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 27, 2020; comparisons are with the 13 weeks ended March 29, 2019 unless noted. Lam Research and Applied Materials were the company’s two largest customers.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $220.0 million | $137.8 million |
| Gross profit / gross margin | $28.8 million / 13.1% | $20.2 million / 14.7% |
| Operating income / margin | $5.5 million / 2.5% | $2.9 million / 2.1% |
| Net income | $3.4 million | $1.5 million |
| GAAP diluted EPS | $0.15 | $0.07 |
| Non-GAAP net income / diluted EPS | $12.1 million / $0.52 | $5.6 million / $0.25 |
Amounts are in U.S. dollars. Non-GAAP measures exclude specified amortization, share-based compensation, non-recurring expenses including the contract settlement loss, and related tax effects; they are not a substitute for GAAP results.
- Revenue rose 59.6%; gross profit rose 42.3%. Gross margin contracted 160 basis points as COVID-related facility costs and lower utilization weighed on results, alongside the settlement charge.
- Cash from operations was negative $21.0 million, versus negative $0.4 million a year earlier. The company attributed the outflow primarily to higher inventory ($16.7 million), lower accounts payable ($12.4 million), and higher receivables ($2.7 million).
- Capital expenditures were $2.5 million; cash declined $19.0 million to $41.6 million. Net financing cash flow was positive $4.5 million.
- At March 27, 2020, total debt principal was $183.8 million ($181.1 million net of issuance costs), including $8.8 million due within 12 months. The term loan and $125 million revolving facility mature February 2023; $24.2 million was drawn on the revolver. Reported cash was $41.6 million.
- Current assets were $279.7 million and current liabilities $151.4 million. Total liabilities were $334.5 million.
Material changes versus the prior comparable period
- Management attributed higher sales to recovery in the global wafer-fabrication-equipment market and share gains at major customers; COVID-related factory limits partially offset growth. U.S. sales increased $44.2 million and foreign sales $38.0 million.
- Operating expenses increased to $23.3 million from $17.3 million. SG&A rose $4.9 million, including $1.8 million in CEO-transition costs and higher employee-related and share-based compensation expenses.
- Interest expense declined to $2.4 million from $2.8 million, reflecting lower average borrowings and a lower weighted-average interest rate.
- The income tax benefit was $0.2 million, compared with $1.4 million a year earlier. The 2020 quarter included a $0.2 million benefit related to the CARES Act; the company expected an additional tax refund of approximately $0.7 million.
- Cash used in operations increased substantially, principally due to working-capital investment.
Outlook, risks, contingencies and unusual items
- No quantified revenue or earnings guidance was provided. Management said cash, amounts available under the revolver, and operating cash flows were expected to cover anticipated needs for at least 12 months.
- COVID-19 created significant uncertainty around demand, factory capacity, workforce availability, supplier and logistics continuity, costs, and customer orders and collections. Government shutdowns temporarily closed the company’s California and Malaysia facilities for approximately one to two weeks near quarter-end. Management said the duration and financial effects were not yet quantifiable.
- After quarter-end, the company reached a mutual settlement of a contract dispute and recorded a $1.4 million loss in cost of sales because it related to a condition existing at March 27. The charge reduced gross margin by approximately 60 basis points and was excluded from non-GAAP results.
- Debt bears variable interest. The filing estimated a 1 percentage-point rate change would affect quarterly interest expense by $0.5 million, or $1.8 million annualized. The company reported no material pending or threatened litigation and no material foreign-currency hedging activity.
- Management concluded disclosure controls were effective as of March 27, 2020; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether COVID-related disruptions, added operating costs, and demand uncertainty continued or materially changed after the quarter.
- Whether inventory and payable movements reversed, and how operating cash flow and cash levels evolved.
- Customer concentration and the durability of the reported market recovery and customer share gains.
- Debt balances, variable borrowing rates, revolver availability and covenant compliance.
- The final cash and tax effects of the contract settlement and CARES Act-related refund expectations.
- The reconciliation and recurring nature of non-GAAP adjustments, particularly CEO-transition, acquisition-related, ERP/SOX, and settlement costs.