Ichor Holdings Ordinary Shares (ICHR) Q1 2020 Earnings Call Transcript

Ichor Holdings Ordinary Shares (ICHR -2.82%)
Q1 2020 Earnings Call
May 04, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Ichor Systems first-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Claire McAdams, investor relations for Ichor. Please go ahead.

Claire McAdams -- Investor Relations

Thank you, Jessie. Good afternoon, and thank you for joining today's first-quarter 2020 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements, including those made about the impact of the ongoing COVID-19 pandemic on our operations and the industry, at large, are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements.

These risks and uncertainties include those spelled out in our earnings press release, those described in our annual report on Form 10-K for fiscal year 2019 on file with the SEC and those described in subsequent filings with the SEC. As noted in these aforementioned files, we remind you that the COVID-19 pandemic continues to create significant volatility, uncertainty and turmoil in our industry, limiting our ability to provide longer-term forward-looking statement. You should consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, we will be providing certain non-GAAP financial measures during this conference call.

Our earnings press release and the financial supplement posted to our IR website each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeffrey Andreson, our CEO; and Larry Sparks, our CFO. Jeff will begin with an update on our business and a review of our results and outlook, and then Larry will provide additional details of our first-quarter results and second-quarter guidance. After the prepared remarks, we will open the line for questions.

I'll now turn over the call to Jeffrey Andreson. Jeff?

Jeffrey Andreson -- Chief Executive Officer

Thank you, Claire. Welcome to our Q1 earnings call. I hope that all of you on the call today and your families are healthy and safe. During the first quarter, our operations were impacted by the global COVID-19 pandemic with each of our locations being affected by shelter-in-place requirements.

We had several of our sites temporarily experience full shutdowns, most notably our California and Malaysian operation. In spite of these challenges, our flexible manufacturing strategies and the exceptional efforts of our employees worldwide enabled us to achieve strong quarter-on-quarter revenue growth of 16%, ahead of the vast majority of our peers in the semiconductor equipment supply chain. Total sales of $220 million also represents industry-leading organic growth of 60% compared to the same period last year. We are immensely proud of our teams globally for their Q1 performance to achieve this level of revenue growth, in light of the obstacles associated with the COVID-19 pandemic.

Before I move to an update on our strategic growth initiatives, I'd like to provide you with more detail regarding the impact of the COVID-19 pandemic on Ichor. Our first priority remains the safety of our workforce and business partners and their families. We are complying with all public health directives in place for each of our sites. We have implemented procedures in each site that includes spacing, temperature monitoring and additional cleaning procedures to protect the safety of our employees as well as have designed plans to quickly react to any potential exposures we may face.

Additionally, all employees who can perform their jobs remotely are working from home. Throughout periods of shutdowns, we kept all our employees on our payroll. It is an integral part of our values to care for all our employees and to treat them with respect. While furloughs would have saved us money in the first quarter, we believe the long-term benefits of our approach will always outweigh the near-term cost.

Our second priority is to maximize our output in support of our customers' delivery requirements while continuing to drive our strategic growth initiatives. We are working closely with our customers to ensure that we support their shipment plans in light of challenges, both in capacity and supply chain. The initial impacts of the pandemic were mainly associated with our supply base in China during February as we have several key suppliers that were closed for three to four weeks, delaying our ability to ship some of our backlog. Those suppliers largely recovered by the end of the quarter and are operating well now.

In mid March, California and Malaysia announced the first shelter-in-place orders, affecting our operations with similar requirements following shortly thereafter at our sites in Texas, Oregon and Minnesota. For a period of about two weeks, this essentially shut down our ability to provide certain weldments and components to our customers. More recently, Singapore expanded their shelter-in-place practices as well. Malaysia, in particular, has experienced the most prolonged disruption in their factories.

Malaysia is a critical country in the worldwide WFE supply chain. We are very pleased to have a manufacturing facility there. Our customers prefer suppliers to be close to their factories, and we will continue being committed to Malaysia. It is great news that our Malaysia operation was just recently approved to resume full operation, and we expect to be near pre-COVID capacity level in the next several weeks as we readjust the factory for the new spacing requirements.

In each of the countries in which we operate, we have been designated an essential business, supporting the critical infrastructure IT industry, which allows us to operate. That being said, our capacity levels have been somewhat impacted by the spacing protocols that we are now required to follow. So while March and April were very challenging, we are seeing the situation improve during early May. Our supply chain is strong.

We are working closely with our supply base and supporting them during these challenging times. In return, they have kept part flowing. We have built a strong inventory position in order to continue to support the strong level of demand from our customers. Ichor has been doing an excellent job in executing our business continuity plans to address these challenges and uncertainties, and I want to thank everyone for their dedication and commitment to supporting the company as we navigate through the COVID-19 pandemic.

Now I'd like to discuss the demand environment we are operating in today. In general, the demand for semiconductor equipment remain strong and has not changed much over the course of the last quarter. We are seeing increased demand from each of our largest customers and across all of our business driven by continued strong levels of foundry and logic investment and a modest degree of recovery in memory spending. However, in many in the -- many in the industry are experiencing manufacturing output limitations, primarily as a result of the social distancing requirement which is stretching lead times.

We are seeing steady improvements in those constraints and any unfilled backlog exiting the second quarter we expect will roll into the following quarter. Before I discuss the outlook for the second quarter, I will review the progress that we are making against our revenue growth objectives for the year. In spite of the current challenges, our team has executed on the fastest-ever three-quarter ramp in the company's history, growing quarterly revenues organically by 60% since the second quarter of 2019. Given that we believe the underlying industry improvement was between 20% and 30% over the same period, at least half of this revenue growth was a direct result of our increased market share and growing footprint within our served markets.

In gas delivery, we are continuing to execute on opportunities to increase our share with our largest customers and with our customer base in Asia. In weldments and in precision machining, we continue to work on additional qualifications across our customer base. We are on track with our plan so far this year with some of these gains contributing to our revenue growth in the first quarter. Another factor driving our revenue growth in 2020 will be success in penetrating new customers, especially those in Asia, in the area of chemical delivery and specifically with our proprietary liquid delivery module.

The largest opportunity for this business is with customers in Japan and Korea, and we are actively in discussion with several potential new OEM customers. As I reported on our last call, we shipped the first beta unit to a Korean OEM in the first quarter, and we are in discussion with other potential new OEM customers, all of which will position us for meaningful contribution from this region starting in 2021. And finally, we are benefiting from the continued ramp of EUV lithography with year-over-year growth in shipments expected for both 2020 and 2021. Each of these factors, we believe, will enable us to achieve revenue growth outperforming the overall industry in 2020.

Further, we continue to make progress on our strategy to increase the engineering and IP content for Ichor. We started with our liquid delivery module and are making good strides there and are continuing to work on our next-generation gas panel. We continue to invest in this area and are making good progress in the development of this proprietary gas delivery solution and expect to have our first beta units delivered this year. These proprietary products are the cornerstones of our strategy to increase the engineering and IP content for Ichor in order to drive longer-term expansion of our share of our served markets, as well as to drive the operating model toward increased levels of profitability.

Before I turn the call over to Larry, I will share our outlook for the second-quarter revenues. We expect revenues in the range of $180 million to $220 million. We have expanded the range given the level of uncertainties that remain with the high end of the range, incorporating no additional restrictions on our manufacturing sites and a quicker-than-anticipated recovery of our weldment capacity. At the midpoint of our revenue guidance, Ichor's first half of 2020 will be up over 50% from the same period last year, approximately twice the level of growth of our overall peer group.

The range is wide, however, as while we are seeing improvements, we are still operating in a dynamic and changing environment. To summarize, the team did a great job in managing through the challenges we've encountered as a result of the pandemic to deliver the third-highest revenue quarter in the company's history, delivered solid financial performance and made good stride against our strategic growth initiatives. We continue to operate in a strong demand environment and believe that the long-term growth drivers remain intact. I'll now turn the call over to Larry to provide an update on the financial performance and our outlook.

Larry?

Larry Sparks -- Chief Financial Officer

Thanks, Jeff. First, I would like to remind you that the P&L metrics discussed today are non-GAAP measures, unless I identify the measure as GAAP based. These measures exclude the impact of share-based compensation expense, amortization of acquired intangible assets, nonrecurring charges and discrete tax items and adjustments. There is a very helpful schedule summarizing our GAAP and non-GAAP financial results, including the individual line items for non-GAAP operating expenses, such as R&D and SG&A in the Investors section of our website for reference during this call.

As Jeff mentioned, the COVID-19 pandemic created a challenging operational environment for the company in the first quarter. In spite of these challenges, first-quarter revenue was $220 million, an increase of 16% from the fourth quarter and up 60% from the same period last year. This was our fourth straight quarter of sequential revenue growth and reflects continued strength in customer demand. Gross margin for the quarter was 13.8%, unchanged from Q4.

On the strength of higher revenue and improved factory utilization, we had forecasted a sequential improvement in gross margin of approximately 100 basis points in Q1. However, the disruption to our operations resulting from the COVID-19 pandemic had a negative impact on margin, completely offsetting the expected increase in the quarter. The pandemic affected gross margin from both a factory output and higher cost perspective. Most of the impact was the direct or indirect result of shelter-in-place orders and temporary shutdowns of our operations in multiple locations.

These disruptions had a negative impact on factory overhead absorption and the mix of products we were able to ship during the quarter. For example, our higher-margin weldment business was significantly constrained in the quarter and represented a smaller portion of our sales and expectations. We also incurred a number of additional direct costs related to managing the COVID-19 disruptions to our operations and changing customer priorities. To support our customers while ensuring the safety and health of our workforce required us to change production workflows, increase expedited freight, increase factory cleaning, expand employee PPE deployment and incur higher overtime and shift premiums.

In total, the COVID-19 pandemic had at least 100-basis-point negative impact on gross margin, and we expect a similar impact in the second quarter. Operating expenses came in above forecast for the quarter at $14.6 million due primarily to higher seasonal, legal and other G&A expenses versus forecast. The impact of COVID-19 on operating expenses was not significant, and we expect operating expenses to trend slightly lower in the coming quarters. Together, the negative gross margin impact due to COVID-19 and the higher operating expenses resulted in operating profit of $16 million, approximately $3 million lower than we forecast at the low end of our original revenue guidance.

This equates to $0.12 per share of impact on EPS with our reported Q1 EPS at $0.52 versus the $0.64 guided at the low end of our original revenue guidance range. Our interest expense in the first quarter declined, as expected, to about $2.4 million, and our tax rate for the quarter was 10.2%. Our planning rate for tax over the next couple of years continues to be in the range of 10% to 13%. Net income for the quarter was $12 million, up 10% from Q4 and more than doubling from the same period last year.

Now I will turn to the balance sheet. We ended the quarter with $42 million of cash, compared to $61 million at year end. We generated approximately $13 million of cash from the P&L. However, working capital increased by $34 million in the quarter, resulting in negative operating cash flow of $21 million.

The primary increases in working capital were in inventory to support the significant ramp in revenue volumes and lower payables. Inventory turns remained at 5.6. Days sales outstanding were 36 days, an improvement compared to the last couple of quarters. We ended the quarter with total debt of $184 million, an increase of $3 million from year end with a net increase on our revolver of $5 million, offset by a $2 million reduction in our term loan.

Our revolver balance was $24 million out of the $125 million available. In the current COVID-19 environment, we are laser-focused on our cash situation and ensuring adequate liquidity in the company to support projected long-term business growth. Our revolving credit line gives us significant flexibility, and we are highly confident we will remain within all bank covenants governing our credit facilities. We continue to forecast much higher revenue levels than we sustained during the recent five-quarter long industry downturn.

Even during the lowest 12-month revenue period, which ended September 2019, we remain below our contractual three times EBITDA coverage calculation. We feel very comfortable with our debt levels and capitalization given our current outlook. Now I will turn to our second-quarter guidance. With revenue guidance in the range of $180 million to $220 million, our earnings guidance of $0.32 to $0.54 per share reflects similar gross margin levels as Q1 and slightly lower operating expenses.

We are forecasting similar interest expenses and tax rate to Q1 and $23.2 million shares outstanding. While it is too early to say with great confidence, we expect the majority of the gross margin headwinds related to COVID-19 will be behind us after this quarter. Our historical gross margin flow-through is in the low 20s, and the longer-term goal remains to drive greater gross margin accretion through incremental cost-reduction programs, growing our share within higher-margin component markets and increasing our content of proprietary IP within our products. Operator, we are ready to take questions.

Please open the line.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Quinn Bolton with Needham & Company. Please proceed with your question.

Quinn Bolton -- Needham and Company -- Analyst

Hey, guys. Congratulations on the -- nice revenue performance in a challenging environment. I guess I wanted to start off with recent Commerce Department actions last Monday, where they're changing some of the export license requirements for military use and military end users in China. Wondering if that's had any impact, if you've been able to take a look at those new regulations and what that might mean for the business.

Jeffrey Andreson -- Chief Executive Officer

Well, Quinn, it's Jeff. I had a feeling this might come up given some of the headlines in the last few days. But in general, we don't have to provide the license so that would come from our customers. I would say we haven't seen any effect of this.

We're keeping a close eye on it. Many, many years ago, licenses were required for virtually everything that's shipped into China from the semiconductor industry and getting the license takes some time, but I haven't really gotten a good feel on whether there's going to be any limitations there. So unfortunately, it's probably better asked off one of our OEM customers as they're the ones that will actually do the licensing.

Quinn Bolton -- Needham and Company -- Analyst

Got it. Understood. I thought that I'd just ask because it's been topical over the last week. Just moving onto the business, you guys obviously had a big revenue ramp over the last few quarters.

Inventory has sort of followed suit. I'm just kind of wondering how you're thinking about inventory as you come into the June quarter. And is the higher inventory balance sort of reflective of what you think the second half may hold? Or is there anything we can read in how you're thinking about the second half of the year given that higher inventory balance?

Larry Sparks -- Chief Financial Officer

Well, what I would tell you is that the demand environment is still very, very strong. We opted to not overly constrain inbound inventory in light of some of the challenges. As we get through those challenges, we want to make sure we have the inventory and can -- and turn it as well. Our inventory turn stayed pretty healthy.

I would say as we look at next quarter, it'll probably likely pretty flat number, maybe down slightly, depending on where we come out in the range. And so we'll manage it down to some level, but we still see a relatively strong demand environment as we go into Q3 as well.

Quinn Bolton -- Needham and Company -- Analyst

Great. And then just last question for me. Obviously, during periods of uncertainty and downturns, I think some of the supply -- or some of your customers may look to tighten the supplier base. Wondering if you're seeing any increased activity from your customers to try to tighten up the supplier base, especially given some of this COVID-driven supply effect that we've seen around the world.

Jeffrey Andreson -- Chief Executive Officer

By tighten, you mean reduce, I think?

Quinn Bolton -- Needham and Company -- Analyst

Reduce -- yes, reduce the number of suppliers, kind of consolidate to the larger folks like yourselves.

Jeffrey Andreson -- Chief Executive Officer

Yes. I would tell you that I actually think it's kind of miraculous what the industry has been able to accomplish given the global nature of this and the global supply chain, so I'm not seeing that happen. I would tell you that as the industry gets bigger and bigger, some of the smaller players become more challenged to ramp and things like that. So I'd say it's more of a function of ability to grow than it is to kind of rejigger the entire global supply chain.

I mean, we just -- most companies that have reported have done pretty well in addressing the ramp during the situation.

Operator

Thank you. Our next question comes from Sidney Ho with Deutsche Bank. Please proceed with your question.

Sidney Ho -- Deutsche Bank -- Analyst

I have a few. The first one is maybe can you help us quantify what revenue would have been for Q1 and Q2, if there were no supply constraints.

Jeffrey Andreson -- Chief Executive Officer

That is a good question. I would say when we look at Q1, I think, certainly, we would have probably been toward the upper end of the revenue range that we had provided had we not run into the headwinds beginning in -- with the China supply base and then ending with a couple of weeks of shutdowns of two of our large operations. So and -- but I think as you look at Q2, I think the underlying demand is higher than the revenue guidance you'll probably hear from the industry, mainly because everyone in the industry has kind of had to adjust, reflow and realign with our customers. And they -- our customers have been obviously impacted, too, because there's spacing requirements for everybody out there.

So everybody is working their factories over to adjust.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Kind of related to that, based on your comments and your competitors' comment, it sounds like you have lost some market share in Q1 because parts can't get out of Malaysia or whatnot. Would you be able to quantify that impact? And kind of related to this, can you talk about your expectation when you think you will regain those shares? Is it simply just when your factory is open, you can start shipping, you get those back?

Jeffrey Andreson -- Chief Executive Officer

Well, I think there was a comment made by one of our competitors about market share gains. The way -- we know we haven't lost any share in gas delivery. They do have duplicate weldments, but we think that's fairly small. So I think the inference that it came from us is maybe not 100% correct as we don't 100% overlap with our product lines.

I'd also just point out, when you compare our year-over-year revenue growth that we talked about since a year ago, you can see that we're significantly outgrowing what the industry has seen, and that's just the effect really largely due to the market share that we put in gains last year that we won and some additional market share gains this year as well.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Maybe my last question is you have talked about these share gain opportunities in the past, and you have gave us some progress today as well. Can you talk about what your revenue expectation of these opportunities in aggregate this year, maybe a range would be more appropriate now? And how do you rank order these opportunities for calendar 2020?

Jeffrey Andreson -- Chief Executive Officer

I think we said on the last call, Sidney, we weren't going to try and do the quarter-by-quarter scorecard. What I would tell you is that we're working on opportunities on the component side of our businesses in weldments and in precision machining. There's opportunity in gas distribution to some degree. And then obviously, with our chemical delivery, we're looking at expanding that geographically, really around some of the success we may have in qualifying additional customers here in the U.S.

than the initial impact that may start late in the year for the LDM outside of the U.S.

Operator

Thank you. Our next question comes from the line of Karl Ackerman with Cowen. Please proceed with your question.

Sam Reiff -- Cowen and Company -- Analyst

This is Sam on for Carl. With many other semi-cap companies reluctant to put out guidance near term, what kind of visibility do you have for the next few months that gives you confidence in the guide? And I guess, to say it a different way, how do your different exposures play into comparability here with your customers? And then I have a follow-up, please.

Jeffrey Andreson -- Chief Executive Officer

Yes. It's a good question. I think as we look at where we're at today and what we can do operationally, I think we were comfortable that we could set a range. We've widened it quite a bit from what we typically do.

It's nearly twice as wide. I'd say, you think of the top end of our recovery of our range is being able to come back online faster than we're anticipating. But right now, I think we're pretty comfortable with where our supply chain is and its recovery. Malaysia is a big challenge for us and now that we've been approved to operate completely, now we're bringing all of our employees back on, they're putting the spacing protocols in place and we should be back to kind of pre-COVID or near pre-COVID capacity levels there.

And so with that, I think we're comfortable with providing a range. Now if something happens where a lot of places put other restrictions in, which doesn't feel is going to happen, but we can't predict the future.

Sam Reiff -- Cowen and Company -- Analyst

Got it. That's helpful. And then you talked about gross margins a bit on the call already, but how should we be thinking about linearity through the rest of the year, given how impressive your revenue ramp has been to date? I think we are expecting them to trend positively through the rest of the year, of course. But how long could it possibly take for your labor cost structure to catch up with the demand you've seen, in speaking beyond June here, COVID-19 not considered?

Larry Sparks -- Chief Financial Officer

Well, I think before what we said when we were projecting a growth from the kind of 189 range to the midpoint of 227, we said that should contribute around 100-basis-point improvement in margin. I think we're still confident that as we kind of exit Q2, and as Jeff mentioned, sort of get back to more normal capacity and kind of flow through the factories, we would expect to see at least that. And a lot of it then beyond that will depend on overall customer demand and the strength of that demand and what kind of volume leverage we can see, in addition to where we are in Q2. And also, there's some cost programs that we have, the timing of which may happen in Q3 or Q4, just depending upon how quick we can get those done and then how much we're responding to kind of changing customer dynamics.

So we expect to get at least 100 basis points back. And then, as we mentioned before, as we increase the amount of higher mix of products in the weldment and precision machining areas, we'll go beyond that and try to get closer down the road to our model.

Operator

Thank you. Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely -- D. A. Davidson -- Analyst

So Larry, taking the margin one step further. When you get back up to the 150 -- or sorry, $250 million, $260 million range, are you going to be back at the 17 plus/minus margin as well? Similar to what it was a couple of years ago?

Larry Sparks -- Chief Financial Officer

I would say as we get toward the end of this year, and we're -- if we're at that revenue level, we'll probably still be slightly under that, but very close to that. I think a lot of it's going to depend on the mix of product that we have at that point. If we can continue to capture the share that we expect to in the weldment areas and precision machining, I think that's definitely in the range of where we expect to be.

Jeffrey Andreson -- Chief Executive Officer

Yes. I think -- Tom, it's Jeff. I think we're driving to try and increase, obviously, the mix of our weldment and our precision machine. I think we've got a good initial wave of market share gains, and we're working on others in that space.

So that will be helpful as well. And as Larry said, as we kind of go through the year, we'll have our cost reduction programs be -- continuing to kick in.

Tom Diffely -- D. A. Davidson -- Analyst

OK. And then on the weldment subject, why was that a little weaker in the quarter? Was it just a facility that was hit more than the rest?

Jeffrey Andreson -- Chief Executive Officer

Yes. I mean we have kind of three large weldment facilities. The largest is in Malaysia. Malaysia was shut down for the better part of three weeks before we were even allowed to bring in about 30% of our production labor.

And so -- and then at Alameda County here locally, we have our weldment facility as well that is the vast majority of that and then a smaller one up in Portland. The -- when California shut down, obviously, we were closed for about a week before the definition -- or we were added to the essential industries list. Then it takes you a while to kind of bring the facility up and get people back. So they were down for the better part of two weeks as well.

So you do lose that revenue stream for almost two straight weeks there. And in Malaysia, Malaysia is a combination of weldments that they make for the gas panels that we use internally in weldments that we sell externally, but the vast majority of it is internally used. And so that had an effect on two operations at that point, which is why Malaysia is so critical to come back up for us. They're doing a very good job.

I mean, it's only been a week since they've been notified to bring everything back and it's -- and they're coming up the capacity curve quickly.

Tom Diffely -- D. A. Davidson -- Analyst

Yes. I know it can be a little tough to weld at home sometimes. And then finally, when you look at the social distancing inside the factories. Has that reduced your capacity? Or do you have enough kind of empty sort of that?

Jeffrey Andreson -- Chief Executive Officer

No. So the answer is yes, it limits our capacity to some degree. I would say, as you look at us, our integration sites where the actual gas panels are all assembled, I think the spacing requirements are not as impactful there because of the space they have in the clean rooms and other areas. Where we're seeing a little more of an impact is really in the weldments and the machining and not necessarily out where you're doing machining on the CNCs.

But there's clean room operations, and there's final Q&A and things like that where the space gets a little constrained. So we've created a few bottlenecks. We're trying to work around those in creative ways, and I think the operations team is doing a really good job just trying to eke out all the capacity that they can. We certainly have enough capacity to do the range of revenue that we see for next quarter that we just guided to.

Operator

Thank you. Our next question comes from the line of Mitch Steves with RBC Capital Markets. Please proceed with your question.

Mitch Steves -- RBC Capital Markets -- Analyst

The first one I had is just kind of on the demand side. So I think it's very pretty good. You guys are guiding relatively flattish for Q over Q, just given the environment we're in. But how do we think about demand instruction or potential demand instruction, let's say, 12 months from now? I guess, my question there is, what gives you guys confidence that this kind of demand is going to continue? I realize that last year is very, very cyclical down year.

But going forward here, just given all the news we're seeing, what type of visibility you guys have in terms of orders that's giving you confidence over the next, call it, 12 months or so?

Jeffrey Andreson -- Chief Executive Officer

Yes. Well, we certainly don't get input from our customers out 12 months. I will tell you that the message from them is that the demand is still remaining fairly strong, and I think some of this is driven by the strength in foundry and logic that we've seen in the first half. We do expect some recovery on the memory side.

It's very difficult to predict what could happen as we come through this as a global economy at this point. So I don't want to be the first one to go and do this. But if there's going to be an impact to it, it may have some trickle down effect, obviously, to the semiconductor industry itself. But having said that, there's a lot of kind of secular technology, things going on right now, just taking transition to 5G.

I think the work from home and all of that infrastructure has been kind of an upside to the downside. I think where you may see some of it is in the hand phones and things like that eventually, but PCs are very strong, obviously, right now as well. So I wish I could predict the future. We operate the company with one foot on the gas and one foot near the break, and we apply the break fairly quickly.

I think you can see that in the last cycle, we were able to rightsize the infrastructure fairly quickly if need be. So that -- we'll monitor the situation, and we'll react as we see the demand. But right now, the signal is -- from our customers is they're -- and you've heard them say it, and still remains fairly strong.

Mitch Steves -- RBC Capital Markets -- Analyst

OK. Then I just have a couple of small ones. So just the other one I had in mind was just the idea that the U.S. is probably going to incentivize -- or I wouldn't be surprised to see them incentivize semiconductor companies to bring manufacturing to the United States and kind of start building out fabs here.

Would that benefit you guys? Or does it not really matter if the fab is built -- or new fabs are built versus, I guess, filling in old fabs, would it make sense? So if you build a new one, is that beneficial to you guys versus trying to fill an old one? And then the very just last one is just if ASML is going to be a 10% cash for the year, I think, this year? I know it was close to last year. Just curious if you had a thought on that.

Jeffrey Andreson -- Chief Executive Officer

It was getting there last year in a very low-revenue year. So this year, the other customers, just given the magnitude of the business and stuff they'll outgrow -- ASML is growing, but just the law of large numbers will make them -- they can't grow fast enough to get to 10%. And then the question about whether building fabs in the U.S. is beneficial to us.

I would say it's -- we're probably indifferent on location unless there's some impact around this Department of Commerce licensing. They may end up with more greenfield. That would be slightly beneficial to us. But we do like greenfield fabs because they fill them all with tools, whereas you get a technology node shift, and they'll fill up tools for parts of the fab, so -- and fill in where they need to, to address the new technology node.

So if that should happen, it probably would be a net benefit.

Operator

Thank you. Our next question comes from Patrick Ho with Stifel. Please proceed with your question.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Maybe for you, Jeff or Larry, in terms of the gross margin impact, specifically with COVID-19, you said 100 basis points. And based on at least the prepared remarks, it sounds like a lot of it in the March quarter was on manufacturing utilization, the shutdowns and things of that nature. As you look at the June quarter and that 100-basis-point impact, is that still the biggest variable for that 100 point -- basis-point impact? Or logistics, supply chain or those maybe bigger impacts in the June quarter as manufacturing kind of gets back to "more normal operations"?

Larry Sparks -- Chief Financial Officer

Yes. Patrick, I think you sort of answered the question. I think you see the -- around logistics, obviously, the freight -- we're seeing significantly higher freight costs that will impact most of the quarter as opposed to sort of the back end of last quarter. We're also, as we socially distance and bring our factories up, we've had to change kind of when people work and shift coverage.

So we have more people on the late shifts, which have shift premiums and other things. So I think you'll see a little bit, on average, kind of higher hourly rates that will pay people as we end up getting production up to where we want it to be. I think the direct shutdown -- as Jeff mentioned, we ended March with a lot of the factories or a good number of them shut down or significantly impaired with the shelter-in-place orders, trying to figure out what we needed to do. I think, as Jeff said, we understand what to do now.

We will have some costs around cleanings and extra equipment for folks. We've also looking at moving around operations inside the factory to kind of optimize output and distance kind of operations further away from where they would normally be. So there's a significant amount of energy going on inside of the factory and inside of how we structure our labor force and where we put them and when they work, that, I think it's a little bit different composition, but the end result is a similar impact to margin as what happened in Q1.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's really helpful. And Jeff, maybe as my follow-up question, it's evident obviously in your year-to-year growth in revenues about the share gains you've talked about in weldments and precision machining. Given that the focus of yourself and your largest customers are right now on the current situation and just making sure that customers get their products, have you seen any changes in the timing of the evaluations and the qualification for these share gains? And what I'm looking at that is, does this just push out potentially into 2021 as everyone is focused on the near-term environment? Do you believe these evaluations are still on track?

Jeffrey Andreson -- Chief Executive Officer

So I'd probably split this in two pieces, Patrick. I mean, I think that if there is a continuity of supply, and you have to go get something qualified, I think those are going really quickly now. So if you need to change vendors or something you would generally work with your customers to ensure that they qualify with us. New product qualifications, I have not seen them slow, I think, as I kind of talked about the operational aspects of how the industry has handled this.

I think they're largely maintaining their R&D and development. So we have a couple of, obviously, liquid delivery module betas, and we hope to have by the end of the year, the next-generation gas panel beta out there. I think those are still progressing quite well in light of all of this as well.

Operator

Thank you. Our next question comes from Craig Ellis with B. Riley FBR. Please proceed with your question.

Carlin Lynch -- B. RIley FBR, Inc.-- Analyst

This is Carlin Lynch on for Craig. Just wanted to jump on the gross margin point and ask a follow-up. Looking beyond kind of the COVID-19 impact, you've talked last quarter about the impact from plastics division. I was wondering how you guys were thinking about that business through the year and what kind of impact it has as revenues ramp? And then I had a quick follow-up.

Jeffrey Andreson -- Chief Executive Officer

Your question was around plastics?

Carlin Lynch -- B. RIley FBR, Inc.-- Analyst

Yes. Just the margin impact, like through the year as revenues kind of come back.

Jeffrey Andreson -- Chief Executive Officer

Yes. Well, the plastics business, certain aspects of it are growing and certain aspects are not scaling right now with that. We still have some activity that we're doing there, but we do expect that, that margin will start to improve, but it's probably going to be a second-half effect.

Carlin Lynch -- B. RIley FBR, Inc.-- Analyst

Got it. And then just on the opex point, you mentioned that opex is going to come down slightly in the second quarter. But given all the R&D projects and new customer qualifications, is -- what are the kind of puts and takes there through the year? Just any color there would be great.

Larry Sparks -- Chief Financial Officer

Well, I think we continue to prioritize execution on those programs. I mean we're -- we've been doing that for a couple of quarters now, especially in the liquid delivery module and the development of the kind of next-generation gas panel efforts. I think that we have no intention to kind of shortchange that activity. We will probably adjust the G&A and other spending kind of around making sure that the R&D is preserved.

And I think, overall, we're trying to hold the spending levels kind of to that lower level $14 million range that we communicated last time. So I think no change in strategy. If we have to prioritize where to make those investments, we'll do it in R&D and adjust on G&A and sales if we have to.

Jeffrey Andreson -- Chief Executive Officer

Yes. And I'd add that we're kind of when I say opex light, I mean, we generally don't -- we don't add opex until we have to. A perfect example of this year is we have to become SOX-compliant by the end of the year and starting next year. So that costs money.

That's funded in there. And then the rest of our growth this year is largely around kind of what we acquired last year and the development of new R&D programs when we did the acquisition of the flow control unit. We get the full impact of it this year. So that's another reason why it's up a bit.

Having said that, if we see any softening in the second half, we have a few levers to pull on that as well.

Operator

We have no additional questions at this time. So I'd like to pass the floor back over to Mr. Andreson for any additional concluding comments.

Jeffrey Andreson -- Chief Executive Officer

Thank you for joining us on our call this quarter. I'd like to thank our employees, suppliers and customers for their support, as we manage through these challenging times. We look forward to updating you again on our next earnings call in early August. In the meantime, we are scheduled to participate in the virtual tech conferences hosted by Cowen in late May and Stifel in early June, which will be available via webcast on our IR website.

Operator, that concludes our call.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Claire McAdams -- Investor Relations

Jeffrey Andreson -- Chief Executive Officer

Larry Sparks -- Chief Financial Officer

Quinn Bolton -- Needham and Company -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Sam Reiff -- Cowen and Company -- Analyst

Tom Diffely -- D. A. Davidson -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Patrick Ho -- Stifel Financial Corp. -- Analyst

Carlin Lynch -- B. RIley FBR, Inc.-- Analyst

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