Ichor Holdings, Ltd. — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 28, 2019 (13 weeks); six-month results are also compared with the corresponding 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Ichor designs and manufactures fluid-delivery subsystems and components for semiconductor equipment. Management attributed the sharp sales decline to a cyclical downturn in the global wafer-fabrication equipment market. Lam Research and Applied Materials were the company’s two largest customers in all periods presented.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $139.2 | $249.0 | $277.0 | $507.0 |
| Gross profit / margin | $19.5 / 14.0% | $43.9 / 17.6% | $39.8 / 14.4% | $86.5 / 17.1% |
| Operating income | $3.0 | $25.9 | $5.9 | $46.4 |
| GAAP net income | $0.3 | $28.0 | $1.9 | $44.8 |
| GAAP diluted EPS | $0.01 | $1.07 | $0.08 | $1.69 |
| Non-GAAP adjusted net income | $5.1 | $26.7 | $10.7 | $54.2 |
| Non-GAAP adjusted diluted EPS | $0.23 | $1.02 | $0.47 | $2.05 |
- Q2 sales declined 44.1% year over year; first-half sales fell 45.4%. Gross margin contracted 360 basis points in Q2 and 270 basis points in the first half. Management cited lower volume, customer and product mix, and reduced factory utilization.
- Q2 operating expenses decreased 8.2% to $16.5 million, but fell much less than revenue; operating margin declined to 2.2% from 10.4%. Interest expense rose 19.9% in Q2 to $2.8 million, primarily reflecting higher average borrowing and interest rates.
- First-half operating cash flow was $20.7 million, versus $30.2 million a year earlier. Investing cash outflow was $14.3 million, including $8.1 million for developed technology and $6.1 million of capital expenditures. Financing cash outflow was $8.8 million, including net debt repayments and share repurchases. Cash decreased $2.4 million to $41.5 million.
- At June 28, 2019, current assets were $196.4 million and current liabilities were $85.9 million. Inventory was $108.5 million, down from $121.1 million at year-end 2018.
- Total debt principal was $195.2 million ($191.8 million net of issuance costs), including $8.8 million due within 12 months. The company had $31.2 million drawn on its revolving facility and reported $16.6 million in lease liabilities. Debt bears variable rates; the term loan and revolver rates were 4.83% and 4.92%, respectively, and facilities mature in February 2023.
Material changes and notable items
- Revenue, gross profit, and GAAP earnings fell substantially year over year as semiconductor equipment demand weakened. Sales decreased in both the United States and foreign markets.
- Management said SG&A declined partly due to lower employee-related, consulting, and legal costs and the absence of prior-year CFO transition costs; the first-half comparison also included a $0.7 million expense from releasing a Cal-Weld tax indemnification asset.
- The company adopted lease accounting in fiscal 2019, recognizing operating-lease right-of-use assets of $16.2 million and lease liabilities of $16.6 million at quarter-end. Adoption initially recorded $18.1 million of lease liabilities and $17.7 million of ROU assets; management said the standard did not significantly affect operations or cash flows.
- During the first half, Ichor repurchased 97,910 shares for $1.6 million at an average $16.34 per share; $8.4 million remained authorized. It also acquired developed technology for $8.1 million in Q2.
- The effective tax rate and reported tax benefit reflect differing foreign tax rates and discrete items, including tax-reserve releases in 2019 and a foreign-tax-credit valuation-allowance release in 2018. Non-GAAP results exclude specified amortization, share compensation, nonrecurring costs, and tax items; they are not substitutes for GAAP results.
Outlook, risks, and contingencies
The filing provides no numerical revenue or earnings guidance. Management stated that cash, revolver availability, and operating cash flows should be sufficient for anticipated needs for at least the next 12 months. Key risks include continued cyclicality in semiconductor equipment demand, customer concentration, operating leverage and factory utilization, variable-rate debt exposure, and foreign-currency effects. A hypothetical 1% interest-rate change would have affected Q2 interest expense by approximately $0.5 million, or $2.0 million annualized. The filing reports no material changes to previously disclosed risk factors, no material expected adverse effect from ordinary-course legal matters, and no defaults on senior securities.
Important facts for investors to verify
- Whether semiconductor equipment demand and customer orders recover, and how customer concentration affects sales.
- Whether margins stabilize as factory utilization and product/customer mix change.
- Cash generation and liquidity under a prolonged downturn, including scheduled debt service and variable interest costs.
- The composition and sustainability of non-GAAP adjustments and the impact of discrete tax benefits on reported earnings.
- Expected returns and useful-life assumptions for the $8.1 million developed-technology purchase, alongside capital spending and share repurchases.