uctt-10q_20180330.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 March 30, 2018

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,” “smaller reporting company” and “emerging growth 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

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 April 27, 2018: 38,724,272 

 

 


 

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

 

21

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

26

ITEM 4.

 

CONTROLS AND PROCEDURES

 

26

 

 

PART II. OTHER INFORMATION

 

 

ITEM 1.

 

LEGAL PROCEEDINGS

 

27

ITEM 1A.

 

RISK FACTORS

 

27

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

41

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

 

41

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

41

ITEM 5.

 

OTHER INFORMATION

 

41

ITEM 6.

 

EXHIBITS

 

42

SIGNATURES

 

43

 

- 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)

 

 

 

March 30,

 

 

December 29,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

162,365

 

 

$

68,306

 

Accounts receivable, net of allowance of $103 and $69, respectively

 

 

83,660

 

 

 

90,213

 

Inventories

 

 

261,798

 

 

 

236,840

 

Prepaid expenses and other

 

 

13,225

 

 

 

12,089

 

Total current assets

 

 

521,048

 

 

 

407,448

 

Equipment and leasehold improvements, net

 

 

36,839

 

 

 

32,246

 

Goodwill

 

 

85,248

 

 

 

85,248

 

Purchased intangibles, net

 

 

30,489

 

 

 

31,587

 

Deferred tax assets, net

 

 

5,032

 

 

 

4,951

 

Other non-current assets

 

 

2,181

 

 

 

1,932

 

Total assets

 

$

680,837

 

 

$

563,412

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Bank borrowings

 

$

54,779

 

 

$

12,381

 

Accounts payable

 

 

169,592

 

 

 

173,521

 

Accrued compensation and related benefits

 

 

11,004

 

 

 

10,788

 

Deferred rent, current portion

 

 

676

 

 

 

670

 

Other current liabilities

 

 

9,441

 

 

 

9,987

 

Total current liabilities

 

 

245,492

 

 

 

207,347

 

Bank borrowings, net of current portion

 

 

 

 

 

39,893

 

Deferred tax liability

 

 

10,017

 

 

 

9,981

 

Deferred rent and other liabilities

 

 

5,792

 

 

 

5,886

 

Total liabilities

 

 

261,301

 

 

 

263,107

 

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;

   38,721,506 and  33,664,940 shares issued and outstanding,

   in 2018 and 2017, respectively

 

 

39

 

 

 

34

 

Additional paid-in capital

 

 

283,665

 

 

 

188,639

 

Common shares held in treasury, at cost, 601,944 shares in 2018 and

   2017

 

 

(3,337

)

 

 

(3,337

)

Retained earnings

 

 

137,863

 

 

 

113,122

 

Accumulated other comprehensive gain

 

 

1,306

 

 

 

1,847

 

Total stockholders’ equity

 

 

419,536

 

 

 

300,305

 

Total liabilities and stockholders’ equity

 

$

680,837

 

 

$

563,412

 

 

(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

 

 

 

March 30,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Sales

 

$

314,842

 

 

$

204,594

 

Cost of goods sold

 

 

266,038

 

 

 

167,099

 

Gross profit

 

 

48,804

 

 

 

37,495

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

3,029

 

 

 

2,906

 

Sales and marketing

 

 

3,805

 

 

 

3,051

 

General and administrative

 

 

15,062

 

 

 

11,765

 

Total operating expenses

 

 

21,896

 

 

 

17,722

 

Income from operations

 

 

26,908

 

 

 

19,773

 

Interest and other income (expense), net

 

 

326

 

 

 

(938

)

Income before provision for income taxes

 

 

27,234

 

 

 

18,835

 

Income tax provision

 

 

2,493

 

 

 

4,494

 

Net income

 

$

24,741

 

 

$

14,341

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.67

 

 

$

0.43

 

Diluted

 

$

0.66

 

 

$

0.42

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

Basic

 

 

36,723

 

 

 

33,061

 

Diluted

 

 

37,491

 

 

 

33,865

 

 

(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

 

 

 

March 30,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

24,741

 

 

$

14,341

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment

 

 

336

 

 

 

98

 

Cash flow hedges:

 

 

 

 

 

 

 

 

Change in fair value of derivatives

 

 

9

 

 

 

13

 

Adjustment for net gain (loss) realized and included in net income

 

 

(886

)

 

 

7

 

Total change in unrealized gain (loss) on derivative instruments

 

 

(877

)

 

 

20

 

Other comprehensive income (loss), net of tax

 

 

(541

)

 

 

118

 

Comprehensive income

 

$

24,200

 

 

$

14,459

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

 

- 5 -


 

ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Three Months Ended

 

 

 

March 30,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

24,741

 

 

$

14,341

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,316

 

 

 

1,214

 

Amortization of finite-lived intangibles

 

 

1,098

 

 

 

1,231

 

Amortization of debt issuance costs

 

 

38

 

 

 

38

 

Stock-based compensation

 

 

2,563

 

 

 

1,382

 

Change in the fair value of financial instruments

 

 

(856

)

 

 

310

 

Loss on the disposal of fixed assets

 

 

52

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,839

 

 

 

(20,078

)

Inventories

 

 

(24,660

)

 

 

(19,068

)

Prepaid expenses and other

 

 

(1,089

)

 

 

246

 

Deferred income taxes

 

 

(46

)

 

 

(58

)

Other non-current assets

 

 

(255

)

 

 

(245

)

Accounts payable

 

 

(4,214

)

 

 

23,793

 

Accrued compensation and related benefits

 

 

187

 

 

 

2,908

 

Income taxes payable

 

 

(2,358

)

 

 

2,149

 

Other liabilities

 

 

1,723

 

 

 

981

 

Net cash provided by operating activities

 

 

5,079

 

 

 

9,144

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of equipment and leasehold improvements

 

 

(5,911

)

 

 

(2,784

)

Net cash used for investing activities

 

 

(5,911

)

 

 

(2,784

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from bank borrowings

 

 

10,222

 

 

 

1,000

 

Proceeds from issuance of common stock

 

 

94,330

 

 

 

1,383

 

Principal payments on bank borrowings

 

 

(7,873

)

 

 

(4,697

)

Employees’ taxes paid upon vesting of restricted stock units

 

 

(1,862

)

 

 

(1,582

)

Net cash provided by (used for) financing activities

 

 

94,817

 

 

 

(3,896

)

Effect of exchange rate changes on cash and cash equivalents

 

 

74

 

 

 

6

 

Net increase in cash and cash equivalents

 

$

94,059

 

 

$

2,470

 

Cash and cash equivalents at beginning of period

 

 

68,306

 

 

 

52,465

 

Cash and cash equivalents at end of period

 

$

162,365

 

 

$

54,935

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

4,761

 

 

$

2,418

 

Income tax refunds

 

$

5

 

 

$

25

 

Interest paid

 

$

435

 

 

$

551

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Restricted stock issued

 

$

7,751

 

 

$

7,003

 

Equipment and leasehold improvements purchased included in accounts payable

 

$

2,686

 

 

$

658

 

 

(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. 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) 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 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 our 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, to expand the Company’s capabilities with existing customers.

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 29, 2017 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.

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 translation 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.

- 7 -


 

Fair Value of Measurements — The Company measures its cash equivalents, interest rate swap contract and forward contracts 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.

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

 

March 30, 2018

 

 

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

24

 

 

$

 

 

$

24

 

 

$

 

Forward contracts

 

$

1,281

 

 

$

 

 

$

1,281

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurement at

 

 

 

 

 

 

 

Reporting Date Using

 

Description

 

December 29, 2017

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

30

 

 

$

 

 

$

30

 

 

$

 

Forward contracts

 

$

1,302

 

 

$

 

 

$

1,302

 

 

$

 

 

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 net realizable value. 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.

- 8 -


 

Equipment and Leasehold Improvements, netEquipment 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.

 

Internal use software — Direct costs incurred to develop software for internal use are capitalized and amortized over an estimated useful life of three to five years. Costs related to the design or maintenance of internal use software are expensed as incurred. Capitalized internal use software is included in computer equipment and software.

Construction in progress 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. Construction in progress currently includes capitalized costs related to the Company’s Enterprise Resource Planning (“ERP”) implementation project.

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 March 30, 2018. 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 — See Note 3 to the Company’s Condensed Consolidated Financial Statements.

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 7 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 operating segment, and therefore, has one reportable segment.

- 9 -


 

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.

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.

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 March 30, 2018  the Company granted 174,900 RSUs, with a weighted average fair value of $19.57 per share, and granted 87,050 performance stock units with a weighted average fair value of $19.25 per share. During the three months ended March 30, 2018, 92,410 vested shares were withheld to satisfy withholding tax obligations, resulting in the net issuance of 294,661 shares. As of March 30, 2018, approximately $14.1 million of stock-based compensation cost, net of estimated forfeitures, related to RSUs and performance stock units (PSU) remains to be amortized over a weighted average period of 1.7 years. As of March 30, 2018, a total of 1,489,250 RSUs and PSUs remain outstanding with an aggregate intrinsic value of $28.7 million and a weighted average remaining contractual term of 1.2 years.

Restricted Stock Awards — As of March 30, 2018, a total of 45,000 RSAs were outstanding. The total unamortized expense of the Company’s unvested restricted stock awards as of March 30, 2018 was $0.1 million.

- 10 -


 

The following table summarizes the Company’s RSU, PSU and RSA activity for the three months ended March 30, 2018:

 

 

 

Shares

 

 

Aggregate

Fair Value

(in thousands)

 

Unvested restricted stock units and restricted stock awards

   at December 29, 2017

 

 

1,676,312

 

 

$

38,706

 

Granted

 

 

261,950

 

 

 

 

 

Vested

 

 

(387,071

)

 

 

 

 

Forfeited

 

 

(16,941

)

 

 

 

 

Unvested restricted stock units and restricted stock awards

   at March 30, 2018

 

 

1,534,250

 

 

$

29,534

 

Vested and expected to vest restricted stock units and

   restricted stock awards at March 30, 2018

 

 

1,297,887

 

 

$

24,984

 

 

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

 

 

 

Three Months Ended

 

 

 

March 30,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cost of sales (1)

 

$

506

 

 

$

343

 

Research and development

 

 

61

 

 

 

53

 

Sales and marketing

 

 

202

 

 

 

124

 

General and administrative

 

 

1,794

 

 

 

862

 

 

 

 

2,563

 

 

 

1,382

 

Income tax benefit

 

 

(236

)

 

 

(330

)

Stock-based compensation expense, net of tax

 

$

2,327

 

 

$

1,052

 

 

(1)

Stock-based compensation expenses capitalized in inventory for the three months ended March 30, 2018 and March 31, 2017 was not significant.

Recently Adopted Accounting Pronouncements

 

Effective December 30, 2017, the Company adopted FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (Topic 606) using the modified retrospective approach, which requires the recognition of the cumulative effect of initially applying the standard (if any) as an adjustment to the opening retained earnings of the fiscal year beginning December 30, 2017.  The adoption of Topic 606 did not result in the recognition of a cumulative adjustment to the opening retained earnings under the modified retrospective approach, nor did it have a material effect on the Company’s financial position or results of operations.  The adoption of Topic 606 did, however, result in the addition of required disclosures within the notes to financial statements. This new standard replaced the previous revenue recognition guidance under U.S. GAAP. See Note 3, Revenue Recognition in Notes to Condensed Consolidated Financial Statements.

 

Our implementation team consisted of senior leadership from finance, legal, sales and operations with periodic progress reporting to management and to the audit committee of our board of directors.  Implementation consisted of a review of the Company’s significant contracts and an evaluation of our systems and control environment to support additional disclosures under the new standard, as well as updates to our policies and procedures.

 

During our assessment, we considered whether the adoption would require a transition from point-in-time revenue recognition to an over-time approach for products produced by us without an alternative use, which would result in acceleration of revenue.  We concluded based on enforceable rights or prevailing terms and conditions included in the agreements with our customers, an enforceable right of payment that includes a reasonable profit throughout the duration of the contract does not exist.  Therefore, we will remain at a point-in-time approach and record revenue at the point control transfers to our customers.

 

- 11 -


 

Beginning fiscal 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies classification of seven different cash receipts and payments on statement of cash flows and on how the predominance principle should be applied. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

 

Beginning fiscal 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The impact of the adoption on the Company's financial position and results of operations will be dependent upon future acquisitions or disposals, if any.

 

Beginning fiscal 2018, the Company adopted ASU No. 2017-09, Stock Compensation: Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires the application of modification accounting if the value, vesting conditions or classification of the award changes. The impact of the adoption of this guidance will depend on whether the Company makes any future modifications of share-based payment awards.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). Topic 842 supersedes the lease recognition requirements in ASC Topic 840, Leases. 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. The Company currently expects that its operating lease commitment will be subject to the new standard and recognized as right-of-use asset and operating lease liability upon adoption of this standard, which will increase the total assets and total liabilities that it reports relative to such amounts prior to adoption.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which requires companies to perform goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2020. The amendment is required to be adopted prospectively. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of hedge accounting. This standard will be effective for the Company beginning in its first quarter of fiscal year 2019 with early adoption permitted. The Company is evaluating the impact of adopting this amendment to its consolidated financial statements and related disclosures.

 

 

2. Financial Instruments

Derivative Financial Instruments

The Company utilizes foreign currency forward contracts with a local financial institution in the Czech Republic to reduce the risk that its cash flows and earnings of its Miconex subsidiary will be adversely affected by foreign currency exchange rate fluctuations and uses certain interest rate derivative contracts to hedge interest rate exposures on existing floating rate debt. The Company classifies its foreign currency forward contracts and interest rate derivative contracts primarily within Level 2 of the fair-value hierarchy discussed in Note 1 of the Company’s 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 1.65%, as of March 30, 2018. This interest rate swap effectively locks in a fixed interest rate of 2.99% on $6.2 million of the $7.4 million term loan as of March 30, 2018, with a decreasing notional amount based on prorated quarterly principal payments over the remaining period of

- 12 -


 

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 March 30, 2018, 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.

Non-Designated Derivatives

A portion of Miconex’s forward contracts with a total notional amount of $5.8 million is not designated as a hedging instrument. The Company recognizes gains and losses on these contracts, 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 March 30, 2018 and December 29, 2017.

 

 

 

 

 

March 30, 2018

 

 

 

 

 

Fair Value of

 

 

Fair Value of

 

 

 

 

 

 

 

Derivatives

 

 

Derivatives Not

 

 

 

 

 

 

 

Balance Sheet

 

Designated as

 

 

Designated as

 

 

Total

 

 

 

Location

 

Hedge Instruments

 

 

Hedge Instruments

 

 

Fair Value

 

Derivative assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Prepaid expenses and other

 

$

24

 

 

$

 

 

$

24

 

Forward contracts

 

Prepaid expenses and other

 

$

150

 

 

$

591

 

 

$

741

 

Forward contracts

 

Other non-current assets

 

$

118

 

 

$

422

 

 

$

540

 

 

 

 

 

 

December 29, 2017

 

 

 

 

 

Fair Value of

 

 

Fair Value of

 

 

 

 

 

 

 

 

 

Derivatives

 

 

Derivatives Not

 

 

 

 

 

 

 

Balance Sheet

 

Designated as

 

 

Designated as

 

 

Total

 

 

 

Location

 

Hedge Instruments

 

 

Hedge Instruments

 

 

Fair Value

 

Derivative assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Prepaid expenses and other

 

$

30

 

 

$

 

 

$

30

 

Forward contracts

 

Prepaid expenses and other

 

$

714

 

 

$

 

 

$

714

 

Forward contracts

 

Other non-current assets

 

$

588

 

 

$

 

 

$

588

 

 

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

 

 

 

March 30,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Derivatives in Cash Flow Hedging Relationship

 

 

 

 

 

 

 

 

Interest rate swap

 

$

(15

)

 

$

13

 

Forward contracts

 

$

24

 

 

$

 

 

 

 

Gains Reclassified from AOCI into Income (Effective Portion)

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 30,

 

 

March 31,

 

 

 

Income Statement Location

 

2018

 

 

2017

 

Derivatives in Cash Flow Hedging

   Relationship

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest and other income (expense), net

 

$

10

 

 

$

7

 

Forward contracts

 

Cost of goods sold

 

$

42

 

 

$

 

 

- 13 -


 

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 months ended March 30, 2018 and March 31, 2017.

The effect of derivative instruments not designated as hedging instruments on income for the three months ended March 30, 2018 was $1.0 million and not significant for the three months ended March 31, 2017.

 

 

3. Revenue Recognition

On December 30, 2017, the Company adopted Topic 606 using the modified retrospective method to those contracts which were not completed as of December 30, 2017.  The adoption of Topic 606 did not have a material effect on the Company’s financial position or results of operations.

Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. 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.

The Company operates in one operating and reportable segment as the nature of the Company’s products and production processes, as well as type of customers and distribution methods, is consistent among all of the Company’s products.  The Company sells its products primarily to customers in the semiconductor capital equipment industry.  The Company’s revenues are highly concentrated, and we are therefore highly dependent upon a small number of customers. Typical payment terms with our customers range from thirty to sixty days.

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

 

 

 

 

March 30,

 

 

March 31,

 

 

 

 

2018

 

 

2017

 

 

Lam Research Corporation

 

 

66.2

 

%

 

58.7

 

%

Applied Materials, Inc.

 

 

21.4

 

 

 

26.9

 

 

Total

 

 

87.6

 

%

 

85.6

 

%

 

Two customers’ accounts receivable balances, Lam Research Corporation and Applied Materials, Inc., were individually greater than 10% of accounts receivable as of March 30, 2018 and as of December 29, 2017, and in the aggregate represented approximately 69.5% and 75.8% of accounts receivable, respectively.

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 and are not considered significant.

The Company’s products are manufactured at our facilities in the U.S.A., China, Singapore and the Czech Republic.  See Note 10 for geographical revenue details. Sales to customers are initiated through a purchase order and are governed by our standard terms and conditions, written agreements, or both. Revenue is recognized when performance obligations under the terms of an agreement with a customer are satisfied; generally, this occurs with the transfer of control of our products.  Transfer of control occurs at a specific point-in-time.  Based on the enforceable rights included in our agreements or prevailing terms and conditions, products produced by the Company without an alternative use are not protected by an enforceable right of payment that includes a reasonable profit throughout the duration of the agreement. Sales with terms f.o.b. shipping point are recognized at the time of shipment.  For sales transactions with terms f.o.b. destination, revenue is recorded when the product is delivered to the customer’s site. Consignment sales are recognized in revenue at the earlier of the period that the goods are consumed or after a period of time subsequent to receipt by the customer as specified by terms of the agreement, provided control of the promised goods or services has transferred.

- 14 -


 

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.  Sales, value-add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Certain of our customers may receive cash-based incentives, such as rebates or credits, which are accounted for as variable consideration.  We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. As of March 30, 2018, an accrual for unpaid customer rebates of $0.3 million is included in accrued expenses on the Company’s Condensed Consolidated Balance Sheet.  The adoption of Topic 606 did not have a significant impact on our estimates for variable consideration.

 

 

4. Balance Sheet Information

Inventories consisted of the following (in thousands):

 

 

 

March 30,

 

 

December 29,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

188,553

 

 

$

183,457

 

Work in process

 

 

51,882

 

 

 

43,826

 

Finished goods

 

 

21,363

 

 

 

9,557

 

Total

 

$

261,798

 

 

$

236,840

 

 

Equipment and leasehold improvements, net, consisted of the following (in thousands):

 

 

 

March 30,

 

 

December 29,

 

 

 

2018

 

 

2017

 

Computer equipment and software

 

$

11,858

 

 

$

11,672

 

Furniture and fixtures

 

 

3,330

 

 

 

3,318

 

Machinery and equipment

 

 

20,118

 

 

 

19,781

 

Leasehold improvements

 

 

23,734

 

 

 

22,839

 

Accumulated depreciation

 

 

(39,727

)

 

 

(38,879

)

 

 

 

19,313

 

 

 

18,731

 

Construction in progress

 

 

17,526

 

 

 

13,515

 

Total

 

$

36,839

 

 

$

32,246

 

 

 

5. Goodwill and Purchased Intangible Assets

The Company’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends and lower projections of profitability that may impact future operating results.

To test goodwill for impairment, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, the Company then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, the Company would in the first step compare the estimated fair value of each reporting unit to its carrying value. The Company determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, the Company would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the Company determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company would record an impairment charge equal to the difference.

- 15 -


 

The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, the Company will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time. Details of goodwill and other intangible assets were as follows (in thousands):

 

 

 

March 30, 2018

 

 

December 29, 2017

 

 

 

 

 

 

 

Intangible

 

 

 

 

 

 

 

 

 

 

Intangible

 

 

 

 

 

 

 

Goodwill

 

 

Assets

 

 

Total

 

 

Goodwill

 

 

Assets

 

 

Total

 

Carrying amount

 

$

85,248

 

 

$

30,489

 

 

$

115,737

 

 

$

85,248

 

 

$

31,587

 

 

$

116,835

 

 

Purchased Intangible Assets

Intangible assets are generally recorded in connection with a business acquisition. The Company evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, the Company reviews indefinite lived intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable and tests definite lives intangible assets at least annually for impairment. Management considers such indicators as significant differences in product demand from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure. Details of purchased intangible assets were as follows (in thousands):

 

 

 

As of March 30, 2018

 

 

As of December 29, 2017

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Useful

 

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Amount

 

 

Amortization

 

 

Value

 

 

Life

 

AIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

19,000

 

 

$

(18,153

)

 

$

847

 

 

$

19,000

 

 

$

(17,998

)

 

$

1,002

 

 

 

7

 

Tradename

 

 

1,900

 

 

 

(1,900

)

 

 

 

 

 

1,900

 

 

 

(1,900

)

 

 

 

 

 

6

 

Intellectual property/know-how

 

 

1,600

 

 

 

(1,314

)

 

 

286

 

 

 

1,600

 

 

 

(1,257

)

 

 

343

 

 

 

7

 

Marchi

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

9,900

 

 

 

(3,135

)

 

 

6,765

 

 

 

9,900

 

 

 

(2,887

)

 

 

7,013

 

 

 

10

 

Tradename

 

 

1,170

 

 

 

(1,170

)

 

 

 

 

 

1,170

 

 

 

(1,170

)

 

 

 

 

 

6

 

Intellectual property/know-how

 

 

12,300

 

 

 

(4,367

)

 

 

7,933

 

 

 

12,300

 

 

 

(4,023

)

 

 

8,277

 

 

8-12

 

Miconex

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

 

8,800

 

 

 

(3,129

)

 

 

5,671

 

 

 

8,800

 

 

 

(2,835

)

 

 

5,965

 

 

 

7.5

 

UCT