Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Condensed Consolidated Financial Statements” in Item 1 of this Quarterly Report on Form 10-Q (“Quarterly Report”) and our consolidated financial statements and related notes included in “Item 8. Financial Statements and Supplementary Data” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (the “2022 Form 10-K”).
Overview
We are a leading, global manufacturer of capital equipment, including thermal processing and wafer polishing, and related consumables used in fabricating semiconductor devices, such as silicon carbide (“SiC”) and silicon power, analog and discrete devices, and electronic assemblies and modules focusing on enabling technologies for electric vehicles (EV) and clean technology (CleanTech) applications. We sell these products to semiconductor device and module manufacturers worldwide, particularly in Asia, North America and Europe.
We operate in two reportable segments, based primarily on the industry they serve: (i) Semiconductor and (ii) Material and Substrate. In our Semiconductor segment, we supply thermal processing equipment, including solder reflow ovens, horizontal diffusion furnaces and custom high-temp belt furnaces for use by semiconductor, electronics and electro/mechanical assembly manufacturers. Our semiconductor customers are primarily manufacturers of integrated circuits and optoelectronic sensors and discrete (“O-S-D”) components used in analog, power and radio frequency (“RF”). In our Material and Substrate segment, we produce substrate consumables, chemicals and machinery for lapping (fine abrading) and polishing of materials, such as silicon wafers for semiconductor products, sapphire wafers for LED applications, and compound substrates, like silicon carbide wafers, for power device applications.
The semiconductor industry is cyclical, but not seasonal, and historically has experienced fluctuations. Our revenue is impacted by these broad industry trends.
Strategy
We continue to focus on our plans to profitably grow our business and have developed a strategic growth plan and a capital allocation plan that we believe will support our growth objectives. Our power semiconductor strategic growth plan leverages our experience, products and capabilities in pursuit of growth, profitability and sustainability. Our core focus areas are:
•Emerging opportunities in the SiC industry – We believe we are well-positioned to take part in this significant growth area, specifically as it relates to silicon carbide wafer capacity expansion. We are working closely with our customers to understand their SiC growth plans, needs and opportunities. We are investing in our capacity, next generation product development, and in our people. During 2021, we completed the acquisition of Intersurface Dynamics, Inc. ("Intersurface Dynamics"), which added numerous coolants and chemical products to our existing consumable and machine product lines. We believe these investments will help fuel our growth in the emerging growth SiC industry.
•300mm Horizontal Diffusion Furnace – We have a highly successful and proven 300mm horizontal diffusion furnace solution used for power semiconductor device manufacturing applications. We have a strong foundation with the leading 300mm power chip manufacturer. We believe we have a strong opportunity to continue expanding our customer base and grow revenue with our 300mm solution.
•As the largest revenue contributor to our organization, we expect our subsidiary, BTU International, Inc. (“BTU”), will continue to track semiconductor industry growth cycles for our advanced semi-packaging and surface-mount technology products, in addition to specialized custom belt furnaces used in automotive and other specialized industrial applications. We believe that our investments in product innovation will provide BTU with opportunities to grow further, especially in high growth applications of consumer and industrial electronics, Internet of Things, electric vehicles and 5G communications.
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We anticipate future investments will be required to meet the expected demand from the growing markets we serve to achieve our revenue growth targets, including investments in research and development as well as capital expenditures, which also includes additional investments in capacity expansion, talent, and management information systems. In June 2022, we completed the sale of the real property where our manufacturing facility in Massachusetts is located. In connection with this sale, we entered into a two-year leaseback of the facility. This sale-leaseback transaction resulted in a net cash inflow of approximately $14.9 million, after repayment of the existing mortgage and settlement of related sale expenses. During the two-year leaseback period, we will conduct a search for a new manufacturing facility more in line with the needs of our Semiconductor product lines. In the fourth quarter of 2021, we completed the move of our Shanghai facility to a new location. This new location increases our capacity and allows us to streamline our manufacturing processes, thus reducing our lead times. In addition, we are evaluating our management information systems and needs in order to allow for greater efficiencies and to ensure our infrastructure can support our future growth plans. As a capital equipment manufacturer, we will continue to invest in our business to drive future growth.
In addition to investments in our organic growth, another key aspect of our capital allocation policy is our plan to grow through acquisitions. We have the expertise and track record to identify complimentary and synergistic acquisition targets in the Semiconductor and SiC growth environments and to execute transactions and integrations to provide for value creating, profitable growth in both the short-term and long-term. On March 3, 2021, we acquired Intersurface Dynamics, a Connecticut-based manufacturer of substrate process chemicals used in various manufacturing processes, including semiconductors, silicon and compound semiconductor wafers, and optics. On January 17, 2023, we acquired Entrepix, an Arizona-based expert in chemical mechanical polishing (CMP) and wafer cleaning. As of the date of the filing of this Quarterly Report, we do not have an agreement to acquire any additional acquisition target.
COVID-19 Update
On March 28, 2022, the Chinese government issued a mandatory shutdown in Shanghai, the location of one of our manufacturing facilities. The factory was allowed to partially reopen in May 2022 and fully reopened on June 1, 2022. After such reopening, the factory was able to operate near full capacity for the entire month of June. We were able to make up the shipments missed in the fourth quarter of fiscal 2022 and are now operating at normal capacity levels. Given the uncertainty surrounding the COVID-19 pandemic, there can be no assurance that our Shanghai facility will be allowed to remain open on a consistent basis.
Cybersecurity Incident
On April 12, 2021, we detected a data incident in which attackers acquired data and disabled some of the technology systems used by one of our subsidiaries. Upon learning of the incident, we immediately engaged external counsel and retained a team of third-party forensic, incident response, and security professionals to investigate and determine the full scope of this incident. We also notified law enforcement officials and confirmed that the incident is covered by our insurance. We have completed the investigation of the data incident with assistance from our outside professionals, and indications were that the unauthorized third-party gained access to certain personal information relating to employees and their beneficiaries for some of our operations. There was no indication of any misuse of this information.
Despite this disruption, production continued in our facilities. Our previously disabled subsidiary network is now back up and running securely. Working alongside our security professionals, we were able to bring our subsidiary’s systems online with enhanced security controls. We have deployed an advanced next generation anti-virus and endpoint detection and response tool, as well as Managed Detection & Response services. We remain committed to protecting the security of the personal information entrusted to us and providing high-quality products and service to our customers.
We recorded approximately $1.1 million of expense related to this incident, which is included in selling, general and administrative expenses, during the third quarter of fiscal 2021. The expense is primarily related to third-party service providers, including security professionals as well as legal and response teams. We may make additional investments in the future to further strengthen our cybersecurity. We filed an insurance claim during the fourth quarter of fiscal
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2021 related to the incident. During the second quarter of 2022, we signed a final settlement agreement with our insurer resulting in total reimbursement of approximately $0.6 million, which included $0.4 million received during the quarter ended December 31, 2021 and $0.2 million received during the quarter ended March 31, 2022. No portion of the reimbursement remains outstanding as of December 31, 2022.
Results of Operations
The following table sets forth certain operational data as a percentage of net revenue for the periods indicated:
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|
|
|
Three Months Ended December 31, |
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|
|
2022 |
|
|
2021 |
|
Net revenue |
|
|
100 |
% |
|
|
100 |
% |
Cost of sales |
|
|
61 |
% |
|
|
63 |
% |
Gross margin |
|
|
39 |
% |
|
|
37 |
% |
Selling, general and administrative |
|
|
43 |
% |
|
|
26 |
% |
Research, development and engineering |
|
|
6 |
% |
|
|
6 |
% |
Severance expense |
|
|
2 |
% |
|
|
— |
% |
Operating (loss) income |
|
|
(12 |
)% |
|
|
5 |
% |
Interest expense and other, net |
|
|
— |
% |
|
|
— |
% |
(Loss) income before income taxes |
|
|
(12 |
)% |
|
|
5 |
% |
Income tax provision |
|
|
— |
% |
|
|
1 |
% |
Net (loss) income |
|
|
(12 |
)% |
|
|
4 |
% |
Net Revenue
Net revenue consists of revenue recognized upon shipment or delivery of equipment. Spare parts sales are recognized upon shipment and service revenue is recognized upon completion of the service activity, which is generally ratable over the term of the service contract. Since the majority of our revenue is generated from large system sales, revenue, gross profit and operating income can be significantly impacted by the timing of system shipments.
Our net revenue by reportable segment was as follows, dollars in thousands:
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|
|
|
|
Three Months Ended December 31, |
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|
Segment |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Semiconductor |
|
$ |
16,887 |
|
|
$ |
22,765 |
|
|
$ |
(5,878 |
) |
|
|
(26 |
)% |
Material and Substrate |
|
|
4,671 |
|
|
|
3,698 |
|
|
|
973 |
|
|
|
26 |
% |
Total net revenue |
|
$ |
21,558 |
|
|
$ |
26,463 |
|
|
$ |
(4,905 |
) |
|
|
(19 |
)% |
Total net revenue for the three months ended December 31, 2022 and 2021 was $21.6 million and $26.5 million, respectively, a decrease of approximately $4.9 million or 19%. Our Semiconductor results for the first quarter of fiscal 2023 reflect a decrease in production from our Shanghai facility as well as lower shipments of our diffusion furnaces. Material and Substrate revenue increased due to increased shipments of consumables resulting from capacity expansion and production increases by our customers.
Orders and Backlog
New orders booked in the three months ended December 31, 2022 and 2021 were as follows, dollars in thousands:
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|
|
|
|
|
|
|
|
Three Months Ended December 31, |
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|
|
|
|
|
|
Segment |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Semiconductor |
|
$ |
21,084 |
|
|
$ |
27,809 |
|
|
$ |
(6,725 |
) |
|
|
(24 |
)% |
Material and Substrate |
|
|
4,145 |
|
|
|
3,828 |
|
|
|
317 |
|
|
|
8 |
% |
Total new orders |
|
$ |
25,229 |
|
|
$ |
31,637 |
|
|
$ |
(6,408 |
) |
|
|
(20 |
)% |
21
Our backlog as of December 31, 2022 and 2021 was as follows, dollars in thousands:
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|
|
|
|
|
|
|
|
|
|
|
December 31, |
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|
|
|
|
|
|
Segment |
|
2022 |
|
|
2021 |
|
|
Change |
|
|
% Change |
|
Semiconductor |
|
$ |
52,209 |
|
|
$ |
46,921 |
|
|
$ |
5,288 |
|
|
|
11 |
% |
Material and Substrate |
|
|
2,243 |
|
|
|
1,531 |
|
|
|
712 |
|
|
|
47 |
% |
Total backlog |
|
$ |
54,452 |
|
|
$ |
48,452 |
|
|
$ |
6,000 |
|
|
|
12 |
% |
As of December 31, 2022, three Semiconductor segment customers individually accounted for 28%, 15% and 11% of our backlog. No other customer accounted for more than 10% of our backlog as of December 31, 2022. The orders included in our backlog are generally credit approved customer purchase orders believed to be firm and are generally expected to ship within the next twelve months. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for future periods, nor is backlog any assurance that we will realize profit from completing these orders.
Gross Profit and Gross Margin
Gross profit is the difference between net revenue and cost of goods sold. Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment and spare parts and the cost of service and support to customers for installation, warranty and paid service calls. Gross margin is gross profit as a percent of net revenue. Our gross profit and gross margin by business segment were as follows, dollars in thousands:
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Three Months Ended December 31, |
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Segment |
|
2022 |
|
|
Gross Margin |
|
|
2021 |
|
|
Gross Margin |
|
|
Change |
|
Semiconductor |
|
$ |
6,172 |
|
|
|
37 |
% |
|
$ |
8,662 |
|
|
|
38 |
% |
|
$ |
(2,490 |
) |
Material and Substrate |
|
|
2,131 |
|
|
|
46 |
% |
|
|
1,236 |
|
|
|
33 |
% |
|
|
895 |
|
Total gross profit |
|
$ |
8,303 |
|
|
|
39 |
% |
|
$ |
9,898 |
|
|
|
37 |
% |
|
$ |
(1,595 |
) |
Gross profit for the three months ended December 31, 2022 and 2021 was $8.3 million (39% of net revenue) and $9.9 million (37% of net revenue), respectively, a decrease of $1.6 million. Our gross margins can be affected by capacity utilization and the type and volume of machines and consumables sold each quarter. Gross margin on products from our Semiconductor segment was consistent between periods. Gross margin on products from our Material and Substrate segment increased compared to the three months ended December 31, 2021, due to higher consumables sales, which have higher margins than our equipment, and increased capacity utilization. We are experiencing increased material costs across all of our segments and expect this trend to continue through at least the first half of fiscal 2023. In response to such increased costs, we continually review our pricing plans and supplier agreements, with the objective of passing these increased costs to our customers where possible; however, we continue to experience pricing pressure from our customers. Additionally, we have experienced rising labor costs across our divisions, and we expect this trend to continue, as the labor markets in which we operate remain competitive.
Selling, General and Administrative
Selling, general and administrative expenses (“SG&A”) consists of the cost of employees, consultants and contractors, facility costs, sales commissions, shipping costs, promotional marketing expenses, legal and accounting expenses and bad debt expense.
SG&A expenses for the three months ended December 31, 2022 and 2021 were $9.2 million and $7.1 million, respectively. SG&A increased compared to the prior year quarter due primarily to $1.4 million of transaction expenses related to the acquisition of Entrepix, Inc., which was completed in the second quarter of fiscal 2023.
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Research, Development and Engineering
Research, development and engineering (“RD&E”) expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes as well as materials and supplies used in producing prototypes. RD&E expenses may vary from period to period depending on the engineering projects in process. Expenses related to engineers working on strategic projects or sustaining engineering projects are recorded in RD&E. However, from time to time we add functionality to our products or develop new products during engineering and manufacturing to fulfill specifications in a customer’s order, in which case the cost of development, along with other costs of the order, are charged to cost of goods sold. Occasionally, we receive reimbursements through governmental research and development grants which are netted against these expenses when certain conditions have been met.
RD&E expense, net of grants earned, for the three months ended December 31, 2022 and 2021 were $1.4 million and $1.6 million, respectively. The decrease in RD&E is due to the timing of purchases related to specific strategic-development projects at our Semiconductor segment. Grants earned are immaterial in all periods presented.
Severance Expenses
We recorded severance expense of $0.4 million in the three months ended December 31, 2022. This one-time charge relates to the retirement of our founder, Mr. J.S. Whang. There was no severance expense recorded in the three months ended December 31, 2021.
Income Taxes
Our effective tax rate was 0.1% and 13.8% for the three months ended December 31, 2022 and 2021, respectively. The effective tax rate for the three months ended December 31, 2022 differs from the U.S. statutory tax rate of 21% primarily due to higher state taxes partially offset by lower taxes in foreign jurisdictions. For the three months ended December 31, 2022 and 2021, we recorded an income tax benefit of $4,000 and income tax expense of $0.2 million, respectively. The quarterly income tax provision is calculated using an estimated annual effective tax rate, based upon expected annual income, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which we operate. However, losses in certain jurisdictions and discrete items are excluded from the determination of the estimated annual effective tax rate.
Generally accepted accounting principles of the United States ("GAAP") require that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates and the length of carryback and carryforward periods. According to those principles, it is difficult to conclude that a valuation allowance is not needed when the negative evidence includes cumulative losses in recent years. Based on the consideration of all available evidence, we have concluded that we will maintain a full valuation allowance for all net deferred tax assets related to the carryforwards of U.S. net operating losses and foreign tax credits. We will continue to monitor our cumulative income and loss positions in the U.S. and foreign jurisdictions to determine whether full valuation allowances on net deferred tax assets are appropriate. We expect to pay minimal U.S federal cash taxes for the foreseeable future as a result of our U.S. net operating losses that are carried forward.
Our future effective income tax rate depends on various factors, such as the amount of income (loss) in each tax jurisdiction, tax regulations governing each region, non-tax deductible expenses incurred as a percent of pre-tax income and the effectiveness of our tax planning strategies.
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Liquidity and Capital Resources
The following table sets forth for the periods presented certain consolidated cash flow information, in thousands:
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|
|
|
|
|
|
|
|
Three Months Ended December 31, |
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|
|
2022 |
|
|
2021 |
|
Net cash (used in) provided by operating activities |
|
$ |
(2,508 |
) |
|
$ |
2,489 |
|
Net cash used in investing activities |
|
|
(224 |
) |
|
|
(45 |
) |
Net cash provided by (used in) financing activities |
|
|
20 |
|
|
|
(2,741 |
) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
372 |
|
|
|
175 |
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
(2,340 |
) |
|
|
(122 |
) |
Cash and cash equivalents, beginning of period |
|
|
46,874 |
|
|
|
32,836 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
44,534 |
|
|
$ |
32,714 |
|
Cash and Cash Flow
The decrease in cash and cash equivalents from September 30, 2022 of $2.3 million was primarily due to the net loss in the current year period, as we incurred $1.4 million in acquisition-related expenses. We maintain a portion of our cash and cash equivalents in Renminbis, a Chinese currency, at our operations in China; therefore, changes in the exchange rates have an impact on our cash balances. Our working capital was $77.8 million as of December 31, 2022 and $80.3 million as of September 30, 2022. The decrease in working capital was primarily due to the decrease in cash as well as a decrease in accounts receivable, as we collected customer payments that were not offset with new receivables. Our ratio of current assets to current liabilities was 4.6:1 as of December 31, 2022, and 4.5:1 as of September 30, 2022.
During periods of weakening demand, we typically generate cash from operating activities. Conversely, we are more likely to use operating cash flows for working capital requirements during periods of higher growth. The success of our growth strategy is dependent upon the availability of additional capital resources on terms satisfactory to management. Our sources of capital in the past have included the sale of equity securities, which includes common stock sold in private transactions and public offerings, the incurrence of long-term debt and customer deposits. There can be no assurance that we can raise such additional capital resources when needed or on satisfactory terms. We believe that our principal sources of liquidity discussed above are sufficient to support operations for at least the next twelve months. We have never paid dividends on our common stock.
Cash Flows from Operating Activities
Cash used in our operating activities was approximately $2.5 million for the three months ended December 31, 2022, compared to $2.5 million provided by operating activities for the three months ended December 31, 2021. During the first quarter of fiscal 2023, our accounts receivable collections exceeded new accounts receivable, primarily due to the slowdown at our Shanghai facility. During the three months ended December 31, 2021, we increased our inventory balances in preparation for shipments scheduled for the second, third and fourth quarters of fiscal 2022. Additionally, our accounts receivable increased during this period as most of our shipments occurred late in the first quarter of fiscal 2022 and our customers generally have payment terms of 60-90 days.
Cash Flows from Investing Activities
Cash used in investing activities was $0.2 million and less than $0.1 million in the three month periods ended December 31, 2022 and 2021, respectively. Both periods consist solely of capital expenditures. We expect capital expenditures to increase throughout fiscal 2023 as we make targeted investments in our IT systems.
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Cash Flows from Financing Activities
For the three months ended December 31, 2022, cash provided by financing activities was less than $0.1 million, comprised of proceeds received from the exercise of stock options partially offset by payments on long-term debt. For the three months ended December 31, 2021, $2.7 million of cash used in financing activities was comprised of $2.7 million of cash used for the repurchase of common stock and payments on long-term debt of $97,000, partially offset by $69,000 of proceeds received from the exercise of stock options.
Off-Balance Sheet Arrangements
As of December 31, 2022, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
Unrecorded purchase obligations were $19.5 million as of December 31, 2022, compared to $20.0 million as of September 30, 2022, a decrease of $0.5 million.
Subsequent to the end of our fiscal quarter ended December 31, 2022, we entered into a Loan and Security Agreement with UMB Bank. See Note 10 “Subsequent Events” of our condensed consolidated financial statements for a description of this credit facility. There were no other material changes to the contractual obligations included in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K.
Critical Accounting Estimates
"Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report discusses our condensed consolidated financial statements that have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, income taxes, inventory valuation, and goodwill. We base our estimates and judgments on historical experience, expectations regarding the future and on various other factors that we believe to be reasonable under the circumstances. The results of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A critical accounting estimate is one that is both important to the presentation of our financial position and results of operations, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These uncertainties are discussed in Part I, Item 1A of our 2022 Form 10-K. We believe our critical accounting estimates relate to the more significant judgments and estimates used in the preparation of our consolidated financial statements.
We believe the critical accounting estimates discussed in the section entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our 2022 Form 10-K represent the most significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no significant changes in our critical accounting estimates during the three months ended December 31, 2022.
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Impact of Recently Issued Accounting Pronouncements
For discussion of the impact of recently issued accounting pronouncements, see “Part I, Item 1. Financial Information” under “Impact of Recently Issued Accounting Pronouncements.”