ULTRA CLEAN HOLDINGS, INC. 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 theSEC onFebruary 23, 2021 . 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 theSEC onFebruary 23, 2021 , as updated in our Current Report on Form 8-K filed with theSEC onApril 5, 2021 . 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, ultra-high purity cleaning and analytical services primarily for the semiconductor industry.Ultra Clean offers its customers an integrated outsourced solution for major subassemblies, improved design-to-delivery cycle times, design for manufacturability, prototyping and component manufacturing, and tool chamber parts cleaning and coating, as well as micro-contamination analytical services. We operate and report results for two operating segments: Products and Services (formerly known as "SPS" and "SSB", respectively). Our Products business primarily designs, engineers and manufactures production tools, 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 business 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 sell a majority of our products and provide most of our services toU.S. registered customers with locations both in and outside theU.S. In addition toU.S. manufacturing and service operations, we manufacture products and provide parts cleaning and other related services in our Asian and European facilities to support local andU.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 including mobile demand driven by 5G, new CPU architectures which are enabling higher performance servers, and cloud, AI and Machine Learning. 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 division is benefiting as device manufacturers rely on precision cleaning, coating and analytics to advance ever more complex devices.
Critical Accounting Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted inthe 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 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 toDecember 25, 2020 . 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 endedDecember 25, 2020 , as filed with theSEC . - 24 -
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Results of Operations Fiscal Year Our fiscal year is the 52- or 53-week period ending on the Friday nearestDecember 31 . Fiscal year 2021 is the 53-week period endingDecember 31, 2021 , and fiscal year 2020 was the 52-week period endedDecember 25, 2020 . The fiscal quarters endedMarch 26, 2021 andMarch 27, 2020 were both 13-week periods.
Discussion of Results of Operations for the Three months ended
Revenues
Three Months Ended
Revenues by Segment March 26, March 27, Percent
(Dollars in millions) 2021 2020 Change
Products $ 345.6 $ 259.4 33.2 %
Services 72.0 61.5 17.1 %
Total Revenues $ 417.6 $ 320.9 30.1 % Products as a percentage of total revenues 82.8 % 80.8 % Services as a percentage of total revenues 17.2 % 19.2 %
Total Products revenues increased in the three months endedMarch 26, 2021 , compared to the same period in the prior year, primarily due to an increase in customer demand in the semiconductor industry, in particular, the wafer fabrication equipment industry. Total Services revenues increased in the three months endedMarch 26, 2021 , compared to the same period in the prior year, primarily due to increases in demand across our customer base. Three Months Ended Revenues by Geography March 26, March 27, Percent (Dollars in millions) 2021 2020 Change United States$ 144.7 $ 135.1 7.1 % International 272.9 185.8 46.9 % Total Revenues$ 417.6 $ 320.9 30.1 %
Unites States as a percentage of total revenues 34.7 % 42.1 % International as a percentage of total revenues 65.3 % 57.9 %
On a geographic basis, revenues represent products shipped from or services performed at ourU.S. and international locations. For the three months endedMarch 26, 2021 ,U.S. revenues increased due to overall increase in semiconductor industry demand in theU.S. For the three months endedMarch 26, 2021 , international revenue increased in absolute terms and as a percentage of total revenue, primarily due to the overall higher semiconductor and semiconductor capital equipment demand outside of theU.S. Cost of Revenues Three Months Ended Cost of Revenues by Segment March 26, March 27, Percent (Dollars in millions) 2021 2020 Change Products$ 283.6 $ 214.7 32.1 % Services 47.1 40.5 16.3 % Total Cost of Revenues$ 330.7 $ 255.2 29.6 %
Products as a percentage of total Products revenues 82.1 % 82.8 % Services as a percentage of total Services revenues 65.4 % 65.9 %
Total cost of revenues increased
Cost of Products revenues consists of purchased materials, direct labor and manufacturing overhead. Cost of Products revenues increased$68.8 million for the three months endedMarch 26, 2021 compared to the same period in the prior year, due to higher volume of sales driving increased material costs of$59.3 million , higher direct labor spending of$2.6 million and higher overhead costs of$6.9 million - 25 -
-------------------------------------------------------------------------------- Cost of Services revenues consists of direct labor, manufacturing overhead and materials (such as chemicals, gases and consumables). Cost of Services revenues increased$6.6 million in the three months endedMarch 26, 2021 compared to the same period in the prior year driven by higher volumes of service orders, resulting in an increase in labor costs of$2.4 million (the largest component of Services' total cost of revenues), higher material costs of$2.0 million and higher overhead costs of$2.3 million driven by higher service orders. Gross Margin Three Months Ended Gross Profit by Segment March 26, March 27, Percent (Dollars in millions) 2021 2020 Change Products$ 62.0 $ 44.7 38.7 % Services 24.9 21.0 18.6 % Gross profit$ 86.9 $ 65.7 32.3 % Gross Margin by Segment Products 17.9 % 17.2 % Services 34.6 % 34.1 %Total Company 20.8 % 20.5 % Products gross margin increased in the three months endedMarch 26, 2021 , compared to the same period in the prior year, due primarily to higher volume, and the mix of higher margin products. Services gross margin increased in the three months endedMarch 26, 2021 , compared to the same period in the prior year, due to direct labor efficiencies along with lower facility-related costs.
Research and Development
Three Months Ended
March 26, March 27, Percent
(Dollars in millions) 2021 2020 Change
Research and development $ 4.2 $ 3.4 23.5 %
Research and development as a percentage of
total revenues 1.0 % 1.1 %
Research and development expenses increased $0.8 million when comparing the
three months ended March 26, 2021 with the comparable period in the prior year
due to an increase in personnel-related expenses associated with an increase in
headcount.
Sales and Marketing
Three Months Ended
March 26, March 27, Percent
(Dollars in millions) 2021 2020 Change
Sales and marketing $ 7.6 $ 5.8 31.0 %
Sales and marketing as a percentage of total
revenues 1.8 % 1.8 %
Sales and marketing expenses increased $1.8 million when comparing the three
months ended March 26, 2021 with the comparable period in the prior year due to
an increase of $1.2 million in personnel-related expenses, primarily increases
in headcount, and recruiting fees of $0.2 million .
General and Administrative
Three Months Ended
March 26, March 27, Percent
(Dollars in millions) 2021 2020 Change
General and administrative $ 34.7 $ 33.9 2.4 %
General and administrative as a percentage of
total revenues 8.3 % 10.6 %
General and administrative expenses increased $0.8 million in the three months
ended March 26, 2021 , compared to the same period in the prior year, due to $1.3
million of acquisition-related costs related to the acquisition of Ham-Let
(Israel - Canada) Ltd. , and $0.7
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higher personnel-related expenses due to an increases in headcount, partially
offset by a
Interest and Other Income (Expense), net
Three Months Ended
March 26, March 27, Percent
(Dollars in millions) 2021 2020 Change
Interest income $ 0.1 $ 0.3 -66.7 %
Interest expense $ (3.6 ) $ (5.2 ) -30.8 %
Other income (expense), net
Interest expense decreased in the three months endedMarch 26, 2021 , compared to the same periods in the prior year, due to a lower average debt balance, lower interest rates resulting from lower LIBOR rates and higher interest expense capitalized on borrowings related to qualified capital expenditures. Other income (expense), net increased in the three months endedMarch 26, 2021 , compared to the same period in the prior year, due to an increase of$11.6 million in the fair value of forward contracts related to the non-U.S. dollar-denominated acquisition price of Ham-Let. These expenses were partially offset by insurance proceeds of$7.3 million received for the reimbursement of our losses in the Cinos Korea fire. Provision for Income Taxes Three Months Ended March 26, March 27, Percent (Dollars in millions) 2021 2020 Change Provision for income taxes$ 7.0 $ 4.5 55.6 % Effective tax rate 21.5 % 29.8 % The change in respective rates reflects, primarily, 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
Liquidity and Capital Resources
Cash and cash Equivalents
The following table summarizes our cash and cash equivalents:
March 26, December 25,
(In millions) 2021 2020 Increase
Total cash and cash equivalents $ 264.3 $ 200.3 $ 64.0
Three Months Ended
March 26, March 27,
(In millions) 2021 2020
Net cash flow provided by (used in):
Operating activities $ 65.6 $ 15.7
Investing activities 0.8 (6.7 )
Financing activities (1.6 ) 37.0
Effects of exchange rate changes on cash and cash
equivalents (0.8 ) (0.4 )
Net increase in cash and cash equivalents $ 64.0 $ 45.6
Our primary cash inflows and outflows were as follows:
• In the three months ended
activities of
period endedMarch 27, 2020 . The$49.9 million increase in net cash from operating activities was - 27 -
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driven by a
liabilities,
million increase in net income.
• The major contributors to the net change in operating assets and liabilities,
net of effects of acquisition, in the three months ended
as follows:
o Accounts receivable increased
in revenues in fiscal 2021 and the timing of collections.
o Inventories increased
outlook in 2021.
o Accounts payable increased
benefits decreased
million and other liabilities increased
timing of payments.
• In the three months ended
activities was
million received in the first quarter of fiscal 2021, offset by
of purchases of property, plant and equipment.
• In the three months ended
activities was
the three months ended
drawings and payments on bank borrowings. We have required capital to fund our working capital needs, satisfy our debt obligations, maintain our equipment, purchase new capital equipment and make strategic acquisitions from time to time. As ofMarch 26, 2021 , we had cash of$264.3 million compared to$200.3 million as ofDecember 25, 2020 . 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 ofMarch 26, 2021 . 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 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 new 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 prior years, we determined that a portion of the current year and future year earnings of one of ourChina subsidiaries may be remitted in the future to one of our foreign subsidiaries outside ofChina and, accordingly, we provided for the related withholding taxes in our Condensed Consolidated Financial Statements. As ofMarch 26, 2021 , we had undistributed earnings of foreign subsidiaries that are indefinitely invested outside of theU.S. of approximately$305.0 million . As ofMarch 26, 2021 , we have cash of approximately$235.0 million in our foreign subsidiaries.
Borrowing Arrangements
The following table summarizes our borrowings:
March 26, 2021
Weighted-
Average
(Dollars in millions) Amount Interest Rate
U.S. Term Loan $ 272.8 4.6 %
Cinos China Credit Facilities 2.4 3.1 %
Debt issuance costs (7.4 )
$ 267.8 In
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the Credit Facility by granting a first priority lien in substantially all of
our respective personal property assets (subject to certain exceptions and
limitations). In August 2018 , we borrowed $350.0 million under the Term Loan and
used the proceeds, together with cash on hand, to finance the acquisition of QGT
and to refinance our previous 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 original
outstanding principal balance payable beginning January 2019 , with the remaining
principal paid upon maturity. The Term Loan accrues interest daily at a rate
equal to a base LIBOR rate determined by reference to the London interbank
offered rate for dollars, plus 4.5% (subject to certain adjustments quarterly
based upon the Company's consolidated leverage ratio). At March 26, 2021 , we had
an outstanding amount under the Term Loan of $272.8 million , gross of
unamortized debt issuance costs of $7.4 million . As of March 26, 2021 , the
interest rate on the outstanding Term Loan was 4.6%. On December 31, 2021 , LIBOR
will officially be phased out. The Company will work with its bank to determine
alternative risk-free rates.
The Revolving Credit Facility has an initial available commitment of
The Credit Agreement requires that we 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 New Credit Agreement) as of the last day of any fiscal quarter of no greater than 3.75 to 1.00. We were in compliance with all covenants for the quarter endedMarch 26, 2021 . The Letter of Credit Facility has an initial available commitment of$50.0 million and a maturity date ofAugust 27, 2023 . We pay quarterly in arrears a fee equal to 2.5% (subject to certain adjustments as per the Term Loans) 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 ofMarch 26, 2021 , we had$2.4 million of outstanding letters of credit with beneficiaries such as landlords of certain facility leases and government agencies making up the majority of the outstanding balance. The remaining available commitments are$47.6 million on the Letter of Credit Facility and$65.0 million on the Revolving Credit Facility. In fiscal 2020, Cinos China amended its existing Credit Agreement and entered into two additional Credit Agreements with a local bank that provide Revolving Credit Facilities for a total available commitment of$3.5 million with various maturity dates throughSeptember 23, 2022 and interest rates ranging from 2.0% to 4.1%. As ofMarch 26, 2021 , Cinos China had an outstanding amount of$ 2.4 million with an interest rate of 3.1% under these Credit Agreements. Cinos Korea has Credit Agreements with various banks that provide Revolving Credit Facilities for a total available commitment of1.6 billion Korean Won (approximately$1.4 million ) with annual renewals beginning fromApril 2021 throughJune 2021 and interest rates ranging from 2.5% - 3.7%. During the three months endedMarch 26, 2021 , borrowings under these Revolving Facilities were insignificant and no amounts were outstanding as ofMarch 26, 2021 . UCT Fluid Delivery Solutions s.r.o. (FDS) has a credit agreement with a local bank in theCzech Republic that provides for a revolving credit facility in the aggregate of up to6.0 million euros . As ofMarch 26, 2021 , FDS had no outstanding amount under its revolving credit facility. As ofMarch 26, 2021 , our total bank debt was$267.8 million , net of unamortized debt issuance costs of$7.4 million . As ofMarch 26, 2021 , we had unused revolving credit facilities of$65.0 million ,$7.1 million and$1.1 million inthe United States ,Czech Republic andChina , respectively. The fair value of our long-term debt was based on Level 2 inputs, and fair value was determined using quoted prices for similar liabilities in inactive markets. The carrying value of our long-term debt approximates fair value. OnMarch 31, 2021 , we completed the acquisition ofHam-Let (Israel-Canada) Ltd. (Ham-Let), a public company organized under the laws of theState of Israel , pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), for approximately$351.0 million in cash. Our primary reason for this acquisition is to broaden our semiconductor serviceable available market and provides access to a new set of customers in the semiconductor fab infrastructure and sub-fab market. In connection with the consummation of the acquisition, we entered into a Second Amendment datedMarch 31, 2021 to the Credit Agreement dated as ofAugust 27, 2018 , and amended as ofOctober 1, 2018 , to refinance and reprice its approximately$273.0 million of existing term B borrowings that will remain outstanding and obtain a$355.0 million senior secured incremental term loan B facility (the "Incremental Term Loan") with Barclays Bank PLC, which increased the amount of term loan indebtedness outstanding under the Credit Agreement. The Incremental Term Loan has a maturity date ofAugust 27, 2025 , with monthly interest payments in arrears, quarterly principal payments of 0.625% of the original outstanding principal balance payable beginningJuly 2021 , with the remaining principal balance paid upon maturity. The Term Loan accrues interest at a rate equal to a base LIBOR rate determined by reference to theLondon interbank offered rate for dollars, plus 3.75% (subject to certain adjustments quarterly based upon our consolidated leverage ratio). - 29 - --------------------------------------------------------------------------------
The Incremental Term Loan, together with cash on hand, was used to finance the acquisition, to refinance the existing debt of Ham-Let and to pay fees and expenses incurred in connection with the Incremental Term Loan and the acquisition of Ham-Let.
Capital Expenditures
Capital expenditures were$6.8 million during the three months endedMarch 26, 2021 and were primarily attributable to the capital invested in our manufacturing facilities inthe United States ,China andSouth Korea 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 2021 are expected to be financed primarily from our cash flow generated from operations.
Off-Balance Sheet Arrangements
During the periods presented, we do not have unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 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 ofMarch 26, 2021 , 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.
Contractual Obligations
Other than operating leases for certain equipment and real estate and purchase order commitments primarily for inventory, we have no off-balance sheet transactions or similar instruments and, other than the arrangements described under "Borrowing Arrangements" above and our common stock purchase obligations resulting from the acquisition of QGT, are not a guarantor of any other entities' debt or other financial obligations. The following table summarizes our future minimum lease payments, principal payments under debt obligations and our purchase obligations for the purchase of inventory as ofMarch 26, 2021 : Fiscal Year Fiscal Years Fiscal Years (In millions) Total 2021 2022 - 2023 2024 - 2025 Beyond Operating leases (1)$ 75.2 $ 11.5 $ 26.8 $ 17.0$ 19.9 Borrowing arrangements (2) 275.2 7.6 18.9 17.5 231.2 Common stock purchase obligation (3) 12.6 - 12.6 - - Purchase order commitments (4) 297.9 297.9 - - - Total$ 660.9 $ 317.0 $ 58.3 $ 34.5$ 251.1
(1) The Company leases facilities in
under non-cancellable leases that expire on various dates through 2031. The
total balance of
the Company's operating leases, however, the total operating lease
liabilities as disclosed in the condensed consolidated balance sheets are
presented on a discounted present value basis and excludes lease agreements
with commencement date after
provisions of ASC 842, "Leases".
(2) The total borrowing arrangements reflects obligations under our Term loan
totaling
costs, and
(3) The Company is obligated to purchase the common stock owned by one of
shareholders. See Note 11 of the Notes to the Condensed Consolidated
Financial Statements.
(4) Represents our outstanding purchase orders primarily for inventory.
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