2022 decreased 13% compared to net sales of $99.4 million in the first nine months of 2021.

Value-added sales of $85.9 million in the first nine months of 2022 decreased 14% compared to value-added sales of $99.4 million in the first nine months 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, $ %

EBITDA for the Precision Optics segment was $9.3 million in the first nine months of 2022 compared to $19.2 million in the first nine months of 2021.

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

Third Quarter

(Thousands) Third Quarter Ended

September 30, October 1, $ %

2022 2021 Change Change

3 unchanged sentences

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.

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, $ %

Corporate costs were $5.8 million in the third quarter of 2022 compared to $10.6 million in the third quarter of 2021.

Corporate costs decreased from 5% of Company-wide value-added sales in the third quarter of 2021 to 2% in the third quarter of 2022.

The decrease in corporate costs in the third quarter of 2022 compared to the third quarter of 2021 is primarily related to acquisition costs in 2021 that did not reoccur in 2022.

(Thousands) Nine Months Ended

September 30, October 1, $ %

2022 2021 Change Change

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EBITDA (18,206) (22,030) 3,824 (17) %

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.

Corporate costs were $18.2 million in the first nine months of 2022 compared to $22.0 million in the first nine months of 2021.

Corporate costs accounted for 2% and 4% of Company-wide value-added sales in the first nine months of 2022 and 2021, respectively.

The decrease in corporate costs in the first nine months of 2022 compared to the first nine months of 2021 is primarily related to 2021 acquisition costs that did not reoccur in 2022.

This is offset slightly by an increase in employee related costs.

FINANCIAL POSITION

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

Six Months Ended

July 1, July 2, $

Nine Months Ended

September 30, October 1, $

(Thousands) 2022 2021 Change

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Net change in cash and cash equivalents $ 6,220 $ (7,869) $ 14,089

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.

Net cash provided by operating activities totaled $34.2 million in the first nine months of 2022 versus $40.5 million in the prior-year period.

Net cash used in investing activities was $56.4 million in the first nine months of 2022 compared to $77.0 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.

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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.

Capital expenditures are primarily driven by customer partnerships like the precision clad strip project and investments within our HCS-Electronic Materials operations 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 $90 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.

Net cash provided by financing activities totaled $31.3 million in the first nine months of 2022 and $28.8 million in the comparable prior-year period.

The increase is primarily due to net borrowings of $49.1 million under our revolving credit facility in the first nine months of 2022, compared to net borrowings of $43.0 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 July 1, 2022, cash and cash equivalents held by our foreign operations totaled $29.7 million.

At September 30, 2022, cash and cash equivalents held by our foreign operations totaled $17.0 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,

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of September 30, 2022 and December 31, 2021 is as follows:

September 30, 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 July 1, 2022 and December 31, 2021.

We were in compliance with all of our debt covenants as of September 30, 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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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.

In the third quarter of 2022, we entered into a precious metals consignment agreement, maturing on August 31, 2025, which replaced the consignment agreement that would have matured on August 27, 2022.

The available and unused capacity under the metal consignment lines expiring in August 2025 totaled approximately $260.8 million as of September 30, 2022, compared to $69.8 million as of December 31, 2021 under the metal financing lines that expired on August 27, 2022.

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

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

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

We did not repurchase any shares under this program in the third quarter or first nine 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 paid cash dividends of $2.6 million and $7.6 million on our common stock in the third quarter and first nine 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.

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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 $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.

The notional value of off-balance sheet precious metals and copper was $354.2 million and $480.2 million as of September 30, 2022 and December 31, 2021, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of September 30, 2022.

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

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

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

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

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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