What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-11 · 73 added, 47 removed, 181 unchanged (40% of the section changed)

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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;

Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include geopolitical, economic and market conditions, including heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain and any disruptions in European economies as a result of the conflict in Ukraine;

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;

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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.

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Three Months Ended

Six Months Ended

(dollars in thousands, except per share amounts)

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Non-GAAP diluted EPS

COVID-19 Pandemic and Market Conditions Update

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.

Macroeconomic Conditions and COVID-19 Pandemic Update

Adverse macroeconomic conditions, including but not limited to heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations and challenges in the supply chain have created, and are expected to continue to create significant volatility, uncertainty, and turmoil in our industry.

Further, the war in Ukraine has given rise to potential global security issues that may adversely affect international business and economic conditions as well as economic sanctions imposed by the international community that have impacted the global economy.

We and certain of our customers may be negatively impacted by these events.

In addition, the impact that the COVID‑19 pandemic and associated macroeconomic conditions, including those discussed above, will have on our consolidated results of operations for the remainder of 2022 contains to remain uncertain.

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.

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 those of our customers and suppliers.

Results of Operations

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Three Months Ended

Six Months Ended

(in thousands)

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Interest expense, net

Other expense, net

Other expense (income), net

Income before income taxes

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Three Months Ended

Six Months Ended

Cost of sales

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Interest expense, net

Other expense, net

Other expense (income), net

Income before income taxes

Income tax expense

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

Comparison of the three months ended July 1, 2022 and June 25, 2021

Three Months Ended

Six Months Ended

(dollars in thousands)

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 $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 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.

The increase in net sales from the three and six months ended June 25, 2021 to the three and six months ended July 1, 2022 was primarily due to strong demand from our customers as a result of continued growth in the global wafer fabrication equipment market, supported by capacity expansions and headcount additions we have made over the last year, as well as incremental revenues from our acquisition of IMG Companies, LLC (“IMG”) in November 2021.

Cost of Sales, Gross Profit, and Gross Margin

Three Months Ended

Six Months Ended

(dollars in thousands)

Cost of sales

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.

The increase in the gross amounts of cost of sales and gross profit from the three and six months ended June 25, 2021 to the three and six months ended July 1, 2022 was primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales .”

Our gross margin was flat from the second quarter of 2021 to the second quarter of 2022, and up 10 basis points from the six months ended June 25, 2021 to the six months ended July 1, 2022, primarily due to accretive margins from our acquisition of IMG in November 2021, 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, thereby reducing factory utilization.

Research and Development

Three Months Ended

Six Months Ended

(dollars in thousands)

Research and development

The increase in research and development expenses from the first quarter of 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.

The increase in research and development expenses from the three and six months ended June 25, 2021 to the three and six months ended July 1, 2022 was primarily due to increased employee-related expense, inclusive of share-based compensation expense, of $0.7 million and $1.7 million, respectively, as we expand our engineering team to design and engineer next generation, high performance solutions for our customers, as well as program costs related to the development of our new products of $0.1 million and $0.3 million, respectively.

Selling, General, and Administrative

Three Months Ended

Six Months Ended

(dollars in thousands)

Selling, general, and administrative

The increase in selling, general, and administrative expense from the first quarter of 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.

The increase in selling, general, and administrative expense from the second quarter of 2021 to the second quarter of 2022 was primarily due to (1) incremental costs from our acquisition of IMG in November 2021 of $3.1 million, primarily consisting of employee-related expenses;

(2) increased employee-related expenses, inclusive of share-based compensation expense, of $2.1 million;

(3) increased depreciation and occupancy costs of $0.8 million;

and (4) increased consulting and professional fees of $0.5 million.

The increase in selling, general, and administrative expense from the six months ended June 25, 2021 to the six months ended July 1, 2022 was primarily due to (1) incremental costs from our acquisition of IMG in November 2021 of $6.3 million, primarily consisting of employee-related expenses;

(2) increased employee-related expenses, inclusive of share-based compensation expense, of $3.8 million;

(3) a non-recurring loss accrual recorded in the first quarter of 2022 relating to an expected settlement of an employment-related legal matter of $3.1 million;

(4) increased depreciation and occupancy costs of $1.2 million;

and (5) increased consulting and professional fees of $1.2 million.

Amortization of Intangible Assets

Three Months Ended

Six Months Ended

(dollars in thousands)

Amortization of intangibles assets

The increase in amortization expense from the first quarter of 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.

The increase in amortization expense from the three and six months ended June 25, 2021 to the three and six months ended July 1, 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 from certain intangible assets becoming fully amortized in the fourth quarter of 2021 and the first quarter of 2022.

Interest Expense, Net

Three Months Ended

Six Months Ended

(dollars in thousands)

Interest expense, 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

Weighted average borrowings outstanding

Weighted average borrowing rate

The increase in interest expense, net from the three and six months ended June 25, 2021 to the three and six months ended July 1, 2022 was primarily due to an increase of $138.6 million and $121.8 million in our average amount borrowed during the during the three and six months ended July 1, 2022, respectively, compared to the three and six months ended June 25, 2021.

This was partially offset by a decrease of 58 basis points and 103 basis points in our weighted average borrowing rate during the three and six months ended July 1, 2022, respectively, compared to the three and six months ended June 25, 2021, as well as a decrease in debt issuance cost amortization expense.

Our average amount borrowed was primarily the 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 borrowing rate was primarily due to more favorable borrowing terms under our October 2021 amended and restated credit agreement, partially offset by overall higher prevailing BSBY and LIBOR rates in the second quarter of 2022 compared to 2021.

Other Expense (Income), Net

Three Months Ended

Six Months Ended

(dollars in thousands)

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.

Other expense (income), net

The change in other expense (income), net from the three and six months ended June 25, 2021 to the three and six months ended July 1, 2022 was primarily due to currency exchange rate fluctuations during the quarter, reflecting a strengthening U.S.

dollar against local currency payables of our foreign operations.

Income Tax Expense

Three Months Ended

Six Months Ended

(dollars in thousands)

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.

Income before income taxes

Effective income tax rate

The increase in income tax expense from the three and six months ended June 25, 2021 to the three and six months ended July 1, 2022 was primarily due reduced benefits from share-based compensation activity.

This was primarily driven by RSU awards vesting at lower fair values in 2022 compared to their corresponding grant-date fair values.

In 2021, RSU awards vested at higher fair values compared to their corresponding grant-date fair values.

Non ‑GAAP Financial Results

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Three Months Ended

Six Months Ended

(dollars in thousands)

GAAP gross profit

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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.

Included in this amount for the second quarter of 2021 is a gain realized upon the sale of equipment and other fixed assets, partially offset by write-off costs associated with inventories determined during the quarter to be obsolete.

Included in this amount for the six months ended June 25, 2021 are write-off costs associated with inventories determined during the period to be obsolete and severance and other shutdown related charges, partially offset by a gain realized upon the sale of equipment and other fixed assets.

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 for the first quarter of 2021 is primarily a non-recurring settlement charge.

Included in this amount for the six months ended June 25, 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

Six Months Ended

(dollars in thousands, except per share amounts)

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Shares used to compute diluted EPS

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.

See footnote 1 to the reconciliation of U.S.

GAAP gross profit to non-GAAP gross profit above.

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.

See footnote 2 to the reconciliation of U.S.

GAAP gross profit to non-GAAP gross profit above.

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.

Included in this amount for the six months ended June 25, 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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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

We ended the second quarter of 2022 with cash and cash equivalents of $46.1 million, a decrease of $29.4 million from December 31, 2021.

The decrease was primarily due to cash used in operating activities of $26.9 million and capital expenditures of $14.4 million, partially offset by net proceeds from our credit facilities of $11.3 million.

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

Three Months Ended

Six Months Ended

(in thousands)

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Cash used in investing activities

Cash used in financing activities

Cash provided by (used in) financing activities

Net decrease in cash

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.

Our cash used in operating activities of $26.9 million during the six months ended July 1, 2022 consisted of an increase in our net operating assets and liabilities of $80.4 million, partially offset by net income of $29.6 million and net non-cash charges of $23.9 million, primarily consisting of depreciation and amortization of $18.4 million and share-based compensation expense of $6.4 million.

The increase in our net operating assets and liabilities during the six months ended July 1, 2022, net of acquisitions, was primarily due to an increase in inventories of $54.2 million, an increase in accounts receivable of $15.4 million, and a decrease in accounts payable of $12.5 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 .

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 higher revenues in the last few weeks of the second quarter of 2022 compared to the last few weeks of the fourth quarter of 2021.

Cash used in investing activities during the six months ended July 1, 2022 consists of capital expenditures.

Cash provided by financing activities during the six months ended July 1, 2022 consists of net proceeds from our credit facilities of $11.3 million, including a net draw on our revolving facility of $15.0 million for U.S.

working capital obligations, and net proceeds from share-based compensation activity of $0.6 million .

Critical Accounting Estimates

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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