MATERION Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW We are an integrated producer of high-performance advanced engineered materials used in a variety of electronic, thermal, and structural applications. Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, consumer electronics, energy, and telecom and data center. 24 RESULTS OF OPERATIONS Third Quarter Third Quarter Ended September 29, September 30, $ % (Thousands, except per share data) 2023 2022 Change Change Net sales $ 403,067 $ 428,191 $ (25,124) (6) % Value-added sales 270,532 283,497 (12,965) (5) % Gross margin 88,936 82,743 6,193 7 % Gross margin as a % of value-added sales 33 % 29 % Selling, general, and administrative (SG&A) expense 38,806 38,958 (152) — % SG&A expense as a % of value-added sales 14 % 14 % Research and development (R&D) expense 6,322 7,430 (1,108) (15) % R&D expense as a % of value-added sales 2 % 3 % Restructuring expense 1,077 484 593 123 % Other—net 6,211 6,774 (563) (8) % Operating profit 36,520 29,097 7,423 26 % Other non-operating (income)—net (685) (1,175) 490 (42) % Interest expense—net 7,678 5,888 1,790 30 % Income before income taxes 29,527 24,384 5,143 21 % Income tax expense 2,963 4,432 (1,469) (33) % Net income $ 26,564 $ 19,952 $ 6,612 33 % Diluted earnings per share $ 1.27 $ 0.96 $ 0.31 32 % 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 (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 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 $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 $38.8 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 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 25 customers. 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 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 $7.7 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 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. Nine Months Nine Months Ended September 29, September 30, $ % (Thousands, except per share data) 2023 2022 Change Change Net sales $ 1,244,144 $ 1,322,531 $ (78,387) (6) % Value-added sales 837,351 811,417 25,934 3 % Gross margin 269,327 245,461 23,866 10 % Gross margin as a % of value-added sales 32 % 30 % SG&A expense 118,053 122,666 (4,613) (4) % SG&A expense as a % of value-added sales 14 % 15 % R&D expense 21,098 22,096 (998) (5) % R&D expense as a % of value-added sales 3 % 3 % Restructuring (income) expense 3,194 1,560 1,634 105 % Other—net 18,178 18,575 (397) (2) % Operating profit 108,804 80,564 28,240 35 % Other non-operating (income)—net (2,141) (3,512) 1,371 (39) % Interest expense—net 22,820 14,325 8,495 59 % Income before income taxes 88,125 69,751 18,374 26 % Income tax expense 11,891 12,525 (634) (5) % Net income $ 76,234 $ 57,226 $ 19,008 33 % Diluted earnings per share $ 3.65 $ 2.76 $ 0.89 32 % 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 (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. 26 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 nine months of 2023 favorably impacted gross margin. See Note F to the Consolidated Financial Statements for further discussion. 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 consists primarily of direct personnel costs for product innovation including pre-production development, evaluation, and testing of new products, prototypes, and applications to deliver new high performing advanced materials to our customers. R&D expense accounted for 3% of value-added sales in the first nine months of both 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 $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 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 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. 27 Value-Added Sales - Reconciliation of Non-GAAP Financial Measure A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the third quarter and first nine months of 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 Net sales Performance Materials $ 184,642 $ 169,357 $ 554,427 $ 473,876 Electronic Materials 192,305 230,841 611,855 762,649 Precision Optics 26,120 27,993 77,862 86,006 Other — — — — Total $ 403,067 $ 428,191 $ 1,244,144 $ 1,322,531 Less: pass-through metal costs Performance Materials $ 15,748 $ 20,525 $ 51,906 $ 61,959 Electronic Materials 116,772 123,905 354,829 447,719 Precision Optics 15 16 58 83 Other — 248 — 1,353 Total $ 132,535 $ 144,694 $ 406,793 $ 511,114 Value-added sales Performance Materials $ 168,894 $ 148,832 $ 502,521 $ 411,917 Electronic Materials 75,533 106,936 257,026 314,930 Precision Optics 26,105 27,977 77,804 85,923 Other — (248) — (1,353) Total $ 270,532 $ 283,497 $ 837,351 $ 811,417 Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through precious metal market costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through market metal costs. The dollar amount of gross margin and operating profit is not affected by the value-added sales calculation. We sell other metals and materials that are not considered direct pass-throughs, and these costs are not deducted from net sales when calculating value-added sales. Non-GAAP financial measures, such as value-added sales, have inherent limitations and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. The cost of gold, silver, platinum, palladium, copper, ruthenium, iridium, rhodium, rhenium, and osmium can be quite volatile. Our pricing policy is to directly pass the market cost of these metals on to the customer in order to mitigate the impact of metal price volatility on our results from operations. Trends and comparisons of net sales are affected by movements in the market prices of these metals, but changes in net sales due to metal price movements may not have a proportionate impact on our profitability. Our net sales are also affected by changes in the use of customer-supplied metal. When we manufacture a precious metal product, the customer may purchase metal from us or may elect to provide its own metal, in which case we process the metal on a toll basis and the metal value does not flow through net sales or cost of sales. In either case, we generally earn our margin based upon our fabrication efforts. The relationship of this margin to net sales can change depending upon whether or not the 28 product was made from our metal or the customer’s metal. The use of value-added sales removes the potential distortion in the comparison of net sales caused by changes in the level of customer-supplied metal. By presenting information on net sales and value-added sales, it is our intention to allow users of our financial statements to review our net sales with and without the impact of the pass-through metals. Segment Results The Company consists of four reportable segments: Performance Materials, Electronic Materials, Precision Optics, and Other. The Other reportable segment includes unallocated corporate costs. Performance Materials Third Quarter Third Quarter Ended September 29, September 30, $ % (Thousands) 2023 2022 Change Change Net sales $ 184,642 $ 169,357 $ 15,285 9 % Value-added sales 168,894 148,832 20,062 13 % EBITDA 46,366 28,866 17,500 61 % 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 $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. Nine Months Nine Months Ended September 29, September 30, $ % (Thousands) 2023 2022 Change Change Net sales $ 554,427 $ 473,876 $ 80,551 17 % Value-added sales 502,521 411,917 90,604 22 % EBITDA 134,061 80,886 53,175 66 % 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 $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 29 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 Third Quarter Third Quarter Ended September 29, September 30, $ % (Thousands) 2023 2022 Change Change Net sales $ 192,305 $ 230,841 $ (38,536) (17) % Value-added sales 75,533 106,936 (31,403) (29) % EBITDA 10,155 16,853 (6,698) (40) % 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 $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 $10.2 million in the third quarter of 2023 compared to $16.9 million in the third quarter 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 the second quarter of 2023. Nine Months Nine Months Ended September 29, September 30, $ % (Thousands) 2023 2022 Change Change Net sales $ 611,855 $ 762,649 $ (150,794) (20) % Value-added sales 257,026 314,930 (57,904) (18) % EBITDA 37,504 51,338 (13,834) (27) % 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 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 $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. 30 Precision Optics Third Quarter (Thousands) Third Quarter Ended September 29, September 30, $ % 2023 2022 Change Change Net sales $ 26,120 $ 27,993 $ (1,873) (7) % Value-added sales 26,105 27,977 (1,872) (7) % EBITDA 3,261 3,546 (285) (8) % 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 $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 $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. Nine Months (Thousands) Nine Months Ended September 29, September 30, $ % 2023 2022 Change Change Net sales $ 77,862 $ 86,006 $ (8,144) (9) % Value-added sales 77,804 85,923 (8,119) (9) % EBITDA 7,654 9,281 (1,627) (18) % 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 $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 $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. Other Third Quarter (Thousands) Third Quarter Ended September 29, September 30, $ % 2023 2022 Change Change Net sales $ — $ — $ — — % Value-added sales — (248) 248 (100) % EBITDA (7,497) (5,839) (1,658) 28 % The Other reportable segment in total includes unallocated corporate costs. 31 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. Nine Months (Thousands) Nine Months Ended September 29, September 30, $ % 2023 2022 Change Change Net sales $ — $ — $ — — % Value-added sales — (1,353) 1,353 (100) % EBITDA (21,750) (18,206) (3,544) 19 % 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. 32 FINANCIAL POSITION Cash Flow A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows: Nine Months Ended September 29, September 30, $ (Thousands) 2023 2022 Change Net cash provided by operating activities $ 84,505 $ 34,204 $ 50,301 Net cash used in investing activities (94,160) (56,380) (37,780) 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 $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. 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 $105 million. 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. Liquidity We believe cash flow from operations plus the available borrowing capacity and our current cash balance are adequate to support operating requirements, capital expenditures, projected pension plan contributions, the current dividend program, environmental remediation projects, and strategic acquisitions for at least the next twelve months and for the foreseeable future thereafter. At September 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 September 29, 2023 and December 31, 2022 is as follows: September 29, December 31, (Thousands) 2023 2022 Cash and cash equivalents $ 16,401 $ 13,101 Total outstanding debt 460,995 431,981 Net debt $ (444,594) $ (418,880) Available borrowing capacity $ 150,996 $ 185,294 Net debt is a non-GAAP financial measure. We are providing this information because we believe it is more indicative of our overall financial position. It is also a measure our management uses to assess financing and other decisions. We believe that based on our typical cash flow generated from operations, we can support a higher leverage ratio in future periods. 33 The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts the borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation, depletion and amortization, and other adjustments. In 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. dollar denominated borrowings from LIBOR to SOFR for both the revolving credit agreement and the term loan and increased the cap on precious metals consignment line 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 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 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 minimum interest coverage ratio. 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. In November 2021, we completed the acquisition of HCS-Electronic Materials. The Company financed the purchase price for the HCS-Electronic Materials acquisition with a new $300.0 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103.0 million of borrowings under its amended revolving credit facility. The interest rate for the term loan is based on 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. 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 $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. In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock. The timing of the share repurchases will depend on several factors, including market and business conditions, our cash flow, debt levels, and other investment opportunities. There is no minimum quantity requirement to repurchase our common stock for a given year, and the repurchases may be discontinued at any time. We did not repurchase any shares under this program in the third quarter or first nine months of 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 $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. 34 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 $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. 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. Forward-looking Statements: Portions of the narrative set forth in this document that are not statements of historical or current facts are forward-looking statements. Our actual future performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. These factors include, in addition to those mentioned elsewhere herein: the global economy, including inflationary pressures, potential future recessionary conditions and the impact of tariffs and trade agreements; the impact of any U.S. Federal Government shutdowns or sequestrations; the condition of the markets which we serve, whether defined geographically or by segment; changes in product mix and the financial condition of customers; our success in developing and introducing new products and new product ramp-up rates; our success in passing through the costs of raw materials to customers or otherwise mitigating fluctuating prices for those materials, including the impact of fluctuating prices on inventory values; our success in identifying acquisition candidates and in acquiring and integrating such businesses; the impact of the results of acquisitions on our ability to fully achieve the strategic and financial objectives related to these acquisitions; our success in implementing our strategic plans and the timely and successful start-up and completion of any capital projects; other financial and economic factors, including the cost and availability of raw materials (both base and precious metals), physical inventory valuations, metal consignment fees, tax rates, exchange rates, interest rates, pension costs and required cash contributions and other employee benefit costs, energy costs, regulatory compliance costs, the cost and availability of insurance, credit availability, and the impact of the Company’s stock price on the cost of incentive compensation plans; the uncertainties related to the impact of war, terrorist activities, and acts of God; changes in government regulatory requirements and the enactment of new legislation that impacts our obligations and operations; the conclusion of pending litigation matters in accordance with our expectation that there will be no material adverse effects; the disruptions in operations from, and other effects of, catastrophic and other extraordinary events including 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; and the risk factors set forth in Part 1, Item 1A of the Company's 2022 Annual Report on Form 10-K. Item 3. Quantitative and Qualitative Disclosures about Market Risk For information regarding market risks, refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2022 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2022 Annual Report on Form 10-K. 35