Ultra Clean Holdings, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 27, 2015. Ultra Clean designs and manufactures tools, modules and subsystems, primarily for semiconductor capital equipment customers. Results include two months of Marchi Thermal Systems’ operations following its February acquisition.
Financial performance and liquidity
- Revenue: $125.3 million, down 13.1% from $144.2 million in the prior-year quarter. Semiconductor sales fell $10.0 million and non-semiconductor sales fell $8.9 million.
- Profitability: Gross profit was $19.9 million (15.9% margin), versus $23.3 million (16.2%). Operating income was $2.6 million, versus $9.2 million; net income was $1.2 million, versus $7.1 million. Basic and diluted EPS were each $0.04, compared with $0.24.
- Costs and margins: Operating expenses rose to $17.3 million from $14.2 million and increased to 13.7% of sales from 9.8%. The filing attributes lower gross profit mainly to reduced volume and a lower-margin sales mix.
- Cash flow: Operating activities used $5.7 million, compared with $4.0 million provided a year earlier. Investing activities used $32.3 million, including $29.7 million for Marchi and $2.6 million of equipment purchases. Financing activities provided $28.6 million. Cash declined by $9.4 million to $69.6 million.
- Balance sheet and liquidity: Current assets were $211.0 million and current liabilities $63.5 million. Cash was $69.6 million; accounts receivable were $69.6 million and inventory was $59.9 million. The company said existing cash and operating cash flow were expected to cover debt service and operating needs for at least 12 months.
- Debt: Debt was $75.6 million net of $0.6 million of unamortized issuance costs ($76.2 million gross). The new secured facility comprises a $40.0 million term loan and a $40.0 million revolving facility; $36.2 million was drawn on the revolver. Interest was initially 3.25%, with rates tied to base rate or LIBOR and margins based on leverage.
Material changes versus the prior comparable period
- Revenue declined, reflecting lower semiconductor and non-semiconductor sales, the bankruptcy of GT Advanced Technologies (GTAT), and reduced ISI production as that customer moved manufacturing of its next-generation robot in-house.
- Marchi was acquired for approximately $29.9 million in cash and 1,437,500 newly issued shares, for a total purchase price of approximately $43.7 million. The preliminary allocation included $18.4 million of goodwill and $23.4 million of identifiable intangible assets; the allocation remained subject to finalization.
- General and administrative expense increased to $11.9 million. The company cited $2.4 million of severance for its former CEO, $0.2 million of Marchi deal costs, higher outside services, and Marchi expenses, partly offset by lower amortization and share-based compensation.
- The company refinanced its prior credit facility in February 2015 and borrowed to fund Marchi. The new facility is secured by substantially all personal property assets, subject to exceptions.
Outlook, commentary and risks
- Management expected Q2 2015 sales and gross profit to be lower than Q1, citing lower overall customer demand and lower revenue.
- The ISI insourcing transition was expected to reduce revenue by approximately $5 million to $6 million per quarter; Q1 included a $1.0 million payment from ISI related to the arrangement.
- Customer concentration is substantial: Lam Research represented 46.7% and Applied Materials 28.9% of Q1 sales, or 75.6% combined. Lam and Applied Materials together represented approximately 68.3% of accounts receivable at quarter-end.
- GTAT’s October 2014 bankruptcy impaired collection of receivables and the value of related inventory and resulted in a charge for non-cancelable vendor commitments.
- The company was in compliance with its financial covenants at quarter-end. The facility requires a minimum fixed-charge coverage ratio of 1.25:1 and a maximum leverage ratio of 3.5:1, restricts cash dividends and requires certain excess-cash-flow prepayments. A 100-basis-point immediate rate increase was estimated to add approximately $0.2 million of quarterly interest expense.
- Approximately $57.5 million of cash was held by foreign subsidiaries and could be subject to U.S. taxes if repatriated. The company said it intended to keep these funds abroad. Its Singapore subsidiary’s zero-rate tax holiday was scheduled to expire for tax years beginning January 2016, subject to specified commitments.
- Key risks include semiconductor-industry cyclicality, reliance on a small number of OEM customers, customer insourcing or order delays, supplier availability, acquisition integration and impairment, debt covenant compliance, and the impact of foreign cash and tax rules.
Important facts for investors to verify
- Whether Q2 revenue and gross profit declined as management expected, and how much of the ongoing ISI revenue reduction was offset by other demand.
- Marchi’s integration, final purchase-price allocation, contribution to earnings and cash generation, and any subsequent goodwill or intangible-asset impairment indicators.
- Customer concentration, collections and inventory exposure, particularly following the GTAT bankruptcy and given the large Lam and Applied Materials balances.
- Debt levels, available revolver capacity, interest-rate sensitivity and covenant headroom as operating results change.
- The filing reports $2.6 million of equipment purchases in the cash flow statement but also cites $4.5 million of capital expenditures in MD&A; investors should reconcile the cash-paid and broader capex figures. The geographic sales figures in the notes also differ from the U.S. sales figures stated in MD&A and merit reconciliation.