Ultra Clean Holdings, Inc.: Form 10-Q for the period ended Mar 28, 2025

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.

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

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.

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.

Cost of Revenues

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

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

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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

(Dollars in millions)

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

(Dollars in millions)

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

(Dollars in millions)

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

(Dollars in millions)

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 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

(Dollars in millions)

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)

The following table summarizes the Condensed Consolidated Statements of Cash Flow information:

(In millions)

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.
• 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:

(Dollars in millions)

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.

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.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the period covered by this report. Refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for our fiscal year ended December 27, 2024, for a more complete discussion of the market risks we encounter.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange Act. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, our chief executive officer and our chief financial officer concluded the disclosure controls and procedures were not effective as of March 28, 2025, the end of the period covered by this Quarterly Report on Form 10-Q, due to material weaknesses in internal control over financial reporting described below.

Material Weaknesses in Internal Control Over Financial Reporting

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2024, the Company identified the following material weaknesses in our internal control over financial reporting that continue to exist as of March 28, 2025.

The Company did not design and maintain effective controls relating to the: (i) sufficiency of processes related to identifying and analyzing risks to the achievement of objectives across the Company, (ii) sufficiency of competent personnel to analyze risks of material misstatement and develop internal control activities to support the achievement of the Company’s internal control objectives; and (iii) monitoring of control activities in accordance with established policies in a timely manner.

These material weaknesses contributed to the following additional material weaknesses:

(a) The Company did not design and maintain effective information technology (“IT”) general controls for certain information systems that are relevant to the preparation of its consolidated financial statements. Specifically, for certain of the Fluid Solutions operating subsidiaries in the Products segment which have not been migrated to the Company’s primary ERP system, the Company did not design and maintain (i) program change management controls to ensure that IT program and data changes are identified, tested, authorized and implemented appropriately, and (ii) user access controls to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate company personnel.

(b) The Company did not design and maintain effective controls for certain other international operating subsidiaries in the Products segment. Specifically, the Company did not design and maintain effective segregation of duties controls across various business processes, including journal entries.

The material weaknesses described above did not result in any material misstatements to annual or interim consolidated financial statements. However, these material weaknesses could result in misstatements of our consolidated financial statements that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Plan and Progress

Management has been executing and remains committed to implementing measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively.

In response to all material weaknesses, management has taken the following actions:

• engaged an external advisor to assist with evaluating and documenting the design and operating effectiveness of internal controls and to assist with the remediation of deficiencies, as necessary;
• hired additional IT, accounting, and finance personnel to support our remediation efforts, including a Vice President of Internal Audit, as well as third-party resources with relevant expertise to augment our internal resources;
• formalized roles and responsibilities within the organization to establish ownership of workstreams to identify and analyze risks of material misstatement, develop internal control activities to support the achievement of the Company’s internal control objectives, and monitor the effective performance of those control objectives;
• performed an entity-wide risk assessment of information technology systems and business processes by operating subsidiary; and
• assessed the specific training needs for newly hired and existing personnel and developed and delivered training programs designed to support our internal controls.

In response to the material weakness “(a)” management has taken the following actions:

• in process of designing and implementing change management and user access review controls for relevant information technology systems at certain Fluid Solutions operating subsidiaries not yet migrated to our primary ERP system. Management also continues to design and implement other user access controls to ensure appropriate segregation of duties that adequately restrict user access to our financial applications and data to appropriate company personnel.

In response to the material weakness “(b)” management has taken the following actions:

• in process of designing and implementing controls over segregation of duties assessment to identify key conflicts, establishing policies and procedures to maintain effective segregation of duties, and identifying and implementing mitigating controls for any key conflicts identified for certain other international operating subsidiaries in the Products segment which have not been migrated to the Company’s primary ERP system.

As we continue to evaluate and work to improve our internal control over financial reporting, we may decide to take additional measures to address the material weaknesses or modify the remediation plans described above. We believe that these actions will remediate the material weaknesses, however the material weaknesses will not be considered remediated until we conclude all measures necessary to remediate the material weaknesses have been designed, implemented, and the applicable controls have operated for a sufficient period of time, and management has concluded, through testing, that these controls are designed and operating effectively. While Management believes that the aforementioned plans will remediate the material weaknesses, there is no assurance on the exact timing of the completion of the remediation.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 28, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no material changes during the period covered in this report to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 27, 2024.