Item 2. Management’s Discussion and Analysis
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 electrical, 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.
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RESULTS OF OPERATIONS
First Quarter
First Quarter Ended
March 29, March 31, $ %
(Thousands, except per share data) 2024 2023 Change Change
Net sales $ 385,287 $ 442,526 $ (57,239) (13) %
Value-added sales 257,848 298,558 (40,710) (14) %
Gross margin 71,212 91,336 (20,124) (22) %
Gross margin as a % of value-added sales 28 % 31 %
Selling, general, and administrative (SG&A) expense 35,844 40,336 (4,492) (11) %
SG&A expense as a % of value-added sales 14 % 14 %
Research and development (R&D) expense 7,142 7,621 (479) (6) %
R&D expense as a % of value-added sales 3 % 3 %
Restructuring (income) expense 1,620 664 956 144 %
Other—net 4,357 5,775 (1,418) (25) %
Operating profit 22,249 36,940 (14,691) (40) %
Other non-operating (income)—net (643) (730) 87 (12) %
Interest expense—net 8,279 7,502 777 10 %
Income before income taxes 14,613 30,168 (15,555) (52) %
Income tax expense (benefit) 1,204 4,580 (3,376) (74) %
Net income $ 13,409 $ 25,588 $ (12,179) (48) %
Diluted earnings per share $ 0.64 $ 1.23 $ (0.59) (48) %
NM = Not Meaningful
Net sales of $385.3 million in the first quarter of 2024 decreased $57.2 million from $442.5 million in the first quarter of 2023. Volume decreases in the semiconductor (13%), industrial (28%), energy (34%) and automotive (28%) end markets were partially offset by volume increases in the aerospace and defense end market (32%). 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 during the first quarter of 2024 by $3.7 million.
Value-added sales is a non-GAAP financial measure that removes the impact of pass-through metal costs and allows for analysis without the distortion of the movement or volatility in metal prices and changes in mix due to customer-supplied material. 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 $257.8 million in the first quarter of 2024 decreased $40.7 million, or 14%, compared to the first quarter of 2023. The decrease was driven by volume decrease in the semiconductor (25%), industrial (29%), energy (36%) and automotive (32%) end markets partially off set by a volume increase in the aerospace and defense (41%) end market.
Gross margin in the first quarter of 2024 was $71.2 million, a decrease of 22% compared to the first quarter of 2023. Gross margin expressed as a percentage of value-added sales decreased to 28% in the first quarter of 2024 from 31% in the first quarter of 2023. Gross margin decreased from the prior year primarily due to impact of lower volumes and related unabsorbed costs. Additionally, gross margin was unfavorably impacted by higher pre-production costs associated with the expansion of the new wide area clad facility.
SG&A expense was $35.8 million in the first quarter of 2024, compared to $40.3 million in the first quarter of 2023. The decrease in SG&A expense was primarily due to various cost savings initiatives implemented throughout 2023 and during the first quarter of 2024. Expressed as a percentage of value-added sales, SG&A expense was 14% in both the first quarter of 2024 and 2023.
R&D expense consists primarily of direct personnel costs for pre-production evaluation and testing of new products, prototypes, and applications. R&D spend was 3% of value-added sales in both the first quarter of 2024 and 2023.
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Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first quarter of 2024, we recorded a combined total of $1.6 million of restructuring charges across all segments, compared to $0.7 million of restructuring charges in the first quarter of 2023 recorded in our Electronic Materials and Precision Optics segments.
Other-net was $4.4 million of expense in the first quarter of 2024, or a $1.4 million decrease from the first quarter of 2023, primarily driven by a $0.9 million decrease in metal consignment fees. Refer to Note E to the Consolidated Financial Statements for details of the major components within Other-net.
Other non-operating (income) expense-net includes components of pension and post-retirement expense other than service costs. Refer to Note J to the Consolidated Financial Statements for details of the components.
Interest expense-net was $8.3 million and $7.5 million in the first quarter of 2024 and 2023, 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 quarter of 2024 was expense of $1.2 million, compared to $4.6 million in the first quarter of 2023. The effective tax rate for the first quarter of 2024 and 2023 was 8.2% and 15.2%, respectively. The effective tax rate for the first quarter of 2024 was lower than the statutory tax rate primarily due to the impact of percentage depletion, the foreign derived intangible income deduction, and excess tax benefits from stock-based compensation awards. See Note F to the Consolidated Financial Statements for additional discussion.
Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
A reconciliation of net sales to value-added sales, a non-GAAP financial measure, for each reportable segment and for the total Company for the first quarter of 2024 and 2023 is as follows:
First Quarter Ended
March 29, March 31,
(Thousands) 2024 2023
Net sales
Performance Materials $ 168,646 $ 187,014
Electronic Materials 191,971 228,820
Precision Optics 24,670 26,692
Other — —
Total $ 385,287 $ 442,526
Less: pass-through metal costs
Performance Materials $ 13,072 $ 19,004
Electronic Materials 114,341 124,942
Precision Optics 26 22
Other — —
Total $ 127,439 $ 143,968
Value-added sales
Performance Materials $ 155,574 $ 168,010
Electronic Materials 77,630 103,878
Precision Optics 24,644 26,670
Other — —
Total $ 257,848 $ 298,558
Internally, management reviews net sales on a value-added basis. Value-added sales is a non-GAAP financial measure that deducts the value of the pass-through metal costs from net sales. Value-added sales allow management to assess the impact of differences in net sales between periods, segments, or markets, and analyze the resulting margins and profitability without the distortion of movements in pass-through metal costs. 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
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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 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 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.
The primary measurement used by management to measure the financial performance of each segment is EBITDA. Refer to Note B to the Consolidated Financial Statements for the reconciliation of EBITDA by segment to consolidated net income.
Performance Materials
First Quarter
First Quarter Ended
March 29, March 31, $ %
(Thousands) 2024 2023 Change Change
Net sales $ 168,646 $ 187,014 $ (18,368) (10) %
Value-added sales 155,574 168,010 (12,436) (7) %
EBITDA 30,676 42,770 (12,094) (28) %
Net sales from the Performance Materials segment of $168.6 million in the first quarter of 2024 decreased 10% compared to net sales of $187.0 million in the first quarter of 2023. The decrease in sales was due to lower volume in the industrial (30%) and automotive (30%) end markets, partially offset by a volume increase in the aerospace and defense end market (37%).
Value-added sales of $155.6 million in the first quarter of 2024 were 7% lower than value-added sales of $168.0 million in the first quarter of 2023. The decrease in value-added sales was due to the same factors driving the decrease in net sales.
EBITDA for the Performance Materials segment was $30.7 million in the first quarter of 2024 compared to $42.8 million in the first quarter of 2023. The decrease in EBITDA was primarily driven by the impact of lower volumes and related unabsorbed costs. Additionally, EBITDA was unfavorably impacted by higher pre-production costs associated with the production ramp of the new wide area clad facility.
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Electronic Materials
First Quarter
First Quarter Ended
March 29, March 31, $ %
(Thousands) 2024 2023 Change Change
Net sales $ 191,971 $ 228,820 $ (36,849) (16) %
Value-added sales 77,630 103,878 (26,248) (25) %
EBITDA 14,352 13,955 397 3 %
Net sales from the Electronic Materials segment of $192.0 million in the first quarter of 2024 decreased 16% from net sales of $228.8 million in the first quarter of 2023. The decrease in net sales was primarily due to lower sales volumes in the semiconductor (13%) and energy (32%) end markets. Additionally, pass-through metal pricing increased net sales by $4.3 million compared to the first quarter of 2023.
Value-added sales of $77.6 million in the first quarter of 2024 were 25% lower than value-added sales of $103.9 million in the first quarter of 2023. 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 $14.4 million in the first quarter of 2024 compared to $14.0 million in the first quarter of 2023. Despite the impact of decreased sales volumes, EBITDA increased slightly as a result of favorable product mix and various targeted cost control initiatives implemented throughout 2023 and during the first quarter of 2024.
Precision Optics
First Quarter
(Thousands) First Quarter Ended
March 29, March 31, $ %
2024 2023 Change Change
Net sales $ 24,670 $ 26,692 $ (2,022) (8) %
Value-added sales 24,644 26,670 (2,026) (8) %
EBITDA (252) 2,692 (2,944) (109) %
Net sales from the Precision Optics segment of $24.7 million in the first quarter of 2024 decreased 8% compared to net sales of $26.7 million in the first quarter of 2023. The decrease was primarily due to lower sales volumes in the industrial end market (22%).
Value-added sales of $24.6 million in the first quarter of 2024 decreased 8% compared to value-added sales of $26.7 million in the first quarter of 2023. 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 a loss of $0.3 million in the first quarter of 2024, compared to EBITDA of $2.7 million in the first quarter of 2023. The decrease in EBITDA was primarily driven by the impact of lower sales volumes and unfavorable mix.
Other
First Quarter
(Thousands) First Quarter Ended
March 29, March 31, $ %
2024 2023 Change Change
Net sales $ — $ — $ — — %
Value-added sales — — — — %
EBITDA (5,699) (6,655) 956 (14) %
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs were $5.7 million in the first quarter of 2024 compared to $6.7 million in the first quarter of 2023. Corporate costs were 2% of Company-wide value-added sales in the first quarter of 2024 and 2023. The decrease in corporate costs in the
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first quarter of 2024 compared to the first quarter of 2023 is the result of various targeted cost control initiatives implemented throughout 2023 and during the first quarter of 2024
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FINANCIAL POSITION
Cash Flow
A summary of cash flows provided by (used in) operating, investing, and financing activities is as follows:
Three Months Ended
March 29, March 31, $
(Thousands) 2024 2023 Change
Net cash (used in) provided by operating activities $ (13,805) $ 38,105 $ (51,910)
Net cash used in investing activities (26,299) (29,802) 3,503
Net cash provided by financing activities 40,297 (6,291) 46,588
Effects of exchange rate changes (383) 130 (513)
Net change in cash and cash equivalents $ (190) $ 2,142 $ (2,332)
Net cash used in operating activities totaled $13.8 million in the first three months of 2024 compared to net cash provided by operating activities of $38.1 million in the prior-year period. The decrease in operating cash flow was driven by lower earnings as well as unfavorable working capital usage. Working capital requirements used cash of $29.0 million in the first quarter of 2024 compared to $6.4 million in the first quarter of 2023 compared. The increase in cash used for working capital was primarily due to increased inventory levels as a result of the ramp for aerospace and defense projects as well as the second phase of the clad strip project. Additionally, the Company received $7.7 million of customer prepayments in the first quarter of 2023, and none in the first quarter of 2024.
Net cash used in investing activities was $26.3 million in the first quarter of 2024 compared to $29.8 million in the prior-year period. The decrease in cash used in investing activities is due to timing of capital expenditures, partially offset by outflow for mine development in the first quarter of 2024.
Capital expenditures are made primarily for new product development, replacing and upgrading equipment, infrastructure investments, and implementing information technology initiatives. For the full year 2024, the Company expects payments for property, plant, and equipment to be approximately $90 million.
Net cash provided by financing activities totaled $40.3 million in the first three months of 2024 compared to net cash used in financing activities of $6.3 million in the prior-year period. The net financing cash inflow in 2024 was primarily due financing used to support ongoing business growth.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the inherent use of estimates and management’s judgment in establishing those estimates. For additional information regarding critical accounting policies, please refer to our 2023 Annual Report on Form 10-K.
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 March 29, 2024, cash and cash equivalents held by our foreign operations totaled $12.5 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.
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A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of March 29, 2024 and December 31, 2023 is as follows:
March 29, December 31,
(Thousands) 2024 2023
Cash and cash equivalents $ 13,104 $ 13,294
Total outstanding debt 475,279 426,173
Net debt $ (462,175) $ (412,879)
Available borrowing capacity $ 130,236 $ 178,734
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.
The available borrowing capacity in the table above represents the additional amounts that could be borrowed under our revolving credit facility and other secured lines existing as of the end of each period depicted. The applicable debt covenants have been taken into account when determining the available borrowing capacity, including the covenant that restricts borrowing capacity to a multiple of the twelve-month trailing earnings before interest, income taxes, depreciation and amortization, and other adjustments.
In January 2023, we amended the agreement governing our $375.0 million revolving credit facility and term loan (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. 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 March 29, 2024 and December 31, 2023. Cash on hand up to $25 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 million five-year term loan pursuant to its delayed draw term loan facility under the Credit Agreement and $103 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 $282.7 million as of March 29, 2024, compared to $263.5 million as of December 31, 2023. The availability is determined by Board approved levels and actual capacity.
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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 first quarter of 2024. Since the approval of the repurchase plan, we have purchased 1,254,264 shares at a total cost of $41.7 million, or an average of $33.23 per share.
We paid cash dividends of $2.7 million on our common stock in the first quarter of 2024. We intend to pay a quarterly dividend on an ongoing basis, subject to a determination that the dividend remains in the best interest of our shareholders.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
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 $332.1 million and $351.5 million as of March 29, 2024 and December 31, 2023, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of March 29, 2024. For additional information on our contractual and other obligations, refer to our 2023 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 the conflict between Russia and Ukraine; realization of 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 2023 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 2023 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2023 Annual Report on Form 10-K.
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