Ichor Holdings

Good afternoon and thank you for joining today's fourth quarter and fiscal year 2021 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal 2020, and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release and the financial supplement posted to our IR website, each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andreessen, our CEO, and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our fourth quarter results and first quarter guidance. After the prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreessen. Jeff?

Thank you, Claire, and welcome to our Q4 earnings call. Q4 revenues were $287 million, up 9% from Q3 and just below the midpoint of guidance. While the acquisition of IMG added $7 million of incremental revenue in the quarter, The supply chain challenges the industry has been facing progressively worsened in Q4, not only for component supply, but also the additional labor constraints brought by the Omicron COVID variant, which we had not predicted when we provided Q4 guidance. Despite these challenges, it was a strong end to 2021 with gross margin improvement to 17.1% in Q4. For the full year, we achieved a record $1.1 billion in sales, and $3.37 in earnings per share. We increased gross margin by 210 basis points year over year and grew net income by 65% on a revenue growth of 20%. You have probably heard on many earnings calls at this point the incredibly robust business environment we are seeing in the wafer fab equipment industry. To support unprecedented levels of customer demand, we increased revenues by 47% in 2020 and another 20% in 2021 to levels now 77% higher than we reported in 2019. Expectations for continued industry growth in 2022 have recently increased from sequential annual growth of about 10% a quarter ago to now high teens percentages or $100 billion. At the same time, the challenges in the supply chain have not only continued, but they have worsened in many ways, shifting from freight and logistics issues initially, to factory shutdowns affecting us mid-year, to the labor impact stemming from Omicron, to increasing component supply challenges, particularly electronic components, as well as shortages of materials, which certainly affected the fourth quarter and we expect will be a factor through at least the first half of this year. Nonetheless, we along with the rest of the supply chain are working to manage these challenges and steadily increase our output each quarter through 2022, which we expect will result in another record revenue and earnings year in support of $100 billion of WFE demand. With our current visibility, we are forecasting Q1 revenues to be up around 4% to 5% sequentially, chiefly as a result of a full quarter of IMG revenues though we have widened the range to account for the incremental uncertainties in the supply chain. We also expect our revenue output to increase sequentially through each quarter of 2022, and given current WFE growth expectations in the high teens percentages, we also expect our revenue growth while outperforming WFE this year. The added visibility brought upon by tight supply conditions bodes well for the longevity of the current demand cycle. with our customers expecting industry supply to finally catch up with demand sometime in 2024. In this environment, we expect to continue to demonstrate incremental improvements to our gross margins, increasing operating leverage, and strong growth in earnings per share. Earlier in 2021, we talked about our plans to increase CapEx in order to add the capacity that will enable I-Corps to achieve quarterly revenue run rates in excess of $400 million. We will continue to invest in 2022 to ensure that we have the right level of capacity to support the demand that we see in the next two years. We are also making incremental investments in R&D and in the company's infrastructure to support the growth ahead. Now I'll discuss in more detail the benefits of our IMG acquisition and our progress in other strategic growth initiatives. Our M&A strategy is focused on increasing the IP content of the business. which is accretive to our gross margins while also leveraging our existing sales challenge. IMG fits this strategy very well. They have a strong precision machining capabilities but address a larger format versus what we have today. So it is complimentary and it will be instantly accretive to our gross margin and earnings. As we indicated in our November press release, we expect IMG to add 100 basis points to gross margin and at least 40 basis points to operating margin for our fiscal 2022 results. From a valuation perspective, the EBITDA multiple was around 13, which is a bit higher than I-Corps currently, but compares favorably to deals currently being completed for other machining-based business transactions. It brings a strong management team with a very capable engineering group as well. The acquisition of IMG has been closed for just over two months. And in that time, we have been impressed with their leadership team and their strong customer relationships. We are expecting a smooth integration process. IMG also brings a bit of diversification to our revenues in that a portion of their revenue is recurring, and they also serve exciting growth applications in medical, aerospace, and defense. Now I'll update you on the progress the team has made on our strategy to develop new products that will result in longer-term expansion of our share of our served markets, as well as drive the operating model toward increased levels of profitability. Our first next-generation gas panel is beginning the qualification process this quarter. The qualification process is expected to take up to a year to complete. We currently expect to ship our second beta system to an additional customer by mid-year. In our chemical delivery business, after shipping a beta chemical delivery system to a North America customer in Q3, we recently completed this phase of the evaluation and are now working on designing the production configuration for their tool. We expect this qualification period for the production unit to extend into the second half of this year. Additionally, earlier this year, we shipped another beta unit for an additional application, which will begin the first phase of qualification this quarter. We completed the qualification of our first evaluation unit of our proprietary liquid delivery subsystem to a Japanese customer, and I expect to see first production orders by mid-year. As I noted on our last call, the scale of this first opportunity is relatively small, but an important step in penetrating the Japanese market which is the largest portion of the wet processing SAM. We continue to quote opportunities at other OEMs that are larger in scale. In our precision machining business, the two qualifications completed in 2021 will begin to see first revenues this quarter and increasing from there. These qualifications will both increase our proprietary content on a gas panel and be accretive to our gross margin profile. In summary, in a very challenging operating environment, the team is working extremely hard to ramp the business to address the customer demand we are experiencing. And with our current visibility, we are expecting to report sequential growth and record-setting revenues for the next several quarters. We are also pleased with our gross margin improvements in 2021. As we look to 2022, we expect strong earnings leverage on the revenue growth forecast as a result of our continued gross margin improvements. which brings us to Larry's discussion of our financial performance and further details on our outlook. Larry?

Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, non-recurring charges, and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses such as R&D and SG&A in the investor section of our website for reference during this conference call. Fourth quarter revenues were $287 million, up 9% from Q3 and 17% higher than Q4 of 2020. First year revenues totaled a record $1.1 billion. Given the challenging operating environment, we are pleased with our gross margin and profitability performance. Q4 gross margin of 17.1% was up 40 basis points from Q3 and benefited from the addition of IMG during the last month of the quarter, along with continued cost reduction programs. Full year gross margin increased to 16.7%, up 210 basis points from 2020. COVID-related impacts on our gross margin continue to be around 50 basis points and are expected to persist for the foreseeable future. Q4 operating expenses were $18.6 million compared to our guidance of $17.5 million, reflecting approximately $1 million added from the partial quarter of IMG operations. Operating margin of 10.7%, increased 20 basis points from Q3, and for the full year, operating margin was also 10.7%, up 240 basis points from 2020. Interest expense for Q4 was just under $1.5 million, essentially flat to Q3 as a result of our new debt terms, with a lower overall interest rate on the increase in borrowings to fund the IMG acquisition. Our tax rate for the quarter was 10%, and the full year tax rate was 11.5%. We reported earnings per share of $0.90 for Q4 at the midpoint of our guidance. The strong operating leverage in 2021 resulted in record net earnings of $98 million, up 65% from 2020, with EPS also outgrowing revenue growth of 34% from 2020, reflecting the higher share count. Now I will turn to the balance sheet. We closed the acquisition of IMG in late November and the purchase price of $270 million was funded with approximately $140 million of cash and investments on hand and $130 million of incremental borrowing on our newly revised credit agreement. This transaction drove the majority of the increase in total debt to $295 million and the decline in total cash and investments to $75 million at year end. Based upon our prior revenue guidance for Q4, we had expected stronger cash conversion of working capital late in the year. But given the continued increases in customer demand concurrent with output challenges, we built inventory in the quarter to support the growth forecast for the next several quarters. This reduced our inventory turns to 4.4 in Q4, and DSOs were higher at 49 days compared to 44 days in Q3. Going into 2022, we expect these working capital investments in 2021 will translate to strong free cash flow generation in the quarters ahead. Now I will turn to our first quarter guidance. With revenue guidance in the range of $280 to $320 million, our earnings guidance is 80 cents to $1.04 per share. At the midpoint of guidance, this includes approximately $18 million of revenue from IMG compared to $7 million in Q4. Our guidance assumes the industry's supply chain constraints will persist at the same level through the quarter, but we have also widened the guidance range to factor in the additional uncertainty we've all been experiencing since last quarter. We are expecting about an 80 basis point improvement in gross margin for Q1, reflecting a full quarter of IMG and continued cost improvement efforts. We continue to drive improvements to our gross margin profile. Our key strategies to drive gross margin higher are through incremental cost reduction programs, growing our share within our higher margin components businesses, and increasing our content of proprietary IP within our products. With the IMG acquisition, an important element of increasing our revenue mix of higher margin components we expect continued progress on our other gross margin improvement plans as we progress through 2022. Our Q1 operating expense forecast is $21.4 million with the majority of the increase due to the full quarter of IMG operations along with seasonal increases. Through 2022, we expect OPEX to increase a bit each quarter as we continue to make incremental investments in R&D supporting our new product development programs the new ERP system, and overall investments supporting company growth. We expect our interest expense will be approximately $1.5 million in the first quarter, reflecting a full quarter of borrowings for the IMG acquisitions, as well as our lower borrowing rate. Our tax rate in Q1 will increase to approximately 13.5% given the higher mix of U.S.-based revenues and we estimate our fully diluted share count to be approximately 29.1 million. Our tax planning rate over the next couple of years is now in the range of 13 to 14% given current tax policy and the expected geographical mix of revenues. Finally, we expect CapEx to be around 3% of revenues for 2022, which reflects the higher levels of investment required to support our precision machining business. We expect to deliver strong free cash flow performance in 2022 as we show improved cash conversion metrics compared to 2021 when we built inventory in support of the growth ahead. Operator, we are ready to take questions. Please open the line.