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UCTT > SEC Filings for UCTT > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for ULTRA CLEAN HOLDINGS INC

Form 10-Q for ULTRA CLEAN HOLDINGS INC


7-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion And Analysis of Financial Condition And Results Of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q in our Annual Report on Form 10-K filed with the SEC on March 21, 2012. This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses gross margins and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "estimate," "expect," "intend," "may," "might," "plan," "project," "will," "would," "should," "could," "can," "predict," "potential," "continue," "objective," or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties and other factors that may cause our actual results, performance or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K filed with the SEC on March 21, 2012. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading developer and supplier of critical subsystems, primarily for the semiconductor capital equipment industry. We also leverage the specialized skill sets required to support semiconductor capital equipment to serve the technologically similar markets in the flat panel, medical, energy and research industries, collectively referred to as "Other Addressed Industries." We develop, design, prototype, engineer, manufacture and test subsystems which are highly specialized and tailored to specific steps in the semiconductor manufacturing process as well as the manufacturing process in Other Addressed Industries. Our revenue is derived primarily from the sale of gas delivery systems and other critical subsystems including chemical mechanical planarization ("CMP") subsystems, chemical delivery modules, top-plate assemblies, frame assemblies, process modules and other high level assemblies.

Our customers are primarily original equipment manufacturers (OEMs) in industries we support, providing customers complete subsystem solutions that combine our expertise in design, test, component characterization and highly flexible manufacturing operations with quality control and financial stability. This combination helps us to drive down total manufacturing costs, reduce design-to-delivery cycle times and maintain high quality standards for our customers. We believe these characteristics, as well as our standing as a leading supplier of gas delivery systems and other critical subsystems, place us in a position to benefit from the growing demand for subsystem outsourcing.

On July 3, 2012, we completed the acquisition of American Integration Technologies LLC ("AIT"), a supplier of critical subsystems to the semiconductor capital equipment, medical, energy, industrial and aerospace industries, for approximately $75.3 million in cash and 4.5 million shares of our newly issued common stock. We financed the cash portion of the merger, and repaid our existing indebtedness, by borrowing a total of $79.8 million under a new senior secured credit facility, of which $40.0 million represents borrowings under a term loan and $39.8 million represents borrowings under a revolving credit facility.

Financial Highlights

Sales for the three months ended September 28, 2012, were $100.8 million, a decrease of $4.5 million, or 4.2%, from the comparable quarter of 2011. Gross profit for the three months ended September 28, 2012, decreased $1.5 million, to $14.3 million, or 14.2% of sales, from $12.9 million, or 12.2% of sales, for the three months ended September 30, 2011. Sales for the nine months ended September 28, 2012, were $313.4 million, a decrease of $52.4 million, or 14.3%, from the comparable period of 2011. Gross profit for the nine months ended September 28, 2012, decreased $5.2 million, to $44.2 million, or 14.1% of sales, from $49.4 million, or 13.5% of sales, for the nine months ended September 30, 2011. Total operating expenses for the three months ended September 28, 2012, were $15.8 million, or 15.6% of sales, compared to $8.5 million, or 8.1% of sales, for the three months ended September 30, 2011. Total operating expenses for the nine months ended September 28, 2012, were $34.5 million, or 11.0% of sales, compared to $27.4 million, or 7.5% of sales, for the nine months ended September 30, 2011. We incurred a loss of $1.7 million for the three months ended September 28, 2012 compared to net income of $3.2 million for the three months ended September 30, 2011. We earned net income of $6.9 million for the nine months ended September 28, 2012 compared to net income of $15.9 million for the nine months ended September 30, 2011.

We had significant sales to three customers, each of which accounted for 10% or more of sales for the three months ended September 28, 2012 and we had significant sales to two customers, each of which accounted for 10% or more of sales for the nine months ended September 28, 2012. For a further discussion, see Note 1. Organization Basis of Presentation and Significant Accounting Policies- Significant Sales to Customers in Notes to Condensed Consolidated Financial Statements above.

Effective as of the end of the first quarter of 2012, we agreed to terminate our arrangement with FEI Corporation, whereby FEI would take back the manufacturing process they had been outsourcing to us since 2008. As part of the


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arrangement, we agreed to assist FEI during the transition period through our third quarter of fiscal 2012 and, as a result, recorded a revenue stream totaling $2.1 million related to these efforts during that timeframe, offset by associated costs. During the second quarter of fiscal 2012, we received payments totaling $2.1 million, of which we recorded half of this amount in revenue in the second quarter and deferred the remainder which was recognized in the third quarter of fiscal 2012. During the second quarter we also received cash for all remaining outstanding accounts receivable and remaining inventory we had with FEI.

In addition, we announced in the third quarter of fiscal 2012 that one of our larger semiconductor equipment customers has decided to in-source a portion of their gas panel business. While this decision is not expected to impact our revenue in the fiscal 2012, it could have a negative quarterly impact of 7% to 9% on total revenue by the end of fiscal 2013.

Results of Operations

For the periods indicated, the following table sets forth certain costs and
expenses and other income items as a percentage of sales. The table and
subsequent discussion should be read in conjunction with our condensed
consolidated financial statements and notes thereto included elsewhere in our
quarterly report.



                                            Three months ended                                   Nine months ended
                                  September 28,             September 30,             September 28,             September 30,
                                      2012                      2011                      2012                      2011
Sales                                      100.0 %                   100.0 %                   100.0 %                   100.0 %
Cost of goods sold                          85.8 %                    87.8 %                    85.9 %                    86.5 %

Gross profit                                14.2 %                    12.2 %                    14.1 %                    13.5 %
Operating expenses:
Research and development                     1.3 %                     1.2 %                     1.3 %                     1.2 %
Sales and marketing                          1.8 %                     1.6 %                     1.7 %                     1.6 %
General and administrative                  10.5 %                     5.3 %                     7.3 %                     4.7 %
Acquisition costs                            2.0 %                       -                       0.8 %                       -

Total operating expenses                    15.6 %                     8.1 %                    11.0 %                     7.5 %

Income (loss) from
operations                                  (1.4 )%                    4.1 %                     3.1 %                     6.0 %
Interest and other income
(expense), net                              (0.8 )%                   (0.3 )%                   (0.3 )%                   (0.3 )%

Income (loss) before
provision for income taxes                  (2.2 )%                    3.8 %                     2.8 %                     5.7 %
Income tax provision
(benefit)                                   (0.5 )%                    0.8 %                     0.6 %                     1.4 %

Net income (loss)                           (1.7 )%                    3.0 %                     2.2 %                     4.4 %

Sales

Sales for the three months ended September 28, 2012 decreased $4.5 million, or 4.2%, to $100.8 million from $105.3 million in the comparable period of 2011. Sales for the nine months ended September 28, 2012 decreased $52.4 million, or 14.3%, to $313.4 million from $365.8 million in the comparable period of 2011. Sales for both the three and nine months ended September 28, 2012, reflects primarily a decrease in semiconductor revenues resulting from the continued semiconductor industry downturn which began during the third quarter of fiscal 2011 as well as the continued softness in the energy industry. In addition, sales to FEI decreased in the third quarter of fiscal 2012 to approximately $1.2 million from $4.7 million in the second quarter of fiscal 2012, due to the termination of our relationship with FEI, as discussed above. We expect overall, sales to decrease slightly the fourth quarter of 2012 primarily due to the continued slow-down in the semiconductor industry.

Gross Profit

Cost of goods sold consists primarily of purchased materials, labor and overhead, including depreciation related to certain capital assets associated with the design and manufacture of products sold. Gross profit for the three months ended September 28, 2012, increased $1.5 million to $14.3 million, or 14.2% of sales, from $12.9 million, or 12.2% of sales, for the same period in 2011. Our gross margin for the three months ended September 28, 2012, increased from the comparable period in 2011 due primarily to the inclusion of AIT's higher margin products offset by lower factory utilization of certain of our non-AIT operating units due to lower revenues during the third quarter of 2012. Gross profit for the nine months ended September 28, 2012, decreased $5.2 million to $44.2 million, or 14.1% of sales, from $49.4 million, or 13.5% of sales, for the same period in 2011. Our gross margin for the nine months ended September 28, 2012, decreased from the comparable period in 2011 due primarily to lower material and direct labor costs as a percentage of gross revenues. We expect our gross profit to be slightly lower in the fourth quarter of 2012 due to expected lower revenues.


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Research and Development Expense

Research and development expense consists primarily of activities related to new component testing and evaluation, test equipment and fixture development, product design, and other product development activities. Research and development expense for the three months ended September 28, 2012 increased $0.1 million, or 4.6%, to $1.3 million, or 1.3% of sales, compared to $1.2 million, or 1.2% of sales in the comparable period in 2011 due to the timing of reassignment of existing resources to research and development activities . Research and development expense for the nine months ended September 28, 2012 decreased $0.3 million, or 6.8%, to $4.0 million, or 1.3% of sales, compared to $4.3 million, or 1.2% of sales in the comparable period in 2011. The decrease in expense for the nine month period from the comparable prior period is primarily due to reduced payroll and associated costs as a result of reduced headcount offset by the timing of reassignment of existing resources to research and development activities.

Sales and Marketing Expense

Sales and marketing expense consists primarily of salaries and commissions paid to our sales and service employees, salaries paid to our engineers who work with the sales and service employees to help determine the components and configuration requirements for new products and other costs related to the sales of our products. Sales and marketing expense for the three months ended September 28, 2012, increased $0.1 million to $1.8 million, or 1.8% of sales, compared to $1.7 million, or 1.6% of sales, in the comparable period of 2011. The increase in expense was primarily due to the inclusion of sales costs for AIT offset by decreased payroll and related benefit costs due to reduced fully employed and temporary headcount and a reduction in commission expense resulting from reduced revenues. Sales and marketing expense for the nine months ended September 28, 2012, decreased $0.5 million to $5.2 million, or 1.7% of sales, compared to $5.8 million, or 1.6% of sales, in the comparable period of 2011. The decrease in expense is primarily due to decreased payroll and related benefit costs due to reduced fully employed and temporary headcount and a reduction in commission expense resulting from reduced sales, offset slightly due to inclusion of sales expenses for AIT.

General and Administrative Expense

Our general and administrative expense has historically consisted of primarily of salaries and overhead associated with our administrative staff and professional fees. General and administrative expense increased approximately $5.0 million, or 88.4% for the three months ended September 28, 2012, to $10.6 million, or 10.5% of sales, compared with $5.6 million, or 5.3% of sales, in the comparable period of 2011. The increase when comparing the three months ended September 28, 2012, with the comparable period in 2011 is primarily due to
(a) amortization of finite-lived intangibles associated with the AIT acquisition of approximately $1.8 million, (b) the inclusion of AIT's general and administrative expenses of $2.3 million and (c), an increase in stock compensation costs and an increase in headcount and related payroll costs in our Singapore office as we continue to expand our operations there. General and administrative expense increased approximately $5.5 million, or 31.5% for the nine months ended September 28, 2012, to $22.8 million, or 7.3% of sales, compared with $17.4 million, or 4.7% of sales, in the comparable period of 2011. The increase when comparing the nine months ended September 28, 2012, with the comparable period in 2011 is primarily due to the AIT expenses described above as well as increases from absorbing AIT's personnel, and an increase in stock compensation costs and an increase in headcount and related payroll costs in the Company's Singapore office as we continue to expand our operations there.

Acquisition costs

Acquisition costs were approximately $2.1 million, or 2.0% of sales, for the three months ended September 28, 2012, and approximately $2.4 million, or 0.8% of sales, for the nine months ended September 28, 2012. These acquisition costs are associated with our purchase of AIT and consist of professional fees and services in connection with the acquisition.

Interest and Other Income (Expense), net

Interest and other income (expense), net, for the three months ended September 28, 2012, was $(0.8) million compared to $(0.3) million in the comparable period of 2011 primarily due to the increase in debt in the third quarter of 2012 resulting from the acquisition of AIT. Interest and other income (expense), net, for the nine months ended September 28, 2012, was $(0.9) million compared to $(1.0) million in the comparable period of 2011, a decrease of $0.1 million, due to reductions in the average balance of our line of credit during the first two quarters of fiscal 2012, offset by an increase in the balance of our debt at the beginning of the third quarter of fiscal 2012 due to the acquisition of AIT.

Income Tax Provision

Our effective tax rate for the three months ended September 28, 2012, and September 30, 2011, was 24.0% and 21.8%, respectively. Our effective tax rate for the nine months ended September 28, 2012, and September 30, 2011, was 22.0% and 24.1%, respectively. The change in respective rates reflects, primarily, a change in the geographic distribution of our world-wide earnings in foreign jurisdictions with lower tax rates or tax holidays.


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Liquidity and Capital Resources

We have required capital principally to fund our acquisitions and working capital needs, satisfy our debt obligations, maintain our equipment and purchase new capital equipment. As of September 28, 2012, we had cash of $58.3 million compared to $52.2 million as of December 30, 2011. Our cash and cash equivalents, as well as cash generated from operations, was our principal source of liquidity as of September 28, 2012.

For the nine months ended September 28, 2012, we generated cash from operating activities of $29.1 million compared to $8.2 million for the comparable period of 2011. Operating cash flows generated in the nine months ended September 28, 2012, were from $6.9 million of net income; net non-cash activity, including depreciation and amortization of intangibles and debt issuance costs of $4.3 million and stock-based compensation of $4.1 million; and decreases in accounts receivable and inventory of $10.8 million and $14.6 million, respectively. These were offset by a decrease in accounts payable of $6.7 million, a decrease in accrued compensation and related benefits of $0.9 million, and a decrease in other liabilities of $2.0 million. Our cash flows from operations in any given period are largely driven by the timing of sales, the collection of accounts receivable and the payment of accounts payable.

Net cash used in investing activities for the nine months ended September 28, 2012, was $75.7 million, consisting of $0.4 million for capital expenditures and $75.3 million for the acquisition of AIT. Investments in capital equipment in 2012 reflect our continued investment in our Asian subsidiaries as well as our domestic operating units. These investments are driven by the timing of our capital expenditures budget.

Net cash provided by (used in) financing activities for the nine months ended September 28, 2012, was $52.8 million compared to $(1.5) million for the comparable period of 2011. For the nine months ended September 28, 2012, our cash provided by financing activities was due primarily to proceeds from our new credit facility, offset by payments on our prior term debt and revolving line of credit and the payment of $1.9 million in debt issuance costs relating to our new credit facility. See "Borrowing Arrangements" below for information about our new borrowing arrangements we entered into in connection with our acquisition of AIT on July 3, 2012.

We anticipate that our existing cash balance and operating cash flow will be sufficient to service our indebtedness and meet our working capital requirements and technology development projects for at least the next twelve months. The adequacy of these resources to meet our liquidity needs beyond that period will depend on our growth, the state of the worldwide economy, our ability to meet our financial covenants with our credit facility, the cyclical expansion or contraction of the semiconductor capital equipment industry and the other industries we serve and capital expenditures required to meet possible increased demand for our products.

In order to expand our business or acquire additional complementary businesses or technologies, we may need to raise additional funds through equity or debt financings. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, our stockholders' equity interest will be diluted and these securities might have rights, preferences and privileges senior to those of our current stockholders. We may also require the consent of our senior lenders to raise additional funds through equity or debt financings. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.

In addition, the undistributed earnings of our foreign subsidiaries at September 28, 2012, are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise. Accordingly, no provisions for U.S. income taxes have been provided thereon. We anticipate that we have adequate liquidity and capital resources and would not need to repatriate earnings. As of September 28, 2012, we have approximately $33.0 million cash in our foreign subsidiaries.

Borrowing Arrangements

Prior to July 3, 2012, we had borrowing arrangements with Silicon Valley Bank under a Loan and Security Agreement (the "Loan Agreement") which included a $25.0 million revolving credit facility ("revolver"), maturing on December 31, 2013, and an $8.0 million term loan ("term loan"), maturing on October 21, 2013. The aggregate amount of the revolver was secured by substantially all of our assets.

The interest rate on the revolver during the six months ended June 29, 2012 was 3.5%. Pursuant to the Loan Agreement, the term loan bore interest per annum at a variable rate equal to the greater of prime rate, as defined per the loan agreement, plus a margin of 75 basis points. During the six months ended and as of June 29, 2012, the interest rate on the outstanding term loan was 4.0%. We paid off the entire outstanding balance of the revolver during the second quarter of 2012 and the entire outstanding balance of the term loan on July 3, 2012 in connection with the New Revolving Credit facility discussed below.


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On July 3, 2012, in connection with our acquisition of AIT, we entered into a new credit agreement (the "Credit Agreement") by and among the Company, certain of its subsidiaries, Silicon Valley Bank, U.S. Bank National Association and the other several lenders party thereto from time to time (collectively, the "Lenders"). The Credit Agreement provides for a term loan in an aggregate principal amount of $40.0 million (the "New Term Loan") and a revolving credit facility in an aggregate principal amount of $40.0 million (the "New Revolving Credit Facility"), a letter of credit facility in the aggregate availability amount of $15.0 million (as a sublimit of such New Revolving Credit Facility) (the "L/C Facility") and a swingline sub-facility in the aggregate availability amount of $4.0 million (as a sublimit of the New Revolving Credit Facility) (together with the Term Loan, the Revolving Credit Facility and the L/C Facility, the "Senior Secured Credit Facility"). On July 3, 2012, we borrowed an aggregate of $40.0 million under the New Term Loan and approximately $39.8 million under the New Revolving Credit Facility. The borrowed funds were used at the closing of our merger with AIT to finance the merger and repay the outstanding balance of $3.7 million to Silicon Valley Bank as lender under our prior Loan Agreement. The prior Loan Agreement was terminated in connection with this transaction.

The New Term Loan must be repaid in consecutive quarterly installments of $2.5 million, with the first payment due on September 30, 2012, and with the balance of the outstanding principal amount of the New Term Loan due at the final maturity, which is July 3, 2016. The New Revolving Credit Facility is available for the four-year period beginning on July 3, 2012. The Credit Agreement includes customary representations, warranties, covenants and events of default. We and certain of our subsidiaries have agreed to secure all of our obligations under the Credit Agreement by granting a first priority lien in substantially all of our and their respective personal property assets (subject to certain exceptions and limitations).

At our option, borrowings under the New Term Loan and New Revolving Credit Facility (subject to certain limitations) bear interest at either a base rate or at the London Interbank Offered Rate ("LIBOR") (with the LIBOR being adjusted for certain Eurocurrency reserve requirements, if any, as described in the Credit Agreement), plus, in each case, an applicable margin based on our consolidated leverage ratio. All loans described above made on July 3, 2012 were initially base rate loans, carrying interest of 3.75%. We expect, however, that the effective interest rate will be higher due to the incurrence of certain loan-related merger costs that will be treated as deferred interest and amortized over the life of the loan.

The Credit Agreement requires us to maintain a consolidated fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.75 to 1.00 initially and 2.00 to 1.00 from and after March 2013. The Credit Agreement requires us to maintain a consolidated leverage ratio (as defined in the Credit Agreement) no greater than 2.25 to 1.00 as of the end of the third quarter of fiscal 2012, stepping down to 2.00 to 1.00 as of the end of the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013, 1.50 to 1.00 as of the end of the second and third quarters of fiscal 2013 and 1.25 to 1.00 as of the end of each fiscal quarter thereafter. The Credit Agreement also requires us to maintain minimum domestic cash of $20.0 million as of the last day of any fiscal quarter and $15.0 million as of the last day of any other month from September 1, 2012 through June 30, 2013 and $25.0 million as of the last day of any fiscal quarter and $20.0 million as of the last day of any other month after June 30, 2013. The Credit Agreement also includes other customary affirmative and negative covenants.

The Credit Agreement also contains provisions requiring the following mandatory prepayments (subject to certain exceptions and limitations): (i) prepayments equal to 50% of the net cash proceeds from the issuance of capital stock by our primary operating subsidiary (or any of its subsidiaries); (ii) prepayments equal to 100% of the net cash proceeds from the incurrence of any indebtedness by our primary operating subsidiary over $250,000; (iii) prepayments equal to the net cash proceeds from certain asset sales or insurance or condemnation . . .

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