Item 2. Management’s Discussion and Analysis
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 economic downturns and market conditions beyond our control, including periods of 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; the quality of global financial markets; 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 2022 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 2022 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.
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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.
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 below to the section entitled Non-GAAP Financial Results within this report.
Three Months Ended
March 31,
2023 April 1,
2022
(dollars in thousands, except per share amounts)
Net sales $ 225,870 $ 293,146
Gross margin 14.7 % 15.0 %
Non-GAAP gross margin 15.5 % 16.0 %
Operating margin 2.1 % 3.6 %
Non-GAAP operating margin 6.1 % 8.4 %
Net income (loss) $ (5) $ 8,039
Non-GAAP net income $ 11,128 $ 20,178
Diluted EPS $ 0.00 $ 0.28
Non-GAAP diluted EPS $ 0.38 $ 0.70
Macroeconomic Conditions and Business Update
In the first quarter of 2023, customer demand weakened due to overall reductions in spending for semiconductor capital equipment, the primary industry in which we operate. Many macroeconomic factors may have contributed to this reduced spending environment, including persistent levels of high inflation, higher interest rates, foreign currency rate fluctuations, supply chain disruptions, and reduced consumer confidence. Additionally, increased export controls for semiconductor-related goods and services shipped to China and delayed business investment in electronic memory capacity had varying levels of unfavorable consequences to our business.
To help mitigate these impacts and to better align our resources and cost structure with current and expected future levels of business, we initiated labor and other cost reduction initiatives starting in the fourth quarter of 2022 and continuing through the first quarter of 2023. As a result of these programs, we incurred severance charges of $1.1 million and $1.3 million in the fourth quarter of 2022 and first quarter of 2023, respectively. While challenging macroeconomic conditions have impacted our business and customers in the near-term, we believe demand for semiconductors, semiconductor equipment, and our products will return to growth and expect healthy long-term industry growth in the future.
Additionally, increased borrowing rates due to tightening monetary policy have increased our debt-service costs, as the interest on our outstanding indebtedness is variable (refer above to Part I – Item 1. Financial Statements (Unaudited) – Note 8—Long-Term Debt ). An analysis of the changes in our debt-service cost is provided below under the heading Comparison of the three months ended March 31, 2023 and April 1, 2022 – Interest expense, net .
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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
March 31,
2023 April 1,
2022
(in thousands
Net sales $ 225,870 $ 293,146
Cost of sales 192,630 249,214
Gross profit 33,240 43,932
Operating expenses:
Research and development 4,313 4,851
Selling, general, and administrative 20,167 23,267
Amortization of intangible assets 3,966 5,349
Total operating expenses 28,446 33,467
Operating income 4,794 10,465
Interest expense, net 4,550 1,532
Other expense, net 784 84
Income (loss) before income taxes (540) 8,849
Income tax expense (benefit) (535) 810
Net income (loss) $ (5) $ 8,039
The following table sets forth our unaudited results of operations as a percentage of our total sales for the periods presented.
Three Months Ended
March 31,
2023 April 1,
2022
Net sales 100.0 100.0
Cost of sales 85.3 85.0
Gross profit 14.7 15.0
Operating expenses:
Research and development 1.9 1.7
Selling, general, and administrative 8.9 7.9
Amortization of intangible assets 1.8 1.8
Total operating expenses 12.6 11.4
Operating income 2.1 3.6
Interest expense, net 2.0 0.5
Other expense, net 0.3 0.0
Income (loss) before income taxes (0.2) 3.0
Income tax expense (benefit) (0.2) 0.3
Net income (loss) — 2.7
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Comparison of the three months ended March 31, 2023 and April 1, 2022
Net sales
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Net sales $ 225,870 $ 293,146 $ (67,276) (22.9) %
The decrease in net sales from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to reduced customer demand stemming from reduced spending within the semiconductor capital equipment industry. Further detail is provided above under the section entitled Macroeconomic Conditions and Business Update .
Cost of sales, Gross profit, and Gross Margin
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Cost of sales $ 192,630 $ 249,214 $ (56,584) (22.7) %
Gross profit $ 33,240 $ 43,932 $ (10,692) (24.3) %
Gross margin 14.7 % 15.0 % -30 bps
The decrease in the gross amounts of cost of sales and gross profit from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales .”
The decrease in gross margin from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to reduced factory utilization as a result of lower volume due to reduced customer demand.
Research and development
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Research and development $ 4,313 $ 4,851 $ (538) (11.1) %
The decrease in research and development expenses from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to reduced employee-related expense.
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Selling, general, and administrative
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Selling, general, and administrative $ 20,167 $ 23,267 $ (3,100) (13.3) %
The decrease in selling, general, and administrative expense from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to a $3.1 million loss accrual recorded in the first quarter of 2022 relating to an expected settlement of an employment-related legal matter and reduced employee-related expenses, inclusive of share-based compensation expense, of $0.5 million, partially offset by increased software and IT system costs of $0.5 million.
Amortization of intangible assets
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Amortization of intangible assets $ 3,966 $ 5,349 $ (1,383) (25.9) %
The decrease in amortization expense from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to certain intangible assets becoming fully amortized in 2022.
Interest expense, net
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Interest expense, net $ 4,550 $ 1,532 $ 3,018 197.0 %
Weighted average borrowings outstanding $ 302,479 $ 294,959 $ 7,520 2.5 %
Weighted average borrowing rate 6.10 % 1.83 % +427 bps
The increase in interest expense, net from the three months ended April 1, 2022 to the three months ended March 31, 2023 was due to an increase in our average amount borrowed and an increase in our weighted average borrowing rate. The increase in the average amount borrowed was due to a net draw on our revolving credit facility of $15.0 million in the second quarter of 2022, partially offset by quarterly term loan payments. The increase in our weighted average borrowing rate is due to increased risk-free, short-term borrowing rates as a result of tightening monetary policy, which impacts BSBY, the variable component of our borrowing rate under our credit facilities.
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Other expense, net
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Other expense, net $ 784 $ 84 $ 700 833.3 %
The change in other expense, net from the three months ended April 1, 2022 to the three months ended March 31, 2023 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 (benefit)
Three Months Ended Change
March 31,
2023 April 1,
2022 Amount %
(dollars in thousands)
Income tax expense (benefit) $ (535) $ 810 $ (1,345) n/m
Income (loss) before income taxes $ (540) $ 8,849 $ (9,389) n/m
Effective income tax rate 99.1 % 9.2 % +8,990 bps
The decrease in income tax expense from the three months ended April 1, 2022 to the three months ended March 31, 2023 was primarily due to decreased taxable income in the U.S.
Non‑GAAP Financial Results
Management uses certain 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 profit, operating income, and net income are defined as: gross profit, operating income, or net income (loss), respectively, excluding (1) amortization of intangible assets, share-based compensation expense, and discrete or infrequent charges and gains that are outside of normal business operations, including acquisition-related costs, contract and legal settlement gains and losses, facility shutdown costs, and severance costs associated with reduction-in-force programs, to the extent they are present in gross profit, operating income, and net income (loss), respectively; and (2) the tax impacts associated with these 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 gross margin and non-GAAP operating margin are defined as non-GAAP gross profit and non-GAAP operating income, respectively, divided by net sales.
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 other discrete or infrequent charges and gains that are outside of normal business operations.
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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
March 31,
2023 April 1,
2022
(dollars in thousands)
U.S. GAAP gross profit $ 33,240 $ 43,932
Non-GAAP adjustments:
Share-based compensation 421 551
Fair value adjustment to inventory from acquisitions (1) — 2,492
Other (2) 1,287 —
Non-GAAP gross profit $ 34,948 $ 46,975
U.S. GAAP gross margin 14.7 % 15.0 %
Non-GAAP gross margin 15.5 % 16.0 %
(1) As part of the purchase price allocation of our acquisition of IMG Companies, LLC (“IMG”) in November 2021, we recorded acquired-inventories at fair value, resulting in a fair value step-up. This amount represents the release of the step-up to cost of sales as acquired-inventories were sold.
(2) Included in this amount are severance costs associated with our global reduction-in-force programs.
The following table presents our unaudited non‑GAAP operating income and non-GAAP operating margin and a reconciliation from operating income, the most comparable GAAP measure, for the periods indicated:
Three Months Ended
March 31,
2023 April 1,
2022
(dollars in thousands, except per share amounts)
U.S. GAAP operating income $ 4,794 $ 10,465
Non-GAAP adjustments:
Amortization of intangible assets 3,966 5,349
Share-based compensation 3,637 2,897
Settlement loss (1) — 3,100
Fair value adjustment to inventory from acquisitions (2) — 2,492
Acquisition costs (3) — 275
Other (4) 1,324 —
Non-GAAP operating income $ 13,721 $ 24,578
U.S. GAAP operating margin 2.1 % 3.6 %
Non-GAAP operating margin 6.1 % 8.4 %
(1) During the first quarter of 2022, we recorded a 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 in 2023.
(2) As part of the purchase price allocation of our acquisition of IMG, we recorded acquired-inventories at fair value, resulting in a fair value step-up. This amount represents the release of the step-up to cost of sales as acquired-inventories were sold.
(3) Included in this amount are transaction-related costs incurred in connection with our acquisition of IMG.
(4) Included in this amount are severance costs associated with our global reduction-in-force programs.
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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:
Three Months Ended
March 31,
2023 April 1,
2022
(dollars in thousands, except per share amounts)
U.S. GAAP net income (loss) $ (5) $ 8,039
Non-GAAP adjustments:
Amortization of intangible assets 3,966 5,349
Share-based compensation 3,637 2,897
Settlement loss (1) — 3,100
Fair value adjustment to inventory from acquisitions (2) — 2,492
Acquisition costs (3) — 275
Other (4) 1,324 —
Tax adjustments related to non-GAAP adjustments (5) 2,206 (1,974)
Non-GAAP net income $ 11,128 $ 20,178
U.S. GAAP diluted EPS $ 0.00 $ 0.28
Non-GAAP diluted EPS $ 0.38 $ 0.70
Shares used to compute non-GAAP diluted EPS 29,412,185 29,023,455
(1) During the first quarter of 2022, we recorded a 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 in 2023.
(2) As part of the purchase price allocation of our acquisition of IMG, we recorded acquired-inventories at fair value, resulting in a fair value step-up. This amount represents the release of the step-up to cost of sales as acquired-inventories were sold.
(3) Included in this amount are transaction-related costs incurred in connection with our acquisition of IMG.
(4) Included in this amount are severance costs associated with our global reduction-in-force programs.
(5) Adjusts U.S. GAAP income tax expense for impact of our non-GAAP adjustments, as defined, including the impacts of excluding share-based compensation and amortization of intangible assets. Additionally, this adjustment 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.
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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 2023 with cash and cash equivalents of $68.8 million, a decrease of $17.6 million from the prior year ended December 30, 2022. The decrease of $17.6 million during the first quarter was primarily due to net cash used in operating activities of $10.9 million and capital expenditures of $6.8 million.
The following table sets forth a summary of operating, investing, and financing activities for the periods presented:
Three Months Ended
March 31,
2023 April 1,
2022
(in thousands)
Cash used in operating activities $ (10,873) $ (36,278)
Cash used in investing activities (6,819) (3,417)
Cash provided by (used in) financing activities 59 (1,284)
Net decrease in cash $ (17,633) $ (40,979)
Our cash used in operating activities of $10.9 million during the first quarter consisted of net loss of $0.0 million, net non-cash charges of $11.2 million, consisting primarily of depreciation and amortization of $8.5 million and share-based compensation expense of $3.6 million, and an increase in our net operating assets and liabilities of $22.1 million.
The increase in our net operating assets and liabilities of $22.1 million during the first quarter was primarily due to a decrease in accounts payable of $43.0 million, which was primarily due to the timing of inventory purchases and receipts, partially offset by a decrease in accounts receivable of $13.6 million and a decrease in inventories of $12.1 million.
Cash used in investing activities during the first quarter of 2023 and 2022 consisted of capital expenditures.
Cash provided by financing activities during the first quarter of 2023 and 2022 consisted of net proceeds from share-based compensation activity of $1.9 million and $0.6 million, respectively, partially offset by term loan payments of $1.9 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 2022 Annual Report on Form 10‑K.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.