Ichor Holdings, Ltd. — Q1 2017 Form 10-Q
Reporting period: 13 weeks ended March 31, 2017; comparable period was 13 weeks ended March 25, 2016. Amounts are in U.S. dollars unless noted.
Business context and results
Ichor designs and manufactures fluid-delivery subsystems and components used in semiconductor manufacturing equipment. Its two largest customers were Lam Research and Applied Materials. The company reported one operating segment.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $148.7 million | $73.3 million | +102.9% |
| Gross profit / margin | $24.0 million / 16.1% | $11.9 million / 16.3% | Profit +101.4%; margin −20 bps |
| Operating income / margin | $13.6 million / 9.2% | $2.6 million / 3.5% | |
| Continuing-operations net income | $13.0 million | $1.8 million | |
| Net income | $12.8 million | $0.1 million | |
| Basic / diluted EPS | $0.52 / $0.50 | $0.00 / $0.00 | |
| Non-GAAP adjusted continuing-operations net income | $14.6 million | $4.5 million | |
| Non-GAAP adjusted diluted EPS | $0.57 | $0.19 |
Sales growth primarily reflected higher industry demand and purchases by the two largest customers, as well as an estimated 6% increase in Ichor’s share of those customers’ business. Ajax, acquired in April 2016, contributed $7.6 million in quarterly sales. Gross margin declined mainly because of customer mix.
Cash flow, liquidity, and debt
- Cash and restricted cash totaled $48.4 million at March 31, 2017, down $4.2 million from year-end 2016.
- Operating cash flow was negative $11.7 million, versus negative $5.7 million a year earlier. Increased receivables ($22.7 million) and inventory ($20.1 million) absorbed cash; higher accounts payable provided a $17.9 million offset.
- Investing activities provided $0.2 million: $2.4 million in investment-sale and note-receivable proceeds, partly offset by $2.3 million of capital expenditures. Financing provided $7.3 million, primarily from the IPO over-allotment issuance.
- Long-term debt was $39.8 million gross, or $38.1 million net of issuance costs; no principal was due within 12 months. The term loan rate was 5.00% at quarter-end. The company also had a $20 million revolving facility; the filing does not provide a clear unused-availability figure.
- Management said cash, revolving-facility availability, operating cash flows, and IPO proceeds should cover anticipated working-capital and capital-expenditure needs for at least 12 months.
Material developments, outlook, and risks
- Operating expenses were $10.4 million, up from $9.3 million. R&D spending rose with headcount and project-support consulting; SG&A reflected Ajax and public-company costs, partly offset by lower consulting and acquisition expenses.
- Effective tax rate on continuing operations was 3.9%, compared with 11.4%. The filing attributes the difference from statutory rates to a full valuation allowance on essentially all U.S. net deferred tax assets, foreign-income taxes, and withholding taxes. Unrecognized tax benefits were approximately $617,000.
- The Kingston, New York facility was shut down in 2016. Discontinued operations generated a $112,000 net loss in Q1 2017; lease costs continue through February 2018.
- Outstanding purchase orders for raw materials and components were $93.7 million; operating-lease obligations totaled $7.5 million. Management said ordinary-course legal matters were not expected to materially adversely affect financial position or results.
- No quantitative revenue or earnings guidance was provided. Management cited semiconductor-industry growth and OEM outsourcing as business drivers, but cautioned that historical results may not predict future performance.
- Customer concentration, reliance on semiconductor-equipment demand, working-capital needs, and variable-rate debt are relevant risks. The filing states that a hypothetical 10% interest-rate change would not have had a material financial-statement impact.
- After quarter-end, on May 2, the principal shareholder sold approximately 5.7 million shares, reducing its ownership from 71.5% to 48.6%; Ichor therefore ceased to be a Nasdaq “controlled company.” Executives also sold shares and exercised options. The filing reports disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the sharp sales increase reflects durable customer-share gains versus cyclical industry demand, and how concentrated are sales among the two largest customers?
- Whether receivables and inventory convert to cash as expected, given negative operating cash flow despite strong reported earnings.
- The impact of customer mix on gross margin and whether the Q1 margin decline persists.
- Revolving-facility availability, covenant headroom, and the company’s sensitivity to variable interest rates.
- How the principal shareholder’s reduced ownership and the end of controlled-company status affect governance and trading dynamics.
- The assumptions behind non-GAAP adjustments and the continuing cash and earnings effects of the discontinued Kingston facility.