# ICHOR HOLDINGS, LTD. (ICHR) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ICHOR HOLDINGS, LTD.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1652535/000156459022007613/ichr-10k_20211231.htm
Accession: 0001564590-22-007613
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ICHR/
All MD&A years: /company/ICHR/mda/
Next year: /company/ICHR/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the section entitled Item 1A – Risk Factors. For a comparison of our financial condition, results of operations, and cash flows for 2020 to 2019, refer to Part II, Item 7 in our 2020 Annual Report on Form 10‑K, which was filed with the Securities and Exchange Commission on March 5, 2021.

Overview

We are a leader in the design, engineering, and manufacturing of critical fluid delivery subsystems and components for semiconductor capital equipment. Our product offerings include gas and chemical delivery systems and subsystems, collectively known as fluid delivery systems and subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices. Our gas delivery subsystems deliver, monitor, and control precise quantities of the specialized gases used in semiconductor manufacturing processes such as etch and deposition. Our chemical delivery systems and subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as chemical-mechanical planarization, electroplating, and cleaning. We also provide precision-machined components, weldments, e‑beam and laser-welded components, precision vacuum and hydrogen brazing and surface treatment technologies, and other proprietary products. This vertically integrated portion of our business is primarily focused on metal and plastic parts that are used in gas and chemical systems, respectively.

Fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the semiconductor manufacturing processes. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes. Most OEMs outsource all or a portion of the design, engineering, and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are outsourcing the design, engineering, and manufacturing of their chemical delivery subsystems due to the increased fluid expertise required to manufacture these subsystems. Outsourcing these subsystems has allowed OEMs to leverage the suppliers’ highly specialized engineering, design, and production skills while focusing their internal resources on their own value-added processes. We believe that this outsourcing trend has enabled OEMs to reduce their costs and development time, as well as provide growth opportunities for specialized subsystems suppliers like us.

We have a global footprint with production facilities in California, Minnesota, Oregon, Texas, Singapore, Malaysia, the United Kingdom, Korea, and Mexico.

The following table summarizes key financial information for the periods indicated. Amounts are presented in accordance with GAAP unless explicitly identified as being a non-GAAP metric. For a description of our non-GAAP metrics and reconciliations to the most comparable GAAP metrics, please refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Results within this Annual Report.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2021","","","December 25, 2020"],["","","(dollars in thousands, except per share amounts)"],["Net sales","","$","1,096,917","","","$","914,236"],["Gross profit","","$","177,480","","","$","124,892"],["Gross margin","","","16.2","%","","","13.7","%"],["Non-GAAP gross margin","","","16.7","%","","","14.6","%"],["Operating expenses","","$","96,466","","","$","83,340"],["Operating income","","$","81,014","","","$","41,552"],["Net income","","$","70,899","","","$","33,279"],["Non-GAAP net income","","$","97,698","","","$","59,042"],["Diluted EPS","","$","2.45","","","$","1.42"],["Non-GAAP diluted EPS","","$","3.37","","","$","2.52"]]
[[/GREPCENT_TABLE]]

30

Key Factors Affecting Our Business

Investment in Semiconductor Manufacturing Equipment

The design and manufacturing of semiconductor devices is constantly evolving and becoming more complex in order to achieve greater performance and efficiency. To keep pace with these changes, OEMs need to refine their existing products and invest in developing new products. In addition, semiconductor device manufacturers will continue to invest in new wafer fabrication equipment to expand their production capacity and to support new manufacturing processes.

Outsourcing of Subsystems by Semiconductor OEMs

Faced with increasing manufacturing complexities, more complex subsystems, shorter product lead times, shorter industry spend cycles, and significant capital requirements, outsourcing of subsystems and components by OEMs has continued to grow. In the past two decades, OEMs have outsourced most of their gas delivery systems to suppliers such as us. OEMs have also started to outsource their chemical delivery systems in recent years. Our results will be affected by the degree to which outsourcing of these fluid delivery systems by OEMs continues to grow.

Cyclicality of Semiconductor Capital Equipment Industry

Our business is subject to the cyclicality of the capital expenditures of the semiconductor industry, which drives cyclicality in the semiconductor capital equipment industry in which we operate. In 2021, we derived over 95% of our sales from the semiconductor capital equipment industry. Demand for semiconductor capital equipment can fluctuate significantly based on changes in general economic conditions, including consumer spending, demand for semiconductor products, pricing, and other factors. In the past, these fluctuations have resulted in significant variations in the levels of spending within the semiconductor capital equipment industry, and as a result, our results of operations. The cyclicality of the semiconductor industry will continue to impact our results of operations in the future.

Customer Concentration

The number of capital equipment manufacturers for the semiconductor device industry is significantly consolidated, resulting in a small number of large manufacturers. Our customers are a significant component of this consolidation, resulting in our sales being concentrated in a few customers. In 2021, our top two customers were Lam Research and Applied Material, accounting for approximately 53% and 32% of sales, respectively. Our customers often require reduced prices or other pricing, quality, or delivery commitments as a condition to their purchasing from us in any given period or increasing their purchase volume, which can, among other things, result in reduced gross margins in order to maintain or expand our market share. Although we do not have any long-term contracts that require customers to place orders with us, Lam Research and Applied Materials have been our customers for over a decade.

Acquisitions

In November 2021, we acquired IMG, and California-based leader in precision machining and specialty joining and plating, for approximately $270.0 million. Between 2017 and 2020, we engaged in four separate business combinations for a combined investment of approximately $200.0 million. These acquisitions continue to have a significant impact on our financial position and results of operations. We intend to continue to evaluate opportunistic acquisitions to supplement our organic growth, and any such acquisitions could have a material impact on our business and results of operations.

COVID‑19 Pandemic and Global Supply Chain

The COVID‑19 pandemic and related economic repercussions have created, and are expected to continue to create, significant volatility, uncertainty, and turmoil in our industry. While our facilities are currently not subject to any site-wide government shutdowns, in June 2021, the Malaysian government instituted an Enhanced Movement Control Order (“EMCO”), which impacted our weldment facility in Malaysia through both on-site employee restrictions as well as a complete shutdown of all manufacturing in the region during early July. While we were able to reopen our factory in mid-July, once the government confirmed we were an essential business, we remained under headcount limitations until the third week of August. With 50% of our weldment capacity located in Malaysia, our overall output in the country was reduced by 40% in the third quarter of 2021 due to the EMCO restrictions.

In addition to the recent impacts in Malaysia, we experienced increases in direct costs within our factories associated with employee personal protective equipment (“PPE”), facility cleaning and layout changes, together with increases in logistics costs and employee labor costs, as well as other operating inefficiencies. Additionally, our supply chain has been negatively impacted as a result of the larger, ongoing global supply chain disruption, impacting our ability to source certain components timely. These factors have resulted

31

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 that of our customers and suppliers.

Components of Our Results of Operations

The following discussion sets forth certain components of our statements of operations as well as significant factors that impact those items.

Sales

We generate sales primarily from the design, manufacture, and sale of subsystems and components primarily for semiconductor capital equipment. Sales are recognized when control of promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our shipping terms are generally “shipping point.” Accordingly, control transfers, and sales are recognized, at the point-in-time of shipment.

Cost of Sales and Gross Profit

Cost of sales consists primarily of purchased materials, direct labor, indirect labor, factory overhead cost, and depreciation expense for our manufacturing facilities and equipment. Our business has a highly variable cost structure with low fixed overhead as a percentage of cost of sales. In addition, our existing global manufacturing plant capacity is scalable, and we are able to adjust to increased customer demand for our products without significant additional capital investment. We operate our business in this manner to avoid having excessive fixed costs during a cyclical downturn while retaining flexibility to expand our production volumes during periods of growth. However, this approach results in a smaller increase in gross margin as a percentage of sales in times of increased demand.

Since the gross margin on each of our products differs, our overall gross margin as a percentage of our sales changes based on the mix of products we sell in any period.

Operating Expenses

Our operating expenses primarily include research and development and sales, general, and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, and share-based compensation. Operating expenses also include overhead costs for facilities, IT, and depreciation. In addition, our operating expenses include amortization expense of acquired intangible assets and certain non-recurring costs, including facility shutdown costs and executive transition-related costs.

Research and development – Research and development expense consists primarily of activities related to product design and other development activities, new component testing and evaluation, and test equipment and fixture development. We expect research and development expense will continue to increase in absolute dollars due to continued development of our own IP and product offerings for existing and new customer markets and increases in our customers’ demand for new product designs.

Selling, general, and administrative – Selling expense consists primarily of salaries and commissions paid to our sales and sales support employees and other costs related to the sales of our products. General and administrative expense consists primarily of salaries and overhead associated with our administrative staff, professional fees, and depreciation and other allocated facility related costs. We expect selling expenses to increase in absolute dollars as we continue to invest in expanding our markets and as we expand our international operations. We expect general and administrative expenses to also increase in absolute dollars due to an increase in employee-related costs, regulatory compliance, and accounting expenses.

Amortization of intangibles – Amortization of intangible assets is related to our finite-lived intangible assets and is computed using the straight-line method over the estimated economic life of the asset.

Interest Expense

Interest expense consists of interest on our outstanding debt under our credit facilities, including amortization of debt issuance costs, and any other indebtedness we may incur in the future.

32

Other Expense (Income), Net

The functional currency of our international operations is the U.S. dollar. Transactions denominated in currencies other than the functional currency generate foreign exchange gains and losses that are included in other expense (income), net on the accompanying consolidated statements of operations. Substantially all of our sales contracts, and most of our agreements with third-party suppliers, provide for pricing and payment in U.S. dollars. Accordingly, these transactions are not subject to material exchange rate fluctuations.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists primarily of taxes on our taxable income related to our domestic and foreign operations, offset by the benefit of our tax holiday in Singapore, which was extended through 2026. In 2021, the benefit related to our Singapore tax holiday, compared to the Singapore statutory tax rate, was $9.7 million. Income tax is also impacted by certain withholding taxes, stock option and RSU activity, and credit generation. Stock options and RSUs have historically provided a discrete benefit to our provision for income taxes in the period they were exercised or vested, respectively, due to increases in our stock price.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. 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 described below.

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. The majority of our inventory values are based upon standard costs. On a quarterly basis, we analyze the value of our inventory and periodically record write-downs for estimated excess and obsolete inventory. This analysis is based on estimated future consumption compared to inventory quantities on-hand. The estimate is based on how assumptions of historical consumption, recency of purchases, backlog, and other factors indicate future consumption. Once the value of inventory is adjusted, the original cost of our inventory, less the write-down, represents its new cost basis. Reversal of these write-downs are recognized only when the related inventory has been scrapped or sold. During 2021, 2020, and 2019, we wrote down inventory determined to be excessive or obsolete by $1.9 million, $4.6 million, and $1.1 million, respectively.

Business Combinations

We account for business combinations using the acquisition method of accounting, which requires that assets acquired and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of specifically identifiable assets is recorded as goodwill.

Significant judgment is required in estimating the fair value of intangible assets. Our typical intangible assets acquired include customer relationships and order backlogs. The most critical areas of judgment in applying the acquisition method include selecting the appropriate valuation techniques and assumptions that are used to measure the acquired assets and assumed liabilities at fair value. There are several methods that can be used to determine the fair value of intangible assets. We typically use an income approach to value the specifically identifiable intangible assets, which is based on forecasts of expected future cash flows. Under the income approach, we utilize a multi-period excess earnings methodology to value the primary intangible asset of a business combination. Assumptions around expected future cash flows used in the fair value estimates are based on available historical information and industry, market, and peer data to inform our future expectations. We typically consult with an independent advisor to assist in the valuation of intangible assets. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition dates, our estimates are inherently uncertain and subject to refinement. In addition, unanticipated market or macroeconomic events and circumstances may occur that could affect the accuracy or validity of the estimates and assumptions. If the estimates do not reflect future results or assumptions utilized in the valuation are inaccurate, then our recorded intangible assets and goodwill may become impaired. In November 2021, in connection with our acquisition of IMG, we recorded identifiable intangibles and preliminary goodwill of $65.0 million and $161.0 million, respectively.

33

Results of Operations

The following table sets forth our results of operations for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2021","","","December 25, 2020"],["","","(in thousands)"],["Net sales","","$","1,096,917","","","$","914,236"],["Cost of sales","","","919,437","","","","789,344"],["Gross profit","","","177,480","","","","124,892"],["Operating expenses:"],["Research and development","","","15,691","","","","13,361"],["Selling, general, and administrative","","","65,857","","","","56,614"],["Amortization of intangible assets","","","14,918","","","","13,365"],["Total operating expenses","","","96,466","","","","83,340"],["Operating income","","","81,014","","","","41,552"],["Interest expense, net","","","6,451","","","","8,727"],["Other expense, net","","","807","","","","534"],["Income before income taxes","","","73,756","","","","32,291"],["Income tax expense (benefit)","","","2,857","","","","(988",")"],["Net income","","$","70,899","","","$","33,279"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2021","","","December 25, 2020"],["Net sales","","","100.0","","","","100.0"],["Cost of sales","","","83.8","","","","86.3"],["Gross profit","","","16.2","","","","13.7"],["Operating expenses:"],["Research and development","","","1.4","","","","1.5"],["Selling, general, and administrative","","","6.0","","","","6.2"],["Amortization of intangible assets","","","1.4","","","","1.5"],["Total operating expenses","","","8.8","","","","9.1"],["Operating income","","","7.4","","","","4.5"],["Interest expense, net","","","0.6","","","","1.0"],["Other expense, net","","","0.1","","","","0.1"],["Income before income taxes","","","6.7","","","","3.5"],["Income tax expense (benefit)","","","0.3","","","","(0.1",")"],["Net income","","","6.5","","","","3.6"]]
[[/GREPCENT_TABLE]]

34

Comparison of 2021 and 2020

Net Sales

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Net sales","","$","1,096,917","","","$","914,236","","","$","182,681","","","","20.0","%"]]
[[/GREPCENT_TABLE]]

The increase in net sales from 2020 to 2021 was primarily due to strong demand from our customers as a result of continued growth in the global wafer fabrication equipment market, partially offset by production constraints as a result of challenges in our supply chain, as noted above in the commentary above under the heading, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Factors Affecting Our Business – COVID‑19 Pandemic and Global Supply Chain.

Net sales to U.S. customers increased by $53.1 million in 2021 to $544.1 million. On a relative basis, net sales to U.S. customers as a percent of total net sales decreased from 53.7% in 2020 to 49.6% in 2021.

Net sales to international customers increased by $129.5 million in 2021 to 552.8 million. On a relative basis, net sales to international customers as a percent of total net sales increased from 46.4% in 2020 to 50.4% in 2021.

Cost of Sales and Gross Profit

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Cost of sales","","$","919,437","","","$","789,344","","","$","130,093","","","","16.5","%"],["Gross profit","","$","177,480","","","$","124,892","","","$","52,588","","","","42.1","%"],["Gross margin","","","16.2","%","","","13.7","%","","","","","","+ 250 bps"]]
[[/GREPCENT_TABLE]]

The increase in the gross amounts of cost of sales and gross profit from 2020 to 2021 was primarily due to the factors mentioned in the commentary above under the above heading, Net Sales.

The 250 basis point increase in our gross margin from 2020 to 2021 was primarily due to was primarily due to increased factory utilization, cost reduction initiatives, and customer mix, partially offset by increased materials and logistics costs and increased factory inefficiency due to challenges in our supply chain, as noted above in the commentary above under the heading, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Factors Affecting Our Business – COVID‑19 Pandemic and Global Supply Chain.

Additionally, our gross margin for 2021 was impacted by the following discrete items on a year-over-year basis: We incurred a $1.4 million contract settlement loss in 2020 that did not recur in 2021, favorably impacting gross margin, and we incurred $1.7 million in charges related to acquired-inventory being recorded at fair value, the majority of which was from our acquisition of IMG, unfavorably impacting gross margin..

Research and Development

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Research and development","","$","15,691","","","$","13,361","","","$","2,330","","","","17.4","%"]]
[[/GREPCENT_TABLE]]

The increase in research and development expenses from 2020 to 2021 was primarily due to increased employee-related expense, as we expand our engineering team to design and engineer next generation high performance solutions for our customers.

35

Selling, General, and Administrative

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Selling, general, and administrative","","$","65,857","","","$","56,614","","","$","9,243","","","","16.3","%"]]
[[/GREPCENT_TABLE]]

The increase in selling, general, and administrative expense from 2020 to 2021 was primarily due to (i) $4.4 million in transaction costs associated with our acquisition of IMG in November 2021, a (ii) $4.3 million in employee-related costs (excluding share-based compensation expense) due to increased headcount, salaries, and bonus charges, (iii) $1.3 million in increased IT hardware, software, and service costs, and (iv) $0.8 million in increased share-based compensation expense, partially offset by $1.8 million in executive transition costs that we incurred in 2020 that did not recur in 2021.

Amortization of Intangible Assets

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Amortization of intangibles assets","","$","14,918","","","$","13,365","","","$","1,553","","","","11.6","%"]]
[[/GREPCENT_TABLE]]

The increase in amortization expense from 2020 to 2021 was due to incremental amortization expense from intangible assets acquired in connection with our acquisition of IMG in November 2021.

Interest Expense

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Interest expense, net","","$","6,451","","","$","8,727","","","$","(2,276",")","","","-26.1","%"]]
[[/GREPCENT_TABLE]]

The decrease in interest expense from 2020 to 2021 was primarily due to a 101 basis point decrease in our weighted average interest rate during the year, from 3.75% to 2.74%, and a $10.7 million decrease in the average amount borrowed during the year. The decrease in our weighted average interest rate from 2020 to 2021 was primarily due to decreases in the applicable margin component of our all-in borrowing rate due to continuous decreases in our leverage ratio during 2020 and 2021 and a lower overall applicable margin we incur for borrowings under our October 2021 amended and restated credit agreement.

Other Expense, Net

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Other expense (income), net","","$","807","","","$","534","","","$","273","","","","51.1","%"]]
[[/GREPCENT_TABLE]]

The increase in other expense, net from 2020 to 2021 was primarily due to a $0.7 million loss on extinguishment of debt we incurred in connection with entering into an amended and restated credit agreement in October 2021, partially offset by favorable foreign currency fluctuations for transaction denominated in currencies other than the U.S. dollar.

36

Income Tax Benefit

[[GREPCENT_TABLE]]
[["","","Year Ended","","","Change"],["","","December 31, 2021","","","December 25, 2020","","","Amount","","","%"],["","","(dollars in thousands)"],["Income tax expense (benefit)","","$","2,857","","","$","(988",")","","$","3,845","","","n/m"]]
[[/GREPCENT_TABLE]]

The increase in tax expense from 2020 to 2021 was primarily due to increased taxable income in the U.S, partially offset by increased discrete benefits from share-based compensation activity.

Non-GAAP Results

Management uses non-GAAP metrics to evaluate our operating and financial results. We believe the presentation of non-GAAP results is useful to investors for analyzing business trends and comparing performance to prior periods, along with enhancing investors’ ability to view our results from management’s perspective. Non-GAAP gross margin is defined as non-GAAP gross profit divided by net sales. Non-GAAP gross profit and non-GAAP net income are defined as: gross profit or net income excluding, as applicable, (1) amortization of intangible assets, share-based compensation expense, and non-recurring expenses, including contract settlement losses and facility shutdown costs, to the extent they are present in gross profit or net income; and (2) the tax impacts associated with our non-GAAP adjustments, as well as non-recurring discrete tax items. Non-GAAP diluted earnings per share (“EPS”) is defined as non-GAAP net income divided by weighted average diluted ordinary shares outstanding during the period.

Non-GAAP results have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for our results reported under GAAP. Other companies may calculate non-GAAP results differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our non-GAAP results as a tool for comparison.

Because of these limitations, you should consider non-GAAP results alongside other financial performance measures and results presented in accordance with GAAP. In addition, in evaluating non-GAAP results, you should be aware that in the future we will incur expenses such as those that are the subject of adjustments in deriving non-GAAP results and you should not infer from our presentation of non-GAAP results that our future results will not be affected by these expenses or any unusual or non-recurring items.

The following table presents our unaudited non‑GAAP gross profit and non-GAAP gross margin and and a reconciliation from gross profit, the most comparable GAAP measure, for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2021","","","December 25, 2020"],["","","(dollars in thousands)"],["U.S. GAAP gross profit","","$","177,480","","","$","124,892"],["Non-GAAP adjustments:"],["Share-based compensation","","","1,384","","","","991"],["Facility shutdown costs (1)","","","2,611","","","","2,215"],["Contract settlement loss (2)","","","\u2014","","","","1,386"],["Fair value adjustment to inventory from acquisitions (3)","","","1,652","","","","\u2014"],["Other non-recurring expense, net (4)","","","106","","","","3,743"],["Non-GAAP gross profit","","$","183,233","","","$","133,227"],["U.S. GAAP gross margin","","","16.2","%","","","13.7","%"],["Non-GAAP gross margin","","","16.7","%","","","14.6","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed during the second quarter of 2021."]]
[[/GREPCENT_TABLE]]

Included in this amount for 2021 are (i) write-off costs associated with inventories determined during the period to be obsolete of $2.9 million and (ii) severance costs associated with affected employees of $0.2 million, partially offset by (iii) a gain realized upon the sale of equipment and other fixed assets of $0.5 million.

Included in this amount for 2020 are (i) write-off costs associated with inventories determined during the period to be obsolete of $1.3 million, (ii) severance costs associated with affected employees of $0.5 million, and (iii) accelerated depreciation charges associated with property and equipment that was expected to be abandoned at the time of facility closure of $0.4 million.

37

[[GREPCENT_TABLE]]
[["(2)","During the first quarter of 2020, we reached a mutual settlement with the counterparty of a contract dispute and, accordingly, recorded a $1.4 million contract settlement loss to cost of sales."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","As part of our purchase price allocation for our acquisition of IMG in November 2021 and our acquisition of 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 (preliminary) and $0.2 million, respectively. These amounts are released to cost of sales as acquired-inventories are sold."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","Included in this amount for 2021 is primarily a non-recurring settlement charge. Included in this amount for the 2020 is a $3.6 million loss on the sale of inventories and property and equipment from our Tampa, Florida facility, as well as costs associated with restructuring and transitioning key leadership roles."]]
[[/GREPCENT_TABLE]]

The following table presents our unaudited non‑GAAP net income and non-GAAP diluted EPS and and a reconciliation from net income, the most comparable GAAP measure, for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2021","","","December 25, 2020"],["","","(dollars in thousands, except per share amounts)"],["U.S. GAAP net income","","$","70,899","","","$","33,279"],["Non-GAAP adjustments:"],["Amortization of intangible assets","","","14,918","","","","13,365"],["Share-based compensation","","","11,473","","","","9,875"],["Facility shutdown costs (1)","","","2,996","","","","2,463"],["Contract settlement loss (2)","","","\u2014","","","","1,386"],["Fair value adjustment to inventory from acquisitions (3)","","","1,652","","","","\u2014"],["Acquisition costs (4)","","","4,386","","","","\u2014"],["Other non-recurring expense, net (5)","","","498","","","","7,181"],["Loss on extinguishment of debt (6)","","","737","","","","\u2014"],["Tax adjustments related to non-GAAP adjustments (7)","","","(9,861",")","","","(8,507",")"],["Non-GAAP net income","","$","97,698","","","$","59,042"],["U.S. GAAP diluted EPS","","$","2.45","","","$","1.42"],["Non-GAAP diluted EPS","","$","3.37","","","$","2.52"],["Shares used to compute diluted EPS","","","28,979,352","","","","23,460,105"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed during the second quarter of 2021."]]
[[/GREPCENT_TABLE]]

Included in this amount for 2021 are (i) write-off costs associated with inventories determined during the period to be obsolete of $2.9 million, (ii) other shutdown related charges of $0.3 million, and (iii) severance costs associated with affected employees of $0.2 million, partially offset by (iv) a gain realized upon the sale of equipment and other fixed assets of $0.5 million.

Included in this amount for 2020 are (i) write-off costs associated with inventories determined during the period to be obsolete of $1.3 million, (ii) severance costs associated with affected employees of $0.5 million, and (iii) accelerated depreciation charges associated with property and equipment that was expected to be abandoned at the time of facility closure of $0.6 million.

[[GREPCENT_TABLE]]
[["","(2)","See footnote 2 to the reconciliation of U.S. GAAP gross profit to non-GAAP gross profit above."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(3)","See footnote 2 to the reconciliation of U.S. GAAP gross profit to non-GAAP gross profit above."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(4)","Included in this amount are incremental transaction-related costs incurred in connection with our acquisition of IMG in November 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(5)","Included in this amount for 2021 are primarily non-capitalized costs incurred in connection with our implementation of a new ERP system and a Sarbanes Oxley (\u201cSOX\u201d) compliance program and a non-recurring settlement charge."]]
[[/GREPCENT_TABLE]]

38

Included in this amount for 2020 are primarily (i) a $3.6 million loss on the sale of inventories and property and equipment from our Tampa, Florida facility, (ii) non-capitalized costs incurred in connection with our implementation of a new ERP system and a SOX compliance program, and (iii) costs associated with restructuring and transitioning key leadership roles, including a $1.8 million bonus payment to our former Chief Executive Officer in connection with his transition to executive chairman.

[[GREPCENT_TABLE]]
[["","(6)","In October 2021, we entered into an amended and restated credit agreement, which includes a group of financial institutions as direct lenders underlying the agreement. Under the debt modification literature codified in ASC 470, a portion of the refinance was treated as an extinguishment. Accordingly, $0.7 million of existing capitalized deferred issuance costs were written off as a loss on extinguishment of debt."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(7)","Adjusts U.S. GAAP income tax expense (benefit) for impact of our non-GAAP adjustments, as defined, including the impacts of excluding share-based compensation, amortization of intangible assets, and other non-recurring expenses. This adjustment also excludes the impact of non-recurring discrete tax items."]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

The following section discusses our liquidity and capital resources, including our primary sources of liquidity and our material cash requirements. Our cash and cash equivalents are maintained in highly liquid and accessible accounts with no significant restrictions.

Material Cash Requirements

Our primary liquidity requirements arise from: (i) working capital requirements, including procurement of raw materials inventory for use in our factories and employee-related costs, (ii) business acquisitions, (iii) interest and principal payments under our credit facilities, (iv) research and development investments and capital expenditures, and (v) payment of income taxes. We have no significant long-term purchase commitments related to procuring raw materials inventory. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and are therefore subject to prevailing global macroeconomic conditions and financial, business, and other factors, some of which are beyond our control.

We believe that our cash and cash equivalents, the amounts available under our credit facilities, and our operating cash flow will be sufficient to fund our business and our current obligations for at least the next 12 months and beyond.

Sources and Conditions of Liquidity

Our ongoing sources of liquidity to fund our material cash requirements are primarily derived from: (i) sales to our customers and the related changes in our net operating assets and liabilities and (ii) proceeds from our credit facilities and equity offerings, when applicable.

Summary of Cash Flows

We ended 2021 with cash and cash equivalents of $75.5 million, a decrease of $177.4 million from December 25, 2020. The decrease was primarily due to cash paid of $268.8 million, net of acquired-cash, to acquire IMG in November 2021 and capital expenditures of $20.8 million, partially offset by net proceeds from our credit facilities of $90.9 million, and cash provided by operating activities of $15.3 million.

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

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2021","","","December 25, 2020","","","December 27, 2019"],["","","(in thousands)"],["Cash provided by operating activities","","$","15,272","","","$","38,259","","","$","57,150"],["Cash used in investing activities","","","(289,585",")","","","(14,597",")","","","(20,490",")"],["Cash provided by (used in) financing activities","","","96,909","","","","168,625","","","","(19,882",")"],["Net increase (decrease) in cash","","$","(177,404",")","","$","192,287","","","$","16,778"]]
[[/GREPCENT_TABLE]]

Our cash provided by operating activities of $15.3 million during 2021 consisted of net income of $70.9 million, net non-cash charges of $37.2 million, primarily consisting of depreciation and amortization of $26.0 million and share-based compensation expense of $11.5 million, and an increase in our net operating assets and liabilities, net of acquisitions, of $92.8 million.

39

The increase in our net operating assets and liabilities, net of acquisitions, was primarily due to an increase in inventories of $89.2 million and an increase in accounts receivable of $33.5 million, partially offset by an increase in accounts payable of $38.6 million. The increase in our inventories, net of acquired inventories, is primarily driven by elevated purchasing activity pursuant to strong customer demand and certain supply chain component constraints. The increase in accounts receivable, net of acquired receivables, was primarily due to increased revenue in the fourth quarter of 2021 compared to the fourth quarter of 2020 and timing of customer payments. The increase in accounts payable, net of acquired payables, is primarily due to higher purchases during the fourth quarter of 2021 compared to the fourth quarter of 2020 and payment timing.

Cash used in investing activities during 2021 consists of cash paid to acquire IMG in November 2021 of $268.8 million, net of cash acquired, capital expenditures of $20.8 million, and net proceeds from the purchase and sale of marketable securities of $0.5 million, partially offset by proceeds from the sale of property and equipment of $0.5 million.

Cash provided by financing activities during 2021 consists of net proceeds from our credit facilities of $90.9 million, which includes $1.9 million in fees incurred associated with effecting an amended and restated credit agreement in October 2021, and net proceeds from share-based compensation activity of $6.0 million.

Recent Accounting Pronouncements

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 1 – Organization and Summary of Significant Accounting Policies of our consolidated financial statements in Part IV, Item 15 of this report.