What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2021-11-03 · 106 added, 165 removed, 122 unchanged (69% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

You should not place undue reliance on these statements.

All statements other than statements of historical fact included in this report are forward-looking statements.

These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable.

These statements also relate to our future prospects, developments and business strategies.

These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions.

However, these words are not the exclusive means of identifying such statements.

These statements are contained in many sections of this report, including those in Part I – Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations .

Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations.

All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected.

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include our dependence on expenditures by manufacturers in the semiconductor capital equipment industry;

our reliance on a very small number of original equipment manufacturer customers for a significant portion of our sales;

our customers’ significant negotiating leverage;

competition in our industry;

risks associated with weakness in the global economy and geopolitical instability, including the war in Ukraine;

and other factors set forth in this report, and those set forth in Part I – Item 1A.

Risk Factors of our 2021 Annual Report on Form 10‑K and our other filings with the Securities and Exchange Commission (“SEC”).

All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in Part I – Item 1A.

Risk Factors to our 2021 Annual Report on Form 10-K, as well as other cautionary statements that are made from time to time in our other filings with the SEC and public communications.

You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you.

In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect.

The forward-looking statements included in this report are made only as of the date hereof.

We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated unaudited 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.”

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

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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.

We also provide precision-machined components, weldments, e‑beam and laser-welded components, precision vacuum and hydrogen brazing and surface treatment technologies, and other proprietary products.

This vertically integrated portion of our business is primarily focused on metal and plastic parts that are used in gas and chemical systems, respectively.

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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.

Additionally, many OEMs are 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.

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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.

The following table summarizes key financial information for the periods indicated.

Amounts are presented in accordance with GAAP unless explicitly identified as being a non-GAAP metric.

For a description of our non-GAAP metrics and reconciliations to the most comparable GAAP metrics, please refer to Item 2 – Non-GAAP Financial Results within this report.

For a description of our non-GAAP metrics and reconciliations to the most comparable GAAP metrics, please refer to Part I – Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Results within this report.

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

(dollars in thousands, except per share amounts)

Non-GAAP gross margin

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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, in June 2021, the Malaysian government instituted an Enhanced Movement Control Order (“EMCO”), which impacted our weldment facility in Malaysia through both on-site employee restrictions as well as a complete shutdown of all manufacturing in the region during early July.

While we were able to reopen our factory in mid-July, once the government confirmed we were an essential business, we remained under headcount limitations until the third week of August.

With 50% of our weldment capacity located in Malaysia, our overall output in the country was reduced by 40% in the third quarter due to the EMCO restrictions.

In addition to the recent impacts in Malaysia, increases 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 COVID‑19 pandemic and associated macroeconomic impacts, including supply chain disruptions, tightened labor markets, and overall increased inflation 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, and restrictions have eased around social, business, travel, and governmental activities, we have experienced increases in direct costs and inefficiencies within our factories associated with logistics, employee labor, and certain component shortages.

These factors 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.

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Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(in thousands)

Consolidated Statements of Operations Data:

Cost of sales

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Interest expense, net

Other expense (income), net

Other expense, net

Income before income taxes

Income tax expense (benefit)

Income tax expense

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 24,

September 25,

September 24,

September 25,

Consolidated Statements of Operations Data:

Cost of sales

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Interest expense, net

Other expense (income), net

Other expense, net

Income before income taxes

Income tax expense (benefit)

Comparison of the three and nine months ended September 24, 2021 and September 25, 2020

Income tax expense

Comparison of the three months ended April 1, 2022 and March 26, 2021

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

The increase in net sales from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to strong demand from our customers as a result of continued growth in the global wafer fabrication equipment market, partially offset by production constraints as a result of challenges in our supply chain, primarily due to the EMCO restrictions at our Malaysia factory beginning in June 2021, as noted above in the commentary above under the heading, “ COVID‑19 Pandemic and Market Conditions Update ,” and delivery timelines with certain key suppliers.

The increase in net sales from the first quarter of 2021 to the first quarter of 2022 was primarily due to strong demand from our customers as a result of continued growth in the global wafer fabrication equipment market as well as incremental revenues from our acquisition of IMG Companies, LLC (“IMG”) in November 2021, partially offset by production constraints as a result of challenges in our supply chain.

Net sales to U.S.

customers increased by $2.1 million and $40.5 million for the three and nine months ended September 24, 2021, respectively.

customers increased by $3.3 million in the first quarter of 2022 to $142.5 million.

On a relative basis, net sales to U.S.

customers as a percent of total net sales decreased from 55.1% and 54.4% to 48.6% and 50.0% for the three and nine months ended September 24, 2021, respectively.

Net sales to international customers increased by $33.0 million and $100.0 million for the three and nine months ended September 24, 2021, respectively.

On a relative basis, net sales to international customers as a percent of total net sales increased from 44.8% and 45.6% to 51.5% and 50.0% for the three and nine months ended September 24, 2021, respectively.

customers as a percent of total net sales decreased from 52.6% in the first quarter of 2021 to 48.6% in the first quarter of 2022.

Net sales to international customers increased by $25.2 million in the first quarter of 2022 to $150.7 million.

On a relative basis, net sales to international customers as a percent of total net sales increased from 47.4% in the first quarter of 2021 to 51.4% in the first quarter of 2022.

Cost of Sales, Gross Profit, and Gross Margin

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Cost of sales

The increase in the gross amounts of cost of sales and gross profit for the three and nine months ended September 24, 2021 were primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales ”.

The increase in our gross margin from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to increased factory utilization, partially offset by increased materials and logistics costs and increased factory inefficiency due to challenges in our supply chain, primarily due to the EMCO restrictions at our Malaysia factory in beginning in June 2021, as noted above in the commentary above under the heading, “ COVID‑19 Pandemic and Market Conditions Update ,” and delivery timelines with certain key suppliers.

The following discrete, non‑recurring items favorably impacted our gross margin for the three and nine months ended September 24, 2021 on a year-over-year basis:

Gross margin increased from the third quarter of 2020 to the third quarter of 2021 due to $0.4 million, or 18 basis points, in costs incurred in connection with the planned closure of our Union City, California facility in the third quarter of 2020 that did not recur in the third quarter of 2021.

The facility ceased operations during the second quarter of 2021.

Gross margin increased from the nine months ended September 25, 2020 to the nine months ended September 24, 2021 due to a $1.4 million, or 21 basis point, contract settlement loss in the first quarter of 2020 that did not recur in the nine months ended September 24, 2021.

This was partially offset by a $0.4 million, or 6 basis point, increase in Union City facility shutdown costs in the nine months ended September 24, 2021 compared to the nine months ended September 25, 2020.

The increase in the gross amounts of cost of sales and gross profit from the first quarter of 2021 to the first quarter of 2022 were primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales .”

The increase in our gross margin from the first quarter of 2021 to the first quarter of 2022 was primarily due to accretive margins from our recent acquisition of IMG in November 2021, partially offset by increased materials, logistics, and labor costs, as we invest in our capacity to service present levels of strong customer demand in future quarters, and the impacts of component and material shortages, due to supply chain challenges, reducing factory utilization.

Research and Development

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Research and development

The increase in research and development expenses from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to increased employee-related expense, as we expand our engineering team to design and engineer next generation, high performance solutions for our customers.

The increase in research and development expenses from the first quarter of 2021 to the first quarter of 2022 was primarily due to increased employee-related expense, as we expand our engineering team to design and engineer next generation, high performance solutions for our customers.

Selling, General, and Administrative

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Selling, general, and administrative

The increase in selling, general, and administrative expense from the third quarter of 2020 to the third quarter of 2021 was primarily due (i) $1.6 million in increased employee-related expense, which is inclusive of a $0.5 million increase in share-based compensation expense, and (ii) $0.3 million in increased computer hardware and software costs to support the growing organization and our ERP implementation project, partially offset by (iii) $0.3 million in reduced professional and consulting fees.

The increase in selling, general, and administrative expense from the nine months ended September , 2020 to the nine months ended September 24 , 2021 was primarily due to (i) $2.2 million in increas e d employee-related expense, which is inclusive of a $0.2 million increase in share-based compensation expense, (ii) $1.1 million in increase d computer hardware and software costs to support the growing organization and our ERP implementation project, and (iii) $0.3 million in increase costs related to the shutdown of our Union City, California facility, partially offset by (iv) $1.8 million in reduc ed executive transition costs associated with the transition of our former CEO to e xecutive c hairman in the first quarter of 2020 that did not recur in the first quarter of 2021 and (v) $1.2 million in reduc ed professional and consulting fees.

The increase in selling, general, and administrative expense from the first quarter of 2021 to the first quarter of 2022 was primarily due to a non-recurring loss accrual of $3.1 million related to a probable settlement of an employment-related legal matter;

$3.0 million in incremental selling, general, and administrative expense from our acquisition of IMG in November 2021, $1.7 million in increased employee-related costs, inclusive of increased share-based compensation expense;

$0.8 million in increased professional, consulting, and audit fees;

and $0.3 million in transaction-related fees costs associated with our acquisition of IMG.

Amortization of Intangible Assets

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Amortization of intangibles assets

The increase in amortization expense from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 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.

The increase in amortization expense from the first quarter of 2021 to the first quarter of 2022 was primarily due to incremental amortization expense from intangible assets acquired in connection with our acquisition of IMG in November 2021, partially offset by reduced amortization expense due to an older customer relationship asset reaching full amortization in the fourth quarter of 2021.

Interest Expense, Net

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Interest expense, net

The decrease in interest expense from the third quarter of 2020 to the third quarter of 2021 was primarily due to a 47‑basis point decrease in our weighted average interest rate, from 3.37% to 2.90%, and a $38.7 million decrease in our average amount borrowed during the quarter.

The decrease in interest expense from the nine months ended September 25, 2020 to the nine months ended September 24, 2021 was primarily due to an 81‑basis point decrease in our weighted average interest rate, from 3.89% to 3.08%, and a $21.6 million decrease in our average amount borrowed during the nine‑month period.

The decrease in our weighted average interest rate during the three and nine months ended September 24, 2021 was primarily driven by continued quarterly reductions in our consolidated leverage ratio, starting with the first quarter of 2020, which lowers the applicable margin component of our all-in interest rate.

Additionally, for the nine months ended September 24, 2021, our weighted average interest rate was favorably impacted by reductions in LIBOR during the first half of 2021 compared to the first half of 2020.

Interest expense for the three and nine months ended September 24, 2021 is net of an insignificant amount of interest income, net of premium amortization, associated with our marketable securities, which were originally purchased in May 2021.

Other Expense (Income), Net

The decrease in interest expense, net from the first quarter of 2021 to the first quarter of 2022 was primarily due to a 147‑basis point decrease in our weighted average interest rate, from 3.30 % to 1.83%, respectively, and a decrease in debt issuance cost amortization expense, partially offset by a $105.0 million increase in average debt outstanding during the first quarter of 2022 compared to the first quarter of 2021 as a result of drawing $130.0 million on our revolving credit facility in November 2021 to partially fund our acquisition of IMG.

The decrease in our weighted average interest rate from the first quarter of 2021 to the first quarter of 2022 was primarily due to a decrease in our leverage ratio, which reduces the applicable margin component of our all-in borrowing rate, as well as lower overall applicable margins under our October 2021 amended and restated credit agreement.

Other Expense , Net

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Other expense (income), net

The change in other expense, net from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 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 )

Other expense, net

The change in other expense, net from the first quarter of 2021 to the first quarter of 2022 was primarily due to currency exchange rate fluctuations during the quarter as a result of transactions denominated in the local currencies of our foreign operations.

Income Tax Expense

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands)

Income tax expense (benefit)

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

in 2021 and a reduction in benefits from share-based compensation activity during the quarter.

The increase in income tax expense from the nine months ended September 25, 2020 to the nine months ended September 24, 2021 was primarily due to increased taxable income in the U.S., partially offset by an increase in benefits from share-based compensation activity during the nine-month period.

Income tax expense

The decrease in income tax expense from the first quarter of 2021 to the first quarter of 2022 was primarily due to decreased taxable income in the U.S.

in the first quarter of 2022 and reduced benefits from share-based compensation activity during the quarter.

Non‑GAAP Financial Results

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Non-GAAP gross profit and non-GAAP net income are defined as:

gross profit or net income excluding, as applicable, (1) amortization of intangible assets, share-based compensation expense, and non-recurring expenses, including contract settlement losses and facility shutdown costs, to the extent they are present in gross profit or net income;

gross profit or net income excluding, as applicable, (1) amortization of intangible assets, share-based compensation expense, and non-recurring expenses, including settlement losses, facility shutdown costs, and acquisition-related costs and charges, to the extent they are present in gross profit or net income;

and (2) the tax impacts associated with our non-GAAP adjustments, as well as non-recurring discrete tax items.

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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.

The following table presents our unaudited non‑GAAP gross profit and non-GAAP gross margin and and a reconciliation from gross profit, the most comparable GAAP measure, for the periods indicated:

The following table presents our unaudited non‑GAAP gross profit and non-GAAP gross margin and a reconciliation from gross profit, the most comparable GAAP measure, for the periods indicated:

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands, except per share amounts)

GAAP gross profit

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Share-based compensation

Other non-recurring expense, net (1)

Contract settlement loss (2)

Facility shutdown costs (1)

Fair value adjustment to inventory from acquisitions (2)

Other non-recurring expense, net (3)

Non-GAAP gross profit

1 unchanged sentence

Non-GAAP gross margin

Included in this amount for the nine months ended September 24, 2021 is primarily a non-recurring settlement charge.

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 completed during the second quarter of 2021.

As of the end of the second quarter of 2021, the facility was closed and vacated, and no further charges are expected on a go-forward basis.

Included in this amount for the third quarter of 2020 are (i) severance costs associated with affected employees of $0.2 million, and (ii) accelerated depreciation charges associated with property and equipment expected to be abandoned at the time of facility closure of $0.2 million.

Included in this amount for the nine months ended September 24, 2021 are (i) write-off costs associated with inventories determined during the period to be obsolete of $2.6 million and (ii) severance costs associated with affected employees of $0.2 million, partially offset by (iii) a gain realized upon the sale of equipment and other fixed assets of $0.5 million.

Included in this amount for the nine months September 25, 2020 are (i) write-off costs associated with inventories determined during the period to be obsolete of $1.3 million, (ii) severance costs associated with affected employees of $0.4 million, and (iii) accelerated depreciation charges associated with property and equipment expected to be abandoned at the time of facility closure of $0.2 million.

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.

The following table presents our unaudited non‑GAAP net income and non-GAAP diluted EPS and a reconciliation from net income, the most comparable GAAP measure, for the periods indicated:

During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed in 2021.

We incurred write-off costs associated with inventories determined to be obsolete and severance costs associated with affected employees in connection with the closure.

A s part of the purchase price allocations of our acquisitions of IMG in November 2021 and a precision machining operation in Mexico in December 2020, we recorded acquired-inventories at fair value, resulting in a fair value step-up of $3.9 million and $0.2 million, respectively.

These amounts were subsequently released to cost of sales as acquired-inventories were sold .

Included in this amount for the first quarter of 2021 is primarily a non-recurring settlement charge.

The following table presents our unaudited non‑GAAP net income and non-GAAP diluted EPS and a reconciliation from net income, the most comparable GAAP measure, for the periods indicate d:

Three Months Ended

Nine Months Ended

September 24,

September 25,

September 24,

September 25,

(dollars in thousands, except per share amounts)

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Share-based compensation

Other non-recurring expense, net (1)

Contract settlement loss (2)

Facility shutdown costs (1)

Settlement loss (2)

Fair value adjustment to inventory from acquisitions (3)

Acquisition costs (4)

Other non-recurring expense, net (5)

Tax adjustments related to non-GAAP adjustments (6)

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Shares used to compute diluted EPS

Included in this amount for the third quarter of 2021 are primarily non-capitalized costs incurred in connection with our implementation of a new ERP system.

Included in this amount for the the third quarter of 2020 are primarily (i) non-capitalized 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 24, 2021 are primarily (i) non-capitalized costs incurred in connection with our implementation of a new ERP system and a SOX compliance program.

Included in this amount for the nine months ended September 25, 2020 are primarily (i) a $1.8 million bonus payment to our former CEO in connection with his transition to executive chairman, (ii) acquisition-related expenses associated with a two-year retention agreement between the Company and key management personnel of IAN, (iii) non-capitalizable costs incurred in connection with our implementation of a new ERP system and a SOX compliance program, and (iv) a non-recurring settlement charge.

See footnote 2 to the previous table reconciling gross profit to non-GAAP gross profit.

During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed during the second quarter of 2021.

As of the end of the second quarter of 2021, the facility was closed and vacated, and no further charges are expected on a go-forward basis.

Included in this amount for the third quarter of 2020 are are (i) severance costs associated with affected employees of $0.2 million, and (ii) accelerated depreciation charges associated with property and equipment expected to be abandoned at the time of facility closure of $0.3 million.

Included in this amount for the nine months ended September 24, 2021 are (i) write-off costs associated with inventories determined during the period to be obsolete of $2.6 million, (ii) other shutdown related charges of $0.3 million, (iii) severance costs associated with affected employees of $0.2 million, partially offset by (iv) a gain realized upon the sale of equipment and other fixed assets of $0.5 million.

See footnote 4 to the previous table reconciling gross profit to non-GAAP gross profit.

During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed in 2021.

We incurred write-off costs associated with inventories determined to be obsolete and severance costs associated with affected employees in connection with the closure.

During the first quarter of 2022, we recorded a non-recurring loss accrual of $3.1 million relating to an expected settlement of an employment-related legal matter.

We expect the settlement to be finalized and paid within the next 12 months.

As part of the purchase price allocations of our acquisitions of IMG in November 2021 and a precision machining operation in Mexico in December 2020, we recorded acquired-inventories at fair value, resulting in a fair value step-up of $3.9 million and $0.2 million, respectively.

These amounts were subsequently released to cost of sales as acquired-inventories were sold.

Included in this amount are incremental transaction-related costs incurred in connection with our acquisition of IMG in November 2021.

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

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.

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Liquidity and Capital Resources

We ended the third quarter of 2021 with cash of $128.0 million, a decrease of $124.9 million from December 25, 2020.

The decrease during the nine months ended September 24, 2021 was primarily due to purchases of marketable securities of $105.0 million, payments on long-term debt of $36.6 million, and capital expenditures of $18.7 million, partially offset by cash provided by operating activities of $24.4 million, proceeds from maturities and sales of marketable securities of $6.0 million, and net proceeds from the issuance of shares under our share-based compensation plans of $4.5 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 section discusses our liquidity and capital resources, including our primary sources of liquidity and our material cash requirements.

Our cash and cash equivalents are maintained in highly liquid and accessible accounts with no significant restrictions.

Material Cash Requirements

Our primary liquidity requirements arise from:

(i) working capital requirements, including procurement of raw materials inventory for use in our factories and employee-related costs, (ii) business acquisitions, (iii) interest and principal payments under our credit facilities, (iv) research and development investments and capital expenditures, and (v) payment of income taxes.

We have no significant long-term purchase commitments related to procuring raw materials inventory.

Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and are therefore subject to prevailing global macroeconomic conditions and financial, business, and other factors, some of which are beyond our control.

We believe that our cash and cash equivalents, the amounts available under our credit facilities, and our operating cash flow will be sufficient to fund our business and our current obligations for at least the next 12 months and beyond.

Sources and Conditions of Liquidity

Our ongoing sources of liquidity to fund our material cash requirements are primarily derived from:

(i) sales to our customers and the related changes in our net operating assets and liabilities and (ii) proceeds from our credit facilities and equity offerings, when applicable.

Summary of Cash Flows

We ended the first quarter of 2022 with cash and cash equivalents of $34.5 million, a decrease of $41.0 million from December 31, 2021.

The decrease was primarily due to cash used in operating activities of $36.3 million and capital expenditures of $3.4 million

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

Nine Months Ended

September 24,

September 25,

Three Months Ended

(in thousands)

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Cash used in investing activities

Cash provided by (used in) financing activities

Cash used in financing activities

Net decrease in cash

Operating Activities

Our cash provided by operating activities of $24.4 million during the nine months ended September 24, 2021 consisted of net income of $56.0 million and net non-cash charges of $27.3 million, partially offset by an increase in our net operating assets and liabilities of $58.9 million.

Net non-cash charges primarily consisted of depreciation and amortization of $17.7 million, share-based compensation of $8.1 million, and deferred taxes of $1.0 million.

The increase in our net operating assets and liabilities was primarily due to (i) an increase in inventories of $59.2 million, driven mostly by higher purchasing activity pursuant to strong customer demand and certain supply chain constraints, primarily due to a government-ordered shutdown of our Malaysia factory in July 2021, constraining production and shipments;

(ii) an increase in accounts receivable of $20.7 million, driven mostly by higher sales in the third quarter of 2021 compared to the fourth quarter of 2020, as well as timing of customer payments;

partially offset by (iii) an increase in accounts payable of $21.2 million, which is primarily due to higher purchases during the third quarter of 2021 compared to the fourth quarter of 2020, partially offset by timing of payments to suppliers.

Investing Activities

Our cash used in investing activities of $117.2 million during the nine months ended September 24, 2021 consisted of purchases of marketable securities of $105.0 million, capital expenditures of $18.7 million, partially offset by proceeds from maturities and sales of marketable securities and proceeds from the sale of equipment and other fixed assets associated with our planned closure of our Union City, California facility of $0.5 million.

Our capital expenditures primarily include capacity expansion projects, including machinery and clean rooms, at our factories.

Pursuant to ASU 2018‑15, implementation costs associated with our new ERP implementation of approximately $2.1 million are capitalized as other non-current assets on our consolidated balances sheets and are reflected in cash provided by operating activities.

Financing Activities

Our cash used in financing activities of $32.0 million during the nine months ended September 24, 2021 consisted of payments on long-term debt of $36.6 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 $4.5 million.

Critical Accounting Policies

Our cash used in operating activities of $36.3 million during the first quarter of 2022 consisted of net income of $8.0 million, net non-cash charges of $12.3 million, primarily consisting of depreciation and amortization of $9.3 million and share-based compensation expense of $2.9 million, and an increase in our net operating assets and liabilities of $56.6 million.

The increase in our net operating assets and liabilities, net of acquisitions, was primarily due to an increase in inventories of $27.7 million, a decrease in accounts payable of $18.2 million, and an increase in accounts receivable of $10.5 million.

The increase in our inventories is primarily driven by elevated purchasing activity pursuant to strong customer demand and certain supply chain component constraints.

The decrease in accounts payable and increase in accounts receivable were primarily due to fluctuations in payment timing to suppliers and from customers, as well as a higher revenues in the last few weeks of the first quarter of 2022 compared to the last few weeks of the fourth quarter of 2021.

Cash used in investing activities during the first quarter of 2022 consists of capital expenditures.

Cash used in financing activities during the first quarter of 2022 consists of payments on long-term debt of $1.9 million, partially offset by net proceeds from share-based compensation activity of $0.6 million .

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with U.S.

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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 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 25, 2020 (our “Annual Report”).

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