ICHOR HOLDINGS, LTD. — FY2018 Form 10-K
Business context and reporting period. Ichor designs and manufactures gas and chemical fluid-delivery subsystems, weldments and precision-machined components used in semiconductor capital equipment. This annual report covers the 52-week fiscal year ended December 28, 2018; the fourth quarter was the 13 weeks ended that date. Sales are highly concentrated: Lam Research represented approximately 56% of FY2018 sales and Applied Materials approximately 32%. The company also serves ASML and other customers.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $823.6 million | $655.9 million |
| Gross profit / margin | $136.1 million / 16.5% | $100.8 million / 15.4% |
| Operating income / margin | $64.0 million / 7.8% | $46.2 million / 7.0% |
| Net income from continuing operations (GAAP) | $57.9 million | $56.9 million |
| Adjusted net income from continuing operations (non-GAAP) | $75.1 million | $65.1 million |
| Diluted EPS from continuing operations | $2.30 | $2.17 |
| Cash provided by operating activities | $60.5 million | $38.8 million |
| Capital expenditures | $13.9 million | $8.2 million |
- Revenue grew 25.6%; management attributed the increase to industry growth, acquisitions and customer market-share gains. Gross margin expanded 110 basis points, including an accretive contribution from the 2017 Cal-Weld and Talon acquisitions.
- GAAP continuing-operations net income increased only 1.7%, despite higher operating income. FY2017 included substantial discrete tax benefits, while FY2018 interest expense rose $6.7 million to $10.0 million following acquisition-related borrowing. FY2018 included a $4.1 million tax benefit from releasing a valuation allowance on foreign tax credits.
- Non-GAAP adjusted net income rose 15.4% to $75.1 million; adjusted diluted EPS was $2.99. The measure excludes items including intangible amortization, share-based compensation, specified non-recurring costs and tax items; it is not a GAAP measure.
- Fourth-quarter sales were $141.4 million, down from $175.2 million in Q3 2018 and $182.9 million in Q4 2017. Q4 gross margin was 15.2%, operating income $6.0 million and continuing-operations net income $3.5 million. Quarterly diluted continuing-operations EPS was $0.15. The filing does not provide a specific causal explanation for the sharp sequential sales decline.
Cash, debt and liquidity
- Year-end cash was $43.8 million, down from $69.3 million. Working capital was $123.8 million, versus $131.2 million; current assets were $211.6 million and current liabilities $87.8 million.
- Gross debt was $204.8 million ($170.6 million term loan and $34.2 million revolver), before $3.9 million of debt issuance costs. Net debt based on reported cash was approximately $160.9 million. Debt is principally variable-rate, secured, and matures February 15, 2023; $8.8 million of principal was due within 12 months.
- Operating cash flow of $60.5 million less $13.9 million of capital expenditures implies approximately $46.6 million of cash flow after capital spending. Financing cash use included $90.0 million of share repurchases; net borrowings were $15.3 million.
- Management stated cash, revolver availability and operating cash flows were expected to meet anticipated needs for at least the next 12 months. The filing does not specify unused revolver availability in the supplied text.
- Credit facilities require a minimum fixed-charge coverage ratio of 1.25:1 and maximum leverage ratio of 3.00:1. A hypothetical 1% interest-rate change would have changed 2018 interest expense by approximately $2.0 million.
Material changes, outlook and risks
- Acquisitions expanded the business: IAN was acquired in April 2018 for approximately $6.5 million and contributed $7.7 million of 2018 sales; Cal-Weld and Talon, acquired in 2017, contributed to the year-over-year growth and margin improvement. Amortization expense increased 73% to $15.4 million, reflecting acquired intangible assets.
- The business is exposed to semiconductor-equipment cyclicality and has no long-term contracts requiring minimum customer purchases. Two customers supplied 88% of FY2018 sales, increasing exposure to order cuts, delays, pricing pressure or changes in outsourcing.
- Quarterly revenue fell from $258.0 million in Q1 2018 to $141.4 million in Q4. This trend, together with semiconductor cyclicality and short order visibility, is an important near-term demand risk. Management provided no numerical FY2019 revenue or earnings guidance in the supplied filing text.
- Other disclosed risks include reliance on a limited supplier base and customer-specified components, manufacturing and quality issues, integration and impairment risks from acquisitions, foreign-currency and international operating exposure, and compliance with debt covenants.
- The company repurchased 4.34 million shares in 2018 for approximately $90.0 million at an average $20.73 per share; $10.0 million remained authorized at year-end. No cash dividends were anticipated for the foreseeable future.
- Management reported disclosure controls and internal control over financial reporting were effective at year-end. A 2017 inventory translation material weakness, which had caused a $1.8 million cost-of-sales charge, was reported remediated by December 2017. The auditor audited the financial statements but did not attest to internal-control effectiveness. The auditor’s opinion on the consolidated financial statements was unqualified.
- The filing reports no material legal proceedings. Adoption of the new lease standard in FY2019 was expected to add approximately $17–22 million of right-of-use assets and lease liabilities, with no anticipated material income-statement or cash-flow impact.
Important facts for investors to verify
- Whether the Q4 revenue decline continued into 2019, and the company’s current customer forecasts and order visibility.
- How customer concentration and semiconductor-industry exposure affect volumes, pricing and gross margins.
- Debt-covenant headroom, variable-rate exposure, revolver availability and the capacity to service or refinance debt.
- Whether acquisition integration, acquired goodwill and intangible assets, and the preliminary IAN purchase accounting produce further costs or adjustments.
- The composition and repeatability of GAAP tax benefits and the reconciliation of reported GAAP results to non-GAAP adjusted results.
- How the 2019 lease-standard adoption changes reported assets, liabilities and leverage measures.