Notes to Consolidated Financial Statements
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, primarily for the semiconductor industry that, initially, is expected to expand the Company’s capabilities with existing customers.
Principles of Consolidation
— The Company’s 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.
51
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
Significant Sales to Customers
— The Company’s most significant custo
mers (having accounted for 10% or more of sales) and their related sales as a percentage of total sales for each of the previous three years, were as follows:
|
|
Fiscal Year Ended
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
Lam Research Corporation
|
|
53.3
|
|
%
|
|
50.6
|
|
%
|
|
|
38.0
|
|
%
|
Applied Materials, Inc.
|
|
28.9
|
|
|
|
26.4
|
|
|
|
22.8
|
|
|
ASM International, Inc.
|
|
—
|
|
*
|
|
—
|
|
*
|
|
14.9
|
|
|
Total
|
|
|
82.2
|
|
%
|
|
|
77.0
|
|
%
|
|
|
75.7
|
|
%
|
*
|
Total sales for the period are below 10%.
|
Two customers’ accounts receivable balances: Lam Research Corporation and Applied Materials, Inc. were individually greater than 10% of total accounts receivable as of December 30, 2016, and there were three customers’ accounts receivable balances: Lam Research Corporation, Applied Materials, Inc. and ASM International, Inc., that were individually greater than 10% of accounts receivable as of December 25, 2015 and, in the aggregate, represented approximately 85.0% and 84.6% of accounts receivable at December 30, 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.
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
|
|
December 30,
2016
|
|
|
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
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Contingent earn-out liability
|
|
$
|
278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
278
|
|
52
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
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 Consolidated Balance Sheets at fair value. The Company records changes in the fair value of the derivatives in the accompanying Consolidated Statements of Operations as interest and other income (expense), net, or as a component of AOCI in the accompanying 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.
At December 30, 2016 and December 25, 2015, inventory balances were $103.9 million and $72.7 million, respectively, net of reserves of $6.9 million and $5.7 million, respectively. The inventory write-downs are recorded as an inventory valuation allowance established on the basis of obsolete inventory or specific identified inventory in excess of estimated usage. For fiscal years 2016, 2015 and 2014, inventory write-downs were $2.3 million, $2.4 million and $4.6 million, including $2.6 million of inventory written off as part of the GTAT bankruptcy in the third quarter of 2014.
Equipment and Leasehold Improvements
— 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.
Internal use software
— Direct costs incurred to develop software for internal use are capitalized and amortized over an estimated useful life of three or five years. Costs related to the design or maintenance of internal use software are expensed as incurred. Capitalized internal use software is included in equipment and leasehold improvements.
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.
53
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
Product Warranty
— The Company provides a war
ranty 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 reser
ve is included in other current liabilities on the consolidated balance sheet.
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.
During the quarter ended December 30, 2016, the Company performed a twelve quarter analysis of its U.S. cumulative pretax profit position as of December 30, 2016 and, weighing both positive and negative evidence, determined that it is more likely than not that the Company will not have the ability to generate sufficient taxable income over the foreseeable future to realize its U.S. federal and state deferred tax assets. Therefore, during the quarter ended December 30, 2016, the Company continues to believe that a valuation allowance is required on its U.S. federal net deferred tax assets. The total U.S. federal and state valuation allowance as of December 30, 2016 was $23.6 million.
During the quarter ended December 30, 2016, the Company has concluded that a full valuation allowance against one of its Singapore subsidiaries’ deferred tax assets continues to be necessary. The total valuation allowance of the Singapore loss entity as of December 30, 2016 is $0.2 million.
The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryback or carry forward periods. In assessing the Company’s future taxable income, the Company considered all sources of future taxable income available to realize its deferred tax assets, including the taxable income from future reversal of existing temporary differences, carry forwards, taxable income in carryback years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of its deferred tax liabilities, the valuation allowance may need to be adjusted in the future.
The Company had a total valuation allowance on its net deferred tax assets in the amount of $23.8 million and $18.7 million as of December 30, 2016 and December 25, 2015, respectively.
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 consolidated statements of income 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.
54
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
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 re
venue 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 9 to the Notes to 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.
Stock-based compensation
The Company maintains stock-based compensation plans which allow for the issuance of equity-based awards to executives and certain employees. These equity-based awards include stock options, restricted stock awards and restricted stock units. 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.
Stock-based compensation expense includes compensation costs related to estimated fair values of stock options, units and awards granted. Stock-based compensation expense from stock options, restricted stock units and stock awards and the related income tax benefit recognized were $5.7 million and $2.7 million, respectively, for fiscal year 2016, $3.7 million and $0.5 million, respectively, for fiscal year 2015 and $4.4 million and $1.3 million, respectively, for fiscal year 2014.
The estimated fair value of the Company’s equity-based awards, net of expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis over a weighted average period of four years for stock options, three years for restricted stock units and one year for restricted stock awards and will be adjusted for subsequent changes in estimated forfeitures and future option grants.
The Company uses historical data to estimate pre-existing forfeitures, and records stock-based compensation for those awards that are expected to vest at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.
55
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The stockholders of the Company approved an increase in the number of shares available for issuance under our amended and restated stock incentiv
e plan by 1,500,000 and 3,100,000 on June 10, 2010 and May 22, 2013, respectively.
There were no employee stock option grants by the Company for years 2016, 2015 and 2014. Generally, options vest over four years and expire no later than ten years from the grant date. During fiscal years 2016, 2015 and 2014, the Company recorded $3.0 million, $3.2 million and $3.1 million, respectively, of stock-based compensation expense, net of tax, associated with employee and director stock plans and employee stock purchase plan programs. As of December 30, 2016, there was $6.4 million, net of forfeitures of $1.5 million, of unrecognized compensation cost related to employee and director stock which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.83 years, and will be adjusted for subsequent changes in estimated forfeitures and future grants.
Total stock-based compensation during the fiscal years 2016, 2015 and 2014, respectively, to various expense categories was as follows (in thousands):
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 25,
|
|
|
December 26,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of goods sold (1)
|
|
$
|
|
1,254
|
|
|
$
|
|
1,175
|
|
|
$
|
|
1,195
|
|
Sales and marketing
|
|
|
3,673
|
|
|
|
414
|
|
|
|
428
|
|
Research and development
|
|
|
281
|
|
|
|
202
|
|
|
|
156
|
|
General and administrative
|
|
|
|
463
|
|
|
|
|
1,869
|
|
|
|
|
2,621
|
|
|
|
|
|
5,671
|
|
|
|
|
3,660
|
|
|
|
|
4,400
|
|
Income tax benefit
|
|
|
|
(2,660
|
)
|
|
|
|
(487
|
)
|
|
|
|
(1,342
|
)
|
Stock-based compensation expense, net of tax
|
|
$
|
|
3,011
|
|
|
$
|
|
3,173
|
|
|
$
|
|
3,058
|
|
(1)
|
Stock-based compensation expenses capitalized in inventory for fiscal years 2016, 2015 and 2014 were considered immaterial.
|
Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed for impairment annually. Purchased intangible assets are presented at cost, net of accumulated amortization, and are amortized on either a straight-line method or on an accelerated method over their estimated future discounted cash flows. The Company accounts for intangible assets in accordance with ASC 360. The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, such as when reductions in demand or significant economic slowdowns in the semiconductor industry are present.
Intangible assets reviews are performed to determine whether the carrying value is impaired, based on comparisons to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using: (i) quoted market prices or (ii) discounted expected future cash flows utilizing a discount rate. See Note 5 to the Notes to Consolidated Financial Statements for further discussion.
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter of each fiscal year or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of the Company’s reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company
56
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
performs the second step of the goodwill
impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The Company would the
n record a charge based on the results of the second step.
Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. The Company assesses the fair value of the assets based on the amount of the undiscounted future cash flows that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset are less than the carrying value of the asset. If the Company identifies an impairment, the Company reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
At the end of fiscal years 2016, 2015 and 2014, the Company assessed the useful lives of its long-lived assets, including property, plant and equipment as well as its intangible assets and concluded that no impairment was required, except for UAMC assets, as discussed below.
Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale or distribution, the assets, or components of a disposal group, are measured at the lower of the carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized in the statement of operations. Gains are not recognized in excess of any cumulative impairment loss. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortized or depreciated.
In November 2016, the Company approved a plan to dispose of a portion of its 3D printing business in Singapore (UAMC). This plan is consistent with the Company’s strategy to focus on producing products for the semiconductor capital equipment industry. The Company is actively seeking a buyer for a portion of its 3D printing business and expects to complete the sale in 2017. The Company recognized a $0.7 million loss on reclassification of the assets of UAMC as held for sale as at December 30, 2016. This loss was recorded in the cost of goods in the statements of operations. The total assets of UAMC at the end of the reporting period were $1.6 million.
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, which is when the Company plans to adopt this standard. The Company has not yet determined whether it would use the retrospective or cumulative effect transition method. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on the Company’s consolidated financial statements and disclosures.
In August 2014, the FASB amended the guidance related to an entity’s evaluations and disclosures of going concern uncertainties. The new guidance requires management to perform interim and annual assessments of the entity’s ability to continue as a going concern within one year of the date the financial statements are issued, and to provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The Company adopted the amended guidance for annual and interim periods beginning on December 26, 2015. The adoption of the amended guidance did not impact the Company’s balance sheets, results of operations or cash flows.
57
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
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 discou
nts.
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 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.
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 update is effective for annual period beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted as of the beginning of any interim or annual reporting period. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company early adopted this standard during the quarter ended December 30, 2016 using the prospective method. A change was made to the prior year consolidated balance sheets to reclassify the current deferred tax liability of $0.5 million from other current liabilities to deferred tax liability. This change was made to conform with the current year presentation. See Note 7, Income Taxes, for additional information.
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 adopted the amended accounting guidance as of December 31, 2016 and recognized an insignificant cumulative-effect adjustment to equity as of the beginning of the period. Forfeitures will continue to be estimated consistent with the Company's existing accounting policies. The impact to the Company's financial condition, results of operations and cash flows will vary based on, among other factors, the market price of the Company's common stock.
In August 2016, the FASB issued an amendment to its accounting guidance related to the classification of certain cash receipts and cash payments. The amendment was issued to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2019 with early adoption permitted. The amendment is required to be adopted retrospectively unless it is impracticable. The Company is evaluating the impact of adopting this amendment to its consolidated financial statements.
58
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
In January 2017, the FASB clarified its guidance to simplify the measurement of goodwill by eliminating the Step 2 impairment test. The new guidance requires companies to perform goodwill impairment test by comparing the fair value of a report
ing unit with its carrying amount. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2021. 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 January 2017, the FASB clarified its guidance on the definition of a business in accounting for transactions when determining whether they represent acquisitions or disposals of assets or of a business. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2019. The amendment is required to be adopted prospectively. The Company is evaluating the impact of adopting this amendment to its 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 December 30, 2016.
Derivative Financial Instruments
The Company uses certain interest rate derivative contracts to hedge interest rate exposures on existing floating rate debt. The Company classifies its interest rate derivative contracts primarily within Level 2 of the fair-value hierarchy discussed in Note 1of 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 and City National banks 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 LIBOR rate the Company is required to pay under its term loan, or 0.63%, as of December 30, 2016. This interest rate swap effectively locks in a fixed interest rate of 3.49% on $14.0 million of the $26.2 million term loan as of December 30, 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 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, net. As of December 30, 2016, the effective portion of the Company’s cash flow hedge before tax effect was approximately $0.1 million, of which $5,600 is expected to be reclassified from AOCI into earnings within the next 12 months.
Non-Designated Derivatives
Miconex interest swap to convert the variable interest rates on Miconex debt to fixed rates with a total notional amount of $0.3 million is not designated as hedging instruments. The Company recognizes gains and losses on this contract, as well any related costs in interest and other income (expense), net.
59
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company records all derivatives in the 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 Comp
any’s derivative instruments at gross fair value (in thousands) as of December 30, 2016 and December 25, 2015.
|
|
|
|
December 30, 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 assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Other non-current assets
|
|
$
|
15
|
|
$
|
—
|
|
$
|
|
15
|
|
Interest rate swap
|
|
Deferred rent and other
liabilities
|
|
$
|
—
|
|
$
|
6
|
|
$
|
|
6
|
|
|
|
|
|
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)
|
|
|
Twelve Months Ended
|
|
|
December 30, 2016
|
|
|
December 25, 2015
|
|
Derivatives in Cash Flow Hedging Relationship
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
$
|
|
(60
|
)
|
|
$
|
|
(55
|
)
|
|
|
Gains Reclassified from AOCI into Income (Effective Portion)
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
Income Statement Location
|
|
December 30, 2016
|
|
|
December 25, 2015
|
|
Derivatives in Cash Flow Hedging Relationship
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Interest and other income (expense),
net
|
|
$
|
|
88
|
|
|
$
|
|
(39
|
)
|
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 fiscal year ended December 30, 2016 and December 25, 2015.
The effect of derivative instruments not designated as hedging instruments on income for the fiscal year ended December 30, 2016 and December 25, 2015 is immaterial to the financial statements.
60
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
3. Balance Sheet Information
Inventories consisted of the following (in thousands):
|
|
December 30,
|
|
|
December 25,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
|
75,060
|
|
|
$
|
|
57,321
|
|
Work in process
|
|
|
|
26,529
|
|
|
|
|
17,954
|
|
Finished goods
|
|
|
|
9,140
|
|
|
|
|
4,561
|
|
|
|
|
|
110,729
|
|
|
|
|
79,836
|
|
Reserve for excess and obsolete
|
|
|
|
(6,868
|
)
|
|
|
|
(7,120
|
)
|
Total
|
|
$
|
|
103,861
|
|
|
$
|
|
72,716
|
|
Equipment and leasehold improvements, net, consisted of the following (in thousands):
|
December 30,
|
|
|
December 25,
|
|
|
2016
|
|
|
2015
|
|
Computer equipment and software
|
$
|
|
11,135
|
|
|
$
|
|
10,308
|
|
Furniture and fixtures
|
|
|
3,118
|
|
|
|
|
3,201
|
|
Machinery and equipment
|
|
|
17,016
|
|
|
|
|
16,253
|
|
Leasehold improvements
|
|
|
16,838
|
|
|
|
|
14,951
|
|
Construction in progress
|
|
|
4,576
|
|
|
|
|
1,168
|
|
|
|
|
52,683
|
|
|
|
|
45,881
|
|
Accumulated depreciation
|
|
|
(33,825
|
)
|
|
|
|
(28,614
|
)
|
Total
|
$
|
|
18,858
|
|
|
$
|
|
17,267
|
|
4. Acquisitions
Miconex
On July 31, 2015, the Company acquired 100.0% of the shareholding interest of Miconex, a limited liability company incorporated under the laws of the Czech Republic and a provider of advanced precision fabrication of plastics, primarily for the semiconductor industry. This acquisition is expected to expand the Company’s capabilities with existing customers. Pursuant to the purchase agreement, the Company paid $15.6 million in cash and issued 500,000 shares of the Company’s common stock. In addition, the former owners of Miconex are entitled to up to $4.0 million of potential cash “earn-out” payments over a two-year period following closing, based on Miconex’s achievement of specified performance targets based on earnings before interest and taxes pursuant to the provisions of the purchase agreement. In 2016, Miconex achieved the specified performance targets for the first year and was paid the maximum of $2.0 million of the $4.0 million potential cash earn-out. The acquisition price of Miconex for purposes of the Company’s purchase price allocation was determined to be $20.7 million, which includes the cash payment of $15.6 million, the stock consideration valued at $3.8 million and the fair value of the potential earn-out payments of approximately $1.3 million.
The fair value of the common stock issued was determined based on the average of the high and low trading prices per share of the Company’s common stock on the acquisition date of approximately $7.64 per share. The fair value of the earn-out payments at the acquisition date was determined providing risk adjusted earnings projections using the Monte Carlo Simulation. These inputs are not observable in the market and thus represent a Level 3 measurement as discussed in Note 1 of the Company’s Consolidated Financial Statements. During the fourth quarter of fiscal year 2015, the Company reassessed the fair value of the earn-out payments, reducing the fair value from $1.3 million at the end of the third quarter of fiscal year 2015 to $0.3 million as of December 30, 2016. The increase in the fair value of the contingent earn out of $1.4 million was recorded as other expense.
61
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company
allocated the purchase price of Miconex to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. Goodwill associat
ed with this acquisition is primarily attributable to future technology, market presence and knowledgeable and experienced workforce. The fair value assigned to identifiable intangible assets acquired was determined using the income approach taking into ac
count the Company’s consideration of a number of inputs, including an independent third party analysis that was based upon estimates and assumptions provided by the Company. These estimates and assumptions were determined through established and generally
accepted valuation techniques.
The purchase price for this acquisition has been allocated as follows:
Fair Market Values (in thousands)
|
|
|
Cash and cash equivalents
|
$
|
|
239
|
|
Accounts receivable
|
|
|
3,065
|
|
Inventories
|
|
|
6,198
|
|
Deferred tax assets
|
|
|
196
|
|
Prepaid expenses and other
|
|
|
214
|
|
Equipment and leasehold improvements
|
|
428
|
|
Goodwill
|
|
|
10,950
|
|
Purchased intangible assets
|
|
|
8,800
|
|
Total assets acquired
|
|
|
30,090
|
|
Bank borrowings
|
|
|
(3,027
|
)
|
Accounts payable
|
|
|
(3,509
|
)
|
Accrued compensation and related benefits
|
|
|
(432
|
)
|
Other current liabilities
|
|
|
(576
|
)
|
Deferred tax liability
|
|
|
(1,856
|
)
|
Other liabilities
|
|
|
(24
|
)
|
Total liabilities assumed
|
|
|
(9,424
|
)
|
Purchase price allocated
|
$
|
|
20,666
|
|
|
|
|
Purchased
|
|
|
Useful
Life
|
|
Intangible
Assets
|
|
|
(In years)
|
|
(In thousands)
|
|
Customer relationships
|
|
7.5
|
|
$
|
|
8,800
|
|
Goodwill is not amortized but is 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. Although goodwill is not amortized for financial accounting purposes, it is amortized in its entirety for tax purposes over fifteen years.
The results of operations for the Company for the fiscal period ended December 25, 2015 include five months of operating activity for Miconex. Net sales of approximately $14.2 million and operating income of approximately $2.0 million attributable to Miconex were included in the consolidated results of operations. For the fiscal year ended December 25, 2015, results of operations included charges of $0.5 million attributable to amortization of purchased intangible assets and $0.4 million of deal costs associated with the acquisition. Deal costs are included in general and administrative expenses in the Company’s Consolidated Statements of Operations.
Marchi
On February 5, 2015, the Company acquired 100.0% of the shareholding interest of Marchi, a designer and manufacturer of specialty thermocouples, heaters and temperature controllers, for approximately $29.9 million in cash and 1,437,500 shares of newly issued common stock for a total purchase price of approximately $43.7 million. In addition, the Company incurred approximately $0.2 million of costs related to the acquisition. The Company completed this acquisition primarily in order to expand its capabilities with existing customers and to bring the Company closer to
62
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
the customer in the design stage of new products and next generation equipment. The Company financed th
e cash portion of the acquisition by borrowing a total of $29.7 million under a new Credit Agreement. See further discussion of the borrowing arrangements in Note 6 to the Company’s Consolidated Financial Statements.
The Company allocated the purchase price of Marchi to the tangible assets, liabilities and identifiable intangible assets acquired, based on their calculated fair values. The excess of purchase price over the aggregate fair value was recorded as goodwill. Goodwill associated with the Marchi acquisition is primarily attributable to the future technology, market presence and the knowledgeable and experienced workforce. The fair value assigned to identifiable intangible assets acquired was determined using the income approach taking into account the Company’s consideration of a number of inputs, including an independent third party analysis that was based upon estimates and assumptions provided by the Company. These estimates and assumptions were determined through established and generally accepted valuation techniques. The estimated fair value of the tangible and intangible assets acquired was allocated at Marchi’s acquisition date.
The purchase price for this acquisition has been allocated as follows:
Fair Market Values (in thousands)
|
|
|
Inventories
|
$
|
|
1,297
|
|
Equipment and leasehold improvements
|
|
767
|
|
Goodwill
|
|
|
18,380
|
|
Purchased intangible assets
|
|
|
23,370
|
|
Other non-current assets
|
|
|
26
|
|
Total assets acquired
|
|
|
43,840
|
|
Other liabilities
|
|
|
(100
|
)
|
Total liabilities assumed
|
|
|
(100
|
)
|
Purchase price allocated
|
$
|
|
43,740
|
|
|
|
|
Purchased
|
|
|
|
Useful
Life
|
|
Intangible
Assets
|
|
|
|
(In years)
|
|
(In thousands)
|
|
Customer relationships
|
|
10
|
|
$
|
|
9,900
|
|
Trade name
|
|
6
|
|
|
|
1,170
|
|
Intellectual properties/know-how
|
|
8 - 12
|
|
|
|
12,300
|
|
Total purchased intangible assets
|
|
|
|
$
|
|
23,370
|
|
The results of operations for the Company for fiscal year ended December 25, 2015 include eleven full months of operating activity for Marchi. Net sales of approximately $12.9 million and operating income of approximately $4.8 million attributable to Marchi were included in the consolidated results of operations. For the fiscal year ended December 30, 2016, results of operations included charges of $2.4 million attributable to amortization of purchased intangible assets and $0.2 million of deal costs associated with the acquisition. Deal costs are included in general and administrative expenses in the Company’s consolidated results of operations.
The following unaudited pro forma consolidated results of operations assume the Marchi and Miconex acquisitions were completed as of the beginning of the year of the reporting periods presented (in thousands, except per share amounts):
|
Year Ended
|
|
|
December 25,
|
|
|
December 26,
|
|
|
2015
|
|
|
2014
|
|
Net sales
|
$
|
|
490,927
|
|
|
$
|
|
562,918
|
|
Net loss
|
$
|
|
(9,161
|
)
|
|
$
|
|
13,371
|
|
Basic loss per share
|
$
|
|
(0.29
|
)
|
|
$
|
|
0.43
|
|
Diluted loss per share
|
$
|
|
(0.29
|
)
|
|
$
|
|
0.42
|
|
63
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The unaudited pro forma results above
include adjustments related to the purchase price allocation and financing of the Marchi and Miconex acquisitions, primarily to increase amortization for the identifiable intangible assets, to increase interest expense for the additional debt incurred to c
omplete the acquisition of Marchi, to reflect the related income tax effect of the pro forma adjustments and to adjust weighted shares issued as part of the acquisitions. The unaudited pro forma results for the year ended December 25, 2015 include acquisit
ions related costs of $0.6 million which are not expected to occur in future quarters. The unaudited pro forma condensed combined financial information has been prepared by management for illustrative purposes only and are not necessarily indicative of the
condensed consolidated financial position or results of income in future periods or the results that actually would have been realized had UCT, Marchi and Miconex been a combined company during the specified periods. The unaudited pro forma condensed comb
ined financial information does not reflect any operating efficiencies and/or cost savings that we may achieve with respect to the combined companies, or any liabilities that may result from integration activities.
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. 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. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. 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.
As part of the Company’s annual testing of goodwill impairment, in the fourth quarter of fiscal 2016, the Company performed the two-step impairment test of the Company’s three reporting units for potential impairment. The Company utilized the discounted cash flow method of the income approach to estimate the fair values of each of the reporting units. The estimates used in the impairment testing were consistent with the discrete forecasts that the Company uses to manage its business, and, additionally, considered the developments that occurred since the dates of the acquisitions. Under the discounted cash flow method, cash flows beyond the discrete forecasts were estimated using terminal growth rates ranging from 4.0%—4.8%, which are considered to be the long-term earnings growth rates specific to the reporting units. The estimated future cash flows were discounted to present value using discount rates between 12.0%—17.0% that were the value-weighted average of the reporting units’ estimated cost of equity and debt derived using both known and estimated market metrics. These discount rates were adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows for each of the respective reporting units. The tax rates used in the discounted cash flows reflected the international structure currently in place, which is consistent with the market participant perspective. The Company then allocated the fair values of the reporting units to the assets and liabilities of each of the reporting units. Based on the Company’s analyses, the Company concluded that the fair value of each of the reporting units was greater than their carrying amount, including goodwill, and, therefore, the second step of the goodwill impairment test was not required.
Details of aggregate goodwill of the Company are as follows (in thousands):
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Impairment*
|
|
|
Amount
|
|
Year Ended December 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
119,291
|
|
|
$
|
|
(34,043
|
)
|
|
$
|
|
85,248
|
|
Year Ended December 25, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
119,291
|
|
|
$
|
|
(34,043
|
)
|
|
$
|
|
85,248
|
|
*
|
Represents goodwill recorded for UCT in 2002 and Sieger Engineering in 2006, which was fully impaired in prior years.
|
64
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
Details of goodwill and other
intangible assets were as follows (in thousands):
|
|
December 30, 2016
|
|
December 25, 2015
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Assets
|
|
Total
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
Carrying amount
|
|
$
|
|
85,248
|
|
$
|
|
37,024
|
|
$
|
|
122,272
|
|
|
|
85,248
|
|
|
$
|
|
42,782
|
|
|
$
|
|
128,030
|
|
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 December 30, 2016
|
|
|
As of December 25, 2015
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Useful Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
(in years)
|
AIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
|
19,000
|
|
|
$
|
|
(17,058
|
)
|
|
$
|
|
1,942
|
|
|
$
|
|
19,000
|
|
|
$
|
|
(15,298
|
)
|
|
$
|
|
3,702
|
|
|
|
7
|
Tradename
|
|
|
|
1,900
|
|
|
|
|
(1,900
|
)
|
|
|
—
|
|
|
|
|
1,900
|
|
|
|
|
(1,900
|
)
|
|
|
—
|
|
|
|
6
|
Intellectual property/know-how
|
|
|
|
1,600
|
|
|
|
|
(1,029
|
)
|
|
|
|
571
|
|
|
|
|
1,600
|
|
|
|
|
(800
|
)
|
|
|
|
800
|
|
|
|
7
|
Marchi
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
|
9,900
|
|
|
|
|
(1,898
|
)
|
|
|
|
8,002
|
|
|
|
|
9,900
|
|
|
|
|
(907
|
)
|
|
|
|
8,993
|
|
|
|
10
|
Tradename
|
|
|
|
1,170
|
|
|
|
|
(443
|
)
|
|
|
|
727
|
|
|
|
|
1,170
|
|
|
|
|
(217
|
)
|
|
|
|
953
|
|
|
|
6
|
Intellectual property/know-how
|
|
|
|
12,300
|
|
|
|
|
(2,643
|
)
|
|
|
|
9,657
|
|
|
|
|
12,300
|
|
|
|
|
(1,264
|
)
|
|
|
|
11,036
|
|
|
|
8-12
|
Miconex
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
|
8,800
|
|
|
|
|
(1,662
|
)
|
|
|
|
7,138
|
|
|
|
|
8,800
|
|
|
|
|
(489
|
)
|
|
|
|
8,311
|
|
|
|
7.5
|
UCT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
|
|
8,987
|
|
|
|
—
|
|
|
|
|
8,987
|
|
|
|
|
8,987
|
|
|
|
—
|
|
|
|
|
8,987
|
|
|
|
|
Total
|
|
$
|
|
63,657
|
|
|
$
|
|
(26,633
|
)
|
|
$
|
|
37,024
|
|
|
$
|
|
63,657
|
|
|
$
|
|
(20,875
|
)
|
|
$
|
|
42,782
|
|
|
|
|
The Company amortizes its tradenames for AIT and Marchi and customer relationships intangible asset for AIT using an accelerated method over the estimated economic life of the assets, ranging from 6 to 10 years. The Company amortizes its intellectual property/know-how and customer relationships intangible assets for Marchi and Miconex on a straight-line basis with an estimated economic life of the assets ranging from 7 to 12 years. Amortization expense was approximately $5.8 million for the year ended December 30, 2016, $6.2 million for the year ended December 25, 2015, and $4.9 million for the year ended December 26, 2014.
In the fourth quarter of 2015, the Company wrote off the remaining book value of the tradename intangible acquired from AIT of $0.5 million as the Company no longer believed the AIT name has value. The Company also carries a UCT trade-name intangible asset of $9.0 million as a result of a previous acquisition. The Company concluded that the UCT trade-name intangible asset life is indefinite and is therefore not amortized. The Company concluded that the UCT trade-name as of December 30, 2016 is not impaired as there were no new events or changes in circumstances that would indicate that its carrying amount may not be recoverable.
65
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
As of December 30, 2016, future estimated amortization expense is expected to be as follows:
|
|
Amortization
|
|
|
|
Expense
|
|
|
|
(in thousands)
|
|
2017
|
|
$
|
|
4,924
|
|
2018
|
|
|
|
4,582
|
|
2019
|
|
|
|
4,210
|
|
2020
|
|
|
|
3,682
|
|
2021
|
|
|
|
3,554
|
|
2022 and thereafter
|
|
|
|
7,085
|
|
Total
|
|
$
|
|
28,037
|
|
6. Borrowing Arrangements
On February 2, 2015, the Company entered into a credit agreement (the “Credit Agreement”) by and among the Company, certain of its subsidiaries and East West Bank and City National Bank (collectively, the “Lenders”). The credit agreement was amended on April 3, 2015 (as amended, the “Credit Agreement”) to modify certain terms of the agreement. The Credit Agreement provides for a term loan in an aggregate principal amount of $40.0 million (the “Term Loan”) and a revolving credit facility in an aggregate principal amount of $40.0 million (the “Revolving Credit Facility”), a letter of credit facility in the aggregate availability amount of $20.0 million (as a sublimit of such Revolving Credit Facility) (the “L/C Facility”) and a swingline sub-facility in the aggregate availability amount of $5.0 million (as a sublimit of the Revolving Credit Facility) (together with the Term Loan, the Revolving Credit Facility and the L/C Facility, the “Senior Secured Credit Facility”).
On February 2, 2015, the Company borrowed an aggregate of $40.0 million under the Term Loan and approximately $6.5 million under the Revolving Credit Facility. The borrowed funds were used to repay the outstanding balance to Silicon Valley Bank as lender under our prior loan agreement, which loan agreement was terminated in connection with this transaction. In addition, the Company expensed the unamortized debt issuance costs of approximately $0.7 million in the first quarter of 2015. On February 5, 2015, in order to finance the acquisition of Marchi, the Company borrowed $29.7 million under the Revolving Credit Facility.
As of December 30, 2016, the Term Loan consists of nine remaining quarterly installments of $2.9 million with the balance of the outstanding principal amount due at maturity, which is February 2, 2019. The Revolving Credit Facility is available through February 2, 2019. The Credit Agreement includes customary representations, warranties, covenants and events of default. The Company and certain of its subsidiaries have agreed to secure all of their obligations under the Credit Agreement by granting a first priority lien in substantially all of their respective personal property assets (subject to certain exceptions and limitations).
At the Company’s option, borrowings under the Term Loan and Revolving Credit Facility (subject to certain limitations) bear interest at either a base rate or at the London Interbank Offered Rate (“LIBOR”) (with the LIBOR being adjusted for certain Eurocurrency reserve requirements, if any, as described in the Credit Agreement), plus, in each case, an applicable margin based on the Company’s consolidated leverage ratio. All loans described above made on February 2, 2015 were initially base rate loans, carrying interest of 3.25%. The effective interest rate will be higher due to the incurrence of certain loan-related costs of $0.6 million that have been treated as a discount on the debt and amortized over the life of the loan.
66
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
As of December 30, 2016, the interest rates on the outstanding Term Loan and Revolving Credit facility were 3.38% (2.75% fixed and 0.63% variable based on LIBOR) and 3.75% fixed, respectively. In order to manage interest rate risk on the variable component
of the New Term Loan the Company entered into an interest rate swap with the Lenders in September 2015 with a total 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 varia
ble rate equal to the LIBOR rate the Company is required to pay under its New Term Loan, or 0.63%, as of December 30, 2016. This interest rate swap effectively locked in a fixed interest rate of 3.49% on $14.0 million of the $26.2 million term loan balance
outstanding as of December 30, 2016, with a decreasing notional amount based on prorated quarterly principal payments over the remaining period of the term loan.
The Credit Agreement requires the Company to maintain certain financial covenants including a consolidated fixed charge coverage ratio (as defined in the Credit Agreement) of at least 1.25 to 1.00 starting with the end of the first quarter of fiscal 2015 and a consolidated leverage ratio (as defined in the Credit Agreement) no greater than 3.5 to 1.00 starting with the end of the first quarter of fiscal 2015. The Credit Agreement also includes other customary affirmative and negative covenants. In December 2015, the Credit Agreement was amended to add a covenant requiring the Company to maintain a minimum cash balance of $35.0 million at the end of each quarter. The Company was in compliance with all covenants for the quarter ended December 30, 2016.
The Credit Agreement also contains provisions requiring the following mandatory prepayments (subject to certain exceptions and limitations): annual prepayments in an amount equal to (a) 33% of excess cash flow (as defined in the Credit Agreement) if the aggregate outstanding principal amount of the New Term Loan equals or exceeds $20.0 million and (b) 25% of excess cash flow if the aggregate outstanding principal amount of the New Term Loan equals or exceeds $10.0 million but is less than $20.0 million. The Credit Agreement also restricts us from declaring or paying any cash dividends.
The fair value of the Company’s long term debt was based on Level 2 inputs, and fair value was determined using quoted prices for similar liabilities in inactive markets. The fair value of the Company’s outstanding borrowings under the Company’s revolving credit facility was based on Level 2 inputs, and fair value was determined using inputs other than quoted prices that are observable, specifically, discounted cash flows of expected payments at current borrowing rates. The Company’s carrying value approximates fair value for the Company’s long term debt and revolving credit facility.
As of December 30, 2016, the Company has outstanding amounts under the Term Loan and Revolving Credit Facility of $26.2 million and $36.2 million, respectively, which are gross of unamortized debt issuance costs of $0.3 million, for a total debt balance with this credit facility of $62.4 million.
In conjunction with our acquisition of Miconex in July 2015, the Company has a credit agreement with a local bank in the Czech Republic that provides for a term loan in the aggregate of 0.8 million euros and a revolving credit facility in the aggregate of up to 8.3 million euros. The credit agreement requires Miconex to maintain certain financial covenants, including a debt-to-earnings-before-interest-depreciation-and-amortization ratio no greater than 3.00 to 1.00 and an equity ratio of at least 15%. This agreement also includes other affirmative and negative covenants. As of December 30, 2016, Miconex was in compliance with all of its covenants.
As of December 30, 2016, Miconex had outstanding amounts under the term loan and the revolving credit facility of 0.4 million euros (approximately $0.5 million) and 4.9 million euros (approximately $5.2 million), respectively, for a total of $5.7 million, with interest rates ranging from 1.3% to 2.3% plus a variable rate based on the Euro Interbank Offered Rate with due dates ranging from 2017 to 2020. The Credit facility expires on March 31, 2020.
As of December 30, 2016, the Company’s total bank debt was $68.1 million. As of December 30, 2016, the Company has $3.8 million and 3.3 million euros (approximately $3.5 million) available to borrow on our revolving loans in the U.S. and Czech Republic, respectively.
67
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
7. Income Taxes
U.S. and foreign components of income before income taxes were (in thousands):
|
Year Ended
|
|
|
December 30,
|
|
|
December 25,
|
|
|
December 26,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.S. operations
|
$
|
|
(17,459
|
)
|
|
$
|
|
(10,910
|
)
|
|
$
|
|
(452
|
)
|
Foreign operations
|
|
|
36,406
|
|
|
|
|
14,517
|
|
|
|
|
16,782
|
|
Total pretax income
|
$
|
|
18,947
|
|
|
$
|
|
3,607
|
|
|
$
|
|
16,330
|
|
The provision for income taxes consisted of the following (in thousands):
|
Year Ended
|
|
|
December 30,
|
|
|
December 25,
|
|
|
December 26,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
|
(52
|
)
|
|
$
|
|
(451
|
)
|
State
|
|
110
|
|
|
|
158
|
|
|
|
118
|
|
Foreign
|
|
|
5,321
|
|
|
|
|
3,777
|
|
|
|
|
2,839
|
|
Total current
|
|
|
5,431
|
|
|
|
|
3,883
|
|
|
|
|
2,506
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,706
|
|
|
|
|
12,043
|
|
|
|
|
(404
|
)
|
State
|
|
|
202
|
|
|
|
|
714
|
|
|
|
|
2,722
|
|
Foreign
|
|
|
1,557
|
|
|
|
|
(2,301
|
)
|
|
|
149
|
|
Total deferred
|
|
|
3,465
|
|
|
|
|
10,456
|
|
|
|
|
2,467
|
|
Total provision
|
$
|
|
8,896
|
|
|
$
|
|
14,339
|
|
|
$
|
|
4,973
|
|
Significant components of net deferred tax assets and deferred tax liabilities for federal and state income taxes were as follows (in thousands):
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 25,
|
|
|
|
2016
|
|
|
2015
|
|
Net non-current deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
Inventory valuation and basis difference
|
|
$
|
|
3,359
|
|
|
$
|
|
2,999
|
|
State taxes
|
|
|
|
49
|
|
|
|
|
50
|
|
Deferred rent
|
|
|
|
20
|
|
|
|
|
69
|
|
Other accrued expenses
|
|
|
|
3,516
|
|
|
|
|
3,867
|
|
Depreciation
|
|
|
|
1,347
|
|
|
|
|
1,697
|
|
Intangibles
|
|
|
|
5,105
|
|
|
|
|
3,799
|
|
Net operating losses
|
|
|
|
9,588
|
|
|
|
|
7,281
|
|
Research & other credits
|
|
|
|
980
|
|
|
|
|
20
|
|
|
|
|
|
23,964
|
|
|
|
|
19,782
|
|
Valuation allowance
|
|
|
|
(23,844
|
)
|
|
|
|
(18,723
|
)
|
Net non-current deferred tax asset
|
|
|
|
120
|
|
|
|
|
1,059
|
|
Total deferred tax asset
|
|
|
|
120
|
|
|
|
|
1,059
|
|
Current deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings
|
|
|
|
(1,126
|
)
|
|
|
|
(507
|
)
|
Non-current deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
(7,556
|
)
|
|
|
|
(5,649
|
)
|
Net deferred tax asset (liability)
|
|
$
|
|
(8,562
|
)
|
|
$
|
|
(5,097
|
)
|
68
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The effective tax rate differs from the U.S. federal statutory tax rate as follows:
|
|
Year Ended
|
|
|
|
|
December 30,
|
|
|
|
December 25,
|
|
|
|
December 26,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
|
Federal income tax provision at statutory rate
|
|
|
34.0
|
|
%
|
|
|
34.0
|
|
%
|
|
|
34.0
|
|
%
|
State income taxes, net of federal benefit
|
|
|
(0.6
|
)
|
%
|
|
|
(3.1
|
)
|
%
|
|
|
0.2
|
|
%
|
Effect of foreign operations
|
|
|
(15.3
|
)
|
%
|
|
|
(102.5
|
)
|
%
|
|
|
(19.8
|
)
|
%
|
Change in valuation allowance
|
|
|
30.8
|
|
%
|
|
|
445.8
|
|
%
|
|
|
11.3
|
|
%
|
China withholding taxes
|
|
—
|
|
%
|
|
|
10.3
|
|
%
|
|
|
2.3
|
|
%
|
Acquisition related costs
|
|
|
1.0
|
|
%
|
|
|
8.3
|
|
%
|
|
—
|
|
%
|
Other
|
|
|
(3.0
|
)
|
%
|
|
|
4.7
|
|
%
|
|
|
2.5
|
|
%
|
Effective Tax Rate
|
|
|
46.9
|
|
%
|
|
|
397.5
|
|
%
|
|
|
30.5
|
|
%
|
The Company earns a significant amount of its operating income outside the United States, which is deemed to be indefinitely reinvested in foreign jurisdictions, except as disclosed below. As a result, most of the Company’s cash and cash equivalents are held by foreign subsidiaries. The Company currently does not intend nor foresee a need to repatriate any other funds to the U.S., except for a portion of current year earnings from one of our Singapore subsidiaries. The Company expects domestic cash and cash flows from operations to continue to be sufficient to fund its domestic operating activities and cash commitments for investing and financing activities, such as debt repayment and capital expenditures, for the foreseeable future. If the Company should require more capital in the U.S. than is generated by its domestic operations, for example to fund significant discretionary activities such as business acquisitions, the Company could or raise capital in the United States through debt or equity issuances. These alternatives could result in higher effective tax rates, increased interest expense, or dilution of our earnings. The Company has borrowed funds domestically and continues to believe it has the ability to do so at reasonable interest rates. The Company does not provide for U.S. taxes on its undistributed earnings of foreign subsidiaries that it intends to invest indefinitely outside the U.S., unless such taxes are otherwise required under U.S. tax law. In 2016, the Company determined that a portion of the current year earnings of one of its China subsidiaries may be remitted in the future to one of its foreign subsidiaries outside of mainland China and, accordingly, the Company provided for the related withholding taxes in its consolidated financial statements. As of December 30, 2016, the Company had undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S. of approximately $80.6 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):
Balance as of December 26, 2014
|
$
|
|
356
|
|
Increases related to prior year tax positions
|
|
—
|
|
Increases related to current year tax positions
|
|
|
17
|
|
Releases due to settlements
|
|
|
(36
|
)
|
Balance as of December 25, 2015
|
|
|
337
|
|
Decreases related to prior year tax positions
|
|
|
(28
|
)
|
Increases related to current year tax positions
|
|
|
13
|
|
Expiration of the statute of limitations for the
assessment of taxes
|
|
|
(24
|
)
|
Balance as of December 30, 2016
|
$
|
|
298
|
|
69
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company’s gross liability for unrecognized tax benefits as of December 30, 2016 and December 25, 2015 was $0.3 million and $
0.4 million, respectively. Increases or decreases to interest and penalties on uncertain tax positions are included in the income tax provision in the Consolidated Statements of Operations. Interest related to uncertain tax positions for the periods ended
December 30, 2016, December 25, 2015 and December 26, 2014 was considered to be de minimis. Although it is possible some of the unrecognized tax benefits could be settled within the next twelve months, the Company cannot reasonably estimate the outcome at
this time.
Tax attributes related to equity award windfall deductions are not recorded until they result in a reduction of cash tax payable. As of December 30, 2016, the benefit of the federal net operating losses from windfall deductions were excluded from the deferred tax asset balance as of December 30, 2016. As of December 30, 2016, the benefit of federal and California net operating loss deductions of $4.7 million and $1.7 million, respectively, will be recorded to additional paid-in capital when it reduces cash taxes payable.
As of December 30, 2016, the Company had federal and California net operating loss carryforwards (“NOLs”) of approximately $24.2 million and $24.0 million, respectively. The federal NOLs begin expiring after 2035 and the California NOLs begin expiring after 2031.
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company’s 2013 through 2015 federal income tax returns are open to audit through the statute of limitations by the Internal Revenue Service. The Company’s 2011 through 2015 state income tax returns are open to audit by the California Franchise Tax Board. The Company is also subject to examination in various other jurisdictions for various periods.
8. Stockholders’ Equity
Stock Repurchase Plan — On July 24, 2008, the Board of Directors approved a stock repurchase program for up to $10.0 million. The Company commenced the repurchase of its common stock on August 4, 2008. The total number of shares repurchased and related cost of the stock repurchase program were 601,994 shares at a cost of $3,337,000, or an average cost of $5.54 per share. The Company has not repurchased stock during any of the fiscal years after 2008.
9. Employee Benefit Plans
Stock Options
— On February 20, 2003, the Company adopted the 2003 Stock Incentive Plan (the “2003 Incentive Plan”) which was subsequently amended and restated. The Company has reserved 4,515,239 shares of its common stock for issuance under the 2003 Incentive Plan. The 2003 Incentive Plan provides for the issuance of options and other stock-based awards. Options are generally granted at fair value at the date of grant as determined by the Board of Directors and have terms up to ten years and generally vest over four years.
The stockholders of the Company approved amendments to the Company’s 2003 Stock Incentive Plan, which included an increase in shares available for issuance by 1,500,000 and 3,100,000 common shares which are more fully described in the Company’s definitive proxy statements filed on April 23, 2010 and May 27, 2013, respectively. At December 30, 2016, 667,034 shares were available for future grants under the 2003 Incentive Plan.
70
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
Option activity under the 2003 Incentive Plan is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
Shares
|
|
|
Price
|
|
Life
|
|
(in thousands)
|
|
Outstanding, December 27, 2013
|
|
|
1,209,119
|
|
|
$
|
7.86
|
|
|
2.86
|
|
$
|
|
3,976
|
|
Exercised
|
|
|
(343,947
|
)
|
|
|
5.11
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(11,621
|
)
|
|
|
|
14.40
|
|
|
|
|
|
|
|
|
Outstanding, December 26, 2014
|
|
|
853,551
|
|
|
$
|
8.87
|
|
|
1.35
|
|
$
|
|
1,798
|
|
Exercised
|
|
|
(339,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(198,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 25, 2015
|
|
|
315,648
|
|
|
$
|
10.02
|
|
|
2.06
|
|
$
|
|
216
|
|
Exercised
|
|
|
(101,700
|
)
|
|
|
3.91
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(77,489
|
)
|
|
|
|
12.54
|
|
|
|
|
|
|
|
|
Outstanding, December 30, 2016
|
|
|
136,459
|
|
|
$
|
13.15
|
|
|
0.57
|
|
$
|
|
135
|
|
Options exercisable and expected to vest,
December 30, 2016
|
|
|
136,459
|
|
|
$
|
13.15
|
|
|
0.57
|
|
$
|
|
135
|
|
The following table summarizes information with respect to options outstanding and exercisable at December 30, 2016:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
Shares
|
|
|
Average
|
|
Exercise
|
|
Shares
|
|
|
Exercise
|
Range of Exercise Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
Price
|
|
Exercisable
|
|
|
Price
|
$
|
1.17
|
|
|
|
15,784
|
|
|
2.24
|
|
$
|
1.17
|
|
|
15,784
|
|
|
$
|
1.17
|
$12.99 – 13.71
|
|
|
|
10,500
|
|
|
0.72
|
|
|
13.09
|
|
|
10,500
|
|
|
|
13.09
|
$14.31 – 14.90
|
|
|
|
110,175
|
|
|
0.32
|
|
|
14.87
|
|
|
110,175
|
|
|
|
14.87
|
Grand Total
|
|
|
|
136,459
|
|
|
0.57
|
|
$
|
13.15
|
|
|
136,459
|
|
|
$
|
13.15
|
For the fiscal years 2016, 2015 and 2014, the intrinsic value of the Company’s exercised stock options was $0.1 million, $0.2 million and $1.8 million respectively. For the fiscal years 2016, 2015 and 2014, the Company’s vested share recognized expense was zero. There was no stock-based compensation expense for fiscal year 2016, 2015 and 2014 attributable to stock options as all outstanding options were fully vested at the beginning of the 2014 fiscal year.
Restricted Stock Units and Restricted Stock Awards —
In fiscal years 2016, 2015 and 2014, the Company granted 52,000, 56,000 and 47,000 shares, respectively, of common stock to its board members under the 2003 Incentive Plan. These Restricted Share Awards (RSAs) vest on the earlier of 1) the next Annual Shareholder Meeting, or 2) 365 days from date of grant. The total unamortized expense of the Company’s unvested RSAs as of December 30, 2016, is approximately $0.1 million. During the first quarter of fiscal year 2008, the Company began granting stock awards in the forms of Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) to its employees as part of the Company’s long term equity compensation plan. These stock awards are granted to employees with a unit purchase price of zero dollars and typically vest over three years, subject to the employee’s continued service with the Company and, in the case of PSUs, subject to achieving certain performance goals. The expected cost of the grant is recognized over the service period, and is reduced for estimated forfeitures and, in the case of PSUs, is reduced based on estimated achievement of performance goals. During the year ended December 30, 2016, the Company approved and granted 1,092,360 RSU’s to employees with a weighted average grant date fair value of $6.11 per share and 280,500 PSUs with a weighted average grant date fair value of $5.47 per share. As of December 30, 2016, $6.3 million of unrecognized stock-based compensation cost, net of estimated forfeitures, related to RSUs remains to be amortized and is expected to be recognized over an estimated period of 1.8 years. The unvested amount is subject to forfeiture, until fully vested. At December 30, 2016, 1,757,507 shares were subject to forfeiture.
71
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the Company’s restricted stock unit and restricted stock award activity through the year ended December 30, 2016:
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Value
|
|
|
|
Shares
|
|
|
(in thousands)
|
|
Unvested restricted stock units and restricted stock
awards at December 27, 2014
|
|
|
1,078,279
|
|
|
$
|
|
9,673
|
|
Granted
|
|
|
875,500
|
|
|
|
|
|
|
Vested
|
|
|
(430,380
|
)
|
|
|
|
|
|
Forfeited
|
|
|
(255,457
|
)
|
|
|
|
|
|
Unvested restricted stock units and restricted stock
awards at December 25, 2015
|
|
|
1,267,942
|
|
|
$
|
|
6,563
|
|
Granted
|
|
|
1,432,860
|
|
|
|
|
|
|
Vested
|
|
|
(675,591
|
)
|
|
|
|
|
|
Forfeited
|
|
|
(267,704
|
)
|
|
|
|
|
|
Unvested restricted stock units and restricted stock
awards at December 30, 2016
|
|
|
1,757,507
|
|
|
$
|
|
16,466
|
|
Vested and expected to vest restricted stock units
and restricted stock awards
|
|
|
1,446,944
|
|
|
$
|
|
14,035
|
|
Employee Stock Purchase Plan
— In 2004 the Company adopted an Employee Stock Purchase Plan (“ESPP”) and is authorized to issue 555,343 shares of common stock under the ESPP. The ESPP permits employees to purchase common stock at a discount through payroll withholdings at certain specified dates (purchase period) within a defined offering period. The purchase price is 95% of the fair market value of the common stock at the end of the purchase period and is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. There were 32,533 shares issued under the ESPP during the year ended December 30, 2016.
Employee Savings and Retirement Plan
— The Company sponsors a 401(k) savings and retirement plan (the “401(k) Plan”) for all employees who meet certain eligibility requirements. Participants could elect to contribute to the 401(k) Plan, on a pre-tax basis, up to 25% of their salary to a maximum of $18,000. The Company may make matching contributions of up to 3% of employee contributions based upon eligibility. The Company made approximately $1.1 million, $1.0 million, and $0.9 million discretionary employer contributions to the 401(k) Plan in the years ended December 30, 2016, December 25, 2015 and December 26, 2014, respectively.
72
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
10. Net Income (Loss) Per Share
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income per share (in thousands):
|
Year Ended
|
|
|
December 30,
|
|
|
December 25,
|
|
|
December 26,
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
|
10,051
|
|
|
$
|
|
(10,732
|
)
|
|
$
|
|
11,357
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
32,632
|
|
|
|
|
31,564
|
|
|
|
|
29,301
|
|
Shares used in computation — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
32,632
|
|
|
|
|
31,564
|
|
|
|
|
29,301
|
|
Dilutive effect of common shares outstanding
subject to repurchase
|
|
|
485
|
|
|
|
—
|
|
|
|
396
|
|
Dilutive effect of options outstanding
|
|
|
33
|
|
|
|
—
|
|
|
|
239
|
|
Shares used in computing diluted net income
(loss) per share
|
|
|
33,150
|
|
|
|
|
31,564
|
|
|
|
|
29,936
|
|
Net income (loss) per share — basic
|
$
|
|
0.31
|
|
|
$
|
|
(0.34
|
)
|
|
$
|
0.39
|
|
Net income (loss) per share — diluted
|
$
|
|
0.30
|
|
|
$
|
|
(0.34
|
)
|
|
$
|
0.38
|
|
The Company had securities outstanding which could potentially dilute basic earnings per share in the future, but the incremental shares from the assumed exercise of these securities were excluded in the computation of diluted net income per share, as their effect would have been anti-dilutive. Such outstanding securities consist of the following (in thousands):
|
|
|
Year Ended
|
|
|
|
|
December 30,
|
|
|
December 25,
|
|
|
December 26,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Outstanding options
|
|
|
|
174
|
|
|
|
|
261
|
|
|
|
|
266
|
|
11. Geographical Information
The Company’s principal markets include North America, Asia and Europe. Sales by geographic area represent sales to unaffiliated customers and are based upon the location to which the products were shipped. The following table sets forth revenue by geographic area (in thousands):
|
Year Ended
|
|
|
December 30,
|
|
|
December 25,
|
|
|
December 26,
|
|
Sales
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
$
|
|
308,129
|
|
|
$
|
|
313,090
|
|
|
$
|
|
372,200
|
|
China
|
|
|
13,152
|
|
|
|
|
21,464
|
|
|
|
|
64,376
|
|
Singapore
|
|
|
175,843
|
|
|
|
|
103,176
|
|
|
|
|
55,491
|
|
Austria
|
|
|
35,729
|
|
|
|
|
12,568
|
|
|
|
—
|
|
Others
|
|
|
29,906
|
|
|
|
|
18,805
|
|
|
|
|
21,890
|
|
Total
|
$
|
|
562,759
|
|
|
$
|
|
469,103
|
|
|
$
|
|
513,957
|
|
At December 30, 2016 and December 25, 2015, approximately $8.1 million and $10.0 million, respectively, of the Company’s long-lived assets were located in China, Singapore and the Czech Republic, and the remaining balances were located in the United States.
73
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
12. Commitments and Contingencies
The Company had commitments to purchase inventory totaling approximately $94.6 million at December 30, 2016.
The Company leases properties domestically in Hayward, California, Austin, Texas, Chandler, Arizona and South San Francisco, California and internationally in China, Singapore, Philippines and the Czech Republic. The Company leases certain of its facilities under non-cancelable leases, which expire on various dates through 2023.
As of December 30, 2016, future minimum payments under these operating leases were as follows (in thousands):
Fiscal year
|
|
|
2017
|
$
|
|
6,000
|
|
2018
|
|
|
5,246
|
|
2019
|
|
|
4,269
|
|
2020
|
|
|
4,226
|
|
2021
|
|
|
3,737
|
|
Thereafter
|
|
|
3,311
|
|
Total minimum lease payments
|
$
|
|
26,789
|
|
From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of the various legal proceedings and claims individually or in the aggregate cannot be predicted with certainty, the Company has not had a history of outcomes to date that have been material to the statement of operations and does not believe that any of these proceedings or other claims will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
74