Ichor's Profit Jumps as Cash Burn Grows: Rapid Earnings Reaction

Ichor Holdings, a supplier of gas delivery systems for chipmaking tools, reported a profit of $20.9 million in its fiscal third quarter, a stark contrast to a $22.9 million loss a year ago. This profit jump has led to a 3% rise in the company's stock price in after-hours trading.

Despite the profit, Ichor's rapid sales growth is putting a strain on its cash reserves as inventory and unpaid customer bills increase. The company manufactures complex systems that have heavy fixed costs, meaning that when sales rise, those costs are spread across more units, increasing margins.

Management attributes part of the profit growth to moving more work into its main factories and selling more of its own parts. Operating costs have fallen alongside sales growth, causing operating margin to nearly triple to 6.9%.

However, the company's cash situation remains concerning. Inventory and receivables together swallowed about $75 million in the quarter. While this is typical for a supplier ramping up production, the faster growth in receivables compared to sales hints at potential issues with customer payments or shipments delayed until later in the quarter.

Last quarter's stock sale provides Ichor with some breathing room. For the fourth quarter, management anticipates continued sales growth, with a midpoint GAAP earnings forecast of $0.55, flat with this quarter. However, the outlook assumes that expenses will rise again.

Management's optimistic earnings projections hinge on adjusted figures, which include a lighter tax bill and lower stock-based compensation. Investors should closely monitor whether free cash flow becomes positive as the ramp matures and whether receivables grow in line with sales.