What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-16 · 67 added, 98 removed, 338 unchanged (33% of the section changed)

12 unchanged sentences

R&D expense as a % of Value-added sales 2 % 3 % 3 %

Goodwill impairment charges — — 9,053

Asset impairment charges — — 1,419

Restructuring expense 3,824 1,573 (438)

8 unchanged sentences

2023 Compared to 2022

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

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

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

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

See Note C to the Consolidated Financial Statements for additional details on the year over year changes in our net sales by segment and market.

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

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

Net sales of $1,665.2 million in 2023 decreased $91.9 million from $1,757.1 million in 2022.

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

Volume decreases in the semiconductor (17%), industrial (14%) and consumer electronics (19%) end markets were partially offset by an increase the aerospace and defense (32%) end market, as well as incremental sales from the clad strip project of $90.7 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, which are passed on to the customer as discussed in the value-added sales section below, favorably impacted net sales by $6.2 million in 2023 compared to 2022.

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.

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 $1,143.6 million in 2022 were up 33% compared to 2021.

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

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

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

These increases were partially offset by foreign currency headwinds.

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

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

Value-added sales of $1,127.1 million in 2023 increased $12.7 million compared to $1,114.4 million in 2022.

Volume decreases in the semiconductor (20%) and industrial (9%) end markets were offset by an increase in the aerospace and defense end market (36%) and incremental sales from the clad strip project of $90.7 million.

Gross margin was $349.0 million in 2023, a 2% increase from $343.9 million in 2022.

Gross margin expressed as a percentage of value-added sales was 31% in 2023 and 2022, respectively.

Although gross margin as a percent of value-added sales remained consistent with prior year, 2023 gross margin was favorably impacted by the production credit recorded in 2023, which was partially offset by unfavorable mix as well as the impact of lower volumes, primarily in the Electronic Materials segment.

The Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022.

The IRA, among other provisions, includes a new Advanced Manufacturing Production Credit (“production credit”) effective on January 1, 2023.

The production credit provides an annual cash benefit for a portion of the production costs for the sale of certain critical minerals produced in the U.S.

and sold during the year.

On December 15, 2023, the U.S.

Treasury Department published proposed regulations on the production credit that include clarifying guidance regarding the definition of production costs in the computation of the production credit.

Although the proposed guidance is not authoritative and is subject to change in the regulatory review process, the guidance indicates that the Treasury Department may implement a narrower definition of eligible production costs in the final regulations.

Accordingly, the Company recorded an $8 million benefit to cost of goods sold related to the production credit.

The ultimate amount of the benefit that the Company is entitled to receive in connection with the production credit will depend on the final regulations issued on the production credit.

See Footnote G for further discussion regarding the accounting for the production credit.

SG&A expense totaled $157.9 million in 2023 as compared to $169.3 million in 2022.

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

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

The decrease in SG&A expense for 2023 was primarily due to various cost savings initiatives in 2023.

Expressed as a percentage of value-added sales, SG&A expense decreased from 15% in 2022 to 14% in 2023.

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

R&D expense was $29.0 million in 2022, an increase of 9% compared to 2021.

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

R&D expense was $27.5 million in 2023, a decrease of 5% compared to 2022.

R&D costs as a percentage of value-added sales decreased from 3% in 2022 to 2% in 2023.

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

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

In 2023, we recorded a combined total of $3.8 million of restructuring charges across all segments.

Other-net totaled expense of $23.3 million and $24.2 million in 2023 and 2022, respectively.

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

The decrease Other-net was primarily driven by a decrease in metal consignment fees.

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

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Interest expense - net was $31.3 million in 2023 and $21.9 million in 2022.

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

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

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

The increase in interest expense in 2023 compared to 2022 was primarily due to an increase in interest rates compared to the prior year.

Income tax expense (benefit) for 2023 was $12.1 million of expense compared to $17.1 million of expense in 2022.

The decrease in income tax expense in 2023 compared to 2022 was primarily due to the favorable impacts of the foreign derived intangible income deduction and the non-taxable production credit, partially offset by the impact of adjustments to unrecognized tax benefits.

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

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2023 Compared to 2022

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

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

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

These impacts were slightly offset by a decrease in automotive market sales as a result of the global chip shortage impacting the timing of demand and foreign currency headwinds.

Net sales from the Performance Materials segment of $755.5 million in 2023 increased 13% compared to 2022.

The increase in net sales was due to incremental sales from the clad strip project of $90.7 million and increased volumes in the aerospace and defense end market (31%).

This increase was offset by decreased volumes in the industrial (11%) and automotive (9%) end markets.

Value-added sales of $688.6 million in 2023 were 17% higher than value-added sales of $589.5 million in 2022.

1 unchanged sentence

EBITDA for the Performance Materials segment was $174.5 million in 2023 compared to $125.2 million in 2022.

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

The increase in EBITDA was primarily due to the same factors driving the increase in net sales as well as the benefit from the production credit and operational efficiencies.

Electronic Materials

4 unchanged sentences

2023 Compared to 2022

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

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

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

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

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

The increase was primarily driven by $126.2 million in value-added sales from the HCS-Electronic Materials acquisition and an increase in value-added sales in the semiconductor end market.

The impact of these items were partially offset by foreign currency headwinds.

Net sales from the Electronic Materials segment of $805.8 million in 2023 were 17% lower than net sales of $971.9 million in 2022.

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

This was partially offset by the impact of pass-through metal price fluctuations, which increased net sales by $10.4 million compared to 2022.

Value-added sales of $334.7 million decreased 19% compared to value-added sales of $412.8 million in 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 $45.7 million in 2023 compared to $67.8 million in 2022.

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

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 $7.4 million incurred in the prior year period that did not recur in 2023.

Precision Optics

5 unchanged sentences

Net sales from the Precision Optics segment were $103.9 million in 2023, a decrease of 9% compared to net sales of $113.7 million in 2022.

The change was primarily driven by a reduction in sales related to COVID-19 PCR testing programs, the discontinuation of a consumer electronic application and foreign currency headwinds.

The decrease was primarily due to lower sales volumes related to COVID-19 PCR testing programs as well as decreased sales in the consumer electronics end market (33%), 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 (47%) end market.

Value-added sales of $103.8 million in 2023 decreased 9% compared to value-added sales of $113.6 million in 2022.

1 unchanged sentence

EBITDA for the Precision Optics segment was $9.9 million in 2023 compared to $13.8 million in 2022.

The decrease in EBITDA was driven by decreased volumes, the temporary shut down of the Shanghai facility in the first and second quarters of 2022, related unabsorbed costs and restructuring charges incurred during 2022.

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

(Thousands) 2023 2022 2021

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The Other reportable segment in total includes unallocated corporate costs.

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

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

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

Corporate costs of $29.3 million in 2023 increased $0.9 million as compared to $28.3 million in 2022.

Corporate costs were 3% of total Company value-added sales in both 2023 and 2022.

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

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Net cash provided by operating activities totaled $144.4 million in 2023 versus $116.0 million in 2022.

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

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

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

The increase in net cash provided by operating activities was driven by an increase in operating income of $16.7 million.

Additionally, there was an increase in cash provided by working capital of $66.8 million.

The favorable working capital inflow was driven by the Company's continued working capital initiatives throughout 2023.

This was partially offset by cash outflows due to an increase in unbilled receivables of $18.6 million, a decrease in unearned revenue of $17.6 million and a decrease in customer prepayments of $5.3 million.

Net cash used in investing activities was $119.2 million in 2023 compared to $79.7 million in 2022.

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

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

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

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

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

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

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

Net cash used in financing activities decreased $10.7 million from 2022.

The decrease in 2023 compared to 2022 is a result of an increase in debt repayments in 2023.

Dividends per common share increased 4% to $0.515 per share in 2023.

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

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

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

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

Pursuant to the amendment, we transition U.S.

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

The 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 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 $550 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.

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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 $241.9 million as of December 31, 2022, compared to $69.8 million as of December 31, 2021 under the metal consignment agreements that expired on August 27, 2022.

The available and unused capacity under the metal consignment agreements expiring in August 2025 totaled approximately $263.5 million as of December 31, 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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Total $ 56.2 $ 44.6 $ 370.2 $ 0.2 $ 0.2 $ 0.1 $ 471.5

(1) Refer to Note O to the Consolidated Financial Statements.

(1) Refer to Note N to the Consolidated Financial Statements.

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

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Portions of the following information are based on assumptions, qualifications and procedures that are not fully described herein.

Reference should be made to the full text of the TRS, which is filed as Exhibit 96 to this Form 10-K and is incorporated by reference herein.

Reference should be made to the full text of the TRS, which was filed as Exhibit 96 to our Annual Report on Form 10-K for the year-ended December 31, 2021 and is incorporated by reference herein.

Mineral Resources

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

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

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

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

3) Determine the transaction price

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Refer to Note D of the Consolidated Financial Statements for additional details on our contract balances.

The annual net periodic expense and benefit obligations related to the Company's defined benefit plans are determined on an actuarial basis.

This determination requires critical assumptions regarding the discount rate, long-term rate of return on plan assets, increases in compensation levels, and amortization periods for actuarial gains and losses.

Assumptions are determined based on Company data and appropriate market indicators and are evaluated each year as of the plans' measurement date.

Changes in the assumptions to reflect actual experience, as well as the amortization of actuarial gains and losses, could result in a material change in the annual net periodic expense and benefit obligations reported in the financial statements.

The Company uses a spot-rate approach to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension plans.

The spot-rate approach applies separate discount rates (along the yield curve) for each projected benefit payment in the calculation.

Our pension plan investment strategies are governed by a policy adopted by the Board of Directors.

A senior management team oversees a group of outside investment analysts and brokerage firms that implement these strategies.

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

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

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

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

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

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

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

Refer to Note P of the Consolidated Financial Statements for additional details on our pension and other post-employment benefit plans.

Deferred Taxes

We record deferred tax assets and liabilities based upon the temporary difference between the financial reporting and tax basis of assets and liabilities.

If it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is established.

All available evidence, both positive and negative, is considered to determine whether a valuation allowance is needed.

We review the expiration dates of certain deferred tax assets against projected income levels to determine if a valuation allowance is needed.

Certain deferred tax assets do not have an expiration date.

We also evaluate deferred tax assets for realizability due to cumulative operating losses by jurisdiction and record a valuation allowance as warranted.

A valuation allowance may increase tax expense and reduce net income in the period it is recorded.

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

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

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

Precious Metal Physical Inventory Counts

We take and record the results of a physical inventory count of our precious metals on a quarterly basis.

We take and record the results of a physical inventory count of our precious metals on a periodic basis.

Our precious metal operations include a refinery that processes precious metal-containing scrap and other materials from our customers, as well as our own internally generated scrap.

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

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

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

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

Due to the recent downturn in the semi-conductor market impacting the Electronic Materials reporting unit and recent results for the Precision Optics reporting unit, the Company elected to perform a quantitative annual impairment assessment for the Electronic Materials and Precision Optics reporting units' goodwill as of October 1, 2023 and a qualitative impairment test for the Performance Materials reporting unit.

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

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The discounted cash flow model also requires the use of a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the five years forecast by the reporting units), as well as projections of future operating margins (for the period beyond the forecast five years).

The Company used a discount rate in the mid-teens and a terminal growth rate of low single digits.

The Company used a

discount rate in the mid-teens and a terminal growth rate of low single digits.

The market approach requires several assumptions including sales and EBITDA multiples for comparable companies that operate in the same markets as the reporting unit.

1 unchanged sentence

Based on the quantitative assessment performed for the Precision Optics reporting unit, the fair value exceeded the carrying value by less than 10%, but by a sufficient amount to support no indicators of impairment as of October 1, 2023.

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

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

As of October 1, 2023, based on the quantitative assessments for the Electronic Materials reporting unit, the estimated fair value was substantially in excess of the carrying value.

Additionally, for the Performance Materials reporting unit, there were no indicators of impairment based on the qualitative analysis performed.

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

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

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

The assumptions used for the reporting units

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

The assumptions used for the reporting units and indefinite-lived intangibles with fair values exceeding carrying values of less than 10% are more sensitive to future performance and will be monitored accordingly.

We also compared our market capitalization as of October 1, 2023 to the carrying value of our equity and considering an implied control premium, we noted no impairment indicators or triggering events.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis