0001564590-20-021826.txt : 20200506 0001564590-20-021826.hdr.sgml : 20200506 20200506150704 ACCESSION NUMBER: 0001564590-20-021826 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 82 CONFORMED PERIOD OF REPORT: 20200327 FILED AS OF DATE: 20200506 DATE AS OF CHANGE: 20200506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Ultra Clean Holdings, Inc. CENTRAL INDEX KEY: 0001275014 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 611430858 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-50646 FILM NUMBER: 20852315 BUSINESS ADDRESS: STREET 1: 26462 CORPORATE AVENUE CITY: HAYWARD STATE: CA ZIP: 94545 BUSINESS PHONE: (510) 576-4400 MAIL ADDRESS: STREET 1: 26462 CORPORATE AVENUE CITY: HAYWARD STATE: CA ZIP: 94545 FORMER COMPANY: FORMER CONFORMED NAME: ULTRA CLEAN HOLDINGS INC DATE OF NAME CHANGE: 20031231 10-Q 1 uctt-10q_20200327.htm 10-Q uctt-10q_20200327.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 27, 2020

or

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

For the transition period from                      to                     

Commission file number 000-50646

 

Ultra Clean Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

61-1430858

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

26462 Corporate Avenue, Hayward, California

 

94545

(Address of principal executive offices)

 

(Zip Code)

 

(510) 576-4400

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.001 per share

 

UCTT

 

The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

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

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

 

Number of shares outstanding of the issuer’s common stock as of April 24, 2020: 39.9 million

 

 

 


ULTRA CLEAN HOLDINGS, INC.

TABLE OF CONTENTS

 

 

- 2 -


PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

March 27,

 

 

December 27,

 

(In millions, except par value)

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

208.1

 

 

$

162.5

 

Accounts receivable, net of allowance for doubtful accounts of $0.2 at

   March 27, 2020 and $0.3 at December 27, 2019

 

 

113.2

 

 

 

112.7

 

Inventories

 

 

187.0

 

 

 

172.4

 

Prepaid expenses and other current assets

 

 

19.6

 

 

 

19.4

 

Total current assets

 

 

527.9

 

 

 

467.0

 

Property, plant and equipment, net

 

 

143.4

 

 

 

145.3

 

Goodwill

 

 

171.1

 

 

 

171.1

 

Intangibles assets, net

 

 

175.4

 

 

 

180.3

 

Deferred tax assets, net

 

 

13.9

 

 

 

15.5

 

Operating lease right-of-use assets

 

 

35.6

 

 

 

34.9

 

Other non-current assets

 

 

4.9

 

 

 

5.2

 

Total assets

 

$

1,072.2

 

 

$

1,019.3

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Bank borrowings

 

$

8.3

 

 

$

8.8

 

Accounts payable

 

 

129.3

 

 

 

133.1

 

Accrued compensation and related benefits

 

 

25.0

 

 

 

24.8

 

Operating lease liabilities

 

 

13.4

 

 

 

13.2

 

Other current liabilities

 

 

37.0

 

 

 

30.7

 

Total current liabilities

 

 

213.0

 

 

 

210.6

 

Bank borrowings, net of current portion

 

 

323.9

 

 

 

283.4

 

Deferred tax liabilities

 

 

24.6

 

 

 

25.2

 

Operating lease liabilities

 

 

28.8

 

 

 

28.8

 

Other liabilities

 

 

19.1

 

 

 

18.8

 

Total liabilities

 

 

609.4

 

 

 

566.8

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

UCT stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock — $0.001 par value, 10.0 shares authorized; none

   outstanding

 

 

 

 

Common stock — $0.001 par value, 90.0 shares authorized; 39.9 shares

   issued and outstanding at March 27, 2020 and December 27, 2019

 

 

0.1

 

 

 

0.1

 

Additional paid-in capital

 

 

304.0

 

 

 

300.9

 

Common shares held in treasury, at cost, 0.6 shares at March 27, 2020

   and December 27, 2019

 

 

(3.3

)

 

 

(3.3

)

Retained earnings

 

 

149.7

 

 

 

140.3

 

Accumulated other comprehensive loss

 

 

(4.6

)

 

 

(1.3

)

Total UCT stockholders' equity

 

 

445.9

 

 

 

436.7

 

Noncontrolling interests

 

 

16.9

 

 

 

15.8

 

Total equity

 

 

462.8

 

 

 

452.5

 

Total liabilities and equity

 

$

1,072.2

 

 

$

1,019.3

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

- 3 -


ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Three Months Ended

 

 

 

March 27,

 

 

March 29,

 

(In millions, except per share amounts)

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Product

 

$

259.4

 

 

$

200.2

 

Services

 

 

61.5

 

 

 

59.9

 

Total revenues

 

 

320.9

 

 

 

260.1

 

Cost of revenues:

 

 

 

 

 

 

 

 

Product

 

 

214.7

 

 

174.5

 

Services

 

40.5

 

 

40.8

 

Total cost of revenues

 

255.2

 

 

215.3

 

Gross profit

 

 

65.7

 

 

 

44.8

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

3.4

 

 

3.4

 

Sales and marketing

 

5.8

 

 

5.4

 

General and administrative

 

 

33.9

 

 

27.8

 

Total operating expenses

 

 

43.1

 

 

36.6

 

Income from operations

 

 

22.6

 

 

8.2

 

Interest income

 

 

0.3

 

 

 

0.2

 

Interest expense

 

 

(5.2

)

 

 

(6.6

)

Other income (expense), net

 

 

(2.7

)

 

 

1.1

 

Income before provision for income taxes

 

 

15.0

 

 

 

2.9

 

Provision for income taxes

 

 

4.5

 

 

1.5

 

Net income

 

 

10.5

 

 

 

1.4

 

Less: Net income attributable to noncontrolling interests

 

 

1.1

 

 

 

0.8

 

Net income attributable to UCT

 

$

9.4

 

 

$

0.6

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to UCT common stockholders:

 

Basic

 

$

0.24

 

 

$

0.02

 

Diluted

 

$

0.23

 

 

$

0.02

 

Shares used in computing net income per share:

 

 

 

 

 

 

 

 

Basic

 

 

39.8

 

 

 

39.1

 

Diluted

 

 

40.7

 

 

 

39.4

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

 

- 4 -


ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 27,

 

 

March 29,

 

(In millions)

 

2020

 

 

2019

 

Net income

 

$

10.5

 

 

$

1.4

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment

 

 

(3.2

)

 

 

(0.9

)

Change in defined benefit pension plan net actuarial loss

 

 

(0.1

)

 

 

Total other comprehensive loss

 

 

(3.3

)

 

 

(0.9

)

Other comprehensive income, attributable

   to noncontrolling interests

 

1.1

 

 

 

0.8

 

Comprehensive income (loss) attributable to UCT

 

$

6.1

 

 

$

(0.3

)

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 


- 5 -


ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 27,

 

 

March 29,

 

(In millions)

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

10.5

 

 

$

1.4

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6.4

 

 

 

6.8

 

Amortization of intangible assets

 

 

4.9

 

 

 

4.9

 

Stock-based compensation

 

 

3.1

 

 

 

2.9

 

Amortization of debt issuance costs

 

 

0.4

 

 

 

0.4

 

Loss on the disposal of assets and business

 

 

 

 

 

0.2

 

Deferred income taxes

 

 

1.0

 

 

 

 

Change in the fair value of financial instruments and earn-out liability

 

 

3.0

 

 

 

(1.4

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(0.7

)

 

 

(4.2

)

Inventories

 

 

(14.7

)

 

 

5.5

 

Prepaid expenses and other current assets

 

 

(0.2

)

 

 

(2.4

)

Other non-current assets

 

 

0.3

 

 

 

(0.9

)

Accounts payable

 

 

(4.1

)

 

 

(0.6

)

Accrued compensation and related benefits

 

 

0.2

 

 

 

3.1

 

Income taxes payable

 

 

1.6

 

 

 

1.3

 

Operating lease assets and liabilities

 

 

(0.4

)

 

 

 

Other liabilities

 

 

4.4

 

 

 

1.1

 

Net cash provided by operating activities

 

 

15.7

 

 

 

18.1

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(6.7

)

 

 

(4.8

)

Proceeds from sale of equipment

 

 

 

 

 

0.6

 

Net cash used in investing activities

 

 

(6.7

)

 

 

(4.2

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from bank borrowings

 

 

51.5

 

 

 

6.6

 

Principal payments on bank borrowings and finance leases

 

 

(14.5

)

 

 

(8.9

)

Withholding tax on employee equity compensation

 

 

 

 

 

(0.8

)

Net cash provided by (used in) financing activities

 

 

37.0

 

 

 

(3.1

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(0.4

)

 

 

(0.1

)

Net increase in cash and cash equivalents

 

 

45.6

 

 

 

10.7

 

Cash and cash equivalents at beginning of period

 

 

162.5

 

 

 

144.1

 

Cash and cash equivalents at end of period

 

 

208.1

 

 

$

154.8

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid, net of income tax refunds

 

$

2.0

 

 

$

4.0

 

Interest paid

 

$

4.8

 

 

$

5.6

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property, plant and equipment purchased included in accounts payable and other liabilities

 

$

2.9

 

 

$

7.1

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

 

 

- 6 -


 

ULTRA CLEAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

Treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Shares

 

 

Amount

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity of UCT

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance December 27, 2019

 

 

39.9

 

 

$

0.1

 

 

$

300.9

 

 

 

0.6

 

 

$

(3.3

)

 

$

140.3

 

 

$

(1.3

)

 

$

436.7

 

 

$

15.8

 

 

$

452.5

 

Stock-based compensation expense

 

 

 

 

 

 

3.1

 

 

 

 

 

 

 

 

 

 

 

3.1

 

 

 

 

 

3.1

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

9.4

 

 

 

 

 

9.4

 

 

 

1.1

 

 

 

10.5

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3.3

)

 

 

(3.3

)

 

 

 

 

(3.3

)

Balance March 27, 2020

 

 

39.9

 

 

$

0.1

 

 

$

304.0

 

 

 

0.6

 

 

$

(3.3

)

 

$

149.7

 

 

$

(4.6

)

 

$

445.9

 

 

$

16.9

 

 

$

462.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

Treasury shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Shares

 

 

Amount

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders’

Equity of UCT

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance December 28, 2018

 

 

39.1

 

 

$

0.1

 

 

$

290.4

 

 

 

0.6

 

 

$

(3.3

)

 

$

149.7

 

 

$

(0.6

)

 

$

436.3

 

 

$

14.7

 

 

$

451.0

 

Issuance under employee stock plans

 

 

0.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

2.9

 

 

 

 

 

 

 

 

 

 

 

2.9

 

 

 

 

 

2.9

 

Employees’ taxes paid upon vesting

   of restricted stock units

 

 

(0.1

)

 

 

 

 

(0.9

)

 

 

 

 

 

 

 

 

 

 

(0.9

)

 

 

 

 

(0.9

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

0.6

 

 

 

 

 

0.6

 

 

 

0.8

 

 

 

1.4

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.9

)

 

 

(0.9

)

 

 

 

 

(0.9

)

Balance March 29, 2019

 

 

39.3

 

 

$

0.1

 

 

$

292.4

 

 

 

0.6

 

 

$

(3.3

)

 

$

150.3

 

 

$

(1.5

)

 

$

438.0

 

 

$

15.5

 

 

$

453.5

 

 

(See accompanying Notes to Condensed Consolidated Financial Statements)

 

 

 

- 7 -


ULTRA CLEAN HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization — Ultra Clean Holdings, Inc., (the “Company” or “UCT”) a Delaware corporation, was founded in November 2002 and became a publicly traded company on the NASDAQ Global Market in March 2004. The Company is a global leader in the design, engineering and manufacture of production tools, modules and subsystems for the semiconductor and display capital equipment markets. The Company’s 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 provide part cleaning, surface encapsulation, and high sensitivity micro contamination analysis primarily for the semiconductor device makers and wafer fabrication equipment markets.

Historically, the Company operated under one segment. However, as a result of the acquisition of Quantum Global Technologies, LLC (“QGT”), the Company created an additional segment in the first quarter of 2019. The Company elected to reorganize its organizational and reporting structure to capture efficiencies and operating leverage from its recent acquisition of QGT. Since that time, the Company reports results for two segments: Semiconductor Products and Solutions (“Products” or “SPS”) and Semiconductor Services Business (“Services” or “SSB”).

Basis of Presentation — The unaudited Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). This financial information reflects all adjustments which are, in the opinion of the Company, normal, recurring and necessary for the fair financial statement presentation for the dates and periods presented. Certain information and footnote disclosures normally included in our annual financial statements, prepared in accordance with GAAP, have been condensed or omitted. The Company’s December 27, 2019 balance sheet data were derived from its audited financial statements as of that date.

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 subsidiaries with the ownership interests of minority shareholders presented as noncontrolling interests. All intercompany accounts and transactions have been eliminated upon consolidation.

Noncontrolling interests — The Company recognizes noncontrolling interests 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, 86.0% of whose equity interests the Company is obligated to purchase and whose results the Company consolidates and (2) Cinos Xian Clean Technology, Ltd. (“Cinos China”), a Chinese entity that is 60.0% owned by Cinos. The interest held by others in Cinos Korea and in Cinos China are presented as noncontrolling interests in the accompanying Condensed Consolidated Financial Statements. The noncontrolling interests will continue to be attributed their share of gains and losses even if that attribution results in a deficit noncontrolling interests balance.

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 and reports two segments. See Note 15 to the Company’s Consolidated Financial Statements.

Foreign Currency Translation and Remeasurement

The functional currency of the SPS business unit’s foreign subsidiaries is mostly the U.S. dollar, except for its Czech Republic entity, which is the Euro. The functional currency of the SSB business unit’s foreign subsidiaries is mostly local except for its Singapore entity, which is the U.S. dollar.

- 8 -


 

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 AOCI as a component of 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 are recorded in other income (expense), net.

The functional currency of the Company’s other international subsidiaries are either the U.S. dollar or their local currency. 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 rates of exchange for revenue, costs and expenses. Translation gains and losses are recorded in AOCI as a component of 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 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 revenue recognition, 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.

Two of the Company’s customers accounted for 10% or more of revenues and their related revenues as a percentage of total revenues were as follows:  

 

 

 

Three Months Ended

 

 

 

March 27,

 

 

 

March 29,

 

 

 

2020

 

 

 

2019

 

Lam Research Corporation

 

 

44.6

%

 

 

 

39.6

%

Applied Materials, Inc.

 

 

23.4

%

 

 

 

20.9

%

Total

 

 

68.0

%

 

 

 

60.5

%

 

In addition, three of the Company’s customers: Lam Research Corporation, Applied Materials, Inc. and ASM International, Inc., had accounts receivable balances that were individually greater than 10% of total accounts receivable as of March 27, 2020 and December 27, 2019, and in the aggregate approximately 70.4% and 66.7% of total accounts receivable, respectively.

Fair Value of Measurements — The Company measures its cash equivalents, contingent earn-out liabilities and common stock purchase obligation 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.

- 9 -


 

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

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

Property, Plant and Equipment, net — 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. 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 or 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.

The Company assessed the useful lives of its long-lived assets, including property, plant and equipment as well as its intangible assets as of March 27, 2020 and concluded that no impairment was required.

Leases — The Company determines if an arrangement is a lease, or contains a lease, at the inception of the arrangement. 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 one year or greater 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 consolidated group incremental borrowing rate for all leases. The operating lease ROU asset also includes any lease payments made 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. As allowed by the guidance, 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 March 27, 2020 and at December 27, 2019 were not significant.

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. Costs incurred in connection with revolving credit facilities and letter of credit facilities are deferred and presented as an offset to 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 a noncontributory defined benefit pension plan covering substantially all of the employees of one of its foreign entities upon termination of their employee services. For further discussion of the Company’s defined benefit pension plan see Note 8 of Notes to the Condensed Consolidated Financial Statements.

- 10 -


Revenue Recognition — Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company assesses collectability based on the credit worthiness of the customer and past transaction history. The Company performs on-going credit evaluations of customers and generally does not require collateral from customers.

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 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.

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

The Company continued to maintain a full valuation allowance on its federal and state deferred tax amounts as of March 27, 2020. Income tax positions must meet a more likely than not recognition threshold to be recognized. Income tax positions that previously failed to meet the more likely than not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the Condensed Consolidated Statements of Operations as income tax expense. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a significant 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.

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 14 to the Company’s Condensed Consolidated Financial Statements.

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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

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Although there are several other new accounting pronouncements issued by the FASB, the Company does not believe any of these accounting pronouncements had or will have a significant impact on its consolidated financial statements.

2. BUSINESS COMBINATIONS

Dynamic Manufacturing Solutions, LLC (“DMS”)

On April 15, 2019, the Company purchased substantially all of the assets of DMS, a semiconductor weldment and solutions provider. Pursuant to the purchase agreement, the former owners of DMS are entitled to up to $12.5 million of potential cash earn-out if the combined weldment business achieves certain gross profit and gross margin targets for the twelve months ending June 26, 2020. The fair value of the earn-out at the acquisition date was $1.4 million and was determined using a risk adjusted earnings projection utilizing the Monte Carlo Simulation method. 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 total purchase consideration of DMS for purposes of the Company’s purchase price allocation was determined to be $31.4 million, which includes the cash payment of $29.9 million and the fair value of the potential earn-out payments of approximately $1.5 million.

During the first quarter of fiscal year 2020, the Company reassessed the fair value of the earn-out payment, increasing the fair value from $9.5 million at December 27, 2019 to $12.3 million at March 27, 2020. The increase of $2.8 million was recorded as other expense in the condensed consolidated statement of operations for the three months ended March 27, 2020.

During the quarter ended March 27, 2020, the Company completed the purchase price allocation for the DMS acquisition. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed at the date of acquisition:

 

Fair Market Values (in millions)

 

 

 

 

Accounts receivable

 

$

1.5

 

Inventories

 

 

8.9

 

Equipment and leasehold improvements

 

 

5.4

 

Goodwill

 

 

12.3

 

Purchased intangible assets

 

 

6.9

 

Other non-current assets

 

 

0.3

 

Total assets acquired

 

 

35.3

 

Accounts payable

 

 

(3.8

)

Other liabilities

 

 

(0.1

)

Total liabilities assumed

 

 

(3.9

)

Purchase price allocated

 

$

31.4

 

 

 

 

 

 

 

 

Purchased