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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-02 · 138 added, 134 removed, 221 unchanged (55% of the section changed)

3 unchanged sentences

RESULTS OF OPERATIONS

Second Quarter

Second Quarter Ended

June 30, July 1, $ %

Third Quarter

Third Quarter Ended

September 29, September 30, $ %

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

16 unchanged sentences

Diluted earnings per share $ 1.27 $ 0.96 $ 0.31 32 %

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.

Net sales of $403.1 million in the third quarter of 2023 decreased $25.1 million from $428.2 million in the third 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.

Volume decreases in the semiconductor (18%), industrial (19%), automotive (18%) and medical (37%) end markets were partially offset by an increase the aerospace and defense (19%) end market, as well as incremental sales from the clad strip project of $28.2 million.

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.

The change in precious metal and copper prices favorably impacted net sales by $3.1 million during the third quarter of 2023 compared to prior year quarter.

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 $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.

Value-added sales of $270.5 million in the third quarter of 2023 decreased $13.0 million, or 5%, compared to the third quarter of 2022.

Volume decreases in the semiconductor (33%) and industrial (19%) end markets were partially offset by an increase in the aerospace and defense end market (27%) and incremental sales from the clad strip project of $28.2 million.

Gross margin in the third quarter of 2023 was $88.9 million, which was up 7% compared to the third quarter of 2022.

Gross margin expressed as a percentage of value-added sales increased to 33% in the third quarter of 2023 from 29% in the third quarter of 2022.

The production tax credit recorded in the third 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.

SG&A expense was $38.8 million in the third quarter of 2023, compared to $39.0 million in the third quarter of 2022.

SG&A expense remained relatively flat and expressed as a percentage of value-added sales was 14% for both the third quarter of 2023 and 2022.

R&D expense as a percent of value-added sales decreased slightly from 3% in the third quarter of 2022 to 2% in the third quarter of 2023.

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.

In the third quarter of 2023, we recorded $1.1 million of restructuring charges primarily in our Electronic Materials segment.

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

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

Other-net was $6.2 million of expense in the third quarter of 2023, or a $0.6 million decrease from the third quarter of 2022.

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

Interest expense-net was $7.7 million and $5.9 million in the third 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.

Income tax expense for the third quarter of 2023 was $3.0 million, compared to $4.4 million in the third quarter of 2022.

The effective tax rate for the third quarter of 2023 and 2022 was 10.0% and 18.2%, respectively.

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

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, $ %

Nine Months Ended

September 29, September 30, $ %

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

7 unchanged sentences

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

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

Restructuring (income) expense 3,194 1,560 1,634 105 %

Other—net 18,178 18,575 (397) (2) %

6 unchanged sentences

Diluted earnings per share $ 3.65 $ 2.76 $ 0.89 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.

Net sales of $1,244.1 million in the first nine months of 2023 decreased $78.4 million from $1,322.5 million in the first nine 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.

Volume decreases in the semiconductor (20%), industrial (13%) and consumer electronics (27%) 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 $91.4 million when compared to the first nine months of 2022.

Additionally, there was a $2.4 million year over year decrease in raw material beryllium hydroxide sales compared to the first nine 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.

The change in precious metal and copper market prices unfavorably impacted net sales by $2.9 million during the first nine months of 2023 compared to the same period in the prior year.

Value-added sales of $837.4 million in the first nine months of 2023 increased $25.9 million, or 3%, compared to the first nine months of 2022.

Despite the decrease in net sales, value-added sales increased due to a shift in mix to higher non-precious metal sales versus precious metal sales commensurate with an increase in value-added sales into the aerospace and defense (23%) end market as well as $91.4 million of incremental sales from the clad strip project.

These increases were slightly offset by a $2.4 million decrease in the volume of raw material beryllium hydroxide sales in the first nine months of 2023 when compared to the first nine months of 2022 as well as lower value-added sales into the semiconductor (20%), industrial (7%) and consumer electronics (27%) end markets.

Gross margin in the first nine months of 2023 was $269.3 million, an increase of 10% compared to the first nine months of 2022.

Gross margin expressed as a percentage of value-added sales increased to 32% in the first nine months of 2023 from 30% in the first nine 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.

In addition, the production tax credit recorded in the first nine months 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.

SG&A expense was $118.1 million in the first nine months of 2023, compared to $122.7 million in the first nine months of 2022.

The decrease in SG&A expense for the first nine months of 2023 was primarily driven by $4 million of merger and acquisition costs related to the acquisition of HCS-Electronic Materials incurred in the first nine 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 15% in the first nine months 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.

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

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

In the first nine months of 2023, we recorded a combined total of $3.2 million of restructuring charges in our Electronic Materials, Precision Optics, Performance Materials and Other segments.

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.

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

Other-net was $18.2 million of expense in the first nine months of 2023, or a $0.4 million decrease from the first nine months of 2022.

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 $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 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.

Interest expense-net was $22.8 million and $14.3 million in the first nine 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 period.

Income tax expense for the first nine months of 2023 was $11.9 million, compared to $12.5 million in the nine months of 2022.

The Company's effective tax rate for the first nine months of 2023 and 2022 was 13.5% and 18.0%, 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 and production credits and the foreign derived intangible income deduction.

The effective tax rate for the first nine months of 2023 included a net discrete income tax benefit of $3.4 million, primarily related to excess tax benefits from stock-based compensation awards, return to provision adjustments and an optimization of our foreign-derived intangible income deduction benefit.

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

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

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

Second Quarter Ended Six Months Ended

June 30, July 1, June 30, July 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 third quarter and first nine months of 2023 and 2022 is as follows:

Third Quarter Ended Nine Months Ended

September 29, September 30, September 29, September 30,

(Thousands) 2023 2022 2023 2022

2 unchanged sentences

Precision Optics 26,120 27,993 77,862 86,006

Other — — — —

Total $ 403,067 $ 428,191 $ 1,244,144 $ 1,322,531

23 unchanged sentences

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 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.

5 unchanged sentences

Performance Materials

Second Quarter

Second Quarter Ended

June 30, July 1, $ %

Third Quarter

Third Quarter Ended

September 29, September 30, $ %

(Thousands) 2023 2022 Change Change

2 unchanged sentences

EBITDA 46,366 28,866 17,500 61 %

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.

Net sales from the Performance Materials segment of $184.6 million in the third quarter of 2023 increased 9% compared to net sales of $169.4 million in the third quarter of 2022.

The increase in sales was due to incremental sales from the clad strip project of $28.2 million and increased volumes in the aerospace and defense end market (9%).

This increase was partially offset by decreased volumes in the automotive (22%) and industrial (28%) end markets.

Value-added sales of $168.9 million in the third quarter of 2023 were 13% higher than value-added sales of $148.8 million in the third 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 $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.

EBITDA for the Performance Materials segment was $46.4 million in the third quarter of 2023, compared to $28.9 million in the third quarter of 2022.

The increase in EBITDA in the third quarter of 2023 was primarily due to the same factors driving increases in net sales, manufacturing efficiencies and the $1.6 million of startup costs and $4.1 million of additional resource cost and scrap for the new wide area precision strip clad facility incurred in the third quarter of the prior year that did not recur in the third quarter of 2023.

In addition, we recorded a portion of the expected $10 million annual benefit from the production credit in the third 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, $ %

Nine Months Ended

September 29, September 30, $ %

(Thousands) 2023 2022 Change Change

2 unchanged sentences

EBITDA 134,061 80,886 53,175 66 %

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.

Net sales from the Performance Materials segment of $554.4 million in the first nine months of 2023 increased 17% compared to net sales of $473.9 million in the first nine months of 2022.

The increase in sales was primarily due to incremental sales from the clad strip project of $91.4 million as well an increase in the aerospace and defense (17%) end market, partially offset by decreases in the industrial (8%) and consumer electronics (22%) end markets when compared to the first nine months of 2022.

Additionally, there was a $2.4 million year over year decrease in raw material beryllium hydroxide sales compared to the first nine months of 2022.

Value-added sales of $502.5 million in the first nine months of 2023 were 22% higher than value-added sales of $411.9 million in the first nine 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.

EBITDA for the Performance Materials segment was $134.1 million in the first nine months of 2023 compared to $80.9 million in the first nine months of 2022.

The increase in EBITDA was primarily due to the same factors driving increases in net sales, manufacturing efficiencies and due to the $9.8 million of startup costs and $4.1 million of additional resource cost

and scrap for the new wide area precision strip clad facility incurred in the prior year period and $2.7 million of merger and acquisition costs incurred in the prior year period that did not recur in 2023.

In addition, we recorded a portion of the expected $10 million annual benefit from the production credit in the first nine months of 2023, which favorably impacted EBITDA.

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

Electronic Materials

Second Quarter

Second Quarter Ended

June 30, July 1, $ %

Third Quarter

Third Quarter Ended

September 29, September 30, $ %

(Thousands) 2023 2022 Change Change

2 unchanged sentences

EBITDA 10,155 16,853 (6,698) (40) %

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.

Net sales from the Electronic Materials segment of $192.3 million in the third quarter of 2023 were 17% lower than net sales of $230.8 million in the third quarter of 2022.

The decrease in net sales was primarily due to lower sales volumes in the semiconductor (18%) 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.

Value-added sales of $75.5 million in the third quarter of 2023 decreased 29% compared to value-added sales of $106.9 million in the third 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, $ %

EBITDA for the Electronic Materials segment was $10.2 million in the third quarter of 2023 compared to $16.9 million in the third quarter of 2022.

Nine Months Ended

September 29, September 30, $ %

(Thousands) 2023 2022 Change Change

2 unchanged sentences

EBITDA 37,504 51,338 (13,834) (27) %

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.

Net sales from the Electronic Materials segment of $611.9 million in the first nine months of 2023 were 20% lower than net sales of $762.6 million in the first nine months of 2022.

The decrease in net sales was primarily due to lower sales volumes in the semiconductor (21%) 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.

Additionally, pass-through metal price fluctuations reduced net sales by $3.5 million compared to the first nine months of 2022.

Value-added sales of $257.0 million in the first nine months of 2023 decreased 18% compared to value-added sales of $314.9 million in the first nine months 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.

EBITDA for the Electronic Materials segment was $37.5 million in the first nine months of 2023 compared to $51.3 million in the first nine months of 2022.

The decrease in EBITDA was due to decreased sales volumes, partially offset by decreases in manufacturing and SG&A expenses as a result of various targeted cost control initiatives implemented in 2023 as well as lower merger and acquisition costs of $6.8 million incurred in the prior year period that did not recur in 2023.

Precision Optics

Second Quarter

(Thousands) Second Quarter Ended

June 30, July 1, $ %

Third Quarter

(Thousands) Third Quarter Ended

September 29, September 30, $ %

2023 2022 Change Change

2 unchanged sentences

EBITDA 3,261 3,546 (285) (8) %

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.

Net sales from the Precision Optics segment of $26.1 million in the third quarter of 2023 decreased 7% compared to net sales of $28.0 million in the third 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 (37%), 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 (102%) 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.

Value-added sales of $26.1 million in the third quarter of 2023 decreased 7% compared to value-added sales of $28.0 million in the third 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 $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, $ %

EBITDA for the Precision Optics segment was $3.3 million in the third quarter of 2023 compared to $3.5 million in the third quarter of 2022.

The decrease in EBITDA was driven by decreased volumes, partially offset by targeted cost control initiatives implemented in 2023.

(Thousands) Nine Months Ended

September 29, September 30, $ %

2023 2022 Change Change

2 unchanged sentences

EBITDA 7,654 9,281 (1,627) (18) %

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.

Net sales from the Precision Optics segment of $77.9 million in the first nine months of 2023 decreased 9% compared to net sales of $86.0 million in the first nine months 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 (38%), 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 (44%) 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.

Value-added sales of $77.8 million in the first nine months of 2023 decreased 9% compared to value-added sales of $85.9 million in the first nine months 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, $ %

EBITDA for the Precision Optics segment was $7.7 million in the first nine months of 2023 compared to $9.3 million in the first nine months of 2022.

The decrease in EBITDA was driven by decreased volumes partially offset by targeted cost control initiatives implemented in 2023.

Third Quarter

(Thousands) Third Quarter Ended

September 29, September 30, $ %

2023 2022 Change Change

3 unchanged sentences

The Other reportable segment in total includes unallocated corporate costs.

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, $ %

Corporate costs were $7.5 million in the third quarter of 2023 compared to $5.8 million in the third quarter of 2022.

Corporate costs increased from 2% of Company-wide value-added sales in the third quarter of 2022 to 3% in the third quarter of 2023.

The increase in corporate costs in the third quarter of 2023 compared to the third quarter of 2022 is primarily driven by changes in variable-based compensation and incentives.

(Thousands) Nine Months Ended

September 29, September 30, $ %

2023 2022 Change Change

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EBITDA (21,750) (18,206) (3,544) 19 %

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.

Corporate costs were $21.8 million in the first nine months of 2023 compared to $18.2 million in the first nine months of 2022.

Corporate costs increased from 2% of Company-wide value-added sales in the first nine months of 2022 to 3% in the first nine months of 2023.

The increase in corporate costs in the first nine months of 2023 compared to the first nine months of 2022 is primarily driven by changes in variable-based compensation and incentives.

FINANCIAL POSITION

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

Six Months Ended

June 30, July 1, $

Nine Months Ended

September 29, September 30, $

(Thousands) 2023 2022 Change

1 unchanged sentence

Net cash used in investing activities (94,160) (56,380) (37,780)

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

Net cash provided by financing activities 13,735 31,349 (17,614)

Effects of exchange rate changes (780) (2,953) 2,173

Net change in cash and cash equivalents $ 3,300 $ 6,220 $ (2,920)

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.

Net cash provided by operating activities totaled $84.5 million in the first nine months of 2023 versus $34.2 million in the prior-year period.

The period over period increase in cash provided by operating activities from the prior year period was primarily due to increased net earnings as well as favorable changes in working capital, primarily inventory and accounts receivable, primarily due to working capital initiatives during 2023.

Net cash used in investing activities was $94.2 million in the first nine months of 2023 compared to $56.4 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.

1 unchanged sentence

For the full year 2023, the Company expects payments for property, plant, and equipment to be approximately $105 million.

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.

Net cash provided by financing activities totaled $13.7 million in the first nine months of 2023 and $31.3 million in the comparable prior-year period.

The decrease is primarily due to a decrease in borrowings under our revolving credit facilities in the first nine months of 2023 of $39.6 million, compared to net borrowings of $55.7 million in the same period in the prior year.

We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend program, environmental remediation projects, and strategic acquisitions for at least the next twelve months and for the foreseeable future thereafter.

At June 30, 2023, cash and cash equivalents held by our foreign operations totaled $15.8 million.

At September 29, 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 June 30, 2023 and December 31, 2022 is as follows:

June 30, December 31,

A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of September 29, 2023 and December 31, 2022 is as follows:

September 29, December 31,

(Thousands) 2023 2022

21 unchanged sentences

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 June 30, 2023 and December 31, 2022.

We were in compliance with all of our debt covenants as of September 29, 2023 and December 31, 2022.

Cash on hand up to $25.0 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement.

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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 $293.7 million as of June 30, 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 $270.2 million as of September 29, 2023, compared to $241.9 million as of December 31, 2022.

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

2 unchanged sentences

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

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

We did not repurchase any shares under this program in the third quarter or first nine 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 paid cash dividends of $2.7 million and $7.9 million on our common stock in the third quarter and first nine months of 2023, respectively.

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.

1 unchanged sentence

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 $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.

The notional value of off-balance sheet precious metals and copper was $344.8 million and $373.1 million as of September 29, 2023 and December 31, 2022, respectively.

We were in compliance with all of the covenants contained in the consignment agreements as of September 29, 2023.

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

20 unchanged sentences

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 outbreaks of infectious diseases 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 and other hostilities;

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

5 unchanged sentences

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