What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-05 · 60 added, 50 removed, 141 unchanged (44% of the section changed)

21 unchanged sentences

Three Months Ended

Six Months Ended

(dollars in thousands)

2 unchanged sentences

GAAP net income

Non-GAAP net income (1)

Non-GAAP adjusted net income (1)

Please see “Non‑GAAP Results” within Item 2 for a reconciliation of Non‑GAAP net income to U.S.

2 unchanged sentences

The COVID‑19 pandemic and related economic repercussions have created, and are expected to continue to create, significant volatility, uncertainty, and turmoil in our industry.

Government shutdowns and “social distancing” guidelines are, and will continue to, result in reduced factory capacity.

While we are currently not subject to any site-wide government shutdowns, “social distancing” guidelines are resulting, and will continue to result in, reduced factory capacity.

In addition, an increase in direct costs within our factories associated with employee personal protective equipment (“PPE”), facility cleaning and layout changes, together with increases in logistics costs and employee labor costs, as well as other operating inefficiencies have resulted in, and may continue to result in, lower revenues and operating margins.

The extent and duration of these impacts cannot be specifically quantified given the dynamic nature and breadth of the pandemic’s impact on our operations and that of our customers and suppliers.

See “Risk Factors” in Part II, Item 1A of this Current Report on Form 10‑Q.

In response to the COVID ‑ 19 pandemic , we have instituted weekly Business Continuity Plan (“B CP ”) meetings with executive management , including our CEO, to address new challenges to our current ope rating environment and review the effectiveness of our current BCP appr oach to managing our business.

As necessary, our CEO communicates with our board of directors regarding our BCP to ensure all stakeholders remain informed of COVID ‑19 challenges affecting our business and the measures taken to address them.

We have implemented , at minimum , the following steps at our facilities in order to ensure the safety and welfare of our employees, customers, suppliers, and visitors to our operations:

(1) PPE has been provided to all employees and temperature screening is performed on all personnel entering our facilities , (2) p roduction work environments have been set up and altered to meet social dist ancing guidelines, (3) m ost of our non - direct line manufacturing employee s are working remotely, (4) b usiness travel has largely stopped, with exceptions req uiring CEO staff member approval, (5) i ncreased cleaning and sanitizing of our facilities , and (6) p roduction shift schedule changes to reduce the number of employees per shift with in each production facilit y .

Results of Operations

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Three Months Ended

Six Months Ended

(in thousands)

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Income before income taxes

Income tax benefit

Income tax expense (benefit)

The following table sets forth our unaudited results of operations as a percentage of our total sales for the periods presented.

Three Months Ended

Six Months Ended

Consolidated Statements of Operations Data:

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Income before income taxes

Income tax benefit

Comparison of the Three Months Ended March 27 , 20 20 and March 2 9 , 201 9

Income tax expense (benefit)

Comparison of the Three and Six Months Ended June 26 , 20 20 and June 28 , 201 9

Three Months Ended

Six Months Ended

(dollars in thousands)

The increase in net sales from the first quarter of 2019 to the first quarter of 2020 was primarily due to increased demand from our customers as a result of growth in the global wafer fabrication equipment market as it comes out of the recent cyclical downturn, as well as share-gains at our largest customers, partially offset by lower shipments due to factory output limitations associated with the COVID-19 pandemic (see “COVID‑19 Pandemic and Market Conditions Update” above for expanded commentary).

The increase in net sales from the three and six months ended June 28, 2019 to the three and six months ended June 26, 2020 was primarily due to increased demand from our customers as a result of growth in the global wafer fabrication equipment market as it comes out of the recent cyclical downturn, as well as share-gains at our largest customers.

On a geographic basis, sales in the U.S.

increased by $44.2 million to $120.8 million and foreign sales increased by $38.0 million to $99.2 million.

increased by $40.8 million and $85.0 million from the three and six months ended June 28, 2019, respectively, to $117.7 million and $238.5 million for the three and six months ended June 26, 2020, respectively.

Foreign sales increased by $41.6 million and $79.6 million from the three and six months ended June 28, 2019, respectively, to $103.9 million and $203.1 million for the three and six months ended June 26, 2020, respectively.

Cost of Sales and Gross Profit

Three Months Ended

Six Months Ended

(dollars in thousands)

Cost of sales

The increase in cost of sales and gross profit from the first quarter of 2019 to the first quarter of 2020 was primarily due to increased sales volume.

The decrease in our gross margin from the first quarter of 2019 to the first quarter of 2020 was primarily due increased costs to operate our production facilities and lower factory utilization in response to the COVID‑19 pandemic (see “COVID‑19 Pandemic and Market Conditions Update” above for expanded commentary).

Our facilities in California and Malaysia were shutdown, pursuant to governmental orders, for durations ranging from approximately 1‑2 weeks near the end of the quarter.

The impact of this settlement loss resulted in a 60 basis point reduction in our gross margin.

The increase in cost of sales and gross profit from the three and six months ended June 28, 2019 to the three and six months ended June 26, 2020 was primarily due to increased sales volume.

The decrease in our gross margin from the second quarter of 2019 to the second quarter of 2020 was primarily due to increased costs to operate our production facilities in response to the COVID‑19 pandemic (see “COVID‑19 Pandemic and Market Conditions Update” above for expanded commentary) and unfavorable product mix, partially offset by higher operating leverage as a result of increased factory utilization.

As a result of governmental shelter-in-place orders instituted in March 2020, our facilities in California and Malaysia were shut down for durations ranging from approximately 1‑3 weeks near the end of the first quarter, which also impacted output early in the second quarter.

Additionally, during the second quarter of 2020, we made the decision to close our Union City, California facility, resulting in inventory write-off and severance costs of $1.5 million.

The impact of this event resulted in a 70 basis point reduction in our gross margin during the second quarter of 2020.

The decrease in our gross margin from the six months ended June 28, 2019 to the six months ended June 26, 2020 was primarily due to increased costs to operate our production facilities and lower factory utilization in response to the COVID‑19 pandemic (see “COVID‑19 Pandemic and Market Conditions Update” above for expanded commentary) and unfavorable product mix, partially offset by higher operating leverage as a result of increased factory utilization.

Additionally, during the first quarter of 2020, we reached a mutual settlement with the counterparty of a contract dispute and, accordingly, recorded a $1.4 million contract settlement loss to cost of sales, and during the second quarter of 2020, we made the decision to shut down our Union City, California facility, resulting in inventory write-off and severance costs of $1.5 million.

The impact of these events resulted in a 70 basis point reduction in our gross margin during the six months ended June 26, 2020.

Research and Development

Three Months Ended

Six Months Ended

(dollars in thousands)

Research and development

The increase in research and development expenses from the first quarter of 2019 to the first quarter of 2020 was primarily due to $0.7 million in increased employee-related expense resulting from increased engineering headcount, of which approximately $0.4 million was due to a small engineering team assumed in connection with our purchase of developed technology assets in the second quarter of 2019.

The increase in research and development expenses from the second quarter of 2019 to the second quarter of 2020 was primarily due to $0.7 million in increased employee-related expense resulting from increased engineering headcount, of which approximately $0.4 million was due to a small engineering team assumed in connection with our purchase of developed technology assets in the second quarter of 2019.

The increase in research and development expenses from the six months ended June 28, 2019 to the six months ended June 26, 2020 was primarily due to $1.4 million in increased employee-related expense resulting from increased engineering headcount, of which approximately $0.8 million was due to a small engineering team assumed in connection with our purchase of developed technology assets in the second quarter of 2019.

Selling, General, and Administrative

Three Months Ended

Six Months Ended

(dollars in thousands)

Selling, general, and administrative

The increase in selling, general, and administrative expense from the first quarter of 2019 to the first quarter of 2020 was primarily due (i) $1.8 million in executive transition costs associated with the transition of our former CEO to Executive Chairman, (ii) $2.8 million in increased employee-related expense, of which $1.4 million was from increased share-based compensation expense, (iii) $0.4 million in increased legal and professional fees, and (iv) $0.3 million in increased occupancy costs;

The increase in selling, general, and administrative expense from the second quarter of 2019 to the second quarter of 2020 was primarily due (i) $1.6 million in increased employee-related expense, of which $0.6 million was from increased share-based compensation expense, (ii) $0.5 million in increased legal and professional fees, and (iii) $0.3 million in increased occupancy costs.

The increase in selling, general, and administrative expense from the six months ended June 28, 2019 to the six months ended June 26, 2020 was primarily due (i) $1.8 million in executive transition costs associated with the transition of our former CEO to Executive Chairman, (ii) $4.2 million in increased employee-related expense, of which $2.0 million was from increased share-based compensation expense, (iii) $0.9 million in increased legal and professional fees, and (iv) $0.5 million in increased occupancy costs;

partially offset by the release of a $0.7 million indemnification asset in the first quarter of 2019, which was recorded in connection with our acquisition of Cal‑Weld in 2017, that did not repeat in the first quarter of 2020.

A mortization of Intangible Assets

Amortization of Intangible Assets

Three Months Ended

Six Months Ended

(dollars in thousands)

Amortization of intangibles assets

The increase in amortization expense from the first quarter of 2019 to the first quarter of 2020 was primarily due to incremental amortization expense from purchased developed technology assets during the second quarter of 2019.

The increase in amortization expense from the three and six months ended June 28, 2019 to the three and six months ended June 26, 2020 was primarily due to incremental amortization expense from purchased developed technology assets during the second quarter of 2019.

Interest Expense

Three Months Ended

Six Months Ended

(dollars in thousands)

Interest expense

The decrease in interest expense from the first quarter of 2019 to the first quarter of 2020 was primarily due to a decrease in our weighted average interest rate, from 4.77% to 4.44%, and a $23.4 million decrease in our average amount borrowed during the quarter.

The decrease in interest expense from the second quarter of 2019 to the second quarter of 2020 was primarily due to a decrease in our weighted average interest rate, from 4.89% to 3.93%, partially offset by a $4.1 million increase in our average amount borrowed during the quarter.

The decrease in interest expense from the six months ended June 28, 2019 to the six months ended June 26, 2020 was primarily due to a decrease in our weighted average interest rate, from 4.83% to 4.17%, and a $9.7 million decrease in our average amount borrowed during the six months ended June 26, 2020.

Other Expense (Income), Net

Three Months Ended

Six Months Ended

(dollars in thousands)

1 unchanged sentence

The change in other income, net was primarily due to exchange rate fluctuations on transactions denominated in the local currencies of our foreign operations, principally the Singapore dollar, Malaysian ringgit, British pound, euro, and South Korean won.

Income Tax Benefit

Income Tax Expense (Benefit)

Three Months Ended

Six Months Ended

(dollars in thousands)

Income tax benefit

The decrease in income tax benefit from the first quarter of 2019 to the first quarter of 2020 was primarily due to a decrease in releases of certain tax reserves related to statute of limitation expirations or settlements in the first quarter of 2020 compared to the first quarter of 2019.

Income tax expense (benefit)

The decrease in income tax benefit from the second quarter of 2019 to the second quarter of 2020 was primarily due to increased taxable income in the U.S.

The decrease in income tax benefit from the six months ended June 28, 2019 to the six months ended June 26, 2020 was primarily due to a decrease in releases of certain tax reserves related to statute of limitation expirations or settlements in the first quarter of 2020 compared to the first quarter of 2019, as well as increased taxable income in the U.S.

Non ‑GAAP Results

7 unchanged sentences

Three Months Ended

Six Months Ended

(dollars in thousands, except per share amounts)

6 unchanged sentences

Contract settlement loss (2)

Facility shutdown costs (3)

Tax adjustments related to non-GAAP adjustments (4)

3 unchanged sentences

Shares used to compute diluted EPS

Included in this amount for the first quarter of 2020 are (i) a $1.8 million bonus payment to our former CEO in connection with his transition to executive chairman, (ii) acquisition-related expenses, comprised primarily of expense associated with a two-year retention agreement between the Company and key management personnel of IAN (the “IAN retention agreement”), which we acquired in April 2018, and (iii) non-capitalizable costs incurred in connection with our implementation of a new ERP system and a Sarbanes-Oxley (“SOX”) compliance program.

Included in this amount for the first quarter of 2019 are (i) acquisition-related expenses, comprised primarily of a charge to expense from the extinguishment of an indemnification asset related to our acquisition of Cal‑Weld in 2017 and expense associated with the IAN retention agreement, (ii) costs incurred in connection with reorganizing our key personnel and leadership, and (iii) non-capitalizable costs incurred in connection with our implementation of a new ERP system.

Included in this amount for the second quarter of 2020 and the six months ended June 26, 2020 are (i) a $1.8 million bonus payment to our former CEO in connection with his transition to executive chairman, (ii) acquisition-related expenses, comprised primarily of expense associated with a two-year retention agreement between the Company and key management personnel of IAN (the “IAN retention agreement”), which we acquired in April 2018, and (iii) non-capitalizable costs incurred in connection with our implementation of a new ERP system and a Sarbanes-Oxley (“SOX”) compliance program.

Included in this amount for the second quarter of 2019 are (i) acquisition-related expenses, comprised primarily of expense associated with a two-year retention agreement between the Company and key management personnel of IAN, which we acquired in April 2018 and (ii) costs associated with restructuring and transitioning key leadership roles.

Included in this amount for the six months ended June 28, 2019 are (i) acquisition-related expenses, comprised primarily of a charge to expense from the extinguishment of an indemnification asset related to our acquisition of Cal‑Weld in 2017 and expense associated with a two-year retention agreement between the Company and key management personnel of IAN, (ii) costs incurred in connection with reorganizing our key personnel and leadership, and (iii) costs incurred with implementing a new ERP system.

During the first quarter of 2020, we reached a mutual settlement with the counterparty of a contract dispute and, accordingly, recorded a $1.4 million contract settlement loss to cost of sales.

During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we expect to complete by the end of our 2020 fiscal year.

Included in this amount are inventory write-off costs of $1.3 million and severance costs of $0.2 million associated with the affected employees.

GAAP income tax benefit for impact of our non-GAAP adjustments, as defined, including the impacts of excluding share-based compensation, amortization of intangible assets, and other non-recurring expenses.

5 unchanged sentences

Liquidity and Capital Resources

We ended the first quarter of 2020 with cash of $41.6 million, a decrease of $19.0 million from the end of the prior quarter.

The decrease was primarily due to cash used in operating activities of $21.0 million and capital expenditures of $2.5 million, partially offset by net proceeds from our credit facilities of $2.8 million and net proceeds from the issuance of ordinary shares under our share-based compensation plans of $1.7 million.

We ended the second quarter of 2020 with cash of $57.0 million, a decrease of $3.6 million from December 27, 2019.

The decrease was primarily due to cash used in operating activities of $25.2 million and capital expenditures of $5.7 million, partially offset by net proceeds from our credit facilities of $25.6 million and net proceeds from the issuance of shares under our share-based compensation plans of $1.6 million.

The various impacts of the COVID‑19 pandemic on the U.S.

2 unchanged sentences

Cash Flow Analysis

Three Months Ended

Six Months Ended

(in thousands)

Cash used in operating activities

Cash provided by (used in) operating activities

Cash used in investing activities

2 unchanged sentences

Operating Activities

Our cash used in operating activities during the first quarter of 2020 of $21.0 million consists of net income of $3.4 million and net non-cash charges of $9.6 million, offset by an increase in our net operating assets and liabilities of $34.0 million.

Our cash used in operating activities of $25.2 million for the six months ended June 26, 2020 consists of net income of $10.2 million and net non-cash charges of $17.5 million, offset by an increase in our net operating assets and liabilities of $52.9 million.

Net non-cash charges primarily consist of depreciation and amortization of $11.7 million and share-based compensation of $5.0 million.

The increase in our net operating assets and liabilities was primarily due to an increase in inventories of $16.7 million, a decrease in accounts payable of $12.4 million, and an increase in accounts receivable of $2.7 million.

The increase in our net operating assets and liabilities was primarily due to an increase in inventories of $22.2 million, an increase in accounts receivable of $20.0 million, and a decrease of accounts payable of $13.7 million.

The increase in inventories is primarily due to an increase in purchases to support increased volume, and the increase in accounts receivable is primarily due to increased sales volume during the quarter compared to the fourth quarter of 2019, as well as the timing of second quarter sales being heavily back-end weighted.

Investing Activities

Our cash used in investing activities during the first quarter of 2020 of $2.5 million consists of capital expenditures.

Our cash used in investing activities of $5.7 million for the six months ended June 26, 2020 consists of capital expenditures.

Financing Activities

Our cash provided by financing activities during the first quarter of 2020 of $4.5 million consists of net proceeds from our credit facilities of $2.8 million, partially offset by net proceeds from the issuance of ordinary shares under our share-based compensation plans of $1.7 million.

Our cash provided by financing of $27.2 million for the six months ended June 26, 2020 consists of net proceeds from our credit facilities of $25.6 million, partially offset by net proceeds from the issuance of ordinary shares under our share-based compensation plans of $1.6 million.

Critical Accounting Policies

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The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are identified and described in our annual consolidated financial statements and the notes included in our Annual Report on Form 10‑K for the year ended December 27, 2019 (our “Annual Report”).

QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

Currently, substantially all of our sales and arrangements with third-party suppliers provide for pricing and payment in U.S.

dollars and, therefore, are not subject to material exchange rate fluctuations.

As a result, we do not expect foreign currency exchange rate fluctuations to have a material effect on our results of operations.

However, increases in the value of the U.S.

dollar relative to other currencies would make our products more expensive relative to competing products priced in such other currencies, which could negatively impact our ability to compete.

Conversely, decreases in the value of the U.S.

dollar relative to other currencies could result in our foreign suppliers raising their prices in order to continue doing business with us.

While not currently significant, we do have certain operating expenses that are denominated in currencies of the countries in which our operations are located, and may be subject to fluctuations due to foreign currency exchange rates, particularly the Singapore dollar, Malaysian ringgit, British pound, euro, and South Korean won.

Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations.

To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions.

Interest Rate Risk

We had total indebtedness of $183.8 million as of March 27, 2020, exclusive of $2.7 million in debt issuance costs, of which $8.8 million was due within 12 months.

The outstanding amount of debt included elsewhere in this report is net of debt issuance costs.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates.

The interest rate on our outstanding debt is based on LIBOR, the Prime Rate, or the Federal Funds Rate.

A hypothetical 1% interest rate change on our outstanding debt would have resulted in a $0.5 million change to interest expense during the first quarter of 2020, or $1.8 million on an annualized basis.

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-Q

Item 2. Management’s Discussion and Analysis