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Item 7. Management’s Discussion and Analysis

2025-02-19 compared with 2024-02-15 · 82 added, 66 removed, 339 unchanged (30% of the section changed)

1 unchanged sentence

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, energy, consumer electronics, and telecom and data center.

Our products are sold into numerous end markets, including semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and life sciences.

RESULTS OF OPERATIONS

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Gross margin 325,985 349,042 343,880

Gross margin as a % of Net sales 19 % 21 % 20 %

Gross margin as a % of Value-added sales 30 % 31 % 31 %

Selling, general, and administrative (SG&A) expense 145,588 157,911 169,338

SG&A expense as a % of Net sales 9 % 9 % 10 %

SG&A expense as a % of Value-added sales 13 % 14 % 15 %

Research and development (R&D) expense 29,028 27,540 28,977

R&D expense as a % of Net sales 2 % 2 % 2 %

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

Restructuring expense 6,848 3,824 1,573

Goodwill impairment 56,067 — —

Long-lived asset impairment 17,134 — —

Loss on asset disposal 6,412 — —

Other — net 17,685 23,323 24,237

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2024 Compared to 2023

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.

Net sales of $1,684.7 million in 2024 increased $19.5 million from $1,665.2 million in 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 $79.5 million when compared to the prior year.

Additionally, volume decreases in the energy (21%), industrial (11%) and automotive (16%) end markets were partially offset by a volume increase in the aerospace and defense (25%) end 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 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 $1,127.1 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.

Value-added sales of $1,097.6 million in 2024 decreased $29.5

million compared to $1,127.1 million in 2023.

Volume decreases in the industrial (16%), energy (23%) and automotive (19%) end markets were partially offset by an increase in the aerospace and defense (28%) end market.

Gross margin was $326.0 million in 2024, a 7% decrease from $349.0 million in 2023.

Gross margin expressed as a percentage of net sales was 19% in 2024 and 21% in 2023.

Gross margin expressed as a percentage of value-added sales was 30% in 2024 and 31% in 2023.

Gross margin decreased from the prior year 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 totaled $145.6 million in 2024 as compared to $157.9 million in 2023.

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.

The decrease in SG&A expense for 2024 was primarily due to various cost savings initiatives throughout 2024.

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 $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.

R&D expense was $29.0 million in 2024, an increase of 5% compared to 2023.

R&D costs as a percentage of net sales remained flat at 2% in 2024 and 2023 but as a percent of value-added sales increased from 2% in 2023 to 3% in 2024.

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

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

In 2024, we recorded a combined total of $6.8 million of restructuring charges across all segments compared to $3.8 million in 2023.

See Note D of the Consolidated Financial Statements for further details of restructuring activities.

Goodwill impairment was $56.1 million in 2024.

There were no goodwill impairments recorded in 2023.

The impairment charges were recorded in the Precision Optics reporting unit in the fourth quarter of 2024 as a result of the Company's annual goodwill impairment testing.

Refer to Note A to the Consolidated Financial Statements for additional discussion.

Long-lived asset impairment was $17.1 million in 2024 related to the Company’s Malaysia facility in the Precision Optics segment.

There were no long-lived asset impairments recorded in 2023.

Refer to Note A to the Consolidated Financial Statements for additional discussion.

Loss on asset disposal was $6.4 million in 2024 due to the sale of the Company's Large Area Target business at its Albuquerque, New Mexico facility and wind-down of the related refinery in the fourth quarter of 2024.

There were no material asset disposals in 2023.

Other-net totaled expense of $17.7 million and $23.3 million in 2024 and 2023, respectively.

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Interest expense - net was $34.8 million in 2024 and $31.3 million in 2023.

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

The increase in interest expense in 2024 compared to 2023 was primarily due to an increase in borrowings compared to the prior year.

Income tax expense (benefit) for 2024 was $9.0 million of expense compared to $12.1 million of expense in 2023.

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.

The decrease in income tax expense in 2024 compared to 2023 was primarily due to lower pre-tax income and more favorable impacts of the production credit and depletion in 2024.

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

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2024 Compared to 2023

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.

The increase in value-added sales was driven by the same factors driving the increase in net sales.

Net sales from the Performance Materials segment of $744.5 million in 2024 decreased 1% compared to 2023.

The decrease in sales was due to lower sales volumes in the industrial (13%) and automotive (16%) end markets.

These decreases were partially offset by increased volumes in the aerospace and defense (33%) end market.

Value-added sales of $688.0 million in 2024 decreased slightly from value-added sales of $688.6 million in 2023, consistent with the decrease in net sales.

The decrease in value-added sales was driven by the same factors driving the decrease in net sales.

EBITDA for the Performance Materials segment was $169.3 million in 2024 compared to $174.5 million in 2023.

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.

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 in 2024 by higher costs associated with the production ramp of the precision clad strip facility.

This was partially offset by incremental benefit from the Advanced Manufacturing Production Credit (production credit) recorded in 2024 compared to 2023.

See Note G of the Consolidated Financial Statements for further discussion regarding the accounting for the production credit.

Electronic Materials

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2024 Compared to 2023

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.

Net sales from the Electronic Materials segment of $845.7 million in 2024 was 5% higher than net sales of $805.8 million in 2023.

The increase in net sales was primarily due to higher precious metal pass through costs, increasing net sales by approximately $79.5 million when compared to the prior year.

This increase was partially offset by a decrease in sales volumes in the energy end market (24%).

Value-added sales of $315.3 million decreased 6% compared to value-added sales of $334.7 million in 2023.

The decrease in value-added sales was due to the same factors driving the decrease in net sales.

The decrease in value-added sales was due to the sales volume decrease noted above.

EBITDA for the Electronic Materials segment was $47.4 million in 2024 compared to $45.7 million in 2023.

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.

Despite the decrease in value-added sales and the $6.4 million loss on disposal recorded in 2024 related to the sale of the Target business at the Company's Albuquerque facility, EBITDA increased due to the impact of various targeted cost control initiatives implemented in 2023 and throughout 2024.

See Note A of the Consolidated Financial Statements for further discussion of the sale of the Target business.

Precision Optics

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Net sales from the Precision Optics segment were $94.5 million in 2024, a decrease of 9% compared to net sales of $103.9 million in 2023.

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.

The decrease was primarily due to lower sales volumes in the industrial (13%), automotive (27%) and aerospace and defense (10%) end markets.

Value-added sales of $94.3 million in 2024 decreased 9% compared to value-added sales of $103.8 million in 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 $9.9 million in 2023 compared to $13.8 million in 2022.

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

EBITDA for the Precision Optics segment was a loss of $73.3 million in 2024 compared to income of $9.9 million in 2023.

The decrease in EBITDA was driven by impairments recorded in 2024 for the Precision Optics reporting unit and Malaysia of $73.2

million as well as decreased sales volumes, partially offset by targeted cost control initiatives implemented in 2024.

See Note A of the Consolidated Financial Statements for further discussion of the impairment charges recorded during 2024.

(Thousands) 2024 2023 2022

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The Other reportable segment in total includes unallocated corporate costs.

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.

Corporate costs of $25.1 million in 2024 decreased from $29.3 million in 2023.

Corporate costs were 2 and 3% of total Company value-added sales in 2024 and 2023, respectively.

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

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Net cash provided by operating activities totaled $87.8 million in 2024 versus $144.4 million in 2023.

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.

The decrease in net cash provided by operating activities was primarily driven by working capital outflows in 2024 compared to 2023.

Continued focus on working capital resulted in flat inventory and relatively flat accounts receivable balances as of December 31, 2024 compared to the December 31, 2023, as opposed to a net cash inflow in 2023 of $4.7 million in the prior year when these efforts began.

Additionally, in line with the Company's cost savings initiatives, accounts payable and accruals decreased in 2024 compared to an increase in accounts payable in 2023, creating an unfavorable impact to operating cash flows of $22.4 million.

In addition, there was a $16.7 million decrease in operating cash flow due to lower unearned income for customer prepayments related to the agreements with a customer as discussed in Note K.

Lastly , the decrease in unearned revenue due to an increase in shipments for customers which prepaid had an unfavorable impact to operating cash flow $7.3 million when compared to the prior year.

Net cash used in investing activities was $79.6 million in 2024 compared to $119.2 million in 2023.

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

The decrease in cash used in investing activities is due to decreased capital expenditures concurrent with the decrease in cash flow provided by operating activities.

Net cash used in financing activities decreased $20.7 million from 2023.

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

The decrease in 2024 compared to 2023 is a result of an increase in draws on our credit facilities, offset by increased repayments of our long-term debt in 2024.

Dividends per common share increased 4% to $0.535 per share in 2024.

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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.

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 adjusted 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).

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

In January 2014, our Board of Directors approved a plan to repurchase up to $50.0 million of our common stock.

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We rely on estimates of our ore resources and recoverable reserves, which estimation is complex due to geological characteristics of the properties and the number of assumptions made.

You are cautioned that, except for that portion of mineral resources classified as mineral reserves, mineral resources do not have demonstrated economic value.

You are cautioned that, except for that portion of mineral resources classified as mineral reserves, mineral resources do not have to demonstrate economic value.

Inferred mineral resources are estimates based on limited geological evidence and sampling and have a too high of a degree of uncertainty as to their existence to apply relevant technical and economic factors likely to influence the prospects of economic extraction in a manner useful for evaluation of economic viability.

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Domestic ore 507 405 382

Purchased ore — — —

Non-domestic ore — — —

Unyielded total 507 405 382

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2) Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product is separately identifiable from other promises in the contract.

resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the product is separately identifiable from other promises in the contract.

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

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Advanced billings are typically made in association with products with long manufacturing times and/or products relating to contracts with the government.

Billings in advance of the shipments allow us to collect cash earlier than billing at the time of the shipment and, therefore, the collected cash can be used to reduce our investment in working capital.

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

Billings in advance of

the shipments allow us to collect cash earlier than billing at the time of the shipment and, therefore, the collected cash can be used to reduce our investment in working capital.

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

Precious Metal Physical Inventory Counts

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

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.

Due to the slower than expected semiconductor market recovery 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, 2024 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 Company’s reporting units each provide their forecast of results for the next five years.

These forecasts form the basis for the information used in the discounted cash flow model.

These forecasts form the basis for

the information used in the discounted cash flow model.

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.

During the fourth quarter of 2023, the Company considered sales multiples in the low single digits and EBITDA multiples in the range high single digits to low double digits.

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.

During the fourth quarter of 2024, the Company considered sales multiples in the low single digits and EBITDA multiples in the range high single digits to mid double digits.

As discussed in Note A, the Company's annual goodwill impairment test indicated the carrying value of the Precision Optics reporting unit exceeded its estimated fair value as of the measurement date of October 1, 2024.

As a result, the Company recognized a goodwill impairment charge in the fourth quarter of fiscal 2024 of $56.1 million which was recorded in "Goodwill Impairment" in the accompanying Consolidated Statements of Income in the Precision Optics segment.

As of October 1, 2024, 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.

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.

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.

1 unchanged sentence

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.

We also compared our market capitalization as of October 1, 2024 to the carrying value of our equity and considering an implied control premium, we noted no other 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