3 Key Takeaways From Ultra Clean Holdings' Q3 Report

Ultra Clean Holdings (NASDAQ: UCTT) reported third-quarter results after the closing bell on Wednesday. The maker of semiconductor manufacturing equipment, specifically systems that keep those clean rooms absolutely free of particles that could damage the chip wafers as they're being made, posted a classic beat-and-raise report. Share prices rose more than 7% in the after-hours trading session, cheered by that positive development.

Here are the three things investors need to know about Ultra Clean's third quarter.

A so-called clean room where semiconductors are made, brightly lit and sparkling clean.

They call it a "clean room" for good reason. Image source: Getty Images.

1. The numbers are looking good

Ultra Clean saw revenues rise 9% year over year, stopping at $254 million. Non-GAAP (adjusted) earnings took a 30% haircut instead, falling to $0.21 per diluted share. The analyst consensus had been pointing to earnings near $0.16 per share on approximately $245 million of sales, and Ultra Clean exceeded both of these targets by a comfortable margin.

Furthermore, management issued rosy guidance for the fourth quarter. Non-GAAP earnings are expected to land in the neighborhood of $0.25 per share on revenues near $270 million. The Street view was calling for more modest results, such as earnings of roughly $0.19 per share and revenues closer to $252 million.

2. This company is serious about debt reduction

The third quarter generated $23 million of cash from operations. Management sank all of that and more straight into paying down $25 million of debt. Fifteen million dollars went into shrinking the long-term debt balance, and the remaining $10 million was used to pay down a revolving loan. Ultra Clean ended the quarter with $159 million of cash equivalents balanced against a total of $304 million in noncurrent debt papers.

Management said that the balance sheet is "strong" at these levels, but it's rarely a bad idea to lower your debt load under pressure-free circumstances. Ultra Clean paid out $3.5 million in interest on those loans during the third quarter, after all. That expense amounts to approximately $0.09 per share.

3. The market downturn is probably over

The semiconductor sector as a whole has been struggling in recent quarters, hurt by the Chinese-American trade tensions on one hand and soft consumer interest in smartphone upgrades and new cars on the other. As a direct result, Ultra Clean's incoming order growth slowed down significantly in 2018 and early 2019, with disastrous results for the company's bottom-line profits.

These solid third-quarter results appear to have snapped that downtrend, and CEO Jim Scholhamer made sure to get that message across in the earnings call.

"With overall sentiment more upbeat and constructive heading into 2020, we are well positioned in attractive end markets with multiple levers for value creation to capitalize on the opportunities ahead," Scholhamer said. "We are more optimistic than we were just a few months ago that the cycle has bottomed and the industry is on the road to recovery. Our goal is to maintain sustainable growth and outpace the markets we serve."

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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