Ultra Clean Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: The 13-week quarter ended June 25, 2021; six-month results are also presented. Amounts are in U.S. dollars.
Business context and reporting period
UCT supplies semiconductor and display capital-equipment manufacturers with products such as assemblies, components and fluid or gas delivery systems, and provides precision cleaning, coating and analytical services. It reports Products and Services segments. On March 31, 2021, UCT acquired Ham-Let, a maker of valves, fittings and hoses, expanding its reach into semiconductor fab infrastructure.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $515.2 million | $344.8 million | $932.8 million | $665.7 million |
| Gross profit / margin | $99.9 million / 19.4% | $73.9 million / 21.4% | $186.8 million / 20.0% | $139.6 million / 21.0% |
| Operating income | $31.9 million | $30.8 million | $72.3 million | $53.4 million |
| Net income attributable to UCT | $17.1 million | $21.3 million | $42.1 million | $30.7 million |
| Diluted EPS | $0.39 | $0.52 | $0.98 | $0.75 |
Q2 revenue grew 49.4% year over year, with Products revenue up 59.2% and Services up 8.7%. Operating income was slightly higher, but gross margin contracted and net income attributable to UCT and diluted EPS declined. Q2 operating margin was approximately 6.2%, versus 8.9% a year earlier. For the first half, revenue grew 40.1% and net income attributable to UCT grew 37.1%.
Cash flow: In the first half, operating activities provided $116.7 million, investing activities used $370.5 million and financing activities provided $505.2 million. Operating cash flow benefited from higher earnings and an $80.8 million increase in accounts payable, while inventory growth used $41.3 million. Capital expenditures were $22.7 million.
Liquidity and debt: Cash and equivalents were $451.4 million at June 25, up from $200.3 million at year-end 2020. Current assets were $999.3 million and current liabilities $355.0 million. Total bank debt was $594.7 million net of $15.3 million in unamortized issuance costs, implying net debt of about $143.3 million against reported cash. The U.S. term loan was $598.9 million gross, at a stated 3.84% interest rate, with maturity in August 2025. UCT reported compliance with its debt covenants and $65.0 million available on its U.S. revolving facility.
Material changes versus prior comparable period
- Ham-Let contributed approximately $58.2 million of Q2 revenue following its acquisition. Acquisition consideration was $362.9 million; the purchase-price allocation remained preliminary. Ham-Let also added $124.4 million of purchased intangible assets and $86.1 million of goodwill.
- UCT raised approximately $192.8 million net through an April public offering and overallotment, issuing about 3.7 million shares. It also borrowed an incremental $355.0 million term loan to help finance the acquisition.
- Products demand and Services orders increased. Products represented 85.9% of Q2 revenue, compared with 80.6% a year earlier. Products gross margin was 16.9% versus 17.5%; Services gross margin was 34.8% versus 37.8%.
- Interest expense rose to $7.1 million in Q2 from $3.8 million, primarily reflecting higher average debt. Q2 acquisition costs included $8.1 million in general and administrative expense.
Outlook, risks, contingencies and unusual items
- Management said cash, expected operating cash flow and available revolving credit were expected to be sufficient to service debt and meet working-capital and development needs for at least the next 12 months. The filing gives no quantified revenue or earnings guidance.
- Management cited long-term semiconductor demand drivers, including 5G, higher-performance servers, cloud, AI and machine learning, and expects OEM reliance on outsourced partners to support demand. These are expectations, not guarantees.
- Customer concentration is significant: Lam Research and Applied Materials together represented 62.4% of Q2 revenue and approximately 38.0% of accounts receivable at quarter-end.
- Inventory was $302.0 million, versus $180.4 million at year-end, and purchase commitments for inventory were $405.1 million. Debt covenants, semiconductor-industry cyclicality, acquisition integration and financing availability are relevant risks.
- The Ham-Let acquisition-related foreign-exchange hedge settlement produced a $10.4 million loss recorded in other expense. UCT also recognized $7.3 million of insurance proceeds relating to the prior Cinos Korea fire during the first half; these unusual items affect period comparisons.
- On July 24, 2021, after quarter-end, UCT amended a Cinos Korea shareholder arrangement to eliminate an obligation to purchase certain shares; the company said its noncontrolling interest would increase by 35% beginning in Q3. Ordinary-course legal claims were disclosed, with management stating it did not expect a material adverse effect. No material risk-factor changes were reported.
Important facts for investors to verify
- How much of reported growth reflects underlying customer demand versus Ham-Let’s contribution, and how Ham-Let performs after integration.
- Whether gross margins recover as acquisition-related inventory step-up costs and other integration effects pass through.
- Working-capital trends, especially inventory, receivables and supplier-payment timing, and the cash conversion behind reported operating cash flow.
- Debt balance, interest costs, covenant headroom and the effect of future benchmark-rate changes, including the transition from LIBOR.
- Customer concentration, the status of the preliminary Ham-Let purchase-price allocation, and the impact of the post-quarter Cinos Korea amendment.