Business context and reporting period
Ichor Holdings, Ltd. designs and manufactures fluid-delivery subsystems and related components for semiconductor manufacturing equipment. This unaudited Form 10-Q covers the 13 weeks ended March 30, 2018; comparisons are with the 13 weeks ended March 31, 2017. The company operates as one segment. Lam Research and Applied Materials were its two largest customers by sales; customer concentration percentages are not provided here.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $258.0 million | $148.7 million |
| Gross profit / gross margin | $42.6 million / 16.5% | $24.0 million / 16.1% |
| Operating income / operating margin | $20.6 million / 8.0% | $13.6 million / 9.2% |
| Continuing-operations net income | $16.7 million | $13.0 million |
| GAAP diluted EPS | $0.63 | $0.51 from continuing operations |
| Cash from operating activities | $(0.8) million | $(11.7) million |
Sales increased 73.5%, principally from higher semiconductor-equipment demand, market-share gains, and the Cal-Weld and Talon acquisitions, which contributed $57.4 million of Q1 2018 sales. Gross margin rose 40 basis points, but operating margin declined as operating expenses grew faster than sales. Management reported non-GAAP adjusted continuing-operations net income of $27.5 million, or diluted EPS of $1.03, versus $14.6 million and $0.57, respectively; these measures exclude specified items and are not GAAP results.
Balance sheet, cash flow and capital
At March 30, 2018, cash was $63.8 million, total assets $585.9 million, and shareholders’ equity $235.7 million. Current assets of $309.9 million exceeded current liabilities of $155.6 million. Cash decreased $5.5 million during the quarter. Operating cash use reflected working-capital investment, including a $26.4 million increase in receivables and $10.5 million increase in inventories, partly offset by higher accounts payable. Capital expenditures were $3.7 million.
Debt principal totaled $192.2 million ($187.6 million net of issuance costs), including a $175.0 million term loan and $17.2 million drawn on a revolving facility with a $125.0 million limit. The company amended and restated its credit agreement in February, reduced its borrowing rate depending on leverage, and extended maturity to February 2023. The term loan and revolver carried variable rates of 4.08% and 4.16%, respectively, at quarter-end. Management said cash, revolver availability, and operating cash flows should cover anticipated working capital and capital needs for at least 12 months.
Material changes, outlook and risks
- Acquisitions drove growth and added operating costs, amortization, and debt. Talon and Cal-Weld purchase-price allocations remained preliminary.
- A $4.5 million Talon inventory fair-value step-up charge in cost of sales reduced Q1 gross margin by 180 basis points; the adjustment was fully released by quarter-end.
- SG&A included $2.9 million of accelerated share-based compensation and $1.0 million of former-CFO separation expense. Total share-based compensation was $3.8 million.
- The board authorized a $50 million share-repurchase program; 195,750 shares were repurchased for $5.0 million at an average $25.51, leaving $45.0 million authorized.
- No specific earnings or revenue guidance was provided. On April 13, 2018, a subsidiary agreed to acquire IAN Engineering for $8.0 million, including $4.0 million contingent on milestones; closing was expected by the end of Q2 2018.
- Key exposures include semiconductor-industry demand and customer concentration, working-capital requirements, acquisition integration and purchase-accounting estimates, and variable-rate debt. The filing reported no material change in risk factors from the 2017 Form 10-K. Routine legal matters were not expected to materially affect results. Disclosure controls were deemed effective.
Important facts for investors to verify
- How much of sales growth reflects underlying demand and market-share gains versus acquired revenue, and how dependent results are on the two largest customers.
- Whether receivables, inventory, and operating cash flow improve as elevated sales and production levels continue.
- Final acquisition valuations, integration performance, and any further acquisition-related costs or contingent payments.
- Debt covenants, interest-rate exposure, remaining revolver capacity, and progress on the authorized buyback.
- The assumptions and exclusions behind adjusted net income and the timing of any remaining tax-accounting adjustments.