ICHOR HOLDINGS, LTD. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) ICHOR HOLDINGS, LTD. Consolidated Balance Sheets (in thousands, except share and per share amounts) (unaudited) March 31, 2023 December 30, 2022 Assets Current assets: Cash and cash equivalents $ 68,837 $ 86,470 Accounts receivable, net 122,693 136,321 Inventories 271,538 283,660 Prepaid expenses and other current assets 6,530 7,007 Total current assets 469,598 513,458 Property and equipment, net 101,481 98,055 Operating lease right-of-use assets 40,609 40,557 Other noncurrent assets 12,660 12,926 Deferred tax assets, net 12,345 11,322 Intangible assets, net 68,056 72,022 Goodwill 335,402 335,402 Total assets $ 1,040,151 $ 1,083,742 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 68,030 $ 110,165 Accrued liabilities 21,417 23,616 Other current liabilities 11,821 15,815 Current portion of long-term debt 7,500 7,500 Current portion of lease liabilities 9,457 9,196 Total current liabilities 118,225 166,292 Long-term debt, less current portion, net 291,459 293,218 Lease liabilities, less current portion 31,988 31,828 Deferred tax liabilities, net 29 29 Other non-current liabilities 4,986 4,879 Total liabilities 446,687 496,246 Shareholders’ equity: Preferred shares ($ 0.0001 par value; 20,000,000 shares authorized; 0 shares issued and outstanding) — — Ordinary shares ($ 0.0001 par value; 200,000,000 shares authorized; 29,034,946 and 28,861,949 shares outstanding, respectively; 33,472,385 and 33,299,388 shares issued, respectively) 3 3 Additional paid in capital 437,388 431,415 Treasury shares at cost ( 4,437,439 shares) ( 91,578 ) ( 91,578 ) Retained earnings 247,651 247,656 Total shareholders’ equity 593,464 587,496 Total liabilities and shareholders’ equity $ 1,040,151 $ 1,083,742 The accompanying notes are an integral part of these consolidated financial statements. 1 Table of Contents ICHOR HOLDINGS, LTD. Consolidated Statements of Operations (in thousands, except share and per share amounts) (unaudited) Three Months Ended March 31, 2023 April 1, 2022 Net sales $ 225,870 $ 293,146 Cost of sales 192,630 249,214 Gross profit 33,240 43,932 Operating expenses: Research and development 4,313 4,851 Selling, general, and administrative 20,167 23,267 Amortization of intangible assets 3,966 5,349 Total operating expenses 28,446 33,467 Operating income 4,794 10,465 Interest expense, net 4,550 1,532 Other expense, net 784 84 Income (loss) before income taxes ( 540 ) 8,849 Income tax expense (benefit) ( 535 ) 810 Net income (loss) $ ( 5 ) $ 8,039 Net income (loss) per share Basic $ 0.00 $ 0.28 Diluted $ 0.00 $ 0.28 Shares used to compute Net income (loss) per share: Basic 28,984,878 28,592,629 Diluted 28,984,878 29,023,455 The accompanying notes are an integral part of these consolidated financial statements. 2 Table of Contents ICHOR HOLDINGS, LTD. Consolidated Statements of Shareholders’ Equity (in thousands, except share amounts) (unaudited) For the three months ending March 31, 2023 Ordinary Shares Additional Paid-In Capital Treasury Shares Retained Earnings Total Shareholders' Equity Shares Amount Shares Amount Balance at December 30, 2022 28,861,949 $ 3 $ 431,415 4,437,439 $ ( 91,578 ) $ 247,656 $ 587,496 Ordinary shares issued from exercise of stock options 92,766 — 2,126 — — — 2,126 Ordinary shares issued from vesting of restricted share units 32,527 — ( 692 ) — — — ( 692 ) Ordinary shares issued from employee share purchase plan 47,704 — 902 — — — 902 Share-based compensation expense — — 3,637 — — — 3,637 Net loss — — — — — ( 5 ) ( 5 ) Balance at March 31, 2023 29,034,946 $ 3 $ 437,388 4,437,439 $ ( 91,578 ) $ 247,651 $ 593,464 For the three months ending April 1, 2022 Ordinary Shares Additional Paid-In Capital Treasury Shares Retained Earnings Total Shareholders' Equity Shares Amount Shares Amount 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 The accompanying notes are an integral part of these consolidated financial statements. 3 Table of Contents ICHOR HOLDINGS, LTD. Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 31, 2023 April 1, 2022 Cash flows from operating activities: Net income (loss) $ ( 5 ) $ 8,039 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 8,489 9,315 Share-based compensation 3,637 2,897 Deferred income taxes ( 1,023 ) ( 37 ) Amortization of debt issuance costs 116 117 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable, net 13,628 ( 10,544 ) Inventories 12,122 ( 27,718 ) Prepaid expenses and other assets 2,705 ( 650 ) Accounts payable ( 43,018 ) ( 18,209 ) Accrued liabilities ( 1,797 ) 2,182 Other liabilities ( 5,727 ) ( 1,670 ) Net cash used in operating activities ( 10,873 ) ( 36,278 ) Cash flows from investing activities: Capital expenditures ( 6,819 ) ( 3,417 ) Net cash used in investing activities ( 6,819 ) ( 3,417 ) Cash flows from financing activities: Issuance of ordinary shares under share-based compensation plans 2,626 1,368 Employees' taxes paid upon vesting of restricted share units ( 692 ) ( 777 ) Repayments on term loan ( 1,875 ) ( 1,875 ) Net cash provided by (used in) financing activities 59 ( 1,284 ) Net decrease in cash ( 17,633 ) ( 40,979 ) Cash at beginning of period 86,470 75,495 Cash at end of period $ 68,837 $ 34,516 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 4,745 $ 1,395 Cash paid during the period for taxes, net of refunds $ 104 $ 106 Supplemental disclosures of non-cash activities: Capital expenditures included in accounts payable $ 2,426 $ 2,278 Right-of-use assets obtained in exchange for new operating lease liabilities, including those acquired through acquisitions $ 2,261 $ 6,067 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents 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 30, 2022. Year End We use a 52- or 53-week fiscal year ending on the last Friday in December. Our fiscal years ending December 29, 2023 and December 30, 2022 each are 52 weeks. References to 2023 and 2022 relate to the fiscal years then ended. The three-month periods ended March 31, 2023 and April 1, 2022 each are 13 weeks. References to the first quarter of 2023 and 2022 relate to the three-month periods then ended . 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 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. 5 Table of Contents 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 . 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. We adopted the ASU on the first day of 2023 and it did not have a material impact on our consolidated financial statements. Note 2 – Inventories Inventories consist of the following: March 31, 2023 December 30, 2022 Raw materials $ 196,504 $ 197,726 Work in process 39,733 56,291 Finished goods 54,306 47,186 Excess and obsolete adjustment ( 19,005 ) ( 17,543 ) Total inventories $ 271,538 $ 283,660 6 Table of Contents Note 3 – Property and Equipment and Other Noncurrent Assets Property and equipment consist of the following: March 31, 2023 December 30, 2022 Machinery $ 96,338 $ 90,507 Leasehold improvements 43,556 43,129 Computer software, hardware, and equipment 10,053 9,664 Office furniture, fixtures, and equipment 1,354 1,337 Vehicles 401 401 Construction-in-process 21,510 19,869 173,212 164,907 Less accumulated depreciation ( 71,731 ) ( 66,852 ) Total property and equipment, net $ 101,481 $ 98,055 Depreciation expense was $ 4.3 million and $ 4.0 million for the first quarter of 2023 and 2022, 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 balance of capitalized cloud computing implementation costs, net of accumulated amortization, was $ 11.4 million and $ 11.6 million as of March 31, 2023 and December 30, 2022, respectively, and is included in other assets on our consolidated balance sheets. The related amortization expense was $ 0.2 million and $ 0.2 million during the first quarter of 2023 and 2022, respectively, and is included in selling, general, and administrative expense on our consolidated statements of operations. Note 4 – Intangible Assets Definite‑lived intangible assets consist of the following: March 31, 2023 Gross value Accumulated amortization Accumulated impairment charges Carrying amount Weighted average useful life Customer relationships 117,022 ( 55,202 ) — 61,820 8.4 years Developed technology 11,047 ( 4,811 ) — 6,236 10.0 years Total intangible assets $ 128,069 $ ( 60,013 ) $ — $ 68,056 December 30, 2022 Gross value Accumulated amortization Accumulated impairment charges Carrying amount Weighted average useful life Customer relationships 117,022 ( 51,337 ) — 65,685 8.4 years Developed technology 11,047 ( 4,710 ) — 6,337 10.0 years Total intangible assets $ 128,069 $ ( 56,047 ) $ — $ 72,022 7 Table of Contents Note 5 – Leases Operating lease right-of-use (“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-cancelable 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-cancelable 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. The components of lease expense are as follows: Three Months Ended March 31, 2023 April 1, 2022 Operating lease cost $ 2,411 $ 2,045 Supplemental cash flow information related to leases is as follows: Three Months Ended March 31, 2023 April 1, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 2,237 $ 1,823 Supplemental balance sheet information related to leases is as follows: March 31, 2023 December 30, 2022 Weighted-average remaining lease term of operating leases 5.2 years 5.3 years Weighted-average discount rate of operating leases 3.2 % 3.0 % Future minimum lease payments under non-cancelable leases are as follows as of March 31, 2023: 2023, remaining $ 7,117 2024 9,074 2025 8,418 2026 7,968 2027 6,968 Thereafter 5,367 Total future minimum lease payments 44,912 Less imputed interest ( 3,467 ) Total lease liabilities $ 41,445 8 Table of Contents Note 6 – Income Taxes Income tax information for the periods reported is as follows: Three Months Ended March 31, 2023 April 1, 2022 Income tax expense (benefit) $ ( 535 ) $ 810 Income (loss) before income taxes $ ( 540 ) $ 8,849 Effective income tax rate 99.1 % 9.2 % Our effective tax rates for the three months ended March 31, 2023 and April 1, 2022 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. Our effective tax rate of 99.1 % for the first quarter of 2023 is primarily due to projected pre-tax loss in the U.S. for 2023, which generates tax benefits, partially offset by projected pre-tax income in Singapore, our primary source of non-U.S. pre-tax income and for which we participate in a tax holiday through 2026. The ending balance for the unrecognized tax benefits for uncertain tax positions was approximately $ 4.5 million at March 31, 2023. 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 31, 2023, we were under examination by the Inland Revenue Board of Malaysia for the years 2016 to 2020. 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 $ 0.9 million and $ 1.0 million for the first quarter of 2023 and 2022, respectively. Note 8 – Long-Term Debt Long‑term debt consists of the following: March 31, 2023 December 30, 2022 Term loan $ 140,625 $ 142,500 Revolving credit facility 160,000 160,000 Total principal amount of long-term debt 300,625 302,500 Less unamortized debt issuance costs ( 1,666 ) ( 1,782 ) Total long-term debt, net 298,959 300,718 Less current portion ( 7,500 ) ( 7,500 ) Total long-term debt, less current portion, net $ 291,459 $ 293,218 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. 9 Table of Contents 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, which is based on trailing 12-month EBITDA, as defined in our credit agreement. We are also charged a commitment fee of 0.175 %- 0.350 %, depending on our leverage ratio, 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 March 31, 2023, our credit facilities bore interest under the BSBY rate option of 6.51 %. 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, shares are 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 $ 3.6 million and $ 2.9 million for the first quarter of 2023 and 2022. 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 30, 2022 805,115 $ 23.35 Granted — $ 0.00 Exercised ( 92,766 ) $ 22.91 Forfeited or expired ( 1,444 ) $ 22.18 Outstanding, March 31, 2023 710,905 $ 23.41 2.6 years $ 6,634 Exercisable, March 31, 2023 634,134 $ 23.36 2.4 years $ 5,951 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 30, 2022 860,595 57,562 86,342 $ 30.26 Granted 69,675 — — $ 27.04 Vested ( 51,938 ) — — $ 33.57 Forfeited ( 11,936 ) — — $ 31.81 Unvested, March 31, 2023 866,396 57,562 86,342 $ 29.78 10 Table of Contents 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 March 31, 2023, approximately 2.2 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 March 31, 2023 April 1, 2022 Numerator: Net income (loss) $ ( 5 ) $ 8,039 Denominator: Basic weighted average ordinary shares outstanding 28,984,878 28,592,629 Dilutive effect of options — 292,828 Dilutive effect of RSUs — 135,860 Dilutive effect of ESPP — 2,138 Diluted weighted average ordinary shares outstanding 28,984,878 29,023,455 Securities excluded from the calculation of diluted weighted average ordinary shares outstanding (1) 1,879,000 267,000 Net income (loss) per share: Basic $ 0.00 $ 0.28 Diluted $ 0.00 $ 0.28 (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. 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. Additionally, key resources, decisions, and assessment of performance are analyzed at a company‑wide level. Therefore, we operate in one operating segment. Foreign operations are conducted primarily through our wholly owned subsidiaries in Singapore and Malaysia, and to a lesser degree, Scotland, Korea, and Mexico. Our principal markets include North America, Asia, and to a lesser degree, Europe. 11 Table of Contents Sales by geographic area represents sales to unaffiliated customers based upon the location to which the products were shipped. The following table sets forth sales by geographic area: Three Months Ended March 31, 2023 April 1, 2022 United States of America $ 89,052 $ 142,470 Singapore 82,286 103,295 Europe 29,986 24,392 Other 24,546 22,989 Total net sales $ 225,870 $ 293,146 Foreign long-lived assets, exclusive of deferred tax assets, were $ 52.5 million and $ 52.8 million at March 31, 2023 and December 30, 2022, respectively . 12 Table of Contents