ICHOR HOLDINGS, LTD. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ICHOR HOLDINGS, LTD. Consolidated Balance Sheets (dollars in thousands, except per share amounts) (unaudited) April 1, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 34,516 $ 75,495 Accounts receivable, net 153,534 142,990 Inventories 263,851 236,133 Prepaid expenses and other current assets 7,662 8,153 Total current assets 459,563 462,771 Property and equipment, net 86,003 85,204 Operating lease right-of-use assets 34,054 29,790 Other noncurrent assets 12,110 9,166 Deferred tax assets, net 8,153 8,116 Intangible assets, net 84,578 89,927 Goodwill 335,902 335,902 Total assets $ 1,020,363 $ 1,020,876 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 142,866 $ 159,727 Accrued liabilities 21,661 19,066 Other current liabilities 14,185 14,377 Current portion of long-term debt 7,500 7,500 Current portion of lease liabilities 7,854 7,633 Total current liabilities 194,066 208,303 Long-term debt, less current portion, net 283,495 285,253 Lease liabilities, less current portion 26,563 22,354 Deferred tax liabilities, net 38 38 Other non-current liabilities 4,372 4,213 Total liabilities 508,534 520,161 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; 28,628,907 and 28,551,160 shares outstanding, respectively; 33,066,346 and 32,988,599 shares issued, respectively) 3 3 Additional paid in capital 420,513 417,438 Treasury shares at cost ( 4,437,439 shares) ( 91,578 ) ( 91,578 ) Retained earnings 182,891 174,852 Total shareholders’ equity 511,829 500,715 Total liabilities and shareholders’ equity $ 1,020,363 $ 1,020,876 See accompanying notes. 1 ICHOR HOLDINGS, LTD. Consolidated Statements of Operations (dollars in thousands, except per share amounts) (unaudited) Three Months Ended April 1, 2022 March 26, 2021 Net sales $ 293,146 $ 264,566 Cost of sales 249,214 225,054 Gross profit 43,932 39,512 Operating expenses: Research and development 4,851 3,515 Selling, general, and administrative 23,267 14,349 Amortization of intangible assets 5,349 3,391 Total operating expenses 33,467 21,255 Operating income 10,465 18,257 Interest expense, net 1,532 1,919 Other expense, net 84 185 Income before income taxes 8,849 16,153 Income tax expense 810 1,515 Net income $ 8,039 $ 14,638 Net income per share: Basic $ 0.28 $ 0.52 Diluted $ 0.28 $ 0.51 Shares used to compute net income per share: Basic 28,592,629 28,004,248 Diluted 29,023,455 28,729,112 See accompanying notes. 2 ICHOR HOLDINGS, LTD. Consolidated Statements of Shareholders’ Equity (dollars in thousands) (unaudited) Additional Treasury Total For the three months ending April 1, 2022 Ordinary Shares Paid-In Shares Retained Shareholders' Shares Amount Capital Shares Amount Earnings Equity Balance at December 31, 2021 28,551,160 $ 3 $ 417,438 4,437,439 $ ( 91,578 ) $ 174,852 $ 500,715 Ordinary shares issued from exercise of stock options 42,753 — 955 — — — 955 Ordinary shares issued from vesting of restricted share units 34,994 — ( 777 ) — — — ( 777 ) Share-based compensation expense — — 2,897 — — — 2,897 Net income — — — — — 8,039 8,039 Balance at April 1, 2022 28,628,907 $ 3 $ 420,513 4,437,439 $ ( 91,578 ) $ 182,891 $ 511,829 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 See accompanying notes. 3 ICHOR HOLDINGS, LTD. Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended April 1, 2022 March 26, 2021 Cash flows from operating activities: Net income $ 8,039 $ 14,638 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,315 5,657 Share-based compensation 2,897 2,415 Deferred income taxes ( 37 ) 512 Amortization of debt issuance costs 117 242 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net ( 10,544 ) ( 7,697 ) Inventories ( 27,718 ) ( 9,306 ) Prepaid expenses and other assets ( 650 ) 512 Accounts payable ( 18,209 ) 22,101 Accrued liabilities 2,182 ( 3,467 ) Other liabilities ( 1,670 ) 41 Net cash provided by (used in) operating activities ( 36,278 ) 25,648 Cash flows from investing activities: Capital expenditures ( 3,417 ) ( 5,400 ) Net cash used in investing activities ( 3,417 ) ( 5,400 ) Cash flows from financing activities: Issuance of ordinary shares under share-based compensation plans 1,368 2,654 Employees' taxes paid upon vesting of restricted share units ( 777 ) ( 667 ) Repayments on revolving credit facility — ( 30,000 ) Repayments on term loan ( 1,875 ) ( 2,188 ) Net cash used in financing activities ( 1,284 ) ( 30,201 ) Net decrease in cash ( 40,979 ) ( 9,953 ) Cash at beginning of period 75,495 252,899 Cash at end of period $ 34,516 $ 242,946 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 1,395 $ 1,842 Cash paid during the period for taxes, net of refunds $ 106 $ 667 Supplemental disclosures of non-cash activities: Capital expenditures included in accounts payable $ 2,278 $ 2,273 Right-of-use assets obtained in exchange for new operating lease liabilities, including those acquired through acquisitions $ 6,067 $ 364 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 31, 2021. Year End We use a 52- or 53-week fiscal year ending on the last Friday in December. The three months ended April 1, 2022 and March 26, 2021 were both 13 weeks. References to the first quarter of 2022 and 2021 refer to the three-month periods then ended . References to fiscal year 2022 and 2021 refer to our fiscal years ending December 30, 2022 and December 31, 2021, respectively. Fiscal year 2022 and 2021 are 52 and 53 weeks, 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. Cash and Cash Equivalents Cash and cash equivalents consist of deposits and financial instruments which are readily convertible into cash and have original maturities of 90 days or less at the time of acquisition. Fair Value of Financial Instruments The carrying values of our financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, and long-term debt, net of unamortized debt issuance costs, approximate fair value. 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. 5 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 . Accounting Pronouncements Recently Adopted In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021‑08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805) . This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. This ASU is currently not expected to have a material impact on our consolidated financial statements . Note 2 – Inventories Inventories consist of the following: April 1, 2022 December 31, 2021 Raw materials $ 180,541 $ 159,366 Work in process 66,912 62,537 Finished goods 31,336 28,281 Excess and obsolete adjustment ( 14,938 ) ( 14,051 ) Total inventories $ 263,851 $ 236,133 Note 3 – Property and Equipment and Other Noncurrent Assets Property and equipment consist of the following: April 1, 2022 December 31, 2021 Machinery $ 82,742 $ 80,953 Leasehold improvements 37,174 36,706 Computer software, hardware, and equipment 8,031 8,031 Office furniture, fixtures and equipment 1,169 1,168 Vehicles 284 284 Construction-in-process 11,054 8,565 140,454 135,707 Less accumulated depreciation ( 54,451 ) ( 50,503 ) Total property and equipment, net $ 86,003 $ 85,204 Depreciation expense was $ 4.0 million and $ 2.3 million for the first quarter of 2022 and 2021, respectively. 6 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 31, 2021 $ 8,054 Costs capitalized during the period 3,074 Capitalized costs amortized during the period ( 152 ) Capitalized cloud computing implementation costs as of April 1, 2022 $ 10,976 Note 4 – Intangible Assets Definite‑lived intangible assets consist of the following: April 1, 2022 Gross value Accumulated amortization Accumulated impairment charges Carrying amount Weighted average useful life Customer relationships 120,962 ( 44,355 ) — 76,607 8.5 years Developed technology 11,047 ( 3,755 ) — 7,292 10.0 years Order backlog 2,600 ( 1,921 ) — 679 6 months Total intangible assets $ 134,609 $ ( 50,031 ) $ — $ 84,578 December 31, 2021 Gross value Accumulated amortization Accumulated impairment charges Carrying amount Weighted average useful life Customer relationships 146,569 ( 65,953 ) — 80,616 8.7 years Developed technology 11,047 ( 3,483 ) — 7,564 10.0 years Order backlog 2,600 ( 853 ) — 1,747 6 months Total intangible assets $ 160,216 $ ( 70,289 ) $ — $ 89,927 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 2031 . 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 April 1, 2022, 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 April 1, 2022 March 26, 2021 Operating lease cost $ 2,045 $ 1,381 7 Supplemental cash flow information related to leases is as follows: Three Months Ended April 1, 2022 March 26, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 1,823 $ 1,376 Supplemental balance sheet information related to leases is as follows: April 1, 2022 March 26, 2021 Weighted-average remaining lease term of operating leases 5.8 years 2.2 years Weighted-average discount rate of operating leases 2.2 % 4.4 % Future minimum lease payments under non-cancelable leases as of April 1, 2022 are as follows: 2022, remaining $ 6,209 2023 6,451 2024 5,711 2025 5,333 2026 4,857 Thereafter 7,917 Total future minimum lease payments 36,478 Less imputed interest ( 2,061 ) Total lease liabilities $ 34,417 Note 6 – Income Taxes Income tax information for the periods reported are as follows: Three Months Ended April 1, 2022 March 26, 2021 Income tax expense $ 810 $ 1,515 Income before income taxes $ 8,849 $ 16,153 Effective income tax rate 9.2 % 9.4 % Our effective tax rates for the first quarter of 2022 and 2021 differ from the statutory rate primarily 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. The ending balance for the unrecognized tax benefits for uncertain tax positions was approximately $ 3.6 million at April 1, 2022. 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 April 1, 2022, 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 matching maximum of 4 % of a participant’s annual compensation. Matching contributions were $ 1.0 million and $ 0.6 million for the first quarter of 2022 and 2021, respectively. 8 Note 8 – Long-Term Debt Long‑term debt consists of the following: April 1, 2022 December 31, 2021 Term loan $ 148,125 $ 150,000 Revolving credit facility 145,000 145,000 Total principal amount of long-term debt 293,125 295,000 Less unamortized debt issuance costs ( 2,130 ) ( 2,247 ) Total long-term debt, net 290,995 292,753 Less current portion ( 7,500 ) ( 7,500 ) Total long-term debt, less current portion, net $ 283,495 $ 285,253 On October 29, 2021, we entered into an amended and restated credit agreement, which includes a group of financial institutions as direct lenders underlying the agreement. The credit agreement includes a $ 150.0 million term loan facility and a $ 250.0 million revolving credit facility (together, “credit facilities”). Term loan principal payments of $ 1.9 million are due on a quarterly basis. The credit facilities mature on October 29, 2026 . Interest is charged at either the Base Rate or the Bloomberg Short-Term Bank Yield (“BSBY”) 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 BSBY Rate plus 1.00 %. The applicable margin on Base Rate and BSBY Rate loans is 0.375 ‑ 1.375 % and 1.375 ‑ 2.375 % per annum, respectively, depending on our leverage ratio. We are also charged a commitment fee of 0.175 %- 0.350 % on the unused portion of our revolving credit facility. Base Rate interest payments and commitment fees are due quarterly . BSBY Rate interest payments are due on the last day of the applicable interest period, or quarterly for applicable interest periods longer than 3 months . At April 1, 2022, our credit facilities bore interest under the BSBY rate option of 2.01 %. 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 $ 2.9 million and $ 2.4 million for the first quarter of 2022 and 2021. Stock Options The following table summarizes option activity: Number of Stock Options Service condition Weighted average exercise price per share Weighted average remaining contractual term Aggregate intrinsic value Outstanding, December 31, 2021 921,469 $ 23.20 Granted — $ — Exercised ( 42,753 ) $ 22.33 Forfeited or expired ( 13,501 ) $ 22.55 Outstanding, April 1, 2022 865,215 $ 23.26 3.6 years $ 9,322 Exercisable, April 1, 2022 630,492 $ 23.08 3.3 years $ 6,901 9 Restricted Share Units The following table summarizes RSU activity: Number of Restricted Share Units Service condition Performance condition Market condition Weighted average grant-date fair value per share Unvested, December 31, 2021 559,310 9,716 14,572 $ 37.05 Granted 23,003 — — $ 40.00 Vested ( 52,684 ) — — $ 27.30 Forfeited ( 17,624 ) — — $ 33.45 Unvested, April 1, 2022 512,005 9,716 14,572 $ 38.26 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. As of April 1, 2022, approximately 2.3 million ordinary shares remain available for purchase under the 2017 ESPP. Note 10 – 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 April 1, 2022 March 26, 2021 Numerator: Net income $ 8,039 $ 14,638 Denominator: Basic weighted average ordinary shares outstanding 28,592,629 28,004,248 Dilutive effect of options 292,828 449,656 Dilutive effect of RSUs 135,860 269,002 Dilutive effect of ESPP 2,138 6,206 Diluted weighted average ordinary shares outstanding 29,023,455 28,729,112 Securities excluded from the calculation of diluted weighted average ordinary shares outstanding (1) 267,000 75,000 Earnings per share: Net income: Basic $ 0.28 $ 0.52 Diluted $ 0.28 $ 0.51 (1) Represents potentially dilutive options and RSUs excluded from the calculation of diluted weighted average ordinary shares outstanding, because including them would have been antidilutive under the treasury stock method. 10 Note 11 – 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 April 1, 2022 March 26, 2021 United States of America $ 142,470 $ 139,134 Singapore 103,295 86,324 Europe 24,392 17,330 Other 22,989 21,778 Total net sales $ 293,146 $ 264,566 Foreign long-lived assets, exclusive of deferred tax assets, were $ 39.0 million and $ 38.4 million at April 1, 2022 and December 31, 2021, respectively . 11