Ultra Clean Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 26, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted. Ultra Clean designs and manufactures subsystems and production tools, primarily for semiconductor equipment makers.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $117.5 | $132.7 | $242.9 | $276.9 |
| Gross profit / margin | $18.8 / 16.0% | $21.2 / 15.9% | $38.7 / 16.0% | $44.5 / 16.1% |
| Operating expenses | $15.4 | $13.1 | $32.7 | $27.2 |
| Operating income | $3.4 | $8.1 | $6.1 | $17.2 |
| Net income / diluted EPS | $2.2 / $0.07 | $6.0 / $0.20 | $3.4 / $0.11 | $13.1 / $0.44 |
- For the first half, operating cash flow was $4.1, down from $7.6 a year earlier. Investing used $33.5, including $29.7 for Marchi and $3.8 of equipment purchases; financing provided $27.0. Cash declined $2.4 to $76.6.
- At June 26, current assets were $211.2 and current liabilities $62.2. Inventory was $64.6, up from $56.9 at fiscal year-end.
- Debt under the new secured credit facility was approximately $74.9 gross ($38.7 term loan and $36.2 revolver); reported bank borrowings on the balance sheet were $74.4. The facility matures in February 2019. UCT reported compliance with its financial covenants.
- Cash was $76.6, of which $63.2 was held abroad and could incur U.S. tax if repatriated. Management said domestic cash and operating cash flow should cover obligations and working capital for at least 12 months.
Changes versus comparable periods
- Q2 sales fell 11.4% and first-half sales fell 12.3%. Management attributed the declines mainly to lower non-semiconductor sales, GT Advanced Technologies’ bankruptcy, and Intuitive Surgical’s decision to insource production of its next-generation robot. The ISI change reduced sales by approximately $7.1 in Q2 and $11.0 in the first half year over year; first-half revenue included a $1.0 payment from ISI related to the arrangement.
- Gross margin was broadly stable, but lower sales volume and a less favorable product mix reduced gross profit dollars. Operating expenses rose, including higher R&D and G&A; first-half G&A included $2.4 severance for the former CEO, $0.2 of Marchi deal costs, and Marchi expenses, partly offset by lower stock compensation.
- Lam Research and Applied Materials accounted for 55.4% and 25.8% of Q2 sales, respectively; together they represented 81.2%. The top two customers accounted for 78.3% of first-half sales. Three customers collectively represented 83.4% of receivables at quarter-end.
- Marchi was acquired in February for approximately $43.7, comprising about $29.9 cash and 1,437,500 newly issued shares. It contributed $4.1 Q2 and $6.2 first-half sales. Preliminary allocation included $18.4 goodwill and $23.4 purchased intangibles; the allocation remained subject to finalization.
Outlook, risks, and other notable items
- Management expected Q3 2015 sales to be higher than Q2 on increasing customer demand and gross profit to be consistent with Q2. No numerical sales or earnings guidance was provided.
- On July 31, 2015, after quarter-end, the company acquired Miconex for approximately $22.8, including $15.0 cash, 500,000 shares, and up to $4.0 in performance-based earn-outs. Acquisition accounting and pro forma results were not yet available.
- Key risks include semiconductor-industry cyclicality, customer concentration and insourcing, order volatility, supplier dependence, acquisition integration, significant secured debt and covenant restrictions, and the potential difficulty of using foreign-held cash in the U.S. The company also noted goodwill and intangible-asset impairment risk; these totaled $112.0 at quarter-end.
- The Singapore subsidiary benefited from a zero-rate tax holiday, stated to expire for tax years beginning January 2016, subject to investment and employment commitments. Changes in geographic earnings mix contributed to a higher effective tax rate: 28.1% in Q2 and 29.0% for the first half.
- Inventory purchase commitments were $45.4 and future operating lease payments totaled $27.2. The credit agreement prohibits cash dividends and includes excess-cash-flow prepayment provisions. Management reported no legal proceedings expected to have a material adverse effect; disclosure controls were effective.
Important facts for investors to verify
- Whether the expected Q3 demand improvement occurred, and whether sales and gross margin recovered.
- How customer concentration, particularly Lam Research and Applied Materials, and ISI’s insourcing affect future orders and margins.
- Marchi integration, final purchase-price allocation, and the financial impact and funding of the subsequent Miconex acquisition.
- Debt levels, covenant headroom, cash generation, and practical availability of foreign-held cash for domestic needs.
- Progress on inventory conversion and exposure to the $45.4 of purchase commitments, as well as the Singapore tax-holiday expiry and related tax effects.