What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 87 added, 72 removed, 208 unchanged (43% of the section changed)

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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”).

Risk Factors of our Annual Report on Form 10‑K for the fiscal year ended December 30, 2022 ("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.

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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

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(dollars in thousands, except per share amounts)

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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.

The semiconductor industry is cyclical in nature, and matching customer demand can be challenging based on a variety of factors, including market trends, supply chain shortages and related lead times, customer buying patterns, availability of skilled labor, and macroeconomic and other factors.

During much of 2022, many of these factors impacted our ability to fulfill high customer demand;

however, the industry entered a cyclical downturn in the fourth quarter of 2022, leading to reductions in spending on semiconductor capital equipment, the primary industry in which we operate, resulting in weakened customer demand in the first half of 2023.

In particular, industry overcapacity and a number of macroeconomic factors may have contributed to this reduced spending environment, including persistent levels of high inflation, higher interest rates, supply chain disruptions, and other macroeconomic uncertainties.

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.

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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.

While challenging macroeconomic conditions have impacted and will continue to impact our business and customers in the near-term, we believe demand for semiconductors, semiconductor capital equipment, and our products will return to growth, fueled by the long-term growing need for more semiconductor productive capacity and enhanced process technologies.

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 .

An analysis of the changes in our debt-service cost is provided below under the heading Comparison of the Three and Six Months Ended June 30, 2023 and July 1, 2022 – Interest expense, net.

Results of Operations

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The period‑to‑period comparison of results is not necessarily indicative of results for future periods.

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(in thousands

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Total operating expenses 28,648 30,665 57,094 64,132

Operating income 4,794 10,465

Operating income (loss) (2,906) 24,796 1,888 35,261

Interest expense, net 5,030 2,063 9,580 3,595

Other expense, net 784 84

Other expense (income), net 100 (548) 884 (464)

Income (loss) before income taxes (8,036) 23,281 (8,576) 32,130

Income tax expense (benefit) (535) 810

Income tax expense 12,620 1,744 12,085 2,554

Net income (loss) $ (20,656) $ 21,537 $ (20,661) $ 29,576

The following table sets forth our unaudited results of operations as a percentage of our total sales for the periods presented.

Three Months Ended

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

Net sales 100.0 100.0 100.0 100.0

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Total operating expenses 15.5 9.3 13.9 10.3

Operating income 2.1 3.6

Operating income (loss) (1.6) 7.5 0.5 5.7

Interest expense, net 2.7 0.6 2.3 0.6

Other expense, net 0.3 0.0

Other expense (income), net 0.1 (0.2) 0.2 (0.1)

Income (loss) before income taxes (4.3) 7.1 (2.1) 5.2

Income tax expense (benefit) (0.2) 0.3

Income tax expense 6.8 0.5 2.9 0.4

Net income (loss) (11.2) 6.5 (5.0) 4.7

Comparison of the three months ended March 31, 2023 and April 1, 2022

Three Months Ended Change

2023 April 1,

Comparison of the Three and Six Months Ended June 30, 2023 and July 1, 2022

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

2022 Amount %

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Net sales $ 185,008 $ 329,560 $ (144,552) (43.9) % $ 410,878 $ 622,706 $ (211,828) (34.0) %

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.

The decrease in net sales from the three and six months ended July 1, 2022 to the three and six months ended June 30, 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

2023 April 1,

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

2022 Amount %

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Gross profit $ 25,742 $ 55,461 $ (29,719) (53.6) % $ 58,982 $ 99,393 $ (40,411) (40.7) %

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.

Gross margin 13.9 % 16.8 % -290 bps 14.4 % 16.0 % -160 bps

The decrease in the gross amounts of cost of sales and gross profit from the three and six months ended July 1, 2022 to the three and six months ended June 30, 2023 was primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales .”

Research and development

Three Months Ended Change

2023 April 1,

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

2022 Amount %

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Research and development $ 5,188 $ 4,907 $ 281 5.7 % $ 9,501 $ 9,758 $ (257) (2.6) %

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.

The increase in research and development expenses from the second quarter of 2022 to the second quarter of 2023 was primarily due to increased program costs related to the development of our new products.

The decrease from the six months ended July 1, 2022 to the six months ended June 30, 2023 was primarily due to reduced employee-related expense.

Selling, general, and administrative

Three Months Ended Change

2023 April 1,

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

2022 Amount %

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Selling, general, and administrative $ 19,500 $ 21,103 $ (1,603) (7.6) % $ 39,667 $ 44,370 $ (4,703) (10.6) %

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.

The decrease in selling, general, and administrative expense from the second quarter of 2022 to the second quarter of 2023 was primarily due to reduced employee-related expenses, inclusive of share-based compensation expense, of $2.2 million and reduced occupancy-related costs of $0.3 million, partially offset by increased IT system and related consulting and software costs of $1.0 million.

The decrease in selling, general, and administrative expense from the six months ended July 1, 2022 to the six months ended June 30, 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, reduced employee-related expenses, inclusive of share-based compensation expense, of $2.7 million, and reduced occupancy-related costs of $0.4 million, partially offset by increased IT system and related consulting and software costs of $1.6 million.

Amortization of intangible assets

Three Months Ended Change

2023 April 1,

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

2022 Amount %

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Amortization of intangible assets $ 3,960 $ 4,655 $ (695) (14.9) % $ 7,926 $ 10,004 $ (2,078) (20.8) %

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.

The decrease in amortization expense from the three and six months ended July 1, 2022 to the three and six months ended June 30, 2023 was primarily due to certain intangible assets becoming fully amortized in 2022.

Interest expense, net

Three Months Ended Change

2023 April 1,

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

2022 Amount %

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Weighted average borrowings outstanding $ 300,549 $ 306,600 $ (6,051) (2.0) % $ 301,514 $ 300,780 $ 734 0.2 %

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.

Weighted average borrowing rate 6.63 % 2.43 % +420 bps 6.36 % 2.13 % +423 bps

The increase in interest expense, net from the three and six months ended July 1, 2022 to the three and six months ended June 30, 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 and a $5.0 million payment on our revolving credit facility in the second quarter of 2023.

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.

Other expense, net

Three Months Ended Change

2023 April 1,

Other expense (income), net

Three Months Ended Change Six Months Ended Change

2022 Amount % June 30,

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

2023 April 1,

2022 Amount %

Other expense (income), net $ 100 $ (548) $ 648 n/m $ 884 $ (464) $ 1,348 n/m

The change in other expense, net from the three and six months ended July 1, 2022 to the three and six months ended June 30, 2023 was primarily due to currency exchange rate fluctuations during the quarter related to our local currency payables of our foreign operations.

Income tax expense

Three Months Ended Change Six Months Ended Change

2022 Amount June 30,

(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.

Income tax expense $ 12,620 $ 1,744 $ 10,876 $ 12,085 $ 2,554 $ 9,531

Income (loss) before income taxes $ (8,036) $ 23,281 $ (31,317) $ (8,576) $ 32,130 $ (40,706)

Effective income tax rate -157.0 % 7.5 % -140.9 % 7.9 %

The increase in income tax expense from the three and six months ended July 1, 2022 to the three and six months ended June 30, 2023 was primarily due to recording a valuation allowance against our U.S.

federal and state deferred tax assets, resulting in a $11.1 million charge to income tax expense.

Non‑GAAP Financial Results

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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.

and (2) the tax impacts associated with these non-GAAP adjustments, as well as non-recurring discrete tax items, including deferred tax asset valuation allowance charges.

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.

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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

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(dollars in thousands)

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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

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(dollars in thousands, except per share amounts)

GAAP operating income $ 4,794 $ 10,465

GAAP operating income (loss) $ (2,906) $ 24,796 $ 1,888 $ 35,261

Non-GAAP adjustments:

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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

2023 April 1,

Three Months Ended Six Months Ended

2022 June 30,

(dollars in thousands, except per share amounts)

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Tax adjustments related to non-GAAP adjustments (5) 2,032 (1,396) 4,238 (3,370)

Tax expense from valuation allowance (6) 11,094 — 11,094 —

Non-GAAP net income $ 707 $ 28,326 $ 11,835 $ 48,504

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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.

(6) During the second quarter of 2023, we recorded a valuation allowance of $11.1 million against our U.S.

federal and state deferred tax assets.

The valuation allowance was recorded based on an assessment of available positive and negative evidence, including an estimate of being in a three-year cumulative loss position in the U.S.

by the end of 2023, projections of future taxable income, and other quantitative and qualitative information.

We believe adjusting for this discrete tax event is consistent with our non-GAAP financial results policy, which emphasizes current period operating performance and comparability with historical periods.

Liquidity and Capital Resources

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(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.

Our credit facilities are comprised of $150.0 million term loan facility and a $250.0 million revolving credit facility, of which $95.0 million remained available to draw on as of June 30, 2023.

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.

We ended the second quarter of 2023 with cash and cash equivalents of $84.6 million, a decrease of $1.9 million from the prior year ended December 30, 2022.

The decrease was primarily due to capital expenditures of $10.8 million and net payments on our credit facilities of $8.8 million, partially offset by net cash provided by operating activities of $16.1 million.

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

Three Months Ended

2023 April 1,

Six Months Ended

(in thousands)

Cash used in operating activities $ (10,873) $ (36,278)

Cash provided by (used in) operating activities $ 16,070 $ (26,895)

Cash used in investing activities (10,834) (14,413)

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Net decrease in cash $ (1,862) $ (29,431)

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.

Our cash provided by operating activities of $16.1 million during the six months ended June 30, 2023 consisted of net loss of $20.7 million, net non-cash charges of $35.3 million, consisting primarily of deferred income taxes of $10.0 million, depreciation and amortization of $17.1 million, and share-based compensation expense of $7.9 million, and a decrease in our net operating assets and liabilities of $1.4 million.

Deferred taxes consists primarily of a $11.1 million charge related to a valuation allowance recorded against our U.S.

and state deferred tax assets in the second quarter of 2023.

The decrease in our net operating assets and liabilities of $1.4 million during the six months ended June 30, 2023 was primarily due to a decrease in accounts receivable and inventories of $40.6 million and $17.5 million, respectively, partially offset by a decrease in accounts payable and other liabilities of $45.0 million and $11.6 million, respectively.

This compares to cash used in operating activities of $26.9 million during the six months ended July 1, 2022.

The increase in cash provided by operating activities from the six months ended July 1, 2022 to the six months ended June 30, 2023 was primarily due to favorable changes in the balances of accounts receivable and inventories during the six months ended June 30, 2023 compared to the six months ended July 1, 2022, partially offset by less aggregate net income (loss) and net non-cash charges and a larger unfavorable change in the balance of accounts payable during the six months ended June 30, 2023 compared to the six months ended July 1, 2022

Cash used in investing activities during the six months ended June 30, 2023 and July 1, 2022 consisted of capital expenditures.

The reduction in capital expenditures from the six months ended July 1, 2022 to the six months ended June 30, 2023 was due to reduced factory capacity expansion projects.

Cash used in financing activities during the six months ended June 30, 2023 consisted of net payment on our credit facilities of $8.8 million, partially offset by net proceeds from share-based compensation activity of $1.7 million.

Cash provided by financing activities during the six months ended July 1, 2022 consisted of net proceeds from our credit facilities of $11.3 million and net proceeds from share-based compensation activity of $0.6 million.

The change in net payments on our credit facilities was due to fluctuations in working capital requirements relative to the geographic distribution of available cash during the periods then ended.

The increase in net proceeds from share-based compensation activity from the six months ended July 1, 2022 to the six months ended June 30, 2023 was due to increased stock option exercises.

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