ICHOR HOLDINGS, LTD. — Q3 2018 Form 10-Q
Business context and period. Ichor designs and manufactures fluid-delivery subsystems and components used in semiconductor manufacturing equipment. This unaudited filing covers the 13-week quarter ended September 28, 2018, and the 39 weeks ended that date; comparatives are the corresponding 2017 periods. The company operates as one segment. Lam Research and Applied Materials were its two largest customers by sales.
Financial performance
Amounts in millions, except per-share data and margins.
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net sales | $175.2 | $164.5 | $682.2 | $473.0 |
| Gross profit / margin | $28.2 / 16.1% | $24.2 / 14.7% | $114.7 / 16.8% | $71.7 / 15.2% |
| Operating income | $11.5 | $8.6 | $58.0 | $33.9 |
| Net income from continuing operations | $9.6 | $14.3 | $54.4 | $37.7 |
| Diluted EPS from continuing operations | $0.39 | $0.54 | $2.11 | $1.45 |
| Adjusted net income from continuing operations (non-GAAP) | $13.6 | $16.3 | $67.8 | $46.4 |
| Adjusted diluted EPS (non-GAAP) | $0.55 | $0.62 | $2.62 | $1.78 |
- Q3 sales rose 6.5%; nine-month sales rose 44.2%. Management attributed growth to acquired businesses, industry growth and market-share gains, while noting industry contraction partly offset Q3 growth.
- Reported gross margin improved 140 basis points in Q3 and 160 basis points year to date. Excluding specified acquired-inventory charges, management said Q3 margin declined 40 basis points year over year, while nine-month margin improved 130 basis points.
- Q3 operating income increased, but continuing-operations net income declined. Interest expense rose to $2.6 million from $0.7 million, and the Q3 2017 comparison included substantially larger tax benefits. Nine-month earnings growth also reflects the $4.1 million release of a valuation allowance on foreign tax credit carryforwards.
- Operating cash flow was $27.4 million versus $0.9 million in the prior-year period; investing cash outflow was $12.8 million versus $53.7 million, and financing cash outflow was $50.8 million versus $43.0 million of inflow. The 2018 financing outflow was principally driven by share repurchases.
Financial position and liquidity
- At September 28, 2018, cash was $33.0 million, down from $68.8 million at December 29, 2017. Current assets were $236.4 million and current liabilities $100.0 million.
- Total debt principal was $195.0 million ($190.8 million net of issuance costs), including $172.8 million of term loans and $22.2 million drawn on the $125 million revolver. $8.8 million was due within 12 months. Term loan and revolver maturities are February 2023; rates are variable, and the reported Q3 rates were 4.48% and 4.25%, respectively.
- Management said cash, revolver availability and operating cash flows should meet anticipated needs for at least 12 months. Capital expenditures were $11.4 million for the nine-month period.
- The company repurchased 2.68 million shares for $60.3 million at an average $22.49 per share; $39.7 million remained authorized. Shares outstanding were 23.88 million at quarter-end and 22.85 million as of November 2, 2018.
Material changes, outlook and risks
- Acquisitions of Cal-Weld, Talon and IAN expanded manufacturing capacity and capabilities; IAN contributed about $5.8 million of revenue during its approximately five months included in the nine-month results. Some acquisition purchase-price allocations remained preliminary, potentially affecting future amortization.
- February’s amended credit agreement established a $175 million term loan and $125 million revolver, reduced borrowing margins depending on leverage, and extended maturity. Higher average borrowings contributed to sharply higher interest expense.
- Q3 SG&A fell year over year, partly because prior-year acquisition-related, offering and arbitration expenses did not recur. Year-to-date SG&A and intangible amortization increased, driven principally by acquisitions, higher share-based compensation and the former CFO’s separation benefits; accelerated vesting generated $2.9 million of compensation expense.
- No specific revenue or earnings guidance is provided in the filing. Management noted industry contraction as a partial offset to Q3 sales growth. It said adoption of the new lease standard in fiscal 2019 is expected to materially increase balance-sheet lease assets and liabilities, without a material opening retained-earnings adjustment expected.
- Risks to monitor include semiconductor-industry cyclicality and customer concentration, variable-rate debt exposure, and foreign-currency effects. A hypothetical 1% interest-rate change would have changed Q3 interest expense by about $0.5 million. The filing reports no material change to previously disclosed risk factors; routine litigation is not expected to materially affect financial position or results.
- The company had not completed its accounting assessment of certain Tax Cuts and Jobs Act provisions, including mandatory repatriation and tax-rate effects, and expected to finalize those items in Q4 2018. It reported $2.2 million of unrecognized tax benefits; no tax-authority examination was underway.
Important facts for investors to verify
- Whether sales, margins and operating performance remain resilient if semiconductor-equipment demand contracts further, and how much growth is attributable to acquisitions.
- Whether cash generation and working-capital management support liquidity after the substantial buyback; operating cash flow was affected by large accounts-payable and receivables movements.
- Debt, revolver availability, interest costs and compliance with credit-agreement terms as rates or leverage change.
- Final acquisition valuations and related amortization, the remaining tax-law accounting effects, and the future impact of lease capitalization.
- How non-GAAP adjustments affect comparisons: adjusted results exclude items such as amortization, share-based compensation, acquisition-related charges and certain tax benefits, and are not a substitute for GAAP results.