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 27, September 29, $ % (Thousands, except per share data) 2024 2023 Change Change Net sales $ 436,715 $ 403,067 $ 33,648 8 % Value-added sales 263,828 270,532 (6,704) (2) % Gross margin 80,938 88,936 (7,998) (9) % Gross margin as a % of value-added sales 31 % 33 % Selling, general, and administrative (SG&A) expense 35,009 38,806 (3,797) (10) % SG&A expense as a % of value-added sales 13 % 14 % Research and development (R&D) expense 7,868 6,322 1,546 24 % R&D expense as a % of value-added sales 3 % 2 % Restructuring expense 1,493 1,077 416 39 % Other—net 5,309 6,211 (902) (15) % Operating profit 31,259 36,520 (5,261) (14) % Other non-operating (income)—net (642) (685) 43 (6) % Interest expense—net 8,839 7,678 1,161 15 % Income before income taxes 23,062 29,527 (6,465) (22) % Income tax expense 768 2,963 (2,195) (74) % Net income $ 22,294 $ 26,564 $ (4,270) (16) % Diluted earnings per share $ 1.07 $ 1.27 $ (0.20) (16) % Net sales of $436.7 million in the third quarter of 2024 increased $33.6 million from $403.1 million in the third quarter of 2023. An increase in net sales in the Electronic Materials was partially offset by decreased net sales in the Performance Materials and Precision Optics segments. The increase in the Electronic Materials segment was primarily due to higher precious metal pass through costs, increasing net sales by approximately $30.3 million when compared to the prior year third quarter. Volume increases in the semiconductor (11%) and aerospace and defense (30%) end markets were partially offset by a decrease in the telecom and data center (49%) end market as well as decreased sales in the consumer electronic end market (17%) primarily driven by our largest customer. Additionally, there was a $2.9 million year over year decrease in raw material beryllium hydroxide sales compared to the third quarter of 2023. 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. 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 $263.8 million in the third quarter of 2024 decreased $6.7 million, or 2%, compared to the third quarter of 2023. A volume decrease in the telecom and data center (47%) end market as well as decreased sales in the consumer electronic end market (16%) primarily driven by our largest customer were partially offset by an increase in the aerospace and defense (35%) and semiconductor (10%) end markets. Additionally, there was a $2.9 million year over year decrease in raw material beryllium hydroxide sales compared to the third quarter of 2023. Gross margin in the third quarter of 2024 was $80.9 million, a decrease of 9% compared to the third quarter of 2023. Gross margin expressed as a percentage of value-added sales decreased to 31% in the third quarter of 2024 from 33% in the third quarter of 2023. The decrease in gross margin is primarily due to unfavorable price/mix as well as higher costs associated with the production ramp of the precision clad strip facility. SG&A expense was $35.0 million in the third quarter of 2024, compared to $38.8 million in the third quarter of 2023. The decrease in SG&A expense was primarily due to various cost savings initiatives implemented throughout 2023 and during the 25 first nine months of 2024. Expressed as a percentage of value-added sales, SG&A expense was 13% and 14% in the third quarter of 2024 and 2023, respectively. R&D expense consists primarily of direct personnel and material 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 as a percent of value-added sales increased slightly from 2% in the third quarter of 2023 to 3% in the third quarter of 2024. Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the third quarter of 2024, we recorded $1.5 million of restructuring charges across all segments. In the third quarter of 2023, we recorded $1.1 million of restructuring charges primarily in our Electronic Materials segment. See Note D to the Consolidated Financial Statements for further discussion. Other-net was $5.3 million of expense in the third quarter of 2024, or a $0.9 million decrease from the third quarter of 2023. 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 $8.8 million and $7.7 million in the third quarter of 2024 and 2023, respectively. The increase in interest expense is primarily due to an increase in interest rates and borrowings compared to the prior year period. Income tax expense for the third quarter of 2024 was $0.8 million, compared to $3.0 million in the third quarter of 2023. The effective tax rate for the third quarter of 2024 and 2023 was 3.3% and 10.0%, respectively. The effective tax rate for 2024 and 2023 is lower than the statutory tax rate primarily due to the impact of the foreign-derive d intangible income deduction, percentage depletion and research and development tax credits. See Note F to the Consolidated Financial Statements for additional discussion. Nine Months Nine Months Ended September 27, September 29, $ % (Thousands, except per share data) 2024 2023 Change Change Net sales $ 1,247,868 $ 1,244,144 $ 3,724 — % Value-added sales 801,509 837,351 (35,842) (4) % Gross margin 233,009 269,327 (36,318) (13) % Gross margin as a % of value-added sales 29 % 32 % SG&A expense 104,454 118,053 (13,599) (12) % SG&A expense as a % of value-added sales 13 % 14 % R&D expense 22,712 21,098 1,614 8 % R&D expense as a % of value-added sales 3 % 3 % Restructuring (income) expense 6,161 3,194 2,967 93 % Other—net 14,112 18,178 (4,066) (22) % Operating profit 85,570 108,804 (23,234) (21) % Other non-operating (income)—net (1,925) (2,141) 216 (10) % Interest expense—net 25,920 22,820 3,100 14 % Income before income taxes 61,575 88,125 (26,550) (30) % Income tax expense 6,836 11,891 (5,055) (43) % Net income $ 54,739 $ 76,234 $ (21,495) (28) % Diluted earnings per share $ 2.61 $ 3.65 $ (1.04) (28) % Net sales of $1,247.9 million in the first nine months of 2024 increased $3.7 million from $1,244.1 million in the first nine months of 2023. An increase in net sales in the Electronic Materials segment was partially offset by decreases in the Performance Materials and Precision Optics segments. The increase in the Electronic Materials segment was primarily due to 26 higher precious metal pass through costs, increasing net sales by approximately $49.3 million when compared to the prior year first nine months. Volume decreases in the energy (24%), industrial (14%), telecom and data center (41%) and automotive (18%) end markets were partially offset by an increase in the aerospace and defense (30%) end market. 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. Value-added sales of $801.5 million in the first nine months of 2024 decreased $35.8 million, or 4%, compared to the first nine months of 2023. Volume decreases in the industrial (19%), semiconductor (6%), automotive (20%), energy (24%), and telecom and data center (40%) end markets were partially offset by an increase in the aerospace and defense (36%) end market. Gross margin in the first nine months of 2024 was $233.0 million, a decrease of 13% compared to the first nine months of 2023. Gross margin expressed as a percentage of value-added sales decreased to 29% in the first nine months of 2024 from 32% in the first nine months of 2023. Gross margin decreased from the prior year period primarily due to impact of lower volumes and related unabsorbed costs in the first half of 2024. Additionally, gross margin was unfavorably impacted by higher costs associated with the production ramp of the precision clad strip facility. SG&A expense was $104.5 million in the first nine months of 2024, compared to $118.1 million in the first nine months of 2023. The decrease in SG&A expense was primarily due to various cost savings initiatives implemented throughout 2023 and during the nine months of 2024. Expressed as a percentage of value-added sales, SG&A expense was 13% and 14% in the first nine months of 2024 and 2023, respectively. R&D expense consists primarily of direct personnel and material 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 2024 and 2023. Restructuring (income) expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first nine months of 2024, we recorded a combined total of $6.2 million of restructuring charges in our Electronic Materials, Precision Optics, Performance Materials and Other segments. In the first nine months of 2023, we recorded a combined total of $3.2 million of restructuring charges primarily in our Precision Optics, Electronic Materials and Performance Materials segments. Refer to Note D to the Consolidated Financial Statements for details. Other-net was $14.1 million of expense in the first nine months of 2024, or a $4.1 million decrease from the first nine months of 2023. 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 $25.9 million and $22.8 million in the first nine months of 2024 and 2023, respectively. The increase in interest expense is primarily due to an increase in interest rates and borrowings compared to the prior year period. Income tax expense for the first nine months of 2024 was $6.8 million, compared to $11.9 million in the nine months of 2023. The Company's effective tax rate for the first nine months of 2024 and 2023 was 11.1% and 13.5%, respectively. The effective tax rate for the first nine months of 2024 includes a nominal amount of discrete income tax expense primarily consisting of $1.0 million of excess tax benefits from stock-based compensation awards offset by a $1.1 million valuation allowance recorded against deferred tax assets that are not likely to be realized for one of the Company’s foreign subsidiaries. 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 an optimization of our foreign-derived intangible income deduction benefit, excess tax benefits from stock-based compensation awards, and return to provision adjustments. See Note F to the Consolidated Financial Statements for additional discussion. 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 2024 and 2023 is as follows: Third Quarter Ended Nine Months Ended September 27, September 29, September 27, September 29, (Thousands) 2024 2023 2024 2023 Net sales Performance Materials $ 177,376 $ 184,642 $ 533,534 $ 554,427 Electronic Materials 236,906 192,305 641,564 611,855 Precision Optics 22,433 26,120 72,770 77,862 Other — — — — Total $ 436,715 $ 403,067 $ 1,247,868 $ 1,244,144 Less: pass-through metal costs Performance Materials $ 13,768 $ 15,748 $ 41,283 $ 51,906 Electronic Materials 159,067 116,772 404,953 354,829 Precision Optics 52 15 123 58 Other — — — — Total $ 172,887 $ 132,535 $ 446,359 $ 406,793 Value-added sales Performance Materials $ 163,608 $ 168,894 $ 492,251 $ 502,521 Electronic Materials 77,839 75,533 236,611 257,026 Precision Optics 22,381 26,105 72,647 77,804 Other — — — — Total $ 263,828 $ 270,532 $ 801,509 $ 837,351 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 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. 28 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 27, September 29, $ % (Thousands) 2024 2023 Change Change Net sales $ 177,376 $ 184,642 $ (7,266) (4) % Value-added sales 163,608 168,894 (5,286) (3) % EBITDA 44,802 46,366 (1,564) (3) % Net sales from the Performance Materials segment of $177.4 million in the third quarter of 2024 decreased 4% compared to net sales of $184.6 million in the third quarter of 2023. The decrease in sales was due to lower sales volumes in the telecom and data center (49%) end market as well as decreased sales in the consumer electronic (17%) end market primarily driven by our largest customer. Additionally, there was a $2.9 million year over year decrease in the volume of raw material beryllium hydroxide sales compared to the third quarter of 2023. These decreases were partially offset by increased volumes in the aerospace and defense (45%) end market. Value-added sales of $163.6 million in the third quarter of 2024 were 3% lower than value-added sales of $168.9 million in the third 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 $44.8 million in the third quarter of 2024, compared to $46.4 million in the third quarter of 2023. The impact of unfavorable pricing/mix was offset by the favorable impact manufacturing performance as a result of the various cost control measures implemented throughout 2024. Nine Months Nine Months Ended September 27, September 29, $ % (Thousands) 2024 2023 Change Change Net sales $ 533,534 $ 554,427 $ (20,893) (4) % Value-added sales 492,251 502,521 (10,270) (2) % EBITDA 115,893 134,061 (18,168) (14) % Net sales from the Performance Materials segment of $533.5 million in the first nine months of 2024 decreased 4% compared to net sales of $554.4 million in the first nine months of 2023. The decrease in sales was due to lower sales volumes in the industrial (18%), telecom and data center (41%) and automotive (19%) end markets. These decreases were partially offset by increased volumes in the aerospace and defense (39%) end market. Value-added sales of $492.3 million in the first nine months of 2024 were 2% lower than value-added sales of $502.5 million in the first nine months 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 $115.9 million in the first nine months of 2024 compared to $134.1 million in the first nine months of 2023. The decrease in EBITDA was primarily driven by the impact unfavorable price/mix as well as the impact of lower volumes and related unabsorbed costs in the first half of 2024. Additionally, EBITDA was unfavorably impacted by higher costs associated with the production ramp of the precision clad strip facility. 29 Electronic Materials Third Quarter Third Quarter Ended September 27, September 29, $ % (Thousands) 2024 2023 Change Change Net sales $ 236,906 $ 192,305 $ 44,601 23 % Value-added sales 77,839 75,533 2,306 3 % EBITDA 12,309 10,155 2,154 21 % Net sales from the Electronic Materials segment of $236.9 million in the third quarter of 2024 were 23% higher than net sales of $192.3 million in the third quarter of 2023. The increase in net sales was primarily due to higher precious metal pass through costs, which increased net sales by $30.3 million compared to the third quarter of 2023. Additionally, net sales increased as a result of higher sales volumes in the semiconductor (11%) end market. Value-added sales of $77.8 million in the third quarter of 2024 increased 3% compared to value-added sales of $75.5 million in the third quarter of 2023. The increase in value-added sales was due to the sales volume increases noted above which also drove the increase in net sales. EBITDA for the Electronic Materials segment was $12.3 million in the third quarter of 2024 compared to $10.2 million in the third quarter of 2023. EBITDA increased due to higher sales volume along with the impact of various targeted cost control initiatives implemented in 2023 and throughout 2024. Nine Months Nine Months Ended September 27, September 29, $ % (Thousands) 2024 2023 Change Change Net sales $ 641,564 $ 611,855 $ 29,709 5 % Value-added sales 236,611 257,026 (20,415) (8) % EBITDA 40,118 37,504 2,614 7 % Net sales from the Electronic Materials segment of $641.6 million in the first nine months of 2024 were 5% higher than net sales of $611.9 million in the first nine months of 2023. The increase in net sales was primarily due to higher precious metal pass through costs, which increased net sales by $49.3 million compared to the first nine months of 2023. This was partially offset by decreased sales volumes in the energy (26%) end market. Value-added sales of $236.6 million in the first nine months of 2024 decreased 8% compared to value-added sales of $257.0 million in the first nine months of 2023. The decrease in value-added sales was driven by decreased sales volumes in the energy (28%) and semiconductor (4%) end markets. EBITDA for the Electronic Materials segment was $40.1 million in the first nine months of 2024 compared to $37.5 million in the first nine months of 2023. Despite decreased value-added sales, EBITDA increased slightly as a result of the various targeted cost control initiatives implemented in 2023 and throughout 2024. 30 Precision Optics Third Quarter (Thousands) Third Quarter Ended September 27, September 29, $ % 2024 2023 Change Change Net sales $ 22,433 $ 26,120 $ (3,687) (14) % Value-added sales 22,381 26,105 (3,724) (14) % EBITDA (39) 3,261 (3,300) (101) % Net sales from the Precision Optics segment of $22.4 million in the third quarter of 2024 decreased 14% compared to net sales of $26.1 million in the third quarter of 2023. The decrease was primarily due to lower sales volumes in the aerospace and defense end market (28%). Value-added sales of $22.4 million in the third quarter of 2024 decreased 14% compared to value-added sales of $26.1 million in the third 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 slight loss in the third quarter of 2024 compared to income of $3.3 million in the third quarter of 2023. The decrease in EBITDA was due to the impact of lower sales volumes and unfavorable mix. Nine Months (Thousands) Nine Months Ended September 27, September 29, $ % 2024 2023 Change Change Net sales $ 72,770 $ 77,862 $ (5,092) (7) % Value-added sales 72,647 77,804 (5,157) (7) % EBITDA 1,297 7,654 (6,357) (83) % Net sales from the Precision Optics segment of $72.8 million in the first nine months of 2024 decreased 7% compared to net sales of $77.9 million in the first nine months of 2023. The decrease was primarily due to lower sales volumes in the industrial (13%) and automotive (23%) end markets. Value-added sales of $72.6 million in the first nine months of 2024 decreased 7% compared to value-added sales of $77.8 million in the first nine months 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 $1.3 million in the first nine months of 2024 compared to $7.7 million in the first nine months of 2023. The decrease in EBITDA was due to the impact of lower sales volumes and unfavorable mix. Other Third Quarter (Thousands) Third Quarter Ended September 27, September 29, $ % 2024 2023 Change Change Net sales $ — $ — $ — — % Value-added sales — — — — % EBITDA (6,578) (7,497) 919 (12) % The Other reportable segment in total includes unallocated corporate costs. Corporate costs were $6.6 million in the third quarter of 2024 compared to $7.5 million in the third quarter of 2023. Corporate costs as a percent of Company-wide value-added sales decreased from 3% in the third quarter of 2023, to 2% in the third quarter of 2024. The decrease in corporate costs is the result of various targeted cost control initiatives implemented in 2024. 31 Nine Months (Thousands) Nine Months Ended September 27, September 29, $ % 2024 2023 Change Change Net sales $ — $ — $ — — % Value-added sales — — — — % EBITDA (18,522) (21,750) 3,228 (15) % Corporate costs were $18.5 million in the first nine months of 2024 compared to $21.8 million in the first nine months of 2023. Corporate costs as a percent of Company-wide value-added sales decreased from 3% in the first nine months of 2023, to 2% in the first nine months of 2024. The decrease in corporate costs is the result of various targeted cost control initiatives implemented in 2024. 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 27, September 29, $ (Thousands) 2024 2023 Change Net cash provided by operating activities $ 11,564 $ 84,505 $ (72,941) Net cash used in investing activities (60,545) (94,160) 33,615 Net cash provided by financing activities 52,926 13,735 39,191 Effects of exchange rate changes 635 (780) 1,415 Net change in cash and cash equivalents $ 4,580 $ 3,300 $ 1,280 Net cash provided by operating activities totaled $11.6 million in the first nine months of 2024 versus $84.5 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 $48.5 million in the first nine months of 2024 compared to working capital usage of $9.5 million for the first nine months of 2023. The increase in cash used for working capital was primarily due to timing of cash collections for outstanding receivables in the third quarter of 2024 and a continued increase in inventory throughout 2023 and 2024 to support continued business growth and customer partnerships. Additionally, the Company received $16.7 million of customer prepayments in the first nine months of 2023 and none in 2024. Net cash used in investing activities was $60.5 million in the first nine months of 2024 compared to $94.2 million in the prior-year period. The decrease in cash used in investing activities is due to decreased capital expenditures in line with decreased cash provided by operating activities. 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 $80 million. Net cash provided by financing activities totaled $52.9 million in the first nine months of 2024 and $13.7 million in the comparable prior-year period. The increase is primarily due to a increase in borrowings under our revolving credit facilities in the first nine months of 2024 of $91.1 million, compared to net borrowings of $39.6 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 27, 2024, cash and cash equivalents held by our foreign operations totaled $14.2 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. Other sources of liquidity include uncommitted short-term lines of credit for certain of the Company's foreign subsidiaries, which currently provide for borrowings of up to $21.7 million. At September 27, 2024, the Company had borrowings outstanding of $7.2 million, which reduced the aggregate availability under these facilities to $14.5 million. 33 A summary of key data relative to our liquidity, including outstanding debt, cash, and available borrowing capacity, as of September 27, 2024 and December 31, 2023 is as follows: September 27, December 31, (Thousands) 2024 2023 Cash and cash equivalents $ 17,874 $ 13,294 Total outstanding debt 495,298 426,173 Net debt $ (477,424) $ (412,879) Available borrowing capacity $ 171,460 $ 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 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. The Company financed a portion of the the purchase price for the HCS-Electronic Materials with a $300 million term loan pursuant to the delayed draw term loan facility. 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 27, 2024 and December 31, 2023. Cash on hand up to $25.0 million can benefit the covenants and may benefit the borrowing capacity under the Credit Agreement. 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 $229.3 million as of September 27, 2024, compared to $263.5 million as of December 31, 2023. The availability is determined by Board approved levels and actual capacity. 34 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 2024. 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 $2.8 million and $8.3 million on our common stock in the third quarter and first nine months of 2024, 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. 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 $385.7 million and $351.5 million as of September 27, 2024 and December 31, 2023, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of September 27, 2024. For additional information on our material cash obligations, refer to our 2023 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 2023 Annual Report on Form 10-K. As noted in the "Critical Accounting Policies" section in our 2023 Annual Report on Form 10-K, the Company performs a goodwill impairment assessment for each reporting unit in the fourth quarter. If a quantitative test is performed, the fair value of the reporting unit will be estimated using an income approach (a discounted cash flow model) as well as a market approach. On September 25, 2024, the Company announced the appointment of a new President of its Precision Optics reporting unit. As a part of the transition into this role, the new President has begun an extensive review of the business and its short-term and long-term strategic initiatives, concurrent with the Company’s annual strategic planning process, which will conclude later in the fourth quarter of 2024. As of October 30, 2024, there have been no changes to the long-term strategy for the Precision Optics reporting unit. The upcoming results of the new President’s review, including any shifts in strategy of the Precision Optics reporting unit as part of the annual strategic planning process, could materially impact the future cash flow assumptions of the Precision Optics reporting unit. Due to the fact that the carrying value of the Precision Optics reporting unit exceeded fair value by less than 10% in the Company’s 2023 goodwill assessment, any future changes in business conditions or strategic initiatives impacting the future cash flow assumptions could have an unfavorable impact on the fair value of the Precision Optics reporting unit, which could result in future impairment. 35 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 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. 36