Ultra Clean Holdings, Inc. 10-Q

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 and in our Annual Report on Form 10-K filed with the SEC on February 25, 2025. 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 February 25, 2025. 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 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 both domestic and international locations. 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 process architecture (e.g. gate all around) and memory devices (e.g. high bandwidth memory) necessary for cloud, artificial intelligence (“AI”) and machine learning (“ML”) 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 ongoing basis, we evaluate our estimates and judgments, including those related to inventories, income taxes, business combinations, contingent earn-out liabilities 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. - 22 - Table of Contents 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 27, 2024. 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 27, 2024, as filed with the SEC. Results of Operations Fiscal Year Our fiscal year is the 52- or 53-week period ending on the Friday nearest December 31. Fiscal year 2025 is a 52-week period ending December 26, 2025 and fiscal year 2024 was a 52-week ended December 27, 2024. The fiscal quarters ended March 28, 2025 and March 29, 2024 were both 13-week periods. Discussion of Results of Operations for the Three months ended March 28, 2025 compared to the Three months ended March 29, 2024 Revenues Three Months Ended Revenues by Segment (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Products $ 457.0 $ 418.5 9.2 % Services 61.6 59.2 4.1 % Total revenues $ 518.6 $ 477.7 8.6 % Products as a percentage of total revenues 88.1 % 87.6 % Services as a percentage of total revenues 11.9 % 12.4 % For the three-month period ended March 28, 2025, Products revenues increased compared to the same period in the prior year. The increase in Products revenues was primarily due to an increase in customer demand, along with an overall market improvement in the semiconductor industry. Services revenues increased for the three-month period ended March 28, 2025 compared to the same period in the prior year primarily due to an increase in demand across its customer base. Three Months Ended Revenues by Geography (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change United States $ 119.8 $ 141.0 (15.0) % International 398.8 336.7 18.4 % Total revenues $ 518.6 $ 477.7 8.6 % United States as a percentage of total revenues 23.1 % 29.5 % International as a percentage of total revenues 76.9 % 70.5 % Revenues by geographic area are categorized based on the customer’s location to which the products were shipped or services were performed. For the three months ended March 28, 2025, U.S. revenues decreased compared to the same period in the prior year, primarily due to a shift of product revenues from U.S. to international markets. International revenues increased for the three months ended March 28, 2025 compared to the same period in the prior year, primarily as a result of market improvement driving higher customer demand. - 23 - Table of Contents Cost of Revenues Three Months Ended Cost of revenues by Segment (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Products $ 390.3 $ 354.0 10.3 % Services 44.3 41.1 7.8 % Total Cost of revenues $ 434.6 $ 395.1 10.0 % Products cost as a percentage of total Products revenues 85.4 % 84.6 % Services cost as a percentage of total Services revenues 71.9 % 69.4 % Cost of Products revenues consists of purchased materials, direct labor and manufacturing overhead. For the three-month period ended March 28, 2025, Cost of Products revenues increased by $36.3 million compared to the same period in the prior year. The increase was primarily driven by higher sales volumes, which resulted in a $30.7 million increase in material costs. The remaining increase was attributable to higher labor and overhead costs associated with increased production activity. Services Cost of revenues consists of direct labor, overhead, and materials such as chemicals, gases and consumables. For the three-month period ended March 28, 2025, Services Cost of revenues increased by $3.2 million compared to the same period in the prior year. The increase was driven by a higher volume of service orders, which resulted in increased labor costs of $1.7 million and overhead cost of $1.6 million. Gross Margin Three Months Ended Gross Profit by Segment (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Products $ 66.7 $ 64.5 3.4 % Services 17.3 18.1 (4.4) % Gross profit $ 84.0 $ 82.6 1.7 % Gross Margin by Segment Products 14.6 % 15.4 % Services 28.1 % 30.6 % Total Company 16.2 % 17.3 % Gross profit and gross margins fluctuate with revenue levels, product mix, material costs, and labor costs. Products gross profit increased for the three-month period ended March 28, 2025 compared to the same period in the prior year primarily due to higher revenue levels. However, Products gross margin decreased primarily due to an unfavorable product mix and a shift in sales volumes across different geographic regions. Services gross profit and gross margin decreased for the three-month period ended March 28, 2025 compared to the same period in the prior year. The decrease was primarily due to higher fixed costs which did not scale proportionately with the increase in Services revenue. Operating Margin Three Months Ended Operating Profit by Segment (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Products $ 10.1 $ 14.7 (31.3) % Services 2.8 2.6 7.7 % Operating profit $ 12.9 $ 17.3 (25.4) % Operating Margin by Segment Products 2.2 % 3.5 % Services 4.5 % 4.4 % Total Company 2.5 % 3.6 % - 24 - Table of Contents Operating profit and operating margin of Products decreased for the three-month period ended March 28, 2025 compared to the same period in the prior year. The decrease was primarily due to higher employee-related expenses, which were driven by increased compensation costs. These included annual salary increases, higher incentive compensation, and separation costs associated with the resignation of the Company’s former Chief Executive Officer (CEO). Operating profit and operating margin of Services were consistent for the three-month period ended March 28, 2025 compared to the same period in the prior year. Research and Development Three Months Ended (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Research and development $ 7.6 $ 7.0 8.6 % Research and development as a percentage of total revenues 1.5 % 1.5 % Research and development expenses remained consistent for the three-month period ended March 28, 2025 compared to the same period in the prior year. Sales and Marketing Three Months Ended (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Sales and marketing $ 14.9 $ 13.7 8.8 % Sales and marketing as a percentage of total revenues 2.9 % 2.9 % Sales and marketing expenses increased for the three-month period ended March 28, 2025 compared to the same period in the prior year primarily due to higher employee-related expenses. General and Administrative Three Months Ended (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change General and administrative $ 48.6 $ 44.6 9.0 % General and administrative as a percentage of total revenues 9.4 % 9.3 % General and administrative expenses increased $4.0 million in the three-month period ended March 28, 2025 compared to the same period in the prior year. The increase was primarily driven by non-recurring separation costs related to the resignation of the Company’s CEO, as well as an increase in employee-related expenses due to higher compensation costs, including annual salary increases and higher incentive compensation accruals. These increases were partially offset by a decrease in stock-based compensation expense resulting from the forfeiture of restricted stock units and performance stock units following the former CEO’s resignation. Interest and Other Expense, net Three Months Ended (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Interest income $ 1.1 $ 1.4 (21.4) % Interest expense $ (9.9) $ (12.2) (18.9) % Other income (expense), net $ 0.8 $ (3.8) (121.1) % Interest income was consistent in the three-month period ended March 28, 2025 compared to the same period in the prior year. Interest expense decreased for the three-month period ended March 28, 2025 compared to the same period in the prior year primarily due to lower interest rates and reduced amortization of debt issuance costs. Other income (expense), net, increased by $4.6 million for the three-month period ended March 28, 2025 compared to the same period in the prior year. This increase was primarily due to favorable foreign exchange transaction and - 25 - Table of Contents remeasurement gains, as well as the absence of $1.3 million loss from the change in the fair value of contingent earn-out in the prior period. Provision for Income Taxes Three Months Ended (Dollars in millions) March 28, 2025 March 29, 2024 Percent Change Provision for income taxes $ 7.4 $ 9.9 (25.3) % Effective tax rate 151.0 % 366.7 % The decrease in the effective tax rate for the three-month period ended March 28, 2025 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 valuation allowances on deferred tax assets. Company management continuously evaluates the need for a valuation allowance on its deferred tax assets and, as of March 28, 2025, concluded that a full valuation allowance on its U.S. 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: (In millions) March 28, 2025 December 27, 2024 Increase Total cash and cash equivalents $ 317.6 $ 313.9 $ 3.7 The following table summarizes the Condensed Consolidated Statements of Cash Flow information: Three Months Ended (In millions) March 28, 2025 March 29, 2024 Operating activities $ 28.2 $ 9.8 Investing activities (12.4) (17.9) Financing activities (12.2) (4.5) Effects of exchange rate changes on cash and cash equivalents 0.1 (1.4) Net increase (decrease) in cash and cash equivalents $ 3.7 $ (14.0) Our primary cash inflows and outflows were as follows: • For the three-month period ended March 28, 2025, we generated cash from operating activities of $28.2 million compared to $9.8 million for the same period in the prior year. The $18.4 million increase in net cash provided by operating activities was primarily driven by a $16.4 million favorable change in net working capital and a $4.7 million increase in net income, partially offset by $2.7 million decrease in non-cash items included in net income. • The major contributors in net changes in operating assets and liabilities for the three-month period ended March 28, 2025 were as follows: ◦ Accounts receivable decreased $23.1 million primarily due to the timing of shipments and collections and $6.4 million decrease in inventories due to increased production levels and corresponding consumption of inventory balances. ◦ Accounts payable decreased $8.5 million, other liabilities decreased $2.3 million, and accrued compensation and related benefits decreased $10.4 million, primarily due to the timing of payments. • Net cash used in investing activities during the three-month period ended March 28, 2025 and March 29, 2024 consisted primarily of $12.4 million and $18.0 million purchases of property, plant and equipment, respectively. - 26 - Table of Contents • During the three-month period ended March 28, 2025, cash used in financing activities was $12.2 million compared to $4.5 million in the same period in the prior year. The $7.7 million increase in net cash used by financing activities was primarily due to $7.5 million additional principal payments on bank borrowings. 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 28, 2025, we had cash and cash equivalents of $317.6 million compared to $313.9 million as of December 27, 2024. 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 28, 2025. 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. As of March 28, 2025, there were outstanding customer invoices amounting to $7.5 million that we factored 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 28, 2025, we have cash of approximately $277.5 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. It is the Company’s practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations, except for certain of its subsidiaries based in Singapore. However, since there is no expected Singapore or U.S. tax liability on a distribution of those earnings, the Company does not have taxes accrued for unremitted foreign earnings as of March 28, 2025. Borrowing Arrangements The following table summarizes our borrowings: March 28, 2025 (Dollars in millions) Amount Weighted- Average Interest Rate U.S. Term Loan $ 487.5 7.6 % Debt issuance costs (6.6) $ 480.9 At March 28, 2025, the Company had an outstanding amount under the Term Loan of $487.5 million, gross of unamortized debt issuance costs of $6.6 million. As of March 28, 2025, the interest rate on the outstanding Term Loan was 7.6%. As of March 28, 2025, the Company had $146.4 million, net of $3.6 million of outstanding letters of credit, available under this revolving credit facility. As of March 28, 2025, the Company was in compliance with the financial covenants contained within the Amended Credit Agreement. The Company maintains credit agreements with a local bank in Czechia and with a financial institution in Israel, which provide for revolving credit facilities of up to 7.0 million euros (approximately $7.5 million) and $5.0 million, respectively. As of March 28, 2025, there were no borrowings outstanding under these facilities. As of March 28, 2025, the Company’s total bank debt was $480.9 million, net of unamortized debt issuance costs of $6.6 million. As of March 28, 2025, the Company had $146.4 million, $5.0 million and $7.5 million available to draw from our credit facilities in the U.S., Israel and Czechia, respectively. - 27 - Table of Contents See Note 6 - Borrowing Arrangements, of our Condensed Consolidated Financial Statements, included in Part 1 of this Form-10Q for additional information. Capital Expenditures Capital expenditures were $12.4 million during the three months ended March 28, 2025 and were primarily attributable to the capital invested in our manufacturing facilities worldwide. The Company’s anticipated capital expenditures for the remainder of 2025 are expected to be financed primarily from our cash flow generated from operations and cash on hand. Contractual Obligations The Company had commitments to various third parties to purchase inventories totaling approximately $403.6 million as of March 28, 2025. 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 28, 2025, 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. - 28 - Table of Contents