Business context and reporting period
Ichor Holdings, Ltd. designs and manufactures gas and chemical delivery subsystems and components used in semiconductor manufacturing equipment. This 10-K covers the 52-week fiscal year ended December 29, 2017; comparisons are with the 53-week year ended December 30, 2016. The fourth quarter ended December 29, 2017.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $655.9 million | $405.7 million |
| Gross profit / margin | $100.8 million / 15.4% | $65.4 million / 16.1% |
| Operating income / margin | $46.2 million / 7.0% | $23.9 million / 5.9% |
| Net income from continuing operations | $56.9 million | $20.8 million |
| Net income | $56.5 million | $16.7 million |
| Cash from operating activities | $38.8 million | $27.7 million |
| Capital expenditures | $8.2 million | $4.3 million |
Management’s non-GAAP adjusted net income from continuing operations was $65.1 million, or $2.48 per diluted share, versus $31.6 million, or $1.31, in 2016. These non-GAAP figures exclude specified amortization, share compensation, acquisition-related and other items; they are not substitutes for GAAP results.
At year-end, cash and restricted cash were $69.3 million, working capital was $131.2 million, and total assets were $557.7 million. Debt principal was $189.5 million ($186.7 million net of issuance costs), up from $39.8 million principal at the prior year-end. Operating cash flow was partly offset by a $43.4 million inventory increase, primarily to support expected first-quarter 2018 demand. Capital expenditures remained modest relative to revenue.
Material changes versus the prior period
- Revenue increased 61.7%, driven by semiconductor industry growth, increased customer purchases and market-share gains, and the Cal-Weld and Talon acquisitions. Those acquisitions contributed a combined approximately $57.5 million of 2017 revenue.
- Gross margin declined 70 basis points to 15.4%. It included a $1.75 million charge to correct an inventory translation error and $5.23 million of acquired-inventory fair-value step-up costs; management said the acquisitions’ margins were otherwise accretive.
- Operating income nearly doubled, while operating margin rose to 7.0%, reflecting higher volume and operating expense leverage. Interest expense declined to $3.3 million despite increased year-end debt.
- Net income benefited from a $13.9 million income tax benefit, including benefits associated with acquisitions, U.S. tax-rate remeasurement under the Tax Cuts and Jobs Act, and an intercompany debt-to-equity recharacterization. The tax benefit materially affects comparability with the prior year.
- Cash used in investing activities rose to $186.8 million, chiefly for Talon and Cal-Weld. Financing activities provided $164.6 million, including acquisition-related borrowings.
Outlook, risks and unusual items
The filing provides no numerical revenue or earnings guidance. Management said cash, available credit facilities and operating cash flows were expected to cover working capital and capital expenditure needs for at least the next 12 months. It expects research and development and selling expenses to rise in absolute dollars as the company invests in product development, markets and international operations.
- Customer concentration: Lam Research and Applied Materials represented approximately 53% and 40% of 2017 sales, respectively. The company generally relies on purchase orders, not minimum-volume contracts.
- Industry and operating risks: Results are exposed to semiconductor capital-equipment cyclicality, customer pricing pressure, order timing, supplier constraints, production quality and technology changes.
- Debt: Credit facilities are secured and include restrictive covenants. Subsequent to year-end, the company refinanced its debt with a $175 million term loan and a revolving facility of up to $125 million, extended maturity to February 2023 and reduced applicable interest rates by 25 basis points.
- Tax and other unusual items: The Tax Act’s effects were provisional in some respects; the company recorded a $0.7 million transition-tax expense and expected further analysis. Acquired-asset valuations were also preliminary. An approximately $1.0 million Ajax working-capital arbitration charge was recorded in SG&A.
- Controls: A material weakness involving foreign-currency translation of Malaysia and Singapore inventory led to a $1.75 million correction. Management stated that remediation was completed and internal controls over financial reporting were effective at year-end. The external auditor did not audit or opine on internal-control effectiveness.
- Subsequent capital allocation: In February 2018, the board authorized up to $50 million in share repurchases; approximately $5 million had been repurchased by the filing date. No ordinary-share cash dividends were anticipated for the foreseeable future.
Most important facts for investors to verify
- Whether sales growth and customer demand persist, given the concentration in two OEMs and the semiconductor industry’s cyclicality.
- Whether margins hold up after acquisition-related inventory charges, customer pricing pressure and integration of Cal-Weld and Talon.
- How quickly inventory converts to sales and cash, and whether working-capital needs constrain cash generation.
- Debt repayment capacity, covenant headroom and the effects of the February 2018 refinancing and share repurchases.
- Final tax and acquisition accounting outcomes, and sustained effectiveness of the remediated inventory controls.