# ICHOR HOLDINGS, LTD. (ICHR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ICHOR HOLDINGS, LTD.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1652535/000162828024006527/ichr-20231229.htm
Accession: 0001628280-24-006527
Filing date: 2024-02-23
Report date: 2023-12-29
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/
Previous year: /company/ICHR/mda/fy2022/ (FY 2022)
Next year: /company/ICHR/mda/fy2024/ (FY 2024)

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 2022 to 2021, refer to Part II, Item 7. in our 2022 Annual Report on Form 10‑K, which was filed with the SEC on February 24, 2023.

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Overview

We are a leader in the design, engineering, and manufacturing of critical fluid delivery subsystems and components for semiconductor capital equipment. Our primary 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 29, 2023","","December 30, 2022"],["","(dollars in thousands, except per share amounts)"],["Net sales","$","811,120","","","$","1,280,069"],["Gross margin","12.7","%","","16.6","%"],["Gross margin, non-GAAP","13.4","%","","17.0","%"],["Operating margin","(1.3)","%","","6.7","%"],["Operating margin, non-GAAP","2.9","%","","9.8","%"],["Net income (loss)","$","(42,985)","","","$","72,804"],["Net income, non-GAAP","$","12,257","","","$","104,863"],["Diluted EPS","$","(1.47)","","","$","2.51"],["Diluted EPS, non-GAAP","$","0.42","","","$","3.62"]]
[[/GREPCENT_TABLE]]

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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 2023, we derived over 90% of our sales from the semiconductor capital equipment industry. Demand for semiconductor capital equipment can fluctuate significantly based on changes in regulatory intervention and 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 2023, our top three customers were Applied Materials, Lam Research, and ASML, accounting for a combined 82% of sales. Our customers often require reduced prices or other pricing, quality, or delivery commitments as a condition to their purchasing from us 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, Applied Materials, Lam Research, and ASML have been our customers for over a decade.

Acquisitions

In November 2021, we acquired IMG, a 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.

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Macroeconomic Conditions

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 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 and $2.3 million in 2022 and 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.

Components of Our Results of Operations

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

Sales

We generate sales primarily from the design, manufacture, and sale of subsystems and components 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. Sales are recognized at a point-in-time, upon "delivery," as such term is defined within the contract, which is generally at the time of shipment, as that is when control of the promised good has transferred.

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 variable cost structure, with fixed costs comprising a smaller percentage of cost of sales compared to variable costs. 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, during a cyclical downturn, fixed costs become a larger percentage of cost of sales, which could result in a decrease to gross margin. Additionally, since the gross margin on each of our products can differ, our overall gross margin as a percentage of our sales can change based on the mix of products we sell in any period.

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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.

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 intellectual property 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, professional fees, and overhead associated with our administrative staff. 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 as our business grows, due to an increase in employee-related costs, regulatory compliance, and accounting-related 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, Net

Interest expense, net of interest income on our cash deposits, 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. Borrowings under our credit facilities are generally subject to variable interest rates, which fluctuate depending on macroeconomic factors and can result in increased interest expense in periods of rising interest rates.

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

Income tax expense 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 is expected to continue through 2026. In 2023, the tax benefit resulting from our Singapore tax holiday, compared to the Singapore statutory tax rate, was approximately $5.0 million. During 2023, we recorded a valuation allowance against our U.S. state and federal deferred tax assets; therefore, we are unable to record income tax benefits related to our losses under GAAP losses. Income tax is also impacted by certain withholding taxes, stock option and restricted share unit (“RSU”) activity, and credit generation.

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Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with 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 described below.

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. The majority of our inventories are valued on a standard cost basis, which approximates actual costs on a first-in, first-out basis. The remainder of our inventories are valued on an average cost basis, which approximates actual costs on a first-in, first-out basis. Quarterly, we assess the value of our inventory and periodically write it down for excess quantities or obsolescence to its estimated net realizable value. This assessment is based on estimated future consumption compared to inventory quantities on-hand. The estimate for future consumption 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. During 2023, 2022, and 2021, we wrote down inventory determined to be excessive or obsolete by $9.8 million, $5.0 million, and $1.9 million, respectively. We believe the accounting estimate related to excess and obsolete inventory is a critical accounting estimate because it requires us to make assumptions about future inventory consumption and recoverability of cost, which can be uncertain. Changes in these estimates can have a material impact on our financial statements.

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 29, 2023","","December 30, 2022"],["","(in thousands)"],["Net sales","$","811,120","","","$","1,280,069"],["Cost of sales","707,724","","","1,068,205"],["Gross profit","103,396","","","211,864"],["Operating expenses:"],["Research and development","20,223","","","19,564"],["Selling, general, and administrative","79,334","","","88,572"],["Amortization of intangible assets","14,734","","","17,905"],["Total operating expenses","114,291","","","126,041"],["Operating income (loss)","(10,895)","","","85,823"],["Interest expense, net","19,379","","","11,056"],["Other expense (income), net","804","","","(563)"],["Income (loss) before income taxes","(31,078)","","","75,330"],["Income tax expense","11,907","","","2,526"],["Net income (loss)","$","(42,985)","","","$","72,804"]]
[[/GREPCENT_TABLE]]

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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 29, 2023","","December 30, 2022"],["Net sales","100.0","","","100.0"],["Cost of sales","87.3","","","83.4"],["Gross profit","12.7","","","16.6"],["Operating expenses:"],["Research and development","2.5","","","1.5"],["Selling, general, and administrative","9.8","","","6.9"],["Amortization of intangible assets","1.8","","","1.4"],["Total operating expenses","14.1","","","9.8"],["Operating income (loss)","(1.3)","","","6.7"],["Interest expense, net","2.4","","","0.9"],["Other expense (income), net","0.1","","","0.0"],["Income (loss) before income taxes","(3.8)","","","5.9"],["Income tax expense","1.5","","","0.2"],["Net income (loss)","(5.3)","","","5.7"]]
[[/GREPCENT_TABLE]]

Comparison of 2023 and 2022

Net Sales

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Net sales","$","811,120","","","$","1,280,069","","","$","(468,949)","","","(36.6)","%"]]
[[/GREPCENT_TABLE]]

The decrease in net sales from 2022 to 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 "Key Factors Affecting Our Business".

Net sales to U.S. customers decreased by $290.8 million in 2023 to $281.3 million. On a relative basis, net sales to U.S. customers as a percent of total net sales decreased from 44.7% in 2022 to 34.7% in 2023.

Net sales to international customers decreased by $178.1 million in 2023 to $529.8 million. On a relative basis, net sales to international customers as a percent of total net sales increased from 55.3% in 2022 to 65.3% in 2023.

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Cost of Sales and Gross Profit

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Cost of sales","$","707,724","","","$","1,068,205","","","$","(360,481)","","","(33.7","%)"],["Gross profit","$","103,396","","","$","211,864","","","$","(108,468)","","","(51.2","%)"],["Gross margin","12.7","%","","16.6","%","","","","-390","bps"]]
[[/GREPCENT_TABLE]]

The decrease in the gross amounts of cost of sales and gross profit from 2022 to 2023 was primarily due to the factors mentioned in the commentary above under the above heading, "Net Sales".

The 390 basis point decrease in gross margin from 2022 to 2023 was primarily due to reduced factory utilization as a result of lower volume due to reduced customer demand, as well as a lower revenue mix from sales of components, due to excess inventory levels at our customers. Additionally, increased excess and obsolete inventory expense unfavorably impacted gross margin by approximately 60 basis points.

Research and Development

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Research and development","$","20,223","","","$","19,564","","","$","659","","","3.4","%"]]
[[/GREPCENT_TABLE]]

The increase in research and development expenses from 2022 to 2023 was primarily due to increased materials and professional fees of $1.0 million for program costs related to the development of our new products, partially offset by lower employee related expenses, inclusive of share-based compensation expense, of $0.5 million.

Selling, General, and Administrative

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Selling, general, and administrative","$","79,334","","","$","88,572","","","$","(9,238)","","","(10.4)","%"]]
[[/GREPCENT_TABLE]]

The decrease in selling, general, and administrative expense from 2022 to 2023 was primarily due to reduced employee-related expenses, inclusive of share-based compensation expense, of $6.0 million, loss accruals recorded in 2022 relating to an expected settlement of employment-related legal matters totaling $4.1 million, and reduced occupancy-related costs of $0.8 million, partially offset by increased information technology systems and related consulting and software costs of $1.7 million.

Amortization of Intangible Assets

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Amortization of intangibles assets","$","14,734","","","$","17,905","","","$","(3,171)","","","(17.7)","%"]]
[[/GREPCENT_TABLE]]

The decrease in amortization expense from 2022 to 2023 was primarily due to certain intangible assets becoming fully amortized in 2023.

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Interest Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Interest expense, net","$","19,379","","","$","11,056","","","$","8,323","","","75.3","%"],["Weighted average borrowings outstanding","$","292,661","","","$","303,036","","","$","(10,375)","","","(3.4","%)"],["Weighted average borrowing rate","6.80","%","","3.37","%","","","","+ 343","bps"]]
[[/GREPCENT_TABLE]]

The increase in interest expense, net from 2022 to 2023 was due to increases in our weighted average borrowing rate, partially offset by decreases in our average amount borrowed. The increase in our weighted average borrowing rate was primarily due to an increase in 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, third, and fourth quarters of 2023.

Other Expense (Income), Net

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Other expense (income), net","$","804","","","$","(563)","","","$","1,367","","","n/m"]]
[[/GREPCENT_TABLE]]

The change in other expense (income), net from 2022 to 2023 was primarily due to currency exchange rate fluctuations during the year related to our local currency payables of our foreign operations.

Income Tax Expense

[[GREPCENT_TABLE]]
[["","Year Ended","","Change"],["","December 29, 2023","","December 30, 2022","","Amount","","%"],["","(dollars in thousands)"],["Income tax expense","$","11,907","","","$","2,526","","","$","9,381","","","371.4","%"],["Income before income taxes","$","(31,078)","","","$","75,330","","","$","(106,408)","","","n/m"],["Effective income tax rate","(38.3)","%","","3.4","%","","","","-4,170","bps"]]
[[/GREPCENT_TABLE]]

The increase in income tax expense from 2022 to 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. 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.

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Non-GAAP Financial Results

Management uses certain non-GAAP metrics to evaluate our operating and financial results. We believe the presentation of non-GAAP results is useful to investors for analyzing business trends and comparing performance to prior periods, along with enhancing investors’ ability to view our results from management’s perspective. Non-GAAP gross profit, operating income, and net income are defined as: gross profit, operating income (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 changes. 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 shares ("EPS") is defined as non-GAAP net income divided by weighted average diluted ordinary shares outstanding during the period. Non-GAAP gross margin and non-GAAP operating margin are defined as non-GAAP gross profit and non-GAAP operating income, respectively, divided by net sales.

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

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

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:

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 29, 2023","","December 30, 2022"],["","(dollars in thousands)"],["U.S. GAAP gross profit","$","103,396","","","$","211,864"],["Non-GAAP adjustments:"],["Share-based compensation","3,130","","","2,056"],["Fair value adjustment to inventory from acquisitions (1)","\u2014","","","2,492"],["Other (2)","2,191","","","933"],["Non-GAAP gross profit","$","108,717","","","$","217,345"],["U.S. GAAP gross margin","12.7","%","","16.6","%"],["Non-GAAP gross margin","13.4","%","","17.0","%"]]
[[/GREPCENT_TABLE]]

(1)As part of the purchase price allocation of our acquisition of 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.

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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 (loss), the most comparable GAAP measure, for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 29, 2023","","December 30, 2022"],["","(dollars in thousands)"],["U.S. GAAP operating income (loss)","$","(10,895)","","","$","85,823"],["Non-GAAP adjustments:"],["Amortization of intangible assets","14,734","","","17,905"],["Share-based compensation","17,338","","","13,924"],["Settlement loss (1)","\u2014","","","4,146"],["Fair value adjustment to inventory from acquisitions (2)","\u2014","","","2,492"],["Acquisition costs (3)","\u2014","","","296"],["Other (4)","2,298","","","1,144"],["Non-GAAP operating income","$","23,475","","","$","125,730"],["U.S. GAAP operating margin","(1.3)","%","","6.7","%"],["Non-GAAP operating margin","2.9","%","","9.8","%"]]
[[/GREPCENT_TABLE]]

(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 allocations of our acquisition of IMG, we recorded acquired-inventories at fair value, resulting in a fair value step-up. This amount represents the release of the step-up to cost of sales as acquired-inventories were sold.

(3)Included in this amount are transaction-related costs incurred in connection with our acquisition of IMG.

(4)Included in this amount are severance costs associated with our global reduction-in-force programs.

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The following table presents our unaudited non‑GAAP net income and non-GAAP diluted EPS and a reconciliation from net income (loss), 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."

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 29, 2023","","December 30, 2022"],["","(dollars in thousands, except per share amounts)"],["U.S. GAAP net income (loss)","$","(42,985)","","","$","72,804"],["Non-GAAP adjustments:"],["Amortization of intangible assets","14,734","","","17,905"],["Share-based compensation","17,338","","","13,924"],["Settlement loss (1)","\u2014","","","4,146"],["Fair value adjustment to inventory from acquisitions (2)","\u2014","","","2,492"],["Acquisition costs (3)","\u2014","","","296"],["Other (4)","2,298","","","1,144"],["Tax adjustments related to non-GAAP adjustments (5)","9,778","","","(7,848)"],["Tax expense from valuation allowance (6)","11,094","","","\u2014"],["Non-GAAP net income","$","12,257","","","$","104,863"],["U.S. GAAP diluted EPS","$","(1.47)","","","$","2.51"],["Non-GAAP diluted EPS","$","0.42","","","$","3.62"],["Shares used to compute diluted non-GAAP EPS","29,514,553","","28,963,031"]]
[[/GREPCENT_TABLE]]

(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 the 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, and expect to remain, in a three-year cumulative U.S. income position on a non-GAAP basis.

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.

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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 2023 with cash and cash equivalents of $80.0 million, a decrease of $6.5 million from 2022, which was primarily due to net payments on credit facilities of $52.5 million and capital expenditures of $15.5 million, partially offset by cash provided by operating activities of $57.6 million.

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

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 29, 2023","","December 30, 2022","","December 31, 2021"],["","(in thousands)"],["Cash provided by operating activities","$","57,632","","","$","31,453","","","$","15,272"],["Cash used in investing activities","(15,496)","","","(28,933)","","","(289,585)"],["Cash provided by (used in) financing activities","(48,651)","","","8,455","","","96,909"],["Net increase (decrease) in cash","$","(6,515)","","","$","10,975","","","$","(177,404)"]]
[[/GREPCENT_TABLE]]

Our cash provided by operating activities of $57.6 million during 2023 consisted of net loss of $43.0 million, offset by net non-cash charges of $61.7 million, which consisted primarily of depreciation and amortization of $34.6 million, share-based compensation expense of $17.3 million, and deferred income taxes of $9.3 million, and a decrease in our net operating assets and liabilities of $38.9 million. Deferred taxes consists primarily of $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 $38.9 million was primarily due to a decrease in accounts receivable and inventories of $69.6 million and $37.8 million, respectively, partially offset by a decrease in accounts payable and accrued and other liabilities of $51.0 million and $27.7 million, respectively.

Cash provided by operating activities was $31.5 million during 2022. The increase in cash provided by operating activities from 2022 to 2023 was primarily due to favorable changes in the balances of accounts receivable and inventories during 2023 compared to 2022, partially offset by less aggregate net income (loss) and net non-cash charges and unfavorable changes in the balance of accrued and other liabilities during 2023 compared to 2022.

Cash used in investing activities during 2023 and 2022 consisted of capital expenditures. The reduction in capital expenditures from 2023 to 2022 was due to reduced factory capacity expansion projects.

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Cash used in financing activities during 2023 consisted of net payments from our credit facilities of $52.5 million, partially offset by net proceeds from share-based compensation activity of $3.8 million. Cash provided by financing activities during 2022 consisted of net proceeds from our credit facilities of $7.5 million and net proceeds from share-based compensation activity of $1.0 million.The change in net payments on, and net proceeds from, our 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 2022 to 2023 was due to increased stock option exercises.

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”).

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.