Ultra Clean Holdings, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 25, 2015. Financial amounts below are in millions of dollars unless stated otherwise. The company supplies engineered tools, modules and subsystems, primarily to semiconductor capital-equipment manufacturers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $122.8 | $117.0 | $365.7 | $393.9 |
| Gross profit / margin | $18.9 / 15.4% | $10.3 / 8.8% | $57.7 / 15.8% | $54.8 / 13.9% |
| Operating income (loss) | $3.1 | $(4.0) | $9.2 | $13.3 |
| Net income (loss) | $1.7 | $(5.3) | $5.1 | $7.8 |
| Diluted earnings (loss) per share | $0.05 | $(0.18) | $0.16 | $0.26 |
- Q3 sales increased 4.9% year over year, while nine-month sales fell 7.2%. Q3 semiconductor sales rose $16.3 million, including acquired businesses, partly offset by a $10.5 million decline in non-semiconductor sales.
- Nine-month non-semiconductor sales declined $43.3 million, partly reflecting GT Advanced Technologies’ bankruptcy and Intuitive Surgical’s decision to insource manufacturing. Semiconductor sales increased $15.0 million, primarily due to Marchi and Miconex.
- Q3 gross margin improved from the prior-year period, which included a $4.6 million charge related to GTAT. Acquisitions also contributed to gross profit. Nine-month operating expenses rose to $48.5 million from $41.5 million, including higher R&D, acquisition-related amortization and costs, and a $2.4 million payment to the former CEO on retirement.
- Net cash provided by operations was $4.4 million for the first nine months, down from $24.2 million a year earlier. Inventory growth and reduced accounts payable were significant cash uses; the inventory increase included $7.5 million from acquisitions. Investing cash outflow was $49.7 million, principally for acquisitions and capital spending.
Financial position and capital resources
- At September 25, cash and cash equivalents were $59.8 million, versus $79.0 million at December 26, 2014. Current assets were $205.4 million and current liabilities $70.5 million.
- Total bank debt was $76.9 million, including $37.5 million under the term loan, $36.2 million under the revolving facility and $3.7 million of Miconex debt. The filing reports $11.2 million current and $65.7 million long-term borrowings on the balance sheet.
- The company entered a $20 million interest-rate swap, effectively fixing the rate at 3.49% on that portion of its term loan. It was in compliance with its debt covenants at quarter-end. The credit agreement restricts dividends and requires specified financial ratios and potential excess-cash-flow prepayments.
- Cash held by foreign subsidiaries was substantial: the company reported $47.4 million of foreign cash potentially subject to U.S. tax if repatriated and said it intended to keep the funds abroad. It expected domestic cash and operating cash flow to meet domestic needs for at least 12 months.
Acquisitions, outlook and risks
- Marchi was acquired in February 2015 for approximately $43.7 million, including cash and newly issued shares. Miconex was acquired in July for preliminary consideration of approximately $20.1 million, including $15.0 million cash, 500,000 shares and the estimated fair value of potential earn-outs; additional earn-out payments of up to $4.0 million may be due based on performance. Purchase-price allocations remained preliminary.
- Management expected Q4 2015 sales and gross profit to be lower than Q3 because of declining overall semiconductor customer demand and lower expected sales. No numerical guidance was provided in the filing text.
- Customer concentration is pronounced: Lam Research and Applied Materials together represented 75.8% of Q3 sales and 77.5% of nine-month sales. The filing identifies cyclical demand, customer insourcing or order reductions, supplier constraints, acquisition integration, debt covenants and financing needs as material risks.
- Inventory was $75.6 million, up from $56.9 million at year-end; purchase-order commitments for inventory were $36.5 million. Goodwill and purchased intangible assets totaled $129.4 million, increasing exposure to potential impairment charges.
- The Singapore subsidiary’s zero-rate tax holiday was scheduled to expire for tax years beginning January 2016 and depended on meeting investment and employment commitments. The company maintained a full valuation allowance on specified state and foreign deferred tax assets. Ordinary-course legal proceedings were not expected by management to have a material effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower Q4 demand and sales translated into weaker margins, cash generation or inventory conditions.
- How much revenue and operating profit the acquired businesses contributed, and whether integration delivered the expected benefits.
- Customer concentration, including order trends and any further insourcing or share loss at major customers.
- Debt balances, covenant headroom, revolver availability, required repayments and the effect of interest-rate changes.
- Foreign cash availability and tax consequences, the Singapore tax-holiday status, and any final acquisition accounting adjustments or Miconex earn-out liability.