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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-17 · 115 added, 133 removed, 321 unchanged (44% of the section changed)

2 unchanged sentences

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

COVID-19 Update

In March 2020, the W orld Health O r ganization 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 estima t es.

Management continues to manage global macroeconomic impacts on supply chains, inflationary costs, and labor availability and costs, all of which impacted the Company throughout 2021.

HCS-Electronic Materials Acquisition

On September 19, 2021, the Company entered into a definitive agreement under which it has agreed to acquire HCS-Electronic Materials from H.C.

Starck Group GmbH for a purchase price of approximately $ 395.9 million in cash, on a cash-free, debt-free basis, subject to a customary purchase price adjustment mechanism.

Acquisition-related transaction and integration costs totaled $5.3 million in the third quarter of 2021.

These costs are included in selling, general, and administrative expenses in the Consolidated Statement of Income.

On November 1, 2021, the Company completed the acquisition.

The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300 million five-year term loan pursuant to a delayed draw term loan facility entered into during October 2021 and $103 million of borrowings under its amended revolving credit facility, which was also extended to expire five years in October 2026.

RESULTS OF OPERATIONS

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Net sales of $1,757.1 million in 2022 increased $246.5 million from $1,510.6 million in 2021.

Each segment recorded strong increases in sales when compared to the prior year, as sales in Performance Alloys and Composites grew 30%, sales in Advanced Materials grew 29% and sales in Precision Optics grew 19%.

Strong market demand and our ability to capitalize on new business opportunities drove most of the increase.

The change in precious metal and copper prices favorably impacted net sales during 2021 by $47.4 million.

Sales in 2021 also included a full year of Optics Balzers sales and two months of HCS-Electronic Materials sales as compared to five and a half months of Optics Balzers sales in 2020.

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

Incremental sales from the full year of HCS-Electronic Materials accounted for $153.3 million of the net sales increase, most of which were sales into the semiconductor end market.

Additionally, volume and price increases drove organic growth in our industrial (15%), energy (19%) and aerospace and defense (13%) end markets when compared to last year.

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, which are passed on to the customer as discussed in the value-added sales section below, unfavorably impacted net sales by $9.2 million in 2022 compared to 2021.

This impact was partially offset by an increase in the volume of raw material beryllium hydroxide sales in 2022 of $4.0 million.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices and changes in mix due to customer-supplied material.

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Value-added sales of $1,143.6 million in 2022 were up 33% compared to 2021.

The increase was due to strong demand across all of our markets and our ability to capitalize on new business opportunities.

Gross margin was $283.8 million in 2021, a 47% increase from the $192.6 million gross margin recorded in 2020.

Gross margin expressed as a percentage of value-added sales increased to 33% in 2021 from 29% in 2020.

The increase was primarily driven by strong product demand across all of our manufacturing sites as core markets rebounded in 2021 and the Company's strong operating performance.

Incremental sales from the full year of HCS-Electronic materials accounted for $153.3 million of the value-

added sales increase, most of which were sales into the semiconductor end market.

Additionally, volume and price increases drove organic growth in our industrial (15%), semi-conductor (11%), energy (43%) and aerospace and defense (8%) end markets.

These increases were partially offset by foreign currency headwinds.

Gross margin was $343.9 in 2022, a 21% increase from the $283.8 million gross margin recorded in 2021.

Gross margin expressed as a percentage of value-added sales decreased to 30% in 2022 from 33% in 2021 mainly due to lower gross margin on the HCS-Electronic Materials business and the precision clad strip project.

SG&A expense totaled $169.3 million in 2022 as compared to $163.8 million in 2021.

The increase in SG&A expense for 2021 was primarily driven by the Optics Balzers and HCS-Electronic Materials additions, related transaction and integration costs from the HCS-Electronic Materials acquisition and higher variable compensation costs based on the strong 2021 operating performance.

The increase in SG&A expense for 2022 was primarily due to incremental HCS-Electronic Materials SG&A expense of $4.8 million.

Expressed as a percentage of value-added sales, SG&A expense decreased 400 basis points in 2022 to 15% compared to 19% in 2021.

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R&D costs as a percentage of value-added sales remained at 3%.

The increase in R&D expense reflects the full-year impact of the Optics Balzers acquisition and the additional investment in new product and application development.

Goodwill and Asset impairment charges were $0 in 2021.

Refer to Note N to the Consolidated Financial Statements for additional discussion regarding 2020.

Restructuring expense consists primarily of cost reduction actions taken in order to improve the efficiency of our operations.

We incurred no material restructuring costs in 2021.

All 2021 activity was related to final resolution of 2020 accrual balances that were remaining from the restructuring actions taken in 2020 when we recorded $11.2 million of restructuring charges associated with the permanent closure of our Warren, Michigan and Fremont, California facilities in our Performance Alloys and Composites segment and the closure of our Large Area Coatings (LAC) business in our Precision Optics segment.

Refer to Note E to the Consolidated Financial Statements for additional discussion.

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

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

Other-net totaled expense of $24.2 million and $16.7 million in 2022 and 2021, respectively.

The increase in Other-net was driven by an increase in acquisition amortization due to the acquisition of HCS-Electronic Materials in the fourth quarter of 2021 and a full year of amortization from the Optics Balzers acquisition plus $3.3 million foreign exchange hedge gain realized in 2020 that did not reoccur in 2021.

Refer to Note F to the Consolidated Financial Statements for the major components within Other-net.

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

Refer to Note P of the Consolidated Financial Statements for details of the components of net periodic benefit costs.

The increase in Other-net was driven by an increase in acquisition amortization due to a full year of intangible amortization from the HCS-Electronic Materials acquisition and higher metal consignment fees partially offset by foreign exchange gains in 2022 compared to losses in the prior year.

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

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

Refer to Note O of the Consolidated Financial Statements for details of the components of net periodic benefit costs.

Interest expense - net was $21.9 million in 2022 and $4.9 million in 2021.

The increase in interest expense in 2021 compared to 2020 is primarily due to borrowings under our new term loan facility and increased borrowings under the revolving credit facility during the fourth quarter of 2021 as a result of funding the HCS-Electronic Materials acquisition.

The increase in interest expense in 2022 compared to 2021 was primarily due to borrowings under our term loan facility and under our revolving credit facility incurred in the fourth quarter of 2021 used to finance the HCS-Electronic Materials acquisition.

Income tax expense (benefit) for 2022 was $17.1 million of expense compared to $4.9 million of benefit in 2021.

The effects of percentage depletion, foreign derived intangible income deduction, and the release of a valuation allowance in a foreign jurisdiction were the primary factors for the difference between the effective and statutory tax rates in 2021.

Refer to Note H to the Consolidated Financial Statements for further details on income taxes.

The effects of percentage depletion, foreign derived intangible income deduction, and the impacts of research and development credits were the primary factors for the difference between the effective and statutory tax rates in 2022.

Refer to Note G to the Consolidated Financial Statements for further details on income taxes.

See the Management Discussion and Analysis section of our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our results for 2021 compared to 2020.

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The Company has four reportable segments:

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

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

The Other reportable segment includes unallocated corporate costs.

Performance Alloys and Composites

Performance Materials

(Thousands) 2022 2021 2020

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Value-added sales 589,587 440,432 345,335

Operating profit 67,908 13,597 73,815

EBITDA 125,227 89,028 38,745

2022 Compared to 2021

Net sales from the Performance Alloys and Composites segment of $511.9 million in 2021 increased 30% compared to 2020.

The increase was due to higher sales into all major end markets, the largest of which were in the industrial, automotive, aerospace & defense and other end markets.

Net sales from the Performance Materials segment of $671.5 in 2022 increased 31% compared to 2021.

The increase in sales was due to higher organic volume in industrial, aerospace and defense, energy and telecom end markets as well as an increase in the volume of raw material beryllium hydroxide sales in the 2022 of $4 million.

In addition, sales from HCS-Electronic Materials increased sales in this segment by $27.1 million and incremental sales from the clad strip project increased sales by $54.5 million.

These impacts were slightly offset by a 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 $589.6 million in 2022 were 34% higher than value-added sales of $440.4 million in 2021.

The increase in value-added sales was driven by the same factors driving the increase in net sales.

Performance Alloys and Composites generated operating profit of $67.9 million, or 15.4% of value-added sales, in 2021 as compared to $13.6 million, or 4% of value-added sales, in 2020.

The increase in operating profit was primarily due to increased sales volume, and no mine development costs in 2021 compared to $12.9 million of mine development costs recorded in 2020.

In addition, there were no restructuring charges in 2021 compared to $8.8 million that were recorded in 2020 related to the closure of our Warren, Michigan and Fremont, California facilities.

Advanced Materials

EBITDA for the Performance Materials segment was $125.2 million in 2022 compared to $89.0 million in 2021.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales, partially offset by incremental acquisition and integration costs of $1.1 million, primarily related to purchase accounting inventory step up charges, $9.8 million of incremental start up costs and $4.1 million of additional resource costs and scrap for the new wide area precision strip clad facility.

Electronic Materials

(Thousands) 2022 2021 2020

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Value-added sales 441,955 289,119 220,516

Operating profit 35,330 22,120 25,124

EBITDA 67,806 44,852 30,127

2022 Compared to 2021

Net sales from the Advanced Materials segment of $866.8 million in 2021 were 29% higher than net sales of $670.9 million in 2020.

The increase in net sales was due to higher sales volumes totaling $146.5 million, sales from HCS-Electronic Materials totaling $21.4 million and pass-through metal prices totaling $30 million.

Net sales from the Electronic Materials segment of $971.9 million in 2022 were 12% higher than net sales of $866.8 million in 2021.

The increase in net sales was primarily due to $126.2 million in net sales from the HCS-Electronic Materials acquisition.

The net sales increase from HCS-Electronic Materials was offset by lower precious metal prices impacting net sales by $9.9 million and foreign currency headwinds.

In addition, there was an increase in customer-supplied precious metal transactions in 2022, which does not impact value-added sales but would reduce net sales when compared to 2021.

Value-added sales of $442.0 million increased 53% compared to value-added sales of $289.1 million in 2021.

Higher sales volumes into the semiconductor, industrial and energy markets accounted for $47.2 million and the HCS-Electronic Materials acquisition accounted for the remaining $21.4 million of the increase.

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

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

Advanced Materials generated operating profit of $35.3 million in 2021, compared to $22.1 million in 2020.

Increased operating profit in 2021, compared to 2020, was the result of strong demand across all of our product lines and improved product mix.

The increase was primarily driven by $126.2 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 $67.8 million in 2022 compared to $44.9 million in 2021.

The increase in EBITDA was primarily due to incremental EBITDA from HCS-Electronic Materials.

Precision Optics

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Value-added sales 113,580 131,815 101,878

Operating (loss) profit 14,185 (4,382) (3,550)

EBITDA 13,753 25,854 2,470

2022 Compared to 2021

Net sales from the Precision Optics segment were $132.0 million in 2021, an increase compared to net sales of $111.2 million in 2020.

The increase was due to the full year impact of the Optics Balzers acquisition offset in part by the closure of our LAC business on December 31, 2020.

Value-added sales of $131.8 million in 2021 increased 29% compared to value-added sales of $101.9 million in 2020.

The increase was driven by the full year impact of the Optics Balzers acquisition, which was partially offset by the closure of our LAC business on December 31, 2020.

The Precision Optics segment generated operating profit of $14.2 million in 2021 compared to an operating loss of $4.3 million in 2020.

The operating profit was driven by the full year impact of the Optics Balzers acquisition.

The 2020 operating loss includes impairment charges of $10.5 million and restructuring charges of $2.1 million primarily related to the closure of our LAC business.

Net sales from the Precision Optics segment were $113.7 million in 2022, a decrease of 14% compared to net sales of $132.0 million in 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 and foreign currency headwinds.

Value-added sales of $113.6 million in 2022 decreased 14% compared to value-added sales of $131.8 million in 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 $13.8 million in 2022 compared to $25.9 million in 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 2022.

(Thousands) 2022 2021 2020

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Value-added sales (1,483) (1,666) (2,604)

Operating loss (40,312) (23,120) (24,843)

EBITDA (28,345) (33,371) (16,804)

2022 Compared to 2021

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs of $40.3 million in 2021 increased $17.2 million as compared to $23.1 million in 2020.

Corporate costs of $28.3 million in 2022 decreased $5.1 million as compared to $33.4 million in 2021.

Corporate costs were 2% of total Company value-added sales in 2022 compared to 4% in 2021.

The increase in corporate costs in 2021 compared to 2020 was primarily due to the transaction costs related to the HCS-Electronic Materials acquisition and higher variable compensation expense related to strong 2021 operating performance.

The decrease in corporate costs in 2022 compared to 2021 was primarily due to a $7.3 million decrease in general and administrative expense, primarily related to a decrease in merger and acquisition costs, primarily related to the HCS-Electronic Materials acquisition in 2021.

Value-Added Sales - Reconciliation of Non-GAAP Financial Measure

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(Thousands) 2022 2021 2020

Performance Alloys and Composites $ 511,874 $ 394,195 $ 500,201

Advanced Materials 866,816 670,867 573,763

Performance Materials $ 671,525 $ 511,874 $ 394,195

Electronic Materials $ 971,902 866,816 $ 670,867

Precision Optics 113,682 131,954 $ 111,212

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pass-through metal costs

Performance Alloys and Composites $ 71,442 $ 48,860 $ 72,117

Advanced Materials 577,697 450,351 356,450

Performance Materials $ 81,938 $ 71,442 $ 48,860

Electronic Materials 529,947 577,697 450,351

Precision Optics 102 139 9,334

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Value-added sales

Performance Alloys and Composites $ 440,432 $ 345,335 $ 428,084

Advanced Materials 289,119 220,516 217,313

Performance Materials 589,587 440,432 345,335

Electronic Materials 441,955 289,119 220,516

Precision Optics 113,580 131,815 101,878

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Total $ 1,143,639 $ 859,700 $ 665,125

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

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

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Net cash provided by operating activities totaled $116.0 million in 2022 versus $90.2 million in 2021.

Decreased operating cash flow was due in part to the increase in A/R of $29.8 million to support higher sales in 2021 and a decrease in customer prepayments of $40.3 million was partially offset by $56.8 million of increased net income.

Working capital requirements used cash of $33.7 million during 2021 compared to a use of $23.9 million in 2020.

Cash flows used for inventory were $43.5 million in 2021, compared to using $1.3 million of cash in the prior year primarily in our Performance Alloys and Composites and Advanced Materials segments.

Price movements of precious and base metals are passed through to customers.

Therefore, while sudden movements in the price of metals can cause a temporary imbalance in our cash receipts and payments in either direction, once prices stabilize, our cash flow tends to stabilize as well.

Cash flows generated from accounts payable and accrued expenses were $40.2 million compared to the prior-year use of cash of $21.9 million.

Net cash used in investing activities was $494.2 million in 2021 compared to $194.7 million in 2020 due to a $393 million payment, net of cash acquired, for the HCS-Electronic Materials acquisition.

In addition, capital expenditures increased by $35.6 million in 2021, compared to 2020, due to investments in new equipment funded in part by customer prepayments.

See Notes B and L to the Consolidated Financial Statements for additional discussion.

Net cash provided by (used in) financing activities increased $400.1 million from 2020 primarily due to net borrowings of $384.3 million, of which $84.3 million was from our revolving credit facility and $300 million from a new term loan, partially offset by the paydown of $2.1 million of long-term debt, most of which was assumed in the Optics Balzers acquisition.

Operating cash flow increased primarily due to net income increase of $13.5 million, despite an increase in depreciation and amortization of $9.3 million, customer prepayments increase of $8.2 million and favorable impact of deferred taxes of $14.7 million compared to the prior year.

This was partially offset by an increase in working capital outflow, from $33.7 million in 2021 to $58.6 million in 2022.

The increase in working capital outflow was primarily driven by an increase in inventory levels to support higher sales as well as increases in the price of raw materials.

Net cash used in investing activities was $79.7 million in 2022 compared to $494.3 million in 2021.

The decrease was due to a $392.2 million payment, net of cash acquired, for the HCS-Electronic Materials acquisition in 2021.

In addition, capital expenditures decreased by $25.3 million in 2022, compared to 2021, due to increased investments in new equipment funded in part by customer prepayments in 2021 compared to 2022, primarily related to the precision clad strip project.

See Notes B and K to the Consolidated Financial Statements for additional discussion.

Net cash provided by (used in) financing activities decreased $428.6 million from 2021.

In 2021, the Company entered into the $300 million term loan and incurred $100 million of incremental borrowings under the revolving credit facility used to fund the acquisition of HCS-Electronic Materials.

In 2022, the Company began repaying the incurred debt from 2021 and the net amount due under the revolving credit facility and term loan decreased by $28.3 million.

Dividends per common share increased 4% to $0.495 per share in 2022.

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We intend to pay a quarterly dividend on an ongoing basis, subject to a continuing strong capital structure and a determination that the dividend remains in the best interest of our shareholders.

We believe that cash flow from operations plus available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend and share repurchase programs, environmental remediation projects, and strategic acquisitions.

At December 31, 2022, cash and cash equivalents held by our foreign operations totaled $11.7 million.

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

The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation 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.

The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts

borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.

In January 2023, we amended the agreement governing our $375.0 million revolving credit facility (Credit Agreement).

Pursuant to the amendment, we transition U.S.

dollar denominated borrowings from LIBOR to the Secured Overnight Financial Rate (SOFR) for both the revolving credit agreement and the term loan and increased the cap on precious metals facilities from $600 million to $615 million.

The Company had previously amended and restated the Credit Agreement in connection with the HCS-Electronic Materials acquisition in November 2021.

A $300 million delayed draw term loan facility was added to the Credit Agreement and the maturity date of the Credit Agreement was extended from 2024 to 2026.

Moreover, the Credit Agreement also provides for an uncommitted incremental facility whereby, under certain conditions, the Company may be able to borrow additional term loans in an aggregate amount not to exceed $150.0 million.

The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment, borrowing, or leasing of precious metals and copper, and provides enhanced flexibility to finance acquisitions and other strategic initiatives.

The Credit Agreement provides the Company and its subsidiaries with additional capacity to enter into facilities for the consignment 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 Credit Agreement allows the Company to borrow money at a premium over SOFR, following the January 2023 amendment, 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.

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

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

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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 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103 million of borrowings under 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 to finance metal requirements.

The interest rate for the term loan is based on SOFR, following the January 2023 amendment, 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 metal owned by precious metal consignors as we manufacture product for our customers.

Metal is purchased from the precious metal consignor 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 agreement, entered into in 2019 and maturing on August 27, 2022, was amended in 2021 to be consistent with the Credit Agreement.

The available and unused capacity under the metal financing lines totaled approximately $69.8 million as of December 31, 2021, compared to $50.0 million as of December 31, 2020.

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

The Board approved a $100.0 million capacity increase in 2021 to better support customer demand.

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

The available and unused capacity under the metal consignment agreements expiring in August 2025 totaled approximately $241.9 million as of December 31, 2022, compared to $69.8 million as of December 31, 2021 under the metal consignment agreements that expired on August 27, 2022.

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

In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock.

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There is no minimum number of common shares required to be repurchased in a given year, and the repurchases may be discontinued at any time.

We did not repurchase any shares in 2021.

We did not repurchase any shares in 2021 or 2022.

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

Material Future Cash Obligations

The following table summarizes our material future cash obligations as of December 31, 2021:

The following table summarizes our material future obligations with respect to debt and associated interest as of December 31, 2022.

In addition to the amounts below, the Company anticipates incurring costs related to its finance lease obligations and non-cancelable lease payments for operating leases with an initial lease term in excess of one year.

These obligations are further detailed in Note L.

(Millions) 2023 2024 2025 2026 2027 There-

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17.3 15.9 14.1 10.3 — — 57.6

Finance lease obligations (3)

3.6 2.4 1.5 1.3 1.3 19.0 29.1

Non-cancelable lease payments (4)

11.5 11.0 8.8 7.9 6.5 47.1 92.8

Other long-term liabilities (5)

0.5 2.4 0.3 0.5 0.6 2.4 6.7

Total $ 38.4 $ 46.2 $ 44.4 $ 363.8 $ 0.2 $ 0.3 $ 493.3

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(2) These amounts represent future interest payments related to our total debt, excluding any interest payments to be made on borrowings under our Credit Agreement.

(3) Refer to Note M to the Consolidated Financial Statements.

(4) The non-cancelable lease payments represent payments under operating leases with initial lease terms in excess of one year as of December 31, 2021.

(5) Other long-term liabilities include environmental remediation costs.

We have an active environmental compliance program.

We estimate the probable cost of identified environmental remediation projects and establish reserves accordingly.

The environmental remediation reserve balance was $4.8 million at December 31, 2021 and $5.5 million at December 31, 2020.

Environmental projects tend to be long term, and the associated payments are typically made over a number of years.

Refer to Note T to the Consolidated Financial Statements for further discussion.

Off-balance Sheet Obligations

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We were in compliance with all of the covenants contained in the consignment agreements as of December 31, 2022 and December 31, 2021.

Refer to Note J for additional information.

Refer to Note I for additional information.

The following information concerning our mining properties has been prepared in accordance with the requirements of subpart 1300 of Regulation S-K, which first became applicable to us for the year ended December 31, 2021.

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A mineral resource is a concentration or occurrence of material of economic interest in or on the Earth’s crust in such form, grade or quality, and quantity that there are reasonable prospects for economic extraction.

A mineral resource is a reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, likely mining dimensions, location or

continuity, that, with the assumed justifiable technical and economic conditions, is likely to, in whole or part, become economically extractable.

A mineral resource is a reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, likely mining dimensions, location or continuity, that, with the assumed justifiable technical and economic conditions, is likely to, in whole or part, become economically extractable.

The term "measured mineral resource" is that part of a mineral resource for which quantity and grade or quality are estimated on the basis of conclusive geological evidence and sampling.

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The term “inferred resources” means resources for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling.

The following represents our indicated and inferred ore mineral resources, exclusive of mineral reserves, as of December 31, 2021:

The following represents our indicated and inferred ore mineral resources, exclusive of mineral reserves, as of December 31, 2022 and December 31, 2021:

Indicated Inferred

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Certain of the Company’s contracts with customers may contain multiple performance obligations.

As a result, management utilizes judgment to determine the appropriate accounting, including whether multiple promised products or services in a contract should be accounted for separately or as a group, how the consideration should be allocated among the performance obligations, and when to recognize revenue upon satisfaction of the performance obligations.

As a result, management utilizes judgment to determine the appropriate accounting, including whether multiple promised products or services in a

contract should be accounted for separately or as a group, how the consideration should be allocated among the performance obligations, and when to recognize revenue upon satisfaction of the performance obligations.

3) Determine the transaction price

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This contract liability is subsequently reversed and the revenue, cost of sales, and gross margin are recorded when the Company has transferred control of the product to the customer.

The related inventory also

remains on our balance sheet until the revenue recognition criteria are met.

The related inventory also remains on our balance sheet until the revenue recognition criteria are met.

Advanced billings are typically made in association with products with long manufacturing times and/or products relating to contracts with the government.

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The future return on pension assets is dependent upon the plan’s asset allocation, which changes from time to time, and the performance of the underlying investments.

As a result of our review of various factors, we used an expected rate of return on plan assets assumption of 5.25% at December 31, 2021 and 5.75% at December 31, 2020.

Consistent with December 31, 2021, we used an expected rate of return on domestic plan assets assumption of 5.25% at December 31, 2022.

This assumption is reflective of management’s view of the long-term returns in the marketplace, as well as changes in risk profiles and available investments.

Should the assets earn an average return less than the expected return assumption over time, in all likelihood the future pension expense would increase.

The impact of a change in the discount rate or expected rate of return assumption on pension expense can vary from year to year depending upon the undiscounted liability level, the current discount rate, the asset balance, other changes to the plan, and other factors.

A 0.25 percentage point decrease to the discount rate would increase the 2022 projected pension expense approximately $40 thousand.

The impact of a change in the discount rate or expected rate of return assumption on domestic pension expense can vary from year to year depending upon the undiscounted liability level, the current discount rate, the asset balance, other changes to the plan, and other factors.

A 0.25 percentage point decrease to the discount rate would increase the 2023 projected pension expense approximately $0.1 million.

A 0.25 percentage point decrease in the expected rate of return assumption would increase the 2023 projected pension expense by approximately $0.4 million.

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If a valuation allowance is no longer required, it will reduce tax expense and increase net income in the period in which it is reversed.

We had valuation allowances of $5.0 million and $14.1 million associated with certain federal, state, and foreign deferred tax assets as of year-end 2021 and 2020, respectively, primarily for net operating loss and capital loss carryforwards.

Refer to Note H of the Consolidated Financial Statements for additional deferred tax details.

We had valuation allowances of $4.9 million and $5.0 million associated with certain federal, state, and foreign deferred tax assets as of year-end 2022 and 2021, respectively, primarily for net operating loss, capital loss carryforwards and state tax credits.

Refer to Note G of the Consolidated Financial Statements for additional deferred tax details.

Precious Metal Physical Inventory Counts

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The precious metal content within these various refine streams may be in solutions, sludges, and other non-homogeneous forms and can vary over time based upon the input materials, yield rates, and other process parameters.

The determination of the weight of the precious metal content within the refine streams as part of a physical inventory count requires the use of estimates and calculations based upon assays, assumed recovery percentages developed from actual historical data and other analyses, the total estimated volumes of solutions and other materials within the

refinery, data from our refine vendors, and other factors.

The resulting calculated weight of the precious metals in our refine operations may differ, in either direction, from what our records indicate that we should have on hand, which would then result in an adjustment to our pre-tax income in the period when the physical inventory was taken, and the related estimates were made.

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Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment.

Goodwill within the Advanced Materials segment totaled $204.5 million as of December 31, 2021.

Goodwill within the Electronic Materials segment totaled $206.7 million as of December 31, 2022.

Within the Precision Optics segment, goodwill totaled $86.7 million.

The remaining $25.8 million is related to the Performance Alloys and Composites segment.

For the purpose of the annual goodwill impairment assessment, we have the option to perform a qualitative assessment (commonly referred to as "step zero") to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary.

The remaining $26.2 million is related to the Performance Materials segment.

In performing step zero for our impairment test, we are required to make assumptions and judgments including, but not limited to, macroeconomic conditions as related to our business, current and future financial performance of our reporting units, industry and market considerations, and cost factors such as changes in raw materials, labor, or other costs.

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An impairment charge is recognized for the amount the carrying value of the reporting unit exceeds its fair value.

At our October 2, 2021 annual assessment date, we opted to perform a “step zero” qualitative assessment for two of our reporting units, Performance Alloys and Composites and Advanced Materials.

The results of the step zero indicated that no goodwill impairment existed.

The Company notes that reporting units with goodwill and indefinite-lived intangibles due to recent acquisitions are likely to have fair values to the proximity of the carrying value due to the shorter period of time for fair value from the recent acquisition to have changed.

The Precision Optics reporting unit includes the 2020 goodwill of $70.6 million related to the Optics Balzers acquisition.

As a result of the timing of the recent acquisition, the Company elected to assess the Precision Optics reporting unit goodwill balance by performing a quantitative impairment analysis.

The Company notes that reporting units with goodwill due to recent acquisitions are likely to have fair values to the proximity of the carrying value due to the shorter period of time for fair value from the recent acquisition to have changed.

The Precision Optics reporting unit includes the 2020 goodwill of $70.6 million related to the Optics Balzers acquisition and the Performance Materials and Electronic Materials segments include $24.3 million and $157.0 million, respectively, of goodwill related to the HCS-Electronic Materials acquisition.

As a result of the timing of the recent acquisitions over the past few years, the Company elected to bybass the qualitative assessment and perform a quantitative assessment of the Performance Materials, Electronic Materials and Precision Optics reporting units' goodwill balances.

The quantitative analysis compares estimated fair value of the reporting unit, using an income approach (a discounted cash flow model), as well as a market approach, with its carrying value.

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During the fourth quarter of 2022, the Company considered sales multiples in the low single digits and EBITDA multiples in the range high single digits to low double digits.

Based on the October 2, 2021 quantitative assessment for the Precision Optics reporting unit, the fair value exceeded the carrying value by a sufficient amount to support no indicators of impairment.

We also compared our market capitalization as of October 2, 2021 to the carrying value of our equity, noting no impairment indicators or triggering events.

Based on the quantitative assessment performed for the Precision Optics reporting unit, the fair value exceeded the carrying value by less than 10%, but by a sufficient amount to support no indicators of impairment as of October 1, 2022.

As of October 1, 2022, based on the quantitative assessments for the other reporting units, the estimated fair value was substantially in excess of the carrying value for the remaining reporting units.

Management believes the future sales growth and EBITDA margins in the long range plan, terminal growth rate and the discount rate used in the valuations requires significant use of judgment.

If any of our reporting units do not meet our long range plan estimates or our discount rate increase significantly, we could be required to perform an interim goodwill impairment analysis or recognize charges in future periods.

Any impairment charges that the Company may take in the future could be material to its consolidated results of operations and financial condition.

The assumptions used for the reporting units

and indefinite-lived intangibles with fair values exceeding carrying values of less than 10% are more sensitive to future performance and will be monitored accordingly.

We also compared our market capitalization as of October 1, 2022 to the carrying value of our equity and considering an implied control premium, we noted no impairment indicators or triggering events.

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-K

Item 7. Management’s Discussion and Analysis