Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
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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 28, March 29, $ %
(Thousands, except per share data) 2025 2024 Change Change
Net sales $ 420,330 $ 385,287 $ 35,043 9 %
Value-added sales 259,346 257,848 1,498 1 %
Gross margin 76,179 71,212 4,967 7 %
Gross margin as a % of net sales 18 % 18 %
Gross margin as a % of value-added sales 29 % 28 %
Selling, general, and administrative (SG&A) expense 35,445 35,844 (399) (1) %
SG&A expense as a % of net sales 8 % 9 %
SG&A expense as a % of value-added sales 14 % 14 %
Research and development (R&D) expense 6,505 7,142 (637) (9) %
R&D expense as a % of net sales 2 % 2 %
R&D expense as a % of value-added sales 3 % 3 %
Restructuring (income) expense 2,038 1,620 418 26 %
Other—net 4,996 4,357 639 15 %
Operating profit 27,195 22,249 4,946 22 %
Other non-operating (income)—net (666) (643) (23) 4 %
Interest expense—net 6,917 8,279 (1,362) (16) %
Income before income taxes 20,944 14,613 6,331 43 %
Income tax expense (benefit) 3,246 1,204 2,042 170 %
Net income $ 17,698 $ 13,409 $ 4,289 32 %
Diluted earnings per share $ 0.85 $ 0.64 $ 0.21 33 %
NM = Not Meaningful
Net sales of $420.3 million in the first quarter of 2025 increased $35.0 million from $385.3 million in the first quarter of 2024. An increase in net sales in the Electronic Materials and Performance Materials segments were partially offset by decreased net sales in the Precision Optics segment. The increase in the Electronic Materials segment was primarily due to higher precious metal pass through costs, increasing net sales by approximately $40.5 million when compared to the prior year period. At the Company level, volume increases in the energy (45%) and semiconductor (7%) end markets were partially offset by a volume decrease in the consumer electronics (14%) end market. Additionally, there was a $6.2 million year over year increase in the volume of raw material beryllium hydroxide sales compared to the first quarter of 2024. 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 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 $259.3 million in the first quarter of 2025 increased $1.5 million, or 1%, compared to the first quarter of 2024. The increase was driven by volume increase in the energy (47%) and semiconductor (7%) end markets partially offset by a sales volume decrease in the consumer electronics (17%) end market. Additionally, there was a $6.2 million year over year increase in the volume of raw material beryllium hydroxide sales compared to the first quarter of 2024.
Gross margin in the first quarter of 2025 was $76.2 million, an increase of 7% compared to the first quarter of 2024. Gross margin expressed as a percentage of net sales was 18% in both the first quarter of 2025 and 2024. Gross margin expressed as a percentage of value-added sales increased to 29% in the first quarter of 2025 from 28% in the first quarter of 2024. In the first quarter of the prior year, the Company incurred significant pre-production costs and manufacturing inefficiencies associated with the ramp of the wide area clad facility and overall lower sales volumes, resulting in lower margins. In addition to improved manufacturing performance in 2025, the increase in hydroxide sales favorably impacted margins in the first quarter of 2025 compared to the same period in 2024.
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SG&A expense was $35.4 million in the first quarter of 2025, compared to $35.8 million in the first quarter of 2024. SG&A expense remained relatively flat from the prior year period due to continue cost control initiatives. Expressed as a percentage of net sales, SG&A expense decreased from 9% in the first quarter of 2024 to 8% in the first quarter of 2025, primarily due to the impact of precious metal pricing on net sales. Expressed as a percentage of value-added sales, SG&A expense was 14% in both the first quarter of 2025 and 2024.
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 2% of net sales in both the first quarter of 2025 and 2024 and 3% of value-added sales in the first quarter of 2025 and 2024.
Restructuring expense consists primarily of cost reduction actions taken in order to reduce our fixed cost structure. In the first quarter of 2025, we recorded a combined total of $2.0 million of restructuring charges in our Precision Optics, Electronic Materials and Performance Materials segments, compared to $1.6 million of restructuring charges across all segments in the first quarter of 2024.
Other-net was $5.0 million of expense in the first quarter of 2025, or a $0.6 million increase from the first quarter of 2024, impacted by a $0.2 million increase 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 $6.9 million and $8.3 million in the first quarter of 2025 and 2024, respectively. The decrease in interest expense is primarily due to an decrease in interest rates and borrowings compared to the prior year period.
Income tax expense for the first quarter of 2025 was expense of $3.2 million, compared to $1.2 million in the first quarter of 2024. The effective tax rate for the first quarter of 2025 and 2024 was 15.5% and 8.2%, respectively. The effective tax rate for the first quarter of 2025 is lower than the statutory tax rate primarily due to the impact of percentage depletion, foreign derived intangible income deduction and production credit. 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. The effective tax rate for the first three months of 2025 and 2024 included a net discrete income tax effect from stock-based compensation awards of $0.1 million expense and $1.2 million benefit, respectively. See Note F to the Consolidated Financial Statements for additional discussion.
Value-Added Sales - Reconciliation of Non-GAAP Financial Measure
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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 2025 and 2024 is as follows:
First Quarter Ended
March 28, March 29,
(Thousands) 2025 2024
Net sales
Performance Materials $ 173,987 $ 168,646
Electronic Materials 224,795 191,971
Precision Optics 21,548 24,670
Other — —
Total $ 420,330 $ 385,287
Less: pass-through metal costs
Performance Materials $ 13,940 $ 13,072
Electronic Materials 146,982 114,341
Precision Optics 62 26
Other — —
Total $ 160,984 $ 127,439
Value-added sales
Performance Materials $ 160,047 $ 155,574
Electronic Materials 77,813 77,630
Precision Optics 21,486 24,644
Other — —
Total $ 259,346 $ 257,848
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 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
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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 28, March 29, $ %
(Thousands) 2025 2024 Change Change
Net sales $ 173,987 $ 168,646 $ 5,341 3 %
Value-added sales 160,047 155,574 4,473 3 %
EBITDA 40,673 30,676 9,997 33 %
Net sales from the Performance Materials segment of $174.0 million in the first quarter of 2025 increased 3% compared to net sales of $168.6 million in the first quarter of 2024. The increase in sales was due to a $6.2 million year over year increase in the volume of raw material beryllium hydroxide sales compared to the first quarter of 2024 as well as a volume increase in the energy end market (97%), partially offset by a sales volume decrease in the consumer electronics end market (17%).
Value-added sales of $160.0 million in the first quarter of 2025 were 3% higher than value-added sales of $155.6 million in the first quarter of 2024. The increase in value-added sales was due to the same factors driving the increase in net sales.
EBITDA for the Performance Materials segment was $40.7 million in the first quarter of 2025 compared to $30.7 million in the first quarter of 2024. The increase in EBITDA was primarily due to pre-production costs associated with the production ramp of the new wide area clad facility in the first quarter of 2024 that did not recur in the first quarter of 2025 as well as the favorable impact of other manufacturing efficiencies in the first quarter of 2025. In addition, the increase in hydroxide sales favorably impacted margins.
Electronic Materials
First Quarter
First Quarter Ended
March 28, March 29, $ %
(Thousands) 2025 2024 Change Change
Net sales $ 224,795 $ 191,971 $ 32,824 17 %
Value-added sales 77,813 77,630 183 — %
EBITDA 11,078 14,352 (3,274) (23) %
Net sales from the Electronic Materials segment of $224.8 million in the first quarter of 2025 increased 17% from net sales of $192.0 million in the first quarter of 2024. The increase in net sales was due to higher pass-through metal pricing, accounting for an increase of $40.5 million compared to the first quarter of 2024, and an increase in sales volumes in the semiconductor end market (5%). These increases were partially offset by lower volume of precious metal sales and a decrease in sales volumes in the energy end market (19%).
Value-added sales of $77.8 million in the first quarter of 2025 were relatively flat compared to value-added sales of $77.6 million in the first quarter of 2024. The increase in semiconductor sales noted above was partially offset by the decrease in the energy end market.
EBITDA for the Electronic Materials segment was $11.1 million in the first quarter of 2025 compared to $14.4 million in the first quarter of 2024. EBITDA in the first quarter of 2025 was impacted by approximately $1.6 million of incremental one-time costs related to the continued wind-down of the refinery at the Company's Albuquerque, New Mexico facility as well as the impacts of unfavorable price/mix.
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Precision Optics
First Quarter
(Thousands) First Quarter Ended
March 28, March 29, $ %
2025 2024 Change Change
Net sales $ 21,548 $ 24,670 $ (3,122) (13) %
Value-added sales 21,486 24,644 (3,158) (13) %
EBITDA (1,482) (252) (1,230) NM
Net sales from the Precision Optics segment of $21.5 million in the first quarter of 2025 decreased 13% compared to net sales of $24.7 million in the first quarter of 2024. The decrease was primarily due to lower sales volumes in the life sciences end market (41%).
Value-added sales of $21.5 million in the first quarter of 2025 decreased 13% compared to value-added sales of $24.6 million in the first quarter of 2024. 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 $1.5 million in the first quarter of 2025, compared to a loss of $0.3 million in the first quarter of 2024. The decrease in EBITDA was primarily driven by a $1.0 million increase in restructuring expense in the first quarter of 2025 compared to the first quarter of 2024, as well as the impact of lower sales volumes.
Other
First Quarter
(Thousands) First Quarter Ended
March 28, March 29, $ %
2025 2024 Change Change
Net sales $ — $ — $ — — %
Value-added sales — — — — %
EBITDA (5,870) (5,699) (171) 3 %
The Other reportable segment in total includes unallocated corporate costs.
Corporate costs were $5.9 million in the first quarter of 2025 compared to $5.7 million in the first quarter of 2024. Corporate costs were 1% of Company-wide net sales in the first quarter of 2025 and 2024. Corporate costs were 2% of Company-wide value-added sales in the first quarter of 2025 and 2024. Corporate costs remained relatively consistent with the prior year period due to continued cost control initiatives implemented throughout 2024 and in the first quarter of 2025.
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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 28, March 29, $
(Thousands) 2025 2024 Change
Net cash (used in) provided by operating activities $ 15,502 $ (13,805) $ 29,307
Net cash used in investing activities (20,738) (26,299) 5,561
Net cash provided by financing activities 3,478 40,297 (36,819)
Effects of exchange rate changes 679 (383) 1,062
Net change in cash and cash equivalents $ (1,079) $ (190) $ (889)
Net cash provided by operating activities totaled $15.5 million in the first three months of 2025 compared to net cash used in operating activities of $13.8 million in the prior-year period. The favorable change in cash provided by operating activities was primarily driven by continued focus on working capital, specifically efforts focused around inventory management, which resulted in a net cash benefit of $0.4 million in the first quarter of 2025 compared to a usage of $26.5 million in the first quarter of 2024 when inventory levels increased. The increase in Account Receivable and Account Payable during the first quarter of 2025 was primarily due to the significant increase in precious metal pricing from year end, compared to decreases in the same period in the prior year.
Net cash used in investing activities was $20.7 million in the first quarter of 2025 compared to $26.3 million in the prior-year period. The decrease in cash used in investing activities is due to lower capital expenditures, partially offset by an increase in mine development in the first quarter of 2025 compared to 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 2025, the Company expects payments for property, plant, and equipment to be approximately $70 million.
Net cash provided by financing activities totaled $3.5 million in the first three months of 2025 compared to net cash provided by financing activities of $40.3 million in the prior-year period. The decrease in borrowings in 2025 from the same period in the prior year was a result of favorable operating cash flow and lower capital expenditures in 2025.
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 2024 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 28, 2025, cash and cash equivalents held by our foreign operations totaled $14.6 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 28, 2025 and December 31, 2024 is as follows:
March 28, December 31,
(Thousands) 2025 2024
Cash and cash equivalents $ 15,634 $ 16,713
Total outstanding debt 451,317 442,008
Net debt $ (435,683) $ (425,295)
Available borrowing capacity $ 172,228 $ 168,997
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 facility 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 28, 2025 and December 31, 2024. 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 $198.2 million as of March 28, 2025, compared to $233.4 million as of December 31, 2024. 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 2025. 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 $2.8 million on our common stock in the first quarter of 2025. 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 $416.8 million and $381.6 million as of March 28, 2025 and December 31, 2024, respectively. We were in compliance with all of the covenants contained in the consignment agreements as of March 28, 2025. For additional information on our contractual and other obligations, refer to our 2024 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 2024 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 2024 Annual Report on Form 10-K. There have been no material changes in our market risks since the inclusion of this discussion in our 2024 Annual Report on Form 10-K.
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