Ultra Clean Holdings, Inc. — Q3 2013 Form 10-Q
Reporting period: Fiscal quarter and nine months ended September 27, 2013. Unaudited results are presented against the comparable periods ended September 28, 2012. The company supplies specialized subsystems primarily to semiconductor capital-equipment manufacturers, with additional markets including flat panel, medical, energy and research. AIT, acquired in July 2012, is included in the current-period results.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $107.2 million | $100.8 million | $317.8 million | $313.4 million |
| Gross profit / margin | $15.8 million / 14.8% | $14.3 million / 14.2% | $45.8 million / 14.4% | $44.2 million / 14.1% |
| Operating income (loss) | $3.4 million | $(0.7) million | $7.6 million | $10.1 million |
| Net income (loss) | $2.0 million | $(1.1) million | $4.1 million | $6.3 million |
| Diluted EPS | $0.07 | $(0.04) | $0.14 | $0.25 |
- Quarterly sales rose 6.3%; management attributed the increase primarily to higher semiconductor customer shipments. Nine-month sales rose 1.4%, with AIT contributing $89.5 million versus $36.5 million in the prior-year period. Excluding AIT, legacy UCT sales declined, which management attributed to the FEI transition, customer insourcing and semiconductor-industry weakness.
- Quarterly gross margin improved mainly from sales mix and lower material and direct-labor costs. Nine-month operating income and net income fell despite modest sales and gross-profit growth; operating expenses rose, including higher AIT-related amortization and costs, while interest expense increased following acquisition-related borrowing.
- Operating expenses were $12.4 million in Q3, versus $15.0 million a year earlier, when $2.1 million of acquisition costs were recorded. Nine-month operating expenses were $38.1 million versus $34.2 million.
- Net cash provided by operating activities was $33.7 million for the nine months, compared with $28.9 million. The 2013 cash generation included a $14.3 million increase in accounts payable. Investing activities used $2.2 million, primarily for capital expenditures; financing activities used $19.9 million, primarily for debt repayments.
- Cash and cash equivalents were $65.9 million at September 27, up from $54.3 million at December 28, 2012. Current assets were $173.0 million and current liabilities $80.9 million.
- Debt, net of unamortized issuance costs, totaled $56.5 million: $30.0 million under the term loan and $26.5 million under the revolving facility. The company reported $12.0 million of revolving availability. The revolver is classified as short-term due to acceleration provisions.
Outlook, risks and unusual items
- Management said existing cash and operating cash flow should be sufficient to service debt and meet working-capital and technology-development needs for at least 12 months. It cautioned that longer-term liquidity depends on operating results, industry conditions, covenant compliance and capital needs. No specific revenue or earnings guidance was provided.
- The company was in compliance with all credit covenants at quarter-end. The lenders had amended the credit agreement in February 2013 after covenant noncompliance for the November and December 2012 measurement periods. Future covenant requirements tighten over time. The agreement also restricts dividends and includes mandatory prepayment provisions.
- Customer concentration is substantial: three customers accounted for 81.1% of Q3 sales and 79.7% of nine-month sales. Applied Materials and Lam Research represented 32.9% and 37.4% of Q3 sales, respectively; ASM International accounted for 10.8%.
- Approximately $47.6 million of cash was held by foreign subsidiaries and considered indefinitely reinvested; repatriation could create U.S. tax. The Singapore subsidiary’s tax holiday is due to expire for tax years beginning January 2015.
- Management identified risks from semiconductor-industry cyclicality, customer concentration and insourcing, supplier dependence, order volatility, AIT integration and employee retention, debt and covenant restrictions, and international operations. The company had $52.5 million of inventory purchase commitments. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- The company corrected previously reported 2012 interim results for expense timing and related tax items, concluding the corrections were not material. Corrected nine-month 2012 net income was $6.3 million versus $6.9 million as originally reported. Management reported effective disclosure controls and no material change in internal control during the quarter; AIT controls were still being evaluated.
Investor verification priorities
- Assess customer concentration and the expected effect and timing of customer insourcing, particularly the disclosed potential 7%–9% quarterly sales impact from one customer’s gas-panel decision.
- Review covenant headroom, the short-term classification and acceleration provisions of the revolver, scheduled repayments, and the extent to which offshore cash is available for domestic needs.
- Separate AIT’s contribution from legacy UCT performance and monitor integration, customer retention, employee turnover and expected benefits.
- Examine the quality and sustainability of operating cash flow, especially the contribution from the accounts-payable increase, and the inventory commitments.
- Confirm the implications of the 2012 interim corrections and monitor future amortization, taxes and impairment assessments related to AIT goodwill and intangible assets.