Ultra Clean Holdings, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The company supplies specialized subsystems, primarily to semiconductor capital-equipment manufacturers, and also serves flat-panel, medical, energy and research markets. This unaudited report covers the quarter and six months ended July 1, 2011; comparisons are with the periods ended July 2, 2010. Dollar amounts are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $133.7 | $105.9 | $260.5 | $204.3 |
| Gross profit / margin | $19.0 / 14.2% | $14.8 / 14.0% | $36.5 / 14.0% | $27.2 / 13.3% |
| Operating income / margin | $9.5 / 7.1% | $6.6 / 6.2% | $17.7 / 6.8% | $11.2 / 5.5% |
| Net income | $7.0 | $5.7 | $12.8 | $9.5 |
| Diluted earnings per share | $0.30 | $0.25 | $0.54 | $0.41 |
- Q2 sales rose 26.3%; first-half sales rose 27.5%. Management attributed most of the increase to higher volumes with existing customers at relatively constant prices.
- First-half operating cash flow was $6.4, versus cash use of $5.6 in the prior-year period. Inventory increased $10.6 and accounts receivable increased $3.2, partly offset by increases in accounts payable and accrued and other liabilities.
- Cash was $37.6 at July 1, 2011, up from $34.7 at December 31, 2010. First-half capital spending was $2.7; investing cash use was $2.7, and financing cash use was $0.8.
- Total debt was $26.3, comprising $19.5 outstanding on the revolving facility and $6.8 on term loans. The company paid off a $5.0 equipment loan during the quarter and reported compliance with bank covenants. The $25.0 revolving facility matures December 31, 2013.
- Current assets were $174.1 and current liabilities $64.2 at July 1. The company said cash, operating cash flow and available credit should cover working-capital needs and development projects for at least the next 12 months.
Changes, outlook and key risks
- Higher production volume and factory utilization supported improved gross margins. Operating expenses rose in dollars, primarily with headcount and related costs, but declined as a share of sales. Interest expense increased, mainly due to an $8.0 term loan entered into in October 2010.
- Effective tax rates increased to 23.8% for Q2 and 24.6% for the first half, from 12.0% and 12.7%, respectively, in 2010. The company cited changes in uncertain-tax-position accruals, deferred tax assets and geographic earnings mix. It maintained a $7.4 valuation allowance on deferred tax assets.
- Management expected sales to decrease in Q3 2011, primarily because of a semiconductor-industry slowdown. It anticipated approximately $2.8 of capital expenditures for the remainder of 2011. No other quantified revenue or earnings guidance was provided.
- Customer concentration is substantial: Applied Materials and Lam Research together represented 59% of first-half sales, and approximately 63% of receivables at July 1. The company also cited semiconductor cyclicality, dependence on key customers and suppliers, limited order commitments, and challenges scaling production as material risks.
- Inventory purchase commitments were approximately $25.3; future minimum lease payments were approximately $13.5. The filing describes potential supply disruption related to Japanese suppliers and earthquake, tsunami and related events. It also identifies foreign-operation, currency, tax, technology, product-quality and debt-covenant risks.
- The company reported no legal proceedings believed likely to have a material adverse effect, no defaults on senior securities, and no material changes to internal control over financial reporting during the quarter. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether the forecast Q3 sales decline occurred, and how semiconductor demand and customer orders developed.
- Whether customer concentration, order variability and supplier constraints affected revenue, margins or inventory; inventory was $69.9 at quarter-end.
- Whether operating cash flow continued to cover working-capital investment, planned capital spending and debt obligations.
- Debt balances, borrowing availability and covenant compliance, particularly as the $3.0 term loan was scheduled to mature in January 2012.
- The effect of higher effective tax rates, the deferred-tax valuation allowance and ongoing state tax examinations on future results.