e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the transition period from to
Commission file number 000-50646
Ultra Clean Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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61-1430858 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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150 Independence Drive, Menlo Park, California
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94025-1136 |
(Address of principal executive offices)
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(Zip Code) |
(650) 323-4100
Registrants telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Number of shares outstanding of the issuers common stock as of July 31, 2006:
20,808,362.
ULTRA CLEAN HOLDINGS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRA CLEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share amounts)
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June 30, |
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December 31, |
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2006 |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
18,958 |
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$ |
10,663 |
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Accounts receivable |
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51,982 |
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19,528 |
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Inventory |
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45,105 |
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19,106 |
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Deferred income taxes |
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2,255 |
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2,294 |
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Prepaid expenses and other |
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2,619 |
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1,672 |
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Total current assets |
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120,919 |
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53,263 |
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Equipment and leasehold improvements, net |
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7,856 |
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4,312 |
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Goodwill |
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31,857 |
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6,084 |
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Intangible assets |
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23,587 |
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8,987 |
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Deferred income taxes |
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2,132 |
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2,132 |
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Other non-current assets |
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331 |
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231 |
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Total assets |
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$ |
186,682 |
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$ |
75,009 |
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LIABILITIES & STOCKHOLDERS EQUITY |
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Current liabilities: |
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Bank borrowings |
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$ |
6,172 |
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$ |
2,343 |
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Accounts payable |
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44,319 |
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14,188 |
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Accrued compensation and related benefits |
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3,274 |
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769 |
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Other accrued expenses and liabilities |
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4,600 |
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2,004 |
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Capital lease obligations, current portion |
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57 |
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70 |
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Total current liabilities |
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58,422 |
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19,374 |
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Long-term debt |
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28,589 |
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Deferred tax liability |
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5,723 |
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Capital lease obligations and other liabilities |
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325 |
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354 |
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Total liabilities |
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93,059 |
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19,728 |
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Commitments and contingencies (see Note 8) |
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Stockholders Equity: |
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Preferred stock $0.001 par value, 10,000,000 authorized; none outstanding |
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Common stock $0.001 par value, 90,000,000 authorized; 20,800,446 and 16,501,363
shares issued and outstanding, in 2006 and 2005, respectively |
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78,723 |
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46,819 |
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Deferred stock-based compensation |
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(350 |
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Retained earnings |
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14,900 |
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8,812 |
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Total stockholders equity |
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93,623 |
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55,281 |
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Total liabilities and stockholders equity |
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$ |
186,682 |
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$ |
75,009 |
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See accompanying notes to condensed consolidated financial statements
3
ULTRA CLEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net Sales |
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$ |
68,469 |
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$ |
39,289 |
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$ |
125,664 |
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$ |
81,214 |
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Cost of goods sold |
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57,759 |
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33,698 |
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106,763 |
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68,974 |
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Gross profit |
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10,710 |
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5,591 |
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18,901 |
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12,240 |
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Operating expenses: |
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Research and development |
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733 |
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749 |
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1,331 |
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1,436 |
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Sales and marketing |
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1,124 |
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864 |
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2,080 |
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1,758 |
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General and administrative |
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3,638 |
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2,860 |
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6,527 |
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6,223 |
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Total operating expenses |
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5,495 |
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4,473 |
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9,938 |
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9,417 |
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Income from operations |
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5,215 |
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1,118 |
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8,963 |
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2,823 |
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Interest and other income (expense), net |
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(36 |
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28 |
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(523 |
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55 |
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Income before income taxes |
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5,179 |
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1,146 |
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8,440 |
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2,878 |
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Income tax provision |
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1,222 |
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454 |
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2,352 |
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992 |
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Net income |
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$ |
3,957 |
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$ |
692 |
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$ |
6,088 |
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$ |
1,886 |
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Net income per share: |
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Basic |
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$ |
0.22 |
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$ |
0.04 |
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$ |
0.35 |
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$ |
0.12 |
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Diluted |
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$ |
0.21 |
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$ |
0.04 |
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$ |
0.33 |
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$ |
0.11 |
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Shares used in computing net income per share: |
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Basic |
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18,250 |
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16,217 |
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17,566 |
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16,203 |
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Diluted |
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19,168 |
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17,227 |
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18,502 |
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17,116 |
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See accompanying notes to condensed consolidated financial statements
4
ULTRA CLEAN HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
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Six months ended June 30, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
6,088 |
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$ |
1,886 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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950 |
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1,069 |
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Loss on sale of equipment and leasehold improvements |
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30 |
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Amortization of stock-based compensation |
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729 |
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105 |
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Excess tax benefit from stock-based arrangements |
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(597 |
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33 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(18,762 |
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(3,385 |
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Inventory |
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(12,032 |
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1,630 |
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Deferred income taxes, net |
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39 |
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Prepaid expenses and other |
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(570 |
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473 |
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Other non-current assets |
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(33 |
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(50 |
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Accounts payable |
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16,461 |
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(3,776 |
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Accrued compensation and related benefits |
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2,505 |
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(546 |
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Other accrued expenses and liabilities |
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(499 |
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478 |
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Net cash used in operating activities |
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(5,721 |
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(2,053 |
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Cash flows from investing activities: |
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Purchases of equipment and leasehold improvements |
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(1,013 |
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(650 |
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Proceeds from sale of equipment and leasehold improvements |
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9 |
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Net cash used in acquisition |
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(27,606 |
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Net cash used in investing activities |
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(28,619 |
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(641 |
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Cash flows from financing activities: |
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Principal payments on capital lease obligations |
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(29 |
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(40 |
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Proceeds from bank borrowings |
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31,212 |
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2,326 |
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Excess tax benefit from stock-based arrangements |
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597 |
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Proceeds from issuance of common stock |
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10,855 |
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260 |
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Net cash provided by financing activities |
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42,635 |
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2,546 |
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Net increase (decrease) in cash |
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8,295 |
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(148 |
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Cash and cash equivalents at beginning of period |
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10,663 |
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11,440 |
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Cash and cash equivalents at end of period |
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$ |
18,958 |
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$ |
11,292 |
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Supplemental cash flow information: |
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Income taxes paid |
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$ |
1,750 |
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$ |
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Interest paid |
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$ |
106 |
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$ |
22 |
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Non-cash investing and financing activities: |
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Common stock issued in acquisition |
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$ |
20,072 |
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$ |
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See accompanying notes to condensed consolidated financial statements.
5
ULTRA CLEAN HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization Ultra Clean Holdings, Inc. (the Company) is a developer and supplier of
critical subsystems for the semiconductor capital equipment industry, producing primarily gas
delivery systems and other subsystems, including frame and top plate assemblies and process
modules. The Companys products improve efficiency and reduce the costs of our customers design
and manufacturing processes. The Companys customers are primarily original equipment manufacturers
(OEMs) of semiconductor capital equipment. On
June 29, 2006, we completed the acquisition of Sieger
Engineering, Inc. (Sieger) which was renamed UCT Sieger Engineering LLC (UCT Sieger).
Basis of Presentation The unaudited condensed consolidated financial statements included in
this quarterly report on Form 10-Q include the accounts of the Company and its wholly-owned
subsidiaries and have been prepared in accordance with generally accepted accounting principles in
the United States of America (GAAP). This financial information reflects all adjustments which
are, in the opinion of the Company, normal, recurring and necessary to present fairly the
statements of financial position, results of operations and cash flows for the dates and periods
presented. The Companys December 31, 2005 balance sheet data were derived from audited financial
statements as of that date. All significant intercompany transactions and balances have been
eliminated from the information provided.
The presentation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The Company bases its estimates
on experience and on other assumptions that it believes are reasonable under the
circumstances. However, future events are subject to change and the best estimates and judgments
routinely require adjustment. Actual amounts may differ from those estimates.
The unaudited condensed consolidated financial statements should be read in conjunction with
the Companys audited consolidated financial statements for the fiscal year ended December 31,
2005, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission
on February 28, 2006. The Companys results of operations for the three and six months ended June
30, 2006 are not necessarily indicative of the results to be expected for any future periods.
Concentration of Credit Risk Financial instruments that subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company sells its products to U.S.-based semiconductor capital equipment
manufacturers. The Company performs credit evaluations of its customers financial condition and
generally requires no collateral.
The Company had significant sales to three customers, each accounting for 10% or more of total
sales during the quarter: Applied Materials, Inc., Lam Research Corporation and Novellus Systems,
Inc. As a group these three customers accounted for 91% and 90% of the Companys sales for the
three and six months ended June 30, 2006 and 2005, respectively.
Fiscal Year The Company uses a 52-53 week fiscal year ending on the Friday nearest December
31. For presentation purposes, the Company presents each fiscal period as if it ended on the last
day of the month. All references to quarters refer to fiscal quarters.
Comprehensive Income In accordance with SFAS No. 130, Reporting Comprehensive Income, the
Company reports the change in its net assets during the period from non-owner sources by major
components and as a single total. Comprehensive income for the three and six month periods ended
June 30, 2006 and 2005, respectively, was the same as net income.
Income Taxes In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income tax
positions. This Interpretation requires that the Company recognize in the consolidated financial
statements the impact of a tax position that is more likely than not to be sustained upon
examination based on the technical merits of the position. The provisions of FIN 48 will be
effective as of the beginning of the Companys 2007 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained earnings. The Company
is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements.
6
Inventory Costs In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, Inventory Costs (SFAS 151), an amendment of Accounting Research Bulletin No.
43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. We adopted the provisions of SFAS 151 on January 1,
2006 and the adoption did not have a material effect on our consolidated results of operations or
financial position.
Stock-Based Compensation On January 1, 2006 the Company implemented the provisions of
Statement of Financial Accounting Standards No. 123(R), Share-Based Payments (SFAS 123(R)),
using the modified prospective transition method. SFAS 123(R) requires companies to recognize the
cost of employee services received in exchange for awards of equity instruments based upon the
grant-date fair value of those awards. Using the modified prospective transition method of adopting
SFAS 123(R), the Company began recognizing compensation expense for equity-based awards granted
after January 1, 2006 plus unvested awards granted prior to January 1, 2006. Under this method of
implementation, no restatement of prior periods has been made.
Equity-based compensation expense from stock options and the related income tax benefit from
the expense recognized under SFAS 123(R) was $343,000 and $106,000, respectively, for the three
months ended June 30, 2006 and $629,000 and $195,000, respectively, for the six months ended June
30, 2006. The estimated fair value of the Companys equity-based awards, less expected forfeitures,
is amortized over the awards vesting period on a straight-line basis. The implementation of SFAS
123(R) reduced basic and fully diluted earnings per share by $0.01 and $0.02 for the three and six
months ended June 20, 2006, respectively.
The following table shows total stock-based compensation expense included in the Condensed
Consolidated Statements of Operations for the three and six months ended June 30, 2006 (in
thousands):
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Three Months |
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Six Months |
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Ended |
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Ended |
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June 30, 2006 |
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June 30, 2006 |
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Cost of sales |
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$ |
92 |
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|
$ |
163 |
|
Research and development |
|
|
19 |
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|
34 |
|
Sales and marketing |
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|
26 |
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|
48 |
|
General and administrative |
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|
206 |
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|
384 |
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Subtotal |
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343 |
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|
629 |
|
Income tax benefit |
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|
(106 |
) |
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|
(195 |
) |
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Total stock-based compensation expense |
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$ |
237 |
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$ |
434 |
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At June 30, 2006, the total compensation cost related to unvested stock-based awards granted
to employees under the Companys stock option plans but not yet recognized was approximately $3.4
million, net of estimated forfeitures of $1.0 million. This cost will be amortized on a
straight-line basis over a weighted-average period of approximately 1.4 years and will be adjusted
for subsequent changes in estimated forfeitures and future option grants.
Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting
from the exercise of stock options as operating cash flows in our statement of cash flows. In
accordance with SFAS 123(R), the cash flows resulting from excess tax benefits (tax benefits
related to the excess of proceeds from employees exercises of stock options over the stock-based
compensation cost recognized for those options) are classified as financing cash flows. During the
three and six months ended June 30, 2006, we recorded $0.1 million and $0.6 million, respectively,
of excess tax benefits as a financing cash inflow.
Prior to January 1, 2006, the Company measured compensation expense for its employee
equity-based compensation plans using the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations. As the exercise price of all options granted under these plans was based on the
fair market price of the underlying common stock on the grant date, no equity-based compensation
cost was recognized in the condensed consolidated statements of operations under the intrinsic
value method.
The exercise price of each stock option equals the market price of the Companys stock on the
date of grant. Most options are scheduled to vest over four years and expire no later than ten
years from the grant date. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The weighted average assumptions used in the model
are outlined in the following table:
7
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|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
50.0 |
% |
|
|
57.7 |
% |
|
|
50.0 |
% |
|
|
58.1 |
% |
Risk-free interest rate |
|
|
5.0 |
% |
|
|
3.8 |
% |
|
|
4.9 |
% |
|
|
3.8 |
% |
Forfeiture rate |
|
|
12.0 |
% |
|
|
|
|
|
|
12.0 |
% |
|
|
|
|
Expected life (in years) |
|
|
4.9 |
|
|
|
5.0 |
|
|
|
4.9 |
|
|
|
5.0 |
|
The weighted average estimated fair value of employee stock option grants for the three and
six months ended June 30, 2006 was $4.28 and $4.32, respectively. The weighted average estimated
fair value of employee stock option grants for the three and six months ended June 30, 2005 was
$3.53. The computation of the expected volatility assumption used in the Black-Scholes
calculations for new grants is based on a combination of our historical volatility and the
volatility of similar companies in our industry. The risk-free interest rate assumption is based
upon observed interest rates appropriate for the term of our employee stock options. We do not
currently pay dividends and have no plans to do so in the future. The forfeiture rate is based on
our historical option forfeitures, as well as managements expectation of future forfeitures based
on current market conditions. When establishing the expected life assumption, the Company reviews
annual historical employee exercise behavior of option grants with similar vesting periods.
A summary of the changes in stock options outstanding under the Companys equity-based
compensation plans (in thousands, except per share amounts) is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
Options outstanding at December 31, 2005 |
|
|
2,120 |
|
|
$ |
4.17 |
|
|
|
8.26 |
|
|
$ |
6,546 |
|
Granted |
|
|
377 |
|
|
|
8.83 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(227 |
) |
|
|
1.47 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(16 |
) |
|
|
2.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2006 |
|
|
2,254 |
|
|
|
5.23 |
|
|
|
8.21 |
|
|
|
7,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2006 |
|
|
932 |
|
|
$ |
3.25 |
|
|
|
7.35 |
|
|
$ |
5,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2005, the weighted average estimated fair value of
employee purchase rights granted under the Employee Stock Purchase Plan was $1.98. The following
weighted average assumptions are included in the estimated grant date fair value calculations for
rights to purchase stock under the Employee Stock Purchase Plan: (i) an expected dividend yield of
0%, (ii) an expected stock price volatility of 47.3%, (iii) a risk-free interest rate of 3.0% and
(iv) an expected life of 0.5 years. The Companys calculations are based on the single option
valuation approach, and forfeitures are recognized as they occur.
The following table summarizes our restricted stock award activity for the six months ended
June 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average Grant Date |
|
|
Number of Shares |
|
Fair Value |
Nonvested stock at January 1, 2006 |
|
|
103 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(16 |
) |
|
|
|
|
Forfeited |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006 |
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
illustrates the effect on net income and net income per share as if we had
applied the fair value recognition provisions of SFAS 123
Accounting for Stock-Based Compensation as amended
by SFAS No. 148 Accounting for Stock-Based Compensation
Transition and Disclosure An Amendment of FASB Statement No. 123 to stock-based compensation during the
three and six months period ended June 30, 2005 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, 2005 |
|
June 30, 2005 |
Net income as reported |
|
$ |
692 |
|
|
$ |
1,886 |
|
Add: stock-based employee compensation included in reported net income, net of tax |
|
|
36 |
|
|
|
72 |
|
Less: total stock-based compensation determined under the fair value-based
method for all awards, net of tax |
|
|
(187 |
) |
|
|
(219 |
) |
Pro forma net income |
|
$ |
541 |
|
|
$ |
1,739 |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.04 |
|
|
$ |
0.12 |
|
Pro forma |
|
$ |
0.03 |
|
|
$ |
0.11 |
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.04 |
|
|
$ |
0.11 |
|
Pro forma |
|
$ |
0.03 |
|
|
$ |
0.10 |
|
8
The value of the options for the three and six months ended June 30, 2005 was estimated using
a Black-Scholes option-pricing formula and amortized on a straight-line basis over the respective
vesting periods of the awards, with forfeitures recognized as they occurred.
Product Warranty The Company provides a warranty on its products for a period of up to two
years, and provides for warranty costs at the time of sale based on historical activity. The
determination of such provisions requires the Company to make estimates of product return rates and
expected costs to repair or replace the products under warranty. If actual return rates and/or
repair and replacement costs differ significantly from these estimates, adjustments to recognize
additional cost of sales may be required in future periods. Components of the reserve for warranty
costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Beginning balance |
|
|
113 |
|
|
|
107 |
|
|
|
76 |
|
|
|
127 |
|
Additions related to sales |
|
|
57 |
|
|
|
169 |
|
|
|
131 |
|
|
|
177 |
|
Warranty costs incurred |
|
|
(58 |
) |
|
|
(135 |
) |
|
|
(95 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
112 |
|
|
|
141 |
|
|
|
112 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Acquisition
Sieger Engineering,
Inc. On June 29, 2006, the Company completed the
acquisition of Sieger, a privately-held company based in South San Francisco, California. The total purchase
price was approximately $50.6 million, excluding acquisition costs of $1.2 million, and was
comprised of cash consideration of $30.5 million and stock of $20.1 million. Sieger is a supplier
of chemical mechanical planarization modules and other subsystems to the semiconductor and flat
panel capital equipment industries. The Company anticipates that the acquisition may enhance its
strategic position as a semiconductor equipment subsystem supplier. We have accounted for the
acquisition of Sieger as a business combination and the operating results of Sieger have been
included in our consolidated financial statements from the date of acquisition. We have not yet
finalized the allocation of the purchase price to identifiable assets. Our preliminary allocation
is as follows (in thousands):
|
|
|
|
|
Tangible assets |
|
$ |
11,499 |
|
Goodwill |
|
|
24,543 |
|
Customer List |
|
|
13,800 |
|
Trademark |
|
|
800 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
50,642 |
|
|
|
|
|
Pro Forma Results The following pro forma financial information presents the combined results
of operations of the Company and Sieger as if the acquisition had occurred as of the beginning
of the periods presented. The unaudited pro forma financial information is not intended to
represent or be indicative of the consolidated results of operations or financial condition of
the Company that would have been reported had the acquisition been completed as of the dates
presented, and should not be taken as representative of the future consolidated results of
operations or financial condition of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Sales |
|
$ |
101,973 |
|
|
$ |
62,829 |
|
|
$ |
185,676 |
|
|
$ |
129,576 |
|
Net income |
|
|
6,217 |
|
|
|
1,238 |
|
|
|
9,862 |
|
|
|
3,568 |
|
Basic net income per share |
|
$ |
0.30 |
|
|
$ |
0.07 |
|
|
$ |
0.49 |
|
|
$ |
0.19 |
|
Diluted net income per share |
|
$ |
0.29 |
|
|
$ |
0.06 |
|
|
$ |
0.47 |
|
|
$ |
0.18 |
|
3. |
|
Inventory |
|
|
|
Inventory consisted of the following (in thousands): |
9
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
28,184 |
|
|
$ |
12,853 |
|
Work in process |
|
|
13,909 |
|
|
|
5,796 |
|
Finished goods |
|
|
3,012 |
|
|
|
457 |
|
|
|
|
|
|
|
|
Total |
|
$ |
45,105 |
|
|
$ |
19,106 |
|
|
|
|
|
|
|
|
4. Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Computer equipment and software |
|
$ |
3,119 |
|
|
$ |
1,834 |
|
Furniture and fixtures |
|
|
622 |
|
|
|
308 |
|
Machinery and equipment |
|
|
22,991 |
|
|
|
2,960 |
|
Leasehold improvements |
|
|
6,014 |
|
|
|
4,171 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
32,746 |
|
|
|
9,273 |
|
Accumulated depreciation and amortization |
|
|
(24,890 |
) |
|
|
(4,961 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
7,856 |
|
|
$ |
4,312 |
|
|
|
|
|
|
|
|
5. Notes Payable and Borrowing Arrangements
Bank Line of Credit
In connection with its
acquisition of Sieger in the second quarter of 2006, the Company
entered into a borrowing arrangement and an equipment loan. The loan
and security agreement (Loan
Agreement) provides senior secured credit facilities in an aggregate principal amount of up to $32.5
million, consisting of a $25 million revolving line of credit ($10 million of which may be used for
the issuance of letters of credit) and a $7.5 million term loan. The aggregate amount of the credit
facilities is also subject to a borrowing base equal to 80% of eligible accounts receivable and is
secured by substantially all of the Companys assets. Each of the credit facilities will expire
on June 29, 2009 and contain certain financial covenants, including minimum profitability and
liquidity ratios. In addition, the term loan is subject to monthly amortization payments in 36
equal installments. Interest on outstanding loans under the revolving credit facility ranged from
7.75% to 8.0% as of June 30, 2006. The equipment loan is a 5-year, $5 million loan that is secured
by certain of our equipment. Interest on the equipment loan was 7.3% as of
June 30, 2006. As of June 30, 2006, the balances
owing on the Loan Agreement and equipment loan were $27.5 million and $4.9
million, respectively.
During the first quarter
of 2005, the Company entered into a loan and security agreement
providing for a borrowing facility of up to $3.0 million with a bank in China. The borrowing
facility is secured by a standby letter of credit issued under the Companys Loan Agreement. The
interest rate on borrowings under the facility ranges from 6.0% to 6.1% per annum. As of June 30,
2006, the balance outstanding under the facility was $1,600,000, a portion of which was repayable
in Renminbi.
In November 2004, the Company entered into a loan and security
agreement. For the period ended June 30, 2006, no
borrowings or repayments under the loan and security agreement were made and as of June 30, 2006,
the agreement was terminated.
6. Net Income Per Share
Basic net income per share excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted net income per share
reflects the potential dilution that would occur if outstanding securities or other contracts to
issue common stock were exercised or converted into common stock.
The following is a reconciliation of the numerators and denominators used in computing basic
and diluted net income per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator, basic and diluted net income |
|
$ |
3,957 |
|
|
$ |
692 |
|
|
$ |
6,088 |
|
|
$ |
1,886 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computationbasic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
18,335 |
|
|
|
16,398 |
|
|
|
17,656 |
|
|
|
16,384 |
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Weighted average common shares outstanding subject to repurchase |
|
|
(85 |
) |
|
|
(181 |
) |
|
|
(90 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income per share |
|
|
18,250 |
|
|
|
16,217 |
|
|
|
17,566 |
|
|
|
16,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computationdiluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
18,250 |
|
|
|
16,217 |
|
|
|
17,566 |
|
|
|
16,203 |
|
Dilutive effect of common shares outstanding subject to repurchase |
|
|
84 |
|
|
|
134 |
|
|
|
90 |
|
|
|
134 |
|
Dilutive effect of options outstanding |
|
|
834 |
|
|
|
876 |
|
|
|
846 |
|
|
|
779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income per share |
|
|
19,168 |
|
|
|
17,227 |
|
|
|
18,502 |
|
|
|
17,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharebasic |
|
$ |
0.22 |
|
|
$ |
0.04 |
|
|
$ |
0.35 |
|
|
$ |
0.12 |
|
Net income per sharediluted |
|
$ |
0.21 |
|
|
$ |
0.04 |
|
|
$ |
0.33 |
|
|
$ |
0.11 |
|
A total of 377,000 and 500,000 potentially dilutive securities have been excluded from the
dilutive share calculation for the three months ended June 30, 2006 and 2005, respectively, as
their effect was anti-dilutive. A total of 377,000 and 975,000 potentially dilutive securities
have been excluded from the dilutive share calculation for the six months ended June 30, 2006 and
2005, respectively, as their effect was anti-dilutive.
7. Related Party
As part of the acquisition of Sieger, the Company leases a facility from an entity controlled
by one of our executive officers. No rent expense was incurred for the three and six months ended
June 30, 2006.
The
wife of Bruce Weir, our Vice President of Engineering, is the sole
owner of Acorn Travel, Inc., our primary travel agency. We incurred
fees for travel-related services, including the cost of airplane
tickets, of $83,000 and $140,000 for the three and six months ended
June 30, 2006, respectively, and $55,000 and $119,000 for the
three and six months ended June 30, 2005, respectively.
8. Commitments and Contingencies
At June 30, 2006, the Company had purchase commitments totaling $57,544,000 that related
primarily to the purchase of inventory.
On September 2, 2005, the Company filed suit in the federal court for the Northern District of
California against Celerity, Inc., or Celerity, seeking a declaratory judgment that our new
substrate technology does not infringe certain of Celeritys patents and/or that Celeritys patents
are invalid. On September 13, 2005, Celerity filed suit in the federal court of Delaware alleging
that the Company has infringed seven patents by developing and marketing products that use
Celeritys fluid distribution technology. The Delaware litigation was transferred to the Northern
District of California on October 19, 2005 and consolidated with our previously filed declaratory
judgment action on December 12, 2005. The complaint by Celerity seeks injunction against future
infringement of its patents and compensatory and treble damages. The
Company believes that the claims
made by Celerity are without merit and intends to defend the lawsuit vigorously.
Item 2. Managements Discussion And Analysis of Financial Condition And Results Of Operations
The information set forth in this quarterly report on Form 10-Q contains forward-looking
statements regarding future events and our future results. These statements are based on current
expectations, estimates, forecasts, and projections about the industries in which we operate and
the beliefs and assumptions of our management. Words such as expects, anticipates, targets,
goals, projects, intends, plans, believes, seeks, estimates, continues, may,
variations of such words, and similar expressions are intended to identify such forward-looking
statements. These forward-looking statements include, but are not limited to, statements concerning
the following: projections of our financial performance, our anticipated growth and trends in our
businesses, levels of capital expenditures, the adequacy of our capital resources to fund
operations and growth, our relationship with our controlling shareholder, our ability to compete
effectively with our competitors, our strategies and ability to protect our intellectual property,
future acquisitions, customer demand, our manufacturing and procurement process, employee matters,
supplier relations, foreign operations (including our operations in China), the legal and
regulatory backdrop (including environmental regulation), our exposure to market risks and other
characterizations of future events or circumstances described in this Annual Report. Readers are
cautioned that these forward-looking statements are only predictions and are subject to risks,
uncertainties, and assumptions that are difficult to predict, including those identified below,
under Risk Factors, and elsewhere herein. Therefore, actual results may differ materially and
adversely from those expressed in any forward-looking statements. We undertake no obligation to
revise or update any forward-looking statements for any reason.
Overview
We are a leading developer and supplier of critical subsystems, primarily for the
semiconductor capital equipment industry. We develop, design, prototype, engineer, manufacture and
test subsystems which are highly specialized and tailored to specific steps in the semiconductor
manufacturing process. We derive the majority of our revenue from the sale of gas delivery systems
and other
11
subsystems, including chemical delivery modules, top-plate assemblies, frame assemblies and
process modules. Our primary customers are semiconductor equipment manufacturers.
We provide our customers complete subsystem solutions that combine our expertise in design,
test, component characterization and highly flexible manufacturing operations with quality and
financial stability. This combination helps us to drive down total manufacturing costs, reduce
design-to-delivery cycle times and maintain high quality standards for our customers. We believe
these characteristics, as well as our standing as a leading supplier of gas delivery systems and
other subsystems, place us in a strong position to benefit from the growing demand for subsystem
outsourcing.
A significant portion of our products consist of gas delivery systems that enable the precise
delivery of numerous specialty gases used in a majority of the key steps in the semiconductor
manufacturing process, including deposition, etch, diffusion, ion implantation, sputtering,
photoresist stripping and annealing. Our products also include other subsystems, including chemical
delivery modules, top-plate assemblies, frame assemblies and process modules. We began shipping
frame assemblies in the second quarter of 2004, top-plate assemblies in the fourth quarter of 2004
and chemical delivery modules in the first quarter of 2005. We began manufacturing process modules
for a semiconductor equipment manufacturer in our Menlo Park facility in the second quarter of 2005
and from our Shanghai facility in the third quarter of 2005.
Ultra Clean Holdings, Inc.
was founded in November 2002 for the purpose of acquiring Ultra
Clean Technology Systems and Services, Inc. Ultra Clean Technology Systems and Service, Inc. was
founded in 1991 by Mitsubishi Corporation and was operated as a subsidiary of Mitsubishi until
November 2002, when it was acquired by Ultra Clean Holdings, Inc. Ultra Clean Holdings, Inc. became
a publicly traded company in March 2004. In June 2006, we
completed the acquisition of
Sieger, a California corporation. The total purchase price was approximately
$50.6 million, net of acquisition costs of $1.2 million, and was comprised of cash consideration of
$30.5 million and stock of $20.1 million. Sieger is a supplier of chemical mechanical
planarization modules and other subsystems to the semiconductor and flat panel capital equipment
industries. We anticipate that the acquisition may enhance our strategic position as a
semiconductor equipment subsystem supplier. We conduct our operating activities primarily through
our three wholly-owned subsidiaries, Ultra Clean Technology Systems and Service, Inc., Ultra Clean
Technology (Shanghai) Co., LTD and UCT Sieger Engineering LLC.
Financial Highlights
Our operating results for the three and six months ended June 30, 2006 reflect a recovery in
the semiconductor capital equipment industry. Sales for the second quarter of 2006 were $68.5
million, an increase of $11.3 million, or 19.7%, from the first quarter of 2006. Gross profit in
the second quarter of 2006 also increased to $10.7 million, or 15.6% of sales, from $8.2 million,
or 14.3% of sales, in the first quarter of 2006. Total operating expenses in the second quarter of
2006 increased to $5.5 million, or 8.0% of sales, from $4.4 million, or 7.8% of net sales, in the
first quarter of 2006. Net income during the second quarter of 2006 increased to $4.0 million from
$2.1 million in the first quarter of 2006 as a result of increased sales and gross margins
experienced during the quarter, partially offset by higher operating expenses.
Results of Operations
For the periods indicated, the following table sets forth certain costs and expenses and other
income items as a percentage of sales. The table and subsequent discussion should be read in
conjunction with our condensed consolidated financial statements and notes thereto included
elsewhere in our quarterly report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
84.4 |
% |
|
|
85.8 |
% |
|
|
85.0 |
% |
|
|
84.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
15.6 |
% |
|
|
14.2 |
% |
|
|
15.0 |
% |
|
|
15.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
1.1 |
% |
|
|
1.9 |
% |
|
|
1.1 |
% |
|
|
1.8 |
% |
Sales and marketing |
|
|
1.6 |
% |
|
|
2.2 |
% |
|
|
1.6 |
% |
|
|
2.2 |
% |
General and administrative |
|
|
5.3 |
% |
|
|
7.2 |
% |
|
|
5.2 |
% |
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8.0 |
% |
|
|
11.3 |
% |
|
|
7.9 |
% |
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
7.6 |
% |
|
|
2.9 |
% |
|
|
7.1 |
% |
|
|
3.5 |
% |
Interest and other income (expense), net |
|
|
(0.0 |
%) |
|
|
0.1 |
% |
|
|
(0.4 |
%) |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7.6 |
% |
|
|
3.0 |
% |
|
|
6.7 |
% |
|
|
3.6 |
% |
Income tax provision |
|
|
1.8 |
% |
|
|
1.2 |
% |
|
|
1.9 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
5.8 |
% |
|
|
1.8 |
% |
|
|
4.8 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Sales
Sales in the second quarter of 2006 increased 74.3% to a record high $68.5 million from $39.3
million in the second quarter of 2005. The increase reflects a rebound in demand that began during
the first quarter of 2006. Sales in the second quarter of 2006 of non-gas panel assemblies
increased to $10.7 million from $2.4 million in the second quarter of 2005, reflecting continued
market penetration outside our traditional gas-panel business. Sales for the six months ended June
30, 2006 increased 54.7% to $125.7 million from $81.2 million in the six months ended June 30,
2005, reflecting continued strong market demand for semiconductor equipment. We expect a
significant increase in sequential revenues for the remainder or the year as we consolidate results
for our newly-acquired UCT Sieger subsidiary and continue to increase production levels at our
China subsidiary.
Historically, a relatively small number of OEM customers have accounted for a significant
portion of our sales. In the three and six months ended June 30, 2006 and 2005, respectively, three
customers each accounted for 10% or more of our total sales: Applied Materials, Inc., Lam Research
Corporation and Novellus Systems, Inc. As a group these three customers accounted for 91% and 90%
of the Companys sales for the three and six months ended June 30, 2006 and 2005, respectively.
Gross Profit
Cost of goods sold consists primarily of purchased materials, labor and overhead, including
depreciation associated with the design and manufacture of products sold. Gross profit for the
second quarter of 2006 increased to $10.7 million, or 15.6% of net sales, from $5.6 million, or
14.2% of net sales, in the second quarter of 2005. Gross profit for the six months ended June 30,
2006 increased $6.7 million to $18.9 million, or 15.0% of net sales, from $12.2 million, or 15.1%
of net sales, in the six months ended June 30, 2005. The increase in gross profit in dollars is
due primarily to a higher sales volume. We expect gross margins to decline slightly from the
second quarter of 2006 as we consolidated results from UCT Sieger.
Research and Development Expense
Research and development expense consists primarily of activities related to new component
testing and evaluation, test equipment and fixture development, product design, and other product
development activities. Research and development expense for the second quarter of 2006 was $0.7
million, or 1.1% of net sales, compared with $0.7 million, or 1.9% of net sales, for the second
quarter of 2005. Research and development expense for the six months ended June 30, 2006 was $1.3
million, or 1.1% of net sales, compared with $1.4 million, or 1.8% of net sales, in the six months
ended June 30, 2006. We expect research and development expenses to remain relatively flat during
fiscal year 2006.
Sales and Marketing Expense
Sales and marketing expense consists primarily of salaries and commissions paid to our sales
and service employees, salaries paid to our engineers who work with the sales and service employees
to help determine the components and configuration requirements for new products and other costs
related to the sales of our products. Sales and marketing expense for the second quarter of 2006
was $1.1 million, or 1.6% of net sales, compared with $0.9 million, or 2.2% of net sales, in the
second quarter of 2005. Sales and marketing expense for the six months ended June 30, 2006
increased $0.3 million to $2.1 million, or 1.6% of net sales, from $1.8 million, or 2.2% of net
sales, in the six months ended June 30, 2005. The increase in dollars was due primarily to an
increase in headcount from 17 in the second quarter of 2005 to 21 in the second quarter of 2006.
General and Administrative Expense
General and administrative expense consists primarily of salaries and overhead associated with
our administrative staff and professional fees. General and administrative expense for the second
quarter of 2006 was $3.6 million, or 5.3% of net sales, compared with $2.9 million, or 7.2% of net
sales, in the second quarter of 2005. General and administrative expense for the six months ended
June 30, 2006 increased $0.3 million to $6.5 million, or 5.2% of sales, from $6.2 million, or 7.6%
of net sales, in the six months ended June 30, 2005. The increase is due primarily to an increase
in headcount from 39 in June 2005 to 46 in June 2006 and higher levels of accounting and consulting
costs in connection with Sarbanes-Oxley 404 compliance requirements.
13
Interest and Other Income (Expense), net
Interest and other income (expense), net for the second quarter of 2006 was comparable to the
second quarter of 2005. The increase in interest and other income (expense), net for the six
months ended June 30, 2006 over the comparable prior period is due to $0.5 million in charges
related to legal, accounting and other registration fees associated with the secondary component of
our equity offering which closed in March 2006.
Income Tax Provision
Our effective tax rates for the second quarter of 2006 and 2005 were 23.6% and 39.6%,
respectively. Our effective tax rates for the six months ended June 30, 2006 and 2005 were 27.9%
and 34.5%, respectively. The decreased rate in 2006 reflects primarily a change in the geographic
mix of worldwide earnings and financial results for fiscal year 2006 compared with fiscal year 2005
as a higher portion of our income is being generated from our Shanghai subsidiary.
Liquidity and Capital Resources
As of June 30, 2006, we had cash of $19.0 million compared to $10.7 million as of December 31,
2005.
Net cash used in operating activities for the six months ended June 30, 2006 increased to $5.7
million from $2.1 million in the comparable period of fiscal 2005. The increase is due primarily to
higher working capital needs required to support higher levels of sales activity. We used $12.0
million of cash for inventory purchases and $18.8 million to support accounts receivable. These
amounts were partially offset by higher levels of payables of $16.5 million in accounts payable and
$2.5 million in accrued compensation and related benefits.
Net cash used in investing activities for the six months ended June 30, 2006 increased to
$28.6 million from $0.6 million in the comparable period of fiscal 2005. The increase was due
primarily to our acquisition of Sieger and higher levels of equipment purchases relating to
cleanroom expansion activities.
Net cash provided by financing activities for the six months ended June 30, 2006 increased to
$42.6 million from $2.5 million in the comparable period of fiscal 2005. The increase was due
primarily to bank borrowings and stock issued in connection with our acquisition of Sieger.
In connection with
our acquisition of Sieger in the second quarter of 2006, we entered into a
borrowing arrangement and an equipment loan. The loan and security
agreement (Loan Agreement) provides
senior secured credit facilities in an aggregate principal amount of up to $32.5 million,
consisting of a $25 million revolving line of credit ($10 million of which may be used for the
issuance of letters of credit) and a $7.5 million term loan. The aggregate amount of the credit
facilities is also subject to a borrowing base equal to 80% of eligible accounts receivable and is
secured by substantially all of our assets. Each of the credit facilities will expire on June 29,
2009 and contain certain financial covenants, including minimum profitability and liquidity ratios.
In addition, the term loan is subject to monthly amortization payments in 36 equal installments.
Interest on outstanding loans under the revolving credit facility ranged from 7.75% to 8.0% as of
June 30, 2006. The equipment loan is a 5-year, $5 million
loan that is secured by certain of our
equipment. Interest on the equipment loan was 7.3% as of
June 30, 2006. As of June 30, 2006, the balances owing on the
Loan Agreement and equipment loan were $27.5 million and $4.9 million,
respectively.
During the first
quarter of 2005, we entered into a loan and security agreement providing for
a borrowing facility of up to $3.0 million with a bank in China. The borrowing facility is secured
by a standby letter of credit issued under our Loan Agreement. The interest rate on borrowings
under the facility ranges from 6.0% to 6.1% per annum. As of June 30, 2006, the balance outstanding
under the facility was $1,600,000, a portion of which was repayable in Renminbi.
We anticipate that we will continue to finance our operations with cash flows from operations,
existing cash balances and a combination of long-term debt and/or lease financing and additional
sales of equity securities. The combination and sources of capital will be determined by management
based on our then-current needs and prevailing market conditions.
Although cash requirements fluctuate based on the timing and extent of many factors,
management believes that cash generated from operations, together with the liquidity provided by
existing cash balances and borrowing capability, will be sufficient to satisfy our liquidity
requirements for at least the next 12 months.
14
Contractual Obligations and Contingent Liabilities and Commitments
Other than operating leases for certain equipment and real estate, we have no significant
off-balance sheet transactions, unconditional purchase obligations or similar instruments and,
other than with respect to the revolving credit facility described above, are not a guarantor of
any other entities debt or other financial obligations. The following table presents a summary of
our future minimum lease payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
of 2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Total |
|
Purchase obligations |
|
$ |
57,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
57,544 |
|
Capital lease obligations |
|
|
34 |
|
|
|
55 |
|
|
|
24 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
117 |
|
Operating lease obligations* |
|
|
1,181 |
|
|
|
2,010 |
|
|
|
1,273 |
|
|
|
782 |
|
|
|
39 |
|
|
|
|
|
|
|
5,285 |
|
Borrowing arrangements |
|
|
2,881 |
|
|
|
3,397 |
|
|
|
3,465 |
|
|
|
23,888 |
|
|
|
1,116 |
|
|
|
490 |
|
|
|
35,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
61,640 |
|
|
$ |
5,462 |
|
|
$ |
4,762 |
|
|
$ |
24,674 |
|
|
$ |
1,155 |
|
|
$ |
490 |
|
|
$ |
98,183 |
|
|
|
|
* |
|
Operating lease expense reflects the fact that (1) the lease for our
headquarters facility in Menlo Park, California expires on December 31, 2007 and
may not be terminated by our landlord upon less than nine months prior written
notice; (2) the lease for our manufacturing facility in Portland, Oregon expires on
November 7, 2007 and (3) one of the leases for our manufacturing facility in South
San Francisco, California expires on May 31, 2007. We expect to renew our Menlo
Park, Portland and South San Francisco leases prior to expiration or lease other
facilities. Operating lease expense set forth above will increase upon renewal of
these leases. |
Critical Accounting Policies, Significant Judgments and Estimates
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in income tax positions. This Interpretation
requires that the Company recognize in the consolidated financial statements the impact of a tax
position that is more likely than not to be sustained upon examination based on the technical
merits of the position. The provisions of FIN 48 will be effective as of the beginning of the
Companys 2007 fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The Company is currently evaluating the
impact of adopting FIN 48 on the consolidated financial statements.
On January 1, 2006
the Company implemented the provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payments (SFAS 123(R)), using the modified prospective
transition method. SFAS 123(R) requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments based upon the grant-date fair value of those
awards. Using the modified prospective transition method of adopting SFAS 123(R), the Company began
recognizing compensation expense for equity-based awards granted after January 1, 2006 plus
unvested awards granted prior to January 1, 2006. Under this method of implementation, no
restatement of prior periods has been made.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151,
Inventory Costs (SFAS 151), an amendment of Accounting Research Bulletin No. 43, Chapter 4.
SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. We adopted the provisions of SFAS 151 on January 1, 2006 and the
adoption did not have a material effect on our consolidated results of operations or financial
position.
Our condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosure at the date of our financial statements. Estimates and judgments
are reviewed on an on-going basis, including those related to sales, inventories, intangible
assets, stock compensation and income taxes. The estimates and judgments are based 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 the 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 the
Sieger acquisition, revenue
recognition, inventory valuation, accounting for income taxes, valuation of intangible assets and
goodwill and equity incentives to employees to be critical policies due to the estimates and
judgments involved in each. A further discussion can be found in Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed
with the SEC on February 28, 2006.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in value of a financial instrument caused by
fluctuations in interest rates, foreign exchange rates or equity prices. During the first quarter
of fiscal 2005, we entered into a loan and security agreement providing for revolver loans of up to
$3.0 million with a bank in China. One of the two revolver loans outstanding as of June 30, 2006 is
denominated in Chinese Yuan and is secured by a standby letter of
credit issued under our Loan Agreement described above. Interest on the two revolver loans ranges between 6.0% and 6.1% per
annum. Interest is payable quarterly and principal is payable within 12 months of borrowing. As of
June 30, 2006, the balance outstanding under the two revolver loans was $1.6 million. If we enter
into future borrowing arrangements or borrow under our existing revolving credit facility, we may
seek to manage our exposure to interest rate changes by using a mix of debt maturities and
variable- and fixed-rate debt, together with interest rate swaps where appropriate, to fix or lower
our borrowing costs. We do not make material sales in currencies other than the United States
Dollar or have material purchase obligations outside of the United States, except in China where we
have purchase commitments totaling $7.1 million in United States Dollar equivalents. We have
performed a sensitivity analysis assuming a hypothetical 10-percent movement in foreign currency
exchange rates and interest rates applied to the underlying exposures described above. As of June
30, 2006, the analysis indicated that such market movements would not have a material effect on our
business, financial condition or results of operations. Although we do not anticipate any
significant fluctuations, there can be no assurance that foreign currency exchange risk will not
have a material impact on our financial position, results of operations or cash flow in the future.
Item 4. Controls and Procedures
As of the end of the period covered by this report on Form 10-Q, our Chief Executive Officer
and Chief Financial Officer evaluated, with the participation of our management, the effectiveness
of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures were effective
at the reasonable assurance level and designed to ensure that material information related to us
and our consolidated subsidiaries would be made known to them by others within these entities.
There has been no change in our internal controls over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 2, 2005, the Company filed suit in the federal court for the Northern District of
California against Celerity, Inc., or Celerity, seeking a declaratory judgment that our new
substrate technology does not infringe certain of Celeritys patents and/or that Celeritys patents
are invalid. On September 13, 2005, Celerity filed suit in the federal court of Delaware alleging
that the Company has infringed seven patents by developing and marketing products that use
Celeritys fluid distribution technology. The Delaware litigation was transferred to the Northern
District of California on October 19, 2005 and consolidated with our previously filed declaratory
judgment action on December 12, 2005. The complaint by Celerity seeks injunction against future
infringement of its patents and compensatory and treble damages. The Company believes that claims
made by Celerity are without merit and intends to defend the lawsuit vigorously.
From time to time, we are subject to various legal proceedings and claims, either asserted or
unasserted, that arise in the ordinary course of business.
Item 1A. Risk Factors
A restated description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2005.
The highly cyclical nature of the semiconductor capital equipment industry and general economic
slowdowns could harm our operating results.
Our business and operating results depend in significant part upon capital expenditures by
manufacturers of semiconductors, which in turn depend upon the current and anticipated market
demand for semiconductors. Historically, the semiconductor industry has been highly cyclical, with
recurring periods of over-supply of semiconductor products that have had a severe negative effect
on the demand for capital equipment used to manufacture semiconductors. We have experienced and
anticipate that we will continue to experience significant fluctuations in customer orders for our
products. Our sales were $147.5 million in 2005, $184.2 million in 2004 and $77.5 million in 2003.
Historically, semiconductor industry slowdowns have had, and future slowdowns may have, a material
adverse effect on our operating results.
In addition, uncertainty regarding the growth rate of economies throughout the world has
caused companies to reduce capital investment and may cause further reduction of such investments.
These reductions have been particularly severe in the semiconductor capital equipment industry. A
potential rebound in the worldwide economy in the near future will not necessarily mean that our
business will experience similar effects.
We rely on a small number of customers for a significant portion of our sales, and any impairment
of our relationships with these customers would adversely affect our business.
A relatively small number of OEM customers has historically accounted for a significant
portion of our sales, and we expect this trend to continue. Applied Materials, Inc., Lam Research
Corporation and Novellus Systems, Inc. as a group accounted for 89% of our sales in 2005, 93% of
our sales in 2004 and 92% of our sales in 2003. Because of the small number of OEMs in our
industry, most of whom are already our customers, it would be difficult to replace lost revenue
resulting from the loss of, or the reduction, cancellation or delay in purchase orders by, any one
of these customers. Consolidation among our customers or a decision by any one or more of our
customers to outsource all or most manufacturing and assembly work to a single equipment
manufacturer may further concentrate our business in a limited number of customers and expose us to
increased risks relating to dependence on a small number of customers.
In addition, by virtue of our customers size and the significant portion of our revenue that
we derive from them, they are able to exert significant influence and pricing pressure in the
negotiation of our commercial agreements and the conduct of our business with them. We may also be
asked to accommodate customer requests that extend beyond the express terms of our agreements in
order to maintain our relationships with our customers. If we are unable to retain and expand our
business with these customers on favorable terms, our business and operating results will be
adversely affected.
17
We have had to qualify, and are required to maintain our status, as a supplier for each of our
customers. This is a lengthy process that involves the inspection and approval by a customer of our
engineering, documentation, manufacturing and quality control procedures before that customer will
place volume orders. Our ability to lessen the adverse effect of any loss of, or reduction in sales
to, an existing customer through the rapid addition of one or more new customers is minimal because
of these qualification requirements. Consequently, our business, operating results and financial
condition would be adversely affected by the loss of, or any reduction in orders by, any of our
significant customers.
We have significant existing debts; the restrictive covenants under some of our debt agreements may
limit our ability to expand or pursue our business strategy; if we are forced to prepay some or all
of this indebtedness our financial position would be severely and adversely affected.
We have a significant amount of outstanding indebtedness. At June 30, 2006, our long-term debt
was $28.6 million and our short-term debt was $6.2 million, for an aggregate total of $34.8
million. Our $32.5 million loan agreement requires compliance with certain financial covenants,
including a leverage and fixed charge coverage target and a requirement that we maintain $5.0
million of cash and cash equivalents with the bank during the term. The covenants contained in our
line of credit with the bank also restrict our ability to take certain actions, including our
ability to:
|
|
|
incur additional indebtedness; |
|
|
|
|
pay dividends and make distributions in respect of our capital stock; |
|
|
|
|
redeem capital stock; |
|
|
|
|
make investments or other restricted payments outside the ordinary course of business; |
|
|
|
|
engage in transactions with shareholders and affiliates; |
|
|
|
|
create liens; |
|
|
|
|
sell or otherwise dispose of assets; |
|
|
|
|
make payments on our debt, other than in the ordinary course; and |
|
|
|
|
engage in mergers and acquisitions. |
While we are currently in compliance with the financial covenants in our loan agreement, we
cannot assure you that we will meet these financial covenants in subsequent quarters. If we are
unable to meet any covenants, we cannot assure you the bank will grant waivers and amend the
covenants, or that the bank will not terminate the agreement, preclude further borrowings or
require us to repay any outstanding borrowings. As long as our indebtedness remains outstanding,
the restrictive covenants could impair our ability to expand or pursue our business strategies or
obtain additional funding. Forced prepayment of some or all of our indebtedness would reduce our
available cash balances and have an adverse impact on our operating and financial performance.
We may not be able to integrate efficiently the operations of our acquisition of newly acquired
subsidiaries.
We have made, and may continue to make, additional acquisitions of, or significant investments
in, businesses that offer complementary products, services, technologies or market access. If we
are to realize the anticipated benefits of past and any future acquisitions or investments, the
operations of these companies must be integrated and combined efficiently with our own. The process
of integrating supply and distribution channels, computer and accounting systems, and other aspects
of operations, while managing a larger entity, will continue to present a significant challenge to
our management. In addition, it is not certain that we will be able to incorporate different
financial and reporting controls, processes, systems and technologies into our existing business
environment. The difficulties of integration may increase because of the necessity of combining
personnel with varied business backgrounds and combining different corporate cultures and
objectives. We may incur substantial costs associated with these activities and we may suffer other
material adverse effects from these integration efforts which could materially reduce our earnings,
even over the long-term. We may not succeed with the integration process and we may not fully
realize the anticipated benefits of the business
18
combinations. The dedication of management resources to such integration or divestitures may
detract attention from the day-to-day business, and we may need to hire additional management
personnel to manage our acquisitions successfully.
We have identified significant deficiencies in the internal controls of Sieger that existed prior
to our acquisition of Sieger and the identification of any significant deficiencies in the future
could affect our ability to ensure timely and reliable financial reports.
We have identified
significant deficiencies in the internal controls of Sieger that existed
prior to our acquisition of Sieger. The Public Company Accounting Oversight Board (PCAOB)
defines a significant deficiency as a control deficiency, or a combination of control deficiencies,
that adversely affects the companys ability to initiate, authorize, record, process, or report
external financial data reliably in accordance with generally accepted accounting principles such
that there is more than a remote likelihood that a misstatement of the companys annual or interim
financial statements that is more than inconsequential will not be prevented or detected. We are
in the process of implementing changes to strengthen the internal controls of UCT Sieger. However,
additional measures may be necessary and these measures, along with other measures we expect to take
to improve the internal controls of UCT Sieger, may not be sufficient to address the issues
identified by us or ensure that the internal controls of UCT Sieger are effective.
In
addition, we frequently evaluate acquisitions of, or significant
investments in, complementary companies, assets, businesses and
technologies. Even if an acquisition or other investment is not
completed, we may incur significant cost in evaluating such
acquisition or investment, which has in the past had, and could in
the future have, an adverse effect on our results of operations.
We have established operations in China, which exposes us to new risks associated with operating in
a foreign country.
We are exposed to political, economic, legal and other risks associated with operating in
China, including:
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foreign currency exchange fluctuations; |
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political, civil and economic instability; |
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tariffs and other barriers; |
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timing and availability of export licenses; |
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disruptions to our and our customers operations due to the outbreak of communicable
diseases, such as SARS and avian flu; |
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disruptions in operations due to the weakness of Chinas domestic infrastructure, including transportation and energy; |
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difficulties in developing relationships with local suppliers; |
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difficulties in attracting new international customers; |
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difficulties in accounts receivable collections; |
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difficulties in staffing and managing a distant international subsidiary and branch operations; |
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the burden of complying with foreign and international laws and treaties; and |
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potentially adverse tax consequences. |
In addition, while over the past several years the Chinese government has pursued economic
reform policies including the encouragement of private economic activity and greater economic
decentralization, the Chinese government may not continue these policies or may significantly alter
them to our detriment from time to time without notice. Changes in laws and regulations or their
interpretation, the imposition of confiscatory taxation policies, new restrictions on currency
conversion or limitations on sources of supply could materially and adversely affect our Chinese
operations, which could result in a total loss of our investment in that country and materially and
adversely affect our future operating results.
Our quarterly revenue and operating results fluctuate significantly from period to period, and this
may cause volatility in our common stock price.
Our quarterly revenue and operating results have fluctuated significantly in the past, and we
expect them to continue to fluctuate in the future for a variety of reasons which may include:
19
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demand for and market acceptance of our products as a result of the cyclical nature
of the semiconductor industry or otherwise, often resulting in reduced sales during
industry downturns and increased sales during periods of industry recovery; |
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changes in the timing and size of orders by our customers; |
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cancellations and postponements of previously placed orders; |
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pricing pressure from either our competitors or our customers, resulting in the reduction of our product prices; |
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disruptions or delays in the manufacturing of our products or in the supply of
components or raw materials that are incorporated into or used to manufacture our
products, thereby causing us to delay the shipment of products; |
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decreased margins for several or more quarters following the introduction of new
products, especially as we introduce new subsystems; |
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delays in ramp-up in production, low yields or other problems experienced at our
new manufacturing facility in China; |
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changes in design-to-delivery cycle times; |
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inability to reduce our costs quickly in step with reductions in our prices or in
response to decreased demand for our products; |
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changes in our mix of products sold; |
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write-offs of excess or obsolete inventory; |
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one-time expenses or charges associated with failed acquisition negotiations or completed acquisitions; |
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announcements by our competitors of new products, services or technological
innovations, which may, among other things, render our products less competitive; and |
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geographic mix of worldwide earnings. |
As a result of the foregoing, we believe that quarter-to-quarter comparisons of our revenue
and operating results may not be meaningful and that these comparisons may not be an accurate
indicator of our future performance. Changes in the timing or terms of a small number of
transactions could disproportionately affect our operating results in any particular quarter.
Moreover, our operating results in one or more future quarters may fail to meet the expectations of
securities analysts or investors. If this occurs, we would expect to experience an immediate and
significant decline in the trading price of our common stock.
Third parties have claimed and may in the future claim we are infringing their intellectual
property, which could subject us to litigation or licensing expenses, and we may be prevented from
selling our products if any such claims prove successful.
We have received a claim of infringement from Celerity, Inc. that is currently pending and we
may receive notices of other such claims in the future. In addition, we may be unaware of
intellectual property rights of others that may be applicable to our products. Any litigation
regarding patents or other intellectual property could be costly and time-consuming and divert our
management and key personnel from our business operations, any of which could have a material
adverse effect on our business and results of operations. The complexity of the technology involved
in our products and the uncertainty of intellectual property litigation increase these risks.
Claims of intellectual property infringement may also require us to enter into costly license
agreements. However, we may not be able to obtain licenses on terms acceptable to us, or at all. We
also may be subject to significant damages or injunctions against the development, manufacture and
sale of certain of our products if any such claims prove successful. See Item 1Legal
proceedings.
We are subject to order and shipment uncertainties and any significant reductions, cancellations or
delays in customer orders could cause our revenue to decline and our operating results to suffer.
20
Our revenue is difficult to forecast because we generally do not have a material backlog of
unfilled orders and because of the short time frame within which we are often required to design,
produce and deliver products to our customers. Most of our revenue in any quarter depends on
customer orders for our products that we receive and fulfill in the same quarter. We do not have
long-term purchase orders or contracts that contain minimum purchase commitments from our
customers. Instead, we receive non-binding forecasts of the future volume of orders from our
customers. Occasionally, we order and build component inventory in advance of the receipt of actual
customer orders. Customers may cancel order forecasts, change production quantities from forecasted
volumes or delay production for reasons beyond our control. Furthermore, reductions, cancellations
or delays in customer order forecasts occur without penalty to, or compensation from, the customer.
Reductions, cancellations or delays in forecasted orders could cause us to hold inventory longer
than anticipated, which could reduce our gross profit, restrict our ability to fund our operations
and cause us to incur unanticipated reductions or delays in revenue. If we do not obtain orders as
we anticipate, we could have excess component inventory for a specific product that we would not be
able to sell to another customer, likely resulting in inventory write-offs, which could have a
material adverse affect on our business, financial condition and operating results. In addition,
because many of our costs are fixed in the short term, we could experience deterioration in our
gross profit when our production volumes decline.
The manufacturing of our products is highly complex, and if we are not able to manage our
manufacturing and procurement process effectively, our business and operating results will suffer.
The manufacturing of our products is a highly complex process that involves the integration of
multiple components and requires effective management of our supply chain while meeting our
customers design-to-delivery cycle time requirements. Through the course of the manufacturing
process, our customers may modify design and system configurations in response to changes in their
own customers requirements. In order to rapidly respond to these modifications and deliver our
products to our customers in a timely manner, we must effectively manage our manufacturing and
procurement process. If we fail to manage this process effectively, we risk losing customers and
damaging our reputation. In addition, if we acquire inventory in excess of demand or that does not
meet customer specifications, we would incur excess or obsolete inventory charges. These risks are
even greater as we expand our business beyond gas delivery systems into new subsystems. As a
result, this could limit our growth and have a material adverse effect on our business, financial
condition and operating results.
OEMs may not continue to outsource gas delivery systems and other subsystems, which would adversely
impact our operating results.
The success of our business depends on OEMs continuing to outsource the manufacturing of gas
delivery systems and other subsystems for their semiconductor capital equipment. Most of the
largest OEMs have already outsourced production of a significant portion of their gas delivery
systems and other subsystems. If OEMs do not continue to outsource gas delivery systems and other
subsystems for their capital equipment, our revenue would be significantly reduced, which would
have a material adverse affect on our business, financial condition and operating results. In
addition, if we are unable to obtain additional business from OEMs, even if they continue to
outsource their production of gas delivery systems and other subsystems, our business, financial
condition and operating results could be adversely affected.
If our new products are not accepted by OEMs or if we are unable to maintain historical margins on
our new products, our operating results would be adversely impacted.
We design, develop and market gas delivery systems and other subsystems to OEMs. Sales of
these new products are expected to make up an increasing part of our total revenue. The
introduction of new products is inherently risky because it is difficult to foresee the adoption of
new standards, to coordinate our technical personnel and strategic relationships and to win
acceptance of new products by OEMs. We may not be able to recoup design and development
expenditures if our new products are not accepted by OEMs. Gross margins on newly introduced
products typically carry lower gross margins for several or more quarters following their
introduction. If any of our new subsystems is not successful, or if we are unable to obtain gross
margins on new products that are similar to the gross margins we have historically achieved, our
business, operating results and financial condition could be adversely affected.
We may not be able to manage our future growth successfully.
Our ability to execute our business plan successfully in a rapidly evolving market requires an
effective planning and management process. We have increased, and plan to continue to increase, the
scope of our operations. Due to the cyclical nature of the semiconductor industry, however, future
growth is difficult to predict. Our expansion efforts could be expensive and may strain our
managerial and other resources. To manage future growth effectively, we must maintain and enhance
our financial and operating systems and controls and manage expanded operations. Although we
occasionally experience reductions in force, over time the
21
number of people we employ has generally grown and we expect this number to continue to grow
when our operations expand. The addition and training of new employees may lead to short-term
quality control problems and place increased demands on our management and experienced personnel.
If we do not manage growth properly, our business, operating results and financial condition could
be adversely affected.
Our business is largely dependent on the know-how of our employees, and we generally do not have a
protected intellectual property position.
Our business is largely dependent upon our design, engineering, manufacturing and testing
know-how. We rely on a combination of trade secrets and contractual confidentiality provisions and,
to a much lesser extent, patents, copyrights and trademarks, to protect our proprietary rights.
Accordingly, our intellectual property position is more vulnerable than it would be if it were
protected by patents. If we fail to protect our proprietary rights successfully, our competitive
position could suffer, which could harm our operating results. We may be required to spend
significant resources to monitor and protect our proprietary rights, and, in the event we do not
detect infringement of our proprietary rights, we may lose our competitive position in the market
if any such infringement occurs. In addition, competitors may design around our technology or
develop competing technologies and know-how.
If we do not keep pace with developments in the semiconductor industry and with technological
innovation generally, our products may not be competitive.
Rapid technological innovation in semiconductor manufacturing requires the semiconductor
capital equipment industry to anticipate and respond quickly to evolving customer requirements and
could render our current product offerings and technology obsolete. Technological innovations are
inherently complex. We must devote resources to technology development in order to keep pace with
the rapidly evolving technologies used in semiconductor manufacturing. We believe that our future
success will depend upon our ability to design, engineer and manufacture products that meet the
changing needs of our customers. This requires that we successfully anticipate and respond to
technological changes in design, engineering and manufacturing processes in a cost-effective and
timely manner. If we are unable to integrate new technical specifications into competitive product
designs, develop the technical capabilities necessary to manufacture new products or make necessary
modifications or enhancements to existing products, our business prospects could be harmed.
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The timely development of new or enhanced products is a complex and uncertain process which
requires that we:
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design innovative and performance-enhancing features that differentiate our products from those of our competitors; |
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identify emerging technological trends in the semiconductor industry, including new standards for our products; |
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accurately identify and design new products to meet market needs; |
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collaborate with OEMs to design and develop products on a timely and cost-effective basis; |
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ramp up production of new products, especially new subsystems, in a timely manner and with acceptable yields; |
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successfully manage development production cycles; and |
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respond effectively to technological changes or product announcements by others. |
The industry in which we participate is highly competitive and rapidly evolving, and if we are
unable to compete effectively, our operating results would be harmed.
Our competitors are primarily companies that design and manufacture gas delivery systems for
semiconductor capital equipment. Although we have not faced competition in the past from the
largest subsystem and component manufacturers in the semiconductor capital equipment industry,
these suppliers could compete with us in the future. Increased competition has in the past
resulted, and could in the future result, in price reductions, reduced gross margins or loss of
market share, any of which would harm our operating results. We are subject to pricing pressure as
we attempt to increase market share with our existing customers. Competitors may introduce new
products for the markets currently served by our products. These products may have better
performance, lower prices and achieve broader market acceptance than our products. Further, OEMs
typically own the design rights to their products and may provide these designs to other subsystem
manufacturers. If our competitors obtain proprietary rights to these designs such that we are
unable to obtain the designs necessary to manufacture products for our OEM customers, our business,
financial condition and operating results could be adversely affected.
Our competitors may have greater financial, technical, manufacturing and marketing resources
than we do. As a result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, devote greater resources to the development, promotion, sale
and support of their products, and reduce prices to increase market share. Moreover, there may be
merger and acquisition activity among our competitors and potential competitors that may provide
our competitors and potential competitors an advantage over us by enabling them to expand their
product offerings and service capabilities to meet a broader range of customer needs. Further, if
one of our customers develops or acquires the internal capability to develop and produce gas
delivery systems or other subsystems that we produce, the loss of that customer could have a
material adverse effect on our business, financial condition and operating results. The
introduction of new technologies and new market entrants may also increase competitive pressures.
We must achieve design wins to retain our existing customers and to obtain new customers.
New semiconductor capital equipment typically has a lifespan of several years, and OEMs
frequently specify which systems, subsystems, components and instruments are to be used in their
equipment. Once a specific system, subsystem, component or instrument is incorporated into a piece
of semiconductor capital equipment, it will likely continue to be incorporated into that piece of
equipment for at least several months before the OEM switches to the product of another supplier.
Accordingly, it is important that our products are designed into the new semiconductor capital
equipment of OEMs, which we refer to as a design win, in order to retain our competitive position
with existing customers and to obtain new customers.
We incur technology development and sales expenses with no assurance that our products will
ultimately be designed into an OEMs semiconductor capital equipment. Further, developing new
customer relationships, as well as increasing our market share at existing customers, requires a
substantial investment of our sales, engineering and management resources without any assurance
from prospective customers that they will place significant orders. We believe that OEMs often
select their suppliers and place orders based on long-term relationships. Accordingly, we may have
difficulty achieving design wins from OEMs that are not currently our customers. Our operating
results and potential growth could be adversely affected if we fail to achieve design wins with
leading OEMs.
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We may not be able to respond quickly enough to increases in demand for our products.
Demand shifts in the semiconductor industry are rapid and difficult to predict, and we may not
be able to respond quickly enough to an increase in demand. Our ability to increase sales of our
products depends, in part, upon our ability to:
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mobilize our supply chain in order to maintain component and raw material supply; |
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optimize the use of our design, engineering and manufacturing capacity in a timely manner; |
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deliver our products to our customers in a timely fashion; |
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expand, if necessary, our manufacturing capacity; and |
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maintain our product quality as we increase production. |
If we are unable to respond to rapid increases in demand for our products on a timely basis or
to manage any corresponding expansion of our manufacturing capacity effectively, our customers
could increase their purchases from our competitors, which would adversely affect our business.
Our dependence on our suppliers may prevent us from delivering an acceptable product on a timely
basis.
We rely on both single-source and sole-source suppliers, some of whom are relatively small,
for many of the components we use in our products. In addition, our customers often specify
components of particular suppliers that we must incorporate into our products. Our suppliers are
under no obligation to provide us with components. As a result, the loss of or failure to perform
by any of these providers could adversely affect our business and operating results. In addition,
the manufacturing of certain components and subsystems is an extremely complex process. Therefore,
if a supplier were unable to provide the volume of components we require on a timely basis and at
acceptable prices, we would have to identify and qualify replacements from alternative sources of
supply. The process of qualifying new suppliers for these complex components is lengthy and could
delay our production, which would adversely affect our business, operating results and financial
condition. We may also experience difficulty in obtaining sufficient supplies of components and raw
materials in times of significant growth in our business. For example, we have in the past
experienced shortages in supplies of various components, such as mass flow controllers, valves and
regulators, and certain prefabricated parts, such as sheet metal enclosures, used in the
manufacture of our products. In addition, one of our competitors manufactures mass flow controllers
that may be specified by one or more of our customers. If we are unable to obtain these particular
mass flow controllers from our competitor or convince a customer to select alternative mass flow
controllers, we may be unable to meet that customers requirements, which could result in a loss of
market share.
Defects in our products could damage our reputation, decrease market acceptance of our products,
cause the unintended release of hazardous materials and result in potentially costly litigation.
A number of factors, including design flaws, material and component failures, contamination in
the manufacturing environment, impurities in the materials used and unknown sensitivities to
process conditions, such as temperature and humidity, as well as equipment failures, may cause our
products to contain undetected errors or defects. Problems with our products may:
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cause delays in product introductions and shipments; |
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result in increased costs and diversion of development resources; |
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cause us to incur increased charges due to unusable inventory; |
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require design modifications; |
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decrease market acceptance of, or customer satisfaction with, our products, which
could result in decreased sales and product returns; or |
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result in lower yields for semiconductor manufacturers. |
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If any of our products contain defects or have reliability, quality or compatibility problems,
our reputation might be damaged and customers might be reluctant to buy our products. We may also
face a higher rate of product defects as we increase our production levels. Product defects could
result in the loss of existing customers, or impair our ability to attract new customers. In
addition, we may not find defects or failures in our products until after they are installed in a
semiconductor manufacturers fabrication facility. We may have to invest significant capital and
other resources to correct these problems. Our current or potential customers also might seek to
recover from us any losses resulting from defects or failures in our products. Hazardous materials
flow through and are controlled by our products and an unintended release of these materials could
result in serious injury or death. Liability claims could require us to spend significant time and
money in litigation or pay significant damages.
The technology labor market is very competitive, and our business will suffer if we are unable to
hire and retain key personnel.
Our future success depends in part on the continued service of our key executive officers, as
well as our research, engineering, sales, manufacturing and administrative personnel, most of whom
are not subject to employment or non-competition agreements. In addition, competition for qualified
personnel in the technology industry is intense, and we operate in geographic locations in which
labor markets are particularly competitive. Our business is particularly dependent on expertise
which only a very limited number of engineers possess. The loss of any of our key employees and
officers, including our Chief Executive Officer, Vice President of Engineering, Vice President of
Sales and Vice President of Technology, or the failure to attract and retain new qualified
employees, would adversely affect our business, operating results and financial condition.
We may not be able to fund our future capital requirements from our operations, and financing from
other sources may not be available on favorable terms or at all.
We made capital expenditures of $1.1 million in 2005, most of which was for facility leasehold
improvements and equipment in connection with the establishment of a manufacturing facility in
Shanghai, China, and we made capital expenditures of $3.3 million in 2004 and $0.2 million in 2003.
The amount of our future capital requirements will depend on many factors, including:
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the cost required to ensure access to adequate manufacturing capacity; |
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the timing and extent of spending to support product development efforts; |
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the timing of introductions of new products and enhancements to existing products; |
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changing manufacturing capabilities to meet new customer requirements; and |
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market acceptance of our products. |
Although we currently have a credit facility, we may need to raise additional funds through
public or private equity or debt financing if our current cash and cash flow from operations are
insufficient to fund our future activities. Our Loan Agreement matures on June 29, 2009 and we may
not be able renew it on favorable terms. Future equity financings could be dilutive to holders of
our common stock, and debt financings could involve covenants that restrict our business
operations. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to
develop or enhance our products, take advantage of future opportunities, grow our business or
respond to competitive pressures or unanticipated requirements, any of which could adversely affect
our business, operating results and financial condition.
Fluctuations in currency exchange rates may adversely affect our financial condition and results of
operations.
Our international sales are denominated primarily, though not entirely, in U.S. dollars. Many
of the costs and expenses associated with our Shanghai subsidiary are paid in Chinese Renminbi, and
we expect our exposure to Chinese Renminbi to increase as we ramp up production in that facility.
In addition, purchases of some of our components are denominated in Japanese Yen. Changes in
exchange rates among other currencies in which our revenue or costs are denominated and the U.S.
dollar may affect our revenue, cost of sales and operating margins. While fluctuations in the value
of our revenue, cost of sales and operating margins as measured in U.S. dollars have not materially
affected our results of operations historically, we do not currently hedge our exchange exposure,
and exchange rate fluctuations could have an adverse effect on our financial condition and results
of operations in the future.
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If environmental contamination were to occur in one of our manufacturing facilities, we could be
subject to substantial liabilities.
We use substances regulated under various foreign, domestic, federal, state and local
environmental laws in our manufacturing facilities. Our failure or inability to comply with
existing or future environmental laws could result in significant remediation liabilities, the
imposition of fines or the suspension or termination of the production of our products. In
addition, we may not be aware of all environmental laws or regulations that could subject us to
liability.
If our facilities were to experience catastrophic loss due to natural disasters, our operations
would be seriously harmed.
Our facilities could be subject to a catastrophic loss caused by natural disasters, including
fires and earthquakes. We have facilities in areas with above average seismic activity, such as our
manufacturing facility in South San Francisco, California and our manufacturing and headquarters
facilities in Menlo Park, California. If any of our facilities were to experience a catastrophic
loss, it could disrupt our operations, delay production and shipments, reduce revenue and result in
large expenses to repair or replace the facility. In addition, we have in the past experienced, and
may in the future experience, extended power outages at our South San Francisco and Menlo Park,
California facilities. We do not carry insurance policies that cover potential losses caused by
earthquakes or other natural disasters or power loss.
We may not be able to continue to secure adequate facilities to house our operations, and any move
to a new facility could be disruptive to our operations.
On January 19, 2006, we extended the lease for our Menlo Park headquarters and manufacturing
facility through December 31, 2007. If we are unable to renew our lease on favorable terms after
this date we will be forced to relocate all manufacturing, engineering, sales and marketing and
administrative functions currently housed in Menlo Park to new facilities. This move could disrupt
our operations and we would incur additional costs associated with relocation to new facilities,
which could have a material adverse effect on our results of operations.
We must maintain effective controls, and our auditors will report on them.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial reporting. We have been
classified as an Accelerated Filer, as defined in Exchange Act Rule 12-b-2 as of the end of the
second quarter of Fiscal 2006. As a result, our auditors will likely be required to audit and
report on the effectiveness of our internal controls over financial reporting beginning with our
Annual Report on Form 10-K for the year ending December 31, 2006. In order to maintain and improve
the effectiveness of our disclosure controls and procedures and internal control over financial
reporting, significant resources and management oversight will be required. As a result, our
managements attention might be diverted from other business concerns, which could have a material
adverse effect on our business, financial condition and operating results. Any failure by us to
maintain adequate controls or to adequately implement new controls could harm our operating results
or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause
investors to lose confidence in our reported financial information, which could adversely affect
the trading price of our common stock. In addition, we might need to hire additional accounting and
financial staff with appropriate public company experience and technical accounting knowledge, and
we might not be able to do so in a timely fashion. We will also experience additional costs,
especially in 2006, as we complete documentation of our internal control procedures in anticipation
of our Section 404 compliance.
Risks related to the securities markets and ownership of our common stock
Future sales of our common stock by our significant stockholders could depress our stock price.
Sales of substantial amounts of our common stock by FP-Ultra Clean, L.L.C., or the perception
that these sales might occur, may depress prevailing market prices of our common stock. The shares
owned by FP-Ultra Clean, L.L.C. and by the former stockholders of Sieger are governed by an
agreement with us that provides them certain demand and piggyback registration rights.
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The market for our stock is subject to significant fluctuation.
The size of our public market capitalization is relatively small, and the volume of our shares
that are traded is low. The market price of our common stock could be subject to significant
fluctuations. Among the factors that could affect our stock price are:
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quarterly variations in our operating results; |
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our ability to successfully introduce new products and manage new product transitions; |
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changes in revenue or earnings estimates or publication of research reports by analysts; |
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speculation in the press or investment community; |
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strategic actions by us or our competitors, such as acquisitions or restructurings; |
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announcements relating to any of our key customers, significant suppliers or the
semiconductor manufacturing and capital equipment industry generally; |
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general market conditions; |
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the effects of war and terrorist attacks; and |
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domestic and international economic factors unrelated to our performance. |
The stock markets in general, and the markets for technology stocks in particular, have
experienced extreme volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock.
Provisions of our charter documents could discourage potential acquisition proposals and could
delay, deter or prevent a change in control.
The provisions of our amended and restated certificate of incorporation and bylaws could
deter, delay or prevent a third party from acquiring us, even if doing so would benefit our
stockholders. These provisions include:
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a requirement that special meetings of stockholders may be called only by our board of
directors, the chairman of our board of directors, our president or our secretary; |
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|
advance notice requirements for stockholder proposals and director nominations; and |
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|
the authority of our board of directors to issue, without stockholder approval, preferred
stock with such terms as our Board of Directors may determine. |
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
The following exhibits are filed with this current Report on Form 10-Q for the quarter
ended June 30, 2006:
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|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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|
ULTRA CLEAN HOLDINGS, INC. |
|
|
|
|
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|
(Registrant) |
|
|
|
|
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|
|
|
August 14, 2006
|
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By:
|
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/s/ Clarence L. Granger |
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
Clarence L. Granger |
|
|
|
|
Title:
|
|
Chief
Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
August 14, 2006
|
|
By:
|
|
/s/ Jack Sexton |
|
|
|
|
|
|
|
|
|
|
|
Name:
|
|
Jack Sexton |
|
|
|
|
Title
|
|
Chief
Financial Officer (Principal Financial Officer)
|
|
|
29
Exhibit Index
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
30