Ichor Holdings, Ltd. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 25, 2020; comparisons are to the corresponding periods ended September 27, 2019. Dollar amounts below are in U.S. dollars.
Business context
Ichor designs and manufactures fluid-delivery subsystems and related components used in semiconductor manufacturing equipment. It operates as one segment, with production facilities in the U.S. and Asia. Lam Research and Applied Materials were its two largest customers in all periods presented.
Financial highlights
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net sales | $227.7 million | $154.5 million | $669.3 million | $431.5 million |
| Gross profit / margin | $32.5 million / 14.3% | $20.7 million / 13.4% | $90.5 million / 13.5% | $60.4 million / 14.0% |
| Operating income | $12.5 million | $3.3 million | $27.3 million | $9.3 million |
| Net income | $10.5 million | $0.9 million | $20.8 million | $2.8 million |
| Diluted EPS | $0.45 | $0.04 | $0.89 | $0.12 |
| Non-GAAP net income / diluted EPS | $14.6 million / $0.62 | $6.7 million / $0.30 | $39.2 million / $1.69 | $17.4 million / $0.77 |
Q3 sales rose 47.4% year over year and nine-month sales increased 55.1%. Management attributed growth primarily to stronger wafer-fabrication equipment demand as the market recovered from a cyclical downturn, as well as share gains at major customers. Q3 gross margin improved 90 basis points year over year on higher factory utilization and favorable product mix, partly offset by COVID-related operating costs. Nine-month gross margin declined 50 basis points, reflecting pandemic-related costs and product mix.
- Cash flow: Operating cash flow was negative $1.9 million for the first nine months, compared with positive $25.0 million a year earlier. Net income and noncash charges were more than offset by a $48.9 million increase in net operating assets and liabilities, principally higher receivables and inventory and lower accounts payable. Capital expenditures were $8.3 million; cash used in investing activities was also $8.3 million.
- Liquidity: Cash was $78.9 million at September 25, 2020, up from $60.6 million at year-end 2019. Current assets were $326.2 million and current liabilities $148.3 million. Management said cash, revolver availability, and expected operating cash flows should cover anticipated needs for at least 12 months.
- Debt: Debt principal was $204.5 million, up from $181.0 million at year-end 2019; $8.8 million was due within 12 months. Cash less debt principal implies net debt of approximately $125.6 million. The $125 million revolving facility had $49.2 million drawn. Term-loan and revolver rates were 3.50% and 2.78%, respectively, at quarter-end; facilities mature February 15, 2023.
Material changes, outlook, and risks
- Operating income and GAAP earnings increased substantially alongside revenue growth; interest expense declined year over year as borrowing rates fell.
- Costs affecting 2020 included a $1.4 million contract-settlement loss in cost of sales and Union City facility-closure costs. The closure contributed inventory write-offs, severance, and accelerated depreciation; management estimated the settlement and closure reduced nine-month gross margin by about 50 basis points. Closure was expected to be completed by the end of Q1 2021.
- SG&A increased, including executive-transition costs, higher employee and share-based compensation, legal and professional fees, and occupancy costs. Non-GAAP measures exclude specified items; they are supplemental and are not substitutes for GAAP results.
- COVID-19 caused temporary facility shutdowns earlier in 2020 and continued to constrain capacity through social-distancing measures, while adding PPE, cleaning, logistics, labor, and other operating costs. Management said the duration and magnitude of effects were uncertain. The filing provides no specific numerical earnings or revenue guidance.
- Other risks include reliance on major customers, working-capital demands, floating-rate debt, foreign-currency effects on operating costs, and the uncertain outlook for semiconductor-equipment demand. A hypothetical 1% interest-rate change would have changed quarterly interest expense by about $0.5 million. The company reported no material changes to previously disclosed risk factors and no material pending or threatened litigation.
- Management recorded approximately $3.0 million of capitalized ERP implementation costs in other noncurrent assets; the system was not yet in service and no amortization had been recorded. Disclosure controls were deemed effective as of quarter-end.
Important facts for investors to verify
- Whether revenue growth and customer share gains continue, and how much sales depend on Lam Research and Applied Materials.
- Whether operating cash flow improves as receivables, inventory, and payables normalize; earnings growth did not translate into positive operating cash flow for the first nine months.
- Progress and remaining costs for the Union City closure, and the effect of COVID-related capacity constraints and expenses on margins.
- Debt levels, revolver usage, floating-rate exposure, and the company’s ability to service debt through the February 2023 maturity.
- How non-GAAP adjustments compare with recurring costs, and whether the ERP implementation and expected tax refund develop as described.