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 29, 2019; comparisons are with the 13 weeks ended March 30, 2018. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $137.8 | $258.0 |
| Gross profit / margin | $20.2 / 14.7% | $42.6 / 16.5% |
| Operating income | $2.9 | $20.6 |
| Net income | $1.5 | $16.7 |
| Diluted EPS | $0.07 | $0.63 |
| Operating cash flow | $(0.4) | $(0.8) |
| Capital expenditures | $4.8 | $3.7 |
Revenue fell 46.6% year over year. Gross margin declined 180 basis points; operating margin was 2.1% versus 8.0%. The Q1 2019 income tax benefit was $1.4 million, producing a reported effective tax rate of -946.9%; the filing attributes the benefit mainly to releases of tax reserves and other discrete tax items. Non-GAAP adjusted net income was $5.6 million, or $0.25 per diluted share, versus $27.5 million, or $1.03, in Q1 2018. The company cautions that this non-GAAP measure has limitations and should not replace GAAP results.
Cash was $31.6 million at quarter-end, down $12.2 million from year-end. Current assets were $205.6 million and current liabilities $90.5 million. Debt principal totaled $197.4 million ($193.7 million net of issuance costs), including $8.8 million due within 12 months; debt carried variable rates, with term and revolver rates of 4.80% and 4.66%. Management said cash, revolver availability, and operating cash flows should cover anticipated needs for at least 12 months. Lease liabilities totaled $17.2 million after adoption of the new lease standard.
Material changes and management commentary
- Management attributed the sales decline primarily to reduced customer demand during a cyclical downturn in the global wafer fabrication equipment market. U.S. sales fell $85.6 million; foreign sales fell $34.6 million.
- Lower factory utilization and customer/product mix contributed to weaker gross margin. SG&A decreased 25.2%, mainly reflecting lower executive transition and employee costs, partly offset by a $0.7 million one-time tax-indemnification-asset charge.
- Interest expense rose 10.5% to $2.8 million, primarily due to a higher weighted-average interest rate and average borrowings; the weighted average rate was 4.77% versus 4.16%.
- Operating cash use was $0.4 million, while investing and financing used $4.8 million and $7.0 million, respectively. Financing included $7.4 million of net debt payments and $1.6 million of share repurchases. The company repurchased 97,910 shares at an average $16.34; $8.4 million remained authorized.
- The company adopted ASC 842 leases in fiscal Q1 2019, recognizing $18.1 million of lease liabilities and $17.7 million of right-of-use assets at adoption. It reported no material impact on income or cash flows.
Outlook, risks, and contingencies
No specific revenue or earnings guidance is provided in the supplied filing text. Management’s liquidity statement is its principal near-term outlook. The business is exposed to semiconductor equipment cyclicality, customer demand and utilization, and variable interest rates; a hypothetical 1% rate change would have changed quarterly interest expense by $0.5 million. Lam Research and Applied Materials were the two largest customers, but customer revenue percentages are not provided here. The company reported no material change in risk factors from its 2018 Form 10-K. It said routine legal claims are not expected to materially adversely affect financial position or results. No defaults on senior securities were reported.
Important facts for investors to verify
- Whether the semiconductor equipment downturn and lower factory utilization persist, and how they affect sales and gross margin.
- Customer concentration and the extent to which demand from Lam Research and Applied Materials drives results; the filing text does not provide their revenue shares.
- Revolver availability, debt covenants and repayment capacity given $197.4 million of variable-rate debt and reduced cash.
- The composition and sustainability of the $1.4 million tax benefit and the non-GAAP adjustments underlying adjusted net income.
- Cash conversion and working-capital trends, particularly the $13.6 million increase in accounts receivable during the quarter.