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 and in our Annual Report on Form 10-K filed with the SEC on March 1,
2022. 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 and in our Annual Report on Form
10-K filed with the SEC on March 1, 2022. 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
Ultra Clean Holdings, Inc., ("UCT", the "Company" or "We") is a leading
developer and supplier of critical subsystems, components, parts, and ultra-high
purity cleaning and analytical services primarily for the semiconductor
industry. UCT offers its customers an integrated outsourced solution for major
subassemblies, improved design-to-delivery cycle times, design for
manufacturability, prototyping and part and component manufacturing, as well as
tool chamber parts cleaning and coating, and micro-contamination analytical
services. We report results for two operating segments: Products and Services.
Our Products segment primarily designs, engineers and manufactures production
tools, components and parts, and modules and subsystems for the semiconductor
and display capital equipment markets. Products include chemical delivery
modules, frame assemblies, gas delivery systems, fluid delivery systems,
precision robotics, process modules as well as other high-level assemblies. Our
Services segment provides ultra-high purity parts cleaning, process tool part
recoating, surface encapsulation and high sensitivity micro contamination
analysis primarily for the semiconductor device makers and wafer fabrication
equipment ("WFE") markets.
We ship a majority of our products and provide most of our services to U.S.
registered customers with locations both in and outside the U.S. In addition to
U.S. manufacturing and service operations, we manufacture products and provide
parts cleaning and other related services in our Asia Pacific, Europe and Middle
East ("EMEA") facilities to support local and U.S. based customers. We conduct
our operating activities primarily through our subsidiaries.
Over the long-term, we believe the semiconductor market we serve will continue
to grow due to multi-year industry demand from a broad range of drivers, such as
new CPU architectures that enable higher performance servers necessary for
cloud, artificial intelligence ("AI") and Machine Learning applications. We also
believe that semiconductor original equipment manufacturers ("OEM") are
increasingly relying on partners like UCT to fulfill their expanding capacity
requirements. Additionally, our Services business is benefiting as device
manufacturers rely on precision cleaning and coating to achieve ever more
advanced devices.
Critical Accounting Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States, which
require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses and related disclosure at the date of
our Condensed Consolidated Financial Statements. On an on-going basis, we
evaluate our estimates and judgments, including those related to inventories,
income taxes, business combinations and goodwill, intangible assets and
long-lived assets. We base our estimates and judgments on historical experience
and on various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis of our judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates. We consider
certain accounting policies related to revenue recognition, inventory valuation,
accounting for income taxes, business combinations, valuation of goodwill,
intangible assets and long-lived assets to be critical policies due to the
estimates and judgments involved in each.
There have been no significant changes to our critical accounting policies,
significant judgments and estimates disclosed in our Annual Report on Form 10-K
subsequent to December 30, 2022. For further information on our critical and
other significant accounting policies and estimates, see Part II, Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the fiscal year ended December
30, 2022, as filed with the SEC.
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Results of Operations
Fiscal Year
Our fiscal year is the 52- or 53-week period ending on the Friday nearest
December 31. Fiscal year 2023 is a 52-week period ending December 29, 2023, and
fiscal year 2022 was a 52-week period ended December 30, 2022. The fiscal
quarters ended March 31, 2023 and April 1, 2022 were both 13-week periods.
Discussion of Results of Operations for the three months ended March 31, 2023
compared to the for the three months ended April 1, 2022
Revenues
Three Months Ended
Revenues by Segment March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Products $ 368.6 $ 486.8 (24.3 ) %
Services 64.7 77.3 (16.3 ) %
Total revenues $ 433.3 $ 564.1 (23.2 ) %
Products as a percentage of total revenues 85.1 % 86.3 %
Services as a percentage of total revenues 14.9 % 13.7 %
Total Products and Services revenues decreased in the three months ended March
31, 2023, compared to the same period in the prior year, primarily due to a
downturn in the semiconductor industry driven largely by macroeconomic and
geopolitical factors.
Three Months Ended
Revenues by Geography March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
United States $ 133.8 $ 181.4 (26.2 ) %
International 299.5 382.7 (21.7 ) %
Total revenues $ 433.3 $ 564.1 (23.2 ) %
Unites States as a percentage of total revenues 30.9 % 32.2 %
International as a percentage of total revenues 69.1 % 67.8 %
On a geographic basis, revenues represent products that were shipped or services
that were performed at our U.S. and international locations. For the three
months period ended March 31, 2023, both U.S. and international revenues
decreased, compared to the same period in the prior year, primarily as a result
of the global semiconductor industry downturn.
Cost of Revenues
Three Months Ended
Cost of revenues by Segment March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Products $ 315.1 $ 399.5 (21.1 ) %
Services 45.2 50.9 (11.2 ) %
Total Cost of revenues $ 360.3 $ 450.4 (20.0 ) %
Products cost as a percentage
of total Products revenues 85.5 % 82.1 %
Services cost as a percentage
of total Services revenues 69.9 % 65.8 %
Total cost of revenues decreased for the three months ended March 31, 2023
compared to the same period in the prior year, due to lower demand for both
Products and Services driven by global semiconductor industry downturn.
Cost of Products revenues consists of purchased materials, direct labor and
manufacturing overhead. Cost of Products revenues decreased $84.4 million for
the three months ended March 31, 2023, compared to the same period in the prior
year, due to lower volume of sales driving decreased material costs and lower
direct labor spending.
Cost of Services revenues consists of direct labor, manufacturing overhead and
materials (such as chemicals, gases and consumables). Cost of Services revenues
decreased $5.7 million for the three months ended March 31, 2023, compared to
the same period in the
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prior year, driven by lower volumes of service orders, resulting in decrease in
labor costs (the largest component of Cost of Services) and lower material
costs.
In both segments, higher costs of revenue as a percent of revenue increased as
certain fixed costs remain regardless of volume.
Gross Margin
Three Months Ended
Gross Profit by Segment March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Products $ 53.5 $ 87.3 (38.7 ) %
Services 19.5 26.4 (26.1 ) %
Gross profit $ 73.0 $ 113.7 (35.8 ) %
Gross Margin by Segment
Products 14.5 % 17.9 %
Services 30.1 % 34.2 %
Total Company 16.8 % 20.2 %
Products and Services gross profit and gross margin decreased for the three
months period ended March 31, 2023, compared to the same period in the prior
year, due to lower factory utilization.
Operating Margin
Three Months Ended
Operating Profit by Segment March 31, April 1, Percent
(Dollars in millions) 2023
2022 Change
Products $ 8.7 $ 37.6 (76.9 ) %
Services 3.7 8.1 (54.3 ) %
Operating profit $ 12.4 $ 45.7 (72.9 ) %
Operating Margin by Segment
Products 2.4 % 7.7 %
Services 5.7 % 10.5 %
Total Company 2.9 % 8.1 %
Operating profit and operating margin of Products and Services decreased for the
three months period ended March 31, 2023, compared to the same period in the
prior year, primarily due to the lower gross profit which was only partially
offset by lower comparative operating expenses.
Research and Development
Three Months Ended
March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Research and development $ 7.1 $ 6.8 4.4 %
Research and development as a
percentage of total revenues 1.6 % 1.2 %
Research and development expenses increased $0.3 million in the three months
period ended March 31, 2023, compared to the same period in the prior year, due
to an increase in employee-related costs.
Sales and Marketing
Three Months Ended
March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Sales and marketing $ 13.1 $ 13.8 -5.1 %
Sales and marketing as a percentage of
total revenues 3.0 % 2.4 %
Sales and marketing expense decreased during the three months period ended March
31, 2023, as compared to the same period in the prior year, due to the reduction
in costs related to the divested entities during the second and third quarter of
fiscal year 2022.
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General and Administrative
Three Months Ended
March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
General and administrative $ 40.4 $ 47.4 -14.8 %
General and administrative as a
percentage of total revenues 9.3 % 8.4 %
General and administrative expenses decreased $7.0 million in the three months
period ended March 31, 2023, compared to the same period in the prior year,
primarily due to a decrease in amortization of intangibles acquired through
business combinations, a decrease in costs related to legal proceedings and a
decrease in stock-based compensation expense.
Interest and Other Income (Expense), net
Three Months Ended
March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Interest income $ 0.5 - n/m
Interest expense $ (11.8 ) $ (6.4 ) 84.4 %
Other income (expense), net $ 2.8 - n/m
n/m - not meaningful
Interest expense increased $5.4 million in the three months ended March 31, 2023
compared to the same period in the prior year, due primarily to higher interest
rates resulting from LIBOR rate changes.
Other income (expense), net, increased $2.8 million in the three months period
ended March 31, 2023, compared to the same period in the prior year, due to
foreign exchange transactions and remeasurements as the U.S. dollar strengthened
in the current period.
Provision for Income Taxes
Three Months Ended
March 31, April 1, Percent
(Dollars in millions) 2023 2022 Change
Provision for income taxes $ 3.5 $ 8.5 (58.8 ) %
Effective tax rate
89.7 % 21.6 %
The increase in the effective tax rate for the three months period ended March
31, 2023 compared to the same period in the prior year is primarily attributable
to changes in the geographic mix of worldwide earnings and financial results in
jurisdictions which are taxed at different rates and the impact of losses in
jurisdictions with full federal and state valuation allowances.
Company management continuously evaluates the need for a valuation allowance on
its deferred tax assets and, as of March 31, 2023, concluded that a full
valuation allowance on its federal, state and certain of its foreign deferred
tax assets remained appropriate.
Liquidity and Capital Resources
Cash and cash Equivalents
The following table summarizes our cash and cash equivalents:
March 31, December 30,
(In millions) 2023 2022 Decrease
Total cash and cash equivalents $ 322.1 $ 358.8 $ (36.7 )
The following table summarizes the Condensed Consolidated Statements of Cash
Flow information:
Three Months Ended
March 31, April 1,
(In millions) 2023 2022
Operating activities $ 28.0 $ (67.4 )
Investing activities (27.3 ) (28.4 )
Financing activities (36.2 ) (2.6 )
Effects of exchange rate changes on cash and cash
equivalents (1.2 ) (1.1 )
Net decrease in cash and cash equivalents $ (36.7 ) $ (99.5 )
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Our primary cash inflows and outflows were as follows:
•
For the three month period ended March 31, 2023, we generated cash of $28.0
million compared to cash used of $67.4 million for the three months ended April
1, 2022. The $95.4 million increase in net cash from operating activities was
driven by a $133.2 favorable change in net working capital offset in part by a
$7.4 million decrease from non-cash items and by a $30.4 million decrease in net
income.
•
The major contributors in net changes in operating assets and liabilities for
the three months ended March 31, 2023 were as follows:
o
Accounts receivable decreased $63.4 million primarily due to the timing of
shipments and collections, inventories and prepaid expenses decreased $10.9
million and $6.3 million, respectively.
o
Accounts payable decreased $50.5 million, income taxes payable decreased $1.6
million and accrued compensation and related benefits increased $14.7 million,
primarily due to the timing of payments.
•
Net cash used in investing activities during the three months ended March 31,
2023 and April 1, 2022 consisted primarily of $27.3 million and $28.4 million
purchases of property, plant and equipment, respectively.
•
During the three months ended March 31, 2023, cash used in financing activities
was $36.2 million, compared to cash used in financing activities of $2.6 million
in the three months ended April 1, 2022. The change is due to higher principal
payments on bank borrowings and from our share repurchase program initiated in
the fourth quarter of fiscal year 2022.
We believe we have sufficient capital to fund our working capital needs, satisfy
our debt obligations, maintain our existing capital equipment, purchase new
capital equipment and make strategic acquisitions from time to time. As of March
31, 2023, we had cash of $322.1 million compared to $358.8 million as of
December 30, 2022. Our cash and cash equivalents, cash generated from
operations, and amounts available under our revolving line of credit described
below were our principal sources of liquidity as of March 31, 2023.
Our subsidiary Fluid Solutions, has an existing factoring arrangement with a
financial institution in which a portion of its accounts receivable are sold on
a non-recourse basis. For the three months ended March 31, 2023, Fluid Solutions
factored $7.3 million under this arrangement.
We anticipate that our existing cash and cash equivalents 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 size and number of any
acquisitions, 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
financing. 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 new lenders to raise additional funds through equity or debt
financing. 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.
As of March 31, 2023, we have cash of approximately $268.8 million in our
foreign subsidiaries. It is not practicable to determine the tax liability that
might be incurred if the undistributed earnings of these foreign subsidiaries
were to be distributed. For undistributed earnings of foreign subsidiaries which
are not considered indefinitely reinvested, deferred taxes have been accrued.
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Borrowing Arrangements
The following table summarizes our borrowings:
March 31,
2023
Weighted-
Average
(Dollars in millions) Amount Interest Rate
U.S. Term Loan $ 491.0 8.5 %
Fluid Solutions Debt Facilities 10.9 5.1 %
Debt issuance costs (9.2 )
$ 492.7
On March 31, 2021, the Company entered into a Second Amendment (the "Second
Amendment"), to the credit agreement dated as of August 27, 2018 and amended as
of October 1, 2018 (as amended by the Second Amendment, the "Credit Agreement")
to, among other things, (i) refinance and reprice $272.8 million of existing
term B borrowings that will remain outstanding and (ii) obtain a $355.0 million
senior secured incremental term loan B facility ((i) and (ii) collectively the
"Term Loan") with Barclays Bank, which increased the amount of term loan
indebtedness outstanding under the Company's Credit Facilities.
The Term Loan has a maturity date of August 27, 2025, with monthly interest
payments in arrears, quarterly principal payments of 0.625% of the outstanding
principal balance as of March 31, 2021, with the remaining principal paid upon
maturity. Under the Credit Facilities, the Company may elect that the Term Loan
bear interest at a rate per annum equal to either (a) "ABR" (as defined in the
Credit Agreement), plus the applicable margin or (b) the "Eurodollar Rate" (as
defined in the Credit Agreement), based on LIBOR, plus the applicable margin.
The applicable margin for the Term Loan is equal to a rate per annum to either
(i) at any time that the Company's corporate family rating is Ba3 (with a stable
outlook) or higher from Moody's and BB- (with a stable outlook) or higher from
S&P, (x) 3.50% for such Eurodollar term loans and (y) 2.50% for such ABR term
loans or (ii) at all other times, (x) 3.75% for such Eurodollar term loans and
(y) 2.75% for such ABR term loans. Interest on the Term Loan is payable on (1)
in the case of such ABR term loans, the last day of each calendar quarter and
(2) in the case of such Eurodollar term loans, the last day of each relevant
interest period and, in the case of any interest period longer than three
months, on each successive date three months after the first day of such
interest period. On March 29, 2021, the Company elected that the Term Loan
outstanding as of March 31, 2021 accrue interest based on the "Eurodollar Rate"
for an initial interest period of one month. Pursuant to the Second Amendment to
the Credit Agreement, the Credit Facilities contains customary LIBOR replacement
provisions in the event LIBOR is discontinued. At March 31, 2023, the Company
had an outstanding amount under the Term Loan of $491.0 million, gross of
unamortized debt issuance costs of $9.2 million. As of March 31, 2023, the
interest rate on the outstanding Term Loan was 8.4%.
On August 19, 2022, we entered into a Third Amendment (the "Third Amendment") to
the credit agreement dated as of August 27, 2018 and amended as of October 1,
2018 and March 31, 2021 (as amended by the Third Amendment, the "Credit
Agreement") to, among other things, increase the revolving credit facility
portion of the Credit Facilities to $150.0 million with several banks and
Barclays Bank as administrative agent.
The revolving credit facility has an available commitment of $150.0 million and
a maturity date of February 27, 2025. The Company pays a quarterly commitment
fee in arrears equal to 0.25% of the average daily available commitment
outstanding. Outstanding letters of credit reduce the availability of the
revolving credit facility and, as of March 31, 2023, the Company had $146.5
million, net of $3.5 million of outstanding letters of credit, available under
this revolving credit facility.
The letter of credit facility has an available commitment of $65.0 million and a
maturity date of August 27, 2025. The Company pays a quarterly fee in arrears
equal to 2.5% (subject to certain adjustments to the Term Loan) of the dollar
equivalent of all outstanding letters of credit, and a fronting fee equal to
0.125% of the undrawn and unexpired amount of each letter of credit. As of March
31, 2023, the Company had $3.5 million of outstanding letters of credit and
$61.5 million of available commitments remaining under the letter of credit
facility.
The Credit Agreement requires the Company to maintain certain financial
covenants including a consolidated fixed charge coverage ratio (as defined in
the Credit Agreement) as of the last day of any fiscal quarter of at least 1.25
to 1.00, and a consolidated leverage ratio (as defined in the Credit Agreement)
as of the last day of any fiscal quarter of no greater than 3.75 to 1.00. The
Company was in compliance with all financial covenants as of the quarter ended
March 31, 2023.
The Company has a credit agreement with a local bank in the Czech Republic that
provides for a revolving credit facility in the aggregate of up to 5.0 million
euros (approximately $5.4 million). As of March 31, 2023, no debt was
outstanding under this revolving credit facility.
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Fluid Solutions has credit facilities with various financial institutions in
Israel that provides borrowings of up to $18.5 million. As of March 31, 2023,
Fluid Solutions had $10.9 million of outstanding debt with average interest rate
ranges from 4.9% to 7.9%.
As of March 31, 2023, the Company's total bank debt was $501.9 million, net of
unamortized debt issuance costs of $9.2 million. As of March 31, 2023, the
Company had $146.5 million, $5.4 million and $7.6 million available to draw from
our credit facilities in the U.S., Czech Republic and Israel, respectively.
The fair value of the Company's long-term debt was based on Level 2 inputs, and
fair value was determined using quoted prices for similar liabilities in
inactive markets. The Company's carrying value approximates fair value for the
Company's long-term debt.
Capital Expenditures
Capital expenditures were $27.3 million during the three months ended March 31,
2023 and were primarily attributable to the capital invested in our
manufacturing facilities worldwide as well as costs associated with the ongoing
design and implementation of our new enterprise resource planning system. The
Company's anticipated capital expenditures for the remainder of 2023 are
expected to be financed primarily from our cash flow generated from operations.
Contractual Obligations
The Company had commitments to various third parties to purchase inventories
totaling approximately $528.1 million as of March 31, 2023.
In conjunction with the sale of our products in the ordinary course of business,
we provide standard indemnification against certain liabilities to our
customers, which may include claims of losses by their own customers resulting
out of property damages, bodily injuries or deaths, or infringement of
intellectual property rights by our products. Our potential liability arising
out of intellectual property infringement claims by any third party is generally
uncapped. As of March 31, 2023, we have not incurred any significant costs to
defend lawsuits or settle claims related to these indemnification arrangements.
As a result, we believe the estimated fair value of these arrangements is
minimal.
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