ICHOR HOLDINGS, LTD. — Q3 2022 Form 10-Q
Business and period: Ichor designs and manufactures fluid-delivery subsystems and related components used in semiconductor manufacturing equipment. This unaudited filing covers the 13 weeks ended September 30, 2022, and the nine months ended that date; comparisons are to the 13-week and nine-month periods ended September 24, 2021. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $355.6 | $262.9 | $978.3 | $809.7 |
| Gross profit / margin | $63.6 / 17.9% | $43.6 / 16.6% | $163.0 / 16.7% | $130.5 / 16.1% |
| Operating income | $32.5 | $21.2 | $67.8 | $64.7 |
| Net income | $29.0 | $18.5 | $58.6 | $56.0 |
| Diluted EPS | $1.00 | $0.64 | $2.02 | $1.93 |
- Q3 sales rose 35.3% year over year and nine-month sales rose 20.8%. Management attributed growth to strong wafer-fabrication-equipment demand, expanded capacity and staffing, and incremental revenue from the November 2021 IMG acquisition.
- Q3 gross margin improved 130 basis points; nine-month margin improved 60 basis points. Management cited factory utilization, operating leverage, and IMG margins, partly offset by higher materials, logistics, and labor costs.
- Operating expenses increased to $31.0 million in Q3 and $95.1 million for nine months. SG&A included $1.0 million of Q3 accrual for an expected employment-related legal settlement; first- and third-quarter accruals totaled $4.1 million for nine months. Management expects the settlements to be finalized and paid within 12 months.
- Non-GAAP diluted EPS was $1.22 in Q3 and $2.90 for nine months, versus GAAP diluted EPS of $1.00 and $2.02, respectively. Non-GAAP measures exclude specified items including amortization, share compensation, settlement losses, and related tax effects.
Cash flow, balance sheet and debt
- Operating cash flow was negative $7.3 million for the first nine months of 2022, versus positive $24.4 million a year earlier. Working-capital use was driven principally by increases in inventory ($54.5 million) and receivables ($40.3 million), and a decline in accounts payable ($18.5 million).
- Investing cash outflow was $22.0 million, primarily capital expenditures of $22.5 million. Financing provided $10.2 million, including net revolving-credit borrowing. Cash declined $19.0 million from year-end to $56.5 million.
- At September 30, current assets were $535.6 million and current liabilities $205.1 million; inventories were $290.7 million. Total debt principal was $304.4 million, comprising a $144.4 million term loan and $160.0 million drawn on a $250 million revolver. The facilities mature October 29, 2026; outstanding debt bore a 4.94% BSBY-based rate. Debt due within 12 months was $7.5 million.
- Management said cash, available credit and operating cash flow should be sufficient for the business and current obligations for at least the next 12 months and beyond. A 100-basis-point rate change was estimated to alter Q3 interest expense by $0.8 million, or $3.0 million annualized.
Outlook, risks and other matters
- No specific financial guidance was provided. Management described strong 2022 semiconductor-equipment demand but noted uncertainty from inflation, higher interest rates, foreign-exchange movements, supply-chain constraints, export controls affecting China, and the Ukraine conflict. It expects secular semiconductor demand and technology innovation to support long-term industry growth.
- The business relies on semiconductor-equipment spending and a small number of OEM customers with significant negotiating leverage. COVID-related restrictions could again affect operations. The filing reported no material change in risk factors from the 2021 Form 10-K.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2022 because of previously disclosed material weaknesses in internal control over financial reporting. Remediation was underway; management expected completion before fiscal year-end 2022, subject to controls operating and successful testing for a sufficient period.
- The company reported no material pending or threatened litigation, but disclosed expected employment-related legal settlements noted above. No goodwill impairment was recognized in the first nine months.
Important facts for investors to verify
- Whether management completed and tested remediation of the material weaknesses, and whether any subsequent filing reports effective controls.
- Whether working-capital investment, especially elevated inventory and receivables, converts to cash as demand and supply-chain conditions evolve.
- Customer demand, order trends, and customer concentration, including potential effects of export restrictions and a semiconductor-equipment downturn.
- Progress and final cash cost of the employment-related settlements, and the effects of higher floating-rate borrowing costs.
- Availability and covenant capacity under the credit facilities, alongside capital spending and liquidity needs.