ICHOR HOLDINGS, LTD. — Q2 2018 Form 10-Q
Business context and period. Ichor designs and manufactures gas and chemical fluid-delivery subsystems and related components for semiconductor equipment. The quarter was the 13 weeks ended June 29, 2018; the six-month period was 26 weeks. Results are unaudited. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $249.0 | $159.7 | $507.0 | $308.4 |
| Gross profit / margin | $43.9 / 17.6% | $23.5 / 14.7% | $86.5 / 17.1% | $47.5 / 15.4% |
| Operating income / margin | $25.9 / 10.4% | $11.8 / 7.4% | $46.4 / 9.2% | $25.4 / 8.2% |
| Net income from continuing operations | $28.0 | $10.5 | $44.8 | $23.4 |
| Diluted EPS from continuing operations | $1.07 | $0.40 | $1.69 | $0.91 |
- Sales grew 55.9% in Q2 and 64.4% in the first half year over year. Management attributed growth to semiconductor industry and wafer-fabrication-equipment shipment growth, market-share gains, and contributions from Cal-Weld, Talon, and IAN acquisitions.
- Gross margin expanded 290 basis points in Q2 and 170 basis points in the first half. Acquired Cal-Weld and Talon operations were margin-accretive; acquired-inventory fair-value step-ups reduced reported margin by 10 basis points in Q2 and 90 basis points in the first half.
- GAAP net income benefited from a $4.1 million discrete tax benefit in Q2, reflecting release of a valuation allowance on foreign tax credit carryforwards. The effective tax rates were negative 17.8% for Q2 and negative 7.6% for the first half.
- Management’s non-GAAP adjusted net income from continuing operations was $26.7 million in Q2 versus $15.5 million, and $54.2 million for the first half versus $30.1 million. Adjustments include amortization, share-based compensation, certain non-recurring items, acquired-inventory step-ups, and discrete tax items; this measure is not GAAP.
Cash, liquidity, and debt
- Cash was $63.4 million at June 29, 2018, versus $68.8 million at December 29, 2017. Current assets were $282.7 million and current liabilities $134.3 million.
- First-half operating cash flow was $30.2 million, investing cash outflow $10.2 million, and financing cash outflow $25.8 million. Capital expenditures were $8.8 million. Working-capital uses included higher receivables and lower accounts payable.
- Total debt principal was $190.0 million, including $172.8 million term loan and $17.2 million revolver borrowings; $8.8 million was due within 12 months. Debt net of issuance costs was $185.6 million. Cash less total principal implies approximately $126.6 million net debt.
- The February 2018 credit amendment provides a $175 million term loan and a revolver with commitments up to $125 million, maturing February 2023. Borrowings are variable-rate; reported Q2 rates were 4.73% on the term loan and 4.43% on the revolver. The company stated cash, revolver availability, and operating cash flows should meet anticipated needs for at least 12 months.
Material changes, outlook, and risks
- Acquisitions: IAN was acquired in April for $6.5 million, including contingent consideration; it contributed approximately $3.4 million of Q2 revenue. Talon and Cal-Weld acquisitions increased operating scale and contributed to higher amortization and expenses.
- Operating expenses increased, including SG&A and intangible amortization; first-half SG&A included $2.9 million of share-based compensation related to accelerated vesting following the former CFO’s departure and $1.1 million of separation expense.
- The company repurchased 1.26 million shares for $30.0 million in the first half under a $50 million authorization. After quarter-end, it repurchased an additional 936,092 shares for $20.0 million in July.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management cited ongoing semiconductor industry demand and outsourcing trends, but cautioned that forward-looking results may differ materially from expectations.
- Other items to monitor include customer concentration: Lam Research and Applied Materials were the two largest customers by Q2 sales, though their individual or combined sales percentages are not stated here; exposure to semiconductor equipment cycles; variable-rate debt; and integration and purchase-price accounting for acquisitions. Accounting for certain Tax Cuts and Jobs Act effects remained incomplete, with finalization expected in Q4 2018.
- Operating lease minimum payments were $17.3 million. Management said routine legal matters were not expected to materially adversely affect financial position or results. The filing reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective.
Key facts for investors to verify
- How much of growth and margin improvement is organic versus acquisition-related, and whether acquired businesses sustain their contribution.
- Customer concentration, semiconductor equipment demand, and the sensitivity of orders and margins to industry cycles.
- Normalized earnings and tax rate after the $4.1 million discrete tax benefit and other non-GAAP adjustments.
- Cash conversion, receivables and payables trends, capital spending, and available revolver capacity subject to credit-agreement conditions.
- Debt covenants and variable-rate exposure, alongside the effect of the July buyback on liquidity and share count.
- Final acquisition valuations and remaining Tax Act accounting, including any resulting amortization or tax adjustments.