Ichor Holdings, Ltd. — Q1 2023 Form 10-Q
Reporting period: 13 weeks ended March 31, 2023; compared with the 13 weeks ended April 1, 2022. Ichor designs and manufactures fluid-delivery subsystems and components for semiconductor equipment manufacturers. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $225.9 | $293.1 | Down 22.9% |
| Gross profit / margin | $33.2 / 14.7% | $43.9 / 15.0% | Margin down 30 bps |
| Operating income / margin | $4.8 / 2.1% | $10.5 / 3.6% | Lower |
| Net income (loss) | $(0.005) | $8.0 | Moved to near breakeven loss |
| Diluted EPS | $0.00 | $0.28 | Lower |
| Operating cash flow | $(10.9) | $(36.3) | Cash use improved |
| Capital expenditures | $6.8 | $3.4 | Higher |
Non-GAAP results were gross margin of 15.5% versus 16.0%, operating margin of 6.1% versus 8.4%, net income of $11.1 million versus $20.2 million, and diluted EPS of $0.38 versus $0.70. These measures exclude specified items, including amortization, share-based compensation, and severance; they are not substitutes for GAAP results.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $68.8 million at March 31, down $17.6 million from December 30, 2022. Operating and investing activities used $10.9 million and $6.8 million, respectively.
- Debt principal was $300.6 million, including $160.0 million drawn on a $250.0 million revolver and $140.6 million in term loans; $7.5 million was current. The facilities mature in October 2026. The reported borrowing rate was 6.51%, and the quarterly weighted-average rate was 6.10%.
- Accounts receivable were $122.7 million and inventory was $271.5 million. Operating cash flow was affected by a $43.0 million decrease in accounts payable, partly offset by lower receivables and inventory.
- Management stated that cash, credit-facility availability, and operating cash flow should fund the business and current obligations for at least 12 months and beyond.
Changes, outlook, and risks
- Management attributed the sales decline to weaker semiconductor capital-equipment spending, including delayed investment in electronic memory capacity and effects from tighter export controls on China-related semiconductor goods and services. Reduced factory utilization contributed to lower gross margin.
- Interest expense rose to $4.6 million from $1.5 million, mainly because of higher variable rates and somewhat higher average borrowings. A hypothetical 100-basis-point rate change would have changed quarterly interest expense by about $0.8 million.
- The company continued labor and other cost reductions begun in Q4 2022, recording $1.3 million of Q1 2023 severance. Management expects long-term industry growth and a return to demand growth, but gave no specific near-term financial guidance.
- Risks highlighted include semiconductor-equipment cyclicality, dependence on a small number of OEM customers and their negotiating leverage, macroeconomic and supply-chain conditions, export restrictions, variable-rate debt, and currency movements.
- Disclosure controls were concluded to be ineffective as of March 31, 2023 because of a previously reported material weakness in internal control over financial reporting. Remediation was underway, with completion expected before fiscal year-end 2023; the weakness is not considered remediated until controls operate effectively and are tested.
- The filing reports no material pending or threatened litigation and no material changes to the risk factors in the 2022 Form 10-K. It also notes a $4.5 million balance of unrecognized tax benefits and a Malaysian tax examination for 2016–2020.
Important facts for investors to verify
- Whether semiconductor-equipment demand and customer orders recover, and how utilization affects gross margin.
- Progress and testing of the internal-control remediation plan before fiscal year-end.
- Debt costs and liquidity under variable interest rates, including revolver availability and applicable credit-facility conditions.
- Cash conversion as accounts payable, receivables, and inventory change with production and purchasing levels.
- Whether severance and other excluded items recur, and how GAAP performance compares with management’s non-GAAP measures.