ICHOR HOLDINGS, LTD. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ICHOR HOLDINGS, LTD. Consolidated Balance Sheets (dollars in thousands, except per share amounts) (unaudited) March 26, 2021 December 25, 2020 Assets Current assets: Cash $ 242,946 $ 252,899 Accounts receivable, net 108,674 100,977 Inventories 144,062 134,756 Prepaid expenses and other current assets 7,347 7,082 Total current assets 503,029 495,714 Property and equipment, net 46,849 41,811 Operating lease right-of-use assets 9,378 10,088 Other noncurrent assets 5,800 5,503 Deferred tax assets, net 5,812 6,324 Intangible assets, net 36,454 39,845 Goodwill 174,887 174,887 Total assets $ 782,209 $ 774,172 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 140,669 $ 116,664 Accrued liabilities 16,992 20,792 Other current liabilities 11,778 10,700 Current portion of long-term debt 8,750 8,750 Current portion of lease liabilities 4,895 5,128 Total current liabilities 183,084 162,034 Long-term debt, less current portion, net 159,576 191,522 Lease liabilities, less current portion 4,804 5,272 Deferred tax liabilities, net 109 109 Other non-current liabilities 3,574 3,546 Total liabilities 351,147 362,483 Shareholders’ equity: Preferred shares ($ 0.0001 par value; 20,000,000 shares authorized; zero shares issued and outstanding) — — Ordinary shares ($ 0.0001 par value; 200,000,000 shares authorized; 28,070,251 and 27,907,077 shares outstanding, respectively; 32,507,690 and 32,344,516 shares issued, respectively) 3 3 Additional paid in capital 404,046 399,311 Treasury shares at cost ( 4,437,439 shares) ( 91,578 ) ( 91,578 ) Retained earnings 118,591 103,953 Total shareholders’ equity 431,062 411,689 Total liabilities and shareholders’ equity $ 782,209 $ 774,172 See accompanying notes. 1 ICHOR HOLDINGS, LTD. Consolidated Statements of Operations (dollars in thousands, except per share amounts) (unaudited) Three Months Ended March 26, 2021 March 27, 2020 Net sales $ 264,566 $ 220,028 Cost of sales 225,054 191,254 Gross profit 39,512 28,774 Operating expenses: Research and development 3,515 3,322 Selling, general, and administrative 14,349 16,618 Amortization of intangible assets 3,391 3,334 Total operating expenses 21,255 23,274 Operating income 18,257 5,500 Interest expense 1,919 2,374 Other expense (income), net 185 ( 31 ) Income before income taxes 16,153 3,157 Income tax expense (benefit) 1,515 ( 242 ) Net income $ 14,638 $ 3,399 Net income per share: Basic $ 0.52 $ 0.15 Diluted $ 0.51 $ 0.15 Shares used to compute net income per share: Basic 28,004,248 22,737,163 Diluted 28,729,112 23,181,127 See accompanying notes. 2 ICHOR HOLDINGS, LTD. Consolidated Statements of Shareholders’ Equity (dollars in thousands) (unaudited) Additional Treasury Total For the three months ending March 26, 2021 Ordinary Shares Paid-In Shares Retained Shareholders' Shares Amount Capital Shares Amount Earnings Equity Balance at December 25, 2020 27,907,077 $ 3 $ 399,311 4,437,439 $ ( 91,578 ) $ 103,953 $ 411,689 Ordinary shares issued from exercise of stock options 105,600 — 2,381 — — — 2,381 Ordinary shares issued from vesting of restricted share units 30,423 — ( 667 ) — — — ( 667 ) Ordinary shares issued from employee share purchase plan 27,151 — 606 — — — 606 Share-based compensation expense — — 2,415 — — — 2,415 Net income — — — — — 14,638 14,638 Balance at March 26, 2021 28,070,251 $ 3 $ 404,046 4,437,439 $ ( 91,578 ) $ 118,591 $ 431,062 Additional Treasury Total For the three months ending March 27, 2020 Ordinary Shares Paid-In Shares Retained Shareholders' Shares Amount Capital Shares Amount Earnings Equity Balance at December 27, 2019 22,618,708 $ 2 $ 242,318 4,437,439 $ ( 91,578 ) $ 70,674 $ 221,416 Ordinary shares issued from exercise of stock options 113,539 — 2,483 — — — 2,483 Ordinary shares issued from vesting of restricted share units 57,912 — ( 993 ) — — — ( 993 ) Ordinary shares issued from employee share purchase plan 16,520 — 350 — — — 350 Share-based compensation expense — — 2,865 — — — 2,865 Net income — — — — — 3,399 3,399 Balance at March 27, 2020 22,806,679 $ 2 $ 247,023 4,437,439 $ ( 91,578 ) $ 74,073 $ 229,520 See accompanying notes. 3 ICHOR HOLDINGS, LTD. Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 26, 2021 March 27, 2020 Cash flows from operating activities: Net income $ 14,638 $ 3,399 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,657 5,737 Share-based compensation 2,415 2,865 Deferred income taxes 512 722 Amortization of debt issuance costs 242 243 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net ( 7,697 ) ( 2,724 ) Inventories ( 9,306 ) ( 16,684 ) Prepaid expenses and other assets 512 ( 868 ) Accounts payable 22,101 ( 12,380 ) Accrued liabilities ( 3,467 ) ( 568 ) Other liabilities 41 ( 778 ) Net cash provided by (used in) operating activities 25,648 ( 21,036 ) Cash flows from investing activities: Capital expenditures ( 5,400 ) ( 2,470 ) Net cash used in investing activities ( 5,400 ) ( 2,470 ) Cash flows from financing activities: Issuance of ordinary shares under share-based compensation plans 2,654 2,658 Employees' taxes paid upon vesting of restricted share units ( 667 ) ( 993 ) Borrowings on revolving credit facility — 5,000 Repayments on revolving credit facility ( 30,000 ) — Repayments on term loan ( 2,188 ) ( 2,188 ) Net cash provided by (used in) financing activities ( 30,201 ) 4,477 Net decrease in cash ( 9,953 ) ( 19,029 ) Cash at beginning of period 252,899 60,612 Cash at end of period $ 242,946 $ 41,583 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 1,842 $ 2,136 Cash paid during the period for taxes, net of refunds $ 667 $ 34 Supplemental disclosures of non-cash activities: Capital expenditures included in accounts payable $ 2,273 $ 652 Right-of-use assets obtained in exchange for new operating lease liabilities $ 364 $ 328 See accompanying notes. 4 ICHOR HOLDINGS, LTD. Notes to Consolidated Financial Statements (dollar figures in tables in thousands, except per share amounts) (unaudited) Note 1 – Basis of Presentation and Selected Significant Accounting Policies Basis of Presentation These consolidated unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”). All intercompany balances and transactions have been eliminated upon consolidation. All dollar figures presented in tables in the notes to consolidated financial statements are in thousands, except per share amounts. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by the SEC's rules and regulations for interim reporting. These consolidated financial statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10‑K for the year ended December 25, 2020. Year End We use a 52- or 53-week fiscal year ending on the last Friday in December. The three months ended March 26, 2021 and March 27, 2020 were both 13 weeks. References to the first quarter of 2021 and 2020 refer to the three-month periods then ended . References to fiscal year 2021 and 2020 refer to our fiscal years ending December 31, 2021 and December 25, 2020, respectively. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods presented. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from the estimates made by management. Significant estimates include inventory valuation, uncertain tax positions, fair value assigned to stock options granted, and impairment analysis for both definite‑lived intangible assets and goodwill. Revenue Recognition We recognize revenue when control of promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. This amount is recorded as net sales in our consolidated statements of operations. Transaction price – In most of our contracts, prices are generally determined by a customer-issued purchase order and generally remain fixed over the duration of the contract. Certain contracts contain variable consideration, including early-payment discounts and rebates. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal will not occur. Variable consideration estimates are updated at each reporting date. Historically, we have not incurred significant costs to obtain a contract. All amounts billed to a customer relating to shipping and handling are classified as net sales, while all costs incurred by us for shipping and handling are classified as cost of sales. Performance obligations – Substantially all of our performance obligations pertain to promised goods (“products”), which are primarily comprised of fluid delivery subsystems, weldments, and other components. Most of our contracts contain a single performance obligation and are generally completed within twelve months . Product sales are recognized at a point-in-time, generally upon delivery, as such term is defined within the contract, as that is when control of the promised good has transferred. Products are covered by a standard assurance warranty, generally extended for a period of one to two years depending on the customer, which promises that delivered products conform to contract specifications. As such, we account for such warranties under ASC 460, Guarantees , and not as a separate performance obligation . Contract balances – Accounts receivable represents our unconditional right to receive consideration from our customers. Accounts receivable are carried at invoice price less an estimate for doubtful accounts and estimated payment discounts. Payment terms vary by customer but are generally due within 15‑ 60 days. Historically, we have not incurred significant payment issues with our customers. We had no significant contract assets or liabilities on our consolidated balance sheets in any of the periods presented . 5 Accounting Pronouncements Recently Adopted In December 2019, the FASB issued ASU 2019‑12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes , as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses, and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, the ASU requires that entities recognize franchise tax based on an incremental method and requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination. We adopted the standard on the first day of 2021, and it did not have a significant impact on our financial statements. Note 2 – Inventories Inventories consist of the following: March 26, 2021 December 25, 2020 Raw materials $ 91,470 $ 88,015 Work in process 43,869 38,184 Finished goods 20,932 21,299 Excess and obsolete adjustment ( 12,209 ) ( 12,742 ) Total inventories $ 144,062 $ 134,756 Note 3 – Property and Equipment and Other Noncurrent Assets Property and equipment consist of the following: March 26, 2021 December 25, 2020 Machinery $ 36,828 $ 37,196 Leasehold improvements 29,612 29,616 Computer software, hardware, and equipment 6,531 6,501 Office furniture, fixtures and equipment 1,166 1,166 Vehicles 90 75 Construction-in-process 12,878 5,483 87,105 80,037 Less accumulated depreciation ( 40,256 ) ( 38,226 ) Total property and equipment, net $ 46,849 $ 41,811 Depreciation expense was $ 2.3 million and $ 2.4 million for the first quarter of 2021 and 2020, respectively. Cloud Computing Implementation Costs We capitalize implementation costs associated with hosting arrangement that are service contracts. These costs are recorded to prepaid expenses or other noncurrent assets. To-date, these costs are those incurred to implement a new company-wide ERP system. The following table summarizes capitalized cloud computing implementation costs: Capitalized cloud computing implementation costs as of December 25, 2020 $ 4,366 Costs capitalized during the period 325 Capitalized costs amortized during the period — Capitalized cloud computing implementation costs as of March 26, 2021 $ 4,691 6 Note 4 – Intangible Assets Definite‑lived intangible assets consist of the following: March 26, 2021 Gross value Accumulated amortization Accumulated impairment charges Carrying amount Weighted average useful life Trademarks $ 9,690 $ ( 8,959 ) $ — $ 731 10.0 years Customer relationships 84,169 ( 56,824 ) — 27,345 7.7 years Developed technology 11,047 ( 2,669 ) — 8,378 10.0 years Total intangible assets $ 104,906 $ ( 68,452 ) $ — $ 36,454 December 25, 2020 Gross value Accumulated amortization Accumulated impairment charges Carrying amount Weighted average useful life Trademarks $ 9,690 $ ( 8,717 ) $ — $ 973 10.0 years Customer relationships 84,169 ( 53,946 ) — 30,223 7.8 years Developed technology 11,047 ( 2,398 ) — 8,649 10.0 years Total intangible assets $ 104,906 $ ( 65,061 ) $ — $ 39,845 Note 5 – Leases Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. For purposes of calculating operating lease ROU assets and operating lease liabilities, we use the non-cancellable lease term plus options to extend that we are reasonably certain to take. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Our leases generally do not provide an implicit rate. As such, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We lease facilities under various non-cancellable operating leases expiring through 2026 . In addition to base rental payments, we are generally responsible for our proportionate share of operating expenses, including facility maintenance, insurance, and property taxes. As these amounts are variable, they are not included in lease liabilities. As of March 26, 2021, we had one operating lease executed for which the rental period had not yet commenced. The components of lease expense are as follows: Three Months Ended March 26, 2021 March 27, 2020 Operating lease cost $ 1,381 $ 1,320 Supplemental cash flow information related to leases is as follows: Three Months Ended March 26, 2021 March 27, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,376 $ 1,284 Supplemental balance sheet information related to leases is as follows: March 26, 2021 March 27, 2020 Weighted-average remaining lease term of operating leases 2.2 years 2.9 years Weighted-average discount rate of operating leases 4.4 % 4.5 % 7 Future minimum lease payments under non-cancelable leases as of March 26, 2021 are as follows: 2021, remaining $ 3,786 2022 4,370 2023 1,395 2024 448 2025 225 Thereafter 49 Total future minimum lease payments 10,273 Less imputed interest ( 574 ) Total lease liabilities $ 9,699 Note 6 – Income Taxes Income tax information for the periods reported are as follows: Three Months Ended March 26, 2021 March 27, 2020 Income tax expense (benefit) $ 1,515 $ ( 242 ) Income before income taxes $ 16,153 $ 3,157 Effective income tax rate 9.4 % - 7.7 % Our effective tax rate for the first quarter of 2021 differs from the statutory rate due to taxes on foreign income that differ from the U.S. tax rate, including a tax holiday in Singapore, and the impact of share-based compensation activity during the quarter. Our effective tax rate for first quarter of 2020 differs from the statutory rate due to taxes on foreign income that differ from the U.S. tax rate and the release of the certain tax reserves related to statute of limitation expirations and settlements, excess tax benefits from share-based compensation and the impact of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The ending balance for the unrecognized tax benefits for uncertain tax positions was approximately $ 3.0 million at March 26, 2021. The related interest and penalties were insignificant. The uncertain tax positions that are reasonably possible to decrease in the next twelve months are insignificant. As of March 26, 2021, we were not under examination by tax authorities. Note 7 – Employee Benefit Programs 401(k) Plan We sponsor a 401(k) plan available to employees of our U.S.‑based subsidiaries. Participants may make salary deferral contributions not to exceed 50 % of a participant’s annual compensation or the maximum amount otherwise allowed by law. Eligible employees receive a discretionary matching contribution equal to 50 % of a participant’s deferral, up to an annual maximum of 4 % of a participant’s annual compensation. Matching contributions were $ 0.6 million and $ 0.5 million for the first quarter of 2021 and 2020, respectively. Note 8 – Long-Term Debt Long‑term debt consists of the following: March 26, 2021 December 25, 2020 Term loan $ 150,937 $ 153,125 Revolving credit facility 19,162 49,162 Total principal amount of long-term debt 170,099 202,287 Less unamortized debt issuance costs ( 1,773 ) ( 2,015 ) Total long-term debt, net 168,326 200,272 Less current portion ( 8,750 ) ( 8,750 ) Total long-term debt, less current portion, net $ 159,576 $ 191,522 8 On February 15, 2018, we entered into an amended and restated credit agreement, which includes a $ 175.0 million term loan and a $ 125.0 million revolving credit facility. We incurred debt issuance costs of $ 2.1 million in connection with the amendment. The amendment did not meet the definition of an extinguishment and was accounted for as a modification. Term loan principal payments of $ 2.2 million are due on a quarterly basis. The credit facilities mature on February 15, 2023 . Interest is charged at either the Base Rate or the Eurodollar rate (as such terms are defined in the credit agreement) at our option, plus an applicable margin. The Base Rate is equal to the higher of i) the Prime Rate, ii) the Federal Funds Rate plus 0.5 %, or iii) the Eurodollar Rate plus 1.00 %. The Eurodollar rate is equal to LIBOR, subject to a 1.00 % floor for the term loan. The applicable margin on Base Rate and Eurodollar Rate loans is 0.75 ‑ 1.50 % and 1.75 ‑ 2.50 % per annum, respectively, depending on our leverage ratio. We are also charged a commitment fee of 0.20 %- 0.35 % on the unused portion of our revolving credit facility. Base Rate interest payments and commitment fees are due quarterly. Eurodollar interest payments are due on the last day of the applicable interest period. At March 26, 2021, the term loan and revolving credit facility bore interest at the Eurodollar rate option of 3.25 % and 2.50 %, respectively . Note 9 – Share‑Based Compensation The 2016 Omnibus Incentive Plan (the “2016 Plan”) provides for grants of share‑based awards to employees, directors, and consultants. Awards may be in the form of stock options (“options”), tandem and non‑tandem stock appreciation rights, restricted share awards or restricted share units (“RSUs”), performance awards, and other share‑based awards. Forfeited or expired awards are returned to the incentive plan pool for future grants. Awards generally vest over four years , 25 % on the first anniversary of the date of grant and quarterly thereafter over the remaining 3 years. Upon vesting of RSUs, employees may elect to have shares withheld to cover statutory minimum withholding taxes. Shares withheld are not reflected as an issuance of ordinary shares within our consolidated statements of shareholders’ equity, as the shares were never issued, and the associated tax payments are reflected as financing activities within our consolidated statements of cash flows. Share‑based compensation expense across all plans for options, RSUs, and employee share purchase rights was $ 2.4 million and $ 2.9 million for the first quarter of 2021 and 2020, respectively. Stock Options The following table summarizes option activity: Number of Stock Options Time vesting Performance vesting Weighted average exercise price per share Weighted average remaining contractual term Aggregate intrinsic value (in thousands) Outstanding, December 25, 2020 1,325,826 65,908 $ 22.22 Granted — — $ — Exercised ( 105,600 ) — $ 22.55 Forfeited or expired ( 22,958 ) — $ 19.24 Outstanding, March 26, 2021 1,197,268 65,908 $ 22.25 4.4 years $ 37,097 Exercisable, March 26, 2021 579,671 65,908 $ 21.00 3.6 years $ 19,770 Restricted Share Units The following table summarizes RSU activity: Number of Restricted Share Units Time vesting Performance vesting Weighted average grant date fair value per share Unvested, December 25, 2020 564,626 — $ 24.09 Granted 18,227 — $ 35.39 Vested ( 47,542 ) — $ 28.45 Forfeited ( 11,726 ) — $ 22.07 Unvested, March 26, 2021 523,585 — $ 24.13 9 Employee Share Purchase Plan The 2017 Employee Stock Purchase Plan (the “2017 ESPP”) grants employees the ability to designate a portion of their base-pay to purchase ordinary shares at a price equal to 85 % of the fair market value of our ordinary shares on the first or last day of each 6 month purchase period. Purchase periods begin on January 1 or July 1 and end on June 30 or December 31, or the next business day if such date is not a business day. Shares are purchased on the last day of the purchase period. During the first quarter of 2021, 27,151 ordinary shares were purchased by eligible employees under the 2017 ESPP. As of March 26, 2021, approximately 2.4 million ordinary shares remain available for purchase under the 2017 ESPP. Note 10 – Segment Information Our Chief Operating Decision Maker, the Chief Executive Officer, reviews our results of operations on a consolidated level and executive staff is structured by function rather than by product category. Therefore, we operate in one operating segment. Key resources, decisions, and assessment of performance are also analyzed on a company‑wide level. Foreign operations are conducted primarily through our wholly owned subsidiaries in Singapore and Malaysia. Our principal markets include North America, Asia and, to a lesser degree, Europe. Sales by geographic area represent sales to unaffiliated customers. All information on sales by geographic area is based upon the location to which the products were shipped. The following table sets forth sales by geographic area: Three Months Ended March 26, 2021 March 27, 2020 United States of America $ 139,134 $ 120,841 Singapore 86,324 73,209 Europe 17,330 14,959 Other 21,778 11,019 Total net sales $ 264,566 $ 220,028 Foreign long-lived assets, exclusive of deferred tax assets, were $ 34.8 million and $ 31.5 million at March 26, 2021 and December 25, 2020, respectively . Note 11 – Earnings per Share The following table sets forth the computation of basic and diluted earnings per share and a reconciliation of the numerator and denominator used in the calculation: Three Months Ended March 26, 2021 March 27, 2020 Numerator: Net income $ 14,638 $ 3,399 Denominator: Basic weighted average ordinary shares outstanding 28,004,248 22,737,163 Dilutive effect of options 449,656 322,469 Dilutive effect of RSUs 269,002 119,960 Dilutive effect of ESPP 6,206 1,535 Diluted weighted average ordinary shares outstanding 28,729,112 23,181,127 Earnings per share: Net income: Basic $ 0.52 $ 0.15 Diluted $ 0.51 $ 0.15 10 A combined total of approximately 75,000 and 720,000 potentially dilutive o ptions and RSUs were excluded from the calculation of net income per share for the first quarter of 2021 and 2020 , respectively, because including them would have been antidilutive under the treasury stock method .