ICHOR HOLDINGS, LTD. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors”. For discussion related to changes in financial condition and the results of operations for fiscal year 2018-related items, refer to Part II, Item 7 in our Annual Report on Form 10‑K for fiscal year 2019, which was filed with the Securities and Exchange Commission on March 6, 2020. Overview We are a leader in the design, engineering, and manufacturing of critical fluid delivery subsystems and components for semiconductor capital equipment. Our product offerings include gas and chemical delivery systems and subsystems, collectively known as fluid delivery systems and subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices. Our gas delivery subsystems deliver, monitor, and control precise quantities of the specialized gases used in semiconductor manufacturing processes such as etch and deposition. Our chemical delivery systems and subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as chemical-mechanical planarization, electroplating, and cleaning. We also manufacture precision machined components, weldments, and proprietary products for use in fluid delivery systems for direct sales to our customers. This vertically integrated portion of our business is primarily focused on metal and plastic parts that are used in gas and chemical systems, respectively. 31 Fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the semiconductor manufacturing processes. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes. Most OEMs outsource all or a portion of the design, engineering , and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are also increasingly outsourcing the design, engineering , and manufacturing of their chemical delivery subsystems due to the increased fluid expertise required to manufacture these subsystems. Outsourcing these subsystems has allowed OEMs to leverage the suppliers’ highly specialized engineering, design , and production skills while focusing their internal resources on their own value-added processes. We believe that this outsourcing trend has enabled OEMs to reduce their costs and development time, as well as provide growth opportunities for specialized subsystems suppliers like us. We have a global footprint with production facilities in California, Minnesota, Oregon, Texas, Singapore, Malaysia, the United Kingdom, Korea, and Mexico. In 2020, 2019, and 2018, our two largest customers by revenue were Lam Research and Applied Materials. Key Factors Affecting Our Business Investment in Semiconductor Manufacturing Equipment The design and manufacturing of semiconductor devices is constantly evolving and becoming more complex in order to achieve greater performance and efficiency. To keep pace with these changes, OEMs need to refine their existing products and invest in developing new products. In addition, semiconductor device manufacturers will continue to invest in new wafer fabrication equipment to expand their production capacity and to support new manufacturing processes. Outsourcing of Subsystems by Semiconductor OEMs Faced with increasing manufacturing complexities, more complex subsystems, shorter product lead times, shorter industry spend cycles, and significant capital requirements, outsourcing of subsystems and components by OEMs has continued to grow. In the past two decades, OEMs have outsourced most of their gas delivery systems to suppliers such as us. OEMs have also started to outsource their chemical delivery systems in recent years. Our results will be affected by the degree to which outsourcing of these fluid delivery systems by OEMs continues to grow. Cyclicality of Semiconductor Capital Equipment Industry Our business is subject to the cyclicality of the capital expenditures of the semiconductor industry, which drives cyclicality in the semiconductor capital equipment industry in which we operate. In 2020, we derived over 95% of our sales from the semiconductor capital equipment industry. Demand for semiconductor capital equipment can fluctuate significantly based on changes in general economic conditions, including consumer spending, demand for semiconductor products, pricing, and other factors. In the past, these fluctuations have resulted in significant variations in the levels of spending within the semiconductor capital equipment industry, and as a result, our results of operations. The cyclicality of the semiconductor industry will continue to impact our results of operations in the future. Customer Concentration The number of capital equipment manufacturers for the semiconductor device industry is significantly consolidated, resulting in a small number of large manufacturers. Our customers are a significant component of this consolidation, resulting in our sales being concentrated in a few customers. In 2020, our top two customers were Lam Research and Applied Material, with Lam Research and Applied Materials accounting for approximately 52% and 35% of sales, respectively. The sales we generated from these customers in 2020 were spread across 42 different product lines utilized in 13 unique manufacturing process steps. We believe the diversity of products that we provide to these customers, combined with the fact that our customers use our products on numerous types of process equipment, lessens the impact of the inherent concentration in the industry. Our customers often require reduced prices or other pricing, quality, or delivery commitments as a condition to their purchasing from us in any given period or increasing their purchase volume, which can, among other things, result in reduced gross margins in order to maintain or expand our market share. Although we do not have any long-term contracts that require customers to place orders with us, Lam Research and Applied Materials have been our customers for over 10 years. 32 Acquisitions We acquired Cal‑Weld, a California-based leader in the design and fabrication of precision, high purity industrial components, subsystems, and systems, in July 2017 for $56.2 million. We also acquired Talon, a Minnesota-based leader in the design and manufacturing of high precision machined parts used in leading edge semiconductor tools, in December 2017 for $137.8 million. On a combined basis, these acquisitions contributed approximately $57.5 million to sales in 2017. We acquired IAN, a Seoul-based leader in providing locally-sourced design and manufacturing of gas delivery systems to customers in Korea, for $6.5 million, which contributed $7.7 million to sales in 2018. These acquisitions continue to have a significant impact on our financial position and results of operations. In December 2020, we acquired certain operating assets and assumed the operations of a business in Nogales, Mexico for $5.0 million to increase our precision machined component manufacturing capacity. We intend to continue to evaluate opportunistic acquisitions to supplement our organic growth, and any such acquisitions could have a material impact on our business and results of operations. COVID-19 Pandemic and Market Conditions Update 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. While our facilities are currently not subject to any site-wide government shutdowns, “social distancing” guidelines are resulting, and will continue to result in, reduced factory output. 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. Components of Our Results of Operations The following discussion sets forth certain components of our statements of operations as well as significant factors that impact those items. Sales We generate sales primarily from the design, manufacture, and sale of subsystems and components for semiconductor capital equipment. Sales are recognized when control of promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our shipping terms are generally “shipping point.” Accordingly, control transfers, and sales are recognized, at this point-in-time. Cost of Sales and Gross Profit Cost of sales consists primarily of purchased materials, direct labor, indirect labor, factory overhead cost, and depreciation expense for our manufacturing facilities and equipment, as well as certain engineering costs that are related to non-recurring engineering services that we provide to, and for which we invoice, our customers in connection with their product development activities. Our business has a highly variable cost structure with a low fixed overhead structure as a percentage of cost of sales. In addition, our existing global manufacturing plant capacity is scalable, and we are able to adjust to increased customer demand for our products without significant additional capital investment. We operate our business in this manner to avoid having excessive fixed costs during a cyclical downturn while retaining flexibility to expand our production volumes during periods of growth. However, this approach results in a smaller increase in gross margin as a percentage of sales in times of increased demand. Since the gross margin on each of our products differs, our overall gross margin as a percentage of our sales changes based on the mix of products we sell in any period. Operating Expenses Our operating expenses primarily include research and development and sales, general, and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation, and, with regard to sales and marketing expense, sales commissions. Operating expenses also include overhead costs for facilities, IT, and depreciation. In addition, our operating expenses include costs related to amortization of intangible assets and restructuring costs. 33 Research and development – Research and development expense consists primarily of activities related to product design and other development activities, new component testing and evaluation, and test equipment and fixture development. Research and development expense does not include engineering costs that are related to non-recurring engineering services that we provide to , and for which we invoice , our customers as part of sales, which are reflected as cost of sales. We expect research and development expense will increase in absolute dollars as our customers continue to increase their demand for new product designs and as we invest in our research and product development efforts to enhance our product capabilities and access new customer markets. Selling, general, and administrative – Selling expense consists primarily of salaries and commissions paid to our sales and sales support employees and other costs related to the sales of our products. General and administrative expense consists primarily of salaries and overhead associated with our administrative staff, professional fees, and depreciation and other allocated facility related costs. We expect selling expenses to increase in absolute dollars as we continue to invest in expanding our markets and as we expand our international operations. We expect general and administrative expenses to also increase in absolute dollars due to an increase in costs related to being a public company, including higher legal, corporate insurance, and accounting expenses. Amortization of intangibles – Amortization of intangible assets is related to our finite-lived intangible assets and is computed using the straight-line method over the estimated economic life of the asset. Interest Expense Interest expense consists of interest on our outstanding debt under our Credit Facilities and any other indebtedness we may incur in the future. Other Expense (Income), Net The functional currency of our international operations located in the Singapore, Malaysia, the United Kingdom, and Mexico is the U.S. dollar. Transactions denominated in currencies other than the functional currency generate foreign exchange gains and losses that are included in other expense (income), net on the accompanying consolidated statements of operations. Substantially all of our sales contracts, and most of our agreements with third-party suppliers, provide for pricing and payment in U.S. dollars. Accordingly, these transactions are not subject to material exchange rate fluctuations. Income Tax Benefit During 2020, income tax benefit consisted primarily of the benefit from our tax holiday in Singapore, as well as the impacts of withholding taxes, stock option exercises, and credit generation. During 2019, income tax benefit consisted primarily of taxable loss incurred in the United States, the benefit from our tax holiday in Singapore, as well as the impacts of withholding taxes, stock option exercises, credit generation, and the release of tax reserves established in purchase accounting. During 2018, income tax benefit consisted primarily of the impact of U.S. operations, offset by discrete tax benefits, including the release of a valuation allowance against our foreign tax credit carryforwards we now expect to realize as a result of additional analysis of the Tax Cuts and Jobs Act and stock option exercises. 34 Results of Operations The following table sets forth our results of operations for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. Year Ended December 25, 2020 December 27, 2019 December 28, 2018 (in thousands) Consolidated Statements of Operations Data: Net sales $ 914,236 $ 620,837 $ 823,611 Cost of sales 789,344 534,473 687,474 Gross profit 124,892 86,364 136,137 Operating expenses: Research and development 13,361 11,102 9,355 Selling, general, and administrative 56,614 47,270 47,448 Amortization of intangible assets 13,365 13,015 15,369 Total operating expenses 83,340 71,387 72,172 Operating income 41,552 14,977 63,965 Interest expense 8,727 10,647 9,987 Other expense (income), net 534 55 (241 ) Income before income taxes 32,291 4,275 54,219 Income tax benefit (988 ) (6,454 ) (3,664 ) Net income $ 33,279 $ 10,729 $ 57,883 The following table sets forth our results of operations as a percentage of our total sales for the periods presented. Year Ended December 25, 2020 December 27, 2019 December 28, 2018 Consolidated Statements of Operations Data: Net sales 100.0 100.0 100.0 Cost of sales 86.3 86.1 83.5 Gross profit 13.7 13.9 16.5 Operating expenses: Research and development 1.5 1.8 1.1 Selling, general, and administrative 6.2 7.6 5.8 Amortization of intangible assets 1.5 2.1 1.9 Total operating expenses 9.1 11.5 8.8 Operating income 4.5 2.4 7.8 Interest expense 1.0 1.7 1.2 Other expense (income), net 0.1 0.0 0.0 Income before income taxes 3.5 0.7 6.6 Income tax benefit (0.1 ) (1.0 ) (0.4 ) Net income 3.6 1.7 7.0 35 Comparison of Fiscal Years 2020 and 2019 Net Sales Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Net sales $ 914,236 $ 620,837 $ 293,399 47.3 % The increase in net sales from 2019 to 2020 was primarily due to increased demand from our customers as a result of growth in the global wafer fabrication equipment market, as well as share-gains at our largest customers. On a geographic basis, sales in the U.S. increased by $161.9 million to $491.0 million, and foreign sales increased by $131.5 million to $423.3 million. Cost of Sales and Gross Profit Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Cost of sales $ 789,344 $ 534,473 $ 254,871 47.7 % Gross profit $ 124,892 $ 86,364 $ 38,528 44.6 % Gross margin 13.7 % 13.9 % - 20 bps The increase in cost of sales and gross profit from 2019 to 2020 was primarily due to increased sales volume. The 20 basis point decrease in our gross margin from 2019 to 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), as well as the impacts of certain discrete charges to cost of sales during 2020, including a loss on the sale of certain property and equipment and inventories from our Tampa, Florida facility of $3.6 million, costs incurred in connection with the shutdown of our Union City, California facility of $2.2 million, and a contract settlement loss recorded upon reaching a mutual settlement with the counterparty of a contract dispute of $1.4 million. These charges, which had a combined 70 basis point impact on our gross margin, were mostly offset by higher operating leverage as a result of increased factory utilization and favorable product mix on a year-over-year basis. Research and Development Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Research and development $ 13,361 $ 11,102 $ 2,259 20.3 % The increase in research and development expenses from 2019 to 2020 was primarily due to incremental expenses related to the development of our flow controller technology, as well as increased employee-related expense from our existing engineering team, partially offset by lower travel-related expenses. 36 Selling, General , and Administrative Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Selling, general, and administrative $ 56,614 $ 47,270 $ 9,344 19.8 % The increase in selling, general, and administrative expense from 2019 to 2020 was primarily due to (i) $1.8 million in executive transition costs associated with the transition of our former CEO to Executive Chairman, (ii) $4.7 million in increased employee-related expense, of which $0.8 million was from increased share-based compensation expense, (iii) $1.6 million in increased legal and professional fees, (iv) $1.0 million in increased occupancy costs, and (v) $1.7 million in other administrative costs to support the growing company; partially offset by $0.8 million in reduced travel-related costs and 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 2020. Amortization of Intangible Assets Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Amortization of intangibles assets $ 13,365 $ 13,015 $ 350 2.7 % The increase in amortization expense from 2019 to 2020 was primarily due to incremental amortization expense from purchased developed technology IP assets in May 2019. Interest Expense Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Interest expense $ 8,727 $ 10,647 $ (1,920 ) -18.0 % The decrease in interest expense from 2019 to 2020 was primarily due to a 103 basis point decrease in our weighted average interest rate, from 4.78% to 3.75%, partially offset by a $3.9 million increase in the average amount borrowed during the year as a result of a net draw on our revolving facility, which was partially offset by quarterly term loan payments. Other Expense, Net Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Other expense, net $ 534 $ 55 $ 479 870.9 % The increase in other expense, net from 2019 to 2020 was primarily due to transactions denominated in the local currencies of our foreign operations, as the U.S. dollar fell against the local currencies during most of the second half. These local currencies consist primarily of the Singapore dollar, Malaysian ringgit, British pound, euro, and South Korean won. 37 Income Tax Benefit Year Ended Change December 25, 2020 December 27, 2019 Amount % (dollars in thousands) Income tax benefit $ (988 ) $ (6,454 ) $ 5,466 -84.7 % The decrease in income tax benefit from 2019 to 2020 was primarily due to decreased benefit from taxable losses incurred in the United States, partially offset by increased income in Singapore subject to a tax holiday. Non-GAAP Results Management uses non-GAAP metrics to evaluate our operating and financial results. We believe the presentation of non-GAAP results is useful to investors for analyzing business trends and comparing performance to prior periods, along with enhancing investors’ ability to view our results from management’s perspective. Non-GAAP net income is defined as: net income excluding (1) amortization of intangible assets, share-based compensation expense, and non-recurring expenses, including contract settlement losses and divestiture and facility shutdown related charges; and (2) the tax impacts associated with our non-GAAP adjustments, as well as non-recurring discrete tax items. Non-GAAP diluted EPS is defined as non-GAAP net income divided by weighted average diluted ordinary shares outstanding during the period. The following table presents our unaudited non‑GAAP net income and a reconciliation from net income, the most comparable GAAP measure, for the periods indicated: Year Ended December 25, 2020 December 27, 2019 December 28, 2018 (dollars in thousands, except per share amounts) Non-GAAP Data: U.S. GAAP net income $ 33,279 $ 10,729 $ 57,883 Non-GAAP adjustments: Amortization of intangible assets 13,365 13,015 15,369 Share-based compensation 9,875 8,537 7,577 Other non-recurring expense, net (1) 7,181 2,808 1,727 Contract settlement loss (2) 1,386 — — Facility shutdown costs (3) 2,463 — — Fair value adjustment to inventory from acquisitions (4) — — 4,839 Tax adjustments related to non-GAAP adjustments (5) (8,507 ) (6,743 ) (8,203 ) Tax benefit from release of valuation allowance (6) — — (4,140 ) Non-GAAP net income $ 59,042 $ 28,346 $ 75,052 U.S. GAAP diluted EPS $ 1.42 $ 0.47 $ 2.30 Non-GAAP diluted EPS $ 2.52 $ 1.25 $ 2.99 Shares used to compute diluted EPS 23,460,105 22,766,903 25,128,055 ( 1 ) Included in this amount for 2020 are primarily (i) a $3.6 million loss on the sale of inventories and property and equipment from our Tampa, Florida facility, (ii) non-capitalized costs incurred in connection with our implementation of a new ERP system and a Sarbanes-Oxley (“SOX”) compliance program, and (iii) costs associated with restructuring and transitioning key leadership roles. Included in this amount for 2019 are primarily (i) acquisition-related expenses associated with 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 (the “IAN retention agreement”), (ii) costs associated with restructuring and transitioning key leadership roles, and (iii) non-capitalized costs incurred in connection with our implementation of a new ERP system and a SOX compliance program. Included in this amount for fiscal year 2018 are (i) expenses associated with separation benefits for a former officer that became effective in January 2018, (ii) a gain on the extinguishment of the IAN earn-out liability, and (iii) acquisition-related expenses, comprised primarily of expense associated with the IAN retention agreement. 38 ( 2 ) 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 . (3) 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 the first quarter of 2021. Included in this amount are (i) inventory write-off costs of $1.3 million amount for the year ended December 25, 2020; (ii) severance costs associated with affected employees of $0.1 million, $0.2 million, and $0.5 million for the fourth quarter of 2020, the third quarter of 2020, and the year ended December 25, 2020, respectively; and (iii) accelerated depreciation charges in excess of pre-shutdown decision run-rate associated with property and equipment expected to be abandoned at the time of facility closure of $0.3 million, $0.3 million, and $0.6 million for the fourth quarter of 2020, the third quarter of 2020, and the year ended December 25, 2020. (4) As part of our purchase price allocations for our acquisitions of Cal‑Weld in July 2017, Talon in December 2017, and IAN in April 2018, we recorded acquired-inventory at fair value, resulting in a fair value step-up of $3.6 million, $6.2 million, and $0.3 million, respectively. These amounts were subsequently released to cost of sales as acquired-inventory was sold. (5) Adjusts U.S. GAAP income tax expense (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. This adjustment also excludes the impact of non-recurring discrete tax items. (6) Represents the release of a valuation allowance against our foreign tax credit carryforwards we now expect to realize as a result of additional analysis of the Tax Cuts and Jobs Act. Non-GAAP results have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for our results reported under GAAP. Other companies may calculate non-GAAP results differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our non-GAAP results as a tool for comparison. Because of these limitations, you should consider non-GAAP results alongside other financial performance measures and results presented in accordance with GAAP. In addition, in evaluating non-GAAP results, you should be aware that in the future we will incur expenses such as those that are the subject of adjustments in deriving non-GAAP results and you should not infer from our presentation of non-GAAP results that our future results will not be affected by these expenses or any unusual or non-recurring items. Unaudited Quarterly Financial Results The following table set forth statement of operations data for the periods indicated. The information for each of these periods is unaudited and has been prepared on the same basis as our audited consolidated financial statements included herein and includes all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our unaudited operations data for the periods presented. Historical results are not necessarily indicative of the results to be expected in the future. Three Months Ended December 25, 2020 September 25, 2020 June 26, 2020 March 27, 2020 December 27, 2019 September 27, 2019 June 28, 2019 March 29, 2019 (in thousands, except share and per share amounts) Sales $ 244,966 $ 227,678 $ 221,564 $ 220,028 $ 189,355 $ 154,456 $ 139,195 $ 137,831 Cost of sales 210,616 195,172 192,302 191,254 163,440 133,763 119,662 117,608 Gross profit 34,350 32,506 29,262 28,774 25,915 20,693 19,533 20,223 Operating expenses: Research and development 3,261 3,269 3,509 3,322 3,090 2,987 2,634 2,391 Selling, general and administrative 13,516 13,367 13,113 16,618 13,779 11,048 10,685 11,758 Amortization of intangible assets 3,357 3,338 3,336 3,334 3,340 3,336 3,202 3,137 Total operating expenses 20,134 19,974 19,958 23,274 20,209 17,371 16,521 17,286 Operating income 14,216 12,532 9,304 5,500 5,706 3,322 3,012 2,937 Interest expense 1,999 2,052 2,302 2,374 2,454 2,663 2,762 2,768 Other expense (income), net 321 242 2 (31 ) 67 (43 ) 7 24 Income before income taxes 11,896 10,238 7,000 3,157 3,185 702 243 145 Income tax expense (benefit) (625 ) (310 ) 189 (242 ) (4,767 ) (221 ) (93 ) (1,373 ) Net income $ 12,521 $ 10,548 $ 6,811 $ 3,399 $ 7,952 $ 923 $ 336 $ 1,518 Diluted net income per share: $ 0.51 $ 0.45 $ 0.30 $ 0.15 $ 0.35 $ 0.04 $ 0.01 $ 0.07 Shares used to compute diluted net income per share: 24,370,434 23,347,460 23,066,976 23,181,127 22,993,767 22,718,882 22,663,053 22,536,209 39 The following table sets forth our unaudited quarterly consolidated statement of operations data as a percentage of sales for the periods indicated. Three Months Ended December 25, 2020 September 25, 2020 June 26, 2020 March 27, 2020 December 27, 2019 September 27, 2019 June 28, 2019 March 29, 2019 Sales 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of sales 86.0 85.7 86.8 86.9 86.3 86.6 86.0 85.3 Gross profit 14.0 14.3 13.2 13.1 13.7 13.4 14.0 14.7 Operating expenses: Research and development 1.3 1.4 1.6 1.5 1.6 1.9 1.9 1.7 Selling, general and administrative 5.5 5.9 5.9 7.6 7.3 7.2 7.7 8.5 Amortization of intangible assets 1.4 1.5 1.5 1.5 1.8 2.2 2.3 2.3 Total operating expenses 8.2 8.8 9.0 10.6 10.7 11.2 11.9 12.5 Operating income 5.8 5.5 4.2 2.5 3.0 2.2 2.2 2.1 Interest expense 0.8 0.9 1.0 1.1 1.3 1.7 2.0 2.0 Other expense (income), net 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 Income before income taxes 4.9 4.5 3.2 1.4 1.7 0.5 0.2 0.1 Income tax expense (benefit) (0.3 ) (0.1 ) 0.1 (0.1 ) (2.5 ) (0.1 ) (0.1 ) (1.0 ) Net income 5.1 4.6 3.1 1.5 4.2 0.6 0.2 1.1 Seasonality We have not historically experienced meaningful seasonality with respect to our business or results of operations. Liquidity and Capital Resources We had cash of $252.9 million as of December 25, 2020, compared to $60.6 million as of December 27, 2019. Our principal uses of liquidity are to fund our working capital needs, purchase new capital equipment, and acquisitions. The increase was primarily due to net proceeds of $139.4 million from our issuance of 4.6 million ordinary shares on December 14, 2020, cash provided by operating activities of $38.3 million, net proceeds from our credit facilities of $21.3 million, and net proceeds from the issuance of shares under our share-based compensation plans of $8.0 million, partially offset by capital expenditures of $10.3 million and by cash paid to acquire a precision machining operation in Sonora, Mexico of $5.0 million. We believe that our cash, the amounts available under our revolving credit facility, and our cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. Cash Flow Analysis The following table sets forth a summary of operating, investing, and financing activities for the periods presented: Year Ended December 25, 2020 December 27, 2019 December 28, 2018 (in thousands) Cash provided by operating activities $ 38,260 $ 57,150 $ 60,475 Cash used in investing activities (14,597 ) (20,490 ) (15,363 ) Cash provided by (used in) financing activities 168,624 (19,882 ) (70,582 ) Net increase (decrease) in cash $ 192,287 $ 16,778 $ (25,470 ) 40 Operating Activities Cash generated by operating activities of $38.3 million during 2020 was due to net income of $33.3 million and net non-cash charges of $37.0 million, offset by an increase in our net operating assets and liabilities of $32.0 million. Net non-cash charges primarily consisted of depreciation and amortization of $24.2 million, share-based compensation of $9.9 million, and a loss on the sale of equipment and inventory from our Tampa, Florida facility of $3.6 million, partially offset by deferred taxes of $1.7 million. The increase in our net operating assets and liabilities was primarily due to an increase in accounts receivable of $16.1 million, a decrease of accounts payable of $14.5 million, an increase in inventories of $8.5 million, and an increase in prepaid expenses and other assets of $2.1 million, partially offset by an increase in accrued and other liabilities of $9.2 million. The increase in accounts receivable was primarily due to increased sales volume during the fourth quarter of 2020 compared to the fourth quarter of 2019. The decrease in accounts payable was primarily due to the timing of purchases, material receipts, and payments near the end of the fourth quarter of 2020 compared to the fourth quarter of 2019 Cash generated by operating activities of $57.2 million during 2019 was due to net income of $10.7 million, net non-cash charges of $24.2 million, and a decrease in our net operating assets and liabilities of $22.2 million. Non-cash charges of $24.2 million primarily consist of depreciation and amortization of $21.9 million and share-based compensation of $8.5 million, partially offset by deferred taxes of $7.1 million. The decrease in our net operating assets and liabilities was primarily due to an increase in accounts payable of $68.0 million, partially offset by an increase in accounts receivable of $44.6 million, resulting from increased purchasing and sales activity as we ended 2019 compared to ending 2018. Cash generated by operating activities of $60.5 million during 2018 was due to net income of $57.9 million and net non-cash charges of $24.9 million, partially offset by an increase in our net operating assets and liabilities of $22.3 million, net of acquired assets and liabilities. Non-cash charges primarily consist of depreciation and amortization of $23.1 million and share-based compensation of $7.6 million, partially offset by deferred income taxes of $6.7 million. The increase in our net operating assets and liabilities was primarily due to a decrease in accounts payable and accrued and other liabilities of $62.2 million and $5.0 million, respectively, partially offset by a decrease in inventories and accounts receivable of $35.1 million and $10.4 million, respectively. Investing Activities Cash used in investing activities of $14.6 million during 2020 was due to capital expenditures of $10.3 million and cash paid for acquisitions of $5.0 million, partially offset by $0.7 million in proceeds from the sale of certain property and equipment from our Tampa, Florida facility. Cash used in investing activities of $20.5 million during 2019 was due to capital expenditures of $12.3 million and cash paid for developed technology assets of $8.1 million. Cash used in investing activities of $15.4 million during 2018 was due to capital expenditures of $13.9 million and net cash paid in connection with acquisitions of $1.4 million. Financing Activities Cash generated by financing activities of $168.6 million during 2020 was due to net proceeds of $139.4 million from our issuance of 4.6 million ordinary shares on December 14, 2020, net proceeds from our credit facilities of $21.3 million, and net proceeds from the issuance of shares under our share-based compensation plans of $8.0 million. Cash used in financing activities of $19.9 million during 2019 was due to net payments on long-term debt of $23.8 million and share repurchases of $1.6 million, partially offset by net proceeds from the issuance of ordinary shares under our share-based compensation plans of $5.5 million. Cash used in financing activities of $70.6 million during 2018 was due to share repurchases of $90.0 million and debt modification costs in connection with the refinancing of our credit facilities in February 2018 of $2.1 million, partially offset by net borrowing on long-term debt of $15.3 million and proceeds related to issuances of ordinary shares under our share-based compensation plans of $6.2 million. Credit Facilities For a description of our Credit Facilities, please review the information provided in Note 9 – Credit Facilities of our consolidated financial statements included in Part IV, Item 15 of this report. 41 Contractual Obligations and Commitments The following summarizes our contractual obligations and commitments as of December 25, 2020: Payments Due by Period Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years (in thousands) Operating leases $ 11,025 $ 5,128 $ 5,623 $ 274 $ — Long-term debt obligations, principal (1) 202,287 8,750 193,537 — — Long-term debt obligations, interest (2) 13,851 6,700 7,151 — — Total $ 227,163 $ 20,578 $ 206,311 $ 274 $ — (1) Represents the contractually required principal payments under our Credit Facilities in accordance with the required principal payment schedule. (2) Represents the contractually required interest payments under our Credit Facilities in accordance with the required interest payment schedule. Interest costs have been estimated based on interest rates in effect for such indebtedness as of December 25, 2020. The table above does not include amounts related to uncertain tax positions because we cannot reliably estimate the timing of the settlement of such liabilities. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below. Revenue Recognition To understand our revenue recognition accounting policy, please review the information provided in Note 1 – Organization and Summary of Significant Accounting Policies . Inventory Valuation To understand our inventory valuation accounting policy, please review the information provided in Note 1 – Organization and Summary of Significant Accounting Policies . During 2020, 2019, and 2018, we wrote down inventory determined to be excessive or obsolete by $4.6 million, $1.1 million, and $1.9 million, respectively. Recent Accounting Pronouncements From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption. 42 To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 1 – Organization and Summary of Significant Accounting Policies of our consolidated financial statements in Part IV, Item 15 of this report. Off-Balance Sheet Arrangements As of December 25, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other purposes.