What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-10 · 113 added, 58 removed, 196 unchanged (47% 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 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;

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, export restrictions, 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;

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Non-GAAP diluted EPS

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.

Macroeconomic Conditions and Business Update

We have participated in the continuation of unprecedented demand for semiconductor capital equipment in 2022, driven by increased secular demand for semiconductors, as well as the ever-increasing levels of complexity in the manufacturing thereof.

Macroeconomic factors have, however, created, and may continue to create, volatility and uncertainty in our industry, including persistent levels of high inflation, higher interest rates, foreign currency rate fluctuations, and supply chain challenges.

Additionally, increased controls around exporting goods and services to China may impact the overall size of the semiconductor capital equipment industry going forward, and the conflict 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.

Regarding the COVID‑19 pandemic, although our factories and operations are currently not directly affected by any restrictions, measures, or shutdowns, increases in positive case rates may change the extent to which our business becomes adversely impacted by such restrictions, measures, or shutdowns on a go-forward basis.

While these challenging macroeconomic conditions may impact business and customers in the near-term, we believe secular demand for semiconductors, both in quantity and performance, and constant technological innovation will drive long-term, sustainable growth in the semiconductor capital equipment industry.

Results of Operations

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Cost of sales

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Income tax expense

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

Comparison of the three and nine months ended September 30, 2022 and September 24, 2021

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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.

The increase in net sales from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 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

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Cost of sales

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.

The increase in the gross amounts of cost of sales and gross profit from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales .”

The increase in gross margin from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to increased factory utilization and operating leverage, as well as accretive margins from our acquisition of IMG in November 2021, partially offset by increased materials, logistics, and labor costs.

These cost increases are primarily due to investments in our capacity to service strong, present levels of customer demand, inflationary macroeconomic conditions that put pressure on the cost of labor, materials and factory costs, and the impacts of certain supply chain challenges on logistics costs and factory efficiency.

Research and Development

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Research and development

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.

The increase in research and development expenses from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to increased employee-related expense, inclusive of share-based compensation expense, of $0.7 million and $2.3 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 $0.2 million and $0.4 million, respectively.

Selling, General, and Administrative

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Selling, general, and administrative

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;

The increase in selling, general, and administrative expense from the third quarter of 2021 to the third quarter of 2022 was primarily due to (1) incremental costs from our acquisition of IMG in November 2021 of $3.4 million, primarily consisting of employee-related expenses;

(2) a non-recurring loss accrual recorded in the third quarter of 2022 relating to an expected settlement of an employment-related legal matter of $1.0 million;

(3) increased employee-related expenses, inclusive of share-based compensation expense, of $0.9 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;

(4) increased consulting and professional fees of $0.4 million;

(5) increased depreciation and software service costs of $0.4 million;

and (6) increased travel-related costs of $0.2 million.

The increase in selling, general, and administrative expense from the nine months ended September 24, 2021 to the nine months ended September 30, 2022 was primarily due to (1) incremental costs from our acquisition of IMG in November 2021 of $9.4 million, primarily consisting of employee-related expenses;

(2) increased employee-related expenses, inclusive of share-based compensation expense, of $4.8 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.

(3) non-recurring loss accruals recorded in the first and third quarters of 2022 relating to expected settlements of employment-related legal matters of $4.1 million;

(4) increased consulting and professional fees of $1.7 million;

(5) increased depreciation and software service costs of $1.6 million;

and (6) increased travel-related costs of $0.4 million.

Amortization of Intangible Assets

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Amortization of intangibles assets

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.

The increase in amortization expense from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 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

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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.

The increase in interest expense, net from the third quarter of 2021 to the third quarter of 2022 was due to a $140.4 million increase in our average amount borrowed and a 107 basis point increase in our weighted average borrowing rate.

The increase in interest expense, net from the nine months ended September 24, 2021 to the nine months ended September 30, 2022 was due to a $128.0 million increase in our average amount borrowed, partially offset by a 34 basis point decrease in our weighted average borrowing rate.

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.

The changes in our weighted average borrowing rate were primarily due to more favorable borrowing terms under our October 2021 amended and restated credit agreement and higher overall prevailing BSBY and LIBOR rates in the second and third quarters of 2022 compared to 2021.

Other Expense (Income), Net

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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.

The change in other expense (income), net from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 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.

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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.

The decrease in income tax expense from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to decreased taxable income in the U.S., partially offset by reduced benefits from share-based compensation activity .

The reduction in benefits from share-based compensation activity was primarily due to RSU awards vesting in 2022 at lower fair values relative to their grant-date fair values.

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

Non‑GAAP Financial Results

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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.

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 six months ended June 25, 2021 is primarily a non-recurring settlement charge.

Included in this amount for the nine months ended September 24, 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.

A s part of the purchase price allocations of our acquisitions of IMG Companies, LLC (“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.

These amounts represent the release of the step-up to cost of sales as acquired-inventories were sold .

Included in this amount for the nine months ended September 24, 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:

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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.

During the first and third quarters of 2022, we recorded non-recurring loss accruals of $3.1 million and $1.0 million, respectively, relating to expected settlements of employment-related legal matters.

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

See footnote 2 to the reconciliation of U.S.

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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 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.

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 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 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.

We ended the third quarter of 2022 with cash and cash equivalents of $56.5 million, a decrease of $19.0 million from December 31, 2021.

The decrease was primarily due to capital expenditures of $22.5 million and cash used in operating activities of $7.3 million, partially offset by net proceeds from our credit facilities of $9.4 million .

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

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Net decrease in cash

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.

Our cash used in operating activities during the nine months ended September 30, 2022 consisted of an increase in our net operating assets and liabilities of $100.1 million, partially offset by net income of $58.6 million and net non-cash charges of $34.2 million, which consists primarily of depreciation and amortization of $26.7 million and share-based compensation expense of $10.1 million.

The increase in our net operating assets and liabilities of $100.1 million during the nine months ended September 30, 2022 was primarily due to an increase in inventories of $54.5 million, an increase in accounts receivable of $40.3 million, and a decrease in accounts payable of $18.5 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.

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 two weeks of the third quarter of 2022 compared to the last two weeks of the fourth quarter of 2021.

Cash used in investing activities during the nine months ended September 30 , 2022 consists primarily of capital expenditures.

Cash provided by financing activities during the nine months ended September 30 , 2022 consists of net proceeds from our credit facilities of $9.4 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 $0.9 million .

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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