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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-03 · 209 added, 108 removed, 146 unchanged (68% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are an integrated producer of high-performance advanced engineered materials used in a variety of electrical, electronic, thermal, and structural applications.

We are an integrated producer of high-performance advanced engineered materials used in a variety of electronic, thermal, and structural applications.

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

RESULTS OF OPERATIONS

First Quarter

First Quarter Ended

March 31, April 1, $ %

Second Quarter

Second Quarter Ended

June 30, July 1, $ %

(Thousands, except per share data) 2023 2022 Change Change

7 unchanged sentences

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

Restructuring (income) expense 664 1,076 (412) NM

Restructuring expense 1,454 — 1,454 — %

Other—net 6,192 5,928 264 4 %

3 unchanged sentences

Income before income taxes 28,429 28,327 102 — %

Income tax expense (benefit) 4,580 3,021 1,559 52 %

Income tax expense 4,347 5,072 (725) (14) %

Net income $ 24,082 $ 23,255 $ 827 4 %

Diluted earnings per share $ 1.15 $ 1.12 $ 0.03 3 %

NM = Not Meaningful

Net sales of $442.5 million in the first quarter of 2023 decreased $6.5 million from $449.0 million in the first quarter of 2022.

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

Volume and price increases in the aerospace and defense end market (15%) and incremental sales from the clad strip project of $36.2 million were offset by decreased sales in the semiconductor (16%), industrial (5%) and consumer electronics (31%) end markets when compared to the same period last year.

Additionally, there was a $8.9 million year over year decrease in the volume of raw material beryllium hydroxide sales compared to the first quarter of 2022.

See Note B - Segment Reporting for additional details on the year over year changes in our net sales by segment and market.

The change in precious metal and copper prices unfavorably impacted net sales during the first quarter of 2023 by $4.8 million.

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

Net sales of $398.6 million in the second quarter of 2023 decreased $46.7 million from $445.3 million in the second quarter of 2022.

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

Volume decreases in the semiconductor (26%) and consumer electronics (37%) end markets were partially offset by an increase in the aerospace and defense end market (22%), incremental sales from the clad strip project of $27.0 million and a $5.8 million increase in the volume of raw material beryllium hydroxide sales when compared to the second quarter of 2022.

See Note B 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 during the second quarter of 2023 by $1.3 million compared to the prior year period.

Value-added sales is a non-GAAP financial measure that removes the impact of pass-through precious metal market 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 $298.6 million in the first quarter of 2023 increased $39.4 million, or 15%, compared to the first quarter of 2022.

The increase was driven by increased value-added sales into the aerospace and defense (21%) and automotive (23%) end markets as well as $36.2 million of incremental sales from the clad strip project , slightly offset by a year over year decrease in the volume of raw material beryllium hydroxide sales of $8.9 million compared to the first quarter of 2022.

Gross margin in the first quarter of 2023 was $91.3 million, which was up 21% compared to the first quarter of 2022.

Gross margin expressed as a percentage of value-added sales increased to 31% in the first quarter of 2023 from 29% in the first quarter of 2022.

Gross margin increased from the prior year primarily due to $7.5 million of inventory step up amortization from the HCS-Electronic Material acquisition that was recorded during the first quarter of 2022, that did not recur in 2023.

In addition, the production tax credit recorded in the first quarter of 2023 favorably impacted gross margin.

See Note E to the Consolidated Financial Statements for further discussion.

SG&A expense was $40.3 million in the first quarter of 2023, compared to $41.7 million in the first quarter of 2022.

The decrease in SG&A expense from the prior year period was primarily driven by $2.1 million of merger and acquisition costs

related to the acquisition of HCS-Electronic Materials incurred in the first quarter of 2022, that did not recur in 2023.

Expressed as a percentage of value-added sales, SG&A expense was 14% and 16% in the first quarter of 2023 and 2022, respectively.

R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications.

R&D spend was 3% of value-added sales in both the first quarter of 2023 and 2022.

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

In the first quarter of 2023, we recorded a combined total of $0.7 million of restructuring charges in our Precision Optics and Electronic Materials segments, compared to $1.1 million of restructuring charges in the first quarter of 2022 recorded in our Precision Optics, Electronic Materials and Other segments.

Other-net was $5.8 million of expense in the first quarter of 2023, or a $0.1 million decrease from the first quarter of 2022, primarily driven by a $0.1 million decrease in metal consignment fees.

Value-added sales of $268.3 million in the second quarter of 2023 decreased $0.5 million, or 0.2%, compared to the second quarter of 2022.

Volume decreases in the semiconductor (29%) and consumer electronics (38%) end markets were partially offset by an increase in the aerospace and defense end market (25%), incremental sales from the clad strip project of $27.0 million and a $5.8 million increase in the volume of raw material beryllium hydroxide sales when compared to the second quarter of 2022.

Gross margin in the second quarter of 2023 was $89.1 million, an increase of 2% compared to the second quarter of 2022.

Gross margin expressed as a percentage of value-added sales was 33% in both the second quarter of 2023 and the second quarter of 2022.

The production tax credit recorded in the second quarter of 2023 favorably impacted gross margin.

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

SG&A expense was $38.9 million in the second quarter of 2023, compared to $42.0 million in the second quarter of 2022.

The decrease in SG&A expense from the prior year period was primarily driven by $1.0 million of merger and acquisition costs related to the acquisition of HCS-Electronic Materials incurred in the second quarter of 2022 that did not recur in 2023 as well as lower selling related expenses associated with the decrease in value-added sales.

Expressed as a percentage of value-added sales, SG&A expense was 15% and 16% in the second quarter of 2023 and 2022, 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 second quarter of both 2023 and 2022.

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

In the second quarter of 2023, we recorded a combined total of $1.5 million of restructuring charges in our Performance Materials, Electronic Materials and Precision Optics segments.

Refer to Note E to the Consolidated Financial Statements for details.

Other-net was $6.2 million of expense in the second quarter of 2023, or a marginal increase of $0.3 million from the second quarter of 2022.

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

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

Refer to Note I to the Consolidated Financial Statements for details of the components.

Interest expense-net was $7.5 million and $3.7 million in the first quarter of 2023 and 2022, respectively.

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 $7.6 million and $4.7 million in the second quarter of 2023 and 2022, respectively.

The increase in interest expense is primarily due to an increase in interest rates compared to the prior year period.

Income tax expense for the second quarter of 2023 was $4.3 million, compared to $5.1 million in the second quarter of 2022.

The effective tax rate for the second quarter of 2023 and 2022 was 15.3% and 17.9%, respectively.

The effective tax rate for 2023 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 2022 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

June 30, July 1, $ %

(Thousands, except per share data) 2023 2022 Change Change

Net sales $ 841,076 $ 894,340 $ (53,264) (6) %

Value-added sales 566,819 527,919 38,900 7 %

Gross margin 180,391 162,718 17,673 11 %

Gross margin as a % of value-added sales 32 % 31 %

SG&A expense 79,247 83,708 (4,461) (5) %

SG&A expense as a % of value-added sales 14 % 16 %

R&D expense 14,776 14,666 110 1 %

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

Restructuring expense 2,118 1,076 1,042 97 %

Other—net 11,966 11,801 165 1 %

Operating profit 72,284 51,467 20,817 40 %

Other non-operating (income)—net (1,456) (2,337) 881 (38) %

Interest expense—net 15,142 8,437 6,705 79 %

Income before income taxes 58,598 45,367 13,231 29 %

Income tax expense 8,928 $ 8,093 835 10 %

Net income $ 49,670 $ 37,274 $ 12,396 33 %

Diluted earnings per share $ 2.38 $ 1.80 $ 0.58 32 %

Net sales of $841.1 million in the first six months of 2023 decreased $53.3 million from $894.3 million in the first six months of 2022.

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

Volume decreases in the semiconductor (21%), industrial (10%) and consumer electronics (34%) end markets were partially offset by an increase in the aerospace and defense end market (19%) and incremental sales from the clad strip project of $63.2 million when compared to the first six months of 2022.

Additionally, there was a $3.1 million year over year decrease in the volume of raw material beryllium hydroxide sales compared to the first

six months of 2022.

See Note B 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 during the first six months of 2023 by $6.1 million compared to the prior year period.

Value-added sales of $566.8 million in the first six months of 2023 increased $38.9 million, or 7%, compared to the first six months of 2022.

The increase was driven by increased value-added sales into the aerospace and defense (22%) end market as well as $63.2 million of incremental sales from the clad strip project.

These increases were slightly offset by a $3.1 million decrease in the volume of raw material beryllium hydroxide sales in the first six months of 2023 when compared to the first six months of 2022 as well as lower value-added sales into the semiconductor (13%) and consumer electronics (34%) end markets.

Gross margin in the first half of 2023 was $180.4 million, which was up 11% compared to the first half of 2022.

Gross margin expressed as a percentage of value-added sales increased to 32% in the first six months of 2023 from 31% in the first six months of 2022.

Gross margin increased from the prior year period primarily due to $7.5 million of inventory step up amortization from the HCS-Electronic Material acquisition that was recorded during the first quarter of 2022 that did not recur in 2023.

In addition, the production tax credit recorded in the first half of 2023 favorably impacted gross margin.

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

SG&A expense was $79.2 million in the first six months of 2023, compared to $83.7 million in the first six months of 2022.

The decrease in SG&A expense for the first six months of 2023 was primarily driven by $2.8 million of merger and acquisition costs related to the acquisition of HCS-Electronic Materials incurred in the first six months of 2022 that did not recur in 2023 as well as lower selling related expenses associated with the decrease in value-added sales.

Expressed as a percentage of value-added sales, SG&A expense was 14% and 16% in the first half of 2023 and 2022, respectively.

R&D expense accounted for 3% of value-added sales in the first half of both 2023 and 2022.

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

In the first six months of 2023, we recorded a combined total of $2.1 million of restructuring charges in our Precision Optics, Electronic Materials and Precision Optics segments.

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.

Refer to Note E to the Consolidated Financial Statements for details.

Other-net was $12.0 million of expense in the first six months of 2023, or a $0.2 million increase from the first six months of 2022.

Refer to Note D 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 $15.1 million and $8.4 million in the first six months of 2023 and 2022, respectively.

The increase in interest expense is primarily due to an increase in interest rates compared to the prior year.

Income tax expense for the first quarter of 2023 was expense of $4.6 million, compared to $3.0 million in the first quarter of 2022.

The effective tax rate for the first quarter of 2023 and 2022 was 15.2% and 17.7%, respectively.

The effective tax rate for the first quarter of 2023 was lower than the statutory tax rate primarily due to the impact of percentage depletion, the foreign derived intangible income deduction, and research and development credits.

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

Income tax expense for the first half of 2023 was $8.9 million, compared to $8.1 million in the first half of 2022.

The Company's effective tax rate for the first six months of 2023 and 2022 was 15.2% and 17.8%, respectively.

The effective tax rate for each period in 2023 and 2022 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 included a net discrete income tax benefit of $1.0 million and $0.4 million for the first six months of 2023 and 2022, respectively, primarily related to excess tax benefits from stock-based compensation awards.

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

A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the first quarter of 2023 and 2022 is as follows:

First Quarter Ended

March 31, April 1,

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 2023 and 2022 is as follows:

Second Quarter Ended Six Months Ended

June 30, July 1, June 30, July 1,

(Thousands) 2023 2022 2023 2022

7 unchanged sentences

Precision Optics 22 18 44 67

Other — 349 — 1,105

Total $ 130,290 $ 176,498 $ 274,257 $ 366,421

6 unchanged sentences

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

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

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

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

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

2 unchanged sentences

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

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

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

Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability.

9 unchanged sentences

The Other reportable segment includes unallocated corporate costs.

The primary measurement used by management to measure the financial performance of each segment is EBITDA.

Refer to Note B to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated net income.

Performance Materials

First Quarter

First Quarter Ended

March 31, April 1, $ %

Second Quarter

Second Quarter Ended

June 30, July 1, $ %

(Thousands) 2023 2022 Change Change

2 unchanged sentences

EBITDA 44,925 27,229 17,696 65 %

Net sales from the Performance Materials segment of $187.0 million in the first quarter of 2023 increased 25% compared to net sales of $149.6 million in the first quarter of 2022.

The increase in sales was due to higher volume in the aerospace and defense (24%), energy (25%) and automotive (14%) end markets as well as $36.2 million of incremental sales from the clad strip project, slightly offset by a $8.9 million year over year decrease in the volume of raw material beryllium hydroxide sales compared to the first quarter of 2022.

Value-added sales of $168.0 million in the first quarter of 2023 were 30% higher than value-added sales of $129.1 million in the first quarter of 2022.

Net sales from the Performance Materials segment of $182.8 million in the second quarter of 2023 increased 18% compared to net sales of $154.9 million in the second quarter of 2022.

The increase in sales was due to incremental sales from the clad strip project of $27.0 million, and increased sales volumes in the aerospace and defense (17%) end market as well as a $5.8 million increase in the volume of raw material beryllium hydroxide sales when compared to the second quarter of 2022.

These increases were partially offset by decreased volumes in consumer electronics (37%) end market.

Value-added sales of $165.6 million in the second quarter of 2023 were 24% higher than value-added sales of $134.0 million in the second quarter of 2022.

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 $42.8 million in the first quarter of 2023 compared to $24.8 million in the first quarter of 2022.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales as well as a lower merger and acquisition costs of $2.7 million compared to the first quarter of 2022.

In addition, we recorded a portion of the expected $8 million annual benefit from the production credit in the first quarter of 2023 which favorably impacted EBITDA.

See Note E to the Consolidated Financial Statements for further discussion.

EBITDA for the Performance Materials segment was $44.9 million in the second quarter of 2023 compared to $27.2 million in the second quarter of 2022.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales as well as an increase due to the $4.6 million of start-up costs and manufacturing inefficiencies for the new wide area clad facility million incurred in the second quarter of 2022 that did not recur in the second quarter of 2023.

In addition, we recorded a portion of the expected $8 million annual benefit from the production credit in the second quarter of 2023, which favorably impacted EBITDA.

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

Six Months Ended

June 30, July 1, $ %

(Thousands) 2023 2022 Change Change

Net sales $ 369,785 $ 304,520 $ 65,265 21 %

Value-added sales 333,628 263,084 70,544 27 %

EBITDA 87,695 52,021 35,674 69 %

Net sales from the Performance Materials segment of $369.8 million in the first six months of 2023 increased 21% compared to net sales of $304.5 million in the first six months of 2022.

The increase in sales was primarily due to incremental sales from the clad strip project of $63.2 million as well an increase in the aerospace and defense (20%) end market, partially offset by decreases in the consumer electronics end market (33%) when compared to the first six months of 2022.

Additionally, there was a $3.1 million year over year decrease in the volume of raw material beryllium hydroxide sales compared to the first six months of 2022.

Value-added sales of $333.6 million in the first six months of 2023 were 27% higher than value-added sales of $263.1 million in the first six months of 2022.

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 $87.7 million in the first six months of 2023 compared to $52.0 million in the first six months of 2022.

The increase in EBITDA was primarily due to the same factors driving the increase in net sales as well as lower merger and acquisition costs of $2.7 million and improved efficiencies due to higher clad strip volumes in the new facility.

In addition, we recorded a portion of the expected $8 million annual benefit from the production credit in the first six months of 2023, which favorably impacted EBITDA.

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

Electronic Materials

First Quarter

First Quarter Ended

March 31, April 1, $ %

Second Quarter

Second Quarter Ended

June 30, July 1, $ %

(Thousands) 2023 2022 Change Change

2 unchanged sentences

EBITDA 13,394 22,337 (8,943) (40) %

Net sales from the Electronic Materials segment of $228.8 million in the first quarter of 2023 decreased 16% from net sales of $270.8 million in the first quarter of 2022.

The decrease in net sales was primarily due to lower precious metal sales volumes in the semiconductor (16%) and energy (14%) end markets.

Additionally, pass-through metal price reductions reduced net sales by $3.6 million compared to the first quarter of 2022.

Despite the decrease in sales, value-added sales were up slightly to $103.9 million in the first quarter of 2023, compared to value-added sales of $102.2 million in the first quarter of 2022, representing an increase of 2%, due to an increase in non-precious metal sales, primarily in tantalum shipments.

EBITDA for the Electronic Materials segment was $14.0 million in the first quarter of 2023 compared to $12.1 million in the first quarter of 2022.

The increase in EBITDA is primarily due to no HCS-Electronic Materials acquisition costs recorded in the current period, compared to $6.0 million recorded in the first quarter of 2022.

This was partially offset by mix, year over year tantalum costs increases and the impact of lower production late in the first quarter of 2023 resulting in manufacturing cost inefficiencies.

Net sales from the Electronic Materials segment of $190.7 million in the second quarter of 2023 decreased by 27% compared to net sales of $261.0 million in the second quarter of 2022.

The decrease in net sales was primarily due to lower sales volumes in the semiconductor (27%) end market.

Value-added sales of $77.6 million in the second quarter of 2023 decreased 27% compared to value-added sales of $105.8 million in the second quarter of 2022.

The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Electronic Materials segment was $13.4 million in the second quarter of 2023 compared to $22.3 million in the second quarter of 2022.

The decrease in EBITDA was due to decreased sales volumes, partially offset by decreases in manufacturing and SG&A expense as a result of various targeted cost control initiatives implemented in the second quarter of 2023.

Six Months Ended

June 30, July 1, $ %

(Thousands) 2023 2022 Change Change

Net sales $ 419,549 $ 531,807 $ (112,258) (21) %

Value-added sales 181,493 207,994 (26,501) (13) %

EBITDA 27,349 34,484 (7,135) (21) %

Net sales from the Electronic Materials segment of $419.5 million in the first six months of 2023 decreased by 21% compared to net sales of $531.8 million in the first six months of 2022.

The decrease in net sales was primarily due to lower sales volumes in the semiconductor (22%) end market.

Additionally, pass-through metal price reductions reduced net sales by $3.6 million compared to the first six months of 2022.

Value-added sales of $181.5 million in the first half of 2023 decreased 13% compared to value-added sales of $208.0 million in the first half of 2022.

The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Electronic Materials segment was $27.3 million in the first six months of 2023 compared to $34.5 million in the first six months of 2022.

Precision Optics

First Quarter

(Thousands) First Quarter Ended

March 31, April 1, $ %

Second Quarter

(Thousands) Second Quarter Ended

June 30, July 1, $ %

2023 2022 Change Change

2 unchanged sentences

EBITDA 1,701 3,544 (1,843) (52) %

Net sales from the Precision Optics segment of $26.7 million in the first quarter of 2023 decreased 7% compared to net sales of $28.6 million in the first quarter of 2022.

The decrease was primarily due to lower sales volumes in the consumer electronics end market (39%).

Value-added sales of $26.7 million in the first quarter of 2023 decreased 7% compared to value-added sales of $28.5 million in the first quarter of 2022.

Net sales from the Precision Optics segment of $25.1 million in the second quarter of 2023 decreased 15% compared to net sales of $29.4 million in the second quarter of 2022.

The decrease was primarily due to lower sales volumes as a result of a reduction in sales related to COVID-19 PCR testing programs as well as decreased sales in the consumer electronics end market (39%), which was primarily due to the discontinuation of a consumer electronic application.

These decreases were partially offset by an increase in sales volumes in the aerospace and defense (64%) end market.

Value-added sales of $25.0 million in the second quarter of 2023 decreased 15% compared to value-added sales of $29.4 million in the second quarter of 2022.

The decrease in value-added sales was due to the same factors driving the decrease in net sales.

EBITDA for the Precision Optics segment was $2.7 million in the first quarter of 2023, compared to EBITDA of $2.2 million in the first quarter of 2022.

The increase in EBITDA was primarily driven by targeted cost reduction initiatives and spend control.

First Quarter

(Thousands) First Quarter Ended

March 31, April 1, $ %

EBITDA for the Precision Optics segment was $1.7 million in the second quarter of 2023 compared to $3.5 million in the second quarter of 2022.

The decrease in EBITDA was driven by decreased volumes, partially offset by targeted cost control initiatives continued in the second quarter of 2023.

(Thousands) Six Months Ended

June 30, July 1, $ %

2023 2022 Change Change

2 unchanged sentences

EBITDA 4,393 5,735 (1,342) (23) %

Net sales from the Precision Optics segment of $51.7 million in the first half of 2023 decreased 11% compared to net sales of $58.0 million in the first half of 2022.

These decreases were partially offset by an increase in sales volumes in the aerospace and defense (21%) end market.

Value-added sales of $51.7 million in the first half of 2023 decreased 11% compared to value-added sales of $57.9 million in the first half of 2022.

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 $4.4 million in the first six months of 2023 compared to $5.7 million in the first six months of 2022.

The decrease in EBITDA was driven by decreased volumes partially offset by targeted cost control initiatives in the first half of 2023.

Second Quarter

(Thousands) Second Quarter Ended

June 30, July 1, $ %

2023 2022 Change Change

Net sales — — — — %

Value-added sales — (349) 349 (100) %

EBITDA (7,598) (7,191) (407) 6 %

The Other reportable segment in total includes unallocated corporate costs.

Corporate costs were $6.7 million in the first quarter of 2023 compared to $5.2 million in the first quarter of 2022.

Corporate costs accounted for 2% of Company-wide value-added sales in the first quarter of 2023 and 2022.

The increase in corporate costs in the first quarter of 2023 compared to the first quarter of 2022 is is reflective of investments to execute our strategic initiatives and variable costs associated with improved financial performance.

Corporate costs were $7.6 million in the second quarter of 2023 compared to $7.2 million in the second quarter of 2022.

Corporate costs accounted for 3% of Company-wide value-added sales in the second quarter of both 2023 and 2022 and remained relatively flat year over year.

(Thousands) Six Months Ended

June 30, July 1, $ %

2023 2022 Change Change

Net sales $ — $ — — — %

Value-added sales — (1,105) 1,105 (100) %

EBITDA (14,253) (12,366) (1,887) 15 %

Corporate costs were $14.3 million in the first half of 2023 compared to $12.4 million in the first half of 2022.

Corporate costs accounted for 3% and 2% of Company-wide value-added sales in the first half of 2023 and 2022, respectively.

The increase in corporate costs in the first half of 2023 compared to the first half of 2022 is reflective of investments to execute our strategic initiatives and variable costs associated with improved financial performance.

FINANCIAL POSITION

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

Three Months Ended

March 31, April 1, $

Six Months Ended

June 30, July 1, $

(Thousands) 2023 2022 Change

Net cash (used in) provided by operating activities $ 38,105 $ (14,304) $ 52,409

Net cash provided by operating activities $ 70,522 $ 21,415 $ 49,107

Net cash (used in) investing activities (62,677) (40,596) (22,081)

Net cash provided by financing activities (6,291) 39,305 (45,596)

Net cash (used in)/provided by financing activities (3,835) 38,418 (42,253)

Effects of exchange rate changes (537) (1,524) 987

Net change in cash and cash equivalents $ 3,473 $ 17,713 $ (14,240)

Net cash provided by operating activities totaled $38.1 million in the first three months of 2023 compared to net cash used in operating activities of $14.3 million in the prior-year period.

Working capital requirements used cash of $6.4 million in the first quarter of 2023 compared to $47.4 million during the first three months of 2022.

The decrease in cash used for working capital was primarily due to stronger cash collection and continued inventory management.

Net cash used in investing activities was $29.8 million in the first quarter of 2023 compared to $19.0 million in the prior-year period.

The increase in cash used in investing activities is due to increased capital expenditures, as expected, to support continued business growth.

Net cash provided by operating activities totaled $70.5 million in the first six months of 2023 versus $21.4 million in the prior-year period.

Working capital initiatives in the first half of 2023 drove the year over year increase in operating cash.

The increase in operating cash was primarily due to stronger cash collection and continued inventory management.

Net cash used in investing activities was $62.7 million in the first six months of 2023 compared to $40.6 million in the prior-year period.

The increase in cash used in investing activities is due to increased capital expenditures and mine development, as expected, to support continued business growth.

Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives.

For the full year 2023, the Company expects payments for property, plant, and equipment to be approximately $100 million.

Net cash used by financing activities totaled $6.3 million in the first three months of 2023 compared to net cash provided by financing activities of $39.3 million in the prior-year period.

The net financing cash outflow in 2023 was primarily due to debt repayments, compared to financing used to support continued business growth.

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 2022 Annual Report on Form 10-K.

Net cash used in financing activities totaled $3.8 million in the first six months of 2023 and compared to net cash provided by financing activities of $38.4 million in the comparable prior-year period.

The net financing cash outflow in 2023 was primarily due to debt repayments, compared to financing used to support continued business growth 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 March 31, 2023, cash and cash equivalents held by our foreign operations totaled $14.0 million.

At June 30, 2023, cash and cash equivalents held by our foreign operations totaled $15.8 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 March 31, 2023 and December 31, 2022 is as follows:

March 31, December 31,

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of June 30, 2023 and December 31, 2022 is as follows:

June 30, December 31,

(Thousands) 2023 2022

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

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

Pursuant to the amendment, we transitioned U.S.

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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 March 31, 2023 and December 31, 2022.

We were in compliance with all of our debt covenants as of June 30, 2023 and December 31, 2022.

Cash on hand up to $25 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement.

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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 $247.5 million as of March 31, 2023, compared to $241.9 million as of December 31, 2022.

The available and unused capacity under the metal consignment agreements expiring in August 2025 totaled approximately $293.7 million as of June 30, 2023, compared to $241.9 million as of December 31, 2022.

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

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

We did not repurchase any shares under this program in the first quarter of 2023.

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

We paid cash dividends of $2.6 million on our common stock in the first quarter of 2023.

We did not repurchase any shares under this program in the second quarter or first six months of 2023.

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 $2.7 million and $5.3 million on our common stock in the second quarter and first six months of 2023.

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

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

OFF-BALANCE SHEET ARRANGEMENTS AND CASH OBLIGATIONS

We maintain the majority of the precious metals and portions of the copper we use in production on a consignment basis in order to reduce our exposure to metal price movements and to reduce our working capital investment.

The notional value of off-balance sheet precious metals and copper was $367.5 million and $373.1 million as of March 31, 2023 and December 31, 2022, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of March 31, 2023.

For additional information on our contractual and other obligations, refer to our 2022 Annual Report on Form 10-K.

The notional value of off-balance sheet precious metals and copper was $321.3 million and $373.1 million as of June 30, 2023 and December 31, 2022, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of June 30, 2023.

For additional information on our material cash obligations, refer to our 2022 Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

For additional information regarding critical accounting policies, please refer to our 2022 Annual Report on Form 10-K.

Forward-looking Statements:

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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 conflict between Russia and Ukraine;

the disruptions in operations from, and other effects of, catastrophic and other extraordinary events including outbreaks of infectious diseases and the conflict between Russia and Ukraine;

realization of expected financial benefits expected from the Inflation Reduction Act of 2022;

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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