Ichor Holdings, Ltd. — Q2 2022 Form 10-Q
Reporting period: 13 weeks ended July 1, 2022; six-month results are compared with the six months ended June 25, 2021. Figures are unaudited and in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Ichor designs and manufactures fluid-delivery subsystems and components used in semiconductor manufacturing equipment. It serves a global customer base, including a small number of significant OEM customers. Management attributed higher sales to strong customer demand and the November 2021 acquisition of IMG.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $329.6 | $282.3 | $622.7 | $546.9 |
| Gross profit / margin | $55.5 / 16.8% | $47.4 / 16.8% | $99.4 / 16.0% | $86.9 / 15.9% |
| Operating income | $24.8 | $25.2 | $35.3 | $43.5 |
| Net income | $21.5 | $22.9 | $29.6 | $37.5 |
| Diluted EPS | $0.74 | $0.79 | $1.02 | $1.30 |
| Operating cash flow | Not separately presented for the quarter | $(26.9) | $38.9 |
Q2 sales increased 16.7% year over year, while net income declined 5.8%. For the first half, sales rose 13.9%, but net income fell 21.1% and operating income fell 18.9%. GAAP gross margin was flat in Q2 and improved 10 basis points for the first half. Non-GAAP diluted EPS was $0.98 in Q2 and $1.68 for the first half; these measures exclude specified expenses and should be considered alongside GAAP results.
Operating expenses rose to $30.7 million in Q2 from $22.1 million, including higher SG&A, acquisition-related costs and intangible amortization. First-half SG&A included a $3.1 million accrual for an expected employment-related legal settlement. Management expects settlement and payment within 12 months.
Cash, debt and liquidity
- Cash was $46.1 million at July 1, down $29.4 million from year-end 2021. Current assets were $500.5 million and current liabilities $198.9 million.
- First-half operating cash use of $26.9 million reflected an $80.4 million increase in net operating assets and liabilities, including inventory growth of $54.2 million, receivables growth of $15.4 million and a $12.5 million reduction in accounts payable. Capital expenditures were $14.4 million.
- Debt principal totaled $306.3 million, comprising a $146.3 million term loan and $160.0 million drawn on a $250 million revolving facility. The facilities mature October 2026; $7.5 million was classified as current. The reported July 1 interest rate was 3.44% under the BSBY option.
- Management said cash, credit-facility availability and operating cash flow should be sufficient to fund operations and current obligations for at least the next 12 months and beyond. The filing does not provide a specific amount of remaining revolver availability.
Outlook, commentary and risks
No specific revenue or earnings guidance is provided. Management cited inflation, slower growth or recession, higher interest rates, currency movements, the war in Ukraine, COVID-19 effects, supply-chain constraints, component shortages, logistics costs and labor inefficiencies as sources of uncertainty. These pressures may reduce revenue and operating margins. Capacity investments are intended to support customer demand, but shortages have also reduced factory utilization.
Other investor-relevant risks include dependence on semiconductor capital-equipment spending and a limited number of OEM customers, as well as customers’ negotiating leverage. Debt is variable-rate; a hypothetical 100-basis-point rate change would affect quarterly interest expense by approximately $0.8 million, or $3.1 million annualized. The filing reports no material pending or threatened litigation, but includes the expected $3.1 million employment-matter settlement accrual.
Controls and other material items
Management concluded disclosure controls and procedures were not effective as of July 1, 2022 because of material weaknesses in internal control over financial reporting previously disclosed in the 2021 Form 10-K. A remediation plan was underway, with completion expected before fiscal year-end 2022; management stated the weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested. The filing reported no material changes in risk factors from the 2021 Form 10-K.
Important facts for investors to verify
- Whether inventory and receivables convert to cash and operating cash flow recovers, given the first-half working-capital outflow.
- Whether supply constraints, higher input costs and capacity investments affect delivery, utilization and gross margins.
- Customer concentration and semiconductor-equipment demand trends, including the contribution and integration of IMG.
- Debt balances, revolver availability and interest-rate exposure as BSBY rates change.
- Progress and testing evidence for remediation of the disclosed material weaknesses, and resolution of the employment-related settlement.