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 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 ("OEM") 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 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. 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. 14 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 Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (dollars in thousands, except per share amounts) Net sales $ 196,761 $ 355,643 $ 607,639 $ 978,349 Gross margin 12.2 % 17.9 % 13.7 % 16.7 % Non-GAAP gross margin 13.1 % 18.0 % 14.4 % 17.1 % Operating margin (2.5) % 9.2 % (0.5) % 6.9 % Non-GAAP operating margin 2.2 % 11.6 % 3.9 % 10.1 % Net income (loss) $ (10,425) $ 29,031 $ (31,086) $ 58,607 Non-GAAP net income $ 2,097 $ 35,354 $ 13,932 $ 83,858 Diluted EPS $ (0.36) $ 1.00 $ (1.07) $ 2.02 Non-GAAP diluted EPS $ 0.07 $ 1.22 $ 0.47 $ 2.90 Macroeconomic Conditions and Business Update 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 three quarters 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. 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 2023. As a result of these programs, we incurred severance charges of $1.1 million, $1.3 million, and $0.8 million in the fourth quarter of 2022 and the first and third quarters of 2023, respectively. 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. 15 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 and Nine Months Ended September 29, 2023 and September 30, 2022 – Interest expense, net. 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 Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (in thousands Net sales $ 196,761 $ 355,643 $ 607,639 $ 978,349 Cost of sales 172,692 292,083 524,588 815,396 Gross profit 24,069 63,560 83,051 162,953 Operating expenses: Research and development 5,188 4,859 14,689 14,617 Selling, general, and administrative 20,066 22,195 59,733 66,565 Amortization of intangible assets 3,639 3,959 11,565 13,963 Total operating expenses 28,893 31,013 85,987 95,145 Operating income (loss) (4,824) 32,547 (2,936) 67,808 Interest expense, net 5,136 3,249 14,716 6,844 Other expense (income), net 29 (210) 913 (674) Income (loss) before income taxes (9,989) 29,508 (18,565) 61,638 Income tax expense 436 477 12,521 3,031 Net income (loss) $ (10,425) $ 29,031 $ (31,086) $ 58,607 The following table sets forth our unaudited results of operations as a percentage of our total sales for the periods presented. Three Months Ended Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 Net sales 100.0 100.0 100.0 100.0 Cost of sales 87.8 82.1 86.3 83.3 Gross profit 12.2 17.9 13.7 16.7 Operating expenses: Research and development 2.6 1.4 2.4 1.5 Selling, general, and administrative 10.2 6.2 9.8 6.8 Amortization of intangible assets 1.8 1.1 1.9 1.4 Total operating expenses 14.7 8.7 14.2 9.7 Operating income (loss) (2.5) 9.2 (0.5) 6.9 Interest expense, net 2.6 0.9 2.4 0.7 Other expense (income), net — (0.1) 0.2 (0.1) Income (loss) before income taxes (5.1) 8.3 (3.1) 6.3 Income tax expense 0.2 0.1 2.1 0.3 Net income (loss) (5.3) 8.2 (5.1) 6.0 16 Comparison of the Three and Nine Months Ended September 29, 2023 and September 30, 2022 Net sales Three Months Ended Change Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Net sales $ 196,761 $ 355,643 $ (158,882) (44.7) % $ 607,639 $ 978,349 $ (370,710) (37.9) % The decrease in net sales from the three and nine months ended September 30, 2022 to the three and nine months ended September 29, 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 Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Cost of sales $ 172,692 $ 292,083 $ (119,391) (40.9) % $ 524,588 $ 815,396 $ (290,808) (35.7) % Gross profit $ 24,069 $ 63,560 $ (39,491) (62.1) % $ 83,051 $ 162,953 $ (79,902) (49.0) % Gross margin 12.2 % 17.9 % -570 bps 13.7 % 16.7 % -300 bps The decrease in the gross amounts of cost of sales and gross profit from the three and nine months ended September 30, 2022 to the three and nine months ended September 29, 2023 was primarily due to the factors mentioned in the commentary above under the heading, “ Net Sales .” The decrease in gross margin from three and nine months ended September 30, 2022 to the three and nine months ended September 29, 2023 was primarily due to reduced factory utilization as a result of lower volume due to reduced customer demand. Additionally, increased excess and obsolete inventory expense unfavorably impacted gross margin by 150bps and 50bps for the three and nine months ended September 29, 2023. Research and development Three Months Ended Change Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Research and development $ 5,188 $ 4,859 $ 329 6.8 % $ 14,689 $ 14,617 $ 72 0.5 % The increase in research and development expenses from the three and nine months ended September 30, 2022 to the three and nine months ended September 29, 2023 was primarily due to increased program costs related to the development of our new products. 17 Selling, general, and administrative Three Months Ended Change Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Selling, general, and administrative $ 20,066 $ 22,195 $ (2,129) (9.6) % $ 59,733 $ 66,565 $ (6,832) (10.3) % The decrease in selling, general, and administrative expense from the third quarter of 2022 to the third quarter of 2023 was primarily due to reduced employee-related expenses, inclusive of share-based compensation expense, of $1.3 million, a $1.0 million loss accrual recorded in the third quarter of 2022 relating to an expected settlement of an employment-related legal matter, and reduced occupancy-related costs of $0.2 million, partially offset by increased consulting and software costs of $0.7 million. The decrease in selling, general, and administrative expense from the nine months ended September 30, 2022 to the nine months ended September 29, 2023 was primarily due to reduced employee-related expenses, inclusive of share-based compensation expense, of $4.2 million, loss accruals recorded in the first and third quarters of 2022 relating to an expected settlement of employment-related legal matters totaling $4.1 million, and reduced occupancy-related costs of $0.6 million, partially offset by increased information technology systems and related consulting and software costs of $2.2 million. Amortization of intangible assets Three Months Ended Change Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Amortization of intangible assets $ 3,639 $ 3,959 $ (320) (8.1) % $ 11,565 $ 13,963 $ (2,398) (17.2) % The decrease in amortization expense from the three and nine months ended September 30, 2022 to the three and nine months ended September 29, 2023 was primarily due to certain intangible assets becoming fully amortized in 2022. Interest expense, net Three Months Ended Change Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Interest expense, net $ 5,136 $ 3,249 $ 1,887 58.1 % $ 14,716 $ 6,844 $ 7,872 115.0 % Weighted average borrowings outstanding $ 292,630 $ 306,229 $ (13,599) (4.4) % $ 298,553 $ 302,596 $ (4,043) (1.3) % Weighted average borrowing rate 7.06 % 3.97 % +309 bps 6.60 % 2.74 % +386 bps The increase in interest expense, net from the three and nine months ended September 30, 2022 to the three and nine months ended September 29, 2023 was due to increases in our weighted average borrowing rate, partially offset by decreases in our average amount borrowed. The increases in our weighted average borrowing rate were primarily due to increased risk-free, short-term borrowing rates as a result of tightening monetary policy, which impacts the Bloomberg Short Term Bank Yield ("BSBY"), the variable component of our borrowing rate under our credit facilities. The decreases in our average amount borrowed was primarily due to quarterly term loan payments and payments on our revolving credit facilities in the second and third quarters of 2023. 18 Other expense (income), net Three Months Ended Change Nine Months Ended Change September 29, 2023 September 30, 2022 Amount % September 29, 2023 September 30, 2022 Amount % (dollars in thousands) Other expense (income), net $ 29 $ (210) $ 239 n/m $ 913 $ (674) $ 1,587 n/m The change in other expense, net from the three and nine months ended September 30, 2022 to the three and nine months ended September 29, 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 Nine Months Ended Change September 29, 2023 September 30, 2022 Amount September 29, 2023 September 30, 2022 Amount (dollars in thousands) Income tax expense $ 436 $ 477 $ (41) $ 12,521 $ 3,031 $ 9,490 Income (loss) before income taxes $ (9,989) $ 29,508 $ (39,497) $ (18,565) $ 61,638 $ (80,203) Effective income tax rate -4.4 % 1.6 % -67.4 % 4.9 % The decrease in income tax expense from the third quarter of 2022 to the third quarter of 2023 was primarily due to reduced U.S. tax expense as a result of lower taxable income in the U.S. year-over-year, partially offset by higher foreign income tax expense. Because we recorded a valuation allowance against our U.S. state and federal deferred income taxes, we currently do not record tax benefits on our GAAP U.S. taxable losses. The increase in income tax expense from the nine months ended September 30, 2022 to the nine months ended September 29, 2023 was primarily due to recording a valuation allowance against our U.S. federal and state deferred tax assets, resulting in an $11.1 million charge to income tax expense during the second quarter of 2023. 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. All non-GAAP adjustments are presented on a gross basis. Non-GAAP gross profit, operating income, and net income are defined as: gross profit, operating income (loss), 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 (loss), and net income (loss), respectively; 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. All non-GAAP adjustments are presented on a gross basis; the related income tax effects, including current and deferred income tax expense, are included in the adjustment line under the heading "Tax adjustments related to non-GAAP adjustments". 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. 19 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. 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 Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (dollars in thousands) U.S. GAAP gross profit $ 24,069 $ 63,560 $ 83,051 $ 162,953 Non-GAAP adjustments: Share-based compensation 840 553 2,352 1,555 Fair value adjustment to inventory from acquisitions (1) — — — 2,492 Other (2) 774 — 2,061 — Non-GAAP gross profit $ 25,683 $ 64,113 $ 87,464 $ 167,000 U.S. GAAP gross margin 12.2 % 17.9 % 13.7 % 16.7 % Non-GAAP gross margin 13.1 % 18.0 % 14.4 % 17.1 % (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. 20 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 Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (dollars in thousands, except per share amounts) U.S. GAAP operating income (loss) $ (4,824) $ 32,547 $ (2,936) $ 67,808 Non-GAAP adjustments: Amortization of intangible assets 3,639 3,959 11,565 13,963 Share-based compensation 4,752 3,719 12,666 10,125 Settlement loss (1) — 1,046 — 4,146 Fair value adjustment to inventory from acquisitions (2) — — — 2,492 Acquisition costs (3) — — — 296 Other (4) 793 — 2,117 — Non-GAAP operating income $ 4,360 $ 41,271 $ 23,412 $ 98,830 U.S. GAAP operating margin (2.5) % 9.2 % (0.5) % 6.9 % Non-GAAP operating margin 2.2 % 11.6 % 3.9 % 10.1 % (1) 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. (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. 21 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. All non-GAAP adjustments are presented on a gross basis; the related income tax effects, including current and deferred income tax expense, are included in the adjustment line under the heading "Tax adjustments related to non-GAAP adjustments". Three Months Ended Nine Months Ended September 29, 2023 September 30, 2022 September 29, 2023 September 30, 2022 (dollars in thousands, except per share amounts) U.S. GAAP net income (loss) $ (10,425) $ 29,031 $ (31,086) $ 58,607 Non-GAAP adjustments: Amortization of intangible assets 3,639 3,959 11,565 13,963 Share-based compensation 4,752 3,719 12,666 10,125 Settlement loss (1) — 1,046 — 4,146 Fair value adjustment to inventory from acquisitions (2) — — — 2,492 Acquisition costs (3) — — — 296 Other (4) 793 — 2,117 — Tax adjustments related to non-GAAP adjustments (5) 3,338 (2,401) 7,576 (5,771) Tax expense from valuation allowance (6) — — 11,094 — Non-GAAP net income $ 2,097 $ 35,354 $ 13,932 $ 83,858 U.S. GAAP diluted EPS $ (0.36) $ 1.00 $ (1.07) $ 2.02 Non-GAAP diluted EPS $ 0.07 $ 1.22 $ 0.47 $ 2.90 Shares used to compute non-GAAP diluted EPS 29,733,904 29,050,396 29,507,060 28,965,834 (1) 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. (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, which are presented on a gross basis, including the impacts of excluding share-based compensation and amortization of intangible assets. The adjustment reflects income tax benefits generated from U.S. taxable losses, on a non-GAAP basis, as we do not have a valuation allowance against our U.S. federal and state deferred tax assets on a non-GAAP basis. Refer to footnote 6 below. (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. On a non-GAAP basis, we added back the expense associated with our recognition of a valuation allowance against our U.S. federal and state deferred tax assets, because recording a valuation allowance would not have been appropriate, as we were in, and expect to remain in a three-year cumulative U.S. income position on a non-GAAP basis. 22 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, (v) capital expenditures, and (vi) 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. Our credit facilities are comprised of a $150.0 million term loan facility and a $250.0 million revolving credit facility, of which $105.0 million remained available to draw on as of September 29, 2023. Summary of Cash Flows We ended the third quarter of 2023 with cash and cash equivalents of $75.9 million, a decrease of $10.5 million from the prior year ended December 30, 2022. The decrease was primarily due to net payments on our credit facilities of $20.6 million and capital expenditures of $13.2 million, partially offset by net cash provided by operating activities of $20.1 million. The following table sets forth a summary of operating, investing, and financing activities for the periods presented: Nine Months Ended September 29, 2023 September 30, 2022 (in thousands) Cash provided by (used in) operating activities $ 20,058 $ (7,321) Cash used in investing activities (13,239) (21,958) Cash provided by (used in) financing activities (17,356) 10,247 Net decrease in cash $ (10,537) $ (19,032) Our cash provided by operating activities of $20.1 million during the nine months ended September 29, 2023 consisted of net loss of $31.1 million, offset by net non-cash charges of $48.4 million, consisting primarily of depreciation and amortization of $26.0 million, share-based compensation expense of $12.7 million, and deferred income taxes of $9.4 million, and a decrease in our net operating assets and liabilities of $2.7 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. 23 The decrease in our net operating assets and liabilities of $2.7 million during the nine months ended September 29, 2023 was primarily due to a decrease in accounts receivable and inventories of $33.0 million and $16.8 million, respectively, partially offset by a decrease in accounts payable and accrued and other liabilities of $34.8 million and $20.9 million, respectively. This compares to cash used in operating activities of $7.3 million during the nine months ended September 30, 2022. The increase in cash provided by operating activities from the nine months ended September 30, 2022 to the nine months ended September 29, 2023 was primarily due to favorable changes in the balances of accounts receivable and inventories during the nine months ended September 29, 2023 compared to the nine months ended September 30, 2022, partially offset by less aggregate net income (loss) and net non-cash charges and unfavorable changes in the balance of accounts payable and accrued and other liabilities during the nine months ended September 29, 2023 compared to the nine months ended September 30, 2022. Cash used in investing activities during the nine months ended September 29, 2023 and September 30, 2022 consisted of capital expenditures. The reduction in capital expenditures from the nine months ended September 30, 2022 to the nine months ended September 29, 2023 was due to reduced factory capacity expansion projects. Cash used in financing activities during the nine months ended September 29, 2023 consisted of net payment on our credit facilities of $20.6 million, partially offset by net proceeds from share-based compensation activity of $3.3 million. Cash provided by financing activities during the nine months ended September 30, 2022 consisted of net proceeds from our credit facilities of $9.4 million and net proceeds from share-based compensation activity of $0.9 million. The change in net payments on, and net proceeds from, our credit facilities relates to fluctuations in cash required for working capital purposes 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 nine months ended September 30, 2022 to the nine months ended September 29, 2023 was due to increased stock option exercises. 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.