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As filed with the Securities and Exchange Commission on November 29, 2016

Registration No. 333-214588

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ICHOR HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   3674   Not Applicable

(State or other jurisdiction

of incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

3185 Laurelview Ct.

Fremont, California 94538

(510) 897-5200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Thomas M. Rohrs

Chairman and Chief Executive Officer

Ichor Systems, Inc.

3185 Laurelview Ct.

Fremont, California 94538

(510) 897-5200

(Name, address, including zip code and telephone number, including area code, of agent for service)

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Robert M. Hayward, P.C.

Kirkland & Ellis LLP

300 North LaSalle

Chicago, Illinois 60654

(312) 862-2000

 

Tad J. Freese

Latham & Watkins LLP

140 Scott Drive

Menlo Park, California 94025

(650) 328-4600

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  

If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated file” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer     Accelerated filer     Non-accelerated filer      Smaller reporting company  
    (Do not check if a smaller reporting company)   

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities Offered   

Amount

to be
registered(1)

   Estimated
maximum
offering price
per share(2)
   Estimated
maximum
aggregate
offering price(2)
   Amount of
registration fees(3)

Ordinary shares, par value $0.0001 per share

   6,612,500    $14.00    $92,575,000    $10,730

 

(1) Includes 862,500 ordinary shares that may be issuable upon exercise of an option to purchase additional shares granted to the underwriters.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) promulgated under the Securities Act of 1933, as amended.
(3) $9,997 of this amount was previously paid in connection with the filing of this Registration Statement.

The registrant hereby amends this Registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated November 29, 2016

PROSPECTUS

5,750,000 Shares

 

LOGO

ICHOR HOLDINGS, LTD.

Ordinary Shares

This is the initial public offering of ordinary shares of Ichor Holdings, Ltd. We are selling 5,750,000 ordinary shares.

Prior to this offering, there has been no public market for our ordinary shares. The initial public offering price of our ordinary shares is expected to be between $12.00 and $14.00 per share. We have applied to list our ordinary shares on the NASDAQ Global Select Market under the symbol “ICHR.”

Investing in our ordinary shares involves risks that are described in the “ Risk Factors ” section beginning on page 13 of this prospectus.

 

 

We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended, or the Securities Act, and, as such, are allowed to provide in this prospectus more limited disclosures than an issuer that would not so qualify. In addition, for so long as we remain an emerging growth company, we will qualify for certain limited exceptions from investor protection laws such as the Sarbanes-Oxley Act of 2002. Please read “Risk Factors—Risks Related to this Offering and Ownership of Our Ordinary Shares—We are an ‘emerging growth company’ and may elect to comply with reduced public company reporting requirements, which could make our ordinary shares less attractive to investors.”

 

     Per Share        Total  

Public offering price

   $                      $                

Underwriting discounts(1)

   $           $     

Proceeds, before expenses, to us

   $           $     

Proceeds to selling shareholders(2)

   $           $     

 

(1) We refer you to “Underwriting” beginning on page 137 of this prospectus for additional information regarding underwriting compensation.
(2) Assumes full exercise of the underwriters’ option to purchase additional shares.

The underwriters may also exercise their option to purchase up to 862,500 additional ordinary shares from the selling shareholders named in this prospectus at the initial public offering price, less the underwriting discount, for a period of 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission, or SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The ordinary shares will be ready for delivery on or about                     , 2016.

 

Deutsche Bank Securities   Stifel
RBC Capital Markets   Cowen and Company   Needham & Company

The date of the prospectus is                     , 2016.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     13   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     36   

ENFORCEMENT OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS

     37   

USE OF PROCEEDS

     38   

DIVIDEND POLICY

     39   

CAPITALIZATION

     40   

DILUTION

     42   

SELECTED CONSOLIDATED FINANCIAL DATA

     44   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     47   

BUSINESS

     71   

MANAGEMENT

     85   

EXECUTIVE COMPENSATION

     91   

PRINCIPAL AND SELLING SHAREHOLDERS

     103   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     105   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     108   

DESCRIPTION OF SHARE CAPITAL

     110   

SHARES ELIGIBLE FOR FUTURE SALE

     128   

MATERIAL TAX CONSIDERATIONS

     130   

UNDERWRITING

     137   

LEGAL MATTERS

     144   

EXPERTS

     144   

WHERE YOU CAN FIND MORE INFORMATION

     144   

Neither we, the selling shareholders nor the underwriters have authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the selling shareholders are offering to sell, and seeking offers to buy, our ordinary shares only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of our ordinary shares. Our business, financial condition, results of operations and prospects may have changed since that date.

INDUSTRY AND MARKET DATA

We obtained the market and industry data and other statistical information used throughout this prospectus from our own research, surveys or studies conducted by third parties, independent industry or general publications and other published independent sources. In particular, we have based much of our discussion concerning the industry and market in which we operate on independent data, research opinions and viewpoints published by Gartner, Inc., or Gartner. While we believe that each of these sources is reliable, neither we nor the underwriters have independently verified the accuracy or completeness of such data. Similarly, we believe our internal research is reliable, but it has not been verified by any independent sources.

 

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The reports by Gartner, or Gartner Reports, described herein represent research opinion or viewpoints published as part of a syndicated subscription service by Gartner, and are not representations of fact. Each of the following Gartner Reports speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice:

 

   

Gartner, Forecast: Semiconductor Wafer-Level Manufacturing Equipment, Worldwide, 3Q16 Update, Authors: Bob Johnson, Klaus Rinnen, David Christensen, Takashi Ogawa, Jim Walker and Barbara Van, October 6, 2016.

 

   

Gartner, Forecast: Semiconductor Wafer-Level Manufacturing Equipment, Worldwide, 4Q14 Update, Authors: Dean Freeman, Bob Johnson, Klaus Rinnen, Mark Stromberg, David Christensen, Takashi Ogawa and Barbara Van, December 18, 2014.

 

   

Gartner, Market Share Analysis: Semiconductor Wafer-Level Manufacturing Equipment, Worldwide, 2015, Authors: Bob Johnson, Takashi Ogawa, Barbara Van, David Christensen, April 19, 2016.

TRADEMARKS AND TRADE NAMES

This prospectus includes our trademarks and service marks which are protected under applicable intellectual property laws and are the property of Ichor Holdings, Ltd. or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights, of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

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PROSPECTUS SUMMARY

The following is a summary of material information discussed in this prospectus. This summary may not contain all the details concerning our business, our ordinary shares or other information that may be important to you. You should carefully review this entire prospectus, including the “Risk Factors” section and our financial statements and the notes thereto included elsewhere in this prospectus, before making an investment decision. As used in this prospectus, unless the context otherwise indicates, the references to “Ichor,” “our business,” “we,” “our,” or “us” or similar terms refer to Ichor Holdings, Ltd. and its consolidated subsidiaries. Unless otherwise indicated or the context otherwise requires, financial and operating data in this prospectus reflects the consolidated business and operations of Ichor Holdings, Ltd. and its wholly-owned subsidiaries and excludes discontinued operations, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Business.”

Company Overview

We are a leader in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment. Our primary offerings include gas and chemical delivery subsystems, collectively known as fluid delivery 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 subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as electroplating and cleaning. We also manufacture certain components for internal use in fluid delivery systems and for direct sales to our customers. 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 process. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes. Historically, semiconductor original equipment manufacturers, or OEMs, internally designed and manufactured the fluid delivery subsystems used in their process tools. Currently, most OEMs outsource the design, engineering and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are also increasingly 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 fixed costs and development time, as well as provided significant growth opportunities for specialized subsystems suppliers like us.

Our goal is to be the premier supplier of outsourced fluid delivery subsystems to OEMs engaged in manufacturing capital equipment to produce semiconductors and to leverage our technology into new markets. To achieve this goal, we engage with our customers early in their design and development processes and utilize our deep engineering resources and operating expertise to jointly create innovative and advanced solutions that meet the current and future

 

 

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needs of our customers. These collaborations frequently involve our engineers working at our customers’ sites and serving as an extension of our customers’ product design teams. We employ this approach with two of the largest manufacturers of semiconductor capital equipment in the world. We believe this approach enables us to design subsystems that meet the precise specifications our customers demand, allows us to often be the sole supplier of these subsystems during the initial production ramp and positions us to be the preferred supplier for the full five to ten-year lifespan of the process tool.

The broad technical expertise of our engineering team, coupled with our early customer engagement approach, enables us to offer innovative and reliable solutions to complex fluid delivery challenges. With two decades of experience developing complex fluid delivery subsystems and meeting the constantly-changing production requirements of leading semiconductor OEMs, we have developed expertise in fluid delivery that we offer to our OEM customers. In addition, our capital efficient model and the integration of our business systems with those of our customers provides us the flexibility to fulfill increased demand and meet changing customer requirements with minimum additional capital outlay. With an aim to superior customer service, we have a global footprint with many facilities strategically located in close proximity to our customers. We have established long standing relationships with top tier OEM customers, including Lam Research Corporation and Applied Materials, Inc., which were our two largest customers by sales in fiscal 2015.

We grew our sales by 16.7% from $249.1 million in fiscal 2014 to $290.6 million in fiscal 2015, and by 21.2% from $226.3 million in the nine months ended September 25, 2015 to $274.3 million in the nine months ended September 23, 2016. We generated net income from continuing operations of $5.8 million in fiscal 2014, $12.8 million in fiscal 2015, $12.8 million in the nine months ended September 25, 2015 and $12.8 million in the nine months ended September 23, 2016. We generated adjusted net income from continuing operations of $11.7 million in fiscal 2014, $20.2 million in fiscal 2015, $17.9 million in the nine months ended September 25, 2015 and $19.8 million in the nine months ended September 23, 2016. Adjusted net income is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States, or GAAP. See note 3 to “Prospectus Summary—Summary Consolidated Financial Data” for a discussion of adjusted net income, an accompanying presentation of the most directly comparable GAAP financial measure, net income, and a reconciliation of the differences between adjusted net income and net income.

Our Industry

We design, engineer and manufacture critical fluid delivery subsystems for semiconductor capital equipment.

The Semiconductor Device Industry is Large and Growing

Semiconductors are essential building blocks in all electronic systems. In recent years, semiconductor growth has been driven largely by increasing global demand for mobile devices and computer network systems. As consumers increasingly become accustomed to end products with higher functionality, better power management and smaller form factors, the demand for advanced semiconductor devices is expected to grow. Gartner estimates the semiconductor device market is expected to grow to $350.1 billion in 2017 from $315.0 billion in 2013.

 

 

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Semiconductor Manufacturing Process is Complex and Constantly Evolving

Semiconductor manufacturing is complex and capital-intensive, requiring hundreds of process steps utilizing specialized manufacturing equipment. Technological advancements in semiconductor manufacturing have traditionally led to a continual increase in the number of transistors in a given area of silicon, enabling smaller and more feature-rich devices. As a result, semiconductor device manufacturers must continuously refine their manufacturing processes and invest in next-generation manufacturing equipment that can produce semiconductors with a smaller chip size or an increasing number of features. Gartner estimates that the global spend on wafer fabrication equipment will grow to $35.7 billion in 2017 from $27.3 billion in 2013.

Changing Semiconductor Manufacturing Processes are Increasing the Need for Fluid Delivery Systems

A number of innovations in the design and manufacturing of semiconductors are being adopted in order to meet the continuing miniaturization and functionality demands, including multiple patterning, tri-gate, or FinFET, transistors and three-dimensional, or 3D, semiconductors, as well as advanced packaging. Each of these innovations increases the number of process steps that a wafer must pass through during the manufacturing process, in particular, the number of etch, deposition and CMP steps. For example, according to Gartner, changes in the market for process requirements will drive an average annual growth in etch spending of 15% and chemical vapor deposition, or CVD, spending of 15% from 2013 to 2017. This growth benefits us directly as the majority of our gas delivery subsystems are used in etch and CVD processes. Also according to Gartner, spending on chemical-mechanical planarization, or CMP, will grow at an average annual rate of 13% over the same period. This is the primary step where chemical delivery systems are used.

Semiconductor Capital Equipment Industry is Concentrated

The semiconductor capital equipment industry is dominated by a few large OEMs which focus on developing specialized process tools for the many complex manufacturing process steps. As semiconductor manufacturing has become more technically advanced and capital intensive in recent years, the semiconductor equipment industry has experienced significant consolidation in order for the remaining OEMs to leverage economies of scale for delivering larger and more complex tools. As a result, most major semiconductor equipment markets are now typically supplied by a limited number of major global suppliers. According to Gartner, the top five semiconductor equipment OEMs by sales in 2015 represented 67% of the total market for wafer fabrication equipment.

Semiconductor Capital Equipment OEMs Outsource Critical Subsystems including Fluid Delivery Subsystems

OEMs are increasingly outsourcing the development, design, prototyping, engineering, manufacturing, assembly and testing of various critical subsystems to specialized independent suppliers. We believe that subsystem outsourcing has allowed OEMs to benefit from the highly specialized engineering, design and manufacturing skills of the subsystem suppliers while focusing internal resources on their own most critical value-added subsystems and processes. This outsourcing trend has been particularly applicable to the fluid delivery subsystem market. Over the past decade, as gas delivery subsystems have become more complex, most OEMs have increasingly outsourced the design, engineering and manufacturing of these subsystems to third party suppliers. OEMs are now also beginning to outsource chemical delivery subsystems, creating an additional opportunity for suppliers with fluid delivery capabilities.

 

 

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Our Competitive Strengths

As a leader in the fluid delivery industry, we believe that our key competitive strengths include the following:

Deep Fluids Engineering Expertise

We believe that our engineering team, comprised of chemical engineers, mechanical engineers and software and systems engineers, has positioned us to expand the scope of our solutions, provide innovative subsystems and strengthen our incumbent position at our OEM customers. Our engineering team acts as an extension of our customers’ product development teams, providing our customers with technical expertise that is outside of their core competencies.

Early Engagement with Customers on Product Development

We seek to engage with our customers and potential customers very early in their process for new product development. We believe this approach enables us to collaborate on product design, qualification, manufacturing and testing in order to provide a comprehensive, customized solution. Through early engagement during the complex design stages, our engineering team gains early insight into our customers’ technology roadmaps which enables us to pioneer innovative and advanced solutions.

Long History and Strong Relationships with Top Tier Customers

We have established deep relationships with top tier OEMs such as Lam Research and Applied Materials, which were our largest customers by sales in fiscal 2015. Our customers are global leaders by sales and are considered consolidators in the increasingly concentrated semiconductor capital equipment industry. Our existing relationships with our customers have enabled us to effectively compete for new fluid delivery subsystems for our customers’ next generation products in development.

Operational Excellence with Scale to Support the Largest Customers

Over our 17 year history of designing and building gas delivery systems, we have developed deep capabilities in operations. We have strategically located our Austin, Texas and Tualatin, Oregon manufacturing facilities near our customers’ locations in order to provide fast and efficient responses to new product introductions, and accommodate configuration or design changes late in the manufacturing process. We have also built significant capacity in Singapore to support high volume products. In addition to providing high quality and reliable fluid delivery subsystems, one of our principal focuses is delivering short lead times to allow our customers the maximum flexibility in their production processes.

Capital Efficient and Scalable Business Model

In general, our business is not capital intensive and we are able to grow sales with a low investment in property, plant and equipment and low levels of working capital. In 2014 and 2015, our total capital expenditures were $3.5 million and $1.4 million, respectively. In particular, our close supplier relationships also enable us to scale production quickly without maintaining significant inventory on hand. The semiconductor capital equipment market has

 

 

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historically been cyclical. We have structured our business to minimize fixed manufacturing overhead and operating expenses to enable us to grow net income at a higher rate than sales during periods of growth. Conversely, our low fixed cost approach allows us to minimize the impact of cyclical downturns on our net income, but results in a smaller increase in gross margin as a percentage of sales in times of increased demand.

The semiconductor capital equipment market has historically been cyclical. We have structured our business to minimize fixed manufacturing overhead and operating expenses to enable us to grow net income at a higher rate than sales during periods of growth. For example, from 2013 to 2015, sales grew at a compound annual growth rate, or CAGR, of 15.2% while adjusted net income grew at a CAGR of 57.9%. Conversely, our low fixed cost approach allows us to minimize the impact of cyclical downturns on our net income, but results in a smaller increase in gross margin as a percentage of sales in times of increased demand.

Our Growth Strategy

Our objective is to enhance our position as a leader in providing fluid delivery solutions, including subsystem and tool refurbishment, to our customers by leveraging our core strengths. The key elements of our growth strategy are:

Grow Our Market Share within Existing Customer Base

We intend to grow our position with existing customers by continuing to leverage our specialized engineering talent and early collaboration approach with OEMs to foster long-term relationships. Each of our customers produces many different process tools for various process steps. At each customer, we are the outsourced supplier of fluid delivery subsystems for a subset of their entire process tool offerings. We are constantly looking to expand our relationships and to capture additional share at our existing customers. We believe that our early collaborative approach with customers positions us to deliver innovative and dynamic solutions, offer timely deployment and meet competitive cost targets, further enhancing our brand reputation.

Grow Our Total Available Market at Existing Customers with Expanded Product Offerings

We continue to work with our existing core customers on additional opportunities, including chemical delivery, one of our important potential growth areas. We believe that wet processes, such as CMP and clean and electro chemical deposition, or ECD, that require precise chemical delivery are currently an underpenetrated market opportunity for us. By leveraging our existing customer relationships and strong reputation in fluid mechanics, we intend to increase our chemical delivery module market share as well as to introduce additional related products. In April, 2016, we acquired Ajax-United Patterns & Molds, Inc., or Ajax, and its subsidiaries, or the Ajax Acquisition, to add chemical delivery subsystem capabilities with our existing customers. The Ajax Acquisition allows us to manufacture and assemble the complex plastic and metal products required by the medical, biomedical, semiconductor and data communication equipment industries.

Expand Our Total Customer Base Within Fluid Delivery Market

We are actively in discussions with new customers that are considering outsourcing their gas and chemical delivery needs. As an example, we were recently selected as the

 

 

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manufacturing partner for a provider of etch process equipment that was previously not a customer of ours.

Expand Into Emerging Opportunities

We plan to leverage our existing manufacturing platform and engineering expertise to develop or acquire new products and solutions for attractive, high growth applications within new markets such as medical, research, oil and gas and energy. We believe these efforts will diversify our sales exposure while capitalizing on our current capabilities.

Continue to Improve Our Manufacturing Process Efficiency

We continually strive to improve our processes to reduce our manufacturing process cycle time, improve our ability to respond to last minute design or configuration changes, reduce our manufacturing costs and reduce our inventory requirements in order to improve profitability and make our product offerings more attractive to new and existing customers.

Risk Factors

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. These risks include, but are not limited to:

 

   

Our business depends significantly on expenditures by manufacturers in the semiconductor capital equipment industry, which, in turn, is dependent upon the semiconductor device industry. When that industry experiences cyclical downturns, demand for our products and services is likely to decrease, which would likely result in decreased sales. We may also be forced to reduce our prices during cyclical downturns without being able to proportionally reduce costs.

 

   

We rely on a very small number of OEM customers for a significant portion of our sales. Any adverse change in our relationships with these customers could materially adversely affect our business, financial condition and results of operations.

 

   

Our customers exert a significant amount of negotiating leverage over us, which may require us to accept lower prices and gross margins or increased liability risk in order to retain or expand our market share with them.

 

   

The industries in which we participate are highly competitive and rapidly evolving, and if we are unable to compete effectively, our business, financial condition and results of operations could be materially adversely affected.

 

   

An active trading market for our ordinary shares may not develop, and you may not be able to sell your ordinary shares at or above the initial public offering price.

 

   

The price of our ordinary shares may fluctuate substantially.

 

   

We are a “controlled company” and, as a result, we are exempt from obligations to comply with certain corporate governance requirements.

Corporate Information

Our principal executive offices are located at 3185 Laurelview Ct., Fremont, California, 94538, and our telephone number at that address is (510) 897-5200. Our website address is

 

 

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www.ichorsystems.com . The reference to our website is a textual reference only. We do not incorporate the information on our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.

JOBS Act

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of the last day of the fiscal year following the fifth anniversary of the completion of this offering, the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, the date on which we are deemed to be a large accelerated filer (this means the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year), or the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation in this prospectus and may elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, Section 107(b) of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to take advantage of such extended transition period under Section 107(b).

 

 

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THE OFFERING

 

Ordinary shares offered by us

5,750,000 shares

 

Ordinary shares to be outstanding immediately after this offering

23,600,009 shares

 

Option to purchase additional shares

The underwriters have the option to purchase up to an additional 862,500 ordinary shares from the selling shareholders, at the public offering price, less the underwriting discount, within 30 days of the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds from this offering to us will be approximately $67.0 million, assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to obtain additional capital to fund our operations and growth, to create a public market for our ordinary shares and to facilitate our future access to the public equity markets. We expect to use approximately $40.0 million of the net proceeds of this offering to repay outstanding borrowings under our Credit Facilities (as defined herein) and the remainder for general corporate purposes, which we expect to include funding working capital, operating expenses and the selective pursuit of business development opportunities. At this time, we have not specifically identified a large single use for which we intend to use the net proceeds, and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us.

 

  If the underwriters exercise their option to purchase additional shares, we will not receive any proceeds from the sale of ordinary shares by the selling shareholders.

 

Dividend policy

We do not anticipate declaring or paying any cash dividends on our ordinary shares for the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions (including in the credit agreements governing our Credit Facilities), capital requirements,

 

 

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business prospects, legal restrictions and other factors our board of directors may deem relevant. See “Dividend Policy.”

 

Proposed symbol

We have applied to list our ordinary shares on the NASDAQ Global Select Market, or NASDAQ, under the symbol “ICHR.”

Unless otherwise indicated, all information in this prospectus relating to the number of ordinary shares to be outstanding immediately after this offering:

 

   

assumes the effectiveness of our amended and restated memorandum and articles of association, the conversion of all outstanding Series A preferred shares into 142,728,221 ordinary shares and the subsequent 1 for 8.053363 reverse split of our ordinary shares, each of which will occur upon or prior to the completion of this offering;

 

   

excludes (i) an aggregate of 2,313,284 ordinary shares issuable upon the exercise of options that were issued to our employees under the Ichor Holdings, Ltd. 2012 Equity Incentive Plan (the “2012 Incentive Plan”) and (ii) an aggregate of 232,649 unvested restricted shares that were issued under the 2012 Incentive Plan, 120,253 of which will vest upon completion of this offering, in each case as of September 23, 2016;

 

   

excludes an aggregate of 1,888,000 ordinary shares reserved for issuance under the equity compensation plan we intend to adopt in connection with this offering;

 

   

assumes an initial public offering price of $13.00 per share, which is the midpoint of the initial public offering price range indicated on the cover of this prospectus; and

 

   

assumes no exercise of the underwriters’ option to purchase additional shares from the selling shareholders.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our historical consolidated financial data and should be read together with the sections in this prospectus entitled “Selected financial data” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the consolidated statements of operations data for the years ended December 26, 2014 and December 25, 2015 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statements of operations data for the nine months ended September 25, 2015 and September 23, 2016 and the consolidated balance sheet data as of September 23, 2016 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for the fair statement of our unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

    Year Ended     Nine Months Ended  
    December 26,
2014
    December 25,
2015
    September 25,
2015
    September 23,
2016
 
                (Unaudited)  
    (In thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

       

Net sales

  $ 249,087      $ 290,641      $ 226,282      $ 274,339   

Cost of sales(1)

    212,747        242,087        188,197        230,349   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    36,340        48,554        38,085        43,990   

Operating expenses:

       

Research and development(1)

    3,915        4,813        3,469        4,229   

Selling, general and administrative(1)

    22,465        24,729        18,084        20,329   

Amortization of intangible assets

    6,411        6,411        4,808        5,210   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,791        35,953        26,361        29,768   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    3,549        12,601        11,724        14,222   

Interest expense

    3,118        3,831        2,898        3,245   

Other expense (income), net

    253        (46     (42     (384
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    178        8,816        8,868        11,361   

Income tax benefit from continuing
operations(2)

    (5,604     (3,991     (3,924     (1,427
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    5,782        12,807        12,792        12,788   

Income (loss) from discontinued operations before taxes

    132        (7,406     (718     (4,013

Income tax expense (benefit) from discontinued operations

    (254     (225     (326     26   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

    386        (7,181     (392     (4,039
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 6,168      $ 5,626      $ 12,400      $ 8,749   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

       

Adjusted net income from continuing operations(3)

  $ 11,688      $ 20,249      $ 17,909      $ 19,758   

 

 

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            As of September 23, 2016  
     As of
December 25,
2015
     Actual      Pro Forma(5)      Pro Forma As
Adjusted(6)(7)
 
           

(Unaudited)

     (Unaudited)      (Unaudited)  
     (In thousands)  

Consolidated Balance Sheet Data:

           

Cash and restricted cash

   $ 24,188       $ 25,304       $ 25,304       $ 52,297   

Working capital

     24,860         35,626         35,626         62,619   

Total assets

     198,023         244,101         244,101         271,094   

Total long-term debt(4)

     65,000         81,260         81,260         41,260   

Preferred stock

     142,728         142,728                   

Total shareholders’ equity

     74,678         84,772         84,772         151,765   

 

(1) Share-based compensation is included in the consolidated statement of operations data above was as follows:

 

     Year Ended      Nine Months Ended  
     December 26,
2014
     December 25,
2015
     September 25,
2015
     September 23,
2016
 
                   (Unaudited)  
     (In thousands)  

Share-Based Compensation Expense:

           

Cost of sales

   $ 33       $ 105       $ 22       $ 12   

Research and development

     51         46         35         27   

Selling general and administrative

     927         967         750         1,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 1,011       $ 1,118       $ 807       $ 1,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Income tax expense (benefit) consists primarily of federal and state income tax benefits in the United States offset in part by income tax expense in certain foreign jurisdictions. Our historical income tax benefit resulted from losses recorded in the United States, where we incur the majority of our corporate expenses and which was being fully benefited through the third quarter of 2015 as a result of acquired deferred tax liabilities, offset by income in Singapore, which has no tax expense as a result of a tax holiday through 2019. Starting in the fourth quarter of 2015, the Company’s tax provision consisted primarily of foreign based tax provisions primarily in Malaysia and Scotland. We are no longer benefiting from losses generated in the United States, with the exception of the third quarter of 2016 during which we recorded a one-time tax benefit of $2.2 million related to the Ajax acquisition.
(3) Adjusted net income is a financial measure that is not calculated in accordance with GAAP. We define adjusted net income as net income adjusted to exclude amortization of intangible assets, share-based compensation expense, non-recurring tax benefits associated with the acquisition of Ajax and other non-recurring expenses, net of the tax impact of such adjustments. Other non-recurring expenses include (i) expenses incurred in connection with preparation for an initial public offering contemplated in 2014 and 2015, (ii) consulting fees paid to Francisco Partners Consulting, LLC, an entity which is owned and controlled by individual operations executives who are associated with our principal shareholders but in which such shareholders hold no interest, (iii) the bonuses paid to members of our management in connection with the cash dividend paid by us in August 2015 and (iv) acquisition- related charges. We have provided below a reconciliation of adjusted net income to net income, the most directly comparable GAAP financial measure. Adjusted net income should not be considered as an alternative to net income or any other measure of financial performance calculated and presented in accordance with GAAP. In addition, our adjusted net income measure may not be comparable to similarly titled measures of other organizations as they may not calculate adjusted net income in the same manner as we calculate the measure.

 

 

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     The following table presents our adjusted net income from continuing operations and a reconciliation from net income from continuing operations, the most comparable GAAP measure, for the periods indicated:

 

     Year Ended      Nine Months Ended  
     December 26,
2014
     December 25,
2015
     September 25,
2015
     September 23,
2016
 
                  

(Unaudited)

 
     (In thousands)  

Net income from continuing operations

   $ 5,782       $ 12,807       $ 12,792       $ 12,788   

Non-GAAP adjustments:

           

Amortization of intangible assets

     6,411         6,411         4,808         5,210   

Share-based compensation

     1,011         1,118         807         1,345   

Other non recurring expenses

     1,905         4,154         2,402         2,753   

Tax benefit related to Ajax acquisition

                             (2,271

Tax adjustment related to non-GAAP adjustments(a)

     (3,421      (4,241      (2,900      (67
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income for continuing operations

   $ 11,688       $ 20,249       $ 17,909       $ 19,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) The difference between (i) the adjustments to our tax provision (benefit) made in connection with the other non-GAAP adjustments made to determine adjusted net income and (ii) the GAAP tax provision (benefit) for the years ended December 26, 2014 and December 25, 2015 and for the nine months ended September 25, 2015 and September 23, 2016 is ($2,183), $250, ($1,024) and ($1,360), respectively.

 

     Adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for net income or any of our other operating results reported under GAAP. Adjusted net income excludes some costs, namely, non-cash share-based compensation, amortization of intangible assets and other non-recurring expenses, and therefore it does not reflect the non-cash impact of such expenses. Other companies may calculate adjusted net income differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our adjusted net income as a tool for comparison.

 

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

 

(4) Includes on an actual basis, $66.3 million outstanding under our term loan facility and $15.0 million outstanding under our revolving credit facility. The outstanding amount under our term loan facility reflected in our consolidated financial statements included elsewhere in this prospectus is net of $2.0 million of debt discount.
(5) Reflects the conversion of all outstanding shares of our preferred stock into 142,728,221 ordinary shares and the subsequent 1 for 8.053363 reverse split of our ordinary shares to be effective upon or prior to the completion of this offering.
(6) Reflects (i) all adjustments included in the pro forma column, and (ii) the sale by us of 5,750,000 ordinary shares in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds as described in “Use of Proceeds.”
(7) Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted amount of each of cash and restricted cash, working capital, total assets and total shareholders’ equity by approximately $5.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

This offering and an investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. As a result, the trading price of our ordinary shares could decline, and you could lose all or part of your investment in our ordinary shares.

Risks Related to Our Business

Our business depends significantly on expenditures by manufacturers in the semiconductor capital equipment industry, which, in turn, is dependent upon the semiconductor device industry. When that industry experiences cyclical downturns, demand for our products and services is likely to decrease, which would likely result in decreased sales. We may also be forced to reduce our prices during cyclical downturns without being able to proportionally reduce costs.

Our business, financial condition and results of operations depend significantly on expenditures by manufacturers in the semiconductor capital equipment industry. In turn, the semiconductor capital equipment industry depends upon the current and anticipated market demand for semiconductor devices. The semiconductor device industry is subject to cyclical and volatile fluctuations in supply and demand and in the past has periodically experienced significant downturns, which often occur in connection with declines in general economic conditions, and which have resulted in significant volatility in the semiconductor capital equipment industry. The semiconductor device industry has also experienced recurring periods of over-supply of products that have had a severe negative effect on the demand for capital equipment used to manufacture such products. We have experienced, and anticipate that we will continue to experience, significant fluctuations in customer orders for our products and services as a result of such fluctuations and cycles. Any downturns in the semiconductor device industry could have a material adverse effect on our business, financial condition and results of operations.

In addition, we must be able to appropriately align our cost structure with prevailing market conditions, effectively manage our supply chain and motivate and retain employees, particularly during periods of decreasing demand for our products. We may be forced to reduce our prices during periods of decreasing demand. While we operate under a low fixed cost model, we may not be able to proportionally reduce all of our costs if we are required to reduce our prices. If we are not able to timely and appropriately adapt to the changes in our business environment, our business, financial condition and results of operations will be materially adversely affected. The cyclical and volatile nature of the semiconductor device industry and the absence of long-term fixed or minimum volume contracts make any effort to project a material reduction in future sales volume difficult.

We rely on a very small number of OEM customers for a significant portion of our sales. Any adverse change in our relationships with these customers could materially adversely affect our business, financial condition and results of operations.

The semiconductor capital equipment industry is highly concentrated and has experienced significant consolidation in recent years. As a result, a relatively small number of OEM customers have historically accounted for a significant portion of our sales, and we expect this trend to continue for the foreseeable future. For fiscal 2015, our top two customers accounted

 

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for approximately 57% and 38%, respectively, of our total sales, and we expect that our sales will continue to be concentrated among a very small number of customers. We do not have any long-term contracts that require customers to place orders with us in fixed or minimum volumes. Accordingly, the success of our business depends on the success of our customers and those customers and other OEMs continuing to outsource the manufacturing of critical subsystems and process solutions to us. Because of the small number of OEMs in the markets we serve, a number of which are already our customers, it would be difficult to replace lost sales resulting from the loss of, or the reduction, cancellation or delay in purchase orders by, any one of these customers, whether due to a reduction in the amount of outsourcing they do, their giving orders to our competitors, their acquisition by an OEM who is not a customer or with whom we do less business, or otherwise. We have in the past lost business from customers for a number of these reasons. If we are unable to replace sales from customers who reduce the volume of products and services they purchase from us or terminate their relationship with us entirely, such events could have a material adverse impact on our business, financial condition and results of operations.

Additionally, if one or more of the largest OEMs were to decide to single- or sole-source all or a significant portion of manufacturing and assembly work to a single equipment manufacturer, such a development would heighten the risks discussed above.

Our customers exert a significant amount of negotiating leverage over us, which may require us to accept lower prices and gross margins or increased liability risk in order to retain or expand our market share with them.

By virtue of our largest customers’ size and the significant portion of our sales that is derived from them, as well as the competitive landscape, our customers are able to exert significant influence and pricing pressure in the negotiation of our commercial arrangements and the conduct of our business with them. 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. Our customers’ negotiating leverage also can result in customer arrangements that may contain significant liability risk to us. For example, some of our customers require that we provide them indemnification against certain liabilities in our arrangements with them, including claims of losses by their customers caused by our products. Any increase in our customers’ negotiating leverage may expose us to increased liability risk in our arrangements with them, which, if realized, may have a material adverse effect on our business, financial condition and results of operations. In addition, new products often carry lower gross margins than existing products for several quarters following their introduction. If we are unable to retain and expand our business with our customers on favorable terms, or if we are unable to achieve gross margins on new products that are similar to or more favorable than the gross margins we have historically achieved, our business, financial condition and results of operations may be materially adversely affected.

The industries in which we participate are highly competitive and rapidly evolving, and if we are unable to compete effectively, our business, financial condition and results of operations could be materially adversely affected.

We face intense competition from other suppliers of gas or chemical delivery subsystems, as well as the internal manufacturing groups of OEMs. Increased competition has in the past resulted, and could in the future result, in price reductions, reduced gross margins or loss of market share, any of which would materially adversely affect our business, financial condition and results of operations. We are subject to significant pricing pressure as we attempt to

 

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maintain and increase market share with our existing customers. Our competitors may offer reduced prices or introduce new products or services for the markets currently served by our products and services. These products may have better performance, lower prices and achieve broader market acceptance than our products. OEMs also typically own the design rights to their products. Further, if our competitors obtain proprietary rights to these designs such that we are unable to obtain the designs necessary to manufacture products for our OEM customers, our business, financial condition and results of operations could be materially adversely affected.

Certain of our competitors may have or may develop greater financial, technical, manufacturing and marketing resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products and services, and reduce prices to increase market share. In addition to organic growth by our competitors, there may be merger and acquisition activity among our competitors and potential competitors that may provide our competitors and potential competitors with an advantage over us by enabling them to expand their product offerings and service capabilities to meet a broader range of customer needs. The introduction of new technologies and new market entrants may also increase competitive pressures.

We are exposed to risks associated with weakness in the global economy and geopolitical instability.

Our business is dependent upon manufacturers of semiconductor capital equipment, whose businesses in turn ultimately depend largely on consumer spending on semiconductor devices. Continuing uncertainty regarding the global economy continues to pose challenges to our business. Economic uncertainty and related factors, including current unemployment levels, uncertainty in European debt markets, geopolitical instability in various parts of the world, fiscal uncertainty in the U.S. economy, market volatility and the slow rate of recovery of many countries from recent recessions, exacerbate negative trends in business and consumer spending and may cause certain of our customers to push out, cancel or refrain from placing orders for products or services, which may reduce sales and materially adversely affect our business, financial condition and results of operations. Difficulties in obtaining capital, uncertain market conditions or reduced profitability may also cause some customers to scale back operations, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations, leading to customers’ reduced research and development funding and/or capital expenditures and, in turn, lower orders from our customers and/or additional slow moving or obsolete inventory or bad debt expense for us. These conditions may also similarly affect our key suppliers, which could impair their ability to deliver parts and result in delays for our products or require us to either procure products from higher-cost suppliers, or if no additional suppliers exist, to reconfigure the design and manufacture of our products, and we may be unable to fulfill some customer orders. Any of these conditions or events could have a material adverse effect on our business, financial condition and results of operations.

If we do not keep pace with developments in the industries we serve and with technological innovation generally, our products and services may not be competitive.

Rapid technological innovation in the markets we serve requires us to anticipate and respond quickly to evolving customer requirements and could render our current product offerings, services and technologies obsolete. In particular, the design and manufacturing of semiconductors is constantly evolving and becoming more complex in order to achieve greater power, performance and efficiency with smaller devices. Capital equipment manufacturers need to keep pace with these changes by refining their existing products and developing new products.

 

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We believe that our future success will depend upon our ability to design, engineer and manufacture products that meet the changing needs of our customers. This requires that we successfully anticipate and respond to technological changes in design, engineering and manufacturing processes in a cost-effective and timely manner. If we are unable to integrate new technical specifications into competitive product designs, develop the technical capabilities necessary to manufacture new products or make necessary modifications or enhancements to existing products, our business, financial condition and results of operations could be materially adversely affected.

The timely development of new or enhanced products is a complex and uncertain process which requires that we:

 

   

design innovative and performance-enhancing features that differentiate our products from those of our competitors;

 

   

identify emerging technological trends in the industries we serve, including new standards for our products;

 

   

accurately identify and design new products to meet market needs;

 

   

collaborate with OEMs to design and develop products on a timely and cost-effective basis;

 

   

ramp-up production of new products, especially new subsystems, in a timely manner and with acceptable yields;

 

   

manage our costs of product development and the costs of producing the products that we sell;

 

   

successfully manage development production cycles; and

 

   

respond quickly and effectively to technological changes or product announcements by others.

If we are unsuccessful in keeping pace with technological developments for the reasons above or other reasons, our business, financial condition and results of operations could be materially adversely affected.

We must design, develop and introduce new products that are accepted by OEMs in order to retain our existing customers and obtain new customers.

The introduction of new products is inherently risky because it is difficult to foresee the adoption of new standards, coordinate our technical personnel and strategic relationships and win acceptance of new products by OEMs. We attempt to mitigate this risk by collaborating with our customers during their design and development processes. We cannot, however, assure you that we will be able to successfully introduce, market and cost-effectively manufacture new products, or that we will be able to develop new or enhanced products and processes that satisfy customer needs. In addition, new capital equipment typically has a lifespan of five to ten years, and OEMs frequently specify which systems, subsystems, components and instruments are to be used in their equipment. Once a specific system, subsystem, component or instrument is incorporated into a piece of capital equipment, it will often continue to be purchased for that piece of equipment on an exclusive basis for 18-24 months before the OEM generates enough sales volume to consider adding alternative suppliers. Accordingly, it is important that our products are designed into the new systems introduced by the OEMs. If any of the new products we develop are not launched or successful in the market, our business, financial condition and results of operations could be materially adversely affected.

 

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The manufacturing of our products is highly complex, and if we are not able to manage our manufacturing and procurement process effectively, our business, financial condition and results of operations may be materially adversely affected.

The manufacturing of our products is a highly complex process that involves the integration of multiple components and requires effective management of our supply chain while meeting our customers’ design-to-delivery cycle time requirements. Through the course of the manufacturing process, our customers may modify design and system configurations in response to changes in their own customers’ requirements. In order to rapidly respond to these modifications and deliver our products to our customers in a timely manner, we must effectively manage our manufacturing and procurement process. If we fail to manage this process effectively, we risk losing customers and damaging our reputation. We may also be subject to liability under our agreements with our customers if we or our suppliers fail to re-configure manufacturing processes or components in response to these modifications. In addition, if we acquire inventory in excess of demand or that does not meet customer specifications, we could incur excess or obsolete inventory charges. We have from time to time experienced bottlenecks and production difficulties that have caused delivery delays and quality control problems. These risks are even greater as we seek to expand our business into new subsystems. In addition, certain of our suppliers have been, and may in the future be, forced out of business as a result of the economic environment. In such cases, we may be required to procure products from higher-cost suppliers or, if no additional suppliers exist, reconfigure the design and manufacture of our products. This could materially limit our growth, adversely impact our ability to win future business and have a material adverse effect on our business, financial condition and results of operations.

Defects in our products could damage our reputation, decrease market acceptance of our products and result in potentially costly litigation.

A number of factors, including design flaws, material and component failures, contamination in the manufacturing environment, impurities in the materials used and unknown sensitivities to process conditions, such as temperature and humidity, as well as equipment failures, may cause our products to contain undetected errors or defects. Errors, defects or other problems with our products may:

 

   

cause delays in product introductions and shipments;

 

   

result in increased costs and diversion of development resources;

 

   

cause us to incur increased charges due to unusable inventory;

 

   

require design modifications;

 

   

result in liability for the unintended release of hazardous materials;

 

   

create claims for rework, replacement and/or damages under our contracts with customers, as well as indemnification claims from customers;

 

   

decrease market acceptance of, or customer satisfaction with, our products, which could result in decreased sales and increased product returns; or

 

   

result in lower yields for semiconductor manufacturers.

If any of our products contain defects or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products. We may also face a higher rate of product defects as we increase our production levels in periods of significant growth. Product defects could result in warranty and indemnification liability or the

 

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loss of existing customers or impair our ability to attract new customers. In addition, we may not find defects or failures in our products until after they are installed in a manufacturer’s fabrication facility. We may have to invest significant capital and other resources to correct these problems. Our current or potential customers also might seek to recover from us any losses resulting from defects or failures in our products. In addition, hazardous materials flow through and are controlled by certain of our products and an unintended release of these materials could result in serious injury or death. Liability claims could require us to spend significant time and money in litigation or pay significant damages.

We may incur unexpected warranty and performance guarantee claims that could materially adversely affect our business, financial condition and results of operations.

In connection with our products and services, we provide various product warranties, performance guarantees and indemnification rights. Warranty or other performance guarantee or indemnification claims against us could cause us to incur significant expense to repair or replace defective products or indemnify the affected customer for losses. In addition, quality issues can have various other ramifications, including delays in the recognition of sales, loss of sales, loss of future sales opportunities, increased costs associated with repairing or replacing products, and a negative impact on our reputation, all of which could materially adversely affect our business, financial condition and results of operations.

Our dependence on a limited number of suppliers may harm our production output and increase our costs, and may prevent us from delivering acceptable products on a timely basis.

Our ability to meet our customers’ demand for our products depends upon obtaining adequate supplies of quality components and other raw materials on a timely basis. In addition, our customers often specify components from particular suppliers that we must incorporate into our products. We also use consignment and just-in-time stocking programs, which means we carry very little inventory of components or other raw materials, and we rely on our suppliers to deliver necessary components and raw materials in a timely manner. However, our suppliers are under no obligation to provide us with components or other raw materials. As a result, the loss of or failure to perform by any of our key suppliers could materially adversely affect our ability to deliver products on a timely basis. In addition, if a supplier were unable to provide the volume of components we require on a timely basis and at acceptable prices and quality, we would have to identify and qualify replacements from alternative sources of supply. However, the process of qualifying new suppliers for complex components is also lengthy and could delay our production. We may also experience difficulty in obtaining sufficient supplies of components and raw materials in times of significant growth in our business. If we are unable to procure sufficient quantities of components or raw materials from suppliers, our customers may elect to delay or cancel existing orders or not place future orders, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to order and shipment uncertainties, and any significant reductions, cancellations or delays in customer orders could have a material adverse effect on our business, financial condition and results of operations.

Our sales are difficult to forecast because we generally do not have a material backlog of unfilled orders and because of the short time frame within which we are often required to manufacture and deliver products to our customers. Most of our sales for a particular quarter depend on customer orders placed during that quarter or shortly before it commences. Our contracts generally do not require our customers to commit to minimum purchase volumes. While most of our customers provide periodic rolling forecasts for product orders, those

 

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forecasts do not become binding until a formal purchase order is submitted, which generally occurs only a short time prior to shipment. As a result of the foregoing and the cyclicality and volatility of the industries we serve, it is difficult to predict future orders with precision. Occasionally, we order component inventory and build products in advance of the receipt of actual customer orders. Customers may cancel order forecasts, change production quantities from forecasted volumes or delay production for reasons beyond our control. Furthermore, reductions, cancellations or delays in customer order forecasts usually occur without penalty to, or compensation from, the customer. Reductions, cancellations or delays in forecasted orders could cause us to hold inventory longer than anticipated, which could reduce our gross profit, restrict our ability to fund our operations and result in unanticipated reductions or delays in sales. If we do not obtain orders as we anticipate, we could have excess components for a specific product and/or finished goods inventory that we would not be able to sell to another customer, likely resulting in inventory write-offs, which could have a material adverse effect on our business, financial condition and results of operations.

Because our customers generally require that they qualify our engineering, documentation, manufacturing and quality control procedures, our ability to add new customers quickly is limited.

We are generally required to qualify and maintain our status as a supplier for each of our customers. This is a time-consuming process that involves the inspection and approval by a customer of our engineering, documentation, manufacturing and quality control procedures before that customer will place orders with us. Our ability to lessen the adverse effect of any loss of, or reduction in sales to, an existing customer through the rapid addition of one or more new customers is limited in part because of these qualification requirements. Consequently, the risk that our business, financial condition and results of operations would be materially adversely affected by the loss of, or any reduction in orders by, any of our significant customers is increased. Moreover, if we lost our existing status as a qualified supplier to any of our customers, such customer could cancel its orders from us or otherwise terminate its relationship with us, which could have a material adverse effect on our business, financial condition and results of operations.

Restrictive covenants under our Credit Facilities may limit our current and future operations. If we fail to comply with those covenants, the lenders could cause outstanding amounts, which are currently substantial, to become immediately due and payable, and we might not have sufficient funds and assets to pay such loans.

As of September 23, 2016, we had $66.3 million of indebtedness outstanding under our term loan facility, or our Term Loan Facility, and $15.0 million of indebtedness outstanding under our $20.0 million revolving credit facility, or our Revolving Credit Facility, and together with our Term Loan Facility, our Credit Facilities. The outstanding amount of our Term Loan Facility reflected in our consolidated financial statements included elsewhere in this prospectus is net of $2.0 million of debt discount. We may incur additional indebtedness in the future. Our Credit Facilities contain certain restrictive covenants and conditions, including limitations on our ability to, among other things:

 

   

incur additional indebtedness or contingent obligations;

 

   

create or incur liens, negative pledges or guarantees;

 

   

make investments;

 

   

make loans;

 

   

sell or otherwise dispose of assets;

 

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merge, consolidate or sell substantially all of our assets;

 

   

make certain payments on indebtedness;

 

   

pay dividends on or make distributions in respect of capital stock or make certain other restricted payments or investments;

 

   

enter into certain agreements that restrict distributions from restricted subsidiaries;

 

   

enter into transactions with affiliates;

 

   

change the nature of our business; and

 

   

amend the terms of our organizational documents.

As a result of these covenants, we may be restricted in our ability to pursue new business opportunities or strategies or to respond quickly to changes in the industries that we serve. A violation of any of these covenants would be deemed an event of default under our Credit Facilities. In such event, upon the election of the lenders, the loan commitments under our Credit Facilities would terminate and the principal amount of the loans and accrued interest then outstanding would be due and payable immediately. A default may also result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event our lenders accelerate the repayment of our borrowings, we cannot assure you that we and our subsidiaries would have sufficient funds to repay such indebtedness or be able to obtain replacement financing on a timely basis or at all. These events could force us into bankruptcy or liquidation, which could have a material adverse effect on our business, financial condition and results of operations.

We also may need to negotiate changes to the covenants in the agreements governing our Credit Facilities in the future if there are material changes in our business, financial condition or results of operations, but we cannot assure you that we will be able to do so on terms favorable to us or at all.

Certain of our customers require that we consult with them in connection with specified fundamental changes in our business, and address any concerns or requests such customer may have in connection with a fundamental change. While those customers do not have contractual approval or veto rights with respect to fundamental changes, our failure to consult with such customers or to satisfactorily respond to their requests in connection with any such fundamental change could constitute a breach of contract or otherwise be detrimental to our relationships with such customers.

Certain of our key customers require that we consult with them in connection with specified fundamental changes in our business, including, among other things:

 

   

entering into any new line of business;

 

   

amending or modifying our organizational documents;

 

   

selling all or substantially all of our assets, or merging or amalgamating with a third party;

 

   

incur borrowings in excess of a specific amount;

 

   

making senior management changes;

 

   

entering into any joint venture arrangement; and

 

   

effecting an initial public offering.

 

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These customers do not have contractual approval or veto rights with respect to any fundamental changes in our business. However, our failure to consult with such customers or to satisfactorily respond to their requests in connection with any such fundamental change could constitute a breach of contract or otherwise be detrimental to our relationships with such customers, which could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to generate sufficient cash to service all of our indebtedness, including under our Credit Facilities, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our indebtedness, including under our Credit Facilities, depends on our financial condition and results of operations, which are subject to prevailing economic and competitive conditions and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness. If we cannot make scheduled payments on our debt, we will be in default and, as a result, the lenders under our Credit Facilities could terminate their commitments to loan money, or foreclose against the assets securing such borrowings, and we could be forced into bankruptcy or liquidation, in each case, which would have a material adverse effect on our business, financial condition and results of operations.

Our business is largely dependent on the know-how of our employees, and we generally do not have an intellectual property position that is protected by patents.

We believe that the success of our business depends in part on our proprietary technology, information, processes and know-how and on our ability to operate without infringing on the proprietary rights of third parties. We rely on a combination of trade secrets and contractual confidentiality provisions and, to a much lesser extent, patents, copyrights and trademarks to protect our proprietary rights. Accordingly, our intellectual property position is more vulnerable than it would be if it were protected primarily by patents. We cannot assure you that we have adequately protected or will be able to adequately protect our technology, that our competitors will not be able to utilize our existing technology or develop similar technology independently, that the claims allowed with respect to any patents held by us will be broad enough to protect our technology or that foreign intellectual property laws will adequately protect our intellectual property rights. If we fail to protect our proprietary rights successfully, our competitive position could suffer. Any future litigation to enforce patents issued to us, to protect trade secrets or know-how possessed by us or to defend ourselves or to indemnify others against claimed infringement of the rights of others could have a material adverse effect on our business, financial condition and results of operations.

Third parties have claimed and may in the future claim we are infringing their intellectual property, which could subject us to litigation or licensing expenses, and we may be prevented from selling our products if any such claims prove successful.

We may in the future receive claims that our products, processes or technologies infringe the patents or other proprietary rights of third parties. In addition, we may be unaware of intellectual property rights of others that may be applicable to our products. Any litigation

 

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regarding our patents or other intellectual property could be costly and time-consuming and divert our management and key personnel from our business operations, any of which could have a material adverse effect on our business, financial condition and results of operations. The complexity of the technology involved in our products and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement may also require us to enter into costly license agreements. However, we may not be able to obtain licenses on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against the development, manufacture and sale of certain of our products if any such claims prove successful. We also rely on design specifications and other intellectual property of our customers in the manufacture of products for such customers. While our customer agreements generally provide for indemnification of us by a customer if we are subjected to litigation for third-party claims of infringement of such customer’s intellectual property, such indemnification provisions may not be sufficient to fully protect us from such claims, or our customers may breach such indemnification obligations to us, which could result in costly litigation to defend against such claims or enforce our contractual rights to such indemnification.

From time to time, we may become involved in other litigation and regulatory proceedings, which could require significant attention from our management and result in significant expense to us and disruptions in our business.

In addition to any litigation related to our intellectual property rights, we may in the future be named as a defendant from time to time in other lawsuits and regulatory actions relating to our business, such as commercial contract claims, employment claims and tax examinations, some of which may claim significant damages or cause us reputational harm. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot predict the ultimate outcome of any such proceeding. An unfavorable outcome could have a material adverse effect on our business, financial condition and results of operations or limit our ability to engage in certain of our business activities. In addition, regardless of the outcome of any litigation or regulatory proceeding, such proceedings are often expensive, time-consuming and disruptive to normal business operations and require significant attention from our management. As a result, any such lawsuits or proceedings could materially adversely affect our business, financial condition and results of operations.

The technology labor market is very competitive, and our business will suffer if we are unable to hire and retain key personnel.

Our future success depends in part on the continued service of our key executive officers, as well as our research, engineering, sales and manufacturing personnel, most of whom are not subject to employment or non-competition agreements. Competition for qualified personnel in the technology industry is particularly intense, and we operate in geographic locations in which labor markets are competitive. Our management team has significant industry experience and deep customer relationships, and therefore would be difficult to replace. In addition, our business is dependent to a significant degree on the expertise and relationships which only a limited number of engineers possess. Many of these engineers often work at our customers’ sites and serve as an extension of our customers’ product design teams. The loss of any of our key executive officers or key engineers and other personnel, including our engineers working at our customers’ sites, or the failure to attract additional personnel as needed, could have a material adverse effect on our business, financial condition and results of operations and could lead to higher labor costs, the use of less-qualified personnel and the loss of customers. In addition, if any of our key executive officers or other key employees were to join a competitor or form a competing company, we could lose customers, suppliers, know-how and key personnel.

 

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We do not maintain key-man life insurance with respect to any of our employees. Our business will suffer if we are unable to attract, employ and retain highly skilled personnel.

Future acquisitions may present integration challenges, and if the goodwill, indefinite-lived intangible assets and other long-term assets recorded in connection with such acquisitions become impaired, we would be required to record impairment charges, which may be significant.

If we find appropriate opportunities in the future, we may acquire businesses, products or technologies that we believe are strategic. If we acquire a business, product or technology, the process of integration may produce unforeseen operating difficulties and expenditures, fail to result in expected synergies or other benefits and absorb significant attention of our management that would otherwise be available for the ongoing development of our business. In addition, in the event of any future acquisitions, we may record a portion of the assets we acquire as goodwill, other indefinite-lived intangible assets or finite-lived intangible assets. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The recoverability of goodwill and indefinite-lived intangible assets is dependent on our ability to generate sufficient future earnings and cash flows. Changes in estimates, circumstances or conditions, resulting from both internal and external factors, could have a significant impact on our fair valuation determination, which could then have a material adverse effect on our business, financial condition and results of operations.

Our quarterly sales and operating results fluctuate significantly from period to period, and this may cause volatility in our stock price.

Our quarterly sales and operating results have fluctuated significantly in the past, and we expect them to continue to fluctuate in the future for a variety of reasons, including the following:

 

   

demand for and market acceptance of our products as a result of the cyclical nature of the industries we serve or otherwise, often resulting in reduced sales during industry downturns and increased sales during periods of industry recovery or growth;

 

   

overall economic conditions;

 

   

changes in the timing and size of orders by our customers;

 

   

strategic decisions by our customers to terminate their outsourcing relationship with us or give market share to our competitors;

 

   

consolidation by our customers;

 

   

cancellations and postponements of previously placed orders;

 

   

pricing pressure from either our competitors or our customers, resulting in the reduction of our product prices or loss of market share;

 

   

disruptions or delays in the manufacturing of our products or in the supply of components or raw materials that are incorporated into or used to manufacture our products, thereby causing us to delay the shipment of products;

 

   

decreased margins for several or more quarters following the introduction of new products, especially as we introduce new subsystems or other products or services;

 

   

changes in design-to-delivery cycle times;

 

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inability to reduce our costs quickly in step with reductions in our prices or in response to decreased demand for our products;

 

   

changes in our mix of products sold;

 

   

write-offs of excess or obsolete inventory;

 

   

one-time expenses or charges; and

 

   

announcements by our competitors of new products, services or technological innovations, which may, among other things, render our products less competitive.

As a result of the foregoing, we believe that quarter-to-quarter comparisons of our sales and results of operations may not be meaningful and that these comparisons may not be an accurate indicator of our future performance. Changes in the timing or terms of a small number of transactions could disproportionately affect our results of operations in any particular quarter. Moreover, our results of operations in one or more future quarters may fail to meet our guidance or the expectations of securities analysts or investors. If this occurs, we would expect to experience an immediate and significant decline in the trading price of our ordinary shares.

Labor disruptions could materially adversely affect our business, financial condition and results of operations.

As of September 23, 2016, we had approximately 530 full time employees and approximately 141 contract or temporary workers worldwide. None of our employees are unionized, but in various countries, local law requires our participation in works councils. While we have not experienced any material work stoppages at any of our facilities, any stoppage or slowdown could cause material interruptions in manufacturing, and we cannot assure you that alternate qualified capacity would be available on a timely basis, or at all. As a result, labor disruptions at any of our facilities could materially adversely affect our business, financial condition and results of operations.

As a global company, we are subject to the risks of doing business internationally, including periodic foreign economic downturns and political instability, which may adversely affect our sales and cost of doing business in those regions of the world.

Foreign economic downturns have adversely affected our business and results of operations in the past and could adversely affect our business and results of operations in the future. In addition, other factors relating to the operation of our business outside of the United States may have a material adverse effect on our business, financial condition and results of operations in the future, including:

 

   

the imposition of governmental controls or changes in government regulations, including tax regulations;

 

   

difficulties in enforcing our intellectual property rights;

 

   

difficulties in developing relationships with local suppliers;

 

   

difficulties in attracting new international customers;

 

   

difficulties in complying with foreign and international laws and treaties;

 

   

restrictions on the export of technology;

 

   

compliance with U.S. and international laws involving international operations, including the Foreign Corrupt Practices Act, export control laws and export license requirements;

 

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difficulties in achieving headcount reductions due to unionized labor and works councils;

 

   

restrictions on transfers of funds and assets between jurisdictions;

 

   

geo-political instability; and

 

   

trade restrictions and changes in taxes and tariffs.

In the future, we may seek to expand our presence in certain foreign markets or enter emerging markets. Evaluating or entering into an emerging market may require considerable management time, as well as start-up expenses for market development before any significant sales and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local political, economic and market conditions. As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and the other risks noted above. The impact of any one or more of these factors could materially adversely affect our business, financial condition and results of operations.

We are subject to fluctuations in foreign currency exchange rates which could cause operating results and reported financial results to vary significantly from period to period.

The vast majority of our sales are denominated in U.S. Dollars. Many of the costs and expenses associated with our Singapore, Malaysian and U.K. operations are paid in Singapore Dollars, Malaysian Ringgit or British Pounds (or Euros), respectively, and we expect our exposure to these currencies to increase as we increase our operations in those countries. As a result, our risk exposure from transactions denominated in non-U.S. currencies is primarily related to the Singapore Dollar, Malaysian Ringgit, British Pound and Euro. In addition, because the majority of our sales are denominated in the U.S. Dollar, if one or more of our competitors sells to our customers in a different currency than the U.S. Dollar, we are subject to the risk that the competitors’ products will be relatively less expensive than our products due to exchange rate effects. We have not historically established transaction-based hedging programs. Foreign currency exchange risks inherent in doing business in foreign countries could have a material adverse effect on our business, financial condition and results of operations.

We are subject to numerous environmental laws and regulations, which could require us to incur environmental liabilities, increase our manufacturing and related compliance costs or otherwise adversely affect our business.

We are subject to a variety of federal, state, local and foreign laws and regulations governing the protection of the environment. These environmental laws and regulations include those relating to the use, storage, handling, discharge, emission, disposal and reporting of toxic, volatile or otherwise hazardous materials used in our manufacturing processes. These materials may have been or could be released into the environment at properties currently or previously owned or operated by us, at other locations during the transport of materials or at properties to which we send substances for treatment or disposal. In addition, we may not be aware of all environmental laws or regulations that could subject us to liability in the United States or internationally. If we were to violate or become liable under environmental laws and regulations or become non-compliant with permits required at some of our facilities, we could be held financially responsible and incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting in order to comply with Section 404 of the

 

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Sarbanes-Oxley Act. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our ordinary shares.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our ordinary shares to decline, and we may be subject to investigation or sanctions by the SEC.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of the end of the fiscal year that coincides with the filing of our second annual report to shareholders. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. We will also be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act if we take advantage of the exemptions contained in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

Additionally, to comply with the requirements of being a public company, we may need to undertake various costly and time-consuming actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff, which may adversely affect our business, financial condition and results of operations.

In early 2015, we identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our share price.

In early 2015, we identified a material weakness in our internal control over financial reporting. Specifically, we had overstated our liabilities for the goods received but not invoiced account and cost of goods sold relating to certain aged transactions, whereby accounts payable was not reduced on a timely basis. To remediate this weakness, we have initiated compensating

 

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controls regarding the reconciliation of these accounts at the end of each period, including implementing a new account reconciliation tool and a more detailed account review. Despite our efforts, we may identify additional related or unrelated material weaknesses or significant deficiencies in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

There are limitations on the effectiveness of controls, and the failure of our control systems may materially and adversely impact us.

We do not expect that disclosure controls or internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Failure of our control systems to prevent error or fraud could have a material adverse effect on our business, financial condition and results of operations.

Compliance with recently adopted rules of the SEC relating to “conflict minerals” may require us and our suppliers to incur substantial expense and may result in disclosure by us that certain minerals used in products we manufacture are not “DRC conflict free.”

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, required the SEC to promulgate rules requiring disclosure by a public company of any “conflict minerals” (tin, tungsten, tantalum and gold) necessary to the functionality or production of a product manufactured or contracted to be manufactured by such company. The SEC adopted final rules in 2012 which took effect at the end of January 2013. Because we manufacture products which may contain tin, tungsten, tantalum or gold, we will be required under these rules to determine whether those minerals are necessary to the functionality or production of our products and, if so, conduct a country of origin inquiry with respect to all such minerals. If any such minerals may have originated in the Democratic Republic of the Congo, or the DRC, or any of its adjoining countries, or the “covered countries,” then we and our suppliers must conduct diligence on the source and chain of custody of the conflict minerals to determine if they did originate in one of the covered countries and, if so, whether they financed or benefited armed groups in the covered countries. Disclosures relating to the products which may contain conflict minerals, the country of origin of those minerals and whether they are “DRC conflict free” must be provided in a Form SD (and accompanying conflict minerals report if one is required to disclose the diligence undertaken by us in sourcing the minerals and our conclusions relating to such diligence). If we are required to submit a conflict minerals report, that report must be audited by an independent auditor pursuant to existing government auditing standards, unless (for the first two years) we are unable to determine whether the minerals are “DRC conflict free.” Compliance with this new disclosure rule may be very time consuming for management and our supply chain personnel (as well as time consuming for our suppliers) and could involve the expenditure of significant amounts of money and resources by us and them. Disclosures by us mandated by the new rules which are perceived by the market to be “negative” may cause customers to refuse to purchase our products. We are currently unable to assess the cost of compliance with this rule, and we cannot assure you that such cost will not have a material adverse effect on our business, financial condition and results of operations.

 

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Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made disruptions, such as terrorism.

Our facilities could be subject to a catastrophic loss caused by natural disasters, including fires and earthquakes. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production and shipments, reduce sales and result in large expenses to repair or replace the facility. In addition, we may experience extended power outages at our facilities. Disruption in supply resulting from natural disasters or other causalities or catastrophic events may result in certain of our suppliers being unable to deliver sufficient quantities of components or raw materials at all or in a timely manner, disruptions in our operations or disruptions in our customers’ operations. To the extent that natural disasters or other calamities or causalities should result in delays or cancellations of customer orders, or the delay in the manufacture or shipment of our products, our business, financial condition and results of operations would be adversely affected.

Changes in tax laws, tax rates or tax assets and liabilities could materially adversely affect our financial condition and results of operations.

As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly tax rates could be affected by numerous factors, including changes in applicable tax laws, the amount and composition of pre-tax income in countries with differing tax rates or valuation of our deferred tax assets and liabilities. We have significant operations in the United States and our holding company structure includes entities organized in the Cayman Islands, Netherlands, Singapore and Scotland. As a result, changes in applicable tax laws in these jurisdictions could have a material adverse effect on our financial condition and results of operations.

We are also subject to regular examination by the Internal Revenue Service and other tax authorities, and from time to time we initiate amendments to previously filed tax returns. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations and amendments to determine the adequacy of our provision for income taxes, which requires estimates and judgments. Although we believe our tax estimates are reasonable, we cannot assure you that the tax authorities will agree with such estimates. We may have to engage in litigation to achieve the results reflected in the estimates, which may be time-consuming and expensive. We cannot assure you that we will be successful or that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our financial condition and results of operations.

Risks Related to this Offering and Ownership of Our Ordinary Shares

An active trading market for our ordinary shares may not develop, and you may not be able to sell your ordinary shares at or above the initial public offering price.

Prior to the completion of this offering, there has been no public market for our ordinary shares. An active trading market for our ordinary shares may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your ordinary shares at an attractive price, or at all. The price for our ordinary shares in this offering will be determined by negotiations with the underwriters and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your ordinary shares at or above the initial public offering price or at

 

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any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our ordinary shares in the future, and it may impair our ability to attract and motivate our employees through equity incentive awards.

You should consider an investment in our ordinary shares to be risky, and you should invest in our ordinary shares only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause the market price of our ordinary shares to fluctuate, in addition to the other risks mentioned in this section of the prospectus, are:

 

   

our announcements or our competitors’ announcements regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;

 

   

changes in earnings estimates or recommendations by securities analysts, if any, who cover our ordinary shares;

 

   

speculation about our business in the press or investment community;

 

   

failures to meet external expectations or management guidance;

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

changes in our capital structure or dividend policy, future issuances of securities, sales of large blocks of ordinary shares by our shareholders, including Francisco Partners, our incurrence of additional debt or our failure to comply with the agreements governing our Credit Facilities;

 

   

our decision to enter new markets;

 

   

reputational issues;

 

   

additions or departures of key members of our management team or significant changes in our board of directors;

 

   

changes in general economic and market conditions in any of the regions in which we conduct our business;

 

   

material litigation or government investigations;

 

   

the expiration of lock-up agreements;

 

   

changes in industry conditions or perceptions; and

 

   

changes in applicable laws, rules or regulations.

In addition, if the market for stocks in our industry or industries related to our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our ordinary shares could decline for reasons unrelated to our business, financial condition and results of operations. If any of the foregoing occurs, it could cause our share price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

Future sales of our ordinary shares, or the perception in the public markets that these sales may occur, may depress our share price.

Sales of substantial amounts of our ordinary shares in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our ordinary shares and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have 23,600,009 ordinary shares outstanding. The ordinary

 

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shares offered in this offering will be freely tradable without restriction under the Securities Act, except that any ordinary shares that may be acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining ordinary shares, representing approximately 76.0% of our total outstanding ordinary shares following this offering (assuming the underwriters do not exercise their option to purchase additional shares), will be “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale following the consummation of this offering. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144 or Rule 701, as described in “Shares Eligible for Future Sale.”

We, each of our executive officers and directors and the holders of substantially all of our ordinary shares (including Francisco Partners) have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the ordinary shares or securities convertible into or exchangeable for ordinary shares during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus (subject to extension in certain circumstances). The representatives of the underwriters may, in their sole discretion, release any of these shares from these restrictions at any time without notice. See “Underwriting.”

After the lock-up agreements pertaining to this offering expire, all shares subject to such agreements will be eligible for sale in the public market subject to the provisions of Rule 144 or Rule 701. After this offering, subject to any lock-up restrictions, holders of approximately 17.8 million ordinary shares (or approximately 17.0 million ordinary shares if the underwriters exercise in full their option to purchase additional shares from the selling shareholders) will also have the right to require us to register the sales of their shares under the Securities Act, under the terms of an agreement between us and the holders of these securities. See “Shares Eligible for Future Sale—Registration Rights” for a more detailed description of these rights.

In addition, we intend to file a registration statement to register all shares subject to equity awards outstanding or reserved for future issuance under our equity compensation plans. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our ordinary shares could decline. See “Shares Eligible for Future Sale” for a more detailed description of these rights and the restrictions on selling our ordinary shares after this offering.

In the future, we may also issue our securities in connection with investments or acquisitions. The number of our ordinary shares issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding ordinary shares.

We are a “controlled company” and, as a result, we are exempt from obligations to comply with certain corporate governance requirements.

Upon the completion of this offering, Francisco Partners will own approximately 17.7 million ordinary shares (or approximately 16.9 million ordinary shares if the underwriters exercise in full their option to purchase additional shares from the selling shareholders), or approximately 75.1% of our outstanding ordinary shares (or approximately 71.4% of our outstanding ordinary shares if the underwriters exercise in full their option to purchase additional shares from the selling shareholders). Accordingly, we will be a “controlled company” for purposes of NASDAQ listing requirements. As such, we will be exempt from the obligation to comply with certain corporate

 

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governance requirements, including the requirements that a majority of our board of directors consists of independent directors, and that we have nominating and compensation committees that are each composed entirely of independent directors. These exemptions do not modify the requirement for a fully independent audit committee, which is permitted to be phased-in as follows: (1) one independent committee member at the time of our initial public offering; (2) a majority of independent committee members within 90 days of our initial public offering; and (3) all independent committee members within one year of our initial public offering. Similarly, once we are no longer a “controlled company,” we must comply with the independent board committee requirements as they relate to the nominating and compensation committees, on the same phase-in schedule as set forth above, with the trigger date being the date we are no longer a “controlled company” as opposed to our initial public offering date. Additionally, we will have 12 months from the date we cease to be a “controlled company” to have a majority of independent directors on our board of directors.

In addition, our amended and restated memorandum and articles of association that will become effective upon or prior to the completion of this offering will contain a provision that provides Francisco Partners the right to designate: (i) all of the nominees for election to our board of directors for so long as Francisco Partners beneficially owns 40% or more of the total number of ordinary shares then outstanding; (ii) a number of directors (rounded up to the nearest whole number) equal to 40% of the total directors for so long as Francisco Partners beneficially owns at least 30% and less than 40% of the total number of ordinary shares then outstanding; (iii) a number of directors (rounded up to the nearest whole number) equal to 30% of the total directors for so long as Francisco Partners beneficially owns at least 20% and less than 30% of the total number of ordinary shares then outstanding; (iv) two directors for so long as Francisco Partners beneficially owns at least 10% and less than 20% of the total number of ordinary shares then outstanding; and (v) one director for so long as Francisco Partners beneficially owns at least 5% and less than 10% of the total number of ordinary shares then outstanding. This provision will also provide that Francisco Partners may assign such right to an affiliate of Francisco Partners. Our amended and restated memorandum and articles of association will prohibit us from increasing or decreasing the size of our board of directors without the prior written consent of Francisco Partners for so long as it has nomination rights.

We are controlled by Francisco Partners, whose interests may conflict with yours. The concentrated ownership of our ordinary shares will prevent you and other shareholders from influencing significant decisions.

As a result of its ownership of our ordinary shares, Francisco Partners, so long as it holds a majority of our outstanding ordinary shares, will have the ability to control the outcome of matters submitted to a vote of shareholders and, through our board of directors, the ability to control decision-making with respect to our business direction and policies. Matters over which Francisco Partners will, directly or indirectly, exercise control following this offering include:

 

   

the election of our board of directors and the appointment and removal of our officers;

 

   

mergers and other business combination transactions, including proposed transactions that would result in our shareholders receiving a premium price for their shares;

 

   

other acquisitions or dispositions of businesses or assets;

 

   

incurrence of indebtedness and the issuance of equity securities;

 

   

the repurchase of shares and payment of dividends; and

 

   

the issuance of shares to management under our equity compensation plans.

 

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Even if Francisco Partners’ ownership of our ordinary shares falls below a majority, it may continue to be able to strongly influence or effectively control our decisions. Under Cayman Islands Law, Francisco Partners and its affiliates do not have any obligation to present to us, and Francisco Partners and its affiliates may separately pursue, corporate opportunities of which they become aware, even if those opportunities are ones that we would have pursued if granted the opportunity. For additional information about our relationship with Francisco Partners, see “Certain Relationships and Related Party Transactions.”

You will incur immediate dilution as a result of this offering.

If you purchase ordinary shares in this offering, you will pay more for your shares than the pro forma net tangible book value of your shares. As a result, you will incur immediate dilution of $11.27 per share, representing the difference between the assumed initial public offering price of $13.00 per share and our pro forma net tangible book value per share as of September 23, 2016 after giving effect to this offering of $1.73. Accordingly, should we be liquidated at our book value, you would not receive the full amount of your investment. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase ordinary shares granted to our employees, consultants and directors under our equity compensation plans. See “Dilution.”

We are an “emerging growth company” and may elect to comply with reduced public company reporting requirements, which could make our ordinary shares less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various public company reporting requirements. These exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years after the first sale of our ordinary shares pursuant to an effective registration statement under the Securities Act, which fifth anniversary will occur in 2021. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we would cease to be an emerging growth company prior to the end of such five-year period. We have taken advantage of certain of the reduced disclosure obligations regarding executive compensation in this prospectus and may elect to take advantage of other reduced disclosure obligations in future filings. As a result, the information that we provide to holders of our ordinary shares may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on these exemptions. If some investors find our ordinary shares less attractive as a result of any choice we make to reduce disclosure, there may be a less active trading market for our ordinary shares and the price for our ordinary shares may be more volatile.

Under the JOBS Act, emerging growth companies may also elect to delay adoption of new or revised accounting standards until such time as those standards apply to private companies. We have elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies.

 

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We do not expect to pay any cash dividends for the foreseeable future.

On August 11, 2015, our board of directors approved and we declared a one-time approximately $22.1 million cash dividend on our outstanding preferred shares using proceeds from borrowings under our Credit Facilities and cash on hand. However, we do not anticipate that we will pay any cash dividends on our ordinary shares for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, contractual restrictions (including those under our Credit Facilities and any potential indebtedness we may incur in the future), restrictions imposed by applicable law, tax considerations and other factors our board of directors deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our ordinary shares, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our ordinary shares.

Our articles of association contain anti-takeover provisions that could adversely affect the rights of our shareholders.

Our articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of control transactions, including, among other things:

 

   

provisions that authorize our board of directors, without action by our shareholders, to issue additional ordinary shares and preferred shares with preferential rights determined by our board of directors;

 

   

provisions that permit only a majority of our board of directors or the chairman of our board of directors to call shareholder meetings and therefore do not permit shareholders to call shareholder meetings;

 

   

provisions that impose advance notice requirements, minimum shareholding periods and ownership thresholds, and other requirements and limitations on the ability of shareholders to propose matters for consideration at shareholder meetings; provided, however, at any time when Francisco Partners beneficially owns, in the aggregate, at least 5% of our ordinary shares, such advance notice procedure will not apply to it; and

 

   

a staggered board whereby our directors are divided into three classes, with each class subject to re-election once every three years on a rotating basis.

These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. With our staggered board of directors, at least two annual meetings of shareholders are generally required in order to effect a change in a majority of our directors. Our staggered board of directors can discourage proxy contests for the election of our directors and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to gain control of our board of directors in a relatively short period of time. For a further discussion of these and other such anti-takeover provisions, see “Description of Share Capital.”

The issuance of preferred shares could adversely affect holders of ordinary shares.

Our board of directors is authorized to issue preferred shares without any action on the part of holders of our ordinary shares. Our board of directors also has the power, without

 

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shareholder approval, to set the terms of any such preferred shares that may be issued, including voting rights, dividend rights, preferences over our ordinary shares with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue preferred shares in the future that have preference over our ordinary shares with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred shares with voting rights that dilute the voting power of our ordinary shares, the rights of holders of our ordinary shares or the price of our ordinary shares could be adversely affected.

Our management will have significant flexibility in using the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately.

We intend to use approximately $40.0 million of the net proceeds from this offering to repay outstanding borrowings under our Credit Facilities and the remainder for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that we believe will complement our business. However, depending on future developments and circumstances, we may use some of the proceeds for other purposes. We do not have more specific plans for the net proceeds from this offering. Therefore, our management will have significant flexibility in applying most of the net proceeds we receive from this offering. The net proceeds could be applied in ways that do not improve our operating results. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including the amount of cash used in or generated by our operations.

You may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the United States.

Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the Companies Law (2013 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands have a less exhaustive body of securities laws as compared to the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the United States federal courts.

As a result of all of the above, our shareholders may have more difficulty in protecting their interests through actions against us or our officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and a portion our assets are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us in the United States in the event that you believe that your rights have been infringed under U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this

 

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kind, the laws of the Cayman Islands may render you unable to enforce a judgment against our assets. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands, see “Enforcement of Civil Liabilities Under U.S. Federal Securities Laws.”

There can be no assurance that we will not be a passive foreign investment company for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ordinary shares.

A non-U.S. corporation will be a passive foreign investment company, or PFIC, for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. Our PFIC status for any taxable year can be determined only after the close of that year.

Based on the current and anticipated value of our assets and the composition of our income and assets, we do not expect to be treated as a PFIC for U.S. federal income purposes for our current taxable year ending December 30, 2016. However, the determination of PFIC status is based on an annual determination that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of income that we earn, and is subject to uncertainty in several respects. Accordingly, we cannot assure you that we will not be treated as a PFIC for our current taxable year ending December 30, 2016, or for any future taxable year or that the IRS will not take a contrary position.

If we are a PFIC for any taxable year during which a U.S. person holds ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Material Tax Considerations—Material U.S. Federal Income Tax Consequences—Passive Foreign Investment Company.” You are strongly urged to consult your tax advisors as to whether or not we will be a PFIC.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact included in this prospectus 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 prospectus, including those entitled “Prospectus Summary,” “Business” and “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, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. 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 this prospectus under the heading “Risk Factors,” as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus 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 prospectus 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.

 

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ENFORCEMENT OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS

We are organized under the laws of the Cayman Islands. As a result, although we have appointed our subsidiary, Ichor Systems, Inc., as our agent for service of process in the United States, it may be difficult for a shareholder to effect service of process within the United States upon us, or to enforce against us judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.

The Company has been advised by its Cayman Islands legal counsel that the courts of the Cayman Islands are unlikely (1) to recognize or enforce against the Company judgments of courts of the United States predicated upon the civil liability provisions of the securities laws of the United States or any State, and (2) in original actions brought in the Cayman Islands, to impose liabilities against the Company predicated upon the civil liability provisions of the securities laws of the United States or any State, so far as the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 5,750,000 ordinary shares in this offering will be approximately $67.0 million, based upon an initial public offering price of $13.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares, we will not receive any proceeds from the sale of ordinary shares by the selling shareholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) our net proceeds from this offering by approximately $5.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional capital to fund our operations and growth, to create a public market for our ordinary shares and to facilitate our future access to the public equity markets. We expect to use approximately $40.0 million of the net proceeds of this offering to repay outstanding borrowings under our Credit Facilities, of which approximately $25.0 million is expected be used to repay borrowings under our Term Loan Facility and approximately $15.0 million is expected be used to repay borrowings under our Revolving Credit Facility. The remainder of the net proceeds will be used for general corporate purposes, which we expect to include funding working capital, operating expenses and the selective pursuit of business development opportunities in our focus segment areas. At this time, other than the repayment of indebtedness under our Credit Facilities, we have not specifically identified a large single use for which we intend to use the net proceeds, and, accordingly, we are not able to allocate the net proceeds among any of these potential uses in light of the variety of factors that will impact how such net proceeds are ultimately utilized by us. Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade and interest-bearing instruments.

In April 2016, we increased our Term Loan Facility by an additional principal amount of $15.0 million to finance, along with $4.0 million under our Revolving Credit Facility, the Ajax Acquisition.

As of September 23, 2016, we had $66.3 million of indebtedness outstanding under our Term Loan Facility and $15.0 million of indebtedness outstanding under our Revolving Credit Facility, which Credit Facilities mature on August 11, 2020. The outstanding amount of our Term Loan Facility reflected in our consolidated financial statements included elsewhere in this prospectus is net of $2.0 million of debt discount. Borrowings under our Credit Facilities bear interest (x) for base rate loans, at the “base rate” (as defined below) plus 3.00% or (y) for eurodollar loans, at the “eurodollar rate” (as defined below) plus 4.00%. The base rate equals the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50% and (iii) the eurodollar rate plus 1.00%. The eurodollar rate equals LIBOR, provided that with respect to our Term Loan Facility only, LIBOR shall not be less than 1.00%. As of September 23, 2016, the applicable interest rate under our Credit Facilities was 4.89% per annum. No prepayment penalty is owed with respect to the prepayment we intend to make using proceeds of this offering.

 

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DIVIDEND POLICY

In August 2015, our board of directors approved and we declared a one-time approximately $22.1 million cash dividend, or the 2015 Dividend, on our outstanding preferred shares using proceeds from our Credit Facilities and cash on hand. However, we do not anticipate that we will pay any cash dividends on our ordinary shares for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, contractual restrictions (including those under our Credit Facilities and any potential indebtedness we may incur in the future), restrictions imposed by applicable law, tax considerations and other factors our board of directors deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our ordinary shares, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our ordinary shares.

Because we are a holding company, our ability to pay cash dividends on our ordinary shares may be limited by restrictions on our ability to obtain sufficient funds through dividends from subsidiaries. In particular, the agreements governing our and our subsidiaries’ indebtedness, including our Credit Facilities, contain restrictions on the ability of our subsidiaries to make cash dividends to us.

 

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CAPITALIZATION

The following table sets forth our cash and restricted cash and consolidated capitalization as of September 23, 2016 on:

 

   

a historical basis;

 

   

a pro forma basis to give effect to the conversion of all outstanding Series A preferred shares into 142,728,221 ordinary shares and the subsequent 1 for 8.053363 reverse split of our ordinary shares; and

 

   

a pro forma as adjusted basis to also give effect to the issuance and sale of 5,750,000 ordinary shares in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds as described in “Use of Proceeds.”

You should read the following table in conjunction with the sections entitled “Prospectus Summary-Recent Developments,” “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     September 23, 2016  
     Actual     Pro
Forma
    Pro Forma
As Adjusted
 
     (in thousands except share data)  
        

Cash and restricted cash

   $ 25,304      $ 25,304      $ 52,297   

Long-term debt:

      

Senior credit facilities:

      

Revolving credit facility

     15,000        15,000          

Term loan

     66,260        66,260        41,260   
  

 

 

   

 

 

   

 

 

 

Total long-term debt(1)

     81,260        81,260        41,260   

Equity:

      

Preferred shares, par value $0.0001 per share, 150,000,000 shares authorized, 142,728,221 shares issued and outstanding, actual; 20,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted

     142,728                 

Ordinary shares, par value $0.0001 per share, 250,000,000 shares authorized and 1,024,405 shares issued and outstanding, actual; 200,000,000 shares authorized and 17,850,009 shares issued and outstanding, pro forma; 200,000,000 shares authorized and 23,600,009 issued and outstanding, pro forma as adjusted

            2        2   

Additional paid-in-capital

     4,349        147,075        214,068   

Retained earnings

     (62,305     (62,305     (62,305
  

 

 

   

 

 

   

 

 

 

Total equity

     84,772        84,772        151,765   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 166,032      $ 166,032      $ 193,025   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes $66.3 million outstanding under our Term Loan Facility and $15.0 million outstanding under our Revolving Credit Facility, as of September 23, 2016. The outstanding amount under our term loan facility reflected in our consolidated financial statements included elsewhere in this prospectus is net of $2.0 million of debt discount.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted amount for each of cash and restricted cash, additional paid-in capital, total equity and total capitalization by approximately $5.3 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our ordinary shares, your interest will be diluted to the extent of the difference between the initial public offering price per ordinary share and the pro forma net tangible book deficit per ordinary share immediately after this offering. Net tangible book deficit per share represents:

 

   

total assets less intangible assets;

 

   

reduced by our total liabilities; and

 

   

divided by the number of ordinary shares outstanding.

Dilution per share represents the difference between the amount per share paid by purchasers of our ordinary shares in this offering and the pro forma net tangible book deficit per share immediately after this offering. As of September 23, 2016, our net tangible book deficit was approximately $26.3 million, or $25.65 per share. As of September 23, 2016, our pro forma net tangible book deficit was approximately $26.3 million, or $1.47 per share based on 17,850,009 ordinary shares outstanding prior to this offering, which includes the assumed conversion of preferred shares into ordinary shares immediately prior to the completion of this offering and the subsequent 1 for 8.053363 reverse split of our ordinary shares. After giving effect to our sale in this offering of 5,750,000 ordinary shares at the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated expenses payable by us, our pro forma net tangible book value per share as of September 23, 2016 would have been $1.73 per share. This represents an immediate dilution of $11.27 per share to investors purchasing our ordinary shares in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

     $ 13.00   

Pro forma net tangible book deficit per share as of September 23, 2016

   $ (1.47  

Increase per share attributable to new investors

     3.20     
  

 

 

   

Pro forma net tangible book value per share as of September 23, 2016 after giving effect to this offering

       1.73   
    

 

 

 

Dilution per share to new investors

     $ 11.27   
    

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease net tangible book value by $5.3 million, or $0.93 per share, and would increase or decrease the dilution per share to purchasers in this offering by $0.78, based on the assumptions set forth above.

The following table summarizes as of September 23, 2016, on an as adjusted basis, the number of ordinary shares purchased, the total consideration paid and the average price per share paid by our existing shareholders and by purchasers in this offering, based upon the initial public offering price of $13.00 per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     Number      Percentage     Amount      Percentage    
                  (in millions)        

Existing shareholders

     17,850,009         76   $ 142,728,000         66   $ 8.00   

New investors

     5,750,000         24        74,750,000         34        13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     23,600,009         100   $ 217,478,000         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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Except as otherwise indicated, the discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters’ option to purchase additional shares from the selling shareholders is exercised in full, our existing shareholders would own approximately 73% and our new investors would own approximately 27% of the total number of our ordinary shares outstanding after this offering.

To the extent that any options or other equity incentive grants are issued in the future (including pursuant to the equity incentive plan we expect to adopt in connection with the completion of this offering) with an exercise price or purchase price below the initial public offering price, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present our historical selected consolidated financial data. The selected consolidated statement of operations data for the years ended December 26, 2014 and December 25, 2015 and the selected balance sheet data as of December 26, 2014 and December 25, 2015 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended September 25, 2015 and September 23, 2016 and the selected balance sheet data as of September 23, 2016 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial information has been prepared on the same basis as the annual consolidated financial information and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of September 23, 2016 and the results of operations for the nine months ended September 25, 2015 and September 23, 2016.

Our historical results are not necessarily indicative of the results that may be expected in the future and interim results are not necessarily indicative of results to be expected for the full year. You should read the selected historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

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     Year Ended     Nine Months Ended  
     December 26,
2014
    December 25,
2015
    September 25,
2015
    September 23,
2016
 
                 (Unaudited)  
     (In thousands, except share and per share amounts)  

Consolidated Statement of Operations Data:

        

Net sales

   $ 249,087      $ 290,641      $ 226,282      $ 274,339   

Cost of sales(1)

     212,747        242,087        188,197        230,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     36,340        48,554        38,085        43,990   

Operating expenses:

        

Research and development(1)

     3,915        4,813        3,469        4,229   

Selling, general and administrative(1)

     22,465        24,729        18,084        20,329   

Amortization of intangible assets

     6,411        6,411        4,808        5,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,791        35,953        26,361        29,768   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     3,549        12,601        11,724        14,222   

Interest expense

     3,118        3,831        2,898        3,245   

Other expense (income), net

     253        (46     (42     (384
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     178        8,816        8,868        11,361   

Income tax benefit from continuing operations(2)

     (5,604     (3,991     (3,924     (1,427
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     5,782        12,807        12,792        12,788   

Income (loss) from discontinued operations before taxes

     132        (7,406     (718     (4,013

Income tax expense (benefit) from discontinued operations

     (254     (225     (326     26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

     386        (7,181     (392     (4,039
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     6,168        5,626        12,400        8,749   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Preferred stock dividend

            (22,127              

Less: Undistributed earnings attributable to preferred shareholders

     (6,165            (12,773     (12,663
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ 3      $ (16,501   $ (373   $ (3,914
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share from continuing operations attributable to common shareholders:(3)

        

Basic

   $ 0.04      $ (36.31   $ 0.09      $ 0.16   

Diluted

   $ 0.02      $ (36.31   $ 0.05      $ 0.05   

Net income (loss) per share attributable to common stockholders:(3)

        

Basic

   $ 0.04      $ (64.28   $ (1.74   $ (4.95

Diluted

   $ 0.02      $ (64.28   $ (1.78   $ (5.06

Shares used to compute net income (loss) from continuing operations per share attributable to common stockholders:(3)

        

Basic

     67,663        256,701        213,935        790,678   

Diluted

     148,357        256,701        414,028        2,392,154   

Shares used to compute net income per share attributable to common stockholders:(3)

        

Basic

     67,663        256,705        214,368        790,707   

Diluted

     148,357        256,705        209,551        773,518   

 

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     Year Ended      Nine Months Ended  
     December 26,
2014
     December 25,
2015
     September 23,
2016
 
                   (Unaudited)  
     (In thousands)  

Consolidated Balance Sheet Data:

        

Cash and restricted cash

   $ 14,373       $ 24,188       $ 25,304   

Working capital

     28,117         24,860         35,626   

Total assets

     215,563         198,023         244,101   

Total long-term debt(4)

     55,750         65,000         81,260   

Preferred stock

     142,728         142,728         142,728   

Total shareholders’ equity

     90,061         74,678         84,772   

 

(1) Share-based compensation included in the consolidated statement of operations data above was as follows:

 

     Year Ended      Nine Months Ended  
     December 26,
2014
     December 25,
2015
     September 25,
2015
     September 30,
2016
 
                   (Unaudited)  
     (In thousands)  

Share-Based Compensation Expense:

           

Cost of sales

   $ 33       $ 105       $ 22       $ 12   

Research and development

     51         46         35         27   

Selling general and administrative

     927         967         750         1,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 1,011       $ 1,118       $ 807       $ 1,345   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Income tax expense (benefit) consists primarily of federal and state income tax benefits in the United States offset in part by income tax expense in certain foreign jurisdictions. Our historical income tax benefit resulted from losses recorded in the United States, where we incur the majority of our corporate expenses and which was being fully benefited through the third quarter of 2015 as a result of acquired deferred tax liabilities, offset by income in Singapore, which has no tax expense as a result of a tax holiday through 2019. Starting in the fourth quarter of 2015, the Company’s tax provision consisted primarily of foreign based tax provisions primarily in Malaysia and Scotland. We are no longer benefiting from losses generated in the United States, with the exception of the third quarter of 2016 during which we recorded a one-time tax benefit of $2.2 million related to the Ajax acquisition.
(3) Please see Note 14 of our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our actual basic and diluted net income per share and our pro forma unaudited basic and diluted net income per share.
(4) Does not include debt discount of $615, $2,412 and $2,017 as of December 26, 2014, December 25, 2015 and September 23, 2016, respectively.

 

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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 prospectus. 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 prospectus, particularly in “Risk Factors”.

Our fiscal year ends on the last Friday of December and our fiscal quarters end on the last Friday of the 13th week of the year, the last Friday of June and the last Friday of September, respectively. The fiscal years ended December 26, 2014 and December 25, 2015, referred to herein as fiscal 2014 and fiscal 2015, respectively, had 52 weeks each, and the fiscal year ended December 30, 2016 will have 53 weeks. The third fiscal quarters ended September 25, 2015 and September 23, 2016 each had 13 weeks.

Overview

We are a leader in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment. Our primary offerings include gas and chemical delivery subsystems, collectively known as fluid delivery 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 subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as electroplating and cleaning. We also manufacture certain components for internal use in fluid delivery systems and for direct sales to our customers. 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 process. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes. Historically, semiconductor OEMs internally designed and manufactured the fluid delivery subsystems used in their process tools. Currently, most OEMs outsource the design, engineering and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are also increasingly 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 fixed costs and development time, as well as provided significant growth opportunities for specialized subsystems suppliers like us.

We have a global footprint with volume production facilities in Malaysia, Singapore and Union City, California. In fiscal 2014 and 2015, our two largest customers by sales were Lam Research and Applied Materials. During fiscal 2014 and fiscal 2015, respectively, we generated sales of $249.1 million and $290.6 million, gross profit of $36.3 million and $48.6 million, net

 

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income from continuing operations of $5.8 million and $12.8 million and adjusted net income from continuing operations of $11.7 million and $20.2 million. During the nine months ended September 25, 2015 and September 23, 2016, respectively, we generated sales of $226.3 million and $274.3 million, gross profit of $38.1 million and $43.9 million, net income from continuing operations of $12.8 million and $12.8 million and adjusted net income from continuing operations of $17.9 million and $19.8 million. Adjusted net income is a financial measure that is not calculated in accordance with GAAP. See note 3 to “Prospectus Summary—Summary Consolidated Financial Data” for a discussion of adjusted net income, an accompanying presentation of the most directly comparable GAAP financial measure, net income (loss), and a reconciliation of the differences between adjusted net income and net income.

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 Device Industry

Our business is indirectly subject to the cyclicality of the semiconductor device industry. In fiscal 2015, we derived approximately 97% of our sales from the semiconductor device industry. Demand for semiconductor devices can fluctuate significantly based on changes in general economic conditions, including consumer spending, demand for the products that include these devices and other factors. These fluctuations have in the past resulted in significant variations in our results of operations. The cyclicality of the semiconductor device industries will continue to impact our results of operations in the future.

Customer Concentration

The number of capital equipment manufacturers for the semiconductor device industry has undergone significant consolidation in recent years, resulting in a small number of large manufacturers. Our customers have led much of this consolidation, resulting in our sales being concentrated in a few customers. In fiscal 2015, our two largest customers were Lam Research and Applied Materials, which accounted for approximately 57% and 38% of our sales, respectively. The sales we generated from these customers in fiscal 2015 were spread across 14 different product lines utilized in 10 unique manufacturing process steps. We believe the diversity of products that we provide to these customers, combined with the fact that our

 

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customers use our products on numerous types of process equipment, lessens the impact of the inherent concentration in the industry. 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 10 years.

Discontinued Operations

Discontinued operations consist of the results of operations for our systems integration business. The primary purpose of this business was to build modules and tools (metal organic chemical vapor deposition or ion implant) for Veeco Instruments, Inc. In January 2016, our management and the board of directors decided to discontinue this business because it consumed a significant amount of resources while generating low gross margins and contributing only a small amount to our net income. We completed our final builds of these products at the end of May 2016.

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 for semiconductor capital equipment and the sale of refurbished tools. Sales are recognized when persuasive evidence of an arrangement exists, transfer of title has occurred, the fee is fixed or determinable, and collectability is reasonably assured. Our shipping terms are FOB shipping point or FOB destination, or equivalent terms, and accordingly, sales are recognized when legal title has passed to the customer upon shipment or delivery.

Cost of Sales and Gross Profit

Cost of sales consists primarily of purchased materials, direct labor, indirect labor, plant overhead cost and depreciation expense for our manufacturing facilities and equipment, as well as certain engineering costs that are related to non-recurring engineering services that we provide to, and for which we invoice, our customers in connection with their product development activities. Our business has a highly variable cost structure with a low fixed overhead structure 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 in order 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

 

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expenses and consist of salaries, benefits, bonuses, share-based compensation and, with regard to sales and marketing expense, sales commissions. Operating expenses also include overhead costs for facilities, IT and depreciation. In addition, our operating expenses include costs related to the impairment of goodwill and intangible assets, amortization of intangible assets and restructuring 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. Research and development expense does not include engineering costs that are related to non-recurring engineering services that we provide to and for which we invoice our customers as part of sales, which are reflected as cost of sales. We expect research and development expense will increase in absolute dollars as our customers continue to increase their demand for new product designs and as we invest in our research and product development efforts to enhance our product capabilities and access new customer markets.

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. After this offering, we expect general and administrative expenses to also increase in absolute dollars due to an increase in costs related to being a public company, including higher legal, corporate insurance 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, net

Interest expense, net consists of interest on our outstanding debt under our Credit Facilities and any other indebtedness we may incur in the future.

Other Expense (Income), Net

The functional currency of our international subsidiaries located in the United Kingdom, Singapore and Malaysia 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, net on the accompanying consolidated statements of operations. Substantially all of our sales and agreements with third party suppliers provide for pricing and payments in U.S. dollars and, therefore, are not subject to material exchange rate fluctuations.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists primarily of federal and state income tax benefits in the United States offset in part by income tax expense in certain foreign jurisdictions. Our historical income tax benefit resulted from losses recorded in the United States, where we incur the majority of our corporate expenses and which was being fully benefited through the third quarter of 2015 as a result of acquired deferred tax liabilities, offset by income in Singapore, which has no tax expense as a result of a tax holiday through 2019. Starting in the fourth

 

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quarter of 2015, the Company’s tax provision consisted primarily of foreign based tax provisions primarily in Malaysia and Scotland. We are no longer benefiting from losses generated in the United States, with the exception of the third quarter of 2016 during which we recorded a one-time tax benefit of $2.2 million related to the Ajax acquisition.

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.

 

     Year Ended     Nine Months Ended  
     December 26,
2014
    December 25,
2015
    September 25,
2015
    September 23,
2016
 
                 (Unaudited)  
     (In thousands)  

Consolidated Statements of Operations Data:

  

Sales

   $ 249,087      $ 290,641      $ 226,282      $ 274,339   

Cost of sales

     212,747        242,087        188,197        230,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     36,340        48,554        38,085        43,990   

Operating expenses:

        

Research and development

     3,915        4,813        3,469        4,229   

Selling, general and administrative

     22,465        24,729        18,084        20,329   

Amortization of intangible assets

     6,411        6,411        4,808        5,210   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,791        35,953        26,361        29,768   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     3,549        12,601        11,724        14,222   

Interest expense

     3,118        3,831        2,898        3,245   

Other expense (income), net

     253        (46     (42     (384
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     178        8,816        8,868        11,361   

Income tax expense (benefit) from continuing operations

     (5,604     (3,991     (3,924     (1,427
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     5,782        12,807        12,792        12,788   

Income (loss) from discontinued operations before taxes

     132        (7,406     (718     (4,013

Income tax expense (benefit) from discontinued operations

     (254     (225     (326     26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

     386        (7,181     (392     (4,039
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,168      $ 5,626      $ 12,400      $ 8,749   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

    Year Ended     Nine Months Ended  
    December 26,
2014
    December 25,
2015
    September 25,
2015
    September 23,
2016
 
          (Unaudited)  
    (As a percentage of sales)  

Consolidated Statements of Operations Data:

 

Sales

    100.0        100.0        100.0        100.0   

Cost of sales

    85.4        83.3        83.2        84.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    14.6        16.7        16.8        16.0   

Operating expenses:

       

Research and development

    1.6        1.7        1.5        1.5   

Selling, general and administrative

    9.0        8.5        8.0        7.4   

Amortization of intangible assets

    2.6        2.2        2.1        1.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    13.2        12.4        11.6        10.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1.4        4.3        5.2        5.2   

Interest expense

    1.3        1.3        1.3        1.2   

Other expense (income), net

    0.1                      (0.1
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    0.1        3.0        3.9        4.1   

Income tax expense (benefit) from continuing operations

    (2.2     (1.4     (1.7     (0.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    2.3        4.4        5.6        4.6   

Income (loss) from discontinued operations before taxes

    0.1        (2.5     (0.3     (1.5

Income tax expense (benefit) from discontinued operations

    (0.1     (0.1     (0.1       
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

    0.2        (2.4     (0.2     (1.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    2.5        2.0        5.4        3.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended September 25, 2015 and September 23, 2016 (Unaudited)

 

     Nine Months Ended      Change  
     September 25, 2015      September 23, 2016      Amount      %  
     (Dollars in thousands)  

Sales

   $ 226,282       $ 274,339       $ 48,057         21.2

Sales

The increase in sales from the nine months ended September 25, 2015 to the nine months ended September 23, 2016 was primarily related to an increase in sales volume, partially offset by a decrease in sales from our refurbishment business due to a shortage of equipment available for purchase by us. The sales volume increase was due to an approximately 5%, or approximately $23.9 million, increase in our market share at our two largest customers, and an approximately $16.9 million increase in the volume of purchases by one of our two largest customers driven by overall industry growth. We refer to the volume of purchases from us by a

 

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customer of ours relative to its other suppliers as our market share at that customer. Ajax contributed $13.4 million to our sales for the nine months ended September 23, 2016. On a geographic basis, sales in the United States increased by $26.0 million to $151.7 million for the nine months ended September 23, 2016 compared to $125.7 million for the nine months ended September 25, 2015. Foreign sales increased by $22.4 million to $123.0 million for the nine months ended September 23, 2016 compared to $100.6 million for the nine months ended September 25, 2015.

Cost of Sales and Gross Margin

 

     Nine Months Ended     Change  
     September 25, 2015     September 23, 2016     Amount      %  
     (Dollars in thousands)  

Cost of sales

   $ 188,197      $ 230,349      $ 42,152         22.4

Gross profit

   $ 38,085      $ 43,990      $ 5,905         15.5

Gross margin

     16.8     16.0     

The increase in cost of sales from the nine months ended September 25, 2015 to the nine months ended September 23, 2016 was primarily due to the increase in sales.

Gross profit increased by $5.9 million driven primarily by an increase in volume of $8.1 million, which included approximately $2.2 million from the acquisition of Ajax, partially offset by a decline in our refurbishment business of $1.3 million due to reduced volumes and very low factory utilization, a decline in margin at individual customers of $0.7 million and a shift in customer mix at our two largest customers of $0.2 million.

Gross margin decreased by 0.8 percentage points from 16.8% to 16.0%. The cause of this decline was primarily the decline in margins in our refurbishment business. In the nine months ended September 25, 2015, our refurbishment business was among our more profitable operations, while in the nine months ended September 23, 2016, revenue from our refurbishment business decreased significantly as compared to the prior year period. A decline in margin at individual customers and a shift in customer mix also negatively impacted our gross margin in the 2016 period.

Research and Development

 

     Nine Months Ended      Change  
     September 25, 2015      September 23, 2016      Amount      %  
     (Dollars in thousands)  

Research and development

   $ 3,469       $ 4,229       $ 760         21.9

The increase in research and development expenses from the nine months ended September 25, 2015 to the nine months ended September 23, 2016 was due to the increase in headcount to support additional projects.

Selling, General and Administrative

 

    Nine Months Ended     Change  
    September 25, 2015     September 23, 2016     Amount     %  
    (Dollars in thousands)  

Selling, general and administrative

  $ 18,084      $ 20,329      $ 2,245        12.4

 

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The increase in selling, general and administrative expenses from the nine months ended September 25, 2015 to the nine months ended September 23, 2016 was due to $1.2 million in increased acquisition-related costs, $1.0 million in increased expenses from Ajax, $0.6 million in increased share-based compensation expenses, $0.4 million in increased initial public offering expenses, and $0.2 million in increased incentive compensation expenses related to improved operating results, offset in part by a $1.2 million decrease in cash bonuses awarded to holders of employee equity awards in connection with the 2015 Dividend.

Interest Expense, Net

 

     Nine Months Ended      Change  
     September 25, 2015      September 23, 2016      Amount      %  
     (Dollars in thousands)  

Interest expense, net

   $ 2,898       $ 3,245       $ 347         12.0

Interest expense, net increased in the nine months ended September 23, 2016 compared to the nine months ended September 25, 2015 due to a $17.3 million increase in the average amount borrowed in the 2016 period compared to the 2015 period as a result of additional borrowings in connection with the Ajax acquisition. Prevailing interest rates were comparable during those periods.

Other Expense (Income), Net

 

     Nine Months Ended      Change  
     September 25, 2015      September 23, 2016      Amount      %  
     (Dollars in thousands)  

Other expense (income), net

   $ (42    $ (384    $ (342      814.3

The change in other expense (income), net from the nine months ended September 25, 2015 to the nine months ended September 23, 2016 was due to exchange rate fluctuations on transactions denominated in the local currencies of our foreign operations, principally the Singapore Dollar, Malaysian Ringgit and British Pound.

Income Tax Expense (Benefit) from Continuing Operations

 

     Nine Months Ended      Change  
     September 25, 2015      September 23, 2016      Amount      %  
     (Dollars in thousands)  

Income tax benefit from continuing operations

   $ (3,924    $ (1,427    $ 2,497         (63.6)

The decrease in the income tax benefit from continuing operations from the nine months ended September 25, 2015 to the nine months ended September 23, 2016 was primarily due to the recognition of the valuation allowance against substantially all U.S. federal and state net deferred tax assets in the fourth quarter of 2015. Income tax benefit recorded for the nine months ended September 25, 2015 consisted primarily of U.S. federal and state income tax benefits in the United States offset in part by income tax expense in certain foreign jurisdictions in which we conduct business. During the fourth quarter of 2015, we determined that it is more likely than not that our U.S. entities will not generate sufficient taxable income to offset reversing deductible temporary differences and to fully utilize tax attribute carryforwards. As a result, we recorded a valuation allowance to reduce our U.S. federal and state deferred tax

 

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assets to the amount that is more likely than not to be realized. During the third quarter of 2016, we recorded a one-time tax benefit of $2.2 million as a result of the deferred tax liability created from purchase accounting in connection with the Ajax acquisition allowing for the release of an equal amount of valuation allowance on a U.S. consolidated basis. Therefore, income tax benefit recorded for the nine months ended September 23, 2016 consisted primarily of this benefit offset in part by income tax expense in certain foreign jurisdictions in which we conduct business.

Comparison of the Years Ended December 26, 2014 and December 25, 2015

Sales

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Sales

   $ 249,087       $ 290,641       $ 41,554         16.7

The increase in sales from fiscal 2014 to fiscal 2015 was primarily related to an increase in sales volume due to an approximately 7%, or approximately $30 million, increase in our market share at our two largest customers, and an approximately $8.0 million increase in the volume of purchases by our two largest customers driven by overall industry growth. We refer to the volume of purchases from us by a customer of ours relative to its other suppliers as our market share at that customer. The balance of the sales increase was driven by our refurbishment business, where we added additional services. On a geographic basis, sales in the United States decreased by $3.1 million to $157.7 million for fiscal 2015 compared to $160.8 million for fiscal 2014. Foreign sales increased by $44.7 million to $133.0 million for fiscal 2015 compared to $88.3 million for fiscal 2014.

Cost of Sales and Gross Margin

 

     Year Ended     Change  
     December 26,
2014
    December 25,
2015
    Amount      %  
     (Dollars in thousands)  

Cost of sales

   $ 212,747      $ 242,087      $ 29,340         13.8

Gross profit

   $ 36,340      $ 48,554      $ 12,214         33.6

Gross margin

     14.6     16.7     

The increase in cost of sales from fiscal 2014 to fiscal 2015 was primarily due to the increase in sales.

Gross profit increased by $12.2 million driven primarily by an increase in sales volume, which accounted for $6.1 million, improved margins at our two largest customers, which accounted for $4.6 million, and a shift in customer mix, which accounted for $1.5 million.

Gross margin increased by 2.1 percentage points from 14.6% to 16.7%. The cause of this increase was an improvement with respect to the margin at individual customers and customer mix which represented 1.6% and 0.5%, respectively, of the increase.

 

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Research and Development

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Research and development

   $ 3,915       $ 4,813       $ 898         22.9

The increase in research and development expense from fiscal 2014 to fiscal 2015 was due to an increase in headcount costs of $0.4 million and outside engineering services of $0.4 million to support new product introductions and additional product design activity.

Selling, General and Administrative

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Selling, general and administrative

   $ 22,465       $ 24,729       $ 2,264         10.1

The increase in selling, general and administrative expenses from fiscal 2014 to 2015 was due to the cash bonuses awarded to holders of employee equity awards in connection with the 2015 Dividend of $1.8 million and an increase in third-party accounting fees of $0.5 million.

Amortization of Intangible Assets

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Amortization of intangibles assets

   $ 6,411       $ 6,411       $ —           0.0

Amortization of intangible assets was the same in fiscal 2015 and fiscal 2014.

Interest Expense, Net

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Interest expense, net

   $ 3,118       $ 3,831       $ 713         22.9

Interest expense, net increased in fiscal 2015 compared to fiscal 2014 due primarily to the refinancing of our credit facilities in August 2015, which resulted in a $0.5 million write-off relating to the former debt issuance costs. In addition, the average amount borrowed increased by $3.1 million in fiscal 2015 compared to fiscal 2014. Prevailing interest rates were comparable during those periods.

Other Expense (Income), Net

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Other expense (income), net

   $ 253       ($ 46    ($ 299      N/M   

 

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The change in other expense (income), net from fiscal 2014 to fiscal 2015 was due to exchange rate fluctuations on transactions denominated in the local currencies of our foreign operations, principally the Singapore Dollar, Malaysian Ringgit and British Pound.

Income Tax Expense (Benefit) from Continuing Operations

 

     Year Ended      Change  
     December 26,
2014
     December 25,
2015
     Amount      %  
     (Dollars in thousands)  

Income tax expense (benefit) from continuing operations

   ($ 5,604    ($ 3,991    $ 1,613         (28.8 %) 

The decrease in the income tax benefit from continuing operations from fiscal 2014 to fiscal 2015 was primarily due to an increase in tax expense in certain foreign jurisdictions in which we conduct business and the impact of recording the valuation allowance against substantially all U.S. federal and state net deferred tax assets during the fourth quarter of 2015. During the fourth quarter of 2015, we determined that it is more likely than not that our U.S. entities will not generate sufficient taxable income to offset reversing deductible temporary differences and to fully utilize tax attribute carryforwards. As a result, we recorded a valuation allowance to reduce our U.S. federal and state deferred tax assets to the amount that is more likely than not to be realized.

 

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Quarterly Results of Operations (Unaudited)

The following table sets forth our unaudited quarterly consolidated statement of operations data in dollars for each of the last 10 quarters in the period ended September 23, 2016. The unaudited information for each such quarter has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in our opinion, reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this information. The results of historical quarters are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended  
    June 27,
2014
    September 26,
2014
    December 26,
2014
    March 27,
2015
    June 26,
2015
    September 25,
2015
    December 25,
2015
    March 25,
2016
    June 24,
2016
    September 23,
2016
 
    (In thousands)  

Sales

  $ 59,260      $ 51,011      $ 61,002      $ 77,523      $ 73,293      $ 75,466      $ 64,359      $ 73,287      $ 95,365      $ 105,687   

Cost of sales

    51,568        44,189        51,520        64,161        61,224        62,812        53,890        61,362        80,185        88,802   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,692        6,822        9,482        13,362        12,069        12,654        10,469        11,925        15,180        16,885   

Operating expenses:

                   

Research and development

    1,055        890        931        991        1,081        1,397        1,344        1,375        1,290        1,564   

Selling, general and administrative

    6,294        4,481        6,304        5,006        6,042        7,036        6,645        6,364        7,183        6,782   

Amortization of intangible assets

    1,603        1,603        1,603        1,603        1,603        1,602        1,603        1,603        1,803        1,804   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    8,952        6,974        8,838        7,600        8,726        10,035        9,592        9,342        10,276        10,150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (1,260     (152     644        5,762        3,343        2,619        877        2,583        4,904     

 

6,735

  

Interest expense, net

    782        762        758        757        726        1,414        934        902        1,160        1,183   

Other expense (income), net

    5        25        147        (30     28        (40     (4     (387     244        (241
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (2,047     (939     (261     5,035        2,589        1,245        (53     2,068        3,500        5,793   

Income tax expense (benefit) from continuing operations

    (1,780     (1,469     (1,760     (835     (930     (2,159     (67     236        225        (1,888
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    (267     530        1,499        5,870        3,519        3,404        14        1,832        3,275        7,681   

Income (loss) from discontinued operations before taxes

    347               (207     (335     338        (721     (6,688     (1,724     (2,305     16   

Income tax expense (benefit) from discontinued operations

    129        (6     (83     (125     133        (333     100        1        2        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

    218        6        (124     (210     205        (388     (6,788     (1,725     (2,307     (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

  $ (49   $ 536      $ 1,375      $ 5,660      $ 3,724      $ 3,016      $ (6,774   $ 107      $ 968      $ 7,674   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our unaudited quarterly consolidated statement of operations data as a percentage of sales for each of the last ten quarters in the period ended September 23, 2016.

 

    Three Months Ended    

 

 
    June 27,
2014
    September 26,
2014
    December 26,
2014
    March 27,
2015
    June 26,
2015
    September 25,
2015
    December 25,
2015
    March 25,
2016
    June 24,
2016
    September 23,
2016
 
    (As a percentage of sales)  

Sales

    100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0   

Cost of sales

    87.0        86.6        84.5        82.8        83.5        83.2        83.7        83.7        84.1        84.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    13.0        13.4        15.5        17.2        16.5        16.8        16.3        16.3        15.9        16.0   

Operating expenses:

                   

Research and development

    1.8        1.7        1.5        1.3        1.5        1.9        2.1        1.9        1.4        1.5   

Selling, general and administrative

    10.6        8.8        10.3        6.5        8.2        9.3        10.3        8.7        7.5        6.4   

Amortization of intangible assets

    2.7        3.1        2.6        2.1        2.2        2.1        2.5        2.2        1.9        1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    15.1        13.7        14.5        9.8        11.9        13.3        14.9        12.7        10.8        9.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (2.1     (0.3     1.1        7.4        4.6        3.5        1.4        3.5        5.1        6.4   

Interest expense, net

    1.3        1.5        1.2        1.0        1.0        1.9        1.4        1.2        1.2        1.1   

Other expense (income), net

                  0.2                      (0.1            (0.5     0.3        (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (3.5     (1.8     (0.4     6.5        3.5        1.6        (0.1     2.8        3.7        5.5   

Income tax expense (benefit) from continuing operations

    (3.0     (2.9     (2.9     (1.1     (1.3     (2.9     (0.1     0.3        0.2        (1.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    (0.5     1.0        2.5        7.6        4.8        4.5               2.5        3.4        7.3   

Income (loss) from discontinued operations before taxes

    0.6               (0.3     (0.4     0.5        (1.0     (10.4     (2.4     (2.4       

Income tax expense (benefit) from discontinued operations

    0.2               (0.1     (0.2     0.2        (0.4     0.2                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

    0.4               (0.2     (0.3     0.3        (0.5     (10.5     (2.4     (2.4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

    (0.1     1.1        2.3        7.3        5.1        4.0        (10.5     0.1        1.0        7.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sales and gross margin fluctuated based on customer demand, product mix and our ability to adjust our labor force in anticipation of current and future forecasted customer demand. Operating expenses have generally increased starting in the three months ended June 27, 2014 due to increased share-based compensation and management performance bonuses resulting from our grant of additional options and restricted stock awards to new management and more consistent achievement of management performance bonus targets. Additionally, research and development expenses have increased in total dollars as we

 

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continue to add personnel to meet increased customer demand for new product designs and to support our entry into emerging markets. Selling, general and administrative expenses have also increased with the addition of new sales personnel to drive our sales growth strategies. In the second and third quarters of 2016, Ajax contributed $5.7 million and $7.7 million of revenue, respectively, and an operating income (loss) of $(0.5) million and $0.7 million, respectively, due to acquisition-related charges. Starting in the fourth quarter of 2015, the Company established a valuation allowance in the United States and is no longer benefiting from losses generated in such jurisdiction with the exception of the third quarter of 2016 during which we recorded a one-time tax benefit of $2.2 million related to the Ajax acquisition. Our historical tax benefits are not necessarily indicative of future results.

Seasonality

We have not historically experienced meaningful seasonality with respect to our business or results of operations.

Liquidity and Capital Resources

We had cash and restricted cash of $25.3 million as of September 23, 2016. Our principal uses of liquidity are to fund our working capital needs, satisfy our debt obligations, and maintain our equipment and purchase new capital equipment. To date, we have financed our operations primarily through cash flows generated from operations. In addition, we utilize our Revolving Credit Facility to meet short term liquidity needs. See “Credit Facilities” below for additional information on our Credit Facilities.

We believe that our cash, the amounts available under our Credit Facilities and our cash flows from operations, together with the net proceeds of this offering, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Cash Flow Analysis

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

 

    Year Ended     Nine Months Ended  
    December 26,
2014
    December 25,
2015
    September 25,
2015
    September 23,
2016
 
    (In thousands)  

Cash provided by operating activities

  $ 8,091      $ 26,690      $ 10,991      $ 4,025   

Cash used in investing activities

    (3,468     (1,367     (1,062     (19,186

Cash provided by (used in) financing activities

    (3,231     (15,508     (9,508     16,277   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and restricted cash

  $ 1,392      $ 9,815      $ 421      $ 1,116   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

We generated $4.0 million of cash from operating activities during the nine months ended September 23, 2016 due to net income of $8.7 million and non-cash charges of $6.3 million, offset in part by a net increase of $11.0 million in our net operating assets and liabilities. Non-cash charges primarily related to $7.0 million in depreciation and amortization, $1.3 million in share-based compensation, and $0.4 million in amortization of debt issuance cost, offset in part by $2.4 million in deferred tax benefit. The net increase in our net operating assets and liabilities was

 

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primarily the result of a $13.4 million increase in accounts receivable due to increased sales and timing of customer payments, an increase in inventory of $10.2 million due to anticipated sales in the fourth quarter of 2016, and a decrease in customer deposits of $4.3 million arising from a reduction in customer orders associated with discontinued operations. The increase in net operating assets and liabilities was partially offset by an increase in accounts payable of $15.7 million resulting from increased materials purchased to support higher sales volumes.

We generated $11.0 million of cash from operating activities during the nine months ended September 25, 2015 due to net income of $12.4 million and non-cash charges of $4.5 million partially offset by a net increase of $5.9 million in our net operating assets and liabilities. Non-cash charges primarily related to $7.5 million in depreciation and amortization, $0.8 million in share-based compensation and amortization of debt issuance cost of $0.7 million, partially offset by $4.5 million in deferred tax benefit. The net increase in our net operating assets and liabilities was primarily the result of a decrease in accounts payable of $4.7 million, a decrease in customer deposits of $2.8 million arising from decreased product orders from a customer that pays a partial deposit at the time a purchase order is placed and a $2.0 million increase in inventory, offset in part by a decrease in accounts receivable of $4.5 million.

We generated $26.7 million of cash from operating activities in fiscal 2015 due to net income of $5.6 million and non-cash charges of $10.1 million, and a net increase of $10.9 million in our net operating assets and liabilities. Non-cash charges primarily related to $9.9 million in depreciation and amortization, $1.1 million in share-based compensation, $3.2 million related to the impairment of intangible and fixed assets and $0.5 million in write-off of former debt issuance cost, partially offset by $4.9 million in deferred tax benefit. The net change in our operating assets and liabilities was primarily the result of a $9.1 million decrease in inventory due to our initiative to reduce our inventory in the fourth quarter of fiscal 2015, a decrease in accounts receivable of $6.3 million due to the timing of customer payments, partially offset by the decrease, in customer deposit of $3.5 million and accounts payable of $1.7 million.

We generated $8.1 million of cash from operating activities in fiscal 2014 due to net income of $6.2 million and non-cash charges of $4.8 million, offset in part by a net increase of $2.8 million in our net operating assets and liabilities. Non-cash charges primarily related to $9.6 million in depreciation and amortization and $1.0 million in share-based compensation offset in part by $6.2 million in deferred tax benefit. The net change in our operating assets and liabilities was primarily the result of a $12.1 million increase in inventory due to materials purchases in the fourth quarter of fiscal 2014 in anticipation of sales increases in the first quarter of fiscal 2015. The increase in net operating assets and liabilities was partially offset by an $8.7 million increase in accounts payable resulting from increased materials purchases in anticipation of sale increases in the first quarter of 2015 and a $1.0 million decrease in accounts receivable based on timing of customer payments.

Investing Activities

Cash used in investing activities during the nine months ended September 23, 2016 was $19.2 million. We used $17.4 million, net of cash acquired, to acquire Ajax and $2.3 million from capital expenditures to purchase test fixtures and leasehold improvements primarily related to our plant expansions in the United States and Malaysia, partially offset by proceeds from sales of certain intangible and fixed assets totaling $0.5 million.

Cash used in investing activities during the nine months ended September 25, 2015 was $1.1 million for capital expenditures primarily related to facility and test fixtures.

 

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Cash used in investing activities in fiscal 2015 was $1.4 million from capital expenditures for the purchase of property and equipment relating to our manufacturing footprint in our Oregon, Texas and corporate facilities.

Cash used in investing activities in fiscal 2014 was $3.5 million from capital expenditures for the purchase of property and equipment relating to our plant expansion in Scotland, our manufacturing footprint in our Oregon, Texas and Malaysia facilities and ERP hardware upgrade.

Financing Activities

We generated $16.3 million of cash from financing activities during the nine months ended September 23, 2016, which consisted of $27.0 million of proceeds from borrowings under our Credit Facilities and $10.7 million in payments on our Term Loan and Revolving Credit Facility.

We used $9.5 million of cash in financing activities during the nine months ended September 25, 2015, which consisted of $60.0 million for the repayment of bank borrowings, offset in part by $75.0 million in proceeds from new bank borrowings. We also paid cash dividends to our shareholders of $22.1 million and $2.6 million in fees related to the refinancing of our indebtedness, including the entry into our Credit Facilities, in the third quarter of 2015.

We used $15.5 million of cash in financing activities in fiscal 2015, which consisted of $69.8 million for the repayment of bank borrowings offset in part by $79.0 million in proceeds from new bank borrowings. We also paid cash dividends to our shareholders of $22.1 million and $2.6 million in fees related to the refinancing of our indebtedness, including the entry into our Credit Facilities.

We used $3.2 million of cash in financing activities in fiscal 2014, which consisted of $12.2 million for the repayment of bank borrowings offset in part by $9 million in proceeds from bank borrowings.

Credit Facilities

On August 11, 2015, we entered into a $55.0 million term loan facility, or our Term Loan Facility, and a $20.0 million revolving credit facility, including a letter of credit facility, or our Revolving Credit Facility, and together with our Term Loan Facility, our Credit Facilities, pursuant to a Credit Agreement, dated as of August 11, 2015, or the Credit Agreement. We used borrowings under our Credit Facilities to repay all outstanding indebtedness under our prior term loan facility and revolving credit facility. In April 2016, we increased our Term Loan Facility to $70 million to fund the Ajax Acquisition.

As of September 23, 2016, the outstanding principal amount of our Term Loan Facility was $66.3 million and our Revolving Credit Facility was $15.0 million. The outstanding amount of our Term Loan Facility reflected in our consolidated financial statements included elsewhere in this prospectus is net of $2.0 million of debt discount. The material terms of our Credit Facilities are described below and in “Description of Certain Indebtedness.”

Our Credit Facilities are guaranteed by certain of our subsidiaries and secured by substantially all of our tangible and intangible assets (subject to certain exceptions and limitations). The term loan facility is to be repaid in consecutive quarterly payments of (a) $1,447,727 for the quarters ending December 31, 2016 through September 30, 2018 and (b) $1,034,091 for the quarters ending December 31, 2018 through June 30, 2020, provided that to the extent a “qualified initial public offering” (as defined below) has occurred, the foregoing

 

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quarterly payments are reduced to $1,034,091 for the quarters ending December 31, 2016 through June 30, 2020. The outstanding principal amount of our term loan facility and revolving credit facility is due upon maturity on August 11, 2020.

Borrowings under our Term Loan Facility and our Revolving Credit Facility each bear interest at (1) for base rate loans, the “base rate” (as defined below) plus 3.00% or (2) for eurodollar loans, the “eurodollar rate” (as defined below) plus 4.00%. The base rate equals the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.50% and (iii) the eurodollar rate plus 1.00%. The eurodollar rate equals LIBOR, provided that with respect to our Term Loan Facility only, LIBOR shall not be less than 1.00%. We must pay a commitment fee equal to 1.50% per annum on the unused portion of our Revolving Credit Facility.

We are obligated to make certain prepayments on our Credit Facilities under certain circumstances, including (1) upon an initial public offering in which at least $75 million of net cash proceeds are received, $17,500,000 of such net cash proceeds plus an additional amount of such net cash proceeds that would result in our consolidated total net leverage ratio to be less than 1.75:1.00 (2) the incurrence of new indebtedness outside of our Credit Facilities, (3) the receipt of proceeds from asset sales and (4) upon earning excess cash flows. The Credit Agreement contains customary representations, warranties and covenants, including financial covenants.

As amended, the Credit Agreement requires us to comply with the following financial covenants:

 

   

a maximum consolidated fixed charge coverage ratio of 1.25:1.00, commencing with the fiscal quarter ending December 31, 2015; and

 

   

a maximum consolidated leverage ratio as set forth below for the applicable quarter set forth below:

 

Four (4) Fiscal Quarters Ending on or About

   Maximum Consolidated
Leverage Ratio
 

December 31, 2015 through September 2016

     3.00:1.00   

December 31, 2016 through September 2017

     2.50:1.00   

December 31, 2017 through September 2018

     2.25:1.00   

December 31, 2018 through June 30, 2020

     2.00:1.00   

Contractual Obligations and Commitments

The following summarizes our contractual obligations and commitments as of September 23, 2016:

 

     Payments Due by Period  
     Total      Less Than 1
Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (In thousands)  

Operating leases

   $ 9,228       $ 3,576       $ 3,547       $ 1,452       $ 653   

Long-term debt obligations, principal(1)

     81,277         5,791         10,341         65,145           

Long-term debt obligations, interest(2)

     13,210         3,880         7,529         1,801           

Purchase obligations(3)

     55,240         55,240                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 158,955       $ 68,487       $ 21,417       $ 68,398       $ 653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the contractually required principal payments under our Credit Facilities in accordance with the required principal payment schedule.

 

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(2) Represents the contractually required interest payments under our Credit Facilities in accordance with the required interest payment schedule. Interest costs have been estimated based on interest rates in effect for such indebtedness as of September 23, 2016.
(3) Purchase obligations consist primarily of inventory purchase obligations (both cancellable and non-cancellable) with our independent suppliers.

The table above excludes the amount of such uncertain tax positions of $0.5 million as of September 23, 2016 due to the uncertainty of when the related tax settlements will become due.

Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. If we cannot provide reliable financial information, our business, operating results and share price could be negatively impacted.

During early 2015, we identified a material weakness. Specifically, we had overstated our liabilities for the goods received but not invoiced account and cost of goods sold relating to certain aged transactions, whereby accounts payable was not reduced on a timely basis. To remediate this weakness, we have initiated compensating controls regarding the reconciliation of these accounts at the end of each period, including the implementation of a new account reconciliation tool and a more detailed account review.

Critical Accounting Policies and 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.

Sales Recognition

Product sales are recognized when there is persuasive evidence of an arrangement, product delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Our shipping terms are FOB shipping point or FOB destination, or equivalent terms, and accordingly, sales are recognized when legal title has passed to the customer upon shipment or delivery. Title and risk of loss generally pass to the customer at the time of delivery of the product to a common carrier. All amounts billed to a customer related to shipping and handling are classified as sales, while all costs incurred by us for shipping and handling are classified as cost of sales.

 

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Sales are recognized when all of the following criteria are met:

 

   

we enter into a legally binding arrangement with a customer;

 

   

we ship the product;

 

   

we determine the fee is fixed or determinable based on the payment terms associated with the transaction and free of contingencies or significant uncertainties; and

 

   

collectability is reasonably assured . We assess collectability based on credit analysis and payment history. We require collateral, typically cash, in the normal course of business if customers do not meet its criteria established for offering credit.

Inventory Valuation

We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a subsystem or as separate inventory. For fiscal 2014, fiscal 2015, the nine months ended September 25, 2015 and September 23, 2016, we wrote down $1.5 million, $3.0 million, $1.3 million and $3.2 million respectively, in inventory determined to be obsolete.

Goodwill, Intangibles Assets, and Long-lived Assets

Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. We evaluate our goodwill and indefinite life trade name for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. We operate as a single segment and reporting unit. In addition, we evaluate our identifiable intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include significant changes in the manner of our use of the acquired assets or the strategy of our overall business; significant decreases in the market price of the asset; significant negative changes in sales of specific products or services; and significant negative industry or economic trends.

We continually apply judgment when performing these evaluations and continuously monitor for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term sales growth projections, undiscounted net cash flows, discount rates, recent market valuations from transactions by comparable companies, volatility in our market capitalization and general industry, market and macroeconomic conditions. It is possible that changes in such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing fair value, would require us to record a non-cash impairment charge.

 

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At December 25, 2015, the date of our last impairment analysis, the fair value of the reporting unit was substantially in excess of its carrying value.

Share-Based Compensation

Our share-based compensation was $1.0 million, $1.1 million, $0.8 million and $1.3 million for the years ended December 26, 2014 and December 25, 2015 and the nine months ended September 25, 2015 and September 23, 2016, respectively. Compensation expense related to share-based transactions, including employee and non-employee stock options, is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model and a single option award approach. Share-based compensation expense is recognized, net of forfeitures, over the requisite service periods of the awards, which is generally four years.

Our use of the Black-Scholes option-pricing model requires the input of subjective assumptions, including the fair value of the underlying ordinary shares, the expected term of the option, and the expected volatility of the price of our ordinary shares, risk-free interest rates, and the expected dividend yield of our ordinary shares. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future.

These assumptions and estimates are as follows:

 

   

Fair Value of Ordinary Shares .    Because there has been no public market for our ordinary shares, our board of directors has determined the fair value of our ordinary shares by considering a number of objective and subjective factors, including valuations of comparable companies, operating and financial performance, lack of liquidity of our ordinary shares and general and industry-specific economic outlook, among other factors. In addition, we periodically obtain third party valuations to support the determination by our board of directors of the fair value of our ordinary shares.

 

   

Risk-Free Interest Rate .    We base the risk-free interest rate used in the Black-Scholes option-pricing model based on the U.S. Treasury rates in effect during the corresponding period of grant.

 

   

Expected Term .    We use the simplified method to estimate the expected term of option awards.

 

   

Volatility .    We determine the price volatility factor based on the historical volatilities of our publicly traded peer group as we do not have a trading history for our ordinary shares. Industry peers consist of several public companies in the industries that are similar to us in size, stage of life cycle, and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of the price of our own ordinary shares share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

   

Dividend Yield .    The expected dividend assumption is based on our current expectations about our anticipated dividend policy. Consequently, we used an expected dividend yield of zero.

 

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For valuations after the completion of this offering, our board of directors will determine the fair value of each underlying ordinary share based on the closing price of our ordinary shares as reported on the date of grant.

Income Taxes

The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our business, results of operations and financial position. We believe we have adequately reserved for our uncertain tax positions, however, no assurance can be given that the final tax outcome of these matters will not be different than what we expect. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome for these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve positions and changes to reserves that are considered appropriate, as well as the related net interest.

We file income tax returns in the U.S. federal jurisdiction, various states and various foreign jurisdictions. We are no longer subject to U.S. federal examination for tax years ending before 2013, to state examinations before 2012 or to foreign examinations before 2011. We are currently enjoying a zero rate tax holiday in Singapore that is scheduled to expire at the end of fiscal 2019. This tax rate is subject to achieving certain commitments agreed to with the Economic Development Board of Singapore including investment and employment thresholds. Our tax rate could be significantly affected if we are unable to meet these commitments or if we are unable to favorably renegotiate the commitment requirements. As of December 25, 2015, the Company was in compliance with the commitment requirements, with the exception of the headcount requirement for which the Singapore taxing authority has granted a waiver. The Company intends to be in compliance with the remaining commitment requirements by March 31, 2017.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board, or the FASB, issued Accounting Standard Update, or ASU, 2013-11, Income Taxes—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists, on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance became effective for us on January 1, 2014 and it was to be applied prospectively to unrecognized tax benefits that existed at the effective date with retrospective application permitted. We adopted the guidance on January 1, 2014. The guidance had no material impact on our financial position or results of operations in the first quarter of 2014.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the

 

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transfer of promised goods or services to customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The ASU is effective for reporting periods beginning after December 15, 2017 (December 15, 2018 for non-public entities), with an early adoption permitted for reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this accounting standard.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, an amendment to ASC 205, Presentation of Financial Statements. This update provides guidance on management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its financial statements or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. We adopted ASU 2015-03 on December 26, 2015 and retroactively recorded debt issuance costs as a reduction to Term Loan A for all periods presented.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which for entities that do not measure inventory using the last-in, first-out (LIFO) or retail inventory method, changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The ASU also eliminates the requirement for these entities to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted as of the beginning of an interim or annual period. The Company is currently evaluating the impact of this accounting standard.

In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement—Period Adjustments—Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for periods beginning after December 15, 2015. We adopted ASU 2015-16 on December 26, 2015 on a prospective basis for any changes to provisional amounts after the acquisition date. In the third quarter of 2016, we recognized certain measurement period adjustments as disclosed in Note 2 to our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires entities with a classified balance sheet to

 

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present all deferred tax assets and liabilities as noncurrent. ASU 2015-17 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We adopted ASU 2015-17 on a retrospective basis in 2015. Accordingly, to conform with the 2015 presentation, we reclassified the current deferred taxes to noncurrent on our December 26, 2014 Consolidated Balance Sheet, which decreased current deferred tax assets $3.2 million and decreased noncurrent deferred tax liabilities $3.2 million.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update establishes a comprehensive lease standard for all industries. The new standard requires lessees to recognize a right of use asset and a lease liability for virtually all leases, other than leases that meet the definition of short term leases. The standard is effective for interim and annual reporting periods beginning after December 15, 2018 (December 31, 2019 for non-public entities). We are evaluating what impact, if any, the adoption of this ASU will have on our financial condition, results of operations, cash flows or financial disclosures.

In March 2016, the FASB issued ASU No. 2016-09, which amends ASC Topic 718, Compensation—Stock Compensation. This amendment simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. We are evaluating what impact, if any, the adoption of this ASU will have on our financial condition, results of operations, cash flows or financial disclosures.

Off-Balance Sheet Arrangements

As of December 25, 2015 and September 23, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.

Foreign Currency Exchange Risk

Currently, substantially all of our sales and arrangements with third-party suppliers provide for pricing and payment in U.S. dollars and, therefore, are not subject to material exchange rate fluctuations. As a result, we do not expect foreign currency exchange rate fluctuations to have a material effect on our results of operations. However, increases in the value of the U.S. dollar relative to other currencies would make our products more expensive relative to competing products priced in such other currencies, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our foreign suppliers raising their prices in order to continue doing business with us.

While not currently significant, we do have certain operating expenses that are denominated in currencies of the countries in which our operations are located, and may be subject to fluctuations due to foreign currency exchange rates, particularly the Singapore dollar, Malaysian Ringgit, British Pound and Euro. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions.

 

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Interest Rate Risk

We had total outstanding debt of $65.0 million as of December 25, 2015, of which $4.6 million was due within 12 months. As of September 23, 2016, we had total outstanding debt of $81.3 million, of which $5.8 million was due within 12 months. The outstanding amount of debt reflected in our consolidated financial statements included elsewhere in this prospectus is net of $2.0 million of debt discount as of September 23, 2016.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. The interest rate on a significant majority of our outstanding debt is variable, which also reduces our exposure to these interest rate risks. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

 

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BUSINESS

Company Overview

We are a leader in the design, engineering and manufacturing of critical fluid delivery subsystems for semiconductor capital equipment. Our primary offerings include gas and chemical delivery subsystems, collectively known as fluid delivery 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 subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as chemical-mechanical planarization, or CMP, electroplating and cleaning. We also manufacture certain components for internal use in fluid delivery systems and for direct sales to our customers. 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. Historically, semiconductor equipment OEMs internally designed and manufactured the fluid delivery subsystems used in their process tools. Currently, most OEMs outsource the design, engineering and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are also increasingly 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 fixed costs and development time, as well as provided significant growth opportunities for specialized subsystems suppliers like us.

Our goal is to be the premier supplier of outsourced fluid delivery subsystems to OEMs engaged in manufacturing capital equipment to produce semiconductors and to leverage our technology into new markets. To achieve this goal, we engage with our customers early in their design and development processes and utilize our deep engineering resources and operating expertise to jointly create innovative and advanced solutions that meet the current and future needs of our customers. These collaborations frequently involve our engineers working at our customers’ sites and serving as an extension of our customers’ product design teams. We employ this approach with two of the largest manufacturers of semiconductor capital equipment in the world. We believe this approach enables us to design subsystems that meet the precise specifications our customers demand, allows us to often be the sole supplier of these subsystems during the initial production ramp and positions us to be the preferred supplier for the entire five to ten-year lifespan of the process tool.

The broad technical expertise of our engineering team, coupled with our early customer engagement approach, enables us to offer innovative and reliable solutions to complex fluid delivery challenges. With two decades of experience developing complex fluid delivery subsystems and meeting the constantly changing production requirements of leading semiconductor OEMs, we have developed expertise in fluid delivery that we offer to our OEM customers. In addition, our capital efficient model and the integration of our business systems with those of our customers provides us the flexibility to fulfill increased demand and meet

 

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changing customer requirements with minimum additional capital outlay. With an aim to superior customer service, we have a global footprint with many facilities strategically located in close proximity to our customers. We have established long standing relationships with top tier OEM customers, including Lam Research and Applied Materials, which were our two largest customers by sales in fiscal 2015.

We grew our sales by 16.7% from $249.1 million in fiscal 2014 to $290.6 million in fiscal 2015, and by 21.2% from $226.3 million in the nine months ended September 25, 2015 to $274.3 million in the nine months ended September 23, 2016. We generated net income from continuing operations of $5.8 million in fiscal 2014, $12.8 in fiscal 2015, $12.8 million in the nine months ended September 25, 2015 and $12.8 million in the nine months ended September 23, 2016. We generated adjusted net income from continuing operations of $11.7 million in fiscal 2014, $20.2 million in fiscal 2015, $17.9 million in the nine months ended September 25, 2015 and $22.0 million in the nine months ended September 23, 2016. See note 3 to “Prospectus Summary—Summary Consolidated Financial Data” for a discussion of adjusted net income, an accompanying presentation of the most directly comparable GAAP financial measure, net income (loss), and a reconciliation of the differences between adjusted net income and net income.

Our Industry

We design, engineer and manufacture critical fluid delivery subsystems for the semiconductor capital equipment.

The Semiconductor Device Industry is Large and Growing

Semiconductors are essential building blocks in all electronic systems. In recent years, semiconductor growth has been driven largely by increasing global demand for mobile devices and computer network systems. As consumers increasingly become accustomed to end products with higher functionality, better power management and smaller form factors, the demand for advanced semiconductor devices is expected to grow. Gartner estimates the semiconductor device market is expected to grow to $350.1 billion in 2017 from $315.0 billion in 2013.

Semiconductor Manufacturing Process is Complex and Constantly Evolving

Semiconductor manufacturing is complex and capital-intensive, requiring hundreds of process steps utilizing specialized manufacturing equipment. Technological advancements in semiconductor manufacturing have traditionally led to a continual increase in the number of transistors in a given area of silicon, enabling smaller and more feature-rich devices. As a result, semiconductor device manufacturers must continuously refine their manufacturing processes and invest in next-generation manufacturing equipment that can produce semiconductors with a smaller chip size or an increasing number of features, both of which require more complexity. Gartner estimates that the global spend on wafer fabrication equipment will grow to $35.7 billion in 2017 from $27.3 billion in 2013.

 

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The diagram below illustrates the various semiconductor manufacturing process steps and highlights those that require fluid delivery functionality: