5. Acquisition

QGT

On August 27, 2018, the Company acquired all of the outstanding preferred and common units of QGT, a provider of ultra-high purity parts cleaning, process tool part recoating, surface treatment and analytical services to the semiconductor and related industries, for total purchase consideration of $346.2 million, including approximately $342.0 million in cash and an estimated $4.2 million in contingent consideration related to $15.0 million of potential cash earn-out payments if the Company achieves certain specified revenue levels through December 27, 2019. In addition, the Company incurred approximately $9.4 million of costs related to the acquisition. The Company completed this acquisition primarily in order to diversify the Company’s customer base, to create a wafer-starts-based recurring revenue stream, and to expand the Company’s addressable market. The Company borrowed $350.0 million to finance the acquisition and to refinance its existing indebtedness. See further discussion of the new borrowing arrangements in Note 7 to the Notes to Condensed Consolidated Financial Statements.

The fair value of the earn-out at the acquisition date was determined using the Monte Carlo Simulation, which incorporated risk adjusted revenue projections. These inputs are not observable in the market and thus represent a Level 3 measurement as discussed in Note 1 of the Company’s Condensed Consolidated Financial Statements.

The Company has preliminarily allocated the purchase price of QGT to the tangible assets, liabilities and identifiable intangible assets acquired, based on their estimated fair values. The excess of purchase price over the aggregate fair value was recorded as goodwill. Goodwill associated with the acquisition is primarily attributable to the future technology, market presence and knowledgeable and experienced workforce. Although goodwill is not amortized for financial accounting purposes, it is amortized in its entirely for tax purposes over fifteen years. 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 QGT’s acquisition date.

The Merger Agreement contains customary representations and warranties between the Company and QGT, who agreed to indemnify each other for certain breaches of representations, warranties, covenants and other specified matters. Approximately $2.3 million of the purchase price was placed in escrow as security for post-closing working capital adjustments. In addition, approximately $3.4 million of the purchase price was placed in escrow as security for the QGT’s indemnification obligations during the escrow period. The Company also obtained representation and warranty insurance as an additional source of recourse for certain losses in excess of the amount of funds in the indemnity escrow account.

On March 31, 2014, QGT purchased 51% of the outstanding shares of Cinos Co., Ltd., a 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 60% interest in a joint venture (Cinos Xian Clean Technology, Ltd.), in China. In connection with the acquisition, the Company is obligated to purchase shares held by two other shareholders of Cinos Co., Ltd. representing a combined 35% interest. The carrying value of the remaining 14% interest held by others in Cinos Co., Ltd. and the 40% interest in the China joint venture are presented as noncontrolling interests in the accompanying consolidated financial statements. The fair values of the noncontrolling interests were estimated based on the values of Cinos Co., Ltd. and Cinos Xian Clean Technology, Ltd. on a 100% basis. The values were calculated based on the pro-rata portion of total forecasted Q4 2018 QGT earnings before interest expense, taxes, depreciation and amortization ("EBITDA") contributed by each entity. Management indicated that each entity's pro-rata portion of EBITDA was reasonably reflective of each entity's invested capital value at the acquisition date.

The stock purchase obligation requires the Company to purchase stock owned by one Cinos Co., Ltd. shareholder at a fixed price per share, while the purchase price per share for the other shareholder is the greater of the then fair value of the stock and the fixed price per share (floor). The Company has a firm obligation to purchase the shares and a call option, while the two shareholders have a put option. Accordingly, the fair value of the obligation of $8.6 million has been recorded as a non-current liability in the accompanying consolidated balance sheets and represents a Level 3 measurement as discussed in Note 1 of the Company’s Condensed Consolidated Financial Statements.

The agreement with Cinos Co., Ltd. allows for the purchase obligation to become due at various times through December 2022.

In March 2018, QGT transferred 39,000 shares of its Cinos Co., Ltd stock to Cinos Co., Ltd. The shares are to be held as treasury stock and may be repurchased by the Company in the future.

At the acquisition date, Cinos held bank debt in the amount of $30.0 million. The debt was not assumed by the Company and therefore is not included in the purchase price allocation. The Company paid the sellers of QGT the purchase price net of the debt. During the quarter ended September 28, 2018, the Company made a partial payment to the Cinos bank for $1.2 million and the remaining balance of $28.8 million was settled in October 2018.

The allocation of the purchase price is preliminary pending the completion of various analyses and the finalization of estimates. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities, primarily property and equipment, intangible assets, finalization of a working capital adjustment per the merger agreement and residual goodwill. During the measurement period, which can be no more than one year from the date of acquisition, we expect to continue to obtain information to assist us in determining the final fair value of the net assets acquired at the acquisition date during the measurement period. Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. Thus, the provisional measurements of fair value discussed above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

Fair Market Values (in thousands)
Cash and cash equivalents	$	18,991
Accounts receivable		18,683
Inventories		474
Prepaid expenses and other		13,194
Property and equipment		98,738
Goodwill		66,622
Purchased intangible assets		176,200
Total assets acquired		392,902
Accounts payable		(9,362	)
Accrued compensation and related benefits		(2,904	)
Other current liabilities		(8,945	)
Other liabilities		(13,115	)
Noncontrolling interest		(12,413	)
Total liabilities assumed		(46,739	)
Purchase price allocated	$	346,163

			Purchased
	Useful Life		Intangible Assets
	(In years)		(In thousands)
Customer relationships		10	$	79,500
Trade name		4		14,900
Recipes		20		73,200
Standard operating procedures		20		8,600
Total purchased intangible assets			$	176,200

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.

The results of operations for the Company for the nine months ended September 28, 2018 include operating activity for QGT since its acquisition date of August 27, 2018. For the three and nine months ended September 28, 2018, net sales of approximately $22.5 million attributable to QGT were included in the consolidated results of operations. For the three and nine months ended September 28, 2018, results of operations included charges of $1.3 million, attributable to amortization of purchased intangible assets and $9.4 million of deal costs associated with the acquisition. Deal costs are included in general and administrative expenses in the Company’s condensed consolidated results of operations.

The following unaudited pro forma consolidated results of operations assume the acquisition was completed as of the beginning of the year of the reporting periods presented. The unaudited pro forma consolidated results of operations for the three and nine months ended September 28, 2018 and September 29, 2017 (in thousands, except per share amounts) as follows:

	Three Months Ended					Nine Months Ended
	September 28,			September 29,		September 28,		September 29,
	2018			2017		2018		2017
Net sales	$	269,588		$	298,180	$	992,514	$	836,246
Net income	$	(3,343	)	$	16,438	$	31,321	$	46,903
Basic earnings per share	$	(0.09	)	$	0.49	$	0.82	$	1.41
Diluted earnings per share	$	(0.09	)	$	0.48	$	0.81	$	1.37

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 reflect the related income tax effect. The unaudited pro forma results for the three and nine months ended September 28, 2018 include acquisition related costs of $9.4 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 would have been realized had UCT and QGT been a combined company during the specified periods. The unaudited pro forma condensed 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.

Quantum Facility Fire

In September 2018, a fire in a facility owned by a Korean subsidiary of QGT destroyed certain assets, including the building, acquired in the QGT acquisition. The Company recorded an impairment loss of $5.2 million for the net book value of a building and related assets. The Company expects receipt of insurance recoveries up to the recorded impairment losses and concurrently recorded a receivable and gain of $5.2 million. The fire also destroyed inventory owned by one of its customers. The Company is currently in the process of determining the cost of this inventory. The Company was able to minimize the impact on the Company’s revenue stream by utilizing its other local facilities and moving its labor force in quick order. The Company does not expect insurance proceeds to be in excess of recorded losses at this time, but continues to evaluate additional potential losses and related insurance claims.