Ultra Clean Holdings, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 29, 2012. Amounts below are in millions of dollars except per-share data. Ultra Clean develops and supplies specialized subsystems, primarily for semiconductor equipment manufacturers, and also serves flat panel, medical, energy and research markets.
Financial results
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales | $101.9 | $133.7 | $212.5 | $260.5 |
| Gross profit / margin | $14.3 / 14.0% | $19.0 / 14.2% | $29.9 / 14.1% | $36.5 / 14.0% |
| Operating income | $4.9 | $9.5 | $11.2 | $17.7 |
| Net income | $3.9 | $7.0 | $8.6 | $12.8 |
| Diluted EPS | $0.17 | $0.30 | $0.36 | $0.54 |
- Sales fell 23.8% in Q2 and 18.4% in the first half year over year, mainly reflecting semiconductor-industry weakness and softness in energy. Gross margin was broadly steady: Q2 decreased 0.2 percentage points, while first-half margin increased 0.1 points.
- Operating expenses were $9.3 million in Q2, nearly flat in dollars year over year but higher as a share of sales (9.2% versus 7.1%). General and administrative costs increased, partly due to stock compensation and Singapore headcount.
- First-half operating cash flow was $20.3 million, versus $6.4 million a year earlier. The $11.0 million inventory reduction was a significant source of cash. Investing cash outflow was $0.2 million; financing cash outflow was $21.1 million, primarily reflecting debt repayments. Cash declined to $51.1 million from $52.2 million at fiscal year-end.
- At June 29, cash was $51.1 million; current assets were $143.9 million and current liabilities $35.6 million. Debt was approximately $3.7 million, consisting of bank borrowings and term debt. The company had repaid its $19.5 million revolver balance during Q2.
Material changes and notable items
- Customer concentration increased: Applied Materials and Lam Research together represented 82.2% of first-half sales, compared with 72.3% in the comparable period. Their receivables were approximately 86% of total receivables at June 29.
- Ultra Clean completed its acquisition of American Integration Technologies (AIT) on July 3, after quarter-end, for approximately $74.4 million in cash, subject to working-capital adjustments, and 4.5 million newly issued shares. AIT adds customers and manufacturing capabilities. Initial purchase accounting and combined-company pro forma revenue and earnings were not yet available.
- The acquisition was funded with a new senior secured facility: $40.0 million term loan and approximately $39.8 million revolver borrowing. After the acquisition, cash was approximately $45.3 million and total debt approximately $79.8 million. The term loan requires quarterly principal installments of $2.5 million beginning September 30, 2012, and matures July 3, 2016.
- The new facility includes leverage and fixed-charge coverage tests, minimum domestic-cash requirements, liens on substantially all personal property assets, and mandatory prepayment provisions. Management reported compliance with the prior facility’s covenants as of June 29.
- FEI ended its outsourced manufacturing arrangement. Ultra Clean expected to recognize $2.1 million of transition-related revenue through Q3 2012, offset by associated costs; half was recognized in Q2 and half deferred to Q3. It also collected remaining FEI receivables and inventory-related cash.
- The filing corrected prior presentation of certain sales, use and value-added tax receivables and payables on a net basis. The corrections did not affect previously reported equity, earnings or operating cash flow.
Outlook, risks and contingencies
- Management expected Q3 sales to decrease due primarily to continued semiconductor-market weakness, partly offset by including AIT; it also expected lower gross profit because of lower revenues. No numerical guidance was provided.
- Management said existing cash and operating cash flow were expected to cover debt service, working capital and technology-development needs for at least the next 12 months. It anticipated approximately $2.0 million of capital expenditures for the remainder of 2012.
- Key risks include cyclical end markets, limited visibility and cancellable customer forecasts, reliance on a small number of customers, supplier constraints, pricing pressure, and execution and integration risks from AIT. The new debt and covenant requirements increase financial and liquidity risks.
- Inventory purchase commitments were approximately $26.0 million; remaining lease payments were approximately $10.6 million. The company reported ordinary-course legal claims and did not expect them to materially affect its financial condition or results. No material change in internal control over financial reporting was reported; disclosure controls were deemed effective.
Investor facts to verify
- Whether semiconductor demand, customer orders and factory utilization recovered as expected, and how much Q3 revenue came from AIT versus the legacy business.
- AIT purchase accounting, acquired assets and liabilities, pro forma results, integration costs, and retention of AIT customers and employees.
- Post-acquisition cash, debt, borrowing availability, interest expense and compliance with the facility’s financial and minimum-cash covenants.
- Whether customer concentration and FEI transition revenue materially affected subsequent sales, receivables and margins.