ICHOR HOLDINGS, LTD. 10-Q

ITEM 2. 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 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; our customers’ significant negotiating leverage; competition in our industry; 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. Overview We are a leader in the design, engineering, and manufacturing of critical fluid delivery subsystems and components for semiconductor capital equipment. Our product offerings include gas and chemical delivery systems and subsystems, collectively known as fluid delivery systems and subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices. Our gas delivery subsystems deliver, monitor, and control precise quantities of the specialized gases used in semiconductor manufacturing processes such as etch and deposition. Our chemical delivery systems and subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as chemical-mechanical planarization, electroplating, and cleaning. We also 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. Fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the semiconductor manufacturing processes. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes. Most OEMs outsource all or a portion of the design, engineering, and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are outsourcing the design, engineering, and manufacturing of their chemical delivery subsystems due to the increased fluid expertise required to manufacture these subsystems. Outsourcing these subsystems has allowed OEMs to leverage the suppliers’ highly specialized engineering, design, and production skills while focusing their internal resources on their own value-added processes. We believe that this outsourcing trend has enabled OEMs to reduce their costs and development time, as well as provide growth opportunities for specialized subsystems suppliers like us. 14 We have a global footprint with production facilities in California, Minnesota, Oregon, Texas, Singapore, Malaysia, the United Kingdom, Korea, and Mexico. 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 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 Six Months Ended July 1, 2022 June 25, 2021 July 1, 2022 June 25, 2021 (dollars in thousands, except per share amounts) Net sales $ 329,560 $ 282,308 $ 622,706 $ 546,874 Gross profit $ 55,461 $ 47,353 $ 99,393 $ 86,865 Gross margin 16.8 % 16.8 % 16.0 % 15.9 % Non-GAAP gross margin 17.0 % 16.8 % 16.5 % 16.5 % Operating expenses $ 30,665 $ 22,138 $ 64,132 $ 43,393 Operating income $ 24,796 $ 25,215 $ 35,261 $ 43,472 Net income $ 21,537 $ 22,865 $ 29,576 $ 37,503 Non-GAAP net income $ 28,326 $ 26,307 $ 48,504 $ 48,032 Diluted EPS $ 0.74 $ 0.79 $ 1.02 $ 1.30 Non-GAAP diluted EPS $ 0.98 $ 0.90 $ 1.68 $ 1.66 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 those of our customers and suppliers. 15 Results of Operations The following table sets forth our unaudited results of operations for the periods presented. The period‑to‑period comparison of results is not necessarily indicative of results for future periods. Three Months Ended Six Months Ended July 1, 2022 June 25, 2021 July 1, 2022 June 25, 2021 (in thousands) Net sales $ 329,560 $ 282,308 $ 622,706 $ 546,874 Cost of sales 274,099 234,955 523,313 460,009 Gross profit 55,461 47,353 99,393 86,865 Operating expenses: Research and development 4,907 4,049 9,758 7,564 Selling, general, and administrative 21,103 14,699 44,370 29,048 Amortization of intangible assets 4,655 3,390 10,004 6,781 Total operating expenses 30,665 22,138 64,132 43,393 Operating income 24,796 25,215 35,261 43,472 Interest expense, net 2,063 1,591 3,595 3,510 Other expense (income), net (548 ) 22 (464 ) 207 Income before income taxes 23,281 23,602 32,130 39,755 Income tax expense 1,744 737 2,554 2,252 Net income $ 21,537 $ 22,865 $ 29,576 $ 37,503 The following table sets forth our unaudited results of operations as a percentage of our total sales for the periods presented. Three Months Ended Six Months Ended July 1, 2022 June 25, 2021 July 1, 2022 June 25, 2021 Net sales 100.0 100.0 100.0 100.0 Cost of sales 83.2 83.2 84.0 84.1 Gross profit 16.8 16.8 16.0 15.9 Operating expenses: Research and development 1.5 1.4 1.6 1.4 Selling, general, and administrative 6.4 5.2 7.1 5.3 Amortization of intangible assets 1.4 1.2 1.6 1.2 Total operating expenses 9.3 7.8 10.3 7.9 Operating income 7.5 8.9 5.7 7.9 Interest expense, net 0.6 0.6 0.6 0.6 Other expense (income), net (0.2 ) 0.0 (0.1 ) 0.0 Income before income taxes 7.1 8.4 5.2 7.3 Income tax expense 0.5 0.3 0.4 0.4 Net income 6.5 8.1 4.7 6.9 Comparison of the three months ended July 1, 2022 and June 25, 2021 Net Sales Three Months Ended Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Net sales $ 329,560 $ 282,308 $ 47,252 16.7 % $ 622,706 $ 546,874 $ 75,832 13.9 % 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. 16 Cost of Sales, Gross Profit, and Gross Margin Three Months Ended Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Cost of sales $ 274,099 $ 234,955 $ 39,144 16.7 % $ 523,313 $ 460,009 $ 63,304 13.8 % Gross profit $ 55,461 $ 47,353 $ 8,108 17.1 % $ 99,393 $ 86,865 $ 12,528 14.4 % Gross margin 16.8 % 16.8 % n/c 16.0 % 15.9 % + 10 bps 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 Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Research and development $ 4,907 $ 4,049 $ 858 21.2 % $ 9,758 $ 7,564 $ 2,194 29.0 % 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 Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Selling, general, and administrative $ 21,103 $ 14,699 $ 6,404 43.6 % $ 44,370 $ 29,048 $ 15,322 52.7 % 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 Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Amortization of intangibles assets $ 4,655 $ 3,390 $ 1,265 37.3 % $ 10,004 $ 6,781 $ 3,223 47.5 % 17 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 Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Interest expense, net $ 2,063 $ 1,591 $ 472 29.7 % $ 3,595 $ 3,510 $ 85 2.4 % Weighted average borrowings outstanding $ 306,600 $ 168,008 $ 138,592 82.5 % $ 300,780 $ 178,992 $ 121,788 68.0 % Weighted average borrowing rate 2.43 % 3.01 % - 58 bps 2.13 % 3.16 % - 103 bps 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 Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Other expense (income), net $ (548 ) $ 22 $ (570 ) n/m $ (464 ) $ 207 $ (671 ) n/m 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 Change Six Months Ended Change July 1, 2022 June 25, 2021 Amount % July 1, 2022 June 25, 2021 Amount % (dollars in thousands) Income tax expense $ 1,744 $ 737 $ 1,007 136.6 % $ 2,554 $ 2,252 $ 302 13.4 % Income before income taxes $ 23,281 $ 23,602 $ (321 ) -1.4 % $ 32,130 $ 39,755 $ (7,625 ) -19.2 % Effective income tax rate 7.5 % 3.1 % + 440 bps 7.9 % 5.7 % + 220 bps 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. 18 Non ‑GAAP Financial Results Management uses non-GAAP metrics to evaluate our operating and financial results. We believe the presentation of non-GAAP results is useful to investors for analyzing business trends and comparing performance to prior periods, along with enhancing investors’ ability to view our results from management’s perspective. Non-GAAP gross margin is defined as non-GAAP gross profit divided by net sales. 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 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. Non-GAAP diluted earnings per share (“EPS”) is defined as non-GAAP net income divided by weighted average diluted ordinary shares outstanding during the period. Non-GAAP results have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for our results reported under GAAP. Other companies may calculate non-GAAP results differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our non-GAAP results as a tool for comparison. Because of these limitations, you should consider non-GAAP results alongside other financial performance measures and results presented in accordance with GAAP. In addition, in evaluating non-GAAP results, you should be aware that in the future we will incur expenses such as those that are the subject of adjustments in deriving non-GAAP results and you should not infer from our presentation of non-GAAP results that our future results will not be affected by these expenses or any unusual or non-recurring items. 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 Six Months Ended July 1, 2022 June 25, 2021 July 1, 2022 June 25, 2021 (dollars in thousands) U.S. GAAP gross profit $ 55,461 $ 47,353 $ 99,393 $ 86,865 Non-GAAP adjustments: Share-based compensation 451 298 1,002 604 Facility shutdown costs (1) — (102 ) — 2,297 Fair value adjustment to inventory from acquisitions (2) — — 2,492 211 Other non-recurring expense, net (3) — — — 106 Non-GAAP gross profit $ 55,912 $ 47,549 $ 102,887 $ 90,083 U.S. GAAP gross margin 16.8 % 16.8 % 16.0 % 15.9 % Non-GAAP gross margin 17.0 % 16.8 % 16.5 % 16.5 % (1) During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed in 2021. 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. (2) 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. (3) Included in this amount for the six months ended June 25, 2021 is primarily a non-recurring settlement charge. 19 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 July 1, 2022 June 25, 2021 July 1, 2022 June 25, 2021 (dollars in thousands, except per share amounts) U.S. GAAP net income $ 21,537 $ 22,865 $ 29,576 $ 37,503 Non-GAAP adjustments: Amortization of intangible assets 4,655 3,390 10,004 6,781 Share-based compensation 3,509 2,681 6,406 5,096 Facility shutdown costs (1) — 172 — 2,682 Settlement loss (2) — — 3,100 — Fair value adjustment to inventory from acquisitions (3) — — 2,492 211 Acquisition costs (4) 21 — 296 — Other non-recurring expense, net (5) — 110 — 388 Tax adjustments related to non-GAAP adjustments (6) (1,396 ) (2,911 ) (3,370 ) (4,629 ) Non-GAAP net income $ 28,326 $ 26,307 $ 48,504 $ 48,032 U.S. GAAP diluted EPS $ 0.74 $ 0.79 $ 1.02 $ 1.30 Non-GAAP diluted EPS $ 0.98 $ 0.90 $ 1.68 $ 1.66 Shares used to compute diluted EPS 29,042,519 29,092,521 28,948,055 28,942,902 (1) See footnote 1 to the reconciliation of U.S. GAAP gross profit to non-GAAP gross profit above. (2) 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. (3) See footnote 2 to the reconciliation of U.S. GAAP gross profit to non-GAAP gross profit above. (4) Included in this amount are incremental transaction-related costs incurred in connection with our acquisition of IMG in November 2021. (5) 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. (6) Adjusts U.S. GAAP income tax expense (benefit) for impact of our non-GAAP adjustments, as defined, including the impacts of excluding share-based compensation, amortization of intangible assets, and other non-recurring expenses. This adjustment also excludes the impact of non-recurring discrete tax items. Liquidity and Capital Resources 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. 20 Summary of Cash Flows 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: Six Months Ended July 1, 2022 June 25, 2021 (in thousands) Cash provided by (used in) operating activities $ (26,895 ) $ 38,889 Cash used in investing activities (14,413 ) (119,898 ) Cash provided by (used in) financing activities 11,877 (30,176 ) Net decrease in cash $ (29,431 ) $ (111,185 ) 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 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 Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are identified and described in our annual consolidated financial statements and the notes included in our 2021 Annual Report on Form 10‑K.