ICHOR HOLDINGS, LTD. - Quarter Report: 2022 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 30, 2022

☐	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 November 4, 2022, the registrant had 28,802,535 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	14
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
ITEM 4.	CONTROLS AND PROCEDURES	22

PART II
ITEM 1.	LEGAL PROCEEDINGS	23
ITEM 1A.	RISK FACTORS	23
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	23
ITEM 4.	MINE SAFETY DISCLOSURES	23
ITEM 5.	OTHER INFORMATION	23
ITEM 6.	EXHIBITS	23

SIGNATURES		24

PART I

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

ICHOR HOLDINGS, LTD.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

	September 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	56,463		$	75,495
Accounts receivable, net		183,297			142,990
Inventories		290,658			236,133
Prepaid expenses and other current assets		5,164			8,153
Total current assets		535,582			462,771
Property and equipment, net		95,577			85,204
Operating lease right-of-use assets		35,723			29,790
Other noncurrent assets		13,349			9,166
Deferred tax assets, net		11,138			8,116
Intangible assets, net		75,964			89,927
Goodwill		335,402			335,902
Total assets	$	1,102,735		$	1,020,876
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	141,914		$	159,727
Accrued liabilities		26,363			19,066
Other current liabilities		21,224			14,377
Current portion of long-term debt		7,500			7,500
Current portion of lease liabilities		8,062			7,633
Total current liabilities		205,063			208,303
Long-term debt, less current portion, net		294,977			285,253
Lease liabilities, less current portion		28,103			22,354
Deferred tax liabilities, net		38			38
Other non-current liabilities		4,709			4,213
Total liabilities		532,890			520,161
Shareholders’ equity:
Preferred shares ($0.0001 par value; 20,000,000 shares authorized; zero shares issued and outstanding)		—			—
Ordinary shares ($0.0001 par value; 200,000,000 shares authorized; 28,801,274 and 28,551,160 shares outstanding, respectively; 33,238,713 and 32,988,599 shares issued, respectively)		3			3
Additional paid in capital		427,961			417,438
Treasury shares at cost (4,437,439 shares)		(91,578	)		(91,578	)
Accumulated other comprehensive loss		—			—
Retained earnings		233,459			174,852
Total shareholders’ equity		569,845			500,715
Total liabilities and shareholders’ equity	$	1,102,735		$	1,020,876

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 24, 2021			September 30, 2022			September 24, 2021
Net sales	$	355,643		$	262,855		$	978,349		$	809,729
Cost of sales		292,083			219,218			815,396			679,227
Gross profit		63,560			43,637			162,953			130,502
Operating expenses:
Research and development		4,859			3,905			14,617			11,469
Selling, general, and administrative		22,195			15,147			66,565			44,195
Amortization of intangible assets		3,959			3,388			13,963			10,169
Total operating expenses		31,013			22,440			95,145			65,833
Operating income		32,547			21,197			67,808			64,669
Interest expense, net		3,249			1,487			6,844			4,997
Other expense (income), net		(210	)		(104	)		(674	)		103
Income before income taxes		29,508			19,814			61,638			59,569
Income tax expense		477			1,277			3,031			3,529
Net income	$	29,031		$	18,537		$	58,607		$	56,040
Net income per share:
Basic	$	1.01		$	0.65		$	2.04		$	1.99
Diluted	$	1.00		$	0.64		$	2.02		$	1.93
Shares used to compute net income per share:
Basic		28,769,135			28,371,644			28,675,898			28,185,564
Diluted		29,050,396			29,024,862			28,965,834			28,961,308

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended				Nine Months Ended
	September 30, 2022		September 24, 2021		September 30, 2022		September 24, 2021
Net income	$	29,031	$	18,537	$	58,607	$	56,040
Other comprehensive loss, net of tax:
Unrealized gain (loss) on available-for-sale marketable securities		—		16		—		(8	)
Comprehensive income	$	29,031	$	18,553	$	58,607	$	56,032

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Shareholders’ Equity

(in thousands, except share amounts)

(unaudited)

					Additional			Treasury					Accumulated				Total
For the three months ending September 30, 2022	Ordinary Shares				Paid-In			Shares					Other Comprehensive		Retained		Shareholders'
	Shares		Amount		Capital			Shares		Amount			Income (Loss)		Earnings		Equity
Balance at July 1, 2022		28,735,728	$	3	$	424,471			4,437,439	$	(91,578	)	$	—	$	204,428	$	537,324
Ordinary shares issued from exercise of stock options		29,777		—		652			—		—			—		—		652
Ordinary shares issued from vesting of restricted share units		35,769		—		(881	)		—		—			—		—		(881	)
Share-based compensation expense		—		—		3,719			—		—			—		—		3,719
Net income		—		—		—			—		—			—		29,031		29,031
Balance at September 30, 2022		28,801,274	$	3	$	427,961			4,437,439	$	(91,578	)	$	—	$	233,459	$	569,845

					Additional			Treasury					Accumulated				Total
For the nine months ending September 30, 2022	Ordinary Shares				Paid-In			Shares					Other Comprehensive		Retained		Shareholders'
	Shares		Amount		Capital			Shares		Amount			Income (Loss)		Earnings		Equity
Balance at December 31, 2021		28,551,160	$	3	$	417,438			4,437,439	$	(91,578	)	$	—	$	174,852	$	500,715
Ordinary shares issued from exercise of stock options		77,545		—		1,690			—		—			—		—		1,690
Ordinary shares issued from vesting of restricted share units		130,504		—		(2,221	)		—		—			—		—		(2,221	)
Ordinary shares issued from employee share purchase plan		42,065		—		929			—		—			—		—		929
Share-based compensation expense		—		—		10,125			—		—			—		—		10,125
Net income		—		—		—			—		—			—		58,607		58,607
Balance at September 30, 2022		28,801,274	$	3		427,961			4,437,439	$	(91,578	)	$	—	$	233,459	$	569,845

See accompanying notes.

ICHOR HOLDINGS, LTD.

Consolidated Statements of Shareholders’ Equity (continued)

(in thousands, except share amounts)

(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 Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended
	September 30, 2022			September 24, 2021
Cash flows from operating activities:
Net income	$	58,607		$	56,040
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		26,743			17,669
Share-based compensation		10,125			8,106
Deferred income taxes		(3,022	)		985
Amortization of debt issuance costs		349			725
Gain on sale of asset disposal group		—			(504	)
Other		—			319
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net		(40,307	)		(20,703	)
Inventories		(54,525	)		(59,174	)
Prepaid expenses and other assets		4,031			1,720
Accounts payable		(18,508	)		21,234
Accrued liabilities		6,823			(1,448	)
Other liabilities		2,363			(558	)
Net cash provided by (used in) operating activities		(7,321	)		24,411
Cash flows from investing activities:
Capital expenditures		(22,458	)		(18,704	)
Cash paid for acquisitions, net of cash acquired		500			—
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		(21,958	)		(117,233	)
Cash flows from financing activities:
Issuance of ordinary shares under share-based compensation plans		3,093			7,137
Employees' taxes paid upon vesting of restricted share units		(2,221	)		(2,614	)
Borrowings on revolving credit facility		25,000			—
Repayments on revolving credit facility		(10,000	)		(30,000	)
Repayments on term loan		(5,625	)		(6,562	)
Net cash provided by (used in) financing activities		10,247			(32,039	)
Net decrease in cash		(19,032	)		(124,861	)
Cash at beginning of period		75,495			252,899
Cash at end of period	$	56,463		$	128,038
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	6,457		$	4,690
Cash paid during the period for taxes, net of refunds	$	2,335		$	1,786
Supplemental disclosures of non-cash activities:
Capital expenditures included in accounts payable	$	1,625		$	441
Right-of-use assets obtained in exchange for new operating lease liabilities, including those acquired through acquisitions	$	11,158		$	2,239

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 31, 2021.

Year End

We use a 52- or 53-week fiscal year ending on the last Friday in December. The three months ended September 30, 2022 and September 24, 2021 were both 13 weeks. References to the third quarter of 2022 and 2021 refer to the three-month periods then ended. References to fiscal year 2022 and 2021 refer to our fiscal years ending December 30, 2022 and December 31, 2021, respectively. Fiscal year 2022 and 2021 are 52 and 53 weeks, respectively.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods presented. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from the estimates made by management. Significant estimates include inventory valuation and impairment analysis for both definite‑lived intangible assets and goodwill.

Cash and Cash Equivalents

Cash and cash equivalents consist of deposits and financial instruments which are readily convertible into cash and have original maturities of 90 days or less at the time of acquisition.

Fair Value of Financial Instruments

The carrying values of our financial instruments, including cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, and long-term debt, net of unamortized debt issuance costs, approximate fair value.

Revenue Recognition

We recognize revenue when control of promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. This amount is recorded as net sales in our consolidated statements of operations.

Transaction price – In most of our contracts, prices are generally determined by a customer-issued purchase order and generally remain fixed over the duration of the contract. Certain contracts contain variable consideration, including early-payment discounts and rebates. When a contract includes variable consideration, we evaluate the estimate of the variable consideration to determine whether the estimate needs to be constrained; therefore, we include the variable consideration in the transaction price only to the extent that it is probable that a significant reversal will not occur. Variable consideration estimates are updated at each reporting date. Historically, we have not incurred significant costs to obtain a contract. All amounts billed to a customer relating to shipping and handling are classified as net sales, while all costs incurred by us for shipping and handling are classified as cost of sales.

Performance obligations – Substantially all of our performance obligations pertain to promised goods (“products”), which are primarily comprised of fluid delivery subsystems, weldments, and other components. Most of our contracts contain a single performance obligation and are generally completed within twelve months. Product sales are recognized at a point-in-time, generally upon delivery, as such term is defined within the contract, as that is when control of the promised good has transferred. Products are covered by a standard assurance warranty, generally extended for a period of one to two years depending on the customer, which promises that delivered products conform to contract specifications. As such, we account for such warranties under ASC 460, Guarantees, and not as a separate performance obligation.

Contract balances – Accounts receivable represents our unconditional right to receive consideration from our customers. Accounts receivable are carried at invoice price less an estimate for doubtful accounts and estimated payment discounts. Payment terms vary by customer but are generally due within 15‑60 days. Historically, we have not incurred significant payment issues with our customers. We had no significant contract assets or liabilities on our consolidated balance sheets in any of the periods presented.

Accounting Pronouncements Recently Adopted

In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021‑08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. This ASU is currently not expected to have a material impact on our consolidated financial statements.

Note 2 – Inventories

Inventories consist of the following:

	September 30, 2022			December 31, 2021
Raw materials	$	198,753		$	159,366
Work in process		66,794			62,537
Finished goods		40,742			28,281
Excess and obsolete adjustment		(15,631	)		(14,051	)
Total inventories	$	290,658		$	236,133

Note 3 – Property and Equipment and Other Noncurrent Assets

Property and equipment consist of the following:

	September 30, 2022			December 31, 2021
Machinery	$	88,906		$	80,953
Leasehold improvements		41,306			36,706
Computer software, hardware, and equipment		9,627			8,031
Office furniture, fixtures, and equipment		1,281			1,168
Vehicles		325			284
Construction-in-process		17,173			8,565
		158,618			135,707
Less accumulated depreciation		(63,041	)		(50,503	)
Total property and equipment, net	$	95,577		$	85,204

Depreciation expense was $4.4 million and $2.8 million for the third quarter of 2022 and 2021, respectively. Depreciation expense was $12.8 million and $7.5 million for the nine months ended September 30, 2022 and September 24, 2021, 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 31, 2021	$	8,054
Costs capitalized during the period		4,782
Capitalized costs amortized during the period		(646	)
Capitalized cloud computing implementation costs as of September 30, 2022	$	12,190

Note 4 – Intangible Assets

Definite‑lived intangible assets consist of the following:

	September 30, 2022
	Gross value		Accumulated amortization			Accumulated impairment charges		Carrying amount		Weighted average useful life
Customer relationships		117,022		(47,848	)		—		69,174	8.4 years
Developed technology		11,047		(4,257	)		—		6,790	10.0 years
Total intangible assets	$	128,069	$	(52,105	)	$	—	$	75,964

	December 31, 2021
	Gross value		Accumulated amortization			Accumulated impairment charges		Carrying amount		Weighted average useful life
Customer relationships		146,569		(65,953	)		—		80,616	8.7 years
Developed technology		11,047		(3,483	)		—		7,564	10.0 years
Order backlog		2,600		(853	)		—		1,747	6 months
Total intangible assets	$	160,216	$	(70,289	)	$	—	$	89,927

The following table presents the changes to goodwill. There were no goodwill impairment losses recognized during the nine months ended September 30, 2022.

	Goodwill
Balance at December 31, 2021	$	335,902
Acquisitions		(500	)
Balance at September 30, 2022	$	335,402

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. As of September 30, 2022, we had one operating lease executed for which the rental period had not yet commenced.

The components of lease expense are as follows:

Three Months Ended

Nine Months Ended

September 30,

2022

September 24,

2021

September 30,

2022

September 24,

2021

Operating lease cost

2,120

1,394

6,404

4,166

Supplemental cash flow information related to leases is as follows:

	Nine Months Ended
	September 30, 2022		September 24, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	5,801	$	3,979

Supplemental balance sheet information related to leases is as follows:

September 30,

2022

December 31,

2021

Weighted-average remaining lease term of operating leases

5.5 years

5.8 years

Weighted-average discount rate of operating leases

2.4%

Future minimum lease payments under non-cancelable leases as of September 30, 2022 are as follows:

2022, remaining	$	2,214
2023		7,748
2024		7,053
2025		6,397
2026		5,866
Thereafter		9,174
Total future minimum lease payments		38,452
Less imputed interest		(2,287	)
Total lease liabilities	$	36,165

Note 6 – Income Taxes

Income tax information for the periods reported are as follows:

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 24, 2021			September 30, 2022			September 24, 2021
Income tax expense	$	477		$	1,277		$	3,031		$	3,529
Income before income taxes	$	29,508		$	19,814		$	61,638		$	59,569
Effective income tax rate		1.6	%		6.4	%		4.9	%		5.9	%

Our effective tax rates for the three and nine months ended September 30, 2022 and September 24, 2021 differ from the statutory rate primarily due to taxes on foreign income that differ from the U.S. tax rate, including a tax holiday in Singapore, and the impact of share-based compensation activity during the quarter.

The ending balance for the unrecognized tax benefits for uncertain tax positions was approximately $4.1 million at September 30, 2022. The related interest and penalties were insignificant. The uncertain tax positions that are reasonably possible to decrease in the next twelve months are insignificant.

As of September 30, 2022, we were not under examination by tax authorities.

Note 7 – Employee Benefit Programs

401(k) Plan

We sponsor a 401(k) plan available to employees of our U.S.‑based subsidiaries. Participants may make salary deferral contributions not to exceed 50% of a participant’s annual compensation or the maximum amount otherwise allowed by law. Eligible employees receive a discretionary matching contribution equal to 50% of a participant’s deferral, up to an annual matching maximum of 4% of a participant’s annual compensation. Matching contributions were $0.7 million and $0.5 million for the third quarter of 2022 and 2021, respectively. Matching contributions were $2.3 million and $1.6 million for the nine months ended September 30, 2022 and September 24, 2021, respectively.

Note 8 – Long-Term Debt

Long‑term debt consists of the following:

	September 30, 2022			December 31, 2021
Term loan	$	144,375		$	150,000
Revolving credit facility		160,000			145,000
Total principal amount of long-term debt		304,375			295,000
Less unamortized debt issuance costs		(1,898	)		(2,247	)
Total long-term debt, net		302,477			292,753
Less current portion		(7,500	)		(7,500	)
Total long-term debt, less current portion, net	$	294,977		$	285,253

On October 29, 2021, we entered into an amended and restated credit agreement, which includes a group of financial institutions as direct lenders underlying the agreement. The credit agreement includes a $150.0 million term loan facility and a $250.0 million revolving credit facility (together, “credit facilities”). Term loan principal payments of $1.9 million are due on a quarterly basis. The credit facilities mature on October 29, 2026.

Interest is charged at either the Base Rate or the Bloomberg Short-Term Bank Yield (“BSBY”) Rate (as such terms are defined in the credit agreement) at our option, plus an applicable margin. The Base Rate is equal to the higher of i) the Prime Rate, ii) the Federal Funds Rate plus 0.5%, or iii) the BSBY Rate plus 1.00%. The applicable margin on Base Rate and BSBY Rate loans is 0.375‑1.375% and 1.375‑2.375% per annum, respectively, depending on our leverage ratio, 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% 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 September 30, 2022, our credit facilities bore interest under the BSBY rate option of 4.94%.

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 $3.7 million and $3.0 million for the third quarter of 2022 and 2021, and was $10.1 million and $8.1 million for the nine months ended September 30, 2022 and September 24, 2021, respectively.

Stock Options

The following table summarizes option activity:

	Number of Stock Options
	Service condition			Weighted average exercise price per share		Weighted average remaining contractual term	Aggregate intrinsic value
Outstanding, December 31, 2021		921,469		$	23.20
Granted		—		$	—
Exercised		(77,545	)	$	21.79
Forfeited or expired		(24,470	)	$	23.68
Outstanding, September 30, 2022		819,454		$	23.32	3.1 years	$	1,387
Exercisable, September 30, 2022		669,651		$	23.23	2.9 years	$	1,130

Restricted Share Units

The following table summarizes RSU activity:

	Number of Restricted Share Units
	Service condition			Performance condition		Market condition		Weighted average grant-date fair value per share
Unvested, December 31, 2021		559,310			9,716		14,572	$	37.05
Granted		602,864			47,846		71,770	$	27.12
Vested		(193,160	)		—		—	$	34.18
Forfeited		(134,908	)		—		—	$	30.87
Unvested, September 30, 2022		834,106			57,562		86,342	$	31.14

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 September 30, 2022, approximately 2.3 million ordinary shares remain available for purchase under the 2017 ESPP.

Note 10 – Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share and a reconciliation of the numerator and denominator used in the calculation:

	Three Months Ended				Nine Months Ended
	September 30, 2022		September 24, 2021		September 30, 2022		September 24, 2021
Numerator:
Net income	$	29,031	$	18,537	$	58,607	$	56,040
Denominator:
Basic weighted average ordinary shares outstanding		28,769,135		28,371,644		28,675,898		28,185,564
Dilutive effect of options		139,045		430,713		191,909		510,074
Dilutive effect of RSUs		136,733		221,379		96,199		265,295
Dilutive effect of ESPP		5,483		1,126		1,828		375
Diluted weighted average ordinary shares outstanding		29,050,396		29,024,862		28,965,834		28,961,308
Securities excluded from the calculation of diluted weighted average ordinary shares outstanding (1)		462,000		173,000		880,000		188,000
Earnings per share:
Net income:
Basic	$	1.01	$	0.65	$	2.04	$	1.99
Diluted	$	1.00	$	0.64	$	2.02	$	1.93

(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.

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				Nine Months Ended
	September 30, 2022		September 24, 2021		September 30, 2022		September 24, 2021
United States of America	$	156,909	$	127,672	$	457,753	$	404,553
Singapore		132,562		94,831		350,255		282,369
Europe		26,886		16,430		76,084		56,199
Other		39,286		23,922		94,257		66,608
Total net sales	$	355,643	$	262,855	$	978,349	$	809,729

Foreign long-lived assets, exclusive of deferred tax assets, were $44.0 million and $38.4 million at September 30, 2022 and December 31, 2021, respectively.

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

Cautionary Statement Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. You should not place undue reliance on these statements. All statements other than statements of historical fact included in this report are forward-looking statements. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by the use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements are contained in many sections of this report, including those in Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include geopolitical, economic and market conditions, including heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain, export restrictions, and any disruptions in European economies as a result of the conflict in Ukraine; our dependence on expenditures by manufacturers in the semiconductor capital equipment industry; our reliance on a very small number of original equipment manufacturer customers for a significant portion of our sales; our customers’ significant negotiating leverage; competition in our industry; and other factors set forth in this report, and those set forth in Part I – Item 1A. Risk Factors of our 2021 Annual Report on Form 10‑K and our other filings with the Securities and Exchange Commission (“SEC”). All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in Part I – Item 1A. Risk Factors to our 2021 Annual Report on Form 10-K, as well as other cautionary statements that are made from time to time in our other filings with the SEC and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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.

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 provide precision-machined components, weldments, e‑beam and laser-welded components, precision vacuum and hydrogen brazing and surface treatment technologies, and other proprietary products. 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 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 table 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 Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Results within this report.

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 24, 2021			September 30, 2022			September 24, 2021
	(dollars in thousands, except per share amounts)
Net sales	$	355,643		$	262,855		$	978,349		$	809,729
Gross profit	$	63,560		$	43,637		$	162,953		$	130,502
Gross margin		17.9	%		16.6	%		16.7	%		16.1	%
Non-GAAP gross margin		18.0	%		16.7	%		17.1	%		16.6	%
Operating expenses	$	31,013		$	22,440		$	95,145		$	65,833
Operating income	$	32,547		$	21,197		$	67,808		$	64,669
Net income	$	29,031		$	18,537		$	58,607		$	56,040
Non-GAAP net income	$	35,354		$	23,421		$	83,858		$	71,453
Diluted EPS	$	1.00		$	0.64		$	2.02		$	1.93
Non-GAAP diluted EPS	$	1.22		$	0.81		$	2.90		$	2.47

Macroeconomic Conditions and Business Update

We have participated in the continuation of unprecedented demand for semiconductor capital equipment in 2022, driven by increased secular demand for semiconductors, as well as the ever-increasing levels of complexity in the manufacturing thereof. Macroeconomic factors have, however, created, and may continue to create, volatility and uncertainty in our industry, including persistent levels of high inflation, higher interest rates, foreign currency rate fluctuations, and supply chain challenges. Additionally, increased controls around exporting goods and services to China may impact the overall size of the semiconductor capital equipment industry going forward, and the conflict in Ukraine has given rise to potential global security issues that may adversely affect international business and economic conditions as well as economic sanctions imposed by the international community that have impacted the global economy. Regarding the COVID‑19 pandemic, although our factories and operations are currently not directly affected by any restrictions, measures, or shutdowns, increases in positive case rates may change the extent to which our business becomes adversely impacted by such restrictions, measures, or shutdowns on a go-forward basis. While these challenging macroeconomic conditions may impact business and customers in the near-term, we believe secular demand for semiconductors, both in quantity and performance, and constant technological innovation will drive long-term, sustainable growth in the semiconductor capital equipment industry.

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 30, 2022			September 24, 2021			September 30, 2022			September 24, 2021
	(in thousands)
Net sales	$	355,643		$	262,855		$	978,349		$	809,729
Cost of sales		292,083			219,218			815,396			679,227
Gross profit		63,560			43,637			162,953			130,502
Operating expenses:
Research and development		4,859			3,905			14,617			11,469
Selling, general, and administrative		22,195			15,147			66,565			44,195
Amortization of intangible assets		3,959			3,388			13,963			10,169
Total operating expenses		31,013			22,440			95,145			65,833
Operating income		32,547			21,197			67,808			64,669
Interest expense, net		3,249			1,487			6,844			4,997
Other expense (income), net		(210	)		(104	)		(674	)		103
Income before income taxes		29,508			19,814			61,638			59,569
Income tax expense		477			1,277			3,031			3,529
Net income	$	29,031		$	18,537		$	58,607		$	56,040

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 30, 2022			September 24, 2021		September 30, 2022			September 24, 2021

Net sales		100.0			100.0		100.0			100.0
Cost of sales		82.1			83.4		83.3			83.9
Gross profit		17.9			16.6		16.7			16.1
Operating expenses:
Research and development		1.4			1.5		1.5			1.4
Selling, general, and administrative		6.2			5.8		6.8			5.5
Amortization of intangible assets		1.1			1.3		1.4			1.3
Total operating expenses		8.7			8.5		9.7			8.1
Operating income		9.2			8.1		6.9			8.0
Interest expense, net		0.9			0.6		0.7			0.6
Other expense (income), net		(0.1	)		0.0		(0.1	)		0.0
Income before income taxes		8.3			7.5		6.3			7.4
Income tax expense		0.1			0.5		0.3			0.4
Net income		8.2			7.1		6.0			6.9

Comparison of the three and nine months ended September 30, 2022 and September 24, 2021

Net Sales

	Three Months Ended				Change					Nine Months Ended				Change
	September 30, 2022		September 24, 2021		Amount		%			September 30, 2022		September 24, 2021		Amount		%
	(dollars in thousands)
Net sales	$	355,643	$	262,855	$	92,788		35.3	%	$	978,349	$	809,729	$	168,620		20.8	%

The increase in net sales from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to strong demand from our customers as a result of continued growth in the global wafer fabrication equipment market, supported by capacity expansions and headcount additions we have made over the last year, as well as incremental revenues from our acquisition of IMG Companies, LLC (“IMG”) in November 2021.

Cost of Sales, Gross Profit, and Gross Margin

	Three Months Ended						Change					Nine Months Ended						Change
	September 30, 2022			September 24, 2021			Amount		%			September 30, 2022			September 24, 2021			Amount		%
	(dollars in thousands)
Cost of sales	$	292,083		$	219,218		$	72,865		33.2	%	$	815,396		$	679,227		$	136,169		20.0	%
Gross profit	$	63,560		$	43,637		$	19,923		45.7	%	$	162,953		$	130,502		$	32,451		24.9	%
Gross margin		17.9	%		16.6	%			+ 130 bps				16.7	%		16.1	%			+ 60 bps

The increase in the gross amounts of cost of sales and gross profit from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to the factors mentioned in the commentary above under the heading, “Net Sales.”

The increase in gross margin from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to increased factory utilization and operating leverage, as well as accretive margins from our acquisition of IMG in November 2021, partially offset by increased materials, logistics, and labor costs. These cost increases are primarily due to investments in our capacity to service strong, present levels of customer demand, inflationary macroeconomic conditions that put pressure on the cost of labor, materials and factory costs, and the impacts of certain supply chain challenges on logistics costs and factory efficiency.

Research and Development

	Three Months Ended				Change					Nine Months Ended				Change
	September 30, 2022		September 24, 2021		Amount		%			September 30, 2022		September 24, 2021		Amount		%
	(dollars in thousands)
Research and development	$	4,859	$	3,905	$	954		24.4	%	$	14,617	$	11,469	$	3,148		27.4	%

The increase in research and development expenses from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to increased employee-related expense, inclusive of share-based compensation expense, of $0.7 million and $2.3 million, respectively, as we expand our engineering team to design and engineer next generation, high performance solutions for our customers, as well as program costs related to the development of our new products of $0.2 million and $0.4 million, respectively.

Selling, General, and Administrative

	Three Months Ended				Change					Nine Months Ended				Change
	September 30, 2022		September 24, 2021		Amount		%			September 30, 2022		September 24, 2021		Amount		%
	(dollars in thousands)
Selling, general, and administrative	$	22,195	$	15,147	$	7,048		46.5	%	$	66,565	$	44,195	$	22,370		50.6	%

The increase in selling, general, and administrative expense from the third quarter of 2021 to the third quarter of 2022 was primarily due to (1) incremental costs from our acquisition of IMG in November 2021 of $3.4 million, primarily consisting of employee-related expenses; (2) a non-recurring loss accrual recorded in the third quarter of 2022 relating to an expected settlement of an employment-related legal matter of $1.0 million; (3) increased employee-related expenses, inclusive of share-based compensation expense, of $0.9 million; (4) increased consulting and professional fees of $0.4 million; (5) increased depreciation and software service costs of $0.4 million; and (6) increased travel-related costs of $0.2 million.

The increase in selling, general, and administrative expense from the nine months ended September 24, 2021 to the nine months ended September 30, 2022 was primarily due to (1) incremental costs from our acquisition of IMG in November 2021 of $9.4 million, primarily consisting of employee-related expenses; (2) increased employee-related expenses, inclusive of share-based compensation expense, of $4.8 million; (3) non-recurring loss accruals recorded in the first and third quarters of 2022 relating to expected settlements of employment-related legal matters of $4.1 million; (4) increased consulting and professional fees of $1.7 million; (5) increased depreciation and software service costs of $1.6 million; and (6) increased travel-related costs of $0.4 million.

Amortization of Intangible Assets

	Three Months Ended				Change					Nine Months Ended				Change
	September 30, 2022		September 24, 2021		Amount		%			September 30, 2022		September 24, 2021		Amount		%
	(dollars in thousands)
Amortization of intangibles assets	$	3,959	$	3,388	$	571		16.9	%	$	13,963	$	10,169	$	3,794		37.3	%

The increase in amortization expense from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to incremental amortization expense from intangible assets acquired in connection with our acquisition of IMG in November 2021, partially offset by reduced amortization expense from certain intangible assets becoming fully amortized in the fourth quarter of 2021 and the first quarter of 2022.

Interest Expense, Net

	Three Months Ended						Change					Nine Months Ended						Change
	September 30, 2022			September 24, 2021			Amount		%			September 30, 2022			September 24, 2021			Amount		%
	(dollars in thousands)
Interest expense, net	$	3,249		$	1,487		$	1,762		118.5	%	$	6,844		$	4,997		$	1,847		37.0	%
Weighted average borrowings outstanding	$	306,229		$	165,821		$	140,408		84.7	%	$	302,596		$	174,601		$	127,995		73.3	%
Weighted average borrowing rate		3.97	%		2.90	%			+ 107 bps				2.74	%		3.08	%			- 34 bps

The increase in interest expense, net from the third quarter of 2021 to the third quarter of 2022 was due to a $140.4 million increase in our average amount borrowed and a 107 basis point increase in our weighted average borrowing rate.

The increase in interest expense, net from the nine months ended September 24, 2021 to the nine months ended September 30, 2022 was due to a $128.0 million increase in our average amount borrowed, partially offset by a 34 basis point decrease in our weighted average borrowing rate.

Our average amount borrowed was primarily the result of drawing $130.0 million on our revolving credit facility in November 2021 to partially fund our acquisition of IMG. The changes in our weighted average borrowing rate were primarily due to more favorable borrowing terms under our October 2021 amended and restated credit agreement and higher overall prevailing BSBY and LIBOR rates in the second and third quarters of 2022 compared to 2021.

Other Expense (Income), Net

	Three Months Ended						Change				Nine Months Ended					Change
	September 30, 2022			September 24, 2021			Amount			%	September 30, 2022			September 24, 2021		Amount			%
	(dollars in thousands)
Other expense (income), net	$	(210	)	$	(104	)	$	(106	)	n/m	$	(674	)	$	103	$	(777	)	n/m

The change in other expense (income), net from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to currency exchange rate fluctuations during the quarter, reflecting a strengthening U.S. dollar against local currency payables of our foreign operations.

Income Tax Expense

	Three Months Ended						Change						Nine Months Ended						Change
	September 30, 2022			September 24, 2021			Amount			%			September 30, 2022			September 24, 2021			Amount			%
	(dollars in thousands)
Income tax expense	$	477		$	1,277		$	(800	)		-62.6	%	$	3,031		$	3,529		$	(498	)		-14.1	%
Income before income taxes	$	29,508		$	19,814		$	9,694			48.9	%	$	61,638		$	59,569		$	2,069			3.5	%
Effective income tax rate		1.6	%		6.4	%				- 480 bps				4.9	%		5.9	%				- 100 bps

The decrease in income tax expense from the three and nine months ended September 24, 2021 to the three and nine months ended September 30, 2022 was primarily due to decreased taxable income in the U.S., partially offset by reduced benefits from share-based compensation activity. The reduction in benefits from share-based compensation activity was primarily due to RSU awards vesting in 2022 at lower fair values relative to their grant-date fair values. In 2021, RSU awards vested at higher fair values relative to their grant-date fair values.

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 settlement losses, facility shutdown costs, and acquisition-related costs and charges, 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 a reconciliation from gross profit, the most comparable GAAP measure, for the periods indicated:

	Three Months Ended						Nine Months Ended
	September 30, 2022			September 24, 2021			September 30, 2022			September 24, 2021
	(dollars in thousands)
U.S. GAAP gross profit	$	63,560		$	43,637		$	162,953		$	130,502
Non-GAAP adjustments:
Share-based compensation		553			343			1,555			947
Facility shutdown costs (1)		—			—			—			2,297
Fair value adjustment to inventory from acquisitions (2)		—			—			2,492			211
Other non-recurring expense, net (3)		—			—			—			106
Non-GAAP gross profit	$	64,113		$	43,980		$	167,000		$	134,063
U.S. GAAP gross margin		17.9	%		16.6	%		16.7	%		16.1	%
Non-GAAP gross margin		18.0	%		16.7	%		17.1	%		16.6	%

(1)

During the second quarter of 2020, we announced the closure of our manufacturing facility in Union City, California, which we completed in 2021. Included in this amount for the nine months ended September 24, 2021 are write-off costs associated with inventories determined during the period to be obsolete and severance and other shutdown related charges, partially offset by a gain realized upon the sale of equipment and other fixed assets.

(2)

As part of the purchase price allocations of our acquisitions of IMG Companies, LLC (“IMG”) in November 2021 and a precision machining operation in Mexico in December 2020, we recorded acquired-inventories at fair value, resulting in a fair value step-up. These amounts represent the release of the step-up to cost of sales as acquired-inventories were sold.

(3)

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

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 30, 2022			September 24, 2021			September 30, 2022			September 24, 2021
	(dollars in thousands, except per share amounts)
U.S. GAAP net income	$	29,031		$	18,537		$	58,607		$	56,040
Non-GAAP adjustments:
Amortization of intangible assets		3,959			3,388			13,963			10,169
Share-based compensation		3,719			3,010			10,125			8,106
Facility shutdown costs (1)		—			—			—			2,682
Settlement loss (2)		1,046			—			4,146			—
Fair value adjustment to inventory from acquisitions (3)		—			—			2,492			211
Acquisition costs (4)		—			—			296			—
Other non-recurring expense, net (5)		—			110			—			498
Tax adjustments related to non-GAAP adjustments (6)		(2,401	)		(1,624	)		(5,771	)		(6,253	)
Non-GAAP net income	$	35,354		$	23,421		$	83,858		$	71,453
U.S. GAAP diluted EPS	$	1.00		$	0.64		$	2.02		$	1.93
Non-GAAP diluted EPS	$	1.22		$	0.81		$	2.90		$	2.47
Shares used to compute diluted EPS		29,050,396			29,024,862			28,965,834			28,961,308

(1)

See footnote 1 to the reconciliation of U.S. GAAP gross profit to non-GAAP gross profit above.

(2)

During the first and third quarters of 2022, we recorded non-recurring loss accruals of $3.1 million and $1.0 million, respectively, relating to expected settlements of employment-related legal matters. We expect the settlements to be finalized and paid within the next 12 months.

(3)

See footnote 2 to the reconciliation of U.S. GAAP gross profit to non-GAAP gross profit above.

(4)

Included in this amount are incremental transaction-related costs incurred in connection with our acquisition of IMG in November 2021.

(5)

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 Sarbanes-Oxley compliance program and (ii) a non-recurring settlement charge.

(6)

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

The following section discusses our liquidity and capital resources, including our primary sources of liquidity and our material cash requirements. Our cash and cash equivalents are maintained in highly liquid and accessible accounts with no significant restrictions.

Material Cash Requirements

Our primary liquidity requirements arise from: (i) working capital requirements, including procurement of raw materials inventory for use in our factories and employee-related costs, (ii) business acquisitions, (iii) interest and principal payments under our credit facilities, (iv) research and development investments and capital expenditures, and (v) payment of income taxes. We have no significant long-term purchase commitments related to procuring raw materials inventory. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and are therefore subject to prevailing global macroeconomic conditions and financial, business, and other factors, some of which are beyond our control.

We believe that our cash and cash equivalents, the amounts available under our credit facilities, and our operating cash flow will be sufficient to fund our business and our current obligations for at least the next 12 months and beyond.

Sources and Conditions of Liquidity

Our ongoing sources of liquidity to fund our material cash requirements are primarily derived from: (i) sales to our customers and the related changes in our net operating assets and liabilities and (ii) proceeds from our credit facilities and equity offerings, when applicable.

Summary of Cash Flows

We ended the third quarter of 2022 with cash and cash equivalents of $56.5 million, a decrease of $19.0 million from December 31, 2021. The decrease was primarily due to capital expenditures of $22.5 million and cash used in operating activities of $7.3 million, partially offset by net proceeds from our credit facilities of $9.4 million.

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

	Nine Months Ended
	September 30, 2022			September 24, 2021
	(in thousands)
Cash provided by (used in) operating activities	$	(7,321	)	$	24,411
Cash used in investing activities		(21,958	)		(117,233	)
Cash provided by (used in) financing activities		10,247			(32,039	)
Net decrease in cash	$	(19,032	)	$	(124,861	)

Our cash used in operating activities during the nine months ended September 30, 2022 consisted of an increase in our net operating assets and liabilities of $100.1 million, partially offset by net income of $58.6 million and net non-cash charges of $34.2 million, which consists primarily of depreciation and amortization of $26.7 million and share-based compensation expense of $10.1 million.

The increase in our net operating assets and liabilities of $100.1 million during the nine months ended September 30, 2022 was primarily due to an increase in inventories of $54.5 million, an increase in accounts receivable of $40.3 million, and a decrease in accounts payable of $18.5 million. The increase in our inventories is primarily driven by elevated purchasing activity pursuant to strong customer demand and certain supply chain component constraints. The decrease in accounts payable and increase in accounts receivable were primarily due to fluctuations in payment timing to suppliers and from customers, as well as higher revenues in the last two weeks of the third quarter of 2022 compared to the last two weeks of the fourth quarter of 2021.

Cash used in investing activities during the nine months ended September 30, 2022 consists primarily of capital expenditures.

Cash provided by financing activities during the nine months ended September 30, 2022 consists of net proceeds from our credit facilities of $9.4 million, including a net draw on our revolving facility of $15.0 million for U.S. working capital obligations, and net proceeds from share-based compensation activity of $0.9 million.

Critical Accounting Estimates

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 2021 Annual Report on Form 10‑K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

Substantially all of our sales arrangement with customers, and the significant majority of our 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.

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, Korean won, and Mexican peso. 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 $304.4 million as of September 30, 2022, exclusive of $1.9 million in debt issuance costs, of which $7.5 million was due within 12 months. 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. As of September 30, 2022, the interest rate on our outstanding debt is based on BSBY, plus an applicable rate depending on our leverage ratio. A hypothetical 100 basis point change in the interest rate on our outstanding debt would have resulted in a $0.8 million change to interest expense during the third quarter of 2022, or $3.0 million on an annualized basis.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the certifying officers), 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 Securities and Exchange Act, as amended (“the Exchange Act”)) as of December 31, 2021. 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 Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022, due to material weaknesses in internal control over financial reporting that were disclosed in Part II – Item 9A of our Annual Report on Form 10‑K for the fiscal year ended December 31, 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.

Remediation

As previously described in Part II – Item 9A, Controls and Procedures of our Annual Report on Form 10‑K for the fiscal year ended December 31, 2021, we began implementing a remediation plan to address the material weaknesses mentioned above. The weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed prior to the end of fiscal year 2022.

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 2021 Annual Report on Form 10‑K. 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 9, 2022	By:	/s/ Jeffrey S. Andreson
		Jeffrey S. Andreson
		Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2022	By:	/s/ Larry J. Sparks
		Larry J. Sparks
		Chief Financial Officer (Principal Accounting and Financial Officer)