Ultra Clean Holdings, Inc. — Q2 2013 Form 10-Q
Reporting period: Second quarter and six months ended June 28, 2013; comparisons are to the periods ended June 29, 2012. Unaudited results. Amounts are in U.S. dollars; financial statement figures below are in millions except per-share data.
Business context and financial results
Ultra Clean develops and manufactures specialized subsystems, primarily for semiconductor capital equipment OEMs, and also serves flat panel, medical, energy and research markets. Results include American Integration Technologies (AIT), acquired July 3, 2012; AIT contributed $34.4 million of Q2 2013 sales and $62.6 million in the first half.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $110.1 | $101.9 | $210.6 | $212.5 |
| Gross profit / margin | $16.1 / 14.6% | $14.3 / 14.0% | $29.9 / 14.2% | $29.9 / 14.1% |
| Operating income / margin | $3.6 / 3.3% | $4.5 / 4.4% | $4.2 / 2.0% | $10.7 / 5.0% |
| Net income | $2.3 | $2.8 | $2.0 | $7.5 |
| Diluted EPS | $0.08 | $0.12 | $0.07 | $0.31 |
Liquidity, cash flow and debt
- Cash and cash equivalents were $71.3 million at June 28, 2013, up from $54.3 million at year-end 2012. Approximately $41.6 million was held by foreign subsidiaries and treated as indefinitely reinvested.
- First-half operating cash flow was $25.5 million, compared with $20.3 million a year earlier. Investing used $0.7 million, principally for equipment; financing used $7.8 million. Cash increased $17.0 million.
- Total debt was $68.4 million, net of $1.5 million in unamortized issuance costs: $28.6 million on the term loan and $39.8 million on the revolver. The revolver was classified as current because of acceleration provisions; no revolver availability remained.
- The credit facility matures July 2016, is secured by substantially all personal property of the company and certain subsidiaries, restricts dividends, and includes financial covenants. The company reported compliance at quarter-end. Prior covenant noncompliance for November and December 2012 was waived with a February 2013 amendment.
Material changes and management commentary
- Q2 sales rose 8.0%, mainly because AIT was included; excluding its $34.4 million contribution, the comparison reflects underlying softness. First-half sales declined 0.9% despite AIT, primarily due to semiconductor-industry weakness and continued softness in energy, as well as $2.1 million of FEI transition sales in the 2012 comparison.
- Gross margin improved modestly, which management attributed to sales mix and, for the first half, lower material and direct labor costs as a percentage of revenue. Operating expenses rose to $12.5 million in Q2 and $25.7 million in the first half; first-half G&A included AIT-related intangible amortization of about $1.5 million per quarter and other acquisition-related costs.
- Net income fell despite higher Q2 sales: operating expenses and interest expense associated with acquisition debt weighed on results. First-half interest and other expense was $1.7 million versus $0.1 million in 2012. The effective tax rate was 20.1% for Q2 and 21.7% for the first half, down from 37.3% and 29.8%, respectively, mainly reflecting geographic earnings mix and tax holidays, partly offset by discrete items.
- Customer concentration remains high: Applied Materials, Lam Research and ASM International accounted for 79.1% of first-half sales; the same three represented approximately 78% of receivables at quarter-end.
Outlook, risks and unusual items
- Management expected Q3 2013 sales to be flat, but the filing states the comparison as “the second quarter of fiscal 2012,” an apparent period inconsistency that should be clarified. Management also expected gross profit to be flat versus Q2 2013.
- The filing warns of continued semiconductor-sector decline through fiscal 2013. A customer’s decision to in-source part of its gas-panel business could reduce quarterly sales by 7%–9% by fiscal year-end 2013.
- Management said existing cash and operating cash flow should cover debt service, working capital and technology development for at least 12 months. Longer-term liquidity depends on operating results, industry conditions and covenant compliance; additional financing may be unavailable or dilutive. Foreign cash may incur U.S. tax if repatriated.
- Key risks include cyclical end markets, reliance on a small number of OEM customers, supplier constraints, customer order cancellations, AIT integration and retention, debt and covenant requirements, and potential impairment of acquisition goodwill or intangibles. No goodwill impairment trigger was identified in the quarter. The company had $43.8 million of inventory purchase commitments.
- The company corrected its 2012 comparative interim results: acquisition costs and foreign tax payments were shifted into the proper period, reducing reported 2012 net income by $1.1 million for both Q2 and the first half. Management said the corrections were not material to those interim statements.
- Disclosure controls were deemed effective at quarter-end, with no material change in internal control reported. AIT was still being evaluated for inclusion in the company’s annual internal-control assessment.
Most important facts for investors to verify
- Clarify the Q3 sales outlook’s stated comparison period and assess whether the expected flat trend accounts for customer in-sourcing and semiconductor demand weakness.
- Track customer concentration, especially the three customers responsible for 79.1% of first-half sales, and the potential 7%–9% quarterly sales impact from in-sourcing.
- Monitor covenant headroom, scheduled term-loan repayments, the fully drawn revolver and the amount of cash held abroad.
- Assess AIT integration, acquisition-related expenses and amortization, and the resulting effect on earnings and cash generation.
- Review the corrected 2012 interim results and the planned correction to the September 2012 comparative period.