Ichor (ICHR) - 2023 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Unaudited financial statements for Q3 and nine months 2023 show significant performance decline, net losses, and positive operating cash flow from working capital changes Consolidated Balance Sheets Total assets decreased to $994.4 million from $1,083.7 million, with liabilities also down, while shareholders' equity slightly declined Consolidated Balance Sheet Highlights (in thousands) | Account | September 29, 2023 | December 30, 2022 | | :--- | :--- | :--- | | Total current assets | $451,325 | $513,458 | | Total assets | $994,384 | $1,083,742 | | Total current liabilities | $115,668 | $166,292 | | Total liabilities | $421,705 | $496,246 | | Total shareholders' equity | $572,679 | $587,496 | Consolidated Statements of Operations Q3 2023 net sales fell to $196.8 million, resulting in a $10.4 million net loss, while the nine-month period also saw a $31.1 million net loss Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $196,761 | $355,643 | $607,639 | $978,349 | | Gross profit | $24,069 | $63,560 | $83,051 | $162,953 | | Operating income (loss) | $(4,824) | $32,547 | $(2,936) | $67,808 | | Net income (loss) | $(10,425) | $29,031 | $(31,086) | $58,607 | | Diluted EPS | $(0.36) | $1.00 | $(1.07) | $2.02 | Consolidated Statements of Shareholders' Equity Shareholders' equity decreased to $572.7 million due to a $31.1 million net loss, partially offset by $12.7 million in share-based compensation - The primary drivers of change in shareholders' equity during the first nine months of 2023 were a net loss of $31.1 million and share-based compensation expense of $12.7 million[15] Consolidated Statements of Cash Flows Operating activities generated $20.1 million cash, a significant improvement driven by working capital changes, while investing and financing activities used cash Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 29, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $20,058 | $(7,321) | | Net cash used in investing activities | $(13,239) | $(21,958) | | Net cash provided by (used in) financing activities | $(17,356) | $10,247 | | Net decrease in cash | $(10,537) | $(19,032) | Notes to Consolidated Financial Statements Notes detail accounting policies, showing $266.9 million in inventories, a (67.4)% effective tax rate due to a valuation allowance, $281.9 million long-term debt, and concentrated sales in the US and Singapore - The effective tax rate for the nine months ended September 29, 2023 was (67.4)%, primarily due to an $11.1 million valuation allowance recorded against U.S. federal and state deferred tax assets in Q2 2023[37] Sales by Geographic Area (in thousands) | Region | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | | United States of America | $215,204 | $457,753 | | Singapore | $232,881 | $350,255 | | Europe | $86,625 | $76,084 | | Other | $72,929 | $94,257 | | Total net sales | $607,639 | $978,349 | - As of September 29, 2023, the company had total principal long-term debt of $281.9 million, consisting of a term loan and borrowings on a revolving credit facility[40] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management attributes declining revenue and profitability to a semiconductor industry downturn, exacerbated by macroeconomic factors, leading to cost reductions and increased debt-servicing costs Overview and Macroeconomic Conditions The company, a semiconductor equipment supplier, faces a cyclical industry downturn and macroeconomic headwinds, prompting cost reduction initiatives - The semiconductor industry entered a cyclical downturn in Q4 2022, leading to reduced spending on capital equipment and weakened customer demand for Ichor's products through the first three quarters of 2023[61] - To align resources with lower business levels, the company initiated labor and other cost reduction programs, incurring severance charges in Q4 2022 and Q1/Q3 2023[61] Results of Operations Q3 2023 net sales declined 44.7% to $196.8 million, with gross margin contracting 570 bps and operating losses recorded for both periods Net Sales Performance (in thousands) | Period | 2023 | 2022 | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Three Months Ended | $196,761 | $355,643 | $(158,882) | (44.7)% | | Nine Months Ended | $607,639 | $978,349 | $(370,710) | (37.9)% | Gross Margin Performance | Period | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Three Months Ended | 12.2% | 17.9% | -570 bps | | Nine Months Ended | 13.7% | 16.7% | -300 bps | - The decrease in gross margin was primarily due to reduced factory utilization from lower volumes[68] - Increased excess and obsolete inventory expense also unfavorably impacted gross margin by 150bps for the third quarter of 2023[68] - Interest expense increased by 115.0% for the nine-month period year-over-year, driven by a significant rise in the weighted average borrowing rate from 2.74% to 6.60% due to tightening monetary policy[73] Non-GAAP Financial Results Non-GAAP net income for Q3 2023 was $2.1 million ($0.07 diluted EPS), contrasting with a GAAP net loss, after adjustments for non-cash and severance costs GAAP to Non-GAAP Net Income Reconciliation (Q3 2023, in thousands) | Description | Amount | | :--- | :--- | | U.S. GAAP net loss | $(10,425) | | Amortization of intangible assets | $3,639 | | Share-based compensation | $4,752 | | Other (severance) | $793 | | Tax adjustments | $3,338 | | Non-GAAP net income | $2,097 | GAAP vs. Non-GAAP Diluted EPS | Period | GAAP Diluted EPS | Non-GAAP Diluted EPS | | :--- | :--- | :--- | | Q3 2023 | $(0.36) | $0.07 | | Q3 2022 | $1.00 | $1.22 | | Nine Months 2023 | $(1.07) | $0.47 | | Nine Months 2022 | $2.02 | $2.90 | Liquidity and Capital Resources The company ended Q3 2023 with $75.9 million cash, with operating activities providing $20.1 million cash, and sufficient liquidity for the next 12 months - Primary sources of liquidity are sales to customers and proceeds from credit facilities[92] - As of September 29, 2023, $105.0 million remained available under the $250.0 million revolving credit facility[92] - Cash from operations improved to a $20.1 million inflow in the first nine months of 2023 from a $7.3 million outflow in the prior-year period, primarily due to favorable changes in working capital balances[93][95] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Primary market risks are interest rate risk on variable-rate debt, with a 100 bps change impacting interest expense by $2.8 million, and immaterial foreign currency risk - Foreign currency exchange risk is limited because substantially all sales and the majority of supplier arrangements are priced and paid in U.S. dollars[100] - The company is exposed to interest rate risk on its $281.9 million of variable-rate debt[102] - A hypothetical 100 basis point change in the interest rate would change annualized interest expense by $2.8 million[102] ITEM 4. CONTROLS AND PROCEDURES Disclosure controls and procedures were ineffective due to a material weakness in internal control over financial reporting, with remediation expected by year-end 2023 - Disclosure controls and procedures were deemed not effective as of September 29, 2023, due to a previously identified material weakness in internal control over financial reporting[103] - The company is implementing a remediation plan and expects the material weakness to be remediated before the end of fiscal year 2023[106] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, other information, and a list of exhibits ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any material pending or threatened legal proceedings - As of the filing date, the company is not involved in any material legal proceedings[107] ITEM 1A. RISK FACTORS No material changes to risk factors have occurred since the 2022 Annual Report on Form 10-K - No material changes have occurred in the company's risk factors since the 2022 Annual Report on Form 10-K[108] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No unregistered sales of equity securities or use of proceeds were reported during the period - None[109] ITEM 5. OTHER INFORMATION No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during Q3 2023 - No directors or officers adopted or terminated insider trading arrangements under Rule 10b5-1 during Q3 2023[112] ITEM 6. EXHIBITS This section lists filed exhibits, including executive certifications and Inline XBRL documents - Exhibits filed include executive certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL data files[114]