uctt-10q_20160923.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 23, 2016

or

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)

 

 

Delaware

 

61-1430858

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

26462 Corporate Avenue, Hayward, California

 

94545

(Address of principal executive offices)

 

(Zip Code)

(510) 576-4400

Registrant’s 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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of shares outstanding of the issuer’s common stock as of October 28, 2016: 32,922,211 

 

 

 

 

 


 

ULTRA CLEAN HOLDINGS, INC.

TABLE OF CONTENTS

 

 

 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1.

 

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

24

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

30

ITEM 4.

 

CONTROLS AND PROCEDURES

 

30

 

 

PART II. OTHER INFORMATION

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

32

ITEM 1A.

 

RISK FACTORS

 

32

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

45

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

45

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

45

ITEM 5.

 

OTHER INFORMATION

 

45

ITEM 6.

 

EXHIBITS

 

46

SIGNATURES

 

47

 

- 2 -


 

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)

 

 

 

September 23,

 

 

December 25,

 

 

 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,270

 

 

$

50,103

 

Accounts receivable, net of allowance of $42 and $158, respectively

 

 

65,805

 

 

 

59,148

 

Inventories

 

 

89,015

 

 

 

72,716

 

Prepaid expenses and other

 

 

6,941

 

 

 

8,172

 

Total current assets

 

 

209,031

 

 

 

190,139

 

Equipment and leasehold improvements, net

 

 

18,809

 

 

 

17,267

 

Goodwill

 

 

85,248

 

 

 

85,248

 

Purchased intangibles, net

 

 

38,464

 

 

 

42,782

 

Other non-current assets

 

 

743

 

 

 

717

 

Total assets

 

$

352,295

 

 

$

336,153

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Bank borrowings

 

$

15,196

 

 

$

12,744

 

Accounts payable

 

 

51,954

 

 

 

39,660

 

Accrued compensation and related benefits

 

 

6,992

 

 

 

6,536

 

Deferred rent, current portion

 

 

673

 

 

 

584

 

Other current liabilities

 

 

10,208

 

 

 

5,187

 

Total current liabilities

 

 

85,023

 

 

 

64,711

 

Bank borrowings, net of current portion

 

 

54,023

 

 

 

62,795

 

Deferred tax liability

 

 

5,797

 

 

 

4,519

 

Deferred rent and other liabilities

 

 

2,547

 

 

 

3,185

 

Total liabilities

 

 

147,390

 

 

 

135,210

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock — $0.001 par value, 10,000,000 authorized; none outstanding

 

 

 

 

 

 

Common stock — $0.001 par value, 90,000,000 authorized; 32,912,546 and

   32,279,429 shares issued and outstanding in 2016 and 2015, respectively

 

 

33

 

 

 

32

 

Additional paid-in capital

 

 

180,048

 

 

 

176,280

 

Common shares held in treasury, at cost, 601,944 shares in 2016 and 2015

 

 

(3,337

)

 

 

(3,337

)

Retained earnings

 

 

28,084

 

 

 

27,986

 

Accumulated other comprehensive income (loss)

 

 

77

 

 

 

(18

)

Total stockholders’ equity

 

 

204,905

 

 

 

200,943

 

Total liabilities and stockholders’ equity

 

$

352,295

 

 

$

336,153

 

 

(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)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 23,

 

 

September 25,

 

 

September 23,

 

 

September 25,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Sales

 

$

146,154

 

 

$

122,816

 

 

$

388,214

 

 

$

365,683

 

Cost of goods sold

 

 

122,663

 

 

 

103,868

 

 

 

331,132

 

 

 

307,994

 

Gross profit

 

 

23,491

 

 

 

18,948

 

 

 

57,082

 

 

 

57,689

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,447

 

 

 

2,352

 

 

 

7,082

 

 

 

7,319

 

Sales and marketing

 

 

2,819

 

 

 

2,844

 

 

 

8,537

 

 

 

8,494

 

General and administrative

 

 

11,525

 

 

 

10,673

 

 

 

31,742

 

 

 

32,721

 

Total operating expenses

 

 

16,791

 

 

 

15,869

 

 

 

47,361

 

 

 

48,534

 

Income from operations

 

 

6,700

 

 

 

3,079

 

 

 

9,721

 

 

 

9,155

 

Interest and other income (expense), net

 

 

(1,336

)

 

 

(756

)

 

 

(3,263

)

 

 

(2,071

)

Income before provision for income taxes

 

 

5,364

 

 

 

2,323

 

 

 

6,458

 

 

 

7,084

 

Income tax provision

 

 

2,750

 

 

 

647

 

 

 

6,360

 

 

 

2,028

 

Net income

 

$

2,614

 

 

$

1,676

 

 

$

98

 

 

$

5,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

 

$

0.05

 

 

$

0.00

 

 

$

0.16

 

Diluted

 

$

0.08

 

 

$

0.05

 

 

$

0.00

 

 

$

0.16

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

32,759

 

 

 

31,993

 

 

 

32,544

 

 

 

31,359

 

Diluted

 

 

33,100

 

 

 

32,155

 

 

 

32,887

 

 

 

31,653

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

 

- 4 -


 

ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  

(Unaudited; in thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 23,

 

 

September 25,

 

 

September 23,

 

 

September 25,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

2,614

 

 

$

1,676

 

 

$

98

 

 

$

5,056

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment

 

 

50

 

 

 

67

 

 

 

125

 

 

 

67

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

 

27

 

 

 

(91

)

 

 

(101

)

 

 

(91

)

Adjustment for net loss realized and included in net income

 

 

20

 

 

 

4

 

 

 

71

 

 

 

4

 

Total change in unrealized loss on derivative instruments

 

 

47

 

 

 

(87

)

 

 

(30

)

 

 

(87

)

Other comprehensive income (loss):

 

 

97

 

 

 

(20

)

 

 

95

 

 

 

(20

)

Comprehensive income

 

$

2,711

 

 

$

1,656

 

 

$

193

 

 

$

5,036

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

 

- 5 -


 

ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Nine Months Ended

 

 

 

September 23,

 

 

September 25,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

98

 

 

$

5,056

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,242

 

 

 

3,447

 

Amortization of finite-lived intangibles

 

 

4,318

 

 

 

4,042

 

Amortization of debt issuance costs

 

 

114

 

 

 

790

 

Stock-based compensation

 

 

4,040

 

 

 

2,607

 

Change in the fair value of the contingent earn out

 

 

1,405

 

 

 

 

Excess tax benefit from stock-based compensation

 

 

771

 

 

 

809

 

Changes in assets and liabilities, net of effects of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,567

)

 

 

7,416

 

Inventory

 

 

(16,185

)

 

 

(11,071

)

Prepaid expenses and other

 

 

1,249

 

 

 

(1,300

)

Deferred income taxes

 

 

1,276

 

 

 

(196

)

Other non-current assets

 

 

(26

)

 

 

(12

)

Accounts payable

 

 

12,342

 

 

 

(8,180

)

Accrued compensation and related benefits

 

 

443

 

 

 

132

 

Income taxes payable

 

 

450

 

 

 

(809

)

Other liabilities

 

 

1,412

 

 

 

1,712

 

Net cash provided by operating activities

 

 

9,382

 

 

 

4,443

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of equipment and leasehold improvements

 

 

(5,460

)

 

 

(5,196

)

Disposal of equipment and leasehold improvements

 

 

34

 

 

 

 

Acquisition of business

 

 

 

 

 

(44,495

)

Net cash used for investing activities

 

 

(5,426

)

 

 

(49,691

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from bank borrowings

 

 

4,523

 

 

 

76,981

 

Proceeds from issuance of common stock

 

 

500

 

 

 

2,307

 

Principal payments on bank borrowings

 

 

(11,016

)

 

 

(51,509

)

Payments of debt issuance costs

 

 

 

 

 

(611

)

Excess tax benefit from stock-based compensation

 

 

(771

)

 

 

(809

)

Employees’ taxes paid upon vesting of restricted stock units

 

 

 

 

 

(331

)

Net cash provided by (used for) financing activities

 

 

(6,764

)

 

 

26,028

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(25

)

 

 

6

 

Net decrease in cash and cash equivalents

 

$

(2,833

)

 

$

(19,214

)

Cash and cash equivalents at beginning of period

 

 

50,103

 

 

 

78,997

 

Cash and cash equivalents at end of period

 

$

47,270

 

 

$

59,783

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

2,988

 

 

$

2,611

 

Income tax refunds

 

$

591

 

 

$

 

Interest paid

 

$

1,920

 

 

$

1,776

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Fair value of common shares issued for acquisition

 

$

 

 

$

17,661

 

Fair value of earn-out payments related to Miconex acquisition

 

$

 

 

$

1,280

 

Equipment and leasehold improvements purchased included in accounts payable

 

$

483

 

 

$

3,531

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

- 6 -


 

ULTRA CLEAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Significant Accounting Policies

Organization — Ultra Clean Holdings, Inc. (the “Company” or “UCT”) was founded in November 2002 for the purpose of acquiring Ultra Clean Technology Systems and Service 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 UCT. UCT became a publicly traded company in March 2004. In June 2006, the Company completed the acquisition of Sieger Engineering, Inc. to enhance its position as a subsystem supplier to the semiconductor, research, flat panel, energy and medical equipment industries. Ultra Clean Technology (Shanghai) Co., Ltd (“UCTS”) and Ultra Clean Micro-Electronics Equipment (Shanghai) Co., Ltd. (“UCME”) were established in 2005 and 2007, respectively, to facilitate the Company’s operations in China. In December 2015, UCTS merged into UCME. Ultra Clean Asia Pacific, Pte, Ltd. (Singapore) (“UCAP”) was established in fiscal year 2008 to facilitate the Company’s operations in Singapore. In July 2012, UCT acquired American Integration Technologies LLC (“AIT”) to add to the Company’s existing customer base in the semiconductor and medical spaces and to provide additional manufacturing capabilities. In November 2014, the Company launched Prototype Asia, its 3D printing business in Singapore, to develop additive manufacturing capabilities for the Company’s customer base. In February 2015, UCT acquired Marchi Thermal Systems, Inc. (“Marchi”), a designer and manufacturer of specialty heaters, thermocouples and temperature controllers. Marchi delivers flexible heating elements and thermal solutions to UCT’s customers. The Company believes heaters are increasingly critical in equipment design for the most advanced semiconductor nodes. In July 2015, UCT acquired MICONEX s.r.o. (“Miconex”), a privately-held provider of advanced precision fabrication of plastics, primarily for the semiconductor industry that expanded the Company’s capabilities with existing customers.

The Company is a global leader in the design, engineering, and manufacture of production tools, modules and subsystems for the semiconductor capital equipment and equipment industry segments with similar requirements including consumer, medical and flat panel display. The Company focuses on providing specialized engineering and manufacturing solutions for these highly complex, highly configurable, limited volume applications. The Company enables its customers to realize lower manufacturing costs and reduced design-to-delivery cycle times while maintaining high quality standards.

The Company provides its customers with complete solutions that combine its expertise in design, assembly, test and component characterization. The Company’s customers value its highly flexible global manufacturing operations, its excellence in quality control and its scale and financial stability. The Company’s global footprint enables the Company to reduce manufacturing costs and design-to-delivery cycle times while maintaining high quality standards for the Company’s customers. The Company believes that these characteristics allow the Company to provide global solutions for its customers’ product demands. The Company ships the majority of its products to U.S. registered customers with locations both in and outside the U.S. In addition to its U.S. manufacturing capabilities, the Company manufactures products in its Asian facilities to support local and U.S. based customers. The Company conducts its operating activities primarily through its wholly-owned subsidiaries, Ultra Clean Technology Systems and Service, Inc., AIT, UCTS, UCME, UCAP, Marchi and Miconex. The Company’s international sales represented 49.7% and 35.6% of total sales for the three months ended September 23, 2016 and September 25, 2015, respectively, and 46.5% and 33.3% of total sales for the nine months ended September 23, 2016 and September 25, 2015, respectively. See Note 10 to the Company’s Condensed Consolidated Financial Statements for further information about the Company’s geographic areas.

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 U.S. generally accepted accounting principles (“GAAP”). This financial information reflects all adjustments which are, in the opinion of the Company, normal, recurring and necessary for the fair financial statement presentation for the dates and periods presented. Certain information and footnote disclosures normally included in our annual financial statements, prepared in accordance with GAAP, have been condensed or omitted. The Company’s December 25, 2015 balance sheet data were derived from its audited financial statements as of that date.

Principles of Consolidation — The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and all intercompany accounts and transactions have been eliminated in consolidation. The Company uses a 52-53 week fiscal year ending on the Friday nearest December 31. All references to quarters refer to fiscal quarters and all references to years refer to fiscal years.

- 7 -


 

Foreign Currency Translation and Remeasurement — The Company has one foreign subsidiary whose functional currency is not its local currency or the U.S. dollar. The Company remeasures the monetary assets and liabilities of this subsidiary into its functional currency. Gains and losses from these remeasurements are recorded in interest and other income (expense), net. The Company then translates the assets and liabilities of this subsidiary into the U.S. dollar. Gains and losses from these translations are recognized in foreign currency translation included in accumulated other comprehensive income (AOCI) within stockholders’ equity. For the Company’s foreign subsidiaries where the U.S. dollar is the functional currency, any gains and losses resulting from the remeasurement of the assets and liabilities of these subsidiaries are recorded in interest and other income (expense), net.

Use of Accounting Estimates — The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Such estimates and assumptions include reserves on inventory, valuation of deferred tax assets and impairment of goodwill and other long-lived assets. The Company bases its estimates and judgments on historical experience and on various 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.

Concentration of Credit Risk — Financial instruments which subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company sells its products primarily to semiconductor capital equipment manufacturers in the United States. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral.

Significant Sales to Customers — The Company’s most significant customers (having accounted for 10% or more of sales) and their related sales as a percentage of total sales were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 23,

 

 

September 25,

 

 

September 23,

 

 

September 25,

 

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

Lam Research Corporation

 

 

49.5

 

%

 

49.4

 

%

 

53.5

 

%

 

50.4

 

%

Applied Materials, Inc.

 

 

30.9

 

 

 

26.4

 

 

 

27.3

 

 

 

27.1

 

 

Total

 

 

80.4

 

%

 

75.8

 

%

 

80.8

 

%

 

77.5

 

%

 

Two customers’ accounts receivable balances, Lam Research Corporation and Applied Materials, Inc., were individually greater than 10% of accounts receivable as of September 23, 2016 and three customers’ accounts receivable balances, Lam Research Corporation, Applied Materials, Inc. and ASM International, Inc., were individually greater than 10% of accounts receivable as of December 25, 2015, and in the aggregate represented approximately 77.9% and 84.6% of accounts receivable as of September 23, 2016 and December 25, 2015, respectively.

Fair Value of Measurements — The Company measures its cash equivalents, interest rate derivative contracts and contingent earn-out liability at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.

Level 3 — Unobservable inputs that are supported by little or no market activities.

- 8 -


 

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following table summarizes, for assets or liabilities measured at fair value, the respective fair value and the classification by level of input within the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurement at

 

 

 

 

 

 

 

Reporting Date Using

 

Description

 

September 23, 2016

 

 

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant Unobservable

Inputs

(Level 3)

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

56

 

 

$

 

 

$

56

 

 

$

 

Contingent earn-out liability

 

$

2,236

 

 

$

 

 

$

 

 

$

2,236

 

 

 

 

 

 

 

 

Fair Value Measurement at

 

 

 

 

 

 

 

Reporting Date Using

 

Description

 

December 25, 2015

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market fund deposits

 

$

640

 

 

$

640

 

 

$

 

 

$

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

23

 

 

$

 

 

$

23

 

 

$

 

Contingent earn-out liability

 

$

831

 

 

$

 

 

$

 

 

$

831

 

 

Derivative Financial Instruments — The Company recognizes derivative instruments as either assets or liabilities in the accompanying Condensed Consolidated Balance Sheets at fair value. The Company records changes in the fair value of the derivatives in the accompanying Condensed Consolidated Statements of Operations as interest and other income (expense), net, or as a component of AOCI in the accompanying Condensed Consolidated Balance Sheets.

Inventories — Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. The Company evaluates the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis. Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to economic trends, future demand for products, and technological obsolescence of the Company’s products.

Inventory write downs inherently involve judgments as to assumptions about expected future demand and the impact of market conditions on those assumptions. Although the Company believes that the assumptions it used in estimating inventory write downs are reasonable, significant changes in any one of the assumptions in the future could produce a significantly different result. There can be no assurances that future events and changing market conditions will not result in significant increases in inventory write downs.

Equipment and Leasehold Improvements, net — Equipment and leasehold improvements are stated at cost, or, in the case of equipment under capital leases, the present value of future minimum lease payments at inception of the related lease. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the leases. Useful lives range from three to fifteen years. Construction in progress is related to the construction or development of property and equipment that has not yet been placed in service for their intended use and is, therefore, not depreciated.

Product Warranty — The Company provides 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. Determination of the warranty reserve 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. The warranty reserve is included in other current liabilities on the Condensed Consolidated Balance Sheets.

- 9 -


 

Income Taxes — The Company utilizes the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to realize our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider recent cumulative income (loss). A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

The Company continued to maintain a full valuation allowance on its federal, state, and one of its Singapore subsidiary’s deferred tax amounts as of September 23, 2016. Income tax positions must meet a more likely than not recognition threshold to be recognized. Income tax positions that previously failed to meet the more likely than not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the Condensed Consolidated Statements of Operations as income tax expense. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position. Management believes that it has adequately provided for any adjustments that may result from these examinations; however, the outcome of tax audits cannot be predicted with certainty.

The determination of the Company’s tax provision is subject to judgments and estimates.

Revenue Recognition — Product revenue is generally recorded upon shipment. In arrangements that specify title transfer upon delivery, revenue is not recognized until ownership is transferred to the customer. The Company recognizes revenue when persuasive evidence of an arrangement exists, shipment has occurred, price is fixed or determinable and collectability is reasonably assured. If the Company has not substantially completed a product or fulfilled the terms of a sales agreement at the time of shipment, revenue recognition is deferred until fulfillment. The Company’s standard arrangement for its customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions.

The Company assesses collectability based on the credit worthiness of the customer and past transaction history. The Company performs on-going credit evaluations of customers and generally does not require collateral from customers.

Research and Development Costs — Research and development costs are expensed as incurred.

Net Income per Share — Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options and restricted stock using the treasury stock method, except when such shares are anti-dilutive. See Note 8 to the Company’s Condensed Consolidated Financial Statements.

Segments — The Financial Accounting Standards Board’s (FASB) guidance regarding disclosure about segments in an enterprise and related information establishes standards for the reporting by public business enterprises of information about reportable segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the reportable segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Company operates in one reporting segment, and therefore, has one reportable segment.

Business Combinations — The Company recognizes assets acquired (including goodwill and identifiable intangible assets) and liabilities assumed at fair value on the acquisition date. Subsequent changes to the fair value of such assets acquired and liabilities assumed are recognized in earnings, after the expiration of the measurement period, a period not to exceed 12 months from the acquisition date. Acquisition-related expenses and acquisition-related restructuring costs are recognized in earnings in the period in which they are incurred.

- 10 -


 

Stock-Based Compensation Expense

The Company maintains stock-based compensation plans which allow for the issuance of equity-based awards to executives, directors and certain employees. These equity-based awards include stock options, restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) which can be either time-based or performance-based. The Company has not granted stock options to its employees since fiscal year 2010. The Company also maintains an employee stock purchase plan that provides for the issuance of shares to all eligible employees of the Company at a discounted price.

Stock-based compensation expense includes compensation costs related to estimated fair values of stock options and awards granted. The estimated fair value of the Company’s equity-based awards, net of expected forfeitures, is amortized on a straight-line basis over the awards’ vesting period, typically three years for RSUs and one year for RSAs, and is adjusted for subsequent changes in estimated forfeitures related to all equity-based awards and performance as it relates to performance-based RSUs. The Company applies the fair value recognition provisions based on the FASB’s guidance regarding stock-based compensation.

Stock Options

Stock option activity for the nine months ended September 23, 2016:

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Remaining

Contractual

Life (years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding at December 25, 2015

 

 

315,648

 

 

$

10.02

 

 

 

2.06

 

 

$

216

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(100,000

)

 

 

3.96

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(50,489

)

 

$

11.74

 

 

 

 

 

 

 

 

 

Outstanding at September 23, 2016

 

 

165,159

 

 

$

13.17

 

 

 

0.74

 

 

$

103

 

Options exercisable at September 23, 2016

 

 

165,159

 

 

$

13.17

 

 

 

0.74

 

 

$

103

 

 

There were no options granted by the Company during either of the nine months ended September 23, 2016 and September 25, 2015. As of September 23, 2016, there was no stock-based compensation expense attributable to stock options as all outstanding options were fully vested.

Employee Stock Purchase Plan

The Company also maintains an employee stock purchase plan (“ESPP”) that provides for the issuance of shares to all eligible employees of the Company at a discounted price. Under the ESPP, substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 95 percent of the fair market value of the Company’s stock at the end of each applicable purchase period.

Restricted Stock Units and Restricted Stock Awards

The Company grants RSUs to employees and RSAs to non-employee directors as part of the Company’s long term equity compensation plan.

Restricted Stock Units — RSUs are granted to employees with a per share or unit purchase price of zero dollars and either have time based or performance based vesting. RSUs typically vest over three years, subject to the employee’s continued service with the Company. For purposes of determining compensation expense related to these RSUs, the fair value is determined based on the closing market price of the Company’s common stock on the date of award. The expected cost of the grant is reflected over the service period, and is reduced for estimated forfeitures.

During the quarter ended September 23, 2016, the Company granted 138,360 RSUs, with a weighted average fair value of $6.20 per share. During the second quarter ended June 24, 2016, the Company granted 199,000 RSUs, with a weighted average fair value of $5.89 per share, and granted 75,000 performance stock units with a weighted average fair value of $5.93 per share. During the first quarter ended March 25, 2016, the Company granted 644,000 RSUs and PSUs with a weighted average fair value of $5.31 per share.

- 11 -


 

During the nine months ended September 23, 2016, 136,968 vested shares were withheld to satisfy withholding tax obligations, resulting in the net issuance of 460,958 shares. As of September 23, 2016, approximately $5.8 million of stock-based compensation cost, net of estimated forfeitures, related to RSUs and PSUs remains to be amortized over a weighted average period of two years. As of September 23, 2016, a total of 1,411,672 RSUs and PSUs remain outstanding with an aggregate intrinsic value of $9.9 million and a weighted average remaining contractual term of 1.3 years.

Restricted Stock Awards — As of September 23, 2016, a total of 60,000 RSAs were outstanding. The total unamortized expense of the Company’s unvested restricted stock awards as of September 23, 2016, was $0.2 million.

The following table summarizes the Company’s RSU and RSA activity for the nine months ended September 23, 2016:

 

 

 

Shares

 

 

Aggregate

Fair Value

(in thousands)

 

Unvested restricted stock units and restricted stock awards

   at December 25, 2015

 

 

1,267,942

 

 

$

6,563

 

Granted

 

 

1,116,360

 

 

 

 

 

Vested

 

 

(645,926

)

 

 

 

 

Forfeited

 

 

(266,704

)

 

 

 

 

Unvested restricted stock units and restricted stock awards

   at September 23, 2016

 

 

1,471,672

 

 

$

10,361

 

Vested and expected to vest restricted stock units and

   restricted stock awards at September 23, 2016

 

 

1,228,188

 

 

$

8,646

 

 

The following table shows the Company’s stock-based compensation expense included in the Condensed Consolidated Statements of Operations (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 23,

 

 

September 25,

 

 

September 23,

 

 

September 25,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of sales (1)

 

$

362

 

 

$

304

 

 

$

828

 

 

$

908

 

Research and development

 

 

1,277

 

 

 

658

 

 

 

1,405

 

 

 

1,247

 

Sales and marketing

 

 

76

 

 

 

49

 

 

 

253

 

 

 

150

 

General and administrative

 

 

142

 

 

 

103

 

 

 

1,554

 

 

 

302

 

 

 

 

1,857

 

 

 

1,114

 

 

 

4,040

 

 

 

2,607

 

Income tax benefit

 

 

(935

)

 

 

(310

)

 

 

(3,979

)

 

 

(746

)

Stock-based compensation expense, net of tax

 

$

922

 

 

$

804

 

 

$

61

 

 

$

1,861

 

 

(1)

Stock-based compensation expenses capitalized in inventory for the three and nine months ended September 23, 2016 and September 25, 2015 were not significant.

Recent Accounting Pronouncements

In May 2014, the FASB amended the existing accounting standards for revenue recognition. In August 2015, the FASB delayed the effective date of the amended accounting standard for revenue recognition by one year. As such, the updated standard will be effective for the Company in the first quarter of 2018. The Company is still evaluating the effect that the updated standard will have on the consolidated financial statements and related disclosures.

In July 2015, the FASB issued authoritative guidance that requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out  or the retail inventory method but applies to all other inventory including those measured using first-in, first-out or the average cost method. The authoritative guidance will be effective for the Company in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.

- 12 -


 

In April 2015, the FASB issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The Company adopted this guidance with retrospective application in the first quarter of 2016. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued authoritative guidance on income taxes, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective for the Company beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company is currently evaluating the effect of this new guidance on the Company’s consolidated financial statements.

In February 2016, the FASB issued new guidance related to how an entity should recognize lease assets and lease liabilities. The guidance specifies that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. The guidance is effective beginning in the first quarter of 2019. Early adoption is permitted.  In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.

In March 2016, the FASB issued new guidance which involves several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The guidance is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period, however early adoption is permitted. The Company is currently evaluating the guidance to determine the Company's adoption method and the effect it will have on the Company's consolidated financial statements.

 

 

2. Financial Instruments

Cash Equivalents

As of December 25, 2015, the Company had an overnight sweep account invested in money market funds with maturities of less than 90 days from purchase and is thus classified as cash and cash equivalents on the Company’s balance sheet. The carrying value and fair value of these money market funds as of December 25, 2015 was $0.6 million, based on Level 1 inputs. There were no money market funds as of September 23, 2016.

Derivative Financial Instruments

A subsidiary of the Company, Miconex, utilizes foreign currency forward contracts with a local financial institution to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. The Company also uses certain interest rate derivative contracts to hedge interest rate exposures on existing floating rate debt. The Company classifies its foreign currency and interest rate derivative contracts primarily within Level 2 of the fair-value hierarchy discussed in Note 1 of the Company’s Condensed Consolidated Financial Statements as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company does not use derivatives for speculative or trading purposes.

Cash Flow Hedges

In September 2015, the Company entered into an interest rate swap with East West Bank and City National Bank with a notional amount of $20.0 million pursuant to which the Company pays the counterparty a fixed rate of 0.99% and receives interest at a variable rate equal to the London Interbank Offered Rate (LIBOR) rate the Company is required to pay under its term loan, or 0.52%, as of September 23, 2016. This interest rate swap effectively locks in a fixed interest rate of 3.74% on $15.6 million of the $29.2 million term loan as of September 23, 2016, with a decreasing notional amount based on prorated quarterly principal payments over the remaining period of the term loan. Gains or losses on the effective portion of a cash flow hedge are reflected as a component of AOCI and subsequently recorded to interest and other income (expense) when the hedged transactions are realized. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to interest and other income (expense), net. As of September 23, 2016, the effective portion of the Company’s cash flow hedge before tax effect was less than $0.1 million, of which less than $0.1 million is expected to be reclassified from AOCI into earnings within the next 12 months.

- 13 -


 

Non-Designated Derivatives

The Miconex interest swap to convert the variable interest rates on Miconex debt to fixed rates with a total notional amount of $0.4 million is not designated as a hedging instrument. The Company recognizes gains and losses on this contract, as well any related costs in interest and other income (expense), net.

The Company records all derivatives in the Condensed Consolidated Balance Sheets at fair value. The Company’s accounting treatment for these derivative instruments is based on its hedge designation. The following tables show the Company’s derivative instruments at gross fair value (in thousands) as of September 23, 2016 and December 25, 2015.

 

 

 

 

 

September 23, 2016

 

 

 

 

 

Fair Value of

 

 

Fair Value of

 

 

 

 

 

 

 

Derivatives

 

 

Derivatives Not

 

 

 

 

 

 

 

Balance Sheet

 

Designated as

 

 

Designated as

 

 

Total

 

 

 

Location

 

Hedge Instruments

 

 

Hedge Instruments

 

 

Fair Value

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Deferred rent and other liabilities

 

$

47

 

 

$

9

 

 

$

56

 

 

 

 

 

 

December 25, 2015

 

 

 

 

 

Fair Value of

 

 

Fair Value of

 

 

 

 

 

 

 

 

 

Derivatives

 

 

Derivatives Not

 

 

 

 

 

 

 

Balance Sheet

 

Designated as

 

 

Designated as

 

 

Total

 

 

 

Location

 

Hedge Instruments

 

 

Hedge Instruments

 

 

Fair Value

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Deferred rent and other liabilities

 

$

23

 

 

$

10

 

 

$

33

 

 

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in thousands):

 

 

 

Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 23,

 

 

September 25,

 

 

September 23,

 

 

September 25,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Derivatives in Cash Flow Hedging

   Relationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

27

 

 

$

87

 

 

$

(101

)

 

$

87

 

 

 

 

Gains Reclassified from AOCI into Income (Effective Portion)

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 23,

 

 

September 25,

 

 

September 23,

 

 

September 25,

 

 

 

Income Statement Location

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Derivatives in Cash Flow

   Hedging Relationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest and other income (expense), net

 

$

20

 

 

$

4

 

 

$

71

 

 

$

4

 

 

There were no gains (losses) recognized in income on derivatives that are excluded from the effectiveness testing and ineffective portion of the cash flow hedge for the three and nine months ended September 23, 2016 and September 25, 2015.

The effect of derivative instruments not designated as hedging instruments on income for the three and nine months ended September 23, 2016 and September 25, 2015 is not significant to the financial statements.

 

 

- 14 -


 

3. Balance Sheet Information

Inventories consisted of the following (in thousands):

 

 

 

September 23,

 

 

December 25,

 

 

 

2016

 

 

2015

 

Raw materials

 

$

65,428

 

 

$

57,321

 

Work in process

 

 

23,158

 

 

 

17,954

 

Finished goods

 

 

6,785

 

 

 

4,561

 

 

 

 

95,371

 

 

 

79,836

 

Reserve for excess and obsolete

 

 

(6,356

)

 

 

(7,120

)

Total

 

$

89,015

 

 

$