ICHOR HOLDINGS, LTD. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 24, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __ to __

Commission File Number: 001-37961

ICHOR HOLDINGS, LTD.

(Exact Name of Registrant as Specified in its Charter)

Cayman Islands	Not Applicable
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3185 Laurelview Ct. Fremont, CA	94538
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (510) 897-5200

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Ordinary Shares, par value $0.0001	ICHR	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒

Non‑accelerated filer	☐	Small reporting company	☐

Emerging Growth Company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

As of October 28, 2021, the registrant had 28,410,653 ordinary shares, $0.0001 par value per share, outstanding.

TABLE OF CONTENTS

PART I
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4.	CONTROLS AND PROCEDURES	24

PART II
ITEM 1.	LEGAL PROCEEDINGS	25
ITEM 1A.	RISK FACTORS	25
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	25
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	25
ITEM 4.	MINE SAFETY DISCLOSURES	25
ITEM 5.	OTHER INFORMATION	25
ITEM 6.	EXHIBITS	25

SIGNATURES		26

PART I

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

ICHOR HOLDINGS, LTD.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

(unaudited)

	September 24, 2021			December 25, 2020
Assets
Current assets:
Cash and cash equivalents	$	128,038		$	252,899
Marketable securities		98,706			—
Accounts receivable, net		121,680			100,977
Inventories		193,930			134,756
Prepaid expenses and other current assets		7,161			7,082
Total current assets		549,515			495,714
Property and equipment, net		53,087			41,811
Operating lease right-of-use assets		8,681			10,088
Other noncurrent assets		7,350			5,503
Deferred tax assets, net		5,341			6,324
Intangible assets, net		29,676			39,845
Goodwill		174,887			174,887
Total assets	$	828,537		$	774,172
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	137,970		$	116,664
Accrued liabilities		19,038			20,792
Other current liabilities		13,413			10,700
Current portion of long-term debt		5,625			8,750
Current portion of lease liabilities		4,927			5,128
Total current liabilities		180,973			162,034
Long-term debt, less current portion, net		158,810			191,522
Lease liabilities, less current portion		3,989			5,272
Deferred tax liabilities, net		109			109
Other non-current liabilities		4,000			3,546
Total liabilities		347,881			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; 28,409,734 and 27,907,077 shares outstanding, respectively; 32,847,173 and 32,344,516 shares issued, respectively)		3			3
Additional paid in capital		412,246			399,311
Treasury shares at cost (4,437,439 shares)		(91,578	)		(91,578	)
Accumulated other comprehensive loss		(8	)		—
Retained earnings		159,993			103,953
Total shareholders’ equity		480,656			411,689
Total liabilities and shareholders’ equity	$	828,537		$	774,172

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Operations

(dollars in thousands, except per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 24, 2021			September 25, 2020			September 24, 2021		September 25, 2020
Net sales	$	262,855		$	227,678		$	809,729	$	669,270
Cost of sales		219,218			195,172			679,227		578,728
Gross profit		43,637			32,506			130,502		90,542
Operating expenses:
Research and development		3,905			3,269			11,469		10,100
Selling, general, and administrative		15,147			13,367			44,195		43,098
Amortization of intangible assets		3,388			3,338			10,169		10,008
Total operating expenses		22,440			19,974			65,833		63,206
Operating income		21,197			12,532			64,669		27,336
Interest expense, net		1,487			2,052			4,997		6,728
Other expense (income), net		(104	)		242			103		213
Income before income taxes		19,814			10,238			59,569		20,395
Income tax expense (benefit)		1,277			(310	)		3,529		(363	)
Net income	$	18,537		$	10,548		$	56,040	$	20,758
Net income per share:
Basic	$	0.65		$	0.46		$	1.99	$	0.91
Diluted	$	0.64		$	0.45		$	1.93	$	0.89
Shares used to compute net income per share:
Basic		28,371,644			23,051,994			28,185,564		22,875,186
Diluted		29,024,862			23,347,460			28,961,308		23,199,618

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended				Nine Months Ended
	September 24, 2021		September 25, 2020		September 24, 2021			September 25, 2020
Net income	$	18,537	$	10,548	$	56,040		$	20,758
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale marketable securities		16		—		(8	)		—
Comprehensive income	$	18,553	$	10,548	$	56,032		$	20,758

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Shareholders’ Equity

(dollars in thousands)

(unaudited)

					Additional			Treasury					Accumulated					Total
For the three months ending September 24, 2021	Ordinary Shares				Paid-In			Shares					Other Comprehensive			Retained		Shareholders'
	Shares		Amount		Capital			Shares		Amount			Income (Loss)			Earnings		Equity
Balance at June 25, 2021		28,326,559	$	3	$	408,626			4,437,439	$	(91,578	)	$	(24	)	$	141,456	$	458,483
Ordinary shares issued from exercise of stock options		35,783		—		723			—		—			—			—		723
Ordinary shares issued from vesting of restricted share units		25,900		—		(696	)		—		—			—			—		(696	)
Ordinary shares issued from employee share purchase plan		21,492		—		583			—		—			—			—		583
Share-based compensation expense		—		—		3,010			—		—			—			—		3,010
Other comprehensive loss		—		—		—			—		—			16			—		16
Net income		—		—		—			—		—			—			18,537		18,537
Balance at September 24, 2021		28,409,734	$	3	$	412,246			4,437,439	$	(91,578	)	$	(8	)	$	159,993	$	480,656

					Additional			Treasury					Accumulated					Total
For the nine months ending September 24, 2021	Ordinary Shares				Paid-In			Shares					Other Comprehensive			Retained		Shareholders'
	Shares		Amount		Capital			Shares		Amount			Income (Loss)			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		320,514		—		6,254			—		—			—			—		6,254
Ordinary shares issued from vesting of restricted share units		133,500		—		(2,614	)		—		—			—			—		(2,614	)
Ordinary shares issued from employee share purchase plan		48,643		—		1,189			—		—			—			—		1,189
Share-based compensation expense		—		—		8,106			—		—			—			—		8,106
Other comprehensive loss		—		—		—			—		—			(8	)		—		(8	)
Net income		—		—		—			—		—			—			56,040		56,040
Balance at September 24, 2021		28,409,734	$	3		412,246			4,437,439	$	(91,578	)	$	(8	)	$	159,993	$	480,656

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Shareholders’ Equity (continued)

(dollars in thousands)

(unaudited)

					Additional			Treasury							Total
For the three months ending September 25, 2020	Ordinary Shares				Paid-In			Shares					Retained		Shareholders'
	Shares		Amount		Capital			Shares		Amount			Earnings		Equity
Balance at June 26, 2020		22,868,999	$	2	$	248,882			4,437,439	$	(91,578	)	$	80,884	$	238,190
Ordinary shares issued from exercise of stock options		262,940		—		3,319			—		—			—		3,319
Ordinary shares issued from vesting of restricted share units		12,065		—		(184	)		—		—			—		(184	)
Ordinary shares issued from employee share purchase plan		16,668		—		377			—		—			—		377
Share-based compensation expense		—		—		2,417			—		—			—		2,417
Net income		—		—		—			—		—			10,548		10,548
Balance at September 25, 2020		23,160,672	$	2	$	254,811			4,437,439	$	(91,578	)	$	91,432	$	254,667

					Additional			Treasury							Total
For the nine months ending September 25, 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		385,276		—		5,913			—		—			—		5,913
Ordinary shares issued from vesting of restricted share units		123,500		—		(1,570	)		—		—			—		(1,570	)
Ordinary shares issued from employee share purchase plan		33,188		—		727			—		—			—		727
Share-based compensation expense		—		—		7,423			—		—			—		7,423
Net income		—		—		—			—		—			20,758		20,758
Balance at September 25, 2020		23,160,672	$	2	$	254,811			4,437,439	$	(91,578	)	$	91,432	$	254,667

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended
	September 24, 2021			September 25, 2020
Cash flows from operating activities:
Net income	$	56,040		$	20,758
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		17,669			18,029
Share-based compensation		8,106			7,423
Deferred income taxes		985			64
Amortization of debt issuance costs		725			726
Gain on sale of asset disposal group		(504	)		—
Other		319			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net		(20,703	)		(19,272	)
Inventories		(59,174	)		(10,546	)
Prepaid expenses and other assets		1,720			(472	)
Accounts payable		21,234			(23,693	)
Accrued liabilities		(1,448	)		4,002
Other liabilities		(558	)		1,103
Net cash provided by (used in) operating activities		24,411			(1,878	)
Cash flows from investing activities:
Capital expenditures		(18,704	)		(8,291	)
Purchase of marketable securities		(105,033	)		—
Proceeds from maturities and sales of marketable securities		6,000			—
Proceeds from sale of property and equipment		504			—
Net cash used in investing activities		(117,233	)		(8,291	)
Cash flows from financing activities:
Issuance of ordinary shares under share-based compensation plans		7,137			6,609
Employees' taxes paid upon vesting of restricted share units		(2,614	)		(1,570	)
Borrowings on revolving credit facility		—			30,000
Repayments on revolving credit facility		(30,000	)		—
Repayments on term loan		(6,562	)		(6,563	)
Net cash provided by (used in) financing activities		(32,039	)		28,476
Net increase (decrease) in cash		(124,861	)		18,307
Cash at beginning of period		252,899			60,612
Cash at end of period	$	128,038		$	78,919
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	4,690		$	6,426
Cash paid during the period for taxes, net of refunds	$	1,786		$	179
Supplemental disclosures of non-cash activities:
Capital expenditures included in accounts payable	$	441		$	537
Right-of-use assets obtained in exchange for new operating lease liabilities	$	2,239		$	328

See accompanying notes.

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 September 24, 2021 and September 25, 2020 were both 13 weeks. References to the third 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. Fiscal year 2021 and 2020 are 53 and 52 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 and Marketable Securities

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. Marketable securities consist primarily of highly liquid investments with maturities of greater than 90 days when purchased. We classify our marketable securities as available-for-sale and, accordingly, report them at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss). Any unrealized losses which are considered to be other-than-temporary are recorded in other income (expense), net. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method and recorded in other income (expense), net.

All of our available-for-sale investments are subject to a periodic impairment review. If an available-for-sale debt security’s fair value is less than its amortized cost basis, then we evaluate whether the decline is the result of a credit loss, in which case an impairment is recorded through an allowance for credit losses. Unrealized gains and losses not attributable to credit losses are included, net of tax, in accumulated other comprehensive income (loss). We have not record an allowance for credit losses during 2021.

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.

Inventories

Inventories are stated at the lower of cost or net realizable value. The majority of our inventory values are based upon average costs. On a quarterly basis, we analyze the value of our inventory and periodically record write-downs for estimated excess and obsolete inventory. This analysis is based on estimated future consumption compared to inventory quantities on-hand. The estimate is based on how assumptions of historical consumption, recency of purchases, backlog, and other factors indicate future consumption. Once the value of inventory is adjusted, the original cost of our inventory, less the write-down, represents its new cost basis. Reversal of these write-downs are recognized only when the related inventory has been scrapped or sold.

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:

	September 24, 2021			December 25, 2020
Raw materials	$	133,251		$	88,015
Work in process		50,306			38,184
Finished goods		23,831			21,299
Excess and obsolete adjustment		(13,458	)		(12,742	)
Total inventories	$	193,930		$	134,756

Note 3 – Property and Equipment and Other Noncurrent Assets

Property and equipment consist of the following:

	September 24, 2021			December 25, 2020
Machinery	$	40,480		$	37,196
Leasehold improvements		32,838			29,616
Computer software, hardware, and equipment		6,620			6,501
Office furniture, fixtures and equipment		982			1,166
Vehicles		90			75
Construction-in-process		13,346			5,483
		94,356			80,037
Less accumulated depreciation		(41,269	)		(38,226	)
Total property and equipment, net	$	53,087		$	41,811

Depreciation expense was $2.8 million and $3.0 million for the third quarter of 2021 and 2020, respectively, and $7.5 million and $8.0 million for the nine months ended September 24, 2021 and September 25, 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		2,104
Capitalized costs amortized during the period		(151	)
Capitalized cloud computing implementation costs as of September 24, 2021	$	6,319

Note 4 – Intangible Assets

Definite‑lived intangible assets consist of the following:

	September 24, 2021
	Gross value		Accumulated amortization			Accumulated impairment charges		Carrying amount		Weighted average useful life
Trademarks	$	9,690	$	(9,442	)	$	—	$	248	10.0 years
Customer relationships		84,169		(62,577	)		—		21,592	7.7 years
Developed technology		11,047		(3,211	)		—		7,836	10.0 years
Total intangible assets	$	104,906	$	(75,230	)	$	—	$	29,676

	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 September 24, 2021, we had zero operating lease executed for which the rental period had not yet commenced.

The components of lease expense are as follows:

Three Months Ended

Nine Months Ended

September 24,

2021

September 25,

2020

September 24,

2021

September 25,

2020

Operating lease cost

1,394

1,363

4,166

4,015

Supplemental cash flow information related to leases is as follows:

	Nine Months Ended
	September 24, 2021		September 25, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	3,979	$	4,096

Supplemental balance sheet information related to leases is as follows:

September 24,

2021

September 25,

2020

Weighted-average remaining lease term of operating leases

2.6 years

2.5 years

Weighted-average discount rate of operating leases

4.1%

4.5%

Future minimum lease payments under non-cancelable leases as of September 24, 2021 are as follows:

2021, remaining	$	1,302
2022		4,699
2023		1,736
2024		797
2025		582
Thereafter		289
Total future minimum lease payments		9,405
Less imputed interest		(489	)
Total lease liabilities	$	8,916

Note 6 – Income Taxes

Income tax information for the periods reported are as follows:

	Three Months Ended						Nine Months Ended
	September 24, 2021			September 25, 2020			September 24, 2021			September 25, 2020
Income tax expense (benefit)	$	1,277		$	(310	)	$	3,529		$	(363	)
Income before income taxes	$	19,814		$	10,238		$	59,569		$	20,395
Effective income tax rate		6.4	%		-3.0	%		5.9	%		-1.8	%

Our effective tax rate for the three and nine months ended September 24, 2021 differs 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.

Our effective tax rate for the three and nine months ended September 25, 2020 differs 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, the impact of stock option exercises, and return-to-provision adjustments related to recently filed tax returns.

The ending balance for the unrecognized tax benefits for uncertain tax positions was approximately $3.2 million at September 24, 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 September 24, 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 matching maximum of 4% of a participant’s annual compensation. Matching contributions were $0.5 million and $0.5 million for the third quarter of 2021 and 2020, respectively and $1.6 million and $1.5 million for the nine months ended September 24, 2021 and September 25, 2020, respectively.

Note 8 – Long-Term Debt

Long‑term debt consists of the following:

	September 24, 2021			December 25, 2020
Term loan	$	146,563		$	153,125
Revolving credit facility		19,162			49,162
Total principal amount of long-term debt		165,725			202,287
Less unamortized debt issuance costs		(1,290	)		(2,015	)
Total long-term debt, net		164,435			200,272
Less current portion		(5,625	)		(8,750	)
Total long-term debt, less current portion, net	$	158,810		$	191,522

On February 15, 2018, we entered into an amended and restated credit agreement (the “2018 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 2018 Credit Agreement matures 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 September 24, 2021, the term loan and revolving credit facility bore interest at the Eurodollar rate option of 3.00% and 2.15%, respectively.

Subsequent Event

On October 29, 2021, we executed an amended and restated credit agreement to refinance all outstanding indebtedness under our 2018 Credit Agreement. The credit agreement features a $150.0 million term loan and a revolving facility allowing for borrowings up to $250.0 million. The credit agreement lowers our overall borrowing rate by (i) decreasing the applicable margin, (ii) decreasing the revolving facility commitment fee, and (iii) removing the 1.00% Eurodollar Rate floor that was associated with the term loan. Under the new credit agreement, the Eurodollar Rate, which was equal to LIBOR, is replaced with the Bloomberg Short-Term Bank Yield Index (‘BSBY’). Additionally, the maturity date is extended to October 2026, and the maximum permitted leverage ratio is increased to 3.5x from 3.0x. Quarterly term loan payments of $1.9 million commence on March 31, 2022. The impact of the term loan payment schedule under the new credit agreement has been recognized in these consolidated financial statements, which is reflected in the $5.6 million balance of current portion of long-term debt.

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 $3.0 million and $2.4 million for the third quarter of 2021 and 2020, respectively, and $8.1 million and $7.4 million for the nine months ended September 24, 2021 and September 25, 2020, respectively.

Stock Options

The following table summarizes option activity:

	Number of Stock Options
	Service condition			Performance condition			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		(254,606	)		(65,908	)	$	19.51
Forfeited or expired		(42,888	)		—		$	20.72
Outstanding, September 24, 2021		1,028,332			—		$	23.13	4.1 years	$	21,900
Exercisable, September 24, 2021		620,681			—		$	22.71	3.6 years	$	13,481

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 25, 2020		564,626			—		—	$	24.09
Granted		211,224			9,716		14,572	$	50.12
Vested		(192,319	)		—		—	$	21.13
Forfeited		(25,931	)		—		—	$	27.92
Unvested, September 24, 2021		557,600			9,716		14,572	$	34.44

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 nine months ended September 24, 2021, 48,643 ordinary shares were purchased by eligible employees under the 2017 ESPP. As of September 24, 2021, 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				Nine Months Ended
	September 24, 2021		September 25, 2020		September 24, 2021		September 25, 2020
Numerator:
Net income	$	18,537	$	10,548	$	56,040	$	20,758
Denominator:
Basic weighted average ordinary shares outstanding		28,371,644		23,051,994		28,185,564		22,875,186
Dilutive effect of options		430,713		176,292		510,074		232,026
Dilutive effect of RSUs		221,379		117,623		265,295		91,889
Dilutive effect of ESPP		1,126		1,551		375		517
Diluted weighted average ordinary shares outstanding		29,024,862		23,347,460		28,961,308		23,199,618
Securities excluded from diluted weighted average ordinary shares outstanding (1)		173,000		1,215,000		188,000		1,306,000
Earnings per share:
Net income:
Basic	$	0.65	$	0.46	$	1.99	$	0.91
Diluted	$	0.64	$	0.45	$	1.93	$	0.89

(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 – Fair Value Measurements

We measure certain assets and liabilities, including cash equivalents and marketable securities, at fair value. Whenever possible, the fair values of our financial assets and liabilities are determined using quoted market prices of identical securities or quoted market prices of similar securities from active markets. The three levels of inputs that may be used to measure fair value are as follows:

•

Level 1: Quoted prices in active markets for identical assets.

•

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

•

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

As of September 24, 2021, assets measured at fair value on a recurring basis were as follows:

	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	30,940	$	—	$	—	$	30,940
U.S. treasuries		10,000		—		—		10,000
Marketable securities:
U.S. treasuries		52,604		—		—		52,604
Commercial paper		—		35,989		—		35,989
Corporate bonds		—		10,113		—		10,113
Total assets	$	93,544	$	46,102	$	—	$	139,646

The difference between amortized cost and fair value of marketable securities, due to unrealized gains and losses, was immaterial and is recorded as a component of accumulated other comprehensive income (loss). We did not have any other-than-temporary unrealized gains or losses at either period-end included in these financial statements.

Note 12 – 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				Nine Months Ended
	September 24, 2021		September 25, 2020		September 24, 2021		September 25, 2020
United States of America	$	127,672	$	125,538	$	404,553	$	364,071
Singapore		94,831		73,196		282,369		220,732
Europe		16,430		18,191		56,199		51,686
Other		23,922		10,753		66,608		32,781
Total net sales	$	262,855	$	227,678	$	809,729	$	669,270

Foreign long-lived assets, exclusive of deferred tax assets, were $40.1 million and $31.5 million at September 24, 2021 and December 25, 2020, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated unaudited financial statements and related notes included elsewhere in this report. The following discussion contains forward‑looking statements based upon our current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in “Risk Factors.”

Overview

We are a leader in the design, engineering, and manufacturing of critical fluid delivery subsystems and components for semiconductor capital equipment. Our product offerings include gas and chemical delivery systems and subsystems, collectively known as fluid delivery systems and subsystems, which are key elements of the process tools used in the manufacturing of semiconductor devices. Our gas delivery subsystems deliver, monitor, and control precise quantities of the specialized gases used in semiconductor manufacturing processes such as etch and deposition. Our chemical delivery systems and subsystems precisely blend and dispense the reactive liquid chemistries used in semiconductor manufacturing processes such as chemical-mechanical planarization, electroplating, and cleaning. We also manufacture precision machined components, weldments, and proprietary products for use in fluid delivery systems for direct sales to our customers. This vertically integrated portion of our business is primarily focused on metal and plastic parts that are used in gas and chemical systems, respectively.

Fluid delivery subsystems ensure accurate measurement and uniform delivery of specialty gases and chemicals at critical steps in the semiconductor manufacturing processes. Any malfunction or material degradation in fluid delivery reduces yields and increases the likelihood of manufacturing defects in these processes. Most OEMs outsource all or a portion of the design, engineering, and manufacturing of their gas delivery subsystems to a few specialized suppliers, including us. Additionally, many OEMs are also increasingly outsourcing the design, engineering, and manufacturing of their chemical delivery subsystems due to the increased fluid expertise required to manufacture these subsystems. Outsourcing these subsystems has allowed OEMs to leverage the suppliers’ highly specialized engineering, design, and production skills while focusing their internal resources on their own value-added processes. We believe that this outsourcing trend has enabled OEMs to reduce their costs and development time, as well as provide growth opportunities for specialized subsystems suppliers like us.

We have a global footprint with production facilities in California, Minnesota, Oregon, Texas, Singapore, Malaysia, the United Kingdom, Korea, and Mexico.

The following summarizes key financial information for the periods indicated. Amounts are presented in accordance with GAAP unless explicitly identified as being a non-GAAP metric. For a description of our non-GAAP metrics and reconciliations to the most comparable GAAP metrics, please refer to Item 2 – Non-GAAP Financial Results within this report.

	Three Months Ended						Nine Months Ended
	September 24, 2021			September 25, 2020			September 24, 2021			September 25, 2020
	(dollars in thousands)
Net sales	$	262,855		$	227,678		$	809,729		$	669,270
Gross profit	$	43,637		$	32,506		$	130,502		$	90,542
Gross margin		16.6	%		14.3	%		16.1	%		13.5	%
Non-GAAP gross margin		16.7	%		14.6	%		16.6	%		14.1	%
Operating expenses	$	22,440		$	19,974		$	65,833		$	63,206
Operating income	$	21,197		$	12,532		$	64,669		$	27,336
Net income	$	18,537		$	10,548		$	56,040		$	20,758
Non-GAAP net income	$	23,421		$	14,581		$	71,453		$	39,208
Diluted EPS	$	0.64		$	0.45		$	1.93		$	0.89
Non-GAAP diluted EPS	$	0.81		$	0.62		$	2.47		$	1.69

COVID-19 Pandemic and Market Conditions Update

The COVID‑19 pandemic and related economic repercussions have created, and are expected to continue to create, significant volatility, uncertainty, and turmoil in our industry. While our facilities are currently not subject to any site-wide government shutdowns, in June 2021, the Malaysian government instituted an Enhanced Movement Control Order (“EMCO”), which impacted our weldment facility in Malaysia through both on-site employee restrictions as well as a complete shutdown of all manufacturing in the region during early July. While we were able to reopen our factory in mid-July, once the government confirmed we were an essential business, we remained under headcount limitations until the third week of August. With 50% of our weldment capacity located in Malaysia, our overall output in the country was reduced by 40% in the third quarter due to the EMCO restrictions.

In addition to the recent impacts in Malaysia, increases in direct costs within our factories associated with employee personal protective equipment (“PPE”), facility cleaning and layout changes, together with increases in logistics costs and employee labor costs, as well as other operating inefficiencies have resulted in, and may continue to result in, lower revenues and operating margins. The extent and duration of these impacts cannot be specifically quantified given the dynamic nature and breadth of the pandemic’s impact on our operations and that of our customers and suppliers.

Results of Operations

The following table sets forth our unaudited results of operations for the periods presented. The period‑to‑period comparison of results is not necessarily indicative of results for future periods.

	Three Months Ended						Nine Months Ended
	September 24, 2021			September 25, 2020			September 24, 2021		September 25, 2020
	(in thousands)
Consolidated Statements of Operations Data:
Net sales	$	262,855		$	227,678		$	809,729	$	669,270
Cost of sales		219,218			195,172			679,227		578,728
Gross profit		43,637			32,506			130,502		90,542
Operating expenses:
Research and development		3,905			3,269			11,469		10,100
Selling, general, and administrative		15,147			13,367			44,195		43,098
Amortization of intangible assets		3,388			3,338			10,169		10,008
Total operating expenses		22,440			19,974			65,833		63,206
Operating income		21,197			12,532			64,669		27,336
Interest expense, net		1,487			2,052			4,997		6,728
Other expense (income), net		(104	)		242			103		213
Income before income taxes		19,814			10,238			59,569		20,395
Income tax expense (benefit)		1,277			(310	)		3,529		(363	)
Net income	$	18,537		$	10,548		$	56,040	$	20,758

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

	Three Months Ended					Nine Months Ended
	September 24, 2021		September 25, 2020			September 24, 2021		September 25, 2020

Consolidated Statements of Operations Data:
Net sales		100.0		100.0			100.0		100.0
Cost of sales		83.4		85.7			83.9		86.5
Gross profit		16.6		14.3			16.1		13.5
Operating expenses:
Research and development		1.5		1.4			1.4		1.5
Selling, general, and administrative		5.8		5.9			5.5		6.4
Amortization of intangible assets		1.3		1.5			1.3		1.5
Total operating expenses		8.5		8.8			8.1		9.4
Operating income		8.1		5.5			8.0		4.1
Interest expense, net		0.6		0.9			0.6		1.0
Other expense (income), net		0.0		0.1			0.0		0.0
Income before income taxes		7.5		4.5			7.4		3.0
Income tax expense (benefit)		0.5		(0.1	)		0.4		(0.1	)
Net income		7.1		4.6			6.9		3.1

Comparison of the three and nine months ended September 24, 2021 and September 25, 2020

Net Sales

	Three Months Ended				Change					Nine Months Ended				Change
	September 24, 2021		September 25, 2020		Amount		%			September 24, 2021		September 25, 2020		Amount		%
	(dollars in thousands)
Net sales	$	262,855	$	227,678	$	35,177		15.5	%	$	809,729	$	669,270	$	140,459		21.0	%

The increase in net sales from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to strong demand from our customers as a result of continued growth in the global wafer fabrication equipment market, partially offset by production constraints as a result of challenges in our supply chain, primarily due to the EMCO restrictions at our Malaysia factory beginning in June 2021, as noted above in the commentary above under the heading, “COVID‑19 Pandemic and Market Conditions Update,” and delivery timelines with certain key suppliers.

Net sales to U.S. customers increased by $2.1 million and $40.5 million for the three and nine months ended September 24, 2021, respectively. On a relative basis, net sales to U.S. customers as a percent of total net sales decreased from 55.1% and 54.4% to 48.6% and 50.0% for the three and nine months ended September 24, 2021, respectively.

Net sales to international customers increased by $33.0 million and $100.0 million for the three and nine months ended September 24, 2021, respectively. On a relative basis, net sales to international customers as a percent of total net sales increased from 44.8% and 45.6% to 51.5% and 50.0% for the three and nine months ended September 24, 2021, respectively.

Cost of Sales, Gross Profit, and Gross Margin

	Three Months Ended						Change					Nine Months Ended						Change
	September 24, 2021			September 25, 2020			Amount		%			September 24, 2021			September 25, 2020			Amount		%
	(dollars in thousands)
Cost of sales	$	219,218		$	195,172		$	24,046		12.3	%	$	679,227		$	578,728		$	100,499		17.4	%
Gross profit	$	43,637		$	32,506		$	11,131		34.2	%	$	130,502		$	90,542		$	39,960		44.1	%
Gross margin		16.6	%		14.3	%			+ 230 bps				16.1	%		13.5	%			+ 260 bps

The increase in the gross amounts of cost of sales and gross profit for the three and nine months ended September 24, 2021 were primarily due to the factors mentioned in the commentary above under the heading, “Net Sales”.

The increase in our gross margin from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to increased factory utilization, partially offset by increased materials and logistics costs and increased factory inefficiency due to challenges in our supply chain, primarily due to the EMCO restrictions at our Malaysia factory in beginning in June 2021, as noted above in the commentary above under the heading, “COVID‑19 Pandemic and Market Conditions Update,” and delivery timelines with certain key suppliers.

The following discrete, non‑recurring items favorably impacted our gross margin for the three and nine months ended September 24, 2021 on a year-over-year basis:

Gross margin increased from the third quarter of 2020 to the third quarter of 2021 due to $0.4 million, or 18 basis points, in costs incurred in connection with the planned closure of our Union City, California facility in the third quarter of 2020 that did not recur in the third quarter of 2021. The facility ceased operations during the second quarter of 2021.

Gross margin increased from the nine months ended September 25, 2020 to the nine months ended September 24, 2021 due to a $1.4 million, or 21 basis point, contract settlement loss in the first quarter of 2020 that did not recur in the nine months ended September 24, 2021. This was partially offset by a $0.4 million, or 6 basis point, increase in Union City facility shutdown costs in the nine months ended September 24, 2021 compared to the nine months ended September 25, 2020.

Research and Development

	Three Months Ended				Change					Nine Months Ended				Change
	September 24, 2021		September 25, 2020		Amount		%			September 24, 2021		September 25, 2020		Amount		%
	(dollars in thousands)
Research and development	$	3,905	$	3,269	$	636		19.5	%	$	11,469	$	10,100	$	1,369		13.6	%

The increase in research and development expenses from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to increased employee-related expense, as we expand our engineering team to design and engineer next generation, high performance solutions for our customers.

Selling, General, and Administrative

	Three Months Ended				Change					Nine Months Ended				Change
	September 24, 2021		September 25, 2020		Amount		%			September 24, 2021		September 25, 2020		Amount		%
	(dollars in thousands)
Selling, general, and administrative	$	15,147	$	13,367	$	1,780		13.3	%	$	44,195	$	43,098	$	1,097		2.5	%

The increase in selling, general, and administrative expense from the third quarter of 2020 to the third quarter of 2021 was primarily due (i) $1.6 million in increased employee-related expense, which is inclusive of a $0.5 million increase in share-based compensation expense, and (ii) $0.3 million in increased computer hardware and software costs to support the growing organization and our ERP implementation project, partially offset by (iii) $0.3 million in reduced professional and consulting fees.

The increase in selling, general, and administrative expense from the nine months ended September, 2020 to the nine months ended September 24, 2021 was primarily due to (i) $2.2 million in increased employee-related expense, which is inclusive of a $0.2 million increase in share-based compensation expense, (ii) $1.1 million in increased computer hardware and software costs to support the growing organization and our ERP implementation project, and (iii) $0.3 million in increase costs related to the shutdown of our Union City, California facility, partially offset by (iv) $1.8 million in reduced executive transition costs associated with the transition of our former CEO to executive chairman in the first quarter of 2020 that did not recur in the first quarter of 2021 and (v) $1.2 million in reduced professional and consulting fees.

Amortization of Intangible Assets

	Three Months Ended				Change					Nine Months Ended				Change
	September 24, 2021		September 25, 2020		Amount		%			September 24, 2021		September 25, 2020		Amount		%
	(dollars in thousands)
Amortization of intangibles assets	$	3,388	$	3,338	$	50		1.5	%	$	10,169	$	10,008	$	161		1.6	%

The increase in amortization expense from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to incremental amortization expense from the acquisition of a customer relationship intangible asset in December 2020 in connection with our acquisition of a precision machining operation in Nogales, Mexico.

Interest Expense, Net

	Three Months Ended				Change						Nine Months Ended				Change
	September 24, 2021		September 25, 2020		Amount			%			September 24, 2021		September 25, 2020		Amount			%
	(dollars in thousands)
Interest expense, net	$	1,487	$	2,052	$	(565	)		-27.5	%	$	4,997	$	6,728	$	(1,731	)		-25.7	%

The decrease in interest expense from the third quarter of 2020 to the third quarter of 2021 was primarily due to a 47‑basis point decrease in our weighted average interest rate, from 3.37% to 2.90%, and a $38.7 million decrease in our average amount borrowed during the quarter.

The decrease in interest expense from the nine months ended September 25, 2020 to the nine months ended September 24, 2021 was primarily due to an 81‑basis point decrease in our weighted average interest rate, from 3.89% to 3.08%, and a $21.6 million decrease in our average amount borrowed during the nine‑month period.

The decrease in our weighted average interest rate during the three and nine months ended September 24, 2021 was primarily driven by continued quarterly reductions in our consolidated leverage ratio, starting with the first quarter of 2020, which lowers the applicable margin component of our all-in interest rate. Additionally, for the nine months ended September 24, 2021, our weighted average interest rate was favorably impacted by reductions in LIBOR during the first half of 2021 compared to the first half of 2020.

Interest expense for the three and nine months ended September 24, 2021 is net of an insignificant amount of interest income, net of premium amortization, associated with our marketable securities, which were originally purchased in May 2021.

Other Expense (Income), Net

	Three Months Ended					Change				Nine Months Ended				Change
	September 24, 2021			September 25, 2020		Amount			%	September 24, 2021		September 25, 2020		Amount			%
	(dollars in thousands)
Other expense (income), net	$	(104	)	$	242	$	(346	)	n/m	$	103	$	213	$	(110	)		-51.6	%

The change in other expense, net from the three and nine months ended September 25, 2020 to the three and nine months ended September 24, 2021 was primarily due to currency exchange rate changes during the quarter as a result of transactions denominated in the local currencies of our foreign operations. These local currencies consist primarily of the Singapore dollar, Malaysian ringgit, and euro.

Income Tax Expense (Benefit)

	Three Months Ended					Change			Nine Months Ended					Change
	September 24, 2021		September 25, 2020			Amount		%	September 24, 2021		September 25, 2020			Amount		%
	(dollars in thousands)
Income tax expense (benefit)	$	1,277	$	(310	)	$	1,587	n/m	$	3,529	$	(363	)	$	3,892	n/m

The increase in income tax expense from the third quarter of 2020 to the third quarter of 2021 was primarily due to increased taxable income in the U.S. in 2021 and a reduction in benefits from share-based compensation activity during the quarter.

The increase in income tax expense from the nine months ended September 25, 2020 to the nine months ended September 24, 2021 was primarily due to increased taxable income in the U.S., partially offset by an increase in benefits from share-based compensation activity during the nine-month period.

Non‑GAAP Financial Results

Management uses non-GAAP metrics to evaluate our operating and financial results. We believe the presentation of non-GAAP results is useful to investors for analyzing business trends and comparing performance to prior periods, along with enhancing investors’ ability to view our results from management’s perspective. Non-GAAP gross margin is defined as non-GAAP gross profit divided by net sales. Non-GAAP gross profit and non-GAAP net income are defined as: gross profit or net income excluding, as applicable, (1) amortization of intangible assets, share-based compensation expense, and non-recurring expenses, including contract settlement losses and facility shutdown costs, to the extent they are present in gross profit or net income; and (2) the tax impacts associated with our non-GAAP adjustments, as well as non-recurring discrete tax items. Non-GAAP diluted earnings per share (“EPS”) is defined as non-GAAP net income divided by weighted average diluted ordinary shares outstanding during the period.

Non-GAAP results have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for our results reported under GAAP. Other companies may calculate non-GAAP results differently or may use other measures to evaluate their performance, both of which could reduce the usefulness of our non-GAAP results as a tool for comparison.

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

The following table presents our unaudited non‑GAAP gross profit and non-GAAP gross margin and and a reconciliation from gross profit, the most comparable GAAP measure, for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 24, 2021			September 25, 2020			September 24, 2021			September 25, 2020
	(dollars in thousands, except per share amounts)
U.S. GAAP gross profit	$	43,637		$	32,506		$	130,502		$	90,542
Non-GAAP adjustments:
Share-based compensation		343			289			947			724
Other non-recurring expense, net (1)		—			—			106			—
Contract settlement loss (2)		—			—			—			1,386
Facility shutdown costs (3)		—			408			2,297			1,883
Fair value adjustment to inventory from acquisitions (4)		—			—			211			—
Non-GAAP gross profit	$	43,980		$	33,203		$	134,063		$	94,535
U.S. GAAP gross margin		16.6	%		14.3	%		16.1	%		13.5	%
Non-GAAP gross margin		16.7	%		14.6	%		16.6	%		14.1	%

(1)

Included in this amount for the nine months ended September 24, 2021 is primarily a non-recurring settlement charge.

(2)

During the first quarter of 2020, we reached a mutual settlement with the counterparty of a contract dispute and, accordingly, recorded a $1.4 million contract settlement loss to cost of sales.

(3)

During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed during the second quarter of 2021. As of the end of the second quarter of 2021, the facility was closed and vacated, and no further charges are expected on a go-forward basis.

Included in this amount for the third quarter of 2020 are (i) severance costs associated with affected employees of $0.2 million, and (ii) accelerated depreciation charges associated with property and equipment expected to be abandoned at the time of facility closure of $0.2 million.

Included in this amount for the nine months ended September 24, 2021 are (i) write-off costs associated with inventories determined during the period to be obsolete of $2.6 million and (ii) severance costs associated with affected employees of $0.2 million, partially offset by (iii) a gain realized upon the sale of equipment and other fixed assets of $0.5 million.

Included in this amount for the nine months September 25, 2020 are (i) write-off costs associated with inventories determined during the period to be obsolete of $1.3 million, (ii) severance costs associated with affected employees of $0.4 million, and (iii) accelerated depreciation charges associated with property and equipment expected to be abandoned at the time of facility closure of $0.2 million.

(4)

As part of our purchase price allocation for our acquisition of a precision machining operation in Mexico in December 2020, we recorded acquired-inventory at fair value, resulting in a fair value step-up of $0.2 million. This was subsequently released to cost of sales in the first quarter of 2021 as acquired-inventory was sold.

The following table presents our unaudited non‑GAAP net income and non-GAAP diluted EPS and a reconciliation from net income, the most comparable GAAP measure, for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 24, 2021			September 25, 2020			September 24, 2021			September 25, 2020
	(dollars in thousands, except per share amounts)
U.S. GAAP net income	$	18,537		$	10,548		$	56,040		$	20,758
Non-GAAP adjustments:
Amortization of intangible assets		3,388			3,338			10,169			10,008
Share-based compensation		3,010			2,417			8,106			7,423
Other non-recurring expense, net (1)		110			239			498			3,124
Contract settlement loss (2)		—			—			—			1,386
Facility shutdown costs (3)		—			481			2,682			2,017
Fair value adjustment to inventory from acquisitions (4)		—			—			211			—
Tax adjustments related to non-GAAP adjustments (5)		(1,624	)		(2,442	)		(6,253	)		(5,508	)
Non-GAAP net income	$	23,421		$	14,581		$	71,453		$	39,208
U.S. GAAP diluted EPS	$	0.64		$	0.45		$	1.93		$	0.89
Non-GAAP diluted EPS	$	0.81		$	0.62		$	2.47		$	1.69
Shares used to compute diluted EPS		29,024,862			23,347,460			28,961,308			23,199,618

(1)

Included in this amount for the third quarter of 2021 are primarily non-capitalized costs incurred in connection with our implementation of a new ERP system.

Included in this amount for the the third quarter of 2020 are primarily (i) non-capitalized costs incurred in connection with our implementation of a new ERP system and a Sarbanes-Oxley (“SOX”) compliance program.

Included in this amount for the nine months ended September 24, 2021 are primarily (i) non-capitalized costs incurred in connection with our implementation of a new ERP system and a SOX compliance program.

Included in this amount for the nine months ended September 25, 2020 are primarily (i) a $1.8 million bonus payment to our former CEO in connection with his transition to executive chairman, (ii) acquisition-related expenses associated with a two-year retention agreement between the Company and key management personnel of IAN, (iii) non-capitalizable costs incurred in connection with our implementation of a new ERP system and a SOX compliance program, and (iv) a non-recurring settlement charge.

(2)

See footnote 2 to the previous table reconciling gross profit to non-GAAP gross profit.

(3)

Included in this amount for the third quarter of 2020 are are (i) severance costs associated with affected employees of $0.2 million, and (ii) accelerated depreciation charges associated with property and equipment expected to be abandoned at the time of facility closure of $0.3 million.

Included in this amount for the nine months ended September 24, 2021 are (i) write-off costs associated with inventories determined during the period to be obsolete of $2.6 million, (ii) other shutdown related charges of $0.3 million, (iii) severance costs associated with affected employees of $0.2 million, partially offset by (iv) a gain realized upon the sale of equipment and other fixed assets of $0.5 million.

(4)

See footnote 4 to the previous table reconciling gross profit to non-GAAP gross profit.

(5)

Adjusts U.S. GAAP income tax expense (benefit) for impact of our non-GAAP adjustments, as defined, including the impacts of excluding share-based compensation, amortization of intangible assets, and other non-recurring expenses. This adjustment also excludes the impact of non-recurring discrete tax items.

Liquidity and Capital Resources

We ended the third quarter of 2021 with cash of $128.0 million, a decrease of $124.9 million from December 25, 2020. The decrease during the nine months ended September 24, 2021 was primarily due to purchases of marketable securities of $105.0 million, payments on long-term debt of $36.6 million, and capital expenditures of $18.7 million, partially offset by cash provided by operating activities of $24.4 million, proceeds from maturities and sales of marketable securities of $6.0 million, and net proceeds from the issuance of shares under our share-based compensation plans of $4.5 million.

We believe that our cash, the amounts available under our revolving credit facility, and our cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Cash Flow Analysis

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

	Nine Months Ended
	September 24, 2021			September 25, 2020
	(in thousands)
Cash provided by (used in) operating activities	$	24,411		$	(1,878	)
Cash used in investing activities		(117,233	)		(8,291	)
Cash provided by (used in) financing activities		(32,039	)		28,476
Net decrease in cash	$	(124,861	)	$	18,307

Operating Activities

Our cash provided by operating activities of $24.4 million during the nine months ended September 24, 2021 consisted of net income of $56.0 million and net non-cash charges of $27.3 million, partially offset by an increase in our net operating assets and liabilities of $58.9 million. Net non-cash charges primarily consisted of depreciation and amortization of $17.7 million, share-based compensation of $8.1 million, and deferred taxes of $1.0 million. The increase in our net operating assets and liabilities was primarily due to (i) an increase in inventories of $59.2 million, driven mostly by higher purchasing activity pursuant to strong customer demand and certain supply chain constraints, primarily due to a government-ordered shutdown of our Malaysia factory in July 2021, constraining production and shipments; (ii) an increase in accounts receivable of $20.7 million, driven mostly by higher sales in the third quarter of 2021 compared to the fourth quarter of 2020, as well as timing of customer payments; partially offset by (iii) an increase in accounts payable of $21.2 million, which is primarily due to higher purchases during the third quarter of 2021 compared to the fourth quarter of 2020, partially offset by timing of payments to suppliers.

Investing Activities

Our cash used in investing activities of $117.2 million during the nine months ended September 24, 2021 consisted of purchases of marketable securities of $105.0 million, capital expenditures of $18.7 million, partially offset by proceeds from maturities and sales of marketable securities and proceeds from the sale of equipment and other fixed assets associated with our planned closure of our Union City, California facility of $0.5 million. Our capital expenditures primarily include capacity expansion projects, including machinery and clean rooms, at our factories. Pursuant to ASU 2018‑15, implementation costs associated with our new ERP implementation of approximately $2.1 million are capitalized as other non-current assets on our consolidated balances sheets and are reflected in cash provided by operating activities.

Financing Activities

Our cash used in financing activities of $32.0 million during the nine months ended September 24, 2021 consisted of payments on long-term debt of $36.6 million, of which $30.0 million was a paydown on our revolving credit facility, partially offset by net proceeds from the issuance of shares under our share-based compensation plans of $4.5 million.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are identified and described in our annual consolidated financial statements and the notes included in our Annual Report on Form 10‑K for the year ended December 25, 2020 (our “Annual Report”).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

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

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

Interest Rate Risk

We had total indebtedness of $165.7 million as of September 24, 2021, exclusive of $1.3 million in debt issuance costs, of which $8.8 million was due within 12 months. The outstanding amount of debt included elsewhere in this report is net of debt issuance costs.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. The interest rate on our outstanding debt is based on LIBOR, the Prime Rate, or the Federal Funds Rate. A hypothetical 1% interest rate change on our outstanding debt would have resulted in a $0.4 million change to interest expense during the third quarter of 2021, or $1.7 million on an annualized basis.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a‑15(b) under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 24, 2021.

Limitations on Effectiveness of Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the period covered under this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently not a party to any material pending or threatened litigation.

ITEM 1A. RISK FACTORS

This quarterly report should be read in conjunction with the risk factors included in our 2020 Annual Report. There have been no material changes in our risk factors from the risk factors disclosed in that report. These risk factors do not identify all risks that we face – our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit Number		Description

31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a‑14(a) and 15d‑14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

*	Filed herewith.

**	Furnished herewith and not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ICHOR HOLDINGS, LTD.

Date: November 3, 2021	By:	/s/ Jeffrey S. Andreson
		Jeffrey S. Andreson
		Chief Executive Officer (Principal Executive Officer)

Date: November 3, 2021	By:	/s/ Larry J. Sparks
		Larry J. Sparks
		Chief Financial Officer (Principal Accounting and Financial Officer)