Ichor Holdings, Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 26, 2020. Amounts below are in millions of dollars except per-share data. Ichor designs and manufactures fluid-delivery subsystems and related components for semiconductor manufacturing equipment.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $221.6 | $139.2 | $441.6 | $277.0 |
| Gross profit | $29.3 | $19.5 | $58.0 | $39.8 |
| Gross margin | 13.2% | 14.0% | 13.1% | 14.4% |
| Operating income | $9.3 | $3.0 | $14.8 | $5.9 |
| Net income | $6.8 | $0.3 | $10.2 | $1.9 |
| Diluted EPS | $0.30 | $0.01 | $0.44 | $0.08 |
| Non-GAAP net income | $12.6 | $5.1 | $24.6 | $10.7 |
| Non-GAAP diluted EPS | $0.54 | $0.23 | $1.07 | $0.47 |
Sales increased 59.2% in Q2 and 59.4% for the first half, primarily reflecting growth in the global wafer-fabrication-equipment market and share gains at major customers. Higher sales and operating leverage lifted operating income, while gross margin narrowed 80 basis points in Q2 and 130 basis points for the half. Management attributed the margin pressure to pandemic-related operating costs, unfavorable product mix, and, for the first half, lower factory utilization.
Cash, debt, and liquidity
- Cash was $57.0 million at June 26, down $3.6 million from December 27, 2019. Current assets were $317.4 million and current liabilities $155.4 million.
- Operating cash flow was negative $25.2 million for the first half, versus positive $20.7 million a year earlier. Working-capital use included increases of $22.2 million in inventory and $20.0 million in accounts receivable, and a $13.7 million decrease in accounts payable.
- Capital expenditures were $5.7 million. Financing provided $27.2 million, including $30.0 million in revolving-credit borrowings and $4.4 million of term-loan repayments.
- Debt principal totaled $206.7 million ($204.2 million net of issuance costs), including $49.2 million drawn on the revolving facility; $8.8 million was due within 12 months. The facilities mature February 15, 2023. Reported interest rates at quarter-end were 3.95% on the term loan and 3.68% on the revolver.
- Management said cash, revolver availability, and operating cash flows were expected to cover anticipated needs for at least 12 months.
Material changes, outlook, and risks
- COVID-19 restrictions temporarily closed California and Malaysia facilities for approximately one to three weeks near the end of Q1, affecting early-Q2 output. Social distancing, safety measures, logistics, labor costs, and operational inefficiencies continued to pressure capacity and margins.
- Ichor decided to close its Union City, California facility, with closure expected by the end of fiscal 2020. The Q2 charge was $1.5 million, including inventory write-offs and severance, and reduced Q2 gross margin by 70 basis points.
- A contract dispute settlement resulted in a $1.4 million loss recorded in Q1 cost of sales. The settlement was reached after Q1 but before issuance of the financial statements and related to a loss existing at March 27, 2020.
- First-half SG&A included $1.8 million of executive-transition costs; share-based compensation also rose. Non-GAAP measures exclude amortization, share-based compensation, specified nonrecurring items, and related tax effects; they should be considered alongside GAAP results.
- The CARES Act was expected to generate an additional tax refund of approximately $0.7 million; a $0.2 million benefit was recognized in Q1.
- COVID-19 risks include further facility or supplier disruption, reduced customer demand or canceled orders, transportation constraints, workforce interruptions, and added operating and cybersecurity risks. Lam Research and Applied Materials were the two largest customers by revenue. The filing gives no specific sales concentration percentages or numerical earnings guidance.
- No material pending or threatened litigation was reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the six months.
Most important facts for investors to verify
- Whether revenue growth and customer share gains continue, particularly given reliance on two major customers and semiconductor-equipment demand.
- Whether gross margins recover as COVID-related costs, facility-closure effects, and product mix change.
- Whether working-capital investment converts to cash; first-half operating cash flow was substantially negative despite higher earnings.
- Revolver availability, debt-service capacity, and exposure to variable interest rates; a hypothetical 1% rate change would have affected Q2 interest expense by about $0.5 million.
- The final costs and operational consequences of the Union City closure, and any additional effects of the pandemic on facilities, suppliers, or customers.