Ichor (ICHR) - 2023 Q4 - Annual Report

Part I Business Ichor Holdings designs and manufactures critical fluid delivery subsystems for semiconductor capital equipment, with 2023 revenue of $811.1 million reflecting an industry downturn Key Financial Performance (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | $811.1M | $1,280.1M | $1,096.9M | | GAAP Net Income (Loss) | $(43.0)M | $72.8M | $70.9M | | Non-GAAP Net Income | $12.3M | $104.9M | $97.7M | - The company is a leader in designing, engineering, and manufacturing critical fluid delivery subsystems (gas and chemical) for semiconductor capital equipment[16] - Ichor's top three customers, Applied Materials, Lam Research, and ASML, accounted for a combined 82% of sales in 2023[37] Company Overview Ichor specializes in critical fluid delivery subsystems and vertically integrated components for semiconductor manufacturing, enabling OEMs to focus on core competencies - Primary products include gas delivery subsystems for 'dry' processes (etch, deposition) and chemical delivery subsystems for 'wet' processes (CMP, cleaning)[16] - The company also provides vertically integrated components like precision-machined parts, weldments, and surface treatment technologies[16] - Outsourcing to specialized suppliers like Ichor allows OEMs to leverage specialized engineering skills and focus on their core value-added processes[17] Our Competitive Strengths Ichor's strengths include deep engineering expertise, early customer engagement, strong OEM relationships, operational excellence, and a capital-efficient model - Key strengths include: - Deep fluids engineering expertise with a team of chemical, mechanical, electrical, and software engineers - Early engagement in customers' product development, often leading to sole-source supplier status - Strong, long-term relationships with top-tier customers like Applied Materials, Lam Research, and ASML - Operational excellence with strategically located facilities and short lead times (often less than four weeks) - A capital-efficient and scalable business model with low fixed costs[21][22][23][24][25] Our Growth Strategy Ichor's growth strategy focuses on increasing market share, expanding into new markets and products, acquiring new customers, and improving manufacturing efficiency - Grow market share with existing customers by leveraging engineering talent and expanded product offerings[26] - Expand total available market through new products in areas like machined components and chemical delivery, and by entering new sectors such as medical, aerospace, and defense via acquisitions[27][28] - Expand the total customer base by engaging with new OEMs considering outsourcing their fluid delivery needs[29] - Continuously improve manufacturing process efficiency to reduce cycle times, lower costs, and improve profitability[30] Customers, Sales, and Marketing Ichor sells directly to a concentrated OEM customer base, with its top three customers accounting for 82% of 2023 sales, operating on a purchase order basis - The semiconductor equipment market is highly concentrated, with five companies accounting for over 70% of process tool revenues[37] - For 2023, the top three customers (Applied Materials, Lam Research, and ASML) represented a combined 82% of sales[37] - The company generally operates on a purchase order basis and does not have long-term contracts with fixed or minimum volumes[37] Competition Ichor competes with other fluid delivery suppliers and OEM internal groups, with key factors including customer relationships, engineering, and manufacturing flexibility - The fluid delivery subsystem market is concentrated, with key competition from Ultra Clean Technology and regional suppliers[49] - Primary competitive factors emphasized are customer relationships, early engagement, engineering staff, cycle times, and manufacturing flexibility[49] Human Capital Resources As of December 29, 2023, Ichor had 1,690 full-time employees, focusing on competitive compensation, talent development, diversity, and safety Workforce Demographics (as of Dec 29, 2023) | Category | Number of People | | :--- | :--- | | Full-time employees | ~1,690 | | Contract/temporary workers | ~555 | | By Function: | | | Engineers | ~140 | | Sales & Marketing | ~110 | | Manufacturing | ~1,770 | | Executive & Administrative | ~225 | Risk Factors Ichor faces significant risks from semiconductor industry cyclicality, customer concentration, competition, supply chain disruptions, and geopolitical factors Economic and Strategic Risks Ichor's business is highly exposed to the cyclical semiconductor industry, customer concentration, intense competition, and global economic and geopolitical instability - Business depends significantly on the cyclical semiconductor capital equipment industry[69][70] - Reliance on a very small number of OEM customers is a major risk; in 2023, the top three customers accounted for 82% of sales[73] - The company is exposed to risks from global economic weakness, geopolitical instability (e.g., Russia-Ukraine conflict, Middle East conflict), and trade tensions between the U.S. and China[80] Business and Operational Risks Operational risks include manufacturing complexity, supply chain reliance, order uncertainties, IT system vulnerabilities, and dependence on key employee expertise - The manufacturing process is highly complex, and any failure to manage it effectively can lead to lost customers and liability[88] - Dependence on a limited number of suppliers for quality components may harm production and increase costs[92] - The business is subject to order and shipment uncertainties as it generally operates on short-term purchase orders rather than long-term contracts[96] - The business is vulnerable to IT system failures and cyber-attacks, with risks heightened by the evolving nature of threats and global political environment[97][98] Legal and Regulatory Risks Ichor faces legal and regulatory risks from data privacy laws, trade policy changes (e.g., BIS Rule), environmental compliance, and internal control requirements - The business is subject to complex international laws regarding data privacy, such as GDPR and CCPA[106] - Changes in U.S. or international trade policy, tariffs, and import/export regulations, such as the BIS Rule impacting semiconductor-related exports to China, may have a material adverse effect on business[112][113][114] - The company previously identified and has since remediated material weaknesses in its internal control over financial reporting related to IT general controls[123] Liquidity and Capital Resources Risks Ichor faces liquidity risks from substantial variable-rate debt totaling $250.0 million as of December 29, 2023, and restrictive covenants - As of December 29, 2023, the company had $135.0 million outstanding under its term loan and $115.0 million under its revolving credit facility[129] - The credit facilities contain restrictive covenants limiting actions such as incurring additional debt, making investments, and paying dividends[129] - Borrowings are subject to variable interest rates, exposing the company to risk from rising rates[132] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[143] Cybersecurity Ichor's cybersecurity program, based on the NIST Framework, is overseen by the Audit Committee and CIO, focusing on risk assessment and employee training - The cybersecurity program utilizes the National Institute of Standards and Technology (NIST) Cybersecurity Framework[144] - Governance is managed by the Audit Committee of the Board, which receives regular reports, and overseen by the Chief Information Officer with over 25 years of experience[148][149] - The company provides annual cybersecurity awareness training and regular phishing exercises to its employees[146] Properties As of December 29, 2023, Ichor leases approximately 865,700 square feet for global manufacturing and administrative facilities Leased Facilities by Location | Location | Approximate Square Footage | | :--- | :--- | | California | 271,300 | | Oregon | 172,100 | | Minnesota | 113,300 | | Singapore | 97,700 | | Mexico | 62,900 | | Texas | 47,800 | | Scotland | 37,700 | | Malaysia | 31,900 | | Korea | 18,500 | | Nevada | 12,500 | Legal Proceedings The company is not currently involved in any material litigation or regulatory proceedings - The company is not presently a party to any material litigation or regulatory proceeding[152] Mine Safety Disclosures This item is not applicable to the company - Not applicable[153] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ichor's ordinary shares trade on NASDAQ under 'ICHR'; the company does not anticipate paying cash dividends soon - The company's ordinary shares trade on the NASDAQ under the symbol 'ICHR'[158] - The company does not anticipate paying cash dividends for the foreseeable future[155] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net sales decreased to $811.1 million, resulting in a $43.0 million net loss due to a semiconductor industry downturn, despite positive operating cash flow Results of Operations For 2023, net sales decreased by 36.6% to $811.1 million, leading to a $43.0 million net loss due to reduced demand and higher interest and tax expenses Comparison of Net Sales (2023 vs 2022) | Period | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $811,120K | $1,280,069K | $(468,949)K | (36.6)% | Comparison of Gross Profit (2023 vs 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Gross Profit | $103,396K | $211,864K | $(108,468)K | | Gross Margin | 12.7% | 16.6% | -390 bps | - The decrease in gross margin was primarily due to reduced factory utilization from lower volumes and a 60 basis point unfavorable impact from increased excess and obsolete inventory expense[195] - Selling, general, and administrative (SG&A) expenses decreased by 10.4% to $79.3 million, mainly due to reduced employee-related expenses and a $4.1 million legal settlement accrual in 2022 that did not recur[197] - Net interest expense increased by 75.3% to $19.4 million, driven by a rise in the weighted average borrowing rate from 3.37% in 2022 to 6.80% in 2023[199] - Income tax expense increased to $11.9 million from $2.5 million in 2022, primarily due to an $11.1 million charge for a valuation allowance against U.S. federal and state deferred tax assets[201] Non-GAAP Financial Results In 2023, non-GAAP net income was $12.3 million (vs. $43.0 million GAAP net loss), reflecting adjustments for non-cash and infrequent charges Reconciliation of GAAP to Non-GAAP Net Income (2023) | Description | Amount (in thousands) | | :--- | :--- | | U.S. GAAP net income (loss) | $(42,985) | | Amortization of intangible assets | $14,734 | | Share-based compensation | $17,338 | | Other (severance costs) | $2,298 | | Tax adjustments related to non-GAAP items | $9,778 | | Tax expense from valuation allowance | $11,094 | | Non-GAAP net income | $12,257 | GAAP vs. Non-GAAP Diluted EPS (2023) | Metric | 2023 | | :--- | :--- | | U.S. GAAP Diluted EPS | $(1.47) | | Non-GAAP Diluted EPS | $0.42 | Liquidity and Capital Resources As of year-end 2023, Ichor had $80.0 million in cash, with $57.6 million from operations offsetting $52.5 million in net debt payments Summary of Cash Flows (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Cash provided by operating activities | $57,632 | $31,453 | | Cash used in investing activities | $(15,496) | $(28,933) | | Cash provided by (used in) financing activities | $(48,651) | $8,455 | | Net increase (decrease) in cash | $(6,515) | $10,975 | - Cash from operations of $57.6 million was driven by non-cash charges ($61.7 million) and a decrease in net operating assets ($38.9 million), which offset the net loss of $43.0 million[215] - Cash used in financing activities included net payments on credit facilities of $52.5 million[219] Quantitative and Qualitative Disclosures About Market Risk Ichor faces interest rate risk from $250.0 million in variable-rate debt, with a 100 basis point change impacting annual interest expense by $2.5 million - Foreign currency exchange risk is not considered material as most transactions are denominated in U.S. dollars[223] - The company has significant interest rate risk due to variable-rate debt. Total indebtedness was $250.0 million as of December 29, 2023[225] - A hypothetical 100 basis point change in interest rates would result in a $2.5 million change to annualized interest expense[225] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 29, 2023, remediating prior ITGC weaknesses - Management concluded that disclosure controls and procedures were effective as of December 29, 2023[229] - A material weakness related to ITGCs in user access and program change management, disclosed in the 2022 Form 10-K, has been remediated as of December 29, 2023[232][233][234] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Definitive Proxy Statement - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2024 General Meeting[239] Executive Compensation Information on executive compensation is incorporated by reference from the 2024 Definitive Proxy Statement - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2024 General Meeting[241] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2024 Definitive Proxy Statement - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2024 General Meeting[242] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Definitive Proxy Statement - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2024 General Meeting[243] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2024 Definitive Proxy Statement - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2024 General Meeting[244] Part IV Exhibit and Financial Statement Schedules This section presents the audited consolidated financial statements and exhibits, with KPMG LLP issuing an unqualified opinion - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of December 29, 2023[251][259] - The auditor's report identified the 'Evaluation of excess and obsolete inventory' as a Critical Audit Matter due to the subjective judgment required in evaluating assumptions about future inventory consumption[262][264][265] Consolidated Balance Sheets As of December 29, 2023, total assets were $938.5 million, with total liabilities at $373.8 million, reflecting decreases in receivables and inventories Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 29, 2023 | Dec 30, 2022 | | :--- | :--- | :--- | | Total Current Assets | $401,365 | $513,458 | | Inventories | $245,885 | $283,660 | | Goodwill | $335,402 | $335,402 | | Total Assets | $938,481 | $1,083,742 | | Total Current Liabilities | $98,962 | $166,292 | | Long-term debt, net | $241,183 | $293,218 | | Total Liabilities | $373,804 | $496,246 | | Total Shareholders' Equity | $564,677 | $587,496 | Consolidated Statements of Operations For 2023, net sales were $811.1 million, resulting in a $43.0 million net loss or ($1.47) diluted EPS, a reversal from 2022 net income Statement of Operations Summary (in thousands, except per share data) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $811,120 | $1,280,069 | $1,096,917 | | Gross profit | $103,396 | $211,864 | $177,480 | | Operating income (loss) | $(10,895) | $85,823 | $81,014 | | Net income (loss) | $(42,985) | $72,804 | $70,899 | | Diluted EPS | $(1.47) | $2.51 | $2.45 | Notes to Consolidated Financial Statements Notes detail accounting policies, including inventory valuation, revenue recognition, and goodwill testing, with specifics on tax, debt, and segment reporting - Inventories are valued at the lower of cost or net realizable value. The excess and obsolete inventory provision increased from $17.5 million in 2022 to $28.4 million in 2023 (Note 3)[318][319] - A valuation allowance of $28.0 million was recorded against deferred tax assets as of Dec 29, 2023, as it was determined not more-likely-than-not that U.S. entities will generate sufficient taxable income to realize them (Note 7)[328][329] - The company's credit facilities mature on October 29, 2026, and require maintaining a minimum fixed charge coverage ratio of 1.25:1 and a maximum leverage ratio of 3.50:1 (Note 9)[338][339] Sales by Major Customer (as % of Net Sales) | Customer | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Applied Materials | 36.4% | 31.0% | 32.1% | | Lam Research | 35.4% | 48.1% | 52.8% | | ASML | 10.6% | <10% | <10% | | Total % from Major Customers | 82.4% | ~79% | ~85% |