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) 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 nine months of 2022. 28 RESULTS OF OPERATIONS Third Quarter Third Quarter Ended September 30, October 1, $ % (Thousands, except per share data) 2022 2021 Change Change Net sales $ 428,191 $ 388,028 $ 40,163 10 % Value-added sales 290,426 215,826 74,600 35 % Gross margin 82,743 74,313 8,430 11 % Gross margin as a % of value-added sales 28 % 34 % Selling, general, and administrative (SG&A) expense 38,958 43,195 (4,237) (10) % SG&A expense as a % of value-added sales 13 % 20 % Research and development (R&D) expense 7,430 6,354 1,076 17 % R&D expense as a % of value-added sales 3 % 3 % Restructuring expense 484 — 484 — % Other—net 6,774 3,604 3,170 88 % Operating profit 29,097 21,160 7,937 38 % Other non-operating (income)—net (1,175) (1,279) 104 (8) % Interest expense—net 5,888 861 5,027 584 % Income before income taxes 24,384 21,578 2,806 13 % Income tax expense 4,432 3,422 1,010 30 % Net income $ 19,952 $ 18,156 $ 1,796 10 % Diluted earnings per share $ 0.96 $ 0.88 $ 0.08 9 % 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 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 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 $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 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 29 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 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. 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 $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 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. Nine Months Nine Months Ended September 30, October 1, $ % (Thousands, except per share data) 2022 2021 Change Change Net sales $ 1,322,531 $ 1,113,413 $ 209,118 19 % Value-added sales 834,420 622,295 212,125 34 % Gross margin 245,461 210,690 34,771 17 % Gross margin as a % of value-added sales 29 % 34 % SG&A expense 122,666 118,031 4,635 4 % SG&A expense as a % of value-added sales 15 % 19 % R&D expense 22,096 19,164 2,932 15 % R&D expense as a % of value-added sales 3 % 3 % Restructuring (income) expense 1,560 (378) 1,938 (513) % Other—net 18,575 12,272 6,303 51 % Operating profit 80,564 61,601 18,963 31 % Other non-operating (income)—net (3,512) (3,832) 320 (8) % Interest expense—net 14,325 2,480 11,845 478 % Income before income taxes 69,751 62,953 6,798 11 % Income tax expense 12,525 10,162 2,363 23 % Net income $ 57,226 $ 52,791 $ 4,435 8 % Diluted earnings per share $ 2.76 $ 2.56 $ 0.20 8 % 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%), 30 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 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 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 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 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 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. 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 $14.3 million and $2.5 million in the first nine 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 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 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. 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 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 Net sales Performance Materials $ 169,357 $ 136,096 $ 473,876 $ 375,533 Electronic Materials 230,841 220,723 762,649 638,481 Precision Optics 27,993 31,209 86,006 99,399 Other — — — — Total $ 428,191 $ 388,028 $ 1,322,531 $ 1,113,413 Less: pass-through metal costs Performance Materials $ 20,525 $ 20,929 $ 61,959 $ 50,936 Electronic Materials 116,977 151,019 424,716 438,928 Precision Optics 16 — 83 43 Other 248 254 1,353 1,211 Total $ 137,766 $ 172,202 $ 488,111 $ 491,118 Value-added sales Performance Materials $ 148,832 $ 115,167 $ 411,917 $ 324,597 Electronic Materials 113,864 69,704 337,933 199,553 Precision Optics 27,977 31,209 85,923 99,356 Other (248) (254) (1,353) (1,211) Total $ 290,425 $ 215,826 $ 834,420 $ 622,295 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. 32 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. 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 Third Quarter Third Quarter Ended September 30, October 1, $ % (Thousands) 2022 2021 Change Change Net sales $ 169,357 $ 136,096 $ 33,261 24 % Value-added sales $ 148,832 $ 115,167 33,665 29 % EBITDA $ 28,866 $ 28,917 (51) — % 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 $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 Nine Months Ended September 30, October 1, $ % (Thousands) 2022 2021 Change Change Net sales $ 473,876 $ 375,533 $ 98,343 26 % Value-added sales $ 411,917 $ 324,597 87,320 27 % EBITDA $ 80,886 $ 68,027 12,859 19 % 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. 33 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 Third Quarter Third Quarter Ended September 30, October 1, $ % (Thousands) 2022 2021 Change Change Net sales 230,841 220,723 10,118 5 % Value-added sales 113,864 69,704 44,160 63 % EBITDA 16,853 11,326 5,527 49 % 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 Nine Months Ended September 30, October 1, $ % (Thousands) 2022 2021 Change Change Net sales 762,649 638,481 124,168 19 % Value-added sales 337,933 199,553 138,380 69 % EBITDA 51,338 32,668 18,670 57 % 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. 34 Precision Optics Third Quarter (Thousands) Third Quarter Ended September 30, October 1, $ % 2022 2021 Change Change Net sales 27,993 31,209 (3,216) (10) % Value-added sales 27,977 31,209 (3,232) (10) % EBITDA 3,546 6,228 (2,682) (43) % 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 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. Nine Months (Thousands) Nine Months Ended September 30, October 1, $ % 2022 2021 Change Change Net sales 86,006 99,399 (13,393) (13) % Value-added sales 85,923 99,356 (13,433) (14) % EBITDA 9,281 19,246 (9,965) (52) % 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. 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 in the first and second quarters of 2022. 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 $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. Other Third Quarter (Thousands) Third Quarter Ended September 30, October 1, $ % 2022 2021 Change Change Net sales $ — $ — — — % Value-added sales (248) (254) 6 (2) % EBITDA (5,839) (10,617) 4,778 (45) % The Other reportable segment in total includes unallocated corporate costs. 35 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. Nine Months (Thousands) Nine Months Ended September 30, October 1, $ % 2022 2021 Change Change Net sales $ — $ — — — % Value-added sales (1,353) (1,211) (142) 12 % EBITDA (18,206) (22,030) 3,824 (17) % 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. 36 FINANCIAL POSITION Cash Flow A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows: Nine Months Ended September 30, October 1, $ (Thousands) 2022 2021 Change Net cash provided by operating activities $ 34,204 $ 40,518 $ (6,314) Net cash used in investing activities (56,380) (76,954) 20,574 Net cash provided by financing activities 31,349 28,779 2,570 Effects of exchange rate changes (2,953) (212) (2,741) Net change in cash and cash equivalents $ 6,220 $ (7,869) $ 14,089 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. 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 totaling $17.5 million received in the second and third quarters of 2022 vs the $9.0 million received through nine months in 2021. 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. 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 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 $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. 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 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 September 30, 2022 and December 31, 2021 is as follows: September 30, December 31, (Thousands) 2022 2021 Cash and cash equivalents $ 20,682 $ 14,462 Total outstanding debt 494,027 449,474 Net debt $ (473,345) $ (435,012) Available borrowing capacity $ 127,169 $ 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 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. In November 2021, we completed the acquisition of HCS-Electronic Materials. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300.0 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103.0 million of borrowings under its amended revolving credit facility. The interest rate for the term loan is based on LIBOR plus a tiered rate determined by the Company's quarterly leverage ratio. Portions of our business utilize off-balance sheet consignment arrangements allowing us to use bank owned metal as we manufacture product for customers. Metal is purchased from the consignee and sold to our customer at the time of product shipment. Expansion of business volumes and/or higher metal prices can put pressure on the consignment line limitations from time to time. In 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. 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 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 $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. 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 $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. 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 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