NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization — Ultra Clean Holdings, Inc., (the “Company” or “UCT”) was incorporated in Delaware in November 2002 and became a publicly traded company on the NASDAQ Global Market in March 2004. Ultra Clean Holdings, Inc. is a leading developer and supplier of critical subsystems, components, parts, and ultra-high purity cleaning and analytical services, primarily for the semiconductor industry. UCT offers its customers an integrated outsourced solution for major subassemblies, improved design-to-delivery cycle times, design for manufacturability, prototyping and part and component manufacturing, as well as tool chamber parts cleaning and coating, and micro-contamination analytical services. The Company has two reportable segments: Products and Services. The Company’s Products business primarily designs, engineers and manufactures production tools, components and parts, and modules and subsystems for the semiconductor and display capital equipment markets. Products include chemical delivery modules, frame assemblies, gas delivery systems, fluid delivery systems, precision robotics, process modules as well as other high-level assemblies. The Company’s Services business provides ultra-high purity parts cleaning, process tool part recoating, surface encapsulation and high sensitivity micro contamination analysis primarily for the semiconductor device makers and wafer fabrication equipment markets. In 2021, the Company completed the acquisition of Ham-Let (Israel-Canada) Ltd. (“Ham-Let” or “Fluid Solutions”). Fluid Solutions engages in the development, manufacturing and marketing of innovative control valves, fittings, and hoses for the control and monitoring of industrial systems in a variety of markets, including the semiconductor market, and is included in the Products reportable segment. These products are primarily used in ultra clean gas delivery systems as well as other systems for the transmission of liquids and gases. During the second quarter of 2022, the Company divested certain non-core subsidiary entities of Ham-Let. See Note 3 for further discussion.
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 majority-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 from the interim financial statements in this Quarterly Report on Form 10-Q. Therefore, these unaudited financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Fiscal Year — 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.
Principles of Consolidation — The Company’s Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation.
Noncontrolling interests — Noncontrolling interests are recognized to reflect the portion of the equity of the majority-owned subsidiaries which is not attributable, directly or indirectly, to the controlling stockholder. The Company’s consolidated entities include partially-owned entities, which are (1) Cinos Co., Ltd (“Cinos Korea”), a South Korean company that provides outsourced cleaning and recycling of precision parts for the semiconductor industry through its operating facilities in South Korea and whose results the Company consolidates, (2) Cinos Xian Clean Technology, Ltd. (“Cinos China”), a Chinese entity that is majority owned by Cinos Korea and (3) Rovac Pte, Ltd (“Rovac”), a Singaporean Company that is majority owned by Ham-Let. The interest held by others in Cinos Korea, in Cinos China and in Rovac are presented as noncontrolling interests in the accompanying Condensed Consolidated Financial Statements. The noncontrolling interests will continue to be attributed its share of gains and losses even if that attribution results in a deficit noncontrolling interest balance. See Note 11 for further discussion.
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 the Chief Executive Officer. The Company operates two reportable segments: Products and Services. The Company has three operating segments as of July 1, 2022 with two operating segments within the Product reportable segment and one operating segment within the Services reportable segment. See Note 16 of the Notes to the Condensed Consolidated Financial Statements.
Foreign Currency Translation and Remeasurement — The functional currency of the Products business’s foreign subsidiaries, excluding the subsidiaries of Ham-Let, is the U.S. Dollar. The functional currency of the Ham-Let subsidiaries in Singapore, United Kingdom, Norway, Taiwan, South Korea and China, is their local currency, except for Israel, which is the U.S. Dollar. The functional currency of the Services division’s foreign subsidiaries is the local currency except for that of its Singapore and Scotland entities, which is the U.S. dollar.
- 9 -
For the Company’s foreign subsidiaries where the local currency is the functional currency, the Company translates the financial statements of these subsidiaries to U.S. dollars using month-end exchange rates for assets and liabilities, and average exchange rates for revenue, costs and expenses. Translation gains and losses are recorded in accumulated other comprehensive income ("AOCI") within UCT stockholders’ equity. For the Company’s foreign subsidiaries where the U.S. dollar is the functional currency and functional currency differs from their local currency, any gains and losses resulting from the remeasurement of the assets and liabilities of these subsidiaries are recorded in other income (expense), net.
Use of Estimates — The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but not limited to, inventory valuation, accounting for income taxes, business combinations, valuation of goodwill, intangible assets and 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 adjustments. Actual amounts may differ from those estimates.
Cash and Cash Equivalents — The Company considers currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the United States and internationally.
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 and provides services 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.
The Company’s most significant customers (having individually accounted for 10% or more of revenues) and their related revenues as a percentage of total revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Lam Research Corporation |
|
|
41.0 |
% |
|
|
38.3 |
% |
|
|
39.1 |
% |
|
|
41.6 |
% |
Applied Materials, Inc. |
|
|
22.7 |
% |
|
|
24.1 |
% |
|
|
22.9 |
% |
|
|
23.9 |
% |
Total |
|
|
63.7 |
% |
|
|
62.4 |
% |
|
|
62.0 |
% |
|
|
65.5 |
% |
Two customers’ accounts receivable balances, Lam Research Corporation and Applied Materials, Inc., were individually greater than 10% of accounts receivable as of July 1, 2022 and December 31, 2021, and in the aggregate approximately 37.0% and 39.0% of total accounts receivable, respectively.
Fair Value of Measurements — The Company measures its cash equivalents, derivative contracts, pension obligation and common stock purchase obligation (prior to the reclass to non-controlling interests) 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
- 10 -
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.
Derivative Financial Instruments — The Company uses forward contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions typically expected to occur within 24 months. The purpose of the hedge is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated costs and eventual cash flows. 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 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 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, and future demand for the Company’s products.
Inventory write downs inherently involve judgments based on 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.
Property, Plant and Equipment — Property, plant and equipment are stated at cost, or, in the case of equipment under finance leases, the present value of future minimum lease payments at inception of the related lease. The Company also capitalizes interest on borrowings related to eligible capital expenditures. Capitalized interest is added to the cost of the qualified assets and is subject to depreciation. 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 fifty years. Direct costs incurred to develop software for internal use are capitalized and amortized over an estimated useful life of three to ten 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.
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.
Leases — The Company determines if an arrangement is a lease, or contains a lease, at the inception of the arrangement and reassesses that conclusion if the arrangement is modified. When the Company determines the arrangement is a lease, or contains a lease, at lease inception, it then determines whether the lease is an operating lease or a finance lease. Operating and finance leases with lease terms of greater than one year result in the Company recording a right-of-use ("ROU") asset and lease liability on its balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are initially recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable or when the implicit interest rate is not readily determinable, the Company uses its incremental borrowing rate. The incremental borrowing rate is not a commonly quoted rate and is derived through a combination of inputs including the Company’s credit rating and the impact of full collateralization. The incremental borrowing rate is based on the Company’s collateralized borrowing capabilities over a similar term of the lease payments. The Company utilizes the incremental borrowing rate based on bank loan rates at the respective locations for leases where appropriate and the consolidated group bank loan rate where the Company does not have local bank financings. The operating lease ROU asset also includes any lease payments made prior to the adoption of ASC 842 and excludes any lease incentives. Specific lease terms used in computing the ROU assets and lease liabilities may include options to extend or terminate the lease when the Company believes it is reasonably certain that it will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheet. The Company’s finance leases at July 1, 2022 and December 31, 2021 were not significant.
- 11 -
Goodwill and Indefinite-Lived Intangible Assets — Goodwill and indefinite-lived intangible assets are not amortized, but are reviewed for impairment annually. 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 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.
Deferred Debt Issuance Costs — Debt issuance costs incurred in connection with obtaining debt financing are deferred and presented as a direct deduction from Bank Borrowings in the accompanying Condensed Consolidated Balance Sheets. Deferred costs are amortized on an effective interest method basis over the contractual term.
Defined Benefit Pension Plan — The Company has several noncontributory defined benefit pension plans covering substantially all of the employees of three of its foreign entities upon termination of their employee services. The benefits for these plans are based on expected years of service and average compensation. The net period costs are recognized as employees render the services necessary to earn the postretirement benefits. The Company records annual amounts relating to the pension plan based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current and expected rates of return and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive gain (loss) and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under the plan are reasonable based on its experience and market conditions. For further discussion of the Company’s defined benefit pension plan see Note 9 of the Notes to the Condensed Consolidated Financial Statements.
Revenue Recognition — Revenue is recognized when we satisfy performance obligations as evidenced by the transfer of control of the promised goods or services 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 performs the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with its customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied.
Shipping and Handling Costs — Shipping and handling costs are included as a component of cost of revenues.
Research and Development Costs — Research and development costs are expensed as incurred.
Stock-Based Compensation Expense — The Company maintains stock-based compensation plans which allow for the issuance of equity-based awards to directors and certain employees. These equity-based awards include restricted stock awards (“RSAs”), performance stock units ("PSUs") and restricted stock units (“RSUs”). The RSAs and RSUs use the closing price of stock price on the day preceding the grant date as a proxy for fair value and compensation expense. The PSUs contain market conditions, and compensation expense is measured using a Monte Carlo simulation model and recognized over the derived service period based on the expected market performance as of the grant date. 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. See Note 12 for further discussion.
Government Subsidies — Government subsidies are recognized where there is reasonable assurance that the subsidy will be received and all attached conditions will be complied with. When the subsidy relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the subsidy relates to an asset, it is recognized as income in equal amounts over the expected useful life of the related asset. When the subsidy does not relate to specific expenses or assets, the income is accounted for in the period where there is reasonable assurance that the subsidy will be received.
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 federal, state, 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.
- 12 -
Income tax positions must meet a more likely than not recognition threshold to be recognized. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.
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 restricted stock using the treasury stock method, except when such shares are anti-dilutive.
Business Combinations — The Company recognizes assets acquired (including goodwill and identifiable intangible assets), liabilities assumed and noncontrolling interest 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.
Accounting Standard Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financing Reporting. This guidance provides temporary optional expedients and exceptions through December 31, 2022 to the U.S. GAAP guidance on contract modifications to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The Company expects to adopt this guidance and apply it to reference rate reform effected arrangement modifications. The Company does not expect this new standard to have a material effect on its Condensed Consolidated Financial Statements.
2. BUSINESS COMBINATIONS
Ham-Let (Israel-Canada) Ltd.
On March 31, 2021, the Company acquired all of the outstanding common shares of Ham-Let (Israel-Canada) Ltd. ("Ham-let") for a total purchase consideration of $362.9 million paid in cash. The Company borrowed an additional $355.0 million from its existing credit facility to finance the acquisition. See further discussion in Note 7 to the Notes to Condensed Consolidated Financial Statements.
In December 2020, the Company announced the acquisition of Ham-Let. The expected cash consideration for the equity valuation at that time was approximately 934.7 million Israeli New Shekel (“ILS”) or $287.1 million. US GAAP requires the recording of the purchase price of the acquired entity at the spot rate on acquisition date, rather than the cash amount hedged and paid. A loss of $10.4 million on the forward hedge contract was recorded in the accompanying Condensed Consolidated Statements of Operations as other income (expense), net for the three and six month periods ended June 25, 2021.
During the first quarter of fiscal year 2022, the Company completed its analysis of its worldwide tax position and recorded a reduction in tax liabilities that resulted in a decrease to goodwill of approximately $1.5 million. In the first quarter of fiscal year 2022, the Company completed the acquisition accounting and the valuation of the fair value of the assets acquired and the liabilities assumed. The acquisition accounting for Ham-Let is final. None of the goodwill recorded as part of the acquisition will be deductible for income tax purposes.
- 13 -
The following table summarizes the fair values of assets acquired, liabilities assumed and noncontrolling interest at the date of acquisition, including all measurement period adjustments:
|
|
|
|
|
(In millions) |
|
Amount |
|
Cash and cash equivalents |
|
$ |
20.1 |
|
Accounts receivable |
|
|
51.6 |
|
Inventories |
|
|
73.7 |
|
Prepaid expenses and other assets |
|
|
17.3 |
|
Property, plant and equipment |
|
|
52.1 |
|
Goodwill |
|
|
97.4 |
|
Purchased intangible assets |
|
|
118.6 |
|
Deferred tax assets |
|
|
0.8 |
|
Operating lease right-of-use assets |
|
|
27.7 |
|
Other non-current assets |
|
|
2.2 |
|
Total assets acquired |
|
|
461.5 |
|
Bank borrowings |
|
|
(5.0 |
) |
Accounts payable |
|
|
(30.8 |
) |
Accrued compensation and related benefits |
|
|
(10.5 |
) |
Other current liabilities |
|
|
(12.0 |
) |
Deferred tax liabilities |
|
|
(10.7 |
) |
Operating lease liabilities |
|
|
(23.8 |
) |
Other liabilities |
|
|
(4.0 |
) |
Total liabilities assumed |
|
|
(96.8 |
) |
Noncontrolling interests |
|
|
(1.8 |
) |
Total consideration transferred |
|
$ |
362.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased |
|
|
|
Useful
Life |
|
|
Intangible
Assets |
|
|
|
(In years) |
|
|
(In millions) |
|
Customer relationships |
|
|
10 |
|
|
$ |
69.0 |
|
IP Knowhow |
|
10-15 |
|
|
|
35.5 |
|
Trade names |
|
|
5 |
|
|
|
9.8 |
|
Backlog |
|
|
1 |
|
|
|
4.3 |
|
Total purchased intangible assets |
|
|
|
|
$ |
118.6 |
|
The results of operations for Ham-Let have been included in our Condensed Consolidated Financial Statements since the date of the acquisition.
Unaudited Pro Forma Consolidated Results
The following unaudited pro forma consolidated results of operations assume the acquisition was completed as of the beginning of the earliest year of the reporting periods presented.
The unaudited pro forma consolidated results of operations for the six months ended June 25, 2021 (in millions, except per share amounts) are summarized as follows:
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 25, |
|
|
|
2021 |
|
(In millions, except per share amounts) |
|
|
|
Revenues |
|
$ |
989.1 |
|
Net income |
|
$ |
54.1 |
|
Basic income per share |
|
$ |
1.29 |
|
Diluted income per share |
|
$ |
1.26 |
|
The unaudited pro forma results above include adjustments related to the purchase price allocation and financing of the acquisition, primarily to increase amortization for the identifiable intangible assets, to increase interest expense for the additional debt incurred to complete the acquisition, to record the $11.6 million cumulative loss related to the forward contracts entered into, in conjunction with the acquisition and to reflect the related income tax effect.
- 14 -
The unaudited pro forma combined financial information has been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of income in future periods or the results that would have been realized had UCT and Ham-Let been a combined company during the specified period. The unaudited pro forma combined financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies, or any liabilities that may result from integration activities.
3. BUSINESS DIVESTITURE
During the second quarter of 2022, the Company executed the sale of two of its non-semiconductor operating subsidiaries and committed to a plan to sell its majority interest in a third Fluid Solutions subsidiary which is classified as held-for-sale, and presented in Prepaid expenses and other current assets of the Condensed Consolidated Balance Sheets. This transaction is expected to close during the third quarter of 2022. Each of these entities is reported within the Products reportable segment. The Company is committed to improving capital efficiency while remaining focused on its core semiconductor business. As a result of these divestitures, the Company recorded a net loss of $56.6 million which was recorded in the Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2022. The recorded loss includes the write-off of intangible assets, net, goodwill and net assets of $22.6 million, $17.8 million and $16.2 million, respectively. Goodwill has been allocated to the divestitures based on the relative fair value of each component in relation to its respective reporting unit. See Note 6 Goodwill and Intangible Assets for further discussion.
4. BALANCE SHEET INFORMATION
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
December 31, |
|
(In millions) |
|
2022 |
|
|
2021 |
|
Raw materials |
|
$ |
244.7 |
|
|
$ |
220.9 |
|
Work in process |
|
|
108.6 |
|
|
|
102.5 |
|
Finished goods |
|
|
51.8 |
|
|
|
55.8 |
|
Total |
|
$ |
405.1 |
|
|
$ |
379.2 |
|
Property, plant and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life |
|
July 1, |
|
|
December 31, |
|
(In millions) |
|
(in years) |
|
2022 |
|
|
2021 |
|
Land |
|
n/a |
|
$ |
4.4 |
|
|
$ |
4.7 |
|
Buildings |
|
50 |
|
|
57.4 |
|
|
|
52.1 |
|
Leasehold improvements |
|
* |
|
|
68.1 |
|
|
|
67.3 |
|
Machinery and equipment |
|
5-10 |
|
|
137.8 |
|
|
|
132.6 |
|
Computer equipment and software |
|
3-10 |
|
|
59.0 |
|
|
|
57.7 |
|
Furniture and fixtures |
|
5 |
|
|
5.5 |
|
|
|
5.2 |
|
|
|
|
|
|
332.2 |
|
|
|
319.6 |
|
Accumulated depreciation |
|
|
|
|
(131.0 |
) |
|
|
(116.0 |
) |
Construction in progress |
|
|
|
|
47.4 |
|
|
|
38.7 |
|
Total |
|
|
|
$ |
248.6 |
|
|
$ |
242.3 |
|
* Lesser of estimated useful life or remaining lease term
- 15 -
5. FAIR VALUE MEASUREMENTS
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at |
|
|
|
|
|
|
Reporting Date Using |
|
Description |
|
July 1, 2022 |
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
|
Significant
Other
Observable
Inputs
(Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
2.0 |
|
|
$ |
— |
|
|
$ |
2.0 |
|
|
$ |
— |
|
Pension obligation |
|
$ |
3.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at |
|
|
|
|
|
|
Reporting Date Using |
|
Description |
|
December 31, 2021 |
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
|
Significant
Other
Observable
Inputs
(Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
0.8 |
|
|
$ |
— |
|
|
$ |
0.8 |
|
|
$ |
— |
|
Pension obligation |
|
$ |
4.0 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4.0 |
|
The estimated fair value of foreign currency forward contracts is based upon quoted market prices obtained from independent pricing services for similar derivative contracts and these financial instruments are characterized as Level 2 assets in the fair value hierarchy.
The estimated fair value of the pension obligation is based on expected years of service and average compensation. The valuation model used to value the pension obligation utilizes mortality rate, inflation, interest rate risks and changes in the life expectancy for pensioners. These assumptions are routinely made in the appraisal process by the independent actuary thus resulted in a Level 3 classification.
There were no transfers from Level 1 or Level 2. Fair value adjustments were noncash, and therefore did not impact the Company’s liquidity or capital resources. Qualitative information about Level 3 fair value measurements is as follows:
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
Valuation |
|
Unobservable |
|
|
|
2022 |
|
|
Techniques |
|
Input |
|
Range/Multiple |
(Dollars in millions, except rate/multiple) |
|
|
|
|
Pension obligation |
$ |
3.0 |
|
|
Projected unit credit method |
|
Discount rate |
|
2.1% to 2.7% |
|
|
|
|
|
|
Rate on return |
|
1.7% to 2.1% |
|
|
|
|
|
|
Salary increase rate |
|
2.0% to 3.0% |
Following is a summary of the Level 3 activity:
|
|
|
|
|
(In millions) |
|
Pension
obligation |
|
As of December 31, 2021 |
|
$ |
4.0 |
|
Benefits, payments and other adjustments |
|
|
(1.0 |
) |
As of July 1, 2022 |
|
$ |
3.0 |
|
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company’s methodology for allocating the purchase price relating to an acquisition is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the consideration transferred over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed.
- 16 -
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 the Company concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the Company does not proceed to perform a quantitative impairment test. If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit’s fair value. Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions. A goodwill impairment charge is recognized for the amount by which the reporting unit’s fair value is less than its carrying value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 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.
In connection with the divestiture of certain Ham-Let subsidiaries during the second quarter of 2022, the Company wrote off goodwill and intangible assets, net, of $17.8 million and $22.6 million, respectively.
Details of aggregate goodwill of the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Products |
|
|
Services |
|
|
Total |
|
Balance at December 31, 2021 |
|
$ |
196.5 |
|
|
$ |
73.5 |
|
|
$ |
270.0 |
|
Adjustments |
|
|
(1.5 |
) |
|
|
— |
|
|
|
(1.5 |
) |
Divestiture of subsidiaries |
|
|
(17.8 |
) |
|
|
— |
|
|
|
(17.8 |
) |
Balance at July 1, 2022 |
|
$ |
177.2 |
|
|
$ |
73.5 |
|
|
$ |
250.7 |
|
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 lived 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 intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 1, 2022 |
|
|
As of December 31, 2021 |
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
Useful Life |
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
(Dollars in millions) |
(in years) |
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Customer relationships |
6 - 10 |
|
$ |
173.5 |
|
|
$ |
(73.6 |
) |
|
$ |
99.9 |
|
|
$ |
188.4 |
|
|
$ |
(66.9 |
) |
|
$ |
121.5 |
|
Tradenames |
4 - 6* |
|
|
33.2 |
|
|
|
(17.1 |
) |
|
|
16.1 |
|
|
|
36.8 |
|
|
|
(17.5 |
) |
|
|
19.3 |
|
Intellectual property/know-how |
7 - 15 |
|
|
39.5 |
|
|
|
(14.3 |
) |
|
|
25.2 |
|
|
|
49.4 |
|
|
|
(13.1 |
) |
|
|
36.3 |
|
Recipes |
20 |
|
|
73.2 |
|
|
|
(14.0 |
) |
|
|
59.2 |
|
|
|
73.2 |
|
|
|
(12.2 |
) |
|
|
61.0 |
|
Standard operating procedures |
20 |
|
|
8.6 |
|
|
|
(1.6 |
) |
|
|
7.0 |
|
|
|
8.6 |
|
|
|
(1.4 |
) |
|
|
7.2 |
|
Backlog |
1 |
|
|
3.1 |
|
|
|
(3.1 |
) |
|
|
— |
|
|
|
4.3 |
|
|
|
(3.9 |
) |
|
|
0.4 |
|
Total |
|
|
$ |
331.1 |
|
|
$ |
(123.7 |
) |
|
$ |
207.4 |
|
|
$ |
360.7 |
|
|
$ |
(115.0 |
) |
|
$ |
245.7 |
|
* The Company concluded that the asset life of UCT tradename of $9.0 million is indefinite and is therefore 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.
- 17 -
The Company amortizes its intangible assets on a straight-line or accelerated basis over the estimated economic life of the assets. Amortization expense was approximately $7.7 million and $15.7 million for the three and six months ended July 1, 2022, respectively and $9.5 million and $14.4 million for the three and six months ended June 25, 2021, respectively. Amortization expense related to recipes, standard operating procedures and certain intellectual property/know-how is charged to cost of revenues and the remainder is charged to general and administrative expense. As of July 1, 2022, future estimated amortization expense is expected to be as follows:
|
|
|
|
|
|
|
Amortization |
|
(In millions) |
|
Expense |
|
2022 (remaining in year) |
|
$ |
14.6 |
|
2023 |
|
|
23.6 |
|
2024 |
|
|
22.8 |
|
2025 |
|
|
20.5 |
|
2026 |
|
|
19.4 |
|
Thereafter |
|
|
97.5 |
|
Total |
|
$ |
198.4 |
|
7. BORROWING ARRANGEMENTS
On August 27, 2018, the Company entered into a credit agreement with Barclays Bank that provided a term loan B, a revolving credit facility and a letter of credit facility (collectively, the “Credit Facilities”). UCT and certain of its subsidiaries have agreed to secure all of their obligations under the Credit Facilities by granting a first priority lien in substantially all of their respective personal property assets (subject to certain exceptions and limitations). The Company borrowed $350.0 million under the term loan and used the proceeds, together with cash on hand, to finance the acquisition of Quantum Global Technologies, LLC’s ("QGT") and to refinance its previous credit facilities.
On March 31, 2021, the Company entered into a Second Amendment (the “Second Amendment”), to the credit agreement dated as of August 27, 2018 and amended as of October 1, 2018 (as amended by the Second Amendment, the "Credit Agreement") to, among other things, (i) refinance and reprice $272.8 million of existing term B borrowings that will remain outstanding and (ii) obtain a $355.0 million senior secured incremental term loan B facility ((i) and (ii) collectively the “Term Loan”) with Barclays Bank, which increased the amount of term loan indebtedness outstanding under the Company’s Credit Facilities.
The Term Loan has a maturity date of August 27, 2025, with monthly interest payments in arrears, quarterly principal payments of 0.625% of the outstanding principal balance as of March 31, 2021, with the remaining principal paid upon maturity. Under the Credit Facilities, the Company may elect that the Term Loan bear interest at a rate per annum equal to either (a) “ABR” (as defined in the Credit Agreement), plus the applicable margin or (b) the “Eurodollar Rate” (as defined in the Credit Agreement), based on LIBOR, plus the applicable margin. The applicable margin for the Term Loan is equal to a rate per annum to either (i) at any time that the Company’s corporate family rating is Ba3 (with a stable outlook) or higher from Moody’s and BB- (with a stable outlook) or higher from S&P, (x) 3.50% for such Eurodollar term loans and (y) 2.50% for such ABR term loans or (ii) at all other times, (x) 3.75% for such Eurodollar term loans and (y) 2.75% for such ABR term loans. Interest on the Term Loan is payable on (1) in the case of such ABR term loans, the last day of each calendar quarter and (2) in the case of such Eurodollar term loans, the last day of each relevant interest period and, in the case of any interest period longer than three months, on each successive date three months after the first day of such interest period. On March 29, 2021, the Company elected that the Term Loan outstanding as of March 31, 2021 accrue interest based on the “Eurodollar Rate” for an initial interest period of one month. Pursuant to the Second Amendment to the Credit Agreement, the Credit Facilities contains customary LIBOR replacement provisions in the event LIBOR is discontinued. At July 1, 2022, the Company had an outstanding amount under the Term Loan of $547.2 million, gross of unamortized debt issuance costs of $11.5 million. As of July 1, 2022, the interest rate on the outstanding Term Loan was 5.4%.
The revolving credit facility has an initial available commitment of $65.0 million and a maturity date of August 27, 2023. The Company pays a quarterly commitment fee in arrears equal to 0.25% of the average daily available commitment outstanding. Outstanding letters of credit reduce the availability of the revolving credit facility and, as of July 1, 2022, the Company had $61.6 million, net of $3.4 million of outstanding letters of credit available under this revolving credit facility.
The letter of credit facility has an initial available commitment of $50.0 million and a maturity date of August 27, 2023. The Company pays quarterly in arrears a fee equal to 2.5% (subject to certain adjustments to the Term Loan) of the dollar equivalent of all outstanding letters of credit, and a fronting fee equal to 0.125% of the undrawn and unexpired amount of each letter of credit. As of July 1, 2022, the Company had $3.4 million of outstanding letters of credit with beneficiaries such as landlords of certain facility leases, insurance providers and government agencies making up the majority of the outstanding balance. The remaining available commitments are $46.6 million on the letter of credit facility.
- 18 -
The Credit Agreement requires the Company to maintain certain financial covenants including a consolidated fixed charge coverage ratio (as defined in the Credit Agreement) as of the last day of any fiscal quarter of at least 1.25 to 1.00, and a consolidated leverage ratio (as defined in the Credit Agreement) as of the last day of any fiscal quarter of no greater than 3.75 to 1.00. The Company was in compliance with all financial covenants as of the quarter ended July 1, 2022.
In 2020, Cinos China amended its existing credit agreement with a local bank that provide a term loan of RMB 10.0 million (approximately $1.5 million) with a maturity date of September 23, 2022 and an interest rate of 4.1%. As of July 1, 2022, Cinos China had an amount of RMB 8.0 million (approximately $1.2 million) outstanding under this credit facility.
FDS has a credit agreement with a local bank in the Czech Republic that provides for a revolving credit facility in the aggregate of up to 5.0 million euros (approximately $5.2 million). As of July 1, 2022, no debt was outstanding under this revolving credit facility.
Ham-Let has credit facilities with various financial institutions. As of July 1, 2022, Ham-Let had $9.4 million outstanding balance under the overdraft facility.
As of July 1, 2022, the Company’s total bank debt was $557.8 million, net of unamortized debt issuance costs of $11.5 million. As of July 1, 2022, the Company had $61.6 million, and $5.2 million available draw from its revolving credit facilities in the U.S., and Czech Republic, respectively.
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 Company’s carrying value approximates fair value for the Company’s long-term debt.
8. INCOME TAX
The Company's effective tax rate was (66.9%) and 25.6% for the three months ended July 1, 2022 and June 25, 2021, respectively, and 65.8% and 23.2% for the six months ended July 1, 2022 and June 25, 2021. The Company’s income tax provision was $8.7 million and $6.2 million for the three months ended July 1, 2022 and June 25, 2021, respectively, and $17.3 and $13.2 million for the six months ended July 1, 2022 and June 25, 2021, respectively. The change in respective tax rates reflects, primarily, no tax benefit on the loss related to the divestitures during the second quarter, changes in the geographic mix of worldwide earnings and financial results in jurisdictions which are taxed at different rates, and the impact of losses in jurisdictions with full federal and state valuation allowances.
Company management continuously evaluates the need for a valuation allowance and, as of July 1, 2022, concluded that a full valuation allowance on its U.S. federal and state and certain of its foreign deferred tax assets was still appropriate.
As of July 1, 2022 and June 25, 2021, the Company’s gross liability for unrecognized tax benefits, excluding interest, was $1.7 million and $1.3 million, respectively. Increases or decreases to interest and penalties on uncertain tax positions are included in the income tax provision in the Condensed Consolidated Statements of Operations. Although it is possible that some of the unrecognized tax benefits could be settled within the next twelve months, the Company cannot reasonably estimate the outcome at this time.
9. RETIREMENT PLANS
Defined Benefit Plan
Cinos Korea has a noncontributory defined benefit pension plan covering substantially all of its employees upon their retirement. Ham-Let has noncontributory defined benefit pension plans covering its employees in Israel upon their retirement. The benefits for these plans are based on expected years of service and average compensation. The net period costs are recognized as employees render the services necessary to earn the postretirement benefits. The Company records annual amounts relating to the pension plan based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current and expected rates of return and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under the plan are reasonable based on its experience and market conditions.
As of July 1, 2022, the benefit obligation of the plan was $10.8 million and the fair value of the benefit plan assets is $7.8 million which are invested in several fixed deposit accounts with financial institutions. As of July 1, 2022, the unfunded balance of the plans of $3.0 million has been accrued by the Company and is included in other liabilities. Amounts recognized in accumulated other comprehensive gain (loss) as of July 1, 2022 are $0.3 million. The contributions to the plans by the Company and its subsidiaries during the period ended July 1, 2022 was nil.
As of July 1, 2022, the Company's future estimated payment obligations for the respective fiscal years are as follows:
- 19 -
|
|
|
|
|
(In millions) |
|
Future payment |
|
2022 (remaining in year) |
|
$ |
— |
|
2023 |
|
|
0.6 |
|
2024 |
|
|
2.4 |
|
2025 |
|
|
0.8 |
|
2026 |
|
|
1.5 |
|
Thereafter |
|
|
4.2 |
|
Total |
|
$ |
9.5 |
|
Employee Savings and Retirement Plan
The Company sponsors a 401(k) savings and retirement plan (the “401(k) Plan”) for all U.S. 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 the IRS limit. The Company matches 50.0% of participant salary up to 6.0% of employee contributions based upon eligibility. The Company made approximately $0.7 million and $1.6 million discretionary employer contributions to the 401(k) Plan for the three and six months ended July 1, 2022 and $0.7 million and $1.3 million for the three and six months ended June 25, 2021.
10. COMMITMENTS AND CONTINGENCIES
Commitment
The Company had commitments to various third parties to purchase inventories totaling approximately $689.4 million as of July 1, 2022.
Contingency
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 Condensed Consolidated Statements 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.
11. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS
Equity Financings
During April 2021, the Company completed an underwritten public offering, which included an exercised underwriters' option of 3.7 million shares of the Company’s common stock, for which the Company received net proceeds of approximately $192.8 million, after deducting the underwriting discounts and offering expenses payable by the Company.
Non-controlling Interests
QGT, through its wholly-owned subsidiary in Singapore, owns part of the outstanding shares of Cinos Korea, a South Korean company that provides outsourced cleaning and recycling of precision parts for the semiconductor industry through its operating facilities in South Korea and through a partial interest in Cinos China.
The carrying value of the remaining interest held by another shareholder in Cinos Korea and the remaining interest in Cinos China are presented as noncontrolling interests in the accompanying Condensed Consolidated Financial Statements. The fair values of the noncontrolling interests were estimated based on the values of Cinos Korea and Cinos China on a 100.0% basis. The values were calculated based on the pro-rata portion of total QGT earnings before interest expense, taxes, depreciation and amortization contributed by each entity.
Rovac Pte, Ltd., which is based in Singapore, is a majority-owned company of Ham-Let. The carrying value of the remaining interest held by the minority shareholder in Rovac is presented as non-controlling interests in the accompanying Condensed Consolidated Financial Statements. During the second quarter of 2022, the Company committed a plan to sell its majority interest, and as a result, the Company recorded a loss of $5.0 million related to the write-off of goodwill and intangible assets. The transaction is expected to be finalized during third quarter of 2022.
12. EMPLOYEE STOCK PLANS
The Company grants stock awards in the form 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 and market conditions. The Company also grants common stock to
- 20 -
its board members in the form of restricted stock awards ("RSAs"), which vest on the earlier of 1) the next Annual Shareholder Meeting, or 2) 365 days from date of grant.
Stock-based compensation expense includes compensation costs related to estimated fair values of 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 and is adjusted for performance as it relates to PSUs. Under the current PSU program, which was effective beginning fiscal 2021, performance goals are set at the time of grant and performance is reviewed at the end of a three-year period. The percentage to be applied to each participant’s target award ranges from zero to 200% based upon the extent to which the financial performance goals are achieved. If specific performance threshold levels for the financial goals are met on an annual basis, the amount earned for that element will be applied to one-third of the participants’ PSU award granted to determine the number of total units earned.
At the end of the three-year performance period, the total units earned, if any, are adjusted by applying two modifiers, each ranging from 25% to (25)% based on (i) the Company’s relative total shareholder return (“TSR”) compounded annual growth rate (“CAGR”) which is based on the Company’s stock price changes relative to a group of peer companies and (ii) the “average annual difference in operating margin” is defined as non-GAAP operating margin divided by total revenue comparing the annual operating plan to actual results.
The following table shows the Company’s stock-based compensation expense included in the Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
(In millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Cost of revenues (1) |
|
$ |
0.5 |
|
|
$ |
0.4 |
|
|
$ |
1.0 |
|
|
$ |
0.9 |
|
Research and development |
|
|
0.1 |
|
|
|
- |
|
|
|
0.2 |
|
|
|
0.1 |
|
Sales and marketing |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.6 |
|
|
|
0.7 |
|
General and administrative |
|
|
3.6 |
|
|
|
2.9 |
|
|
|
8.3 |
|
|
|
5.5 |
|
|
|
|
4.5 |
|
|
|
3.7 |
|
|
|
10.1 |
|
|
|
7.2 |
|
Income tax benefit |
|
|
(3.0 |
) |
|
|
(0.9 |
) |
|
|
(6.6 |
) |
|
|
(1.7 |
) |
Stock-based compensation expense, net of tax |
|
$ |
1.5 |
|
|
$ |
2.8 |
|
|
$ |
3.5 |
|
|
$ |
5.5 |
|
(1)Stock-based compensation expense capitalized in inventory for the three and six months ended July 1, 2022 and June 25, 2021 and June 25, 2021 was not significant.
For the three and six months ended July 1, 2022, 0.4 million and 0.5 million RSUs were granted with a weighted average fair value of $31.93 and $33.49 per share, respectively, and for the three and six months ended June 25, 2021, 0.3 million and 0.4 million RSUs were granted with a weighted average fair value of $49.86 and $49.02 per share.
For the three and six months ended July 1, 2022, 98.0 and 98.0 thousand PSUs were granted.
As of July 1, 2022, approximately $34.9 million of unrecognized stock-based compensation cost related to employee and director awards which remains to be amortized on a straight-line basis over a weighted average period of 2.0 years, and will be adjusted for subsequent changes in future grants.
As of July 1, 2022, a total of 25.9 thousand RSAs were outstanding. The total unamortized expense of the Company’s unvested RSAs as of July 1, 2022 was $0.7 million.
The following table summarizes the Company’s combined RSU, PSU and RSA activity for the six months ended July 1, 2022:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Shares |
|
|
Aggregate
Fair Value |
|
Unvested RSUs, PSUs and RSAs at December 31, 2021 |
|
|
1.2 |
|
|
$ |
69.3 |
|
Granted |
|
|
0.6 |
|
|
|
- |
|
Vested |
|
|
(0.6 |
) |
|
|
- |
|
Forfeited |
|
|
(0.1 |
) |
|
|
- |
|
Unvested RSUs, PSUs and RSAs as of July 1, 2022 |
|
|
1.1 |
|
|
$ |
34.1 |
|
Vested and expected to vest RSUs, PSUs and RSAs as of July 1, 2022 |
|
|
1.1 |
|
|
$ |
34.1 |
|
Employee Stock Purchase Plan
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 85% of the fair market value of the common stock at the end
- 21 -
of the purchase period and is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During the three and six months ended July 1, 2022, 24.4 thousand shares were issued under the ESPP, and the Company recorded $0.3 million of expense related to the ESPP for the three and six months ended July 1, 2022.
13. REVENUE RECOGNITION
Revenue is recognized when we satisfy performance obligations as evidenced by the transfer of control of the promised goods or services 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 sells its products and services 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 Products business segment 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 revenues may be required in future periods. The warranty reserve is included in other current liabilities on the Condensed Consolidated Balance Sheets and is not considered significant.
The Company’s products are manufactured and services provided at locations throughout the Americas, Asia Pacific and Europe and the Middle East ("EMEA"). 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 the products or when the Company provides the services. 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. 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.
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 July 1, 2022 and December 31, 2021, an accrual for unpaid customer rebates of $4.4 million and $5.1 million was included in accounts receivable on the Company’s Condensed Consolidated Balance Sheet. The Company's disaggregated revenues are apportioned by segments within the Company’s Condensed Consolidated Statement of Operations.
The Company’s principal markets include America, Asia Pacific and EMEA. The Company's foreign operations are conducted primarily through its subsidiaries in China, Singapore, Israel, Taiwan, South Korea, United Kingdom and the Czech Republic. Revenues by geographic area are categorized based on the customer’s location to which the products were shipped or services performed. The following table sets forth revenue by geographic area (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Singapore |
|
$ |
237.0 |
|
|
$ |
182.5 |
|
|
$ |
447.5 |
|
|
$ |
335.8 |
|
United States |
|
|
193.2 |
|
|
$ |
187.3 |
|
|
|
374.6 |
|
|
|
359.9 |
|
South Korea |
|
|
45.4 |
|
|
|
36.7 |
|
|
|
87.0 |
|
|
|
63.3 |
|
China |
|
|
27.8 |
|
|
|
25.4 |
|
|
|
56.4 |
|
|
|
41.4 |
|
Austria |
|
|
28.7 |
|
|
|
20.6 |
|
|
|
57.1 |
|
|
|
39.3 |
|
Rest of the world |
|
|
76.6 |
|
|
|
62.7 |
|
|
|
150.3 |
|
|
|
93.1 |
|
|
|
$ |
608.7 |
|
|
$ |
515.2 |
|
|
$ |
1,172.9 |
|
|
$ |
932.8 |
|
14. LEASES
The Company leases offices, facilities and equipment in locations throughout the United States, Asia Pacific and EMEA.
The Company’s leases do not provide an implicit rate, thus the Company uses an estimated incremental borrowing rate in determining the present value of lease payments.
- 22 -
The components of lease expense were summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
(Dollars in millions) |
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Operating lease cost |
$ |
5.9 |
|
|
$ |
4.8 |
|
|
$ |
11.0 |
|
|
$ |
8.5 |
|
Short-term lease cost |
|
0.3 |
|
|
|
0.5 |
|
|
|
1.0 |
|
|
|
0.9 |
|
Total lease cost |
$ |
6.2 |
|
|
$ |
5.3 |
|
|
$ |
12.0 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
$ |
5.9 |
|
|
$ |
5.5 |
|
|
$ |
11.1 |
|
|
$ |
9.2 |
|
Weighted-average remaining lease term – operating leases |
|
|
|
|
|
|
|
3.4 |
|
|
|
1.8 |
|
Weighted-average discount rate – operating leases |
|
|
|
|
|
|
|
4.8 |
% |
|
|
5.1 |
% |
Future minimum payments under operating leases as of July 1, 2022 were summarized as follows:
|
|
|
|
|
(In millions) |
|
Operating Leases |
|
2022 remaining |
|
$ |
12.7 |
|
2023 |
|
|
22.5 |
|
2024 |
|
|
18.2 |
|
2025 |
|
|
12.4 |
|
2026 |
|
|
10.1 |
|
Thereafter |
|
|
27.1 |
|
Total minimum lease payments |
|
|
103.0 |
|
Less: imputed interest |
|
|
25.5 |
|
Lease liability |
|
$ |
77.5 |
|
15. NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
(In millions, except share amounts) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to UCT |
|
$ |
(25.1 |
) |
|
$ |
17.1 |
|
|
$ |
2.8 |
|
|
$ |
42.1 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
45.2 |
|
|
|
43.3 |
|
|
|
45.1 |
|
|
|
41.9 |
|
Shares used in computation — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
45.2 |
|
|
|
43.3 |
|
|
|
45.1 |
|
|
|
41.9 |
|
Dilutive effect of common shares outstanding subject to repurchase |
|
|
- |
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
1.0 |
|
Shares used in computing diluted net income (loss) per share |
|
|
45.2 |
|
|
|
44.3 |
|
|
|
45.7 |
|
|
|
42.9 |
|
Net income (loss) per share attributable to UCT — basic |
|
$ |
(0.56 |
) |
|
$ |
0.39 |
|
|
$ |
0.06 |
|
|
$ |
1.00 |
|
Net income (loss) per share attributable to UCT — diluted |
|
$ |
(0.56 |
) |
|
$ |
0.39 |
|
|
$ |
0.06 |
|
|
$ |
0.98 |
|
- 23 -
16. REPORTABLE SEGMENTS
The Company prepares financial results based on two reportable segments: Products and Services. These segments are organized primarily by the nature of the products and service they provide. The Company’s Chief Executive Officer (chief operating decision maker) views and evaluates operations based on the results of each of the reportable segments. The following table describes each segment:
|
|
|
|
|
|
|
Segment |
|
Product or Services |
|
Primary Markets Served |
|
Geographic Areas |
Products |
|
Assembly
Weldments
Machining
Fabrication |
|
Semiconductor |
|
Americas
Asia Pacific
EMEA |
Services |
|
Cleaning
Coating
Analytics |
|
Semiconductor |
|
Americas
Asia Pacific
EMEA |
The Company uses segment profit or loss as the primary measure of profitability to evaluate operating performance and to allocate capital resources. Segment profit or loss is defined as a segment’s income or loss from continuing operations before other income and income taxes included in the accompanying Condensed Consolidated Statements of Operations.
Intercompany sales and associated profit are eliminated from segment results.
Segment Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
July 1, |
|
|
June 25, |
|
|
July 1, |
|
|
June 25, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
532.0 |
|
|
$ |
442.5 |
|
|
$ |
1,018.9 |
|
|
$ |
788.1 |
|
Services |
|
|
76.7 |
|
|
|
72.7 |
|
|
|
154.0 |
|
|
|
144.7 |
|
Total segment revenues |
|
$ |
608.7 |
|
|
$ |
515.2 |
|
|
$ |
1,172.9 |
|
|
$ |
932.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
90.9 |
|
|
$ |
74.6 |
|
|
$ |
178.3 |
|
|
$ |
136.6 |
|
Services |
|
|
27.5 |
|
|
|
25.3 |
|
|
|
53.9 |
|
|
|
50.2 |
|
Total segment gross profit |
|
$ |
118.4 |
|
|
$ |
99.9 |
|
|
$ |
232.2 |
|
|
$ |
186.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
(14.4 |
) |
|
$ |
24.0 |
|
|
$ |
23.3 |
|
|
$ |
58.2 |
|
Services |
|
|
8.9 |
|
|
|
7.9 |
|
|
|
17.0 |
|
|
|
14.1 |
|
Consolidated income (loss) from operations |
|
$ |
(5.5 |
) |
|
$ |
31.9 |
|
|
$ |
40.3 |
|
|
$ |
72.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, |
|
|
December 31, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
|
|
|
$ |
1,672.3 |
|
|
$ |
1,757.6 |
|
Services |
|
|
|
|
|
|
|
|
273.1 |
|
|
|
267.8 |
|
Total segment assets |
|
|
|
|
|
|
|
$ |
1,945.4 |
|
|
$ |
2,025.4 |
|
As of July 1, 2022, approximately $123.3 million and $61.1 million of the Company’s net long-lived assets were located in Asia Pacific and EMEA, respectively, and the remaining balances were located in the United States. At December 31, 2021, approximately $129.0 million and $53.4 million of the Company’s net long-lived assets were located in Asia Pacific and EMEA, respectively, and the remaining balances were located in the United States.
- 24 -