Ultra Clean Holdings, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 28, 2012; filed November 7, 2012. Ultra Clean develops and supplies specialized subsystems, primarily for semiconductor equipment makers, and also serves medical, energy, flat-panel and research markets. Results include American Integration Technologies (AIT) from its July 3, 2012 acquisition date.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $100.8 million | $105.3 million | $313.4 million | $365.8 million |
| Gross profit | $14.3 million | $12.9 million | $44.2 million | $49.4 million |
| Gross margin | 14.2% | 12.2% | 14.1% | 13.5% |
| Operating income (loss) | $(1.4) million | $4.3 million | $9.8 million | $22.0 million |
| Net income (loss) | $(1.7) million | $3.2 million | $6.9 million | $15.9 million |
| Diluted EPS | $(0.06) | $0.14 | $0.27 | $0.68 |
- Cash flow: Nine-month operating cash flow was $28.9 million, compared with $8.2 million a year earlier. Investing used $75.7 million, mainly for AIT; financing provided $53.0 million. Cash increased $6.2 million to $58.3 million.
- Liquidity and debt: Current assets were $176.6 million and current liabilities $90.1 million at September 28. Debt, net of issuance costs, was $77.8 million: $48.5 million classified as current and $29.3 million long-term. The new facility included $40 million term and $40 million revolving capacity; only $0.2 million was available for future revolver borrowings, according to risk disclosures.
- Other metrics: Total assets were $278.4 million; stockholders’ equity was $157.3 million. Inventory was $63.3 million, including $22.2 million acquired with AIT. The company reported $25.5 million in inventory purchase commitments.
Material changes versus comparable periods
- Reported sales declined 4.2% in Q3 and 14.3% over nine months, primarily reflecting semiconductor-industry weakness and continued softness in energy. Nine-month comparisons include AIT only from its acquisition date, so they do not represent like-for-like combined-company periods.
- Q3 gross profit increased to $14.3 million from $12.9 million and margin rose to 14.2% from 12.2%; management attributed the margin improvement primarily to AIT’s higher-margin products, partly offset by lower factory utilization elsewhere. Nine-month gross profit fell $5.2 million, though gross margin improved to 14.1% from 13.5%.
- Q3 operating expenses rose to $15.8 million from $8.5 million. The increase included $1.8 million of acquired-intangible amortization, AIT expenses, and $2.1 million of acquisition costs. Consequently, the quarter moved from operating and net income to losses. Nine-month net income fell to $6.9 million from $15.9 million.
- AIT was acquired for approximately $75.3 million cash plus 4.5 million newly issued shares. The preliminary purchase-price allocation included $56.9 million goodwill and $22.5 million acquired intangible assets; valuation remained subject to finalization. AIT contributed approximately $36.5 million Q3 sales and $4.6 million operating income, before specified acquisition-related charges.
- Customer concentration remains substantial: Applied Materials and Lam Research represented 56.9% of Q3 sales; including ASM International, the three largest customers represented 76.4%. Two customers represented 74.0% of nine-month sales.
Outlook, commentary and risks
- Management expected sales to decrease slightly in Q4 2012, primarily due to continued semiconductor-industry slowdown, and gross profit to be slightly lower because of lower expected revenue. No specific numerical guidance was provided.
- Management expected cash and operating cash flow to be sufficient to service debt and meet working-capital and technology-development needs for at least 12 months, subject to business conditions and compliance with credit covenants. Approximately $33 million of cash was held in foreign subsidiaries and considered indefinitely reinvested.
- A large semiconductor customer’s decision to insource part of its gas-panel business was not expected to affect 2012 revenue but could reduce quarterly revenue by 7%–9% by the end of fiscal 2013. The company also completed its transition away from FEI manufacturing work.
- The new secured credit agreement imposes leverage, fixed-charge coverage and minimum-domestic-cash requirements. The company disclosed a waiver for an August covenant breach and a separate waiver for an unmet AIT post-closing documentation requirement; it reported compliance with the specified covenant as of September 28.
- Principal risks include semiconductor cyclicality, concentration and potential customer insourcing, AIT integration and customer retention, substantial debt and covenant constraints, limited revolver availability, supply-chain and inventory exposure, and dependence on additional financing for future expansion. The company cited no material pending legal proceedings and stated disclosure controls were effective.
Important facts for investors to verify
- Subsequent covenant compliance, available domestic cash, debt repayment requirements and the impact of variable interest rates.
- AIT integration progress, final purchase-price allocation, acquired-asset impairment risk and realization of anticipated benefits.
- Timing and revenue impact of the customer’s gas-panel insourcing decision, and whether other customers may reduce or internalize outsourced work.
- Underlying sales and margin trends, distinguishing acquired AIT contribution from legacy operations and accounting for semiconductor-cycle conditions.
- Customer concentration and the sale restrictions on the 4.5 million AIT consideration shares, which began to expire on January 3, 2013.
Note: The filing’s MD&A contains a wording inconsistency describing Q3 gross profit as “decreased” while giving figures that show an increase; the financial statements report $14.3 million versus $12.9 million.