What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-03 · 49 added, 135 removed, 126 unchanged (59% of the section changed)

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Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors.”

We are a leader in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment.

Our primary offerings include gas and chemical delivery subsystems, collectively known as fluid delivery subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices.

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 subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as electroplating and cleaning.

We also manufacture certain components such as weldments and precision machined components for use in fluid delivery systems for direct sales to our customers.

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.

Fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the semiconductor manufacturing process.

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.

Historically, semiconductor OEMs internally designed and manufactured the fluid delivery subsystems used in their process tools.

Currently, most OEMs outsource the design, engineering, and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us.

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 fixed costs and development time, as well as provided significant growth opportunities for specialized subsystems suppliers like us.

We have a global footprint and are headquartered in California, with production facilities in Malaysia, Singapore, South Korea, California, Florida, Minnesota, Oregon, and Texas.

Our two largest customers by revenue were Lam Research and Applied Materials for all periods presented.

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.

The following summarizes key financial information for the periods indicated:

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

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Non-GAAP diluted EPS (1)

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

Please see “Non‑GAAP Results” within Item 2 of this report for a reconciliation of U.S.

GAAP net income to Non‑GAAP net income.

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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.

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.

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 capacity.

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.

In response to the COVID‑19 pandemic, we have instituted weekly Business Continuity Plan (“BCP”) meetings with executive management, including our CEO, to address new challenges to our current operating environment and review the effectiveness of our current BCP approach 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) production work environments have been set up and altered to meet social distancing guidelines, (3) most of our non-direct line manufacturing employees are working remotely, (4) business travel has largely stopped, with exceptions requiring CEO staff member approval, (5) increased cleaning and sanitizing of our facilities, (6) production shift schedule changes to reduce the number of employees per shift within each production facility, and (7) office work spaces have been enhanced to reduce transmission as certain office employees return to work.

Results of Operations

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Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(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

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

Consolidated Statements of Operations Data:

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Income before income taxes

Income tax benefit

Comparison of the Three and Nine Months Ended September 25, 2020 and September 27, 2019

Income tax expense (benefit)

Comparison of the First Quarter of 2021 and the First Quarter of 2020

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

The increase in net sales from the three and nine months ended September 27, 2019 to the three and nine months ended September 25, 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.

The increase in net sales from the first quarter of 2020 to the first quarter of 2021 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 $47.5 million and $132.5 million from the three and nine months ended September 27, 2019, respectively, to $125.5 million and $364.1 million for the three and nine months ended September 25, 2020, respectively.

Foreign sales increased by $25.7 million and $105.2 million from the three and nine months ended September 27, 2019, respectively, to $102.1 million and $305.2 million for the three and nine months ended September 25, 2020, respectively.

increased by $18.3 million to $139.1 million, and foreign sales increased by $26.2 million to $125.4 million.

Cost of Sales and Gross Profit

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Cost of sales

The increase in cost of sales and gross profit from the three and nine months ended September 27, 2019 to the three and nine months ended September 25, 2020 was primarily due to increased sales volume.

The increase in our gross margin from the third quarter of 2019 to the third quarter of 2020 was primarily due to higher operating leverage as a result of increased factory utilization and favorable product mix on a quarter-over-quarter basis , partially offset by 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) .

Additionally , during the second quarter of 2020, we made the decision to close our Union City, California facility, resulting in severance costs of $ 0 .

2 million and accelerated depreciation charges associated with property and equipment expected to be abandoned of $0.2 million during the third quarter .

The impact of these costs associated with the Union City closure resulted in a n approximate 20 basis point reduction in our gross margin during the third quarter of 2020.

The decrease in our gross margin from the nine months ended September 27, 2019 to the nine months ended September 25, 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 product mix compared to the nine months ended September 27, 2019, partially offset by higher operating leverage as a result of increased factory utilization in 2020.

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 costs of $1.3 million, severance costs of $0.4 million, and accelerated depreciation charges associated with property and equipment expected to be abandoned of $0.2 million during the nine months ended September 25, 2020.

The impact of these costs associated with the contract settlement and Union City closure resulted in an approximate 50 basis point reduction in our gross margin during the nine months ended September 25, 2020.

The increase in cost of sales and gross profit from the first quarter of 2020 to the first quarter of 2021 was primarily due to increased sales volume.

The increase in our gross margin from the first quarter of 2020 to the first quarter of 2021 was primarily due to increased factory utilization, as a result of higher overall volume, and product mix, partially offset by $2.5 million in costs recorded in connection with the planned closure of our Union City, California facility.

These costs, which relate to inventory write-down and severance costs, resulted in an approximate 95 basis point reduction in our gross margin for the first quarter of 2021.

The facility ceased operations shortly after the close of our first quarter.

Research and Development

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Research and development

The increase in research and development expenses from the third quarter of 2019 to the third quarter of 2020 was primarily due to $0.4 million in increased new product development costs, partially offset by a $0.1 million reduction in travel-related expenses.

The increase in research and development expenses from the nine months ended September 27, 2019 to the nine months ended September 25, 2020 was primarily due to $1.8 million in increased employee-related expense resulting from increased engineering headcount to support new product development, of which approximately $1.0 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 first quarter of 2020 to the first quarter of 2021 was primarily due to increased employee-related expense, as we expand our engineering team, and materials associated with our new product development programs.

Selling, General, and Administrative

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Selling, general, and administrative

The increase in selling, general, and administrative expense from the third quarter of 2019 to the third quarter of 2020 was primarily due (i) $1.3 million in increased employee-related expense, of which $0.5 million was from increased share-based compensation expense, (ii) $0.8 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 nine months ended September 27, 2019 to the nine months ended September 25, 2020 was primarily due (i) $1.8 million in executive transition costs associated with the transition of our former CEO to Executive Chairman, (ii) $5.6 million in increased employee-related expense, of which $2.5 million was from increased share-based compensation expense, (iii) $1.7 million in increased legal and professional fees, and (iv) $0.9 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.

The decrease in selling, general, and administrative expense from the first quarter of 2020 to the first quarter of 2021 was primarily due (i) $1.8 million in executive transition costs associated with the transition of our former CEO to Executive Chairman in the first quarter of 2020 that did not repeat in the first quarter of 2021 and (ii) $0.6 million in decreased share-based compensation expense as a result of non-recurring charges in the first quarter of 2020 that did not repeat in the first quarter of 2021.

Amortization of Intangible Assets

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Amortization of intangibles assets

The increase in amortization expense from the nine months ended September 27, 2019 to the nine months ended September 25, 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 first quarter of 2020 to the first quarter of 2021 was primarily due to incremental amortization expense from the acquisition of a customer relationship intangible asset in December 2020 in connection with our acquisition of a precision machining operation in Nogales, Mexico.

Interest Expense

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Interest expense

The decrease in interest expense from the third quarter of 2019 to the third quarter of 2020 was primarily due to a decrease in our weighted average interest rate, from 4.83% to 3.37%, partially offset by a $14.4 million increase in our average amount borrowed during the quarter.

The decrease in interest expense from the nine months ended September 27, 2019 to the nine months ended September 25, 2020 was primarily due to a decrease in our weighted average interest rate, from 4.83% to 3.89%, and a $1.6 million decrease in our average amount borrowed during the nine months ended September 25, 2020.

The decrease in interest expense from the first quarter of 2020 to the first quarter of 2021 was primarily due to a 114 basis point decrease in our weighted average interest rate, from 4.44% to 3.30%, partially offset by a $7.5 million increase in our average amount borrowed during the first quarter of 2021 compared to the first quarter of 2020.

Other Expense (Income), Net

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Other expense (income), net

The increase in other expense, net from three and nine months ended September 27, 2019 to the three and nine months ended September 25, 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 third quarter.

These local currencies consist primarily of the Singapore dollar, Malaysian ringgit, British pound, euro, and South Korean won.

Income Tax Benefit

Other expense, net

The change in other expense, net from the first quarter of 2020 to the first quarter of 2021 was primarily due to currency exchange rate changes during the quarter as a result of transactions denominated in the local currencies of our foreign operations.

These local currencies consist primarily of the Singapore dollar, Malaysian ringgit, and euro.

Income Tax Expense (Benefit)

Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands)

Income tax benefit

The increase in income tax benefit from the third quarter of 2019 to the third quarter of 2020 was primarily due to increased excess tax benefits associated with stock option exercise activity during the quarter, partially offset by increased taxable income in the U.S.

The decrease in income tax benefit from the nine months ended September 27, 2019 to the nine months ended September 25, 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.

in 2020, partially offset by increased excess tax benefits associated with stock option exercise activity during the third quarter of 2020.

Income tax expense (benefit)

The increase in income tax expense from the first quarter of 2020 to the first quarter of 2021 was primarily due to increased taxable income in the U.S.

in 2021, as well as a decrease in the release of certain tax reserves related to statute of limitations expirations or settlements compared to the first quarter of 2020.

Non ‑GAAP Results

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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;

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.

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Three Months Ended

Nine Months Ended

September 25,

September 27,

September 25,

September 27,

(dollars in thousands, except per share amounts)

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Facility shutdown costs (3)

Fair value adjustment to inventory from acquisitions (4)

Tax adjustments related to non-GAAP adjustments (5)

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Shares used to compute diluted EPS

Included in this amount for the third quarter of 2020 are primarily 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 third quarter of 2019 are primarily (i) acquisition-related expenses associated with the IAN retention agreement and (ii) costs associated with restructuring and transitioning key leadership roles.

Included in this amount for the nine months ended September 25, 2020 are primarily (i) acquisition-related expenses associated with the IAN retention agreement, and (ii) 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 nine months ended September 27, 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 the IAN retention agreement, (ii) costs associated with restructuring and transitioning key leadership roles, and (iii) non-capitalizable costs incurred with implementing a new ERP system.

Included in this amount for the first quarter of 2021 are (i) non-capitalized costs incurred in connection with our implementation of a new ERP system and a Sarbanes-Oxley (“SOX”) compliance program and (ii) a non-recurring settlement charge.

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 SOX compliance program.

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 the first quarter of 2021.

Included in this amount are (i) inventory write-off costs of zero and $1.3 million amount for the three and nine months ended September 25, 2020;

(ii) severance costs associated with affected employees of $0.2 million and $0.4 million for the three and nine months ended September 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 for the three and nine months ended September 25, 2020.

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.

Included in this amount for the first quarter of 2021 are write-off costs associated with inventories determined during the quarter to be obsolete and severance costs associated with affected employees of $2.2 million and $0.2 million, respectively.

These charges relate to the planned closure of our manufacturing facility in Union City, California, which we ceased operations in shortly after the close of our 2021 first quarter.

As part of our purchase price allocation for our acquisition of a precision machining operation in Mexico in December 2020, we recorded acquired-inventory at fair value, resulting in a fair value step-up of $0.2 million.

This was subsequently released to cost of sales in the first quarter of 2021 as acquired-inventory was sold.

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.

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Liquidity and Capital Resources

We ended the third quarter of 2020 with cash of $78.9 million, an increase of $18.3 million from December 27, 2019.

The increase was primarily due to net proceeds from our credit facilities of $23.4 million and net proceeds from the issuance of shares under our share-based compensation plans of $5.0 million, partially offset by capital expenditures of $8.3 million and cash used in operating activities of $1.9 million.

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

economy, our operations, and our industry have been significant.

Nonetheless, at this time, w e 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.

We ended the first quarter of 2021 with cash of $242.9 million, a decrease of $10.0 million from the end of the prior quarter.

The decrease from the end of the prior quarter was primarily due to payments on long-term debt of $32.2 million, of which $30.0 million was a paydown on our revolving credit facility, and capital expenditures of $5.4 million, partially offset by cash provided by operating activities of $25.6 million and net proceeds from the issuance of shares under our share-based compensation plans of $2.0 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

Nine Months Ended

September 25,

September 27,

The following table sets forth a summary of operating, investing, and financing activities for the periods presented:

(in thousands)

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Cash provided by (used in) financing activities

Net increase (decrease) in cash

Net decrease in cash

Operating Activities

Our cash used in operating activities of $1.9 million for the nine months ended September 25, 2020 consisted of net income of $20.8 million and net non-cash charges of $26.2 million, offset by an increase in our net operating assets and liabilities of $48.9 million.

Net non-cash charges primarily consisted of depreciation and amortization of $18.0 million and share-based compensation of $7.4 million.

The increase in our net operating assets and liabilities was primarily due to a decrease of accounts payable of $23.7 million, an increase in accounts receivable of $19.3 million, and an increase in inventories of $10.5 million, partially offset by an increase in accrued and other liabilities of $5.1 million.

The decrease in accounts payable was primarily due to the timing of purchases, material receipts, and payments near the end of the third quarter of 2020 and the fourth quarter of 2019;

the fourth quarter of 2019 included higher purchasing activity near the end of the quarter compared to the third quarter of 2020.

The increase in accounts receivable was primarily due to increased sales volume during the quarter compared to the fourth quarter of 2019, as well as the timing of third quarter sales being heavily back-end weighted.

Our cash provided by operating activities of $25.6 million for the first quarter of 2021 consisted of net income of $14.6 million, net non-cash charges of $8.8 million, and a decrease in our net operating assets and liabilities of $2.2 million.

Net non-cash charges primarily consisted of depreciation and amortization of $5.7 million, share-based compensation of $2.4 million, and deferred taxes of $0.5 million.

The increase in our net operating assets and liabilities was primarily due to an increase in accounts payable of $22.1 million, partially offset by increases in inventories and accounts receivable of $9.3 million and $7.7 million, respectively, and a decrease in accrued liabilities of $3.5 million.

Investing Activities

Our cash used in investing activities of $8.3 million for the nine months ended September 25, 2020 consists of capital expenditures.

Our cash used in investing activities of $5.4 million for the first quarter of 2021 consists of capital expenditures.

Financing Activities

Our cash provided by financing activities of $28.5 million for the nine months ended September 25, 2020 consists of net proceeds from our credit facilities of $23.4 million, partially offset by net proceeds from the issuance of ordinary shares under our share-based compensation plans of $5.0 million.

Our cash used in financing activities of $30.2 million for the first quarter of 2021 consists of payments on long-term debt of $32.2 million, of which $30.0 million was a paydown on our revolving credit facility, partially offset by net proceeds from the issuance of shares under our share-based compensation plans of $2.0 million.

Critical Accounting Policies

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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