Good day, ladies and gentlemen, and welcome to Ichor's Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, Investor Relations for Ichor. Please go ahead.

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 Andreson, 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 their prepared remarks, we will open the line for questions. I'll now turn over the call to Jeff Andreson. 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 due to 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 about 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 around $100 billion. At the same time, the challenges in the supply chain have not only continued but have worsened in many ways, shifting from freight and logistics issues initially to factory shutdowns affecting us mid-year, to the labor impacts 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. Given current WFE growth expectations in the high-teens percentages, we also expect our revenue growth will outperform WFE this year. The added visibility brought about 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 to add the capacity that will enable Ichor 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 channels. IMG fits this strategy very well. They have strong precision machining capabilities that address a larger format than what we have today. So it is complementary and 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 Ichor's 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. 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 towards 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 American 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 it is 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 will increase 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. With our current visibility, we are expecting to report sequential growth in 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.

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 Investors 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 on 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 million to $320 million, our earnings guidance is $0.80 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 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.

Thank you. At this time, we will be conducting a question-and-answer session. And our first question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question.

Yes. Thank you and good afternoon. First, Larry, a question on the guidance. The range, $0.80 to $1.04, is that strictly just the operating leverage overhead absorption? Or are there other factors that go into that earnings level based on that revenue level?

Well, the biggest piece, Tom, is the IMG will be in for a full quarter, so that drives some of the improvement. The others, we will get a little bit of volume leverage, but I'd say that the majority of the change is from the full quarter of IMG.

I guess I was talking more about the 30% range from the low end of earnings to the high end of the range versus a much smaller revenue percentage change for the delta.

Yes. From the midpoint to the top, you'll see a little bit of leverage. But again, most of that flexibility up is because we're pretty CapEx-light here. So you get some, but you don't get tons of it. So most of it is just the incremental revenue that will flow through at kind of relatively the same flow-through rates that we've had in the past.

Okay. Thanks, Jeff. When I look at the IMG acquisition, curious, does that create – or does that bring with it some extra capacity you can use for your core business? Or is it just too different a business to have it help out the core business going forward, and that will be its own kind of growth driver very separate going forward?

Yes. They do have some incremental capacity that can be utilized for certain portions of the machining that we do. And so they can do some of the steps of the components that we machine, and we've already started that process. That will take a little while to move things in, probably two to three months. The other thing they do is they have a portion of the business in e-beam welding, which we also outsource. We can in-source into the capacity that they have as well, and so we're working on that as well. Those are part of the kind of the cost reductions and synergies that we've seen as we did the acquisition.

Okay. And can you just remind us what the percentage of recurring business there in the percentage of non-semi business?

Yes. They have some exposure to, I'll call it, service parts and services, primarily around kind of their welding operation, where they do welding for customers that supply the parts. I want to say, kind of off the top of my head, it's probably a third or so.

Okay. And final question. When you look at the increased expenses rate, especially on the shipping, what kind of an impact has that had on your model? And do you think some of these shipping expenses are more of a permanent increase versus a temporary increase?

I'd say today, the bulk of the COVID impact is really around shipping. It's been – we've probably seen, if you look at pre-COVID to now, a 50% increase in the kind of freight costs, which we've offset by some operational activities that involve shipping from Malaysia to Singapore with our own trucks, that sort of thing. But generally, right now, we don't see a lot of significant improvement in the environment. I think it looks, at least for the first half of this year, that we're going to be facing the same issues. We will continue to look for creative ways to mitigate some of that, but right now, we don't see a lot of change in the business.

Yes. I think until supply increases for air freight, particularly, it will be with us for a while. But people are getting creative on how they're tackling air freight. We've done some of that too with consolidating and partnering with others to try and minimize the effect on us.

Okay. Well, thank you both for your time today.

Thanks, Tom.

And our next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.

Thank you very much. Jeff, I know there's been a lot of moving parts in the supply chain, the COVID-related costs, and the workforce reductions that have occurred. As you look at the current March quarter and maybe into the June quarter as well, can you rank, I guess, those aspects and which ones are creating the most pressure? Is it the supply chain that's probably causing the greatest headwinds today? And maybe as a follow-up to that, if it is the component shortages, are there multiple components that are becoming more challenging to procure, or is it just kind of one area?

Hey, Patrick. I do think that the component shortages are going to have the biggest impact on recovering and growing, and on our outlook. We’ve seen the Omicron variant begin to decline. It's getting much better now. I would say that's becoming a little less of an issue, but it obviously did start to spike sometime in late October and those trends were felt in our supply chain. I wouldn't say it affected internal Ichor much, but we did see some of that with a few suppliers. Largely, we're seeing, I'll call them, electronic components, semiconductors, and other electronic components that are still challenged. I do see some improvements in the future, and we're hoping that with each passing month, everything continues to get a little bit better.

Great. That's helpful. And maybe as my follow-up question. In terms of CapEx being 3% of revenues this year, you continue to expand capacity. Are these plans looking a year ahead or more on a three to four year basis? Let's just say hypothetically, we're looking at a $1.6 billion to $2 billion type of revenue company. What are some of the plans there in terms of capacity expansion? And are you trying to play a bit of catch-up over the next year or so because of the strong demand? Or are these long-term plans?

They're long-term plans. I think we started talking about this probably towards the end of 2020 and then the outlook for 2021 ended up being much stronger than anticipated. So it might have shortened the timeframe, but I'm pretty comfortable with our plans for the next one to two years for sure. Most of it is largely in place. I think you're seeing us raise that CapEx number to around 3%, which is driven by the necessity to continually increase our capacity on the machining side of the business, which does come with a higher CapEx level. The integration side remains in that 1% to 2%. So we're looking out over multiple years, aligning with our customers' views as well as industry expectations for the next couple of years.

Great. Thank you very much.

You bet.

Our next question comes from the line of Krish Sankar with Cowen. Please proceed with your question.

Hi. This is Robert Mertens on behalf of Krish. Thanks for taking my question. I just wanted to get a little bit more detail on the IMG integration, if that business has any typical seasonality or if you're just expecting the $18 million quarterly revenue in March to grow from there. And I know you mentioned that business has some aerospace and defense exposure. Do you sort of know the breakdown of the end markets for that business overall? And then I have one more question. Thanks.

It has a little bit of seasonality, but not tremendous step functions. I would say Q2 and Q3 have historically been a little bit stronger. We have some plans to try and, obviously, add some revenue synergies to make the seasonality a bit less of an issue. As we go into the fourth quarter, sometimes defense and things slow down a bit, but I don't see our semiconductor business slowing as we go through it. We don't completely break out their pieces of the business, but I would say the vast majority of that business still focuses on semiconductor and the services surrounding semiconductors. They have some exposure to defense applications, some of which are commercial defense. But it's generally stayed pretty robust throughout the last couple of years, which we verified during due diligence.

Great. That's very helpful. And then just real quick, a question around the inventory levels. Are you confident that the current levels support growth that exceeds WFE growth this year? Or should we expect a bit more of a buffer in the next few quarters just to cover the anticipated supply challenges?

Yes. I think we've been – and it's been seen across the industry, no one is trying to constrain inbound inventory levels because any part that could hold up shipping can create a shortage. So I don't think inventory levels will grow significantly from here. If the supply chain improves after mid-year and into next year, they'll probably come down a bit.

Okay. Thank you. That's all for me.

Thanks, Robert.

Our next question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Hey guys. Can I ask a question, just a clarification on your outlook for 2022 where you said you're going to grow faster than WFE? Is that organically? Or does that include roughly six or seven points of growth that you expect through the IMG acquisition in 2022?

Yes, it does. We’re discussing the entire corporation, so your estimation is approximately correct that about 6% of our growth will be from IMG. I think we will grow – if I had to put a number on it, I kind of think low 20s would be a reasonable estimate of where we think we can land this year, given our exposure to the dep-etch EUV products and then adding IMG.

Got it. So that's low 20s inclusive of IMG?

Yes.

Got it. Great. And then second question just around component availability. You mentioned that it's mostly semiconductor-related or maybe other electronic components. Are there any constraints that you’re seeing on things like mass flow controllers or valves or manifolds or anything else that you're sourcing that might be less electronics but still critical to the gas panel?

I mean I wouldn't want to be specific about any specific supplier or component, but I would say anywhere we see the use of semiconductors. I wouldn't say that there are lots of issues, but there are one or two that have affected some of our suppliers' ability to ramp and support the demand we’re witnessing. Most of us are still chasing demand due to these issues, so we are managing a complex supply chain with multiple components and suppliers. But I do not think our challenges are unique.

Got it. But if you’re short on a component, it is probably because that component includes a semiconductor or some kind of electronic component that everybody is struggling to source?

Yes, that would be a good characterization, yes.

And our next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed with your question.

Yes. Thanks for taking the questions. And I appreciate all the transparency you're providing around IMG. So I'll just start there, a quantitative and a qualitative question. Larry, for you. You commented on the revenue contribution for Q4 and Q1. But can you say if the business is accretive to the bottom line? And qualitatively for you, Jeff, can you just talk about how you're feeling about the early integration and the customer reaction to the business as we've had it in the portfolio for a couple of months?

I'll start and then Larry can finish up with the financials. From an integration standpoint, we've organizationally integrated IMG, and it’s going well. We're not rushing the integration on ERP systems but we are excited. As you own IMG, you can see the capability of their engineering and manufacturing group, and they operate at a much higher level of automation than we do. We're excited about leveraging that expertise. Customers have responded positively to the integration and we’ve seen some synergies, though engineering support will require time given current conditions. IMG is connected to strong applications growing at a slightly higher rate than the overall semiconductor business.

Yes, the IMG acquisition is instantly accretive by about 100 basis points on margin, 40 basis points on operating margins, and I would estimate around 20 basis points on the net line for the year, year-over-year.

Got it. That's helpful. And then with regard to the supply chain issues, to what extent are the issues part of products you're building and necessary inputs versus parts that are external to Ichor and perhaps slowing end customer demand for your products because another part is an issue? Are we talking strictly internal supply chain issues?

Yes. I think these challenges are mainly due to components affecting our suppliers' ability to supply parts to us. Labor-related issues are not significantly affecting us. Everyone is impacted by Omicron, but that was managed effectively. So, the most pressing challenges are timing and predictability of part flow.

Yes. Was the impact of that quantified for the quarter and the outlook? Are we talking $5 million to $10 million, $10 million to $20 million? Any sizing detail would be particularly useful?

No, we haven't quantified it. What I can say is we've expanded the guidance range. The high end assumes further recovery in the supply chain versus today’s visibility. Demand is clearly above that level.

Got it. If demand from your customers proves to be materially higher than the low 20s you mentioned, can you discuss your confidence in hitting a mid-20s or high-20s revenue growth should the industry evolve to that level?

If industry demand increases and the supply chain improves, that would likely occur. However, it is hard to predict when the supply chain will recover. The $100 billion WFE assumes that once supply catches up with demand, the environment will improve, although the underlying demand might be higher.

Thanks very much, guys. Appreciate it.

Thank you.

We have reached the end of the question-and-answer session, and I'll now turn the call back over to Jeff Andreson for closing remarks.

Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers, and customers for their support and strong execution in this historic demand environment for the semiconductor industry. We look forward to updating you on our next earnings call in early May. Operator, that concludes our call.

Thank you. You may disconnect your line at this time. Thank you, and have a good day.