C
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.:
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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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes
The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, based on the closing sale price of the Registrant’s common stock on June 26, 2020 as reported on the NASDAQ Global Market, was approximately $
Number of shares of the registrant’s common stock outstanding as of February 19, 2021:
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
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PART I |
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Item 1 |
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3 |
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Item 1A |
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Item 1B |
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27 |
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Item 2 |
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Item 3 |
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Item 4 |
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PART II |
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Item 5 |
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Item 6 |
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Item 7 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A |
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Item 8 |
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Item 9 |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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PART III |
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Item 11 |
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Item 12 |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13 |
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Certain Relationships and Related Transactions and Director Independence |
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Item 14 |
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PART IV |
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Item 16 |
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This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will be,” “will continue,” “will likely results,” variations of such words, and similar expressions are intended to identify such forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, but are not limited to, statements concerning the following: projections of our financial performance, our anticipated growth and trends in our business, levels of capital expenditures, the adequacy of our capital resources to fund operations and growth, our ability to compete effectively with our competitors, our strategies and ability to protect our intellectual property, future acquisitions, customer demand, our manufacturing and procurement process, employee matters, supplier relations, foreign operations, the legal and regulatory backdrop (including environmental regulation), our exposure to market risks and other characterizations of future events or circumstances described in this Annual Report. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Risk Factors,” and elsewhere herein. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Item 1. |
Business |
Overview
Ultra Clean Holdings, Inc., (“UCT”, the “Company” or “We”) is a leading developer and supplier of critical subsystems, ultra-high purity cleaning and analytical services primarily for the semiconductor industry. We operate and report results for two operating segments: Products and Services. Our Products business primarily designs, engineers and manufactures production tools, 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. Our 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 (WFE) markets.
We sell a majority of our products and provide most of our services to U.S. registered customers with locations both in and outside the U.S. In addition to U.S. manufacturing and service operations, we manufacture products and provide parts cleaning and other related services in our Asian and European facilities to support local and U.S. based customers. We conduct our operating activities primarily through our subsidiaries.
Over the long-term, we believe the semiconductor market we serve will continue to grow due to multi-year industry demand from a broad range of drivers including mobile demand driven by 5G, new CPU architectures which are enabling higher performance servers, and cloud, AI and Machine Learning. We also believe that semiconductor original equipment manufacturers (“OEM”) are increasingly relying on partners like UCT to fulfill their expanding capacity requirements. Additionally, our Services business is benefiting as device manufacturers rely on precision cleaning and coating to achieve ever more complex devices.
Our international revenues represented 58.4%, 52.1% and 56.7% of total revenues for fiscal years ended 2020, 2019 and 2018, respectively. See Note 12 to the Notes to Consolidated Financial Statements for further information about our geographic areas.
Our Suite of Offerings
We are a leading developer and supplier of critical subsystems, and ultra-high purity cleaning and analytical services primarily for the semiconductor industry. We offer our customers an integrated outsourced solution for major subassemblies, improved design-to-delivery cycle times, design for manufacturability, prototyping and component manufacturing, and tool chamber parts cleaning and coating, as well as micro contamination analytical services. We offer our customers:
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A vertically integrated solution for complex and highly configurable systems. We provide our OEM customers a broad outsourced solution for the development, design, component sourcing and cleaning, prototyping, |
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engineering, and manufacturing and testing of advanced systems. We utilize our weldment and frame fabrication capabilities with highly specialized engineering, global supply chain management, and assembly capabilities to produce high performance products that are customized to meet the needs of our customers and their customers. We enable our customers to minimize their overall number of suppliers, simplify their supply chain and reduce their inventories. |
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Subsystem manufacturing. Our experience with the demanding requirements in semiconductor equipment manufacturing has enabled us to become a leading developer and supplier of critical modules and subsystems. These assemblies include gas and fluid delivery solutions, wafer transport systems, mechatronic assemblies, and process modules. |
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Improved design-to-delivery cycle times. Our strong customer relationships and familiarity with their product requirements and the ever-changing needs of their customer base help us reduce their design-to-delivery cycle times. We seek to optimize our supply chain management, design and manufacturing coordination and controls to respond rapidly to order requests, enabling us to decrease product design and customization cycle times for our customers. Because our engineers work closely with our customers’ engineers and understand the fabrication, assembly and testing of their products, we often can improve their design for manufacturability, thereby improving their cost, quality and consistency. |
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Component testing capabilities. We utilize our technical expertise to test and characterize key components and subsystems. We have made significant investments in advanced analytical and automated test equipment, enabling us to test and qualify key components. We can perform diagnostic tests, design verifications and failure analyses for our customers and suppliers. |
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Increased integration with OEMs through local presence. Our local presence in close proximity to the facilities of most of our OEM customers enables us to remain closely integrated with their design, development and implementation teams. This level of integration enables us to respond quickly and efficiently to customer changes and requests. |
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Precision fabrication. We design and manufacture weldments and frames with exacting standards to meet or exceed our customers’ needs. UCT’s 25 years of experience in the fabrication of complex components enable us to provide a cost competitiveness in our vertical integration model. Many of our customers require frames that are powder coated and we added this capability in 2016. In 2019, we expanded our weldment capabilities via the acquisition of Dynamic Manufacturing Solutions, LLC (“DMS”). |
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Custom thermal control. We design and manufacture heaters, sensors, and controllers for precise temperature control. These products are complementary to our gas delivery systems products. |
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Parts cleaning and coating and analytical verification: Through our Services business division, we offer integrated device manufacturers (“IDM”) customers validated, ultra-high purity process tool chamber parts cleaning and coating services. Included in these services are tool part process optimization solutions that could lower the total cost of ownership for our customers. We also offer analytical verification of process tool chamber part cleaning effectiveness and micro contamination analysis of tool parts, wafers and depositions, chemicals, cleanroom materials, deionized water and airborne molecular contamination. |
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Our Strategy
Our strategy is to grow our position and enhance our value to our customers as a leading solutions and service provider in the semiconductor markets we serve, while supporting other technologically similar markets in the display, consumer, medical, energy, industrial and research industries. Our strategy is comprised of the following key elements:
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Expand our solutions and service market share with semiconductor OEMs and IDMs. We believe that equipment outsourcing among OEMs creates a significant market opportunity for us to grow our business with existing and new customers. We believe our customers will continue to outsource critical subsystems and that we are well positioned to capture a significant portion of these outsourcing opportunities. We believe that our continued focus on efficient manufacturing, reduced design-to-delivery cycle times, and high quality and reliability will also allow us to gain market share. Similarly, we believe there is room to gain market share with our Services offerings, both with IDMs and OEMs, as customers typically outsource these solutions. By providing customers process improvement through consistently cleaner parts and analytical verification of process tool chamber part cleaning effectiveness, we have expanded our total available market significantly. |
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Develop or acquire solutions that allow our customers to succeed at the leading edge of the semiconductor processing nodes. We continue to expand the number and type of subsystems and services that we offer in the rapidly advancing semiconductor market. |
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Leverage our geographic presence in lower cost manufacturing regions. The diverse footprint of our manufacturing facilities allows us to provide cost competitive solutions. These facilities house subsystem assembly, weldment and thermal control heater operations and put us in close proximity to the manufacturing facilities of existing and potential customers and their end users. In Singapore, we have a procurement office and substantial manufacturing capabilities. Our manufacturing facilities all use similar processes and procedures, enabling us to respond rapidly to demand changes from our customer. UCT is expanding its global footprint into Penang, Malaysia as part of our strategic growth plan. Leasehold improvements should begin in the first quarter of 2021 with initial production scheduled for mid-2021. Several of UCT’s cleaning and analytic facilities are also in low-cost regions, strategically close to our customers, adding to our competitive advantage. |
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Provide production flexibility to respond rapidly to demand changes. Our manufacturing facilities all use similar processes and procedures enabling us to easily shift production between sites to support expanded demand and ensure business continuity. |
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Drive profitable growth with our flexible cost structure. We implement cost containment and capacity enhancement initiatives throughout the semiconductor demand cycle and benefit from the global presence and efficiencies of our supply chain. In addition, we believe our overseas facilities position us to respond effectively to future business demands. We employ a core engineering strategy with flexible partnering to augment our staff during the steep rise and fall often associated with cycles in the semiconductor industry. |
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Continue to selectively pursue strategic acquisitions. We will continue to consider strategic acquisitions that will enable us to improve our financial model, expand our geographic presence, secure new customers and diversify into complementary products and services markets as well as broaden our technological and cleaning and analytical capabilities in the markets we serve. In December, 2020, we entered into a definitive agreement to acquire Ham-Let (Israel-Canada) Ltd., an Israeli company that supplies components to the semiconductor and other industries, for approximately $287.0 million based on the exchange rate in effect at the close of business on December 10, 2020. |
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Strengthen vertical integration. We continue to invest in our operations to meet customer quality and delivery targets. We have expanded welding operations at several of our manufacturing sites, developed/built in-house powder coating capability, and purchased new manufacturing tools. In addition to organic growth, we continue to manage/foster key strategic partnerships to efficiently meet production needs. |
Products
We design, develop, prototype, manufacture and test subsystems, primarily for the semiconductor equipment market. Our products include precision robotic solutions, gas delivery systems, a variety of industrial and automation production equipment products, and subsystems that include wafer cleaning modules, chemical delivery modules, top-plate assemblies, frame assemblies, and process modules.
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Chemical delivery modules: Chemical delivery modules deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber. The module may be a gas delivery system |
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in combination with liquid and vapor precursor delivery systems or may be a liquid delivery system in combination with a liquid storage system. |
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Gas delivery systems: A typical OEM gas delivery system consists of one or more gas lines, comprised of weldments, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system. These systems are typically pallet mounted and are enclosed in a sheet metal encasing. Our gas delivery system designs are developed in collaboration with our customers and are customized to meet the needs of specific processing requirements for OEMs. While several customers specify the full system bill of materials, many leverage our design expertise to help them select the appropriate components for their particular system. |
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Fluid delivery system: A typical OEM liquid delivery system consists of one or more chemical delivery units, comprised of small diameter high purity PFA tubing, filters, flow controllers, regulators, component heaters, and an integrated electronic and/or pneumatic control system. These units are typically contained in a plastic enclosure and further integrated into a frame. Our liquid delivery system designs are developed in collaboration with our customers and are customized to meet the needs of specific processing requirements for OEMs. Although several customers specify the full system bill of materials, many rely on our design expertise and component characterization capabilities to help them select the appropriate components for their particular system. |
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Precision robotics: Precision robotic systems are used when accurate controlled motion is required. Some of the systems that employ robotic systems are: semiconductor wafer and chip handling, wire bonding and industrial equipment. |
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Process modules: Process modules refer to the larger subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers. Process modules include several smaller subsystems such as the frame assembly, top-plate assembly and gas and chemical delivery modules, as well as the chamber and electronic, pneumatic and mechanical subsystems. |
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Other high-level assemblies: Other high-level assemblies refer to large subsystems used in semiconductor manufacturing, display, medical, energy, industrial and research industries. |
Services
Our services business includes ultra-high purity process tool chamber parts cleaning and coating services, tool part life extension and process tool part optimization solutions, and micro-contamination analytical testing, primarily for the semiconductor device manufacturers and wafer fabrication equipment markets.
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Parts cleaning and coating: UCT offers customers validated, ultra-high purity outsourced process tool chamber parts cleaning and coating services. Included in these services are tool part process optimization solutions that can lower the total cost of ownership for our customers. |
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Micro-contamination analysis: UCT also offers micro-contamination analysis of tool parts, wafers and depositions, chemicals, cleanroom materials, deionized water and airborne molecular contamination and provides analytical verification of process tool chamber part cleaning effectiveness. |
Customers
We sell our products and services primarily to customers in the semiconductor capital equipment and semiconductor integrated device manufacturing industries, and we also sell to the display, consumer, medical, energy, industrial, and research equipment industries.
The majority of our total revenues comes from the semiconductor capital equipment industry (OEM customers), which is highly concentrated, so we are therefore highly dependent upon a small number of customers. Our two largest revenue customers in fiscal years 2020, 2019 and 2018 were Applied Materials, Inc. and Lam Research Corporation, each of which accounted for more than 10.0% of our total revenues in fiscal years 2020, 2019 and 2018. As a group, our respective year’s top two customers accounted for 67.1%, 66.9% and 76.6% of the Company’s revenues for fiscal years 2020, 2019 and 2018, respectively.
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Approximately 95.7% of our total revenues for the fiscal year 2020 came from multiple segments of the semiconductor industry, which include IDM, Foundry, OEM, and sub-tier suppliers.
We have successfully been qualified as a supplier of equipment, cleaning, coating and analytical services with each of our customers who require such qualifications. This lengthy qualification process typically involves the inspection and audit of our facilities and evaluation by our customers of our engineering, documentation, manufacturing and quality control processes and procedures. Our customers generally place orders with suppliers who have met and continue to meet their qualification criteria.
Customer Business Management
We sell and support our products and services through our Customer Business Management organization. Our customer relationship directors are responsible for establishing sales strategy and setting the objectives for specific customer accounts. Each customer relationship manager is dedicated to a specific customer account and is responsible for maintaining strong working relationships with that customer, and in many cases provide on-site support. OEM Customer relationship managers often attend customers’ internal meetings related to production and engineering design and quality to ensure that customer expectations are interpreted and communicated properly to our operations group. Customer relationship managers also work with our customers to identify and meet their cost and design-to-delivery cycle time objectives. Our IDM Customer relationship managers work with process tool owners and Fab maintenance managers relating to the development and validation of cleaning recipes, addressing new tools cleaning and analytical requirements, and optimizing cleaning processes and analytical testing requirements to support node transitions.
We have dedicated new business development managers for both our product and service businesses. Our new business development managers initiate and develop long-term, multilevel customer relationships and work closely with them on new business opportunities. Our customer relationship organization includes technical sales support for order placement, spare parts quotes, production status updates as well as service and maintenance contracts and analysis business. We have a technical relationship representative located at most of our facilities.
We integrate new business wins into our facilities via a rigorous product transition process, working in concert with our customers to ensure all production, cleaning and/or test requirements are identified, documented, and validated. We employ the same process at all our sites, enabling products and service offerings to smoothly transition into and between our sites as needed to support customer demand.
In addition, we have developed an overall service and support infrastructure to provide our customers with service and support 24 hours a day, seven days a week. Our dedicated global field service engineers provide customer support through the performance of on-site installation, servicing and repair.
Technology Development
We engage in ongoing technology development efforts to remain a leader for gas delivery systems and to further develop our expertise in other critical subsystems. We work closely with our customers to identify and anticipate changes and trends in next-generation equipment. We participate in customer technology partnership programs that focus on process application requirements for gas and liquid delivery systems and other critical subsystems. These development efforts are designed to meet specific customer requirements in the areas of subsystem design, materials, component selection and functionality. Our technology development group also works directly with our suppliers to help them identify new component technologies and make necessary changes in, and enhancements to, the components that we integrate into our products. Our analytical and testing capabilities enable us to evaluate multiple supplier component technologies and provide our customers with a wide range of appropriate component and design choices for their gas delivery systems and other critical subsystems.
Our analytical and testing capabilities also help us anticipate technological changes and requirements in component features for our core next-generation gas delivery systems and other critical subsystems. We are developing additional features to improve the performance and functionality of our gas delivery systems and other critical subsystems. Our technology development activities for next-generation gas delivery and other critical subsystems are performed principally in Hayward, California.
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We also engage in ongoing technology development to maintain technological leadership in the cleaning, coating and analytical markets. Our Services business works closely with customers to identify and anticipate changes that will be required in next-generation equipment. UCT’s technical capability is becoming extremely critical and differentiated to ensure high wafer yields and throughput as geometries shrink and density increases. Our Services business development activities are performed primarily in Phoenix, AZ.
Intellectual Property
Our success depends in part on our ability to maintain and protect our proprietary technology and to conduct our business without infringing the proprietary rights of others. Both our products and services businesses largely depend upon our design, engineering, manufacturing, testing, cleaning, coating and analytical know-how. We also rely on a combination of trade secrets and confidentiality provisions, and to a much lesser extent, patents, copyrights and trademarks, to protect our proprietary rights. We have 128 patents with various expiration dates and Intellectual Property that we develop on behalf of our customers is generally owned exclusively by those customers.
We require our employees, suppliers and potential business partners to enter into confidentiality and non-disclosure agreements before we disclose to them any sensitive or proprietary information regarding our products, technology or business plans. We require employees to assign to us proprietary information, inventions and other intellectual property they create, modify or improve.
Competition
Our industry is highly fragmented. When we compete for new business, we face competition from other suppliers of gas delivery systems, critical subsystems, cleaning and analytical services, as well as the internal manufacturing and services groups of our customers. Customers that have elected to outsource their gas delivery systems and other critical subsystems including cleaning and analytics, could elect in the future to develop and manufacture these subsystems internally, leading to further competition.
Our principal competitor for gas delivery systems is Ichor Systems, Inc., and our principal competitors for other critical subsystems are Flex Ltd., Foxsemicon Integrated Technology Inc., Jabil, Inc., Sanmina Corporation, Fujikin Incorporated, VDL ETG and Celestica Inc. Some of these competitors have substantially greater financial, technical, manufacturing and marketing resources than we do. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that could adversely affect sales of our current and future products. For our services, cleaning and coating offerings, our main competitors in the US are Pentagon Technologies and Cleanpart, and in South Korea, KoMiCo. For analytical services our primary competitors are Balazs (an Air Liquide company) and Cerium Labs.
The limited number of potential customers in our industry further intensifies competition. The primary competitive factors in our industry are quality, meeting customer timeline demands, price, technology, design-to-delivery cycle time, customer qualification approvals, the development of product recipes for cleaning and analytics and historical customer relationships. We anticipate that increased competitive pressures will cause intensified price-based competition and we may have to reduce the prices of our products. In addition, we expect to face new competitors as we enter new markets.
Governmental Regulation and Environmental Matters
Our operations are subject to federal, state and local regulatory requirements and foreign laws relating to environmental, waste management and health and safety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of contaminants, hazardous substances and waste, as well as practices and procedures applicable to the construction and operation of our UCT facilities.
In 2020, UCT committed to a program titled “SuCCESS2030” designed to enhance the Company’s sustainability vision through its supply chain. UCT will endeavor to identify and coordinate efforts and develop capabilities to ensure its suppliers operate in an ethical, responsible, and sustainable manner. The goal is to build a responsible and sustainable end-to-end supply chain for the future of semiconductors.
UCT participates in the Responsible Business Alliance’s Responsible Minerals Assurance Process for Tantalum. Our cleaning processes for tantalum-deposited parts recovers the tantalum, enabling it to re-enter the commodity market and reduce the demand for mined material, the majority of which originates from the Conflict Region in Africa.
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Although cleaning is a chemical-intensive business, UCT, where possible, utilizes chemical-free processing to remove significant volumes of deposited material. Reduction in the volume of film being chemically removed reduces the amount of chemicals used to meet the target cleanliness specifications.
The semiconductor industry has stringent packaging requirements which include the need to maintain the cleanliness of a part/system while providing structural support of heavy modules. These requirements may necessitate product-specific crates be designed and fabricated or plastic cleanroom boxes be used. To minimize packaging waste UCT has implemented re-use programs for these type of materials with our customers and suppliers.
Our past or future operations may result in injury or claims of injury by employees or the public which may result in material costs and liabilities to us. Although some risk of costs and liabilities related to these matters is inherent in our business, we believe that our business is in compliance with applicable regulations. However, new, modified or more stringent requirements or enforcement policies could be adopted, which could adversely affect us.
Employees and Human Capital
As of December 25, 2020, we had 4,996 employees, of which 641 were temporary. Of our total employees, there were 108 in engineering, 12 in technology development, 295 in sales and support, 3,354 in direct manufacturing, 815 in indirect manufacturing and 412 in administrative and executive functions. These figures include 2,185 employees in Asia and 685 employees in Europe. None of our employees are represented by a labor union and we have not experienced any work stoppages.
UCT believes that its employees are its most important assets. The Company has a long history of embracing diversity and multiculturalism and is reinforcing a culture of inclusion by committing to even greater transparency, clearer targets and comprehensive training to improve diversity and inclusion within the company to ensure every employee is treated with dignity and respect. The ultimate goal is to foster an atmosphere of acceptance, inclusion, trust and of mutual respect for all. To reach that goal, UCT provides mandatory practical and continuous education to all employees on behavioral expectations.
We believe that UCT’s success depends on our ability to attract, develop and retain key personnel. We believe that the skills, experience and industry knowledge of our key employees significantly benefit our operations and performance. The Company strives to provide fair and equal opportunity for career development and advancement to all its employees. UCT offers competitive rewards, compensation and benefits, including an Employee Stock Purchase Plan, healthcare and retirement benefits, parental and family leave, adoption credits, holiday and paid time off, and tuition assistance. Ensuring employee health and safety in the workplace is one of our core values. The COVID-19 pandemic has further reinforced the importance of keeping our employees safe and healthy. In response to the pandemic, we have taken actions aligned with the World Health Organization and the Centers for Disease Control and Prevention in an effort to protect our workforce so they can more safely and effectively perform their work.
UCT uses its annual operating plan and industry growth projections to determine the appropriate level of staffing requirements. Staffing levels are aligned and adjusted on occasion throughout the year to ensure UCT meets its customer obligations, in line with any changes in demand, to ensure business continuity. UCT is fully staffed to meet current demand.
Social Responsibility
UCT believes that Social responsibility is defined as ‘sustaining the equilibrium between the business of the Company and the communities where it works and lives. UCT applies its Core Values to employee engagement inside and outside the company. Positively involving employees and giving back to communities is central to UCT’s culture. Supported by the Company, UCT employees contribute directly to the community with their time and resources. In 2020, UCT organized and conducted 15 events designed to give back and support its communities. For 2021, the Company and its employees have committed to 26 events in support of its social responsibility program.
Available Information
We file with the Securities and Exchange Commission (“SEC”) annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
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1934, as amended, or the Exchange Act. You may read and copy any materials we file with the SEC at the Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may also request copies of all or any portion of such material from the SEC at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. In addition, materials filed electronically with the SEC are available at the SEC’s website at http://www.sec.gov.
In addition, we make available free of charge, on or through our website at http://www.uct.com, our annual, quarterly and current reports and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only; none of the information contained on our website is part of this report or is incorporated by reference herein.
Executive Officers
Set forth below is information concerning our executive officers as of February 19, 2021.
Name |
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Age |
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Position |
James P. Scholhamer |
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54 |
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Chief Executive Officer & Director |
Sheri Savage |
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50 |
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Chief Financial Officer |
Vijay S. Chinnasami |
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55 |
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Chief Operating Officer |
W. Joseph Williams |
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48 |
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President, Products Business |
William C. Bentinck |
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59 |
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President, Services Business |
Chris P. Siu |
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50 |
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Senior Vice President, Chief Accounting Officer |
Joan Sterling |
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63 |
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Senior Vice President, Human Resources |
Paul Y. Cho |
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43 |
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General Counsel, Corporate Secretary |
James P. Scholhamer joined the Company as Chief Executive Officer and a member of our Board of Directors in January 2015. Prior to joining Ultra Clean, Mr. Scholhamer served as Corporate Vice President and General Manager of Applied Materials, Inc., leading the Equipment Products Group and Display Services Group of its Global Service Division from February 2011 to January 2015. Mr. Scholhamer joined Applied Materials, Inc. in 2006, where, prior to his most recent position, he served as Vice President of Operations-Energy, for the Environmental and Display Products Division from July 2006 to December 2008 and Corporate Vice President and General Manager of the Display Business Group from December 2008 to February 2011. Prior to that, Mr. Scholhamer worked for Applied Films Corporation as Vice President of Operations, Engineering and Research Development in the company’s German office from September 2002 to July 2006 and as Vice President of Thin Film Coating Division and Thin Film Equipment Division in the company’s Colorado office from July 2000 to September 2002. Mr. Scholhamer holds a Bachelor of Science degree in Materials and Metallurgical Engineering from the University of Michigan.
Sheri Savage has served as our Chief Financial Officer since July 2016. Ms. Savage joined the Company as the Senior Director of Finance in April 2009. She was Senior Vice President of Finance and Chief Accounting Officer from February 2016 to July 2016. Prior to joining the Company, Ms. Savage served at Credence Systems Corporation, a manufacturer of test equipment for the global semiconductor industry, as its Corporate Controller and Vice President of Finance from February 2008 to February 2009 and as Director of Internal Audit from May 2006 to February 2008. Prior to Credence Systems, Ms. Savage served in various accounting and finance roles at Protiviti, a global business consulting and internal audit firm, and KLA-Tencor Corporation, a supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Ms. Savage also served as Manager, Business Process Risk Accounting, at Arthur Anderson LLP, the former accounting firm, from May 1996 to October 1999. Ms. Savage holds a Bachelor of Science degree in Managerial Economics from the University of California, Davis.
Vijayan S. Chinnasami has served as our Chief Operating Officer since April 2019. Prior to joining the Company, Mr. Chinnasami served as the Senior Vice President of EMS Operations at Jabil Inc. from March 2017 to March 2019, as Chief Executive Officer of CaliBurger (Malaysia) from January 2015 to January 2017 and as Chief Executive Officer of Advanced Optronic Devices (Malaysia) from January 2014 to January 2017. Prior to that, Mr. Chinnasami served in various capacities with SunEdison International, Inc. (formerly MEMC Electronic Materials, Inc.), including most recently as Senior Vice President, Solar Materials, from May 2010 to August 2014, where his
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responsibilities included the executive management of the polysilicon, wafer, cell and module businesses. Mr. Chinnasami’s previous roles have also included Senior Vice President, Industrial Business Unit at Johnson Electric Health Hong Kong and Vice President and General Manager, Consumer Segment of Flextronics International, Ltd. Mr. Chinnasami holds a Bachelor’s degree in Production Engineering from Swinburne University of Technology.
W. Joseph Williams has served as our President, Products business since October of 2018. Prior to that Mr. Williams served as our Senior Vice President of Customer Business Management from October 2016 to October 2018. Mr. Williams joined the Company in February 2015 with the acquisition of Marchi Thermal Systems, Inc. where he served as President until 2016. Prior to joining the Company in 2015, Mr. Williams was President of Thermal from April 2013 to 2015. He worked previously at the Company as Vice President of New Business Development. Mr. Williams was Senior Vice President of Business Development & Engineering at Advanced Integration Technology from 2007 to 2013. Prior to that, Mr. Williams co-founded Integrated Flow Systems and served as Vice President of Engineering and Operations and Director of Engineering and Operations from 1997 to 2007. He worked at Watkins-Johnson Company as a R&D Mechanical Design Engineer from 1994 to 1997. Mr. Williams holds a Bachelor of Science degree in Mechanical Engineering from North Carolina State University.
William C. Bentinck has served as our President, Semiconductor Services Business since May 2019. Mr. Bentinck joined the Company as Senior Vice President, Semiconductor Services Business, in March 2019. Mr. Bentinck previously served as Executive Vice President and General Manager of Eugenus, Inc., a semiconductor equipment manufacturing company, from November 2017 to June 2018. Prior to that, Mr. Bentinck served as Vice President and General Manager of the Logic & Memories Technology Group for AIXTRON Inc., a manufacturer of systems and equipment to the semiconductor industry, from April 2014 to November 2017. From August 2006 to March 2014, Mr. Bentinck served as General Manager, Customer Support Business Group (Spares & Services) for Lam Research Corporation, a global supplier of wafer fabrication equipment and services to the semiconductor industry. Prior to Lam Research Corporation, Mr. Bentinck served in various roles of increasing responsibility at Novellus Systems, Inc., a provider of advanced process equipment for the global semiconductor industry, from 1991 through August 2006. Mr. Bentinck holds a Bachelor of Science degree in Chemical Engineering, and a Master of Science degree in Engineering – Material Science, from California State Polytechnic University, Pomona.
Chris P. Siu has served as our Senior Vice President, Chief Accounting Officer since May 2019. Prior to joining the Company, Mr. Siu served as Vice President of Finance at PDF Solutions, Inc., a provider of differentiated data and analytics solutions to the semiconductor industry, since October 2018. Prior to PDF Solutions, Mr. Siu served at GLOBALFOUNDRIES, Inc., a foundry for the semiconductor industry, as its Corporate Controller from June 2014 to October 2018, and in other executive roles from November 2010 to June 2014. Prior to that, Mr. Siu served at Trident Microsystems, Inc. a provider of high-performance multimedia semiconductor solutions, as its Chief Accounting Officer and Director of Finance from February 2007 to November 2010. Prior to Trident Microsystems, Mr. Siu served at Varian Medial Systems, Inc., a manufacturer of medical devices for the treatment of cancer, in different finance management roles from June 2004 to February 2007. Prior to that, he worked for Deloitte & Touche from 2001 to 2004 and for Ernst & Young from 1996 to 2001. Mr. Siu holds a Bachelor of Science degree in Accounting from Brigham Young University in Hawaii and a Master of Business Administration degree from the University of California at Berkeley. Mr. Siu is a Certified Public Accountant (inactive) in California.
Joan Sterling has served as our Senior Vice President of Global Human Resources since 2016. Ms. Sterling joined the Company in March 2013 as Director of Global Human Resources. Prior to joining the Company, Ms. Sterling was the Human Resources Director for Engineering and Broadcast Operations at SiriusXM Satellite Radio from 2009 to 2013. She worked at Hitachi Data Systems from 2007 to 2009 as an executive change management consultant for a global IT redesign. Ms. Sterling served as Human Resource Senior Vice President for the consumer credit group at Wells Fargo from 2005 to 2007. From 2000 to 2005, Ms. Sterling served in several senior director roles at Hewlett Packard managing human resources sites and functions of staffing, compensation, benefits, training and development. She was the Corporate Director of Human Resource Strategic Planning for First Energy Corporation from 1999 to 2000. She worked at Hewlett Packard Enterprise from 1994 to 1999 as the Midwest Region Headquarters Human Resource Manager. Ms. Sterling holds a Bachelor of Science degree in Business from DePaul University and a Master of Arts degree in Organizational Development from Loyola University.
Paul Y. Cho has served as our General Counsel and Corporate Secretary since October 2019. Mr. Cho brings over a decade of experience in various legal disciplines, including IP and commercial litigations, joint venture projects, and commercial transaction work. Most recently, from April 2016 to October 2019, Mr. Cho held the position of General Counsel and Corporate Secretary for the North American operations of the world’s second largest memory chip
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supplier, SK Hynix, Inc., and held the position of Senior Counsel at its corporate headquarters from September 2014 to March 2016. Prior to SK Hynix Inc., Mr. Cho served as Senior Legal Counsel for Samsung SDI, a storage battery manufacturing company, from June 2013 to September 2014 and as Legal Counsel for LG Electronics, an electronics company, from April 2012 to May 2013. Mr. Cho holds a Bachelor of Arts in English from the University of Michigan and a Juris Doctor Degree from the University of Minnesota Law School.
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Item 1A. |
Risk Factors |
The following risk factors could materially and adversely affect the Company’s business, financial condition or results of operations and cause reputational harm, and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.
COVID-19 outbreak continues to adversely affect semiconductor industry
The COVID-19 outbreak, and our value chain and global governmental responses to contain its spread, have impacted all levels of the semiconductor industry and supply chain. These governmental measures, including stay-at-home orders, travel bans and business closures, as well as our own efforts to minimize the impact of COVID-19 on our employees, suppliers and customers, have detrimentally affected, and are continuing to affect, our business operations by: causing production delays and capacity reduction; requiring the deployment of business continuity plans, including the implementation of social distancing guidelines, travel restrictions, work-from-home arrangements, and testing and quarantine guidelines; disrupting the operations of our supply chain; and delaying nonessential expansion projects.
The scale and duration of this ongoing pandemic and the effectiveness of response measures in curbing its impact, including distribution of COVID-19 vaccines and government stimulus programs, are fraught with uncertainty, which makes it difficult to estimate their ongoing impact on our business and global economy.
Because the ongoing impact of the pandemic on our business is largely dependent upon current and future response measures outside of our control, we cannot with any degree of confidence provide assurance that we will be able to maintain the current level of production, as we may see a decrease in customer spending, demand for our products, delays and capacity limitations at our (and our customers’ and suppliers’) manufacturing facilities, and other adverse impacts on global economy, any one of which can have material adverse impact on our business.
The cyclical and highly volatile nature of the industries we serve could harm our operating results.
Our business depends in large part upon capital expenditures by manufacturers in the semiconductor and display industries, which in turn depend upon the current and anticipated market demand for such products. These industries (especially the semiconductor industry) have historically been highly cyclical, with recurring periods of over-supply of products that have materially reduced the demand for both the capital equipment and the services required to manufacture such products. We likely will continue to experience significant fluctuations in customer orders through such cycles. Although some of our business, including the cleaning, coating and analytical services that support the semiconductor chip market, are less susceptible to such fluctuations, recurring slowdowns in the industries we serve have had material adverse effects on our overall operating results. Demand shifts in these industries are rapid and difficult to predict, and we may not be able to anticipate or respond quickly enough to changes in demand.
Our revenues in periods of increasing demand depends, in part, upon our ability to: timely mobilize our supply chain to maintain component and raw material supply; optimize our design, mobilize our engineering and manufacturing capacity in a timely manner; expand, as necessary, our manufacturing, cleaning, coating and analytical services capacity; and maintain our product and service quality as we increase production. If we fail to timely respond to rapid increases in demand for our products and services, or to effectively manage the corresponding expansion of our manufacturing and service capacity, our customers may divert their purchases of products and services from us to our competitors.
Our ability to remain profitable and mitigate the impact on our business in periods of decreasing demand depends, in part, upon our ability to maintain the prices, quality and delivery cycles of our products and services while managing costs by optimizing our inventory levels, reducing or canceling orders from our suppliers, all without compromising our relationships with such suppliers; and to continue to motivate our employees while we reduce our fixed and variable costs through a number of initiatives, which may include reducing our workforce.
The limited visibility we have on the future needs of our customers, combined with the cyclical and volatile nature of the industries we serve, makes future revenues, results of operations and net cash flows difficult to estimate.
We rely on a small number of OEMs and IDMs for a large portion of our revenues, who could stop outsourcing critical subsystems or part cleaning, coating or analytical services, or give market share to our competitors.
A small number of OEM customers have historically accounted for a significant portion of our revenues, and we expect this trend to continue. Our top two customers accounted for 67.1%, 66.9% and 76.6% of our revenues for
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fiscal years 2020, 2019 and 2018, respectively. Because most of these customers are not contractually obligated to place any orders with us, the success of our products business largely depends on these OEMs’ own discretion, which discretion is buttressed by the fact that the OEMs generally own, and are therefore free to license as they see fit, the designs and other intellectual property to the products we manufacture for them. And since most of these OEMs are already our customers, any lost revenue resulting from the loss, reduction, cancellation or delay in purchase orders by, any one of these customers would be difficult to replace. In the past, we have seen our business levels reduced from customers who have taken the manufacturing of our products in-house, given market share to our competitors, or declared bankruptcy.
Our Services business provides part cleaning, coating and analytical expertise to both IDM and OEM customers. Our IDM business is similarly concentrated in a small number of customers, and we compete with in-house capabilities, the OEMs who perform cleaning as part of service contracts, and businesses that provide similar cleaning, coating and analytical services. The OEM customer profile of our Services business has significant overlap with our Products business, and we compete against other providers of cleaning, coating and analytical services. Because our cleaning and analytical processes are proprietary to us, our customers may need to go through a new qualification process if they decide to transition to a new service provider.
Consolidation among our customers, or a decision by any one or more of our customers to outsource all or most manufacturing, assembly, cleaning, coating and analytical services work to a single equipment manufacturer, may further concentrate our business in a limited number of customers and expose us to increased risks relating to dependence on an even smaller number of customers.
Our customers also exert a significant amount of negotiating leverage over us, which may force us to accept lower operating margins, increased liability risks or changes in our operations in order to retain their business.
Due to their size and level of contribution to our revenue, our largest customers are able to exert significant pressure to seek various concessions in our commercial agreements and individual purchase orders. Our customers often require reduced prices or other quality, manufacturing or delivery commitments as a condition to placing purchase orders. This could, among other things, result in reduced operating margins or require capital or other expenditures in order to maintain or expand our market share. Further, these customers may require us to agree on certain terms and conditions that shift certain risks onto us. For example, our customers generally require indemnity against certain liabilities, which may include claims of losses by their own customers arising out of property damages, bodily injuries or deaths, or infringement of intellectual property rights by our products. Our potential liability for infringing upon a third party’s intellectual property is generally uncapped, and in some cases, we have self-insured against these liability risks, such that we do not have a third-party insurer to reimburse us against these losses. Our customers may also pressure us to make other concessions in order to preserve or expand our market share with them. For example, customers may prevent us from moving our manufacturing sites from higher-cost regions to lower-cost regions, while simultaneously seeking price reductions. If we are unable to retain and expand our business on favorable commercial terms, our business will be adversely affected and we may be susceptible to increased liability risk.
Our dependence on our suppliers may prevent us from delivering an acceptable product on a timely basis.
We rely on both single-source and sole-source suppliers, many of whom have been specifically designated by our customers, for many of the components and raw materials we use in our products and services. If a supplier, who may not be under any long-term supply obligations, fails to provide the necessary volume of supplies, components or raw materials on a timely basis and at acceptable prices and quality, we would be forced to identify and qualify replacements from alternative sources. The process of qualifying new suppliers for complex components and raw materials is lengthy and could delay our production or delivery of services.
We may also experience difficulty in obtaining sufficient supplies of components and raw materials in times of growth in our business. In the past, we have experienced shortages in supplies of various components, such as mass flow controllers, valves and regulators, and certain prefabricated parts, such as sheet metal enclosures, used in the manufacture of our products. Some of the suppliers designated by our customers are also our competitors, which presents a special challenge for us to procure sufficient quantities of the components to meet the customer demands. If we, or our suppliers, are unable to procure sufficient quantities of supplies, components or raw materials, our customers could delay or cancel orders or service contracts.
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The manufacturing of our products and the services we provide are highly complex, and if we are not able to manage our manufacturing and procurement process effectively, our business and operating results will suffer.
The manufacturing of our products is a highly complex process. The services we provide are also highly complex, and dependent upon procuring specialty materials necessary to correctly perform the complex/precise services. Both the manufacturing of our products and the services we provide involve the integration of multiple components and require effective management of our supply chain to meet our customers’ design-to-delivery cycle time requirements. Through the course of the manufacturing process, our customers may modify design and system configurations in response to changes in their own customers’ requirements. In order to respond to these modifications and deliver our products in a timely manner, we must effectively manage our manufacturing and procurement processes, the failure of which can lead to a loss of business and reputational damage. We may also be liable for certain damages under our agreements with our customers, if we or our suppliers fail to effectively or timely re-configure manufacturing processes or components in response to these modifications.
Our inability to successfully manage the implementation of a company-wide enterprise resource planning (“ERP”) system could adversely affect our operating results.
We are continuing the implementation of a new company-wide ERP system. This process has been and continues to be complex and time-consuming and we expect to incur additional capital outlays and expenses. This ERP system will replace many of our existing operating and financial systems, which is a major undertaking from a financial management and personnel perspective. Should the new ERP system not be implemented successfully throughout all our business units on time and within budget, or if the system does not perform in a satisfactory manner, it could be disruptive and adversely affect our operations, including our ability to: report accurate, timely and consistent financial results; purchase supplies, components and raw materials from our suppliers; and deliver products and services to customers on a timely basis and to collect our receivables from them. We have teams leading the implementation of the ERP system at most of our locations. To the extent these teams or key individuals are not retained through the implementation process, the success of our implementation could be compromised and the expected benefits of the ERP system may not be realized.
We are subject to order and shipment uncertainties and any significant reductions, cancellations or delays in customer orders could cause our revenue to decline and our operating results to suffer.
Our revenue is difficult to forecast because we generally do not have a material backlog of unfilled orders and because of the short time frame within which we are often required to design, produce or deliver products to our customers. Most of our revenue depends on customer orders for our products that we receive and fulfill in the same quarter. We generally do not have long-term purchase orders or contracts that contain minimum purchase commitments from our customers. Instead, we receive non-binding forecasts of the future volume of orders from our customers. Occasionally, we order and build component inventory in advance of the receipt of actual customer orders. Customers may cancel order forecasts, change production quantities from forecasted volumes, or delay production for reasons beyond our control, and for which we usually are not entitled to compensation. Reductions, cancellations or delays in forecasted orders could cause us to hold inventory longer than anticipated, which could reduce our gross profit, restrict our ability to fund our operations and cause us to incur unanticipated reductions or delays in revenue. Moreover, many of the products we manufacture are custom built for our customers and are therefore not fungible with products we sell to other customers. If we do not obtain orders as we anticipate, we could have excess component inventory for a customized product that we would not be able to sell to another customer, likely resulting in inventory write-offs. In addition, because many of our costs are fixed in the short term, we could experience deterioration in our gross profit and operating margins when our sales volumes decline.
We hold our customers’ parts on our premises and any significant damage or loss to these parts could cause our operating results to suffer.
In connection with our Services business, we face a number of risks associated with customer parts being held on our property, including the risk of loss or mishandling of, or other damage to, customer parts, any of which could be materially harmful for our business.
Our results of operations, financial position and cash flows may suffer if we do not effectively manage our inventory.
Inventory is one of the largest assets on our balance sheet, representing 16.4% of our total assets as of December 25, 2020. We must manage our inventory of raw materials, work-in-process and finished goods effectively to meet changing customer requirements, while keeping inventory costs down and maintaining or improving gross margins.
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Historically, the industries we serve (in particular the semiconductor capital equipment industry) have been highly cyclical, which makes accurately forecasting customers’ product needs difficult. Although we seek to maintain sufficient inventory levels of materials to guard against interruptions in supply and meet our customers’ needs, we may experience shortages of certain key materials, particularly in times of high industry demand. We also face long lead times from our suppliers, which may be longer than the lead times provided to us by our customers. If we underestimate customer demand or if insufficient manufacturing capacity or raw materials are available, we may have to forego sales opportunities, lose market share and damage our customer relationships.
An overestimation of customer demand may result in allocation of resources to manufacture products that we may not be able to sell, and we may be forced to hold excess or obsolete inventory. Some of our products can become obsolete while in storage due to changing customer specifications, or become excess inventory due to a decrease in demand. Furthermore, if market prices drop below the prices at which we value inventory, we would need to take a charge for a reduction in inventory values in accordance with the applicable accounting rules. Any unexpected changes in demand or increases in costs of production that cause us to take additional charges for un-saleable, obsolete or excess inventory, or to reduce inventory values, would adversely affect our results of operations.
We hold inventory at our various manufacturing sites globally and many of these sites have more than one warehouse. We rely upon our IT systems and internal controls to accurately and timely manage, store and replenish inventory, complete and track customer orders, coordinate sales activities across all of our products and maintain and report vital data and information. A disruption in our IT systems or a failure of our internal controls could result in delays in receiving inventory and supplies, delays in filling customer orders, incorrect inventory counts, over or under stocking, and loss of inventory.
Our customers require our products to undergo a lengthy and expensive qualification process. Any delay or failure in this process could result in a material financial harm.
We have had to qualify as a supplier, and maintain that status, for each of our customers. This is often a lengthy process that normally involves customer inspection and approval of our engineering, documentation, manufacturing and quality control procedures before the customer will place volume orders. Such qualification requirements limit our ability to quickly add new customers to offset any loss of, or reduction in sales to, an existing customer. Moreover, if we fail to maintain our status as a qualified supplier to any of our customers, such customer could cancel its orders or otherwise terminate its relationship with us.
Defects in our products or services could damage our reputation, decrease market acceptance of our products, release hazardous materials, and result in litigation, indemnification liability or unexpected warranty claims.
A number of factors, including design flaws, material and component failures, workmanship issues, contamination in the manufacturing, cleaning, coating or analytical environment, impurities in the materials or chemicals used, equipment failures, and unknown sensitivities to process conditions, such as temperature and humidity, may cause our products to contain undetected errors or defects. Problems with our products may:
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cause delays in product introductions and shipments for us or our customers; |
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result in increased costs and diversion of development resources (for design modifications and others); |
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cause us to incur increased charges due to unusable inventory; |
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result in liability for the unintended release of hazardous materials through the defective products, which can cause serious injury or death; |
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create indemnification and warranty claims for rework, replacement or other damages, which can be significant if our products have already been installed in a fabrication facility; |
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decrease market acceptance of, or customer satisfaction with, our products; and |
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result in lower yields for semiconductor manufacturers. |
Acquisitions could result in operating and integration difficulties, dilution, margin deterioration, diversion of management’s attention, and other consequences that may materially impact our business.
We have made, and may in the future make, acquisitions of, or significant investments in, businesses that offer complementary products, services, technologies or market access. We expect that management will evaluate potential strategic transactions regularly with its advisors and our board of directors in the ordinary course of business. We may not be successful in negotiating the terms of potential acquisitions or financing potential acquisitions, and our due diligence may fail to identify all of the problems, liabilities or other challenges associated
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with an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer retention issues. In addition, we may not be successful in effectively integrating the acquired business, product or technology into our existing business and operations. The areas where we face risks include:
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management of a larger, more complex and capital intensive combined business, including integrating supply and distribution channels, computer and accounting systems, and other aspects of operations; |
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exposure to new operational risks, rules, regulations, worker expectations, customs and practices; |
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inability to complete proposed transactions due to the failure to obtain regulatory or other approvals, litigation or other disputes, and any ensuing obligation to pay a termination fee; |
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reduction of gross margins and pricing leverage due to the acquired company having the same customer base; |
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failure to realize expected returns from acquired businesses; |
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reduction in cash balances or increase in debt obligations to finance the acquisition, which may reduce the availability of cash flow for general corporate or other purposes; |
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integration of the capabilities of the acquired businesses without reducing the quality of existing products; |
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incorporation of different financial and reporting controls, processes, systems and technologies into our existing business environment; |
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unforeseen liabilities, expenses, or other losses associated with the acquisitions for which we do not have recourse under their respective agreements; |
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the risk of litigation or claims associated with a proposed or completed transaction; |
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inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, or environmental, health and safety, anti-corruption, human resource or other policies or practices; |
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performance shortfalls as a result of the diversion of management’s attention from the Company’s operations; |
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cultural challenges associated with integrating employees from the acquired business into our organization, and incentivization and retention of employees from the businesses we acquire; and |
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difficulties associated with the retention and transition of new customers and partners into our existing business. |
If we fail to address these risks, we may not be able to realize the anticipated benefits of such acquisitions or investments and incur unanticipated liabilities and substantial costs, materially harming our business in the process.
Our acquisitions could also result in one or more of the following: dilutive issuances of our equity securities, additional debt, contingent liabilities, amortization expenses, impairment charges and restructuring charges, any of which could harm our financial condition. Also, due to prevailing conditions in the credit market and our existing leverage, the financing of any such acquisition may be difficult to obtain, and the terms of any such financing may not be favorable.
We are continuing our efforts to fully integrate both QGT and DMS businesses. The challenges involved in these integrations include: continuing to maintain customers and other important relationships; continuing to compete effectively in the Services markets; completing the consolidation of IT, finance, general and administrative infrastructures; continuing to improve the coordination of our sales and marketing efforts to effectively position our capabilities; and fully integrating employees and related HR systems and benefits. The integration process continues to require significant management attention and may divert the attention of management from our other business and operational issues.
On December 16, 2020, we entered into an agreement and plan of merger to acquire Ham-Let (Israel – Canada) Ltd., for a total purchase price of approximately NIS 934 million (or approximately $287.0 million based on the exchange rate in effect at the close of business on December 10, 2020). Assuming the merger closes as expected sometime in the second quarter of 2021, this will likely pose additional challenges to the existing integration efforts.
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Our business may be adversely affected by IT disruptions, including by impairing our ability to effectively deliver our products or services, which could cause us to lose customers.
The manufacture and delivery of our products, the provision of our services and our financial reporting depend on the continuing operation of our technology infrastructure and systems, particularly our data center located in California. Any damage to or failure of our systems could result in interruptions in our ability to manufacture or deliver products or services, or adversely impact our ability to accurately and timely report our financial results. Interruptions could reduce our sales and profits, and our systems could be perceived as unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, hardware or software failures, telecommunications failures, cybersecurity attacks, and similar events. Some of the critical components of our system are not redundant and we currently do not have a backup data center.
Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data (our own or that of third parties). Although we have adopted certain measures to mitigate potential risks to our systems from IT-related disruptions, given the unpredictability of the timing, nature and scope of such disruptions, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operations or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our business. For example, in August 2020, a third party gained unauthorized access to some of our data by launching a cyberattack on some of our servers. While the attack has had no material impact on our operations, we had to expend significant amount of time and resources to complete our remedial actions, including notifying all affected individuals and relevant state regulatory agencies.
If we experience frequent or persistent system failures, the attractiveness of our products or services to customers could be permanently harmed. Any steps we take to increase the reliability and redundancy of our systems may be expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled interruptions.
We are exposed to risks associated with volatility in the global economy.
We rely heavily on OEM customers for the success of our business. The success of OEMs’ business is, in turn, directly related to the success of the IDMs and other chipmakers, whose customers are engaged in consumer-facing businesses. Much of our success, therefore, depends on consumer spending and capital expenditures by retail businesses. Uncertainty regarding the global economy may exacerbate negative trends in business and consumer spending, which may cause our customers to scale back operations, reduce capital expenditures, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations. Our customers may then be forced to push out, cancel or refrain from placing orders for our products or services. These conditions may also similarly affect key suppliers, impairing their ability to timely deliver components or raw materials. We may then be forced to procure components or raw materials from higher-cost suppliers or reconfigure the design and manufacture of our products or services, which may eventually lead to our failure to fill customer orders. Inflationary trends, which are especially unpredictable in the COVID-19 world, could also have a negative impact on many aspects of our cost structure.
Escalating trade tensions and the adoption tariffs and trade restrictions could negatively impact us.
International trade tensions or trade wars, as well as other changes in social, political, regulatory and economic conditions or laws and policies, could have a material adverse impact on our business. We and our customers have significant operations in China, with whom the United States has recently reached a “Phase One” trade deal to ease the trade tension between the two countries. The impact of such trade deal on current tariffs and its continual applicability under the new U.S. administration are difficult to predict. Any newly imposed or threatened U.S. tariffs and retaliatory tariffs could have the negative effect of increasing the cost of materials for our products, which could result in our products becoming less competitive or generating lower margins. Also, the United Kingdom’s (UK) withdrawal from the European Union (EU) (“Brexit”) has created significant uncertainty concerning the future relationship between the UK and the EU and the impact on global markets. UK and EU recently agreed on a trade deal, but it remains unclear what financial, trade, regulatory and legal implications the trade deal will have and how such it will affect us. The economic uncertainty created by Brexit may cause our
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customers to closely monitor their costs and reduce their spending budgets, which could have a material adverse impact on our business, financial condition and results of operations.
Other changes in U.S. or international social, political, regulatory and economic conditions or laws and policies governing tax laws, foreign trade, manufacturing, and development and investment in the countries where we or our customers operate could also adversely affect our operating results and our business. International trade disputes could result in increases in tariffs and other trade restrictions and protectionist measures that could adversely impact our operations and reduce the competitiveness of our products relative to local and global competitors.
We have significant existing indebtedness; the restrictive covenants under our credit agreement or other limitations on financing may limit our ability to expand or pursue our business strategy; if we are forced to pay our indebtedness prior to its maturity, our financial position could be materially and adversely affected.
As of December 25, 2020, we have total debt of $269.0 million. Such debt is composed of a $275.0 million term loan outstanding under our credit agreement with Barclays Bank and $1.9 under credit facilities in Cinos China less unamortized debt costs of $7.9 million.
Our indebtedness could have adverse consequences, including: allotment of a portion of our cash to interest and principal payments and will therefore not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; and inability to obtain additional financing in the future, if needed. If we are unable to meet our debt obligations as they come due, we could be forced to restructure or refinance such obligations, seek additional equity financing, incur additional debt or sell assets, which we may not be able to do on satisfactory terms, if at all.
Our credit agreement contains certain covenants that restrict our ability to take certain actions, including incurring additional debt, providing guarantees, creating liens, making certain investments, engaging in transactions with affiliates and engaging in certain mergers and acquisitions. We are also required to comply with certain financial covenants, including the maintenance of a maximum consolidated total gross leverage ratio and a minimum fixed charge coverage ratio. Failure to comply with these covenants could result in the acceleration of all of our indebtedness, which could materially and adversely affect our financial health. As long as our indebtedness remains outstanding, the restrictive covenants and mandatory prepayment provisions could impair our ability to expand or pursue our business strategies or obtain additional funding.
We may not be able to fund our future capital requirements or strategic acquisitions from our operations, and financing from other sources may not be available on favorable terms or at all.
We made capital expenditures of approximately $37.2 million and $25.7 million for fiscal years 2020 and 2019, respectively, which are primarily related to our ERP system implementation and to investments in our manufacturing facilities in the United States, China, Singapore and South Korea. The amount of our future capital requirements will depend on many factors, including: the cost associated with the expansion of our manufacturing capacity into Malaysia as part of our strategic growth plan; the cost to maintain appropriate IT systems; the cost to maintain adequate manufacturing capacity; the timing and extent of spending to support product development efforts; the timing of new product introductions and enhancements to existing products; the timing, size and availability of strategic transactions; the cost to integrate our acquisitions into our business environment; changing manufacturing capabilities to meet new or increased customer requirements; market acceptance of our products; and our ability to generate sufficient cash flow from our operating activities.
In order to finance our capital expenditures or any future strategic acquisitions, we may need to raise additional funds through public or private equity or debt financing, but such financing may not be available on terms satisfactory to us, or at all. Access to capital markets has, in the past, been unavailable to companies such as ours. In addition, equity financings could be dilutive to holders of our common stock, and debt financings would likely involve additional covenants that restrict our business operations. Any potential strategic acquisition or significant capital expenditure may also require the consent of our existing lenders. If we cannot raise funds on acceptable terms when needed, we may not be able to develop or enhance our products, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements.
19
Our quarterly revenue and operating results could fluctuate significantly from period to period, and this may cause volatility in our common stock price.
Our quarterly revenue and operating results, including our gross margin, have fluctuated significantly in the past, and we expect them to continue to fluctuate in the future for a variety of reasons, which may include:
• |
the cyclical nature of the industries we serve that frequently oscillates between downturns and growths; |
• |
changes in the timing and size, or cancellation or postponement, of orders by our customers; |
• |
strategic decisions by our customers to terminate their outsourcing relationship with us or give market share to our competitors, which may result from decreased demand for our customers’ products by end customers; |
• |
strategic consolidation by our customers; |
• |
pricing pressure from either our competitors or our customers; |
• |
disruptions or delays in the manufacturing of our products or in the supply of components or raw materials; |
• |
introduction of new products or services; |
• |
delays in production ramp-up, low yields or other problems experienced at our manufacturing facilities; |
• |
changes in design-to-delivery cycle times; |
• |
inability to reduce our costs quickly, commensurate with reductions in our prices or in response to decreased demand; |
• |
changes in our product and/or service mix; |
• |
write-offs of excess or obsolete inventory; |
• |
one-time expenses or charges associated with failed acquisition negotiations or completed acquisitions; |
• |
inability to control our operating costs consistent with target levels; |
• |
announcements by our competitors of new products, services or technological innovations; and |
• |
geographic mix of customer orders or worldwide earnings. |
As a result of the foregoing, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and that these comparisons may not be an accurate indicator of our future performance. Changes in the timing or terms of a small number of transactions could disproportionately affect our operating results in any particular quarter. Moreover, our operating results in one or more future quarters may fail to meet our guidance or the expectations of securities analysts or investors. If this occurs, we would expect to experience an immediate and significant decline in the trading price of our common stock.
We have established and, as circumstances may require, intend to expand our operations globally, which exposes us to risks associated with operating in foreign countries.
We generated approximately 58.4% and 52.1% of our revenues in international markets for fiscal years 2020 and 2019, respectively. Depending on market conditions, we intend to further expand our operations in Asia and Europe. The carrying amount of our fixed assets in Asia and Europe were $90.4 million and $9.4 million, respectively as of December 25, 2020.
We are exposed to political, economic, legal and other risks associated with operating in Asia and Europe, including:
• |
foreign currency exchange fluctuations; |
• |
political, civil, public health and economic instability; |
• |
restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments, import/export restrictions and quotas, and customs duties and tariffs; |
• |
uncertainty regarding social, political and trade policies in the United States and abroad; |
• |
timing and availability of export licenses; |
20
• |
disruptions due to China’s developing domestic infrastructure, including transportation and energy; |
• |
difficulties in developing relationships with local suppliers, attracting new international customers, conducting due diligence with respect to business partners in certain international markets, collecting accounts receivables, and staffing and managing distant international subsidiaries and branch operations; |
• |
the burden of complying with foreign and international laws and treaties; |
• |
legal systems potentially subject to undue influence or corruption; and |
• |
potentially adverse tax consequences, including restrictions on the repatriation of earnings to the United States. |
Negative or uncertain global conditions could prevent us from accurately forecasting demand for our products and services. In addition, a shift in the mix of orders from our customers away from low-cost markets to higher cost markets could adversely affect our operating margins.
Our operations in Asia and Europe are subject to U.S. regulations governing equipment export. These laws are complex and require us to obtain export licenses, a failure of which could expose us to fines, penalties and export ban. The U.S. Department of Commerce continually updates and often expands the list of entities, particularly in China, to whom U.S. companies cannot sell certain products without a license from the Department of Commerce. These rules and regulatory changes could have material adverse impact on the result of our operations.
Over the past several years, some foreign government authorities, including those in China and Korea, have pursued economic reform policies by promoting local businesses and local economic activity. Without notice, these government authorities may continue or alter these policies to our detriment, including imposition of confiscatory taxation policies, new restrictions on currency conversion, and limitations on sources of supply.
We are subject to various laws and regulations of the countries where we conduct business, including laws and regulations relative to anti-corruption and anti-bribery, antitrust and competition, data privacy, and export regulations. These foreign laws and regulations are constantly evolving and may, in some cases, conflict with each other. Although our compliance policies against unethical business practices apply to all our employees and agents, any violation of these policies by a rogue employee or agent may expose us to enforcement actions against these laws and regulations.
Business practices in Asia may entail greater risk and dependence upon the personal relationships, and therefore some of our agreements with customers or suppliers in Asia could be difficult or impossible to enforce.
Our business activities in Asia are continuing to expand, where personal relationships generally play a larger part in the business culture than is common in the U.S. In some cases, oral agreements based on personal relationships play just as important a role as written contracts, resulting in certain material terms not being reduced to writing. Similarly, there is a tendency in some Asian businesses to treat written agreements as a starting point of an ongoing business relationship, which is expected to continually change over time. The difficulty associated with enforcing oral agreements may expose us to adverse business consequences.
21
We could be adversely affected by risks associated with joint ventures, including those in the Asian markets.
From time to time, we may seek to expand our business through investments in joint ventures with complementary businesses, technologies, services or products, in both new and existing market categories and geographic regions. Our investments in joint ventures are subject to a number of risks, including many of the same risks described above for our acquisition activities. In particular, at the closing of the QGT acquisition, we indirectly became a party to QGT’s joint venture with Cinos Co., Ltd. (“Cinos Korea”) in South Korea and Cinos Xi’an in China, which is our first experience with a joint venture. The success of these joint ventures will continue to demand significant management and capital resources, and effective management of those risks inherent in overseas joint venture operations, including: protection of our intellectual property; economic, political and labor instability; language and cultural differences; contractual enforcement issues; and managing product development, operations and sales activities that are physically far removed from our headquarters and have historically been centralized with local management. In addition, from time to time in the future, our joint venture partners may have economic or business interests that are different from ours. Furthermore, our joint venture with Cinos Korea will require us to make purchases of equity from time to time up to specified amounts. If each joint venture business does not progress according to our plans and anticipated timing, our investment in the joint ventures may not be successful.
The industries in which we participate are highly competitive and rapidly evolving.
We face intense competition from subsystem and component manufacturers in the industries we serve. Increased competition has in the past resulted, and could in the future result, in price reductions, reduced gross margins or loss of market share. Competitors may introduce new products in the markets currently being served by our products. These new products may have better performance, lower prices and achieve broader market acceptance than our products. Further, since our customers generally own the designs and other intellectual property to the products we manufacture on their behalf, we cannot prevent them from licensing such designs and other intellectual property to our competitors for the manufacture of such products. Similarly, while the cleaning and analytical processes we utilize are proprietary to us, OEMs are looking to increase their maintenance services and could create proprietary cleaning processes with competitors, limiting our ability to compete for future business.
Our competitors may have greater financial, technical, manufacturing and marketing resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products and services, and reduce prices to increase market share. Moreover, there may be merger and acquisition activities among our competitors and potential competitors that may provide our competitors and potential competitors an advantage over us by enabling them to expand their product offerings and service capabilities to meet a broader range of customer needs. Further, if one of our customers develops or acquires the internal capability to develop and produce critical subsystems that we produce, or cleaning, coating and analytical services we provide, the loss of that customer could have a material adverse effect on our business, financial condition and operating results.
If our new products are not accepted by OEMs or other customers or if we are unable to obtain historical margins on our new products, our operating results would be adversely impacted.
We design, develop and market critical subsystems and proprietary cleaning, coating and analytical services to OEMs, IDMs and other customers. The introduction of new products and processes is inherently risky because it is difficult to foresee the adoption of new standards, coordinate our technical personnel and strategic relationships and win acceptance of new products by our customers, and ultimately not be able to recoup design and development expenditures. Newly introduced products typically carry lower gross margins than existing products for several quarters following their introduction. If any of our new systems or subsystems are not successful in the market, or if we are unable to obtain gross margins on new products that are similar to the gross margins we have historically achieved, our business, operating results and financial condition could be adversely affected.
If we were required to impair all or part of our goodwill and/or our acquired intangible assets, our net income and net worth could be materially adversely affected.
We had $171.1 million of goodwill recorded on our Consolidated Balance Sheet as of December 25, 2020. Goodwill represents the excess of cost over the fair market value of net tangible and finite lived, identifiable intangible assets acquired in business combinations. If our market capitalization drops significantly below the amount of net equity recorded on our balance sheet, it could indicate a decline in our value and would require us to further evaluate whether our goodwill has been impaired. During the fourth quarter of each year, we perform an annual review of our
22
goodwill and acquired intangible assets to determine if they have become impaired. We also conduct the same evaluation whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If we were required to impair all or a significant part of our goodwill and/or our acquired intangible assets, our financial results and net worth could be materially adversely affected.
Our business is largely dependent on the know-how of our employees, and we generally do not have an intellectual property position that is protected by patents.
Our business is largely dependent upon our design, engineering, manufacturing, chemical processing, analytical and testing know-how. We rely on a combination of trade secrets and contractual confidentiality provisions and, to a much lesser extent, patents, copyrights and trademarks to protect our proprietary rights. Confidentiality agreements with our employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Accordingly, our intellectual property position is more vulnerable than it would be if it were protected primarily by patents. If we fail to protect our proprietary rights successfully, our competitive position could suffer. We may be required to spend significant resources to monitor and protect our proprietary rights, and, in the event infringement or breach of our proprietary rights occurs, our competitive position in the market may be harmed. In addition, competitors may design around our technology or develop competing technologies and know-how.
Third parties may claim we are infringing their intellectual property, which could subject us to litigation or licensing expenses, and we may be prevented from selling our products if any such claims prove successful.
We have in the past and may in the future receive claims that our products, processes or technologies infringe the patents or other proprietary rights of third parties. Any litigation regarding third party patents or other intellectual property rights could be costly and time-consuming and divert our key resources from our business operations. The complexity of the technology involved in our products and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement may also require us to enter into costly license agreements, possibly on terms unacceptable to us. We also may be subject to significant damages or injunctions against the development, manufacture and sale of certain of our products if any such claims prove successful. We also rely on design specifications and other proprietary information provided by our customers to manufacture products for such customers. While many of our customers are contractually obligated to indemnify us for the costs to defend third party claims arising out of our use of the information provided by the customers, the indemnified amount may not be enough to make us whole, or if our customers refuse to honor its obligations, we could end up in costly litigations both to defend against such third-party claims and to enforce our contractual indemnification rights.
We may become involved in litigations and regulatory proceedings, which could require significant attention from our management and result in significant expense to us and disruptions to our business.
In addition to any litigation related to our intellectual property rights, we may in the future be named as a defendant in other lawsuits and regulatory actions relating to our business, such as commercial contract claims, environmental compliance claims, employment claims, and tax examinations, any one of which may expose us to significant damages and reputational harm. The outcome of such litigations and regulatory proceedings is difficult to predict. An unfavorable outcome could have a material adverse effect on our business, including limiting our ability to engage in certain business activities. In addition, such proceedings are often expensive, time-consuming and disruptive to normal business operations and require significant attention from our management.
If we do not keep pace with developments in the industries we serve and with technological innovation generally, our products may not be competitive.
Rapid technological innovation in the markets we serve requires us to anticipate and respond quickly to evolving customer requirements and could render our current product or service offerings and technology obsolete. Technological innovations are inherently complex. We believe that our future success will depend upon our ability to timely design, engineer and manufacture products and services that meet the changing needs of our customers. If we are unable to integrate new technical specifications into competitive product and service designs, develop the technical capabilities necessary to manufacture new products or provide new services or make necessary modifications or enhancements to existing products or services, our business prospects could be harmed.
The timely development of new or enhanced products and services requires us to:
• |
design innovative and performance-enhancing features to differentiate our products and services; |
23
• |
identify emerging technological trends, including new standards for our products and services; |
• |
accurately identify and design new products and services to meet market needs; |
• |
timely and efficiently collaborate with OEMs and IDMs to design and develop products and services; |
• |
timely ramp-up production of new products, especially new subsystems, at acceptable yields and costs; |
• |
successfully manage development production cycles; and |
• |
respond effectively to technological changes or product or service announcements by others. |
We must achieve design wins to retain our existing customers and to obtain new customers.
New capital equipment typically has a lifespan of several years, and OEMs frequently specify which systems, subsystems, components and instruments are to be incorporated in their equipment. Once incorporated, the OEM will likely maintain that same composition of products for at least several months. IDMs typically establish cleaning, coating, and analytical services as they develop and qualify new chip designs for production. Once a cleaned or coated part has been qualified, the refurbishment processes used to clean or coat the qualified part will likely continue to be used. Accordingly, it is important that our products and services are designed into the new capital equipment and new chip designs (known as a “design win”), to retain our existing customers and to obtain new customers.
We incur technology development and sales expenses with no assurance that our products will ultimately be designed into an OEM’s capital equipment or into an IDM’s manufacturing process. Further, developing new customer relationships, as well as maintaining and increasing our market share with existing customers, requires a substantial investment of our sales, engineering and management resources without any assurance from prospective customers that they will place orders. We believe that OEMs and IDMs often consider long-term relationships in selecting and placing orders, which could mean we may have difficulty achieving design wins from OEMs and IDMs that are not our current customers.
Fluctuations in foreign currency exchange rates may adversely affect our financial condition and results of operations.
The majority of our international revenues are denominated in U.S. dollars. Many of the costs and expenses associated with our international operations are paid in foreign currencies, including Chinese Renminbi, Singapore dollars, Japanese Yen, South Korean Won, Israeli New Shekel and Euro, and we expect our exposure to these foreign currencies to increase as we increase production in those regions. Changes in exchange rates among these foreign currencies may affect our revenue, cost of revenues, operating margins and tax.
We use derivative instruments, such as foreign currency forward contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not fully offset the adverse financial effects of unfavorable movements in foreign currency exchange rates over the time the hedges are in place.
The market for our stock is subject to significant fluctuation.
The size of our public market capitalization is relatively small, and the average volume of our shares that are traded is relatively low. The market price of our common stock could be subject to significant fluctuations. Among the factors that could affect our stock price are:
• |
quarterly variations in our operating results; |
• |
our ability to successfully introduce new products and services and manage new product transitions; |
• |
changes in revenue or earnings estimates or publication of research reports by analysts; |
• |
speculation in the press or investment community; |
• |
strategic actions by us, our customers or our competitors, such as acquisitions or restructurings; |
• |
announcements relating to any of our key customers, significant suppliers or the semiconductor manufacturing and capital equipment industry generally; |
• |
the effects of war and terrorist attacks; and |
24
• |
domestic and international economic or political factors unrelated to our performance. |
The stock markets in general, and the markets for technology stocks in particular, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
The technology labor market is very competitive, and we must hire, promote and retain key personnel.
Our future success depends in part on the continued service of our key executive officers, as well as our research, engineering, sales, manufacturing and administrative personnel, most of whom are not subject to employment or non-competition agreements. In addition, the competition for qualified personnel in the technology industry is intense, and we operate in geographic locations in which labor markets are particularly competitive.
Our business is particularly dependent on expertise which only a limited number of engineers possess. The loss of any of our key employees and officers, including our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, any of our Executive or Senior Vice Presidents or any of our other senior managers, or the failure to attract, promote and retain qualified employees, could adversely affect our business. Also, uncertainty and disruption to our organization as a result of executive management transition could divert the executive management’s attention away from key areas of our business and have a material adverse effect on our business.
Any environmental contamination at any of our production facilities could result in substantial liabilities.
Our facilities use substances regulated under various foreign, federal, state and local environmental laws and regulations. We may not always be aware of, or in compliance with, all environmental laws or regulations, and our failure or inability to comply with existing or future environmental requirements could result in significant remediation and other liabilities, imposition of fines, and suspension of our services and products.
Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made disruptions, such as terrorism.
Our facilities may experience catastrophic losses caused by natural disasters or other causalities, such as earthquakes, storms, floods, fires, public health epidemic, labor disruptions, power outages, terrorist attacks or political unrest, the occurrence of any one of which could disrupt our operations, delay production and shipments, and result in large repair expenses. We have facilities in areas with above average seismic activity, such as our facilities in South San Francisco and Hayward, California, and our Taiwan facilities in Hsinchu and Tainan. We also have experienced fires and extended power outages at our facilities, such as the fire that occurred at a Korean plant operated by our joint venture, Cinos Korea, on September 19, 2018. This risk is further exacerbated by the fact that our insurance policies do not cover the losses caused by earthquakes or other natural disasters or power loss.
In addition, our suppliers experiencing natural disasters may not be able to provide sufficient components or raw materials in a timely manner, which can cause disruptions in our operations. For example, in 2011, some of our Japanese suppliers had to temporarily shut down their operations as a result of a severe earthquake followed by a tsunami in northern Japan. Similar events can occur again, to our material detriment.
Changes in tax rates or tax assets and liabilities could affect results of operations.
As a global company, we are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our annual and quarterly tax rates could be affected by numerous factors, including changes in the applicable tax laws, amount and composition of pre-tax income in countries with different tax rates, and valuation of our deferred tax assets and liabilities.
25
We are subject to examinations of our income tax returns by domestic and foreign tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from these examinations. There can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our financial condition and results of operations.
Certain regulations related to conflict minerals could adversely impact our business.
We use conflict minerals in manufacturing our products. As a result, we are required to perform ongoing due diligence on our supply chain and publicly disclose the nature and results of such efforts. Our most recent disclosure was filed on Form SD on June 1, 2020, noting that we could not yet determine whether the conflict minerals we source were, directly or indirectly, used to finance or benefit armed groups in the Democratic Republic of Congo and its adjoining countries. There have been and there will be costs associated with complying with these disclosure requirements to determine the sources of conflict minerals used in our products, and potential changes to products, processes or sources of supply as a consequence of such verification activities. Complying with these rules could adversely affect the sourcing, supply and pricing of materials used in our products and result in substantial additional costs. As there may be only a limited number of suppliers offering “conflict free” conflict minerals, we are not certain that we will be able to obtain the conflict minerals from such suppliers in sufficient quantities or at competitive prices. We may also face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products. If we are unable to comply with these disclosure rules (which themselves may be subject to potential re-formulation by the new administration), we could be subject to enforcement actions by the SEC and liability under the Securities Exchange Act of 1934, which could result in material adverse consequences to our business, as well as significant fines and penalties.
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry analysts publish about us or our business. If any of the analysts issue an adverse opinion regarding our stock, our stock price would likely decline. Similarly, if these analysts cease publishing regular reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We do not currently intend to pay dividends on our common stock and, consequently, our shareholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
Given our current business plan to invest our earnings to fund our growth, we do not intend on declaring any dividends on UCT’s common stock (which ability to do so is also restricted by the terms of our credit agreement). For the foreseeable future, therefore, any return on our shareholders’ investment will depend exclusively on the capital appreciation of our common stock.
26
Item 1B. |
Unresolved Staff Comments |
None.
Item 2. |
Properties |
UCT’s headquarters is located in Hayward, California. This facility provides administrative, sales and support, engineering and technology development and manufacturing operations. This lease expires in 2027.
The Company has manufacturing and engineering facilities in California, Texas, Arizona, China, Singapore, Philippines and Czech Republic. The Company has parts cleaning, analytics and engineering facilities in Colorado, Arizona, California, Oregon, Maine, Texas, Israel, Taiwan, South Korea, Singapore and China. These facilities have leases that expire on various dates through 2031 and are subject to periodic changes. We also own buildings and land that are located in South Korea, China and the United Kingdom. We believe that our existing facilities are well-maintained and in good operating condition.
The table below lists our properties as of February 19, 2021:
Location |
|
Principal Use |
|
Square Footage |
|
|
Ownership |
|
|
Hayward, California |
|
Headquarters, manufacturing, sales, engineering, technology development |
|
|
104,741 |
|
|
Leased |
|
Austin, Texas |
|
Manufacturing, engineering |
|
|
101,440 |
|
|
Leased |
|
Chandler, Arizona |
|
Manufacturing |
|
|
114,934 |
|
|
Leased |
|
Cebu, Philippines |
|
Manufacturing |
|
|
15,726 |
|
|
Leased |
|
Singapore, Singapore |
|
Manufacturing, customer support, parts cleaning |
|
|
175,527 |
|
|
Leased |
|
Shanghai, China |
|
Manufacturing |
|
|
154,069 |
|
|
Leased |
|
Liberec, Czech Republic |
|
Manufacturing, customer support |
|
|
116,289 |
|
|
Leased |
|
Penang, Malaysia |
|
Manufacturing, customer support |
|
|
300,000 |
|
|
Leased |
|
Colorado Springs, Colorado |
|
Parts Cleaning |
|
|
14,000 |
|
|
Leased |
|
Scarborough, Maine |
|
Parts Cleaning |
|
|
20,000 |
|
|
Leased |
|
San Jose, California |
|
Parts Cleaning |
|
|
20,130 |
|
|
Leased |
|
Fremont, California |
|
Parts Cleaning, R&D, Laboratory & Recycling |
|
|
76,791 |
|
|
Leased |
|
Hillsboro, Oregon |
|
Parts Cleaning |
|
|
83,895 |
|
|
Leased |
|
Portland, Oregon |
|
Testing & Parts Cleaning |
|
|
7,461 |
|
|
Leased |
|
Phoenix, Arizona |
|
Parts Cleaning |
|
|
77,771 |
|
|
Leased |
|
Carrollton, Texas |
|
Parts Cleaning |
|
|
121,968 |
|
|
Leased |
|
Quiryat Gat, Israel |
|
Parts Cleaning |
|
|
51,376 |
|
|
Leased |
|
Hukou Township, Taiwan |
|
Parts Cleaning |
|
|
30,354 |
|
|
Leased |
|
Tainan, Taiwan |
|
Parts Cleaning |
|
|
89,607 |
|
|
Leased |
|
Xi'an, China |
|
Parts Cleaning |
|
|
66,185 |
|
|
Lease |
|
HyunGok-Ri, South Korea |
|
Parts Cleaning |
|
|
40,014 |
|
|
Lease |
|
Scotland, United Kingdom |
|
Parts Cleaning |
|
|
22,000 |
|
|
Own |
|
Gyeonggi-do, South Korea |
|
Parts Cleaning |
|
|
197,453 |
|
|
Own |
|
Hwaseong-si, South Korea |
|
Parts Cleaning |
|
|
95,814 |
|
|
Own |
|
Item 3. |
Legal Proceedings |
From time to time, we are 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 cannot be predicted with certainty, we have not had a history of outcomes to date that have been material to our statement of operations and do not believe that any of these proceedings or other claims will have a material adverse effect on our consolidated financial condition or results of operations.
Item 4. |
Mine Safety Disclosures |
Not applicable.
27
PART II
Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
Stock Exchange Listing
Our common stock has been traded on the NASDAQ Global Market under the symbol “UCTT” since March 25, 2004. As of February 19, 2021, there were three holders of record of UCTT common stock.
Dividends on Common Stock
To date, we have not declared or paid cash dividends to our UCT stockholders and we do not intend to do so for the foreseeable future in order to retain earnings for use in our business. Our credit facility also limits our ability to pay dividends.
Stock Performance Graph
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following stock performance graph compares the cumulative total stockholder returns during the period from December 25, 2015 to December 25, 2020 of our common stock to the NASDAQ Composite Index and the RDG Semiconductor Composite Index. The comparison assumes $100 was invested on December 25, 2015 in our common stock and in each of the foregoing indices. The stock performance shown on the following graph represents historical stock performance and is not necessarily indicative of future stock price performance.
28
The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported by the NASDAQ Global Market:
|
|
High |
|
|
Low |
|
||
Fiscal year 2019 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
13.12 |
|
|
$ |
7.93 |
|
Second quarter |
|
$ |
14.82 |
|
|
$ |
10.50 |
|
Third quarter |
|
$ |
16.67 |
|
|
$ |
11.20 |
|
Fourth quarter |
|
$ |
24.24 |
|
|
$ |
13.94 |
|
Fiscal year 2020 |
|
|
|
|
|
|
|
|
First quarter |
|
$ |
30.00 |
|
|
$ |
11.79 |
|
Second quarter |
|
$ |
24.86 |
|
|
$ |
12.37 |
|
Third quarter |
|
$ |
31.10 |
|
|
$ |
19.08 |
|
Fourth quarter |
|
$ |
37.02 |
|
|
$ |
21.06 |
|
Recent Sales of Unregistered Sales of Equity Securities
None.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
29
Item 6. |
Selected Consolidated Financial Data |
You should read the following tables in conjunction with other information contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Consolidated Financial Statements and related notes and other financial information contained elsewhere in this Annual Report on Form 10-K.
Statements of Operations Data:
|
Year ended |
|
||||||||||||||||||||||
(In millions, except per share amounts) |
12/25/2020 |
|
|
12/27/2019 (1) |
|
|
12/28/2018 (2) |
|
|
12/29/2017 |
|
|
12/30/2016 |
|
||||||||||
Consolidated Statements of Operations Data: |
|
|||||||||||||||||||||||
Revenues |
$ |
|
1,398.6 |
|
|
$ |
|
1,066.2 |
|
|
$ |
|
1,096.5 |
|
|
$ |
|
924.4 |
|
|
$ |
|
562.8 |
|
Cost of revenues |
|
|
1,106.8 |
|
|
|
|
869.4 |
|
|
|
|
920.7 |
|
|
|
|
756.7 |
|
|
|
|
476.0 |
|
Gross margin |
|
|
291.8 |
|
|
|
|
196.8 |
|
|
|
|
175.8 |
|
|
|
|
167.7 |
|
|
|
|
86.8 |
|
Operating expenses |
|
|
170.4 |
|
|
|
|
166.9 |
|
|
|
|
115.1 |
|
|
|
|
78.2 |
|
|
|
|
64.4 |
|
Income from operations |
|
|
121.4 |
|
|
|
|
29.9 |
|
|
|
|
60.7 |
|
|
|
|
89.5 |
|
|
|
|
22.4 |
|
Interest and other income (expense), net |
|
|
(21.7 |
) |
|
|
|
(27.6 |
) |
|
|
|
(8.4 |
) |
|
|
|
(2.5 |
) |
|
|
|
(3.4 |
) |
Income before provision for income taxes |
|
|
99.7 |
|
|
|
|
2.3 |
|
|
|
|
52.3 |
|
|
|
|
87.0 |
|
|
|
|
19.0 |
|
Provision for income taxes |
|
|
19.3 |
|
|
|
|
10.0 |
|
|
|
|
15.3 |
|
|
|
|
11.9 |
|
|
|
|
8.9 |
|
Net income (loss) |
|
|
80.4 |
|
|
|
|
(7.7 |
) |
|
|
|
37.0 |
|
|
|
|
75.1 |
|
|
|
|
10.1 |
|
Less: Net income attributable to noncontrolling interests |
|
|
2.8 |
|
|
|
|
1.7 |
|
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
||
Net income (loss) attributable to UCT |
$ |
|
77.6 |
|
|
$ |
|
(9.4 |
) |
|
$ |
|
36.6 |
|
|
$ |
|
75.1 |
|
|
$ |
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to UCT common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
|
1.93 |
|
|
$ |
|
(0.24 |
) |
|
$ |
|
0.95 |
|
|
$ |
|
2.25 |
|
|
$ |
|
0.31 |
|
Diluted |
$ |
|
1.89 |
|
|
$ |
|
(0.24 |
) |
|
$ |
|
0.94 |
|
|
$ |
|
2.19 |
|
|
$ |
|
0.30 |
|
Shares used in computing net income (loss) per share: |
|
|||||||||||||||||||||||
Basic |
|
|
40.2 |
|
|
|
|
39.5 |
|
|
|
|
38.4 |
|
|
|
|
33.4 |
|
|
|
|
32.6 |
|
Diluted |
|
|
41.1 |
|
|
|
|
39.5 |
|
|
|
|
38.9 |
|
|
|
|
34.3 |
|
|
|
|
33.2 |
|
Consolidated Balance Sheet Data:
(In millions) |
|
12/25/2020 |
|
|
12/27/2019 (1) |
|
|
12/28/2018 (2) |
|
|
12/29/2017 |
|
|
12/30/2016 |
|
||||||||||
Cash & cash equivalents |
|
$ |
|
200.3 |
|
|
$ |
|
162.5 |
|
|
$ |
|
144.1 |
|
|
$ |
|
68.3 |
|
|
$ |
|
52.5 |
|
Working capital |
|
$ |
|
343.9 |
|
|
$ |
|
256.4 |
|
|
$ |
|
323.6 |
|
|
$ |
|
200.1 |
|
|
$ |
|
136.4 |
|
Total assets |
|
$ |
|
1,102.5 |
|
|
$ |
|
1,019.3 |
|
|
$ |
|
965.5 |
|
|
$ |
|
563.4 |
|
|
$ |
|
380.7 |
|
Bank borrowings and long-term debt |
|
$ |
|
269.0 |
|
|
$ |
|
292.2 |
|
|
$ |
|
341.2 |
|
|
$ |
|
52.3 |
|
|
$ |
|
67.8 |
|
Other long-term liabilities |
|
$ |
|
57.4 |
|
|
$ |
|
44.0 |
|
|
$ |
|
43.6 |
|
|
$ |
|
6.6 |
|
|
$ |
|
3.3 |
|
Total stockholders’ equity |
|
$ |
|
551.2 |
|
|
$ |
|
452.5 |
|
|
$ |
|
451.0 |
|
|
$ |
|
300.3 |
|
|
$ |
|
216.1 |
|
(1) |
Includes the results of operations of DMS for the period from April 15, 2019 to December 27, 2019. |
(2) |
Includes the results of operations of QGT for the period from August 27, 2018 to December 28, 2018. |
See Note 2 to the Notes to Consolidated Financial Statements for further information.
30
Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This section and other parts of this Annual Report on Form 10-K contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties. Forward-looking statements can also be identified by words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will be,” “will continue,” “will likely results, and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in “Item 1A — Risk Factors” above. The following discussion should be read in conjunction with the Consolidated Financial Statement and notes thereto included in Item 8 of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We are a global leader in the design, engineering and manufacture of production tools, modules and subsystems for the semiconductor and display capital equipment markets. Our products include chemical delivery modules, frame assemblies, gas delivery systems, fluid delivery systems, precision robotics, process modules as well as other high-level assemblies. Our services provide part cleaning, surface encapsulation, and high sensitivity micro contamination analysis primarily for the semiconductor device makers and wafer fabrication (WFE) equipment markets.
Historically, the Company has operated under one operating segment. However, as a result of recent acquisitions, we elected to reorganize our organizational and reporting structure to capture efficiencies and operating leverage. We now report results for two segments: Products and Services.
We ship a majority of our products and provide most of our services to U.S. registered customers with locations both in and outside the U.S. In addition to U.S. manufacturing and service operations, we manufacture products and provide parts cleaning and other related services in our Asian and European facilities to support local and U.S. based customers.
Over the long-term, we believe the semiconductor market we serve will continue to grow due to multi-year industry inflections creating demand from a broad range of drivers including mobile demand driven by 5G, new CPU architectures which are enabling higher performance servers, and cloud, AI and machine learnings. We also believe that semiconductor equipment OEMs are increasingly relying on partners like UCT to fulfill their expanding capacity requirements.
Critical Accounting Estimates
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure at the date of our Consolidated Financial Statements. On an on-going basis, we evaluate our estimates and judgments, including those related to inventories, income taxes, business combinations and goodwill, intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We consider certain accounting policies related to revenue recognition, inventory valuation, accounting for income taxes, business combinations, valuation of goodwill, intangible assets and long-lived assets to be critical policies due to the estimates and judgments involved in each.
31
Revenue Recognition
Our revenues for fiscal years 2020, 2019 and 2018 were highly concentrated in a small number of OEM customers in the semiconductor capital equipment industry. We recognize revenue when promised goods or services (performance obligations) are transferred to a customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We perform the following five steps to determine when to recognize revenue:
1. |
Identification of the contract(s) with customers – Our standard arrangement for our customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions. We assess collectability based on the creditworthiness of the customer and past transaction history. We perform on-going credit evaluations of, and do not require collateral from, our customers. |
2. |
Identification of the performance obligations in the contract – Our performance obligations include delivery of promised goods or services. |
3. |
Determination of the transaction price – The transaction price of our contracts with customers may include both fixed and variable consideration. We include variable consideration in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We generally invoice our customers upon shipment of goods and completion of services with payment due within 30 to 90 days after issuance. |
4. |
Allocation of the transaction price to the performance obligations in the contract – For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations on a relative standalone selling price basis. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract. |
5. |
Recognition of revenue when, or as, a performance obligation is satisfied – We recognize revenue from products sold at a point in time when we have satisfied our performance obligation by transferring control of the goods to the customer, which typically occurs at shipment or delivery. Revenue from service agreements is recognized upon completion of the services. |
Inventory Valuation
We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon inventory age and assumptions about future demand and market conditions. We assess 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 our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are recorded as an inventory valuation allowance established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a subsystem or as separate inventory. For fiscal years 2020, 2019 and 2018, we wrote down inventory of $3.4 million, $2.5 million, and $3.3 million, respectively.
Accounting for Income Taxes
The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be recoverable. In determining whether the realization of these deferred tax assets may be impaired, we make judgments with respect to whether we are likely to generate sufficient future
32
taxable income to realize these assets. In order to reverse a valuation allowance, accounting principles generally accepted in the United States of America suggest that we review our recent cumulative income/loss as well as determine our ability to generate sufficient future taxable income to realize our net deferred tax assets. As of December 25, 2020, we maintained full valuation allowances on our U.S. federal and state deferred tax assets in the amount of $25.6 million as we believe it is more likely than not that these deferred tax assets will not be realized.
In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on the results of our operations and financial position. We believe we have adequately reserved for our uncertain tax positions; however, no assurance can be given that the final tax outcome of these matters will not be different than what we expect. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.
Business Combinations
In accordance with accounting for business combinations, we allocate the purchase price of acquired companies to the identified tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We may engage third-party valuation firms to assist management in reviewing management’s identification and determination of the fair values of acquired intangible assets such as customer relationships and tradenames. Such valuations require management to make significant estimates and assumptions. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Goodwill, Intangibles Assets, and Long-lived Assets
Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed.
We evaluate our goodwill and indefinite life tradename for impairment on an annual basis, and whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. In addition, we evaluate our identifiable intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following:
• |
Significant changes in the manner of our use of the acquired assets or the strategy of our overall business; |
• |
Significant negative changes in revenue of specific products or services; |
• |
Significant negative industry or economic trends; and |
• |
Significant decline in our stock price for a sustained period. |
We continually apply judgment when performing these evaluations and continuously monitor for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, undiscounted cash flows, discount rates, recent market valuations from transactions by comparable companies, volatility in our market capitalization and general industry, market and macroeconomic conditions. It is possible that changes in such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing fair value, would require us to record a non-cash impairment charge.
33
Results of Operations
Fiscal Year
Our fiscal year is the 52- or 53-week period ending on the Friday nearest December 31. Fiscal 2020, 2019 and 2018 each contained 52 weeks.
A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 27, 2019, filed with the SEC on March 11, 2020, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at ww.uct.com/investors.
Discussion of Results of Operations
Revenues
|
|
Years Ended |
|
||||||||||||||||||||||
Revenues by Segment |
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
||||||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
||||||||||||
Products |
|
$ |
|
1,131.2 |
|
|
|
34.5 |
|
% |
|
$ |
|
840.8 |
|
|
|
-17.2 |
|
% |
|
$ |
|
1,015.5 |
|
Services |
|
|
|
267.4 |
|
|
|
18.6 |
|
% |
|
|
|
225.4 |
|
|
|
178.3 |
|
% |
|
|
|
81.0 |
|
Total Revenues |
|
$ |
|
1,398.6 |
|
|
|
|
|
|
|
$ |
|
1,066.2 |
|
|
|
|
|
|
|
$ |
|
1,096.5 |
|
Products as a percentage of total revenues |
|
|
|
80.9 |
% |
|
|
|
|
|
|
|
|
78.9 |
% |
|
|
|
|
|
|
|
|
92.6 |
% |
Services as a percentage of total revenues |
|
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
21.1 |
% |
|
|
|
|
|
|
|
|
7.4 |
% |
Total Products revenues increased in fiscal year 2020 over fiscal year 2019, primarily due to an increase in customer demand in the semiconductor industry, in particular, the wafer fabrication equipment industry.
Total Services revenues increased in fiscal year 2020 over fiscal year 2019, primarily due to increases in demand across its customer base.
|
|
Years Ended |
|
||||||||||||||||||||
Revenues by Geography |
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
|
2018 |
|
|||||||||
United States |
|
$ |
581.6 |
|
|
|
13.8 |
|
% |
|
$ |
510.9 |
|
|
|
7.5 |
|
% |
|
|
$ |
475.3 |
|
International |
|
|
817.0 |
|
|
|
47.1 |
|
% |
|
555.3 |
|
|
|
(10.6 |
) |
% |
|
|
621.2 |
|
||
Total Revenues |
|
$ |
1,398.6 |
|
|
|
|
|
|
|
$ |
1,066.2 |
|
|
|
|
|
|
|
|
$ |
1,096.5 |
|
Unites States as a percentage of total revenues |
|
|
41.6 |
% |
|
|
|
|
|
|
|
47.9 |
% |
|
|
|
|
|
|
|
|
43.3 |
% |
International as a percentage of total revenues |
|
|
58.4 |
% |
|
|
|
|
|
|
|
52.1 |
% |
|
|
|
|
|
|
|
|
56.7 |
% |
On a geographic basis, revenues represent products shipped from or services performed in our U.S. and international locations.
United States revenue increased in absolute terms and as a percentage of total revenue due to two factors. The first of these was an overall increase in semiconductor industry demand in the U.S. The second factor relates to the April, 2019 acquisition of DMS, whose customers are primarily U.S. based.
The increase in foreign revenues in absolute terms and as a percentage of total revenue is due primarily to the overall higher semiconductor and semiconductor capital equipment demand outside of the U.S.
34
Cost of Revenues
|
|
Years Ended |
|
|||||||||||||||||||
Cost of Revenues by Segment |
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
Products |
|
$ |
934.7 |
|
|
|
30.0 |
|
% |
|
$ |
719.0 |
|
|
|
(16.9 |
) |
% |
|
$ |
865.2 |
|
Services |
|
|
172.1 |
|
|
|
14.4 |
|
% |
|
|
150.4 |
|
|
|
171.0 |
|
% |
|
|
55.5 |
|
Total Cost of Revenues |
|
$ |
1,106.8 |
|
|
|
|
|
|
|
$ |
869.4 |
|
|
|
|
|
|
|
$ |
920.7 |
|
Products as a percentage of total Products revenues |
|
|
82.6 |
% |
|
|
|
|
|
|
|
85.5 |
% |
|
|
|
|
|
|
|
85.2 |
% |
Services as a percentage of total Services revenues |
|
|
64.4 |
% |
|
|
|
|
|
|
|
66.7 |
% |
|
|
|
|
|
|
|
68.5 |
% |
Total cost of revenues increased in fiscal year 2020 over fiscal year 2019 due to higher demand for both Products and Services.
Cost of Products revenues consists of purchased materials, direct labor and manufacturing overhead. Cost of Products revenues increased $215.7 million compared to the prior year, due to higher volume of sales driving increased material costs of $199.2 million, higher direct labor spending of $6.1 million and higher overhead costs of $10.4 million.
Cost of Services revenues consists of direct labor, manufacturing overhead and materials (such as chemicals, gases and consumables). Cost of Services revenues increased $21.7 million compared to the prior year driven by higher volumes of service orders, resulting in an increase in labor costs of $2.0 million (the largest component of total cost of Services revenues), higher material costs of $6.6 million and higher overhead costs of $13.1 million driven by higher service orders.
Gross Margin
|
|
Years Ended |
|
|||||||||||||||||||
(Dollars in millions) |
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
Dollar by Segment |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
Products |
|
$ |
196.5 |
|
|
|
61.3 |
|
% |
|
$ |
121.8 |
|
|
|
(19.0 |
) |
% |
|
$ |
150.3 |
|
Services |
|
|
95.3 |
|
|
|
27.1 |
|
% |
|
|
75.0 |
|
|
|
194.1 |
|
% |
|
|
25.5 |
|
Gross profit |
|
$ |
291.8 |
|
|
|
|
|
|
|
$ |
196.8 |
|
|
|
|
|
|
|
$ |
175.8 |
|
Percentage by Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
17.4 |
% |
|
|
|
|
|
|
|
14.5 |
% |
|
|
|
|
|
|
|
14.8 |
% |
Services |
|
|
35.6 |
% |
|
|
|
|
|
|
|
33.3 |
% |
|
|
|
|
|
|
|
31.5 |
% |
Total Company |
|
|
20.9 |
% |
|
|
|
|
|
|
|
18.5 |
% |
|
|
|
|
|
|
|
16.0 |
% |
Products gross margin increased in fiscal year 2020 over fiscal year 2019 due primarily to higher volume, and the favorable mix of higher margin products. Services gross margin increased in fiscal year 2020 over fiscal year 2019 due to direct labor efficiencies along with lower facility-related costs.
Research and Development
|
|
Years Ended |
|
|||||||||||||||||||
|
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
Research and development |
|
$ |
14.8 |
|
|
|
1.4 |
|
% |
|
$ |
14.6 |
|
|
|
9.8 |
|
% |
|
$ |
13.3 |
|
Research and development as a percentage of total revenues |
|
|
1.1 |
% |
|
|
|
|
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
1.2 |
% |
35
Research and development expenses consist primarily of activities related to new component testing and evaluation, test equipment and fixture development, product design, the advancement of cleaning and coating and analytical processes, and other product-development activities. Research and development expenses remained consistent in fiscal year 2020 compared to fiscal year 2019.
Sales and Marketing
|
|
Years Ended |
|
|||||||||||||||||||
|
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
Sales and marketing |
|
$ |
25.1 |
|
|
|
12.1 |
|
% |
|
$ |
22.4 |
|
|
|
37.4 |
|
% |
|
$ |
16.3 |
|
Sales and marketing as a percentage of total revenues |
|
|
1.8 |
% |
|
|
|
|
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
1.5 |
% |
Sales and marketing expenses consist primarily of salaries and commissions paid to our sales employees, salaries paid to our engineers who work with sales and service employees to help determine the components and configuration requirements for new products and other costs related to the sales of our products. Sales and marketing expenses increased $2.7 million in fiscal year 2020 over fiscal year 2019, primarily due to an increase in personnel-related costs resulting from an increase in headcount and higher bonuses.
General and Administrative
|
|
Years Ended |
|
|||||||||||||||||||
|
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
General and administrative |
|
$ |
130.5 |
|
|
|
0.5 |
|
% |
|
$ |
129.9 |
|
|
|
51.9 |
|
% |
|
$ |
85.5 |
|
General and administrative as a percentage of total revenues |
|
|
9.3 |
% |
|
|
|
|
|
|
|
12.2 |
% |
|
|
|
|
|
|
|
7.8 |
% |
General and administrative expenses increased $0.6 million in fiscal year 2020 over fiscal year 2019, due to higher personnel-related expenses primarily due to increases in headcount, higher bonuses and costs related to the proposed acquisition of Ham-Let (Israel – Canada) Ltd., partially offset by a $1.4 million gain from the sale of property and equipment.
Interest and Other Income (Expense), net
|
|
Years Ended |
|
|||||||||||||||||||
|
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
Interest income |
|
$ |
0.9 |
|
|
|
125.0 |
|
% |
|
$ |
0.4 |
|
|
|
33.3 |
|
% |
|
$ |
0.3 |
|
Interest expense |
|
$ |
(16.9 |
) |
|
|
(33.7 |
) |
% |
|
$ |
(25.5 |
) |
|
|
155.0 |
|
% |
|
$ |
(10.0 |
) |
Other income (expense), net |
|
$ |
(5.7 |
) |
|
|
137.5 |
|
% |
|
$ |
(2.4 |
) |
|
|
84.6 |
|
% |
|
$ |
(1.3 |
) |
Interest expense decreased in fiscal year 2020 over fiscal year 2019 due to a lower average debt balance, lower interest rates resulting from lower LIBOR rates and higher interest expense capitalized on borrowings related to qualified capital expenditures.
Other income (expense), net, increased $(3.3) million in fiscal year 2020 over fiscal year 2019 primarily due to other expense from the net changes in fair values of the common stock purchase obligation of $(7.4) million, which was partially offset by changes in contingent earn-out liabilities related to prior acquisitions of $1.3 million. These changes were partially offset by increases in other income of $2.6 million, consisting of $1.5 million of government subsidies received by the Company’s subsidiary in China and $1.1 million of increases in the fair value of forward hedge contracts.
36
Provision for Income Taxes
|
|
Years Ended |
|
|||||||||||||||||||
|
|
December 25, |
|
|
Percent |
|
December 27, |
|
|
Percent |
|
December 28, |
|
|||||||||
(Dollars in millions) |
|
2020 |
|
|
Change |
|
2019 |
|
|
Change |
|
2018 |
|
|||||||||
Provision for income taxes |
|
$ |
19.3 |
|
|
|
93.0 |
|
% |
|
$ |
10.0 |
|
|
|
(34.6 |
) |
% |
|
$ |
15.3 |
|
Effective tax rate |
|
|
19.3 |
% |
|
|
|
|
|
|
|
415.9 |
% |
|
|
|
|
|
|
|
29.3 |
% |
The change in respective tax rates reflects, primarily, changes in the geographic distribution of our worldwide earnings. For fiscal year 2020, our effective tax rate was lower than the federal statutory rate of 21% primarily due to favorable effects of the geographic distribution of our worldwide earnings in foreign jurisdictions with lower effective tax rates.
For the year ended December 25, 2020, the Company concluded that a full valuation allowance against its U.S. federal and state deferred tax assets continues to be necessary. The Company also concluded that some of its foreign deferred tax assets acquired as part of the QGT acquisition required a valuation allowance. As of December 25, 2020, the total U.S. and foreign valuation allowances for deferred tax assets were $23.1 million and $2.5 million, respectively.
Our ability to realize deferred tax assets depends on our ability to generate sufficient future taxable income. In assessing our future taxable income, we have considered all sources of future taxable income available to realize our deferred tax assets, including the taxable income from future reversal of existing temporary differences, carry forwards, and tax-planning strategies. If changes occur in the assumptions underlying our tax planning strategies or in the scheduling of the reversal of our deferred tax liabilities, the valuation allowance may need to be adjusted in the future.
The Company remitted foreign earnings from its subsidiary in Singapore in 2020. The Company has no plans to remit foreign earnings other than possibly from its Singapore subsidiary. We may change our intent to reinvest certain of our undistributed foreign earnings indefinitely, which could require us to accrue or pay taxes on some or all of these undistributed earnings.
Liquidity and Capital Resources
Cash and cash Equivalents
The following table summarizes our cash and cash equivalents:
|
|
Years Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
|
|
|
||
(In millions) |
|
2020 |
|
|
2019 |
|
|
Increase |
|
|||
Total cash and cash equivalents |
|
$ |
200.3 |
|
|
$ |
162.5 |
|
|
$ |
37.8 |
|
The increase in cash and cash equivalents in fiscal year 2020 compared to fiscal year 2019 was primarily due to the cash provided by operating activities of $97.3 million, partially offset by the $36.4 million used for purchases of property, plant and equipment and principal payments on bank borrowings and finance leases of $28.8 million.
37
Cash Flows
|
|
Years Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
(In millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
Operating activities |
|
$ |
97.3 |
|
|
$ |
121.0 |
|
|
$ |
41.7 |
|
Investing activities |
|
|
(29.8 |
) |
|
|
(49.2 |
) |
|
|
(345.9 |
) |
Financing activities |
|
|
(31.1 |
) |
|
|
(53.4 |
) |
|
|
380.1 |
|
Effects of exchange rate changes on cash and cash equivalents |
|
|
1.4 |
|
|
|
- |
|
|
|
(0.1 |
) |
Net increase in cash and cash equivalents |
|
$ |
37.8 |
|
|
$ |
18.4 |
|
|
$ |
75.8 |
|
Our primary cash inflows and outflows were as follows:
• |
We generated net cash from operating activities of $97.3 million in fiscal year 2020, compared to $121.0 million in fiscal year 2019. The $23.7 million decrease was driven by a decrease of $120.2 million in the net change from operating assets and liabilities offset by an increase of $8.4 million in non-cash items and by an increase of $88.1 million in net income. |
• |
The major contributors to the net change in operating assets and liabilities, net of effects of acquisition, in fiscal year 2020 were as follows: |
|
o |
Accounts receivable increased $32.7 million primarily due to the increase in revenues in fiscal 2020 and the timing of collections. |
|
o |
Inventories increased $8.0 million due primarily to the customer demand outlook in 2021. |
|
o |
Accounts payable decreased $12.6 million, accrued compensation and related benefits increased $9.7 million, and other liabilities decreased $7.4 million, primarily due to the timing of payments. |
• |
Cash used in investing activities was $29.8 million in fiscal year 2020 compared to $49.2 million in fiscal year 2019. During fiscal year 2020, net cash used for investing activities primarily consisted of $36.4 million for purchases of property, plant and equipment, offset by $6.6 million in proceeds from insurance related to the Cinos Korea fire in 2018. During fiscal year 2019, net cash used for investing activities primarily consisted of $29.9 million, net of cash acquired, for the DMS acquisition and $26.3 million for purchases of property, plant and equipment. |
• |
Cash used in financing activities was $31.1 million in fiscal year 2020 compared to cash used by financing activities of $53.4 million in fiscal year 2019. During fiscal year 2020, net cash used in financing activities primarily consisted of $28.8 million net of debt repayments and $1.5 million of taxes paid upon the vesting of restricted stock units. During fiscal year 2019, net cash used in financing activities primarily consisted of $51.2 million net of debt repayments, $0.6 million dividends payments made to a joint venture shareholder and $1.9 million of taxes paid upon the vesting of restricted stock units. |
We believe we have sufficient capital to fund our working capital needs, satisfy our debt obligations, maintain our existing capital equipment, purchase new capital equipment and make strategic acquisitions from time to time. As of December 25, 2020, we had cash of $200.3 million compared to $162.5 million as of December 27, 2019. Our cash and cash equivalents, cash generated from operations and amounts available under our revolving line of credit described below were our principal sources of liquidity as of December 25, 2020.
In February of 2018, we completed an underwritten public offering of 4,761,905 shares of our common stock, in which we received net proceeds of approximately $94.3 million, after deducting the underwriting discounts and offering expenses payable by us.
In August 2018, in conjunction with the acquisition of QGT, we entered into a credit agreement with Barclays Bank that provided a Term Loan, a Revolving Credit Facility, and a Letter of Credit Facility (the “Credit Facilities”). See further discussion under Borrowing Arrangements below.
38
We anticipate that our existing cash and cash equivalents balance and operating cash flow will be sufficient to service our indebtedness and meet our working capital requirements and technology development projects for at least the next twelve months. The adequacy of these resources to meet our liquidity needs beyond that period will depend on our growth, the size and number of any acquisitions, the state of the worldwide economy, our ability to meet our financial covenants with our credit facility, the cyclical expansion or contraction of the semiconductor capital equipment industry and the other industries we serve and capital expenditures required to meet possible increased demand for our products.
In order to expand our business or acquire additional complementary businesses or technologies, we may need to raise additional funds through equity or debt financings. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, our stockholders’ equity interest will be diluted and these securities might have rights, preferences and privileges senior to those of our current stockholders. We may also require the consent of our new lenders to raise additional funds through equity or debt financings. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
In 2017, we determined that a portion of the current year and future year earnings of one of our China subsidiaries may be remitted in the future to one of our foreign subsidiaries outside of mainland China and, accordingly, we provided for the related withholding taxes in our Consolidated Financial Statements. As of December 25, 2020, we had undistributed earnings of approximately $267.2 million from our foreign subsidiaries that are indefinitely invested outside of the U.S. As of December 25, 2020, we have cash of approximately $181.4 million in our foreign subsidiaries.
Borrowing Arrangements
|
|
December 25, |
|
|
December 27, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
||||||||||
(Dollars in millions) |
|
Amount |
|
|
Weighted- Average Interest Rate |
|
|
Amount |
|
|
Weighted- Average Interest Rate |
|
||||
U.S. Term Loan |
|
$ |
275.0 |
|
|
4.4% |
|
|
$ |
300.0 |
|
|
6.9% |
|
||
Cinos China Credit Facilities |
|
|
1.9 |
|
|
3.1% |
|
|
— |
|
|
— |
|
|||
FDS Revolving Credit Facility |
|
— |
|
|
1.0% |
|
|
|
1.9 |
|
|
1.0% |
|
|||
Debt issuance costs |
|
|
(7.9 |
) |
|
— |
|
|
|
(9.7 |
) |
|
— |
|
||
|
|
$ |
269.0 |
|
|
|
|
|
|
$ |
292.2 |
|
|
|
|
|
In August 2018, we entered into a credit agreement with Barclays Bank that provided a Term Loan, a Revolving Credit Facility and a Letter of Credit Facility (the “Credit Facility”). We and some of our subsidiaries have agreed to secure all of our obligations under the Credit Facility by granting a first priority lien in substantially all of our respective personal property assets (subject to certain exceptions and limitations). In August 2018, we borrowed $350.0 million under the Term Loan and used the proceeds, together with cash on hand, to finance the acquisition of QGT and to refinance our previous 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 original outstanding principal balance payable beginning in January 2019, with the remaining principal paid upon maturity. The Term Loan accrues interest daily at a rate equal to a base LIBOR rate determined by reference to the London interbank offered rate for dollars, plus 4.5% (subject to certain adjustments quarterly based upon the Company’s consolidated leverage ratio). At December 25, 2020, we had an outstanding amount under the Term Loan of $275.0 million, gross of unamortized debt issuance costs of $7.9 million. As of December 25, 2020, the interest rate on the outstanding Term Loan was 4.65%. On December 31, 2021, LIBOR will officially be phased out. The Company will work with its bank to determine alternative risk-free rates.
The Revolving Credit Facility has an initial available commitment of $65.0 million and a maturity date of August 27, 2023. We pay a quarterly commitment fee in arrears equal to 0.25% of the average daily available commitment outstanding. During the first quarter of 2020 we drew $40.0 million under the Revolving Credit Facility to fund operations. In September 2020, the revolver balance of $40.0 million was repaid in full.
39
The Credit Agreement requires that we 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. We were in compliance with all covenants for the quarter ended December 25, 2020.
The Letter of Credit Facility has an initial available commitment of $50.0 million and a maturity date of August 27, 2023. We pay quarterly in arrears a fee equal to 2.5% (subject to certain adjustments as per the Term Loans) 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 December 25, 2020, we had $2.4 million outstanding letters of credit with beneficiaries such as landlords of certain facility leases and government agencies making up the majority of the outstanding balance. The remaining available commitments are $47.6 million on the Letter of Credit Facility and $65.0 million on the Revolving Credit Facility.
In fiscal 2020, Cinos China amended its existing Credit Agreement and entered into two additional Credit Agreements with a local bank that provide Revolving Credit Facilities for a total available commitment of $3.5 million with various maturity dates through September 23, 2022 and interest rates ranging from 1.9% to 4.1%. As of December 25, 2020, Cinos China had an outstanding amount of $1.9 million with an interest rates of 2.1% to 4.1% under these Credit Agreements.
Cinos Korea has Credit Agreements with various banks that provide Revolving Credit Facilities for a total available commitment of 1.6 billion Korean Won (approximately $1.4 million) with annual renewals beginning from April 2021 through June 2021 and interest rates ranging from 1.4% - 5.4%. During the fiscal year ended December 25, 2020, borrowings under these Revolving Facilities were insignificant and no amounts were outstanding as of December 25, 2020.
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 6.0 million euros. As of December 25, 2020, FDS had no outstanding amount under its revolving credit facility.
As of December 25, 2020, our total bank debt was $269.0 million, net of unamortized debt issuance costs of $7.9 million. As of December 25, 2020, we had $65.0 million, $7.3 million (6.0 million euros) and $1.6 million available to draw from our revolving credit facilities in the U.S., Czech Republic and China, respectively.
The fair value of our long-term debt was based on Level 2 inputs, and fair value was determined using quoted prices for similar liabilities in inactive markets. The carrying value of our long-term debt approximates fair value.
Capital Expenditures
Capital expenditures were $37.2 million for the year ended December 25, 2020, primarily attributable to the expansion of our South Korea, Singapore, Czech Republic and certain U.S. facilities.
Off-Balance Sheet Arrangements
During the periods presented, we do not have unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification against certain liabilities to our customers, which may include claims of losses by their own customers resulting out of property damages, bodily injuries or deaths, or infringement of intellectual property rights by our products. Our potential liability arising out of intellectual property infringement claims by any third party is generally uncapped. As of December 25, 2020, we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification arrangements. As a result, we believe the estimated fair value of these arrangements is minimal.
40
Contractual Obligations
Other than operating leases for certain equipment and real estate and purchase order commitments primarily for inventory, we have no off-balance sheet transactions or similar instruments and, other than the arrangements described under “Borrowing Arrangements” above and our common stock purchase obligation resulting from the acquisition of QGT, are not a guarantor of any other entities’ debt or other financial obligations. The following table summarizes our future minimum lease payments, principal payments under debt obligations and our purchase obligations for the purchase of inventory as of December 25, 2020:
(In millions) |
|
Total |
|
|
Fiscal Year 2021 |
|
|
Fiscal Years 2022 - 2023 |
|
|
Fiscal Years 2024 - 2025 |
|
|
Beyond |
|
||||||||||
Operating leases (1) |
|
$ |
|
71.2 |
|
|
$ |
|
13.8 |
|
|
$ |
|
23.3 |
|
|
$ |
|
14.4 |
|
|
$ |
|
19.7 |
|
Borrowing Arrangement (2) |
|
|
|
276.9 |
|
|
|
|
9.2 |
|
|
|
|
18.9 |
|
|
|
|
17.5 |
|
|
|
|
231.3 |
|
Common stock purchase obligation (3) |
|
|
|
12.6 |
|
|
|
— |
|
|
|
|
12.6 |
|
|
|
— |
|
|
|
— |
|
|||
Purchase order commitments (4) |
|
|
|
205.9 |
|
|
|
|
205.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||
Total |
|
$ |
|
566.6 |
|
|
$ |
|
228.9 |
|
|
$ |
|
54.8 |
|
|
$ |
|
31.9 |
|
|
$ |
|
251.0 |
|
(1) |
The Company leases facilities in the U.S.A. as well as internationally under non-cancellable leases that expire on various date through 2031. |
(2) |
Amounts reflect obligations under our Term loan amounting to $275.0 gross of $7.9 million of unamortized debt issuance costs and $1.9 million held by Cinos China. |
(3) |
The Company is obligated to purchase the common stock owned by one of Cinos’ shareholders. See Note 10 of Notes to the Consolidated Financial Statements. |
(4) |
Represents our outstanding purchase orders primarily for inventory. |
Recently Issued and Adopted Accounting Pronouncement
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on UCT’s Consolidated Financial Statements, see Note 1, “Organization and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to financial market risks, including credit risk, foreign currency exchange rate risk and interest rate risk.
Credit Risk
A substantial majority of our trade receivables are derived from sales to OEMs. We believe the net accounts receivable balances from our three largest customers (62.9% as of December 25, 2020) do not represent a significant credit risk, based on cash flow forecasts, balance sheet analysis, and past collection experience. For more information about the customers that represent our accounts receivable balance, see Note 1, Organization and Significant Accounting Policies.
We have adopted credit policies and standards intended to accommodate industry growth and inherent risk. We believe credit risks are moderated by the financial stability of our major customers. We assess credit risk through quantitative and qualitative analysis. From these analyses, we establish shipping and credit limits and determine whether we will seek to use one or more credit support protection devices, such as obtaining a parent guarantee, prepayment or standby letter of credit.
41
Foreign Currency Exchange Rate Risk
We operate in international markets, which expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. Dollar and various foreign currencies. Historically, the majority of our revenue contracts and arrangements with third party suppliers are denominated in U.S. Dollars. Additionally, a portion of our expenses, primarily the cost to manufacture, cost of personnel to deliver technical support on our products and professional services, sales and sales support and research and development, are denominated in foreign currencies. Revenue resulting from selling in currencies and costs incurred in local currencies are exposed to foreign currency exchange rate fluctuations which can affect our operating income. As foreign currency exchange rates vary, operating income may differ from expectations. Increases in the value of the U.S. dollar relative to other currencies would make our products more expensive relative to competing products priced in such other currencies, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our foreign suppliers raising their prices in order to continue doing business with us. However, we do not expect foreign currency exchange rate fluctuations to have a material effect on our results of operations.
We use derivative instruments, such as foreign currency exchange contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. These contracts reduce, but do not entirely eliminate the impact of currency exchange rates movement on our assets and liabilities.
Interest Rate Risk
We are exposed to market risk due to the possibility of changing interest rates under our credit facilities. Our Credit Facility is comprised of a Term B loan and a revolving credit agreement with interest rates as described under Note 6 of Notes to the Consolidated Financial Statements.
At the end of fiscal 2020, the Term B loan had a balance of $275.0 million. A hypothetical 10% increase in our borrowing rates at the end of fiscal 2020 could result in approximately $27.5 million annual increase in interest expense on these existing principal balances.
42
Item 8. |
Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
44 |
|
Consolidated Balance Sheets as of December 25, 2020 and December 27, 2019 |
47 |
48 |
|
49 |
|
50 |
|
51 |
|
52 |
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Ultra Clean Holdings, Inc.
Opinions on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Ultra Clean Holdings, Inc. (the “Company”) as of December 25, 2020 and December 27, 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the years ended December 25, 2020, December 27, 2019 and December 28, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 25, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 25, 2020 and December 27, 2019, and the consolidated results of its operations and its cash flows for each of the years ended December 25, 2020, December 27, 2019 and December 28, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
44
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Inventories
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated inventories balance was $180.4 million as of December 25, 2020. The Company values its inventories at the lower of cost (first-in, first-out) or net realizable value. 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. As disclosed by management, if these factors are less favorable than those projected, additional inventory write-downs may be required.
The valuation of inventories, specific to write downs, requires management to make significant assumptions and complex judgments about the future salability of the inventory and its net realizable value. These assumptions include the assessment of net realizable value by inventory category considering retention periods, future usage and market demand for their products. Additionally, management makes qualitative judgments related to slow moving and obsolete inventories. These factors were the principal considerations that led us to determine that the valuation of inventories is a critical audit matter.
The most relevant procedures we performed to address this critical audit matter included:
|
• |
Testing the design and operating effectiveness of internal controls over the valuation of inventories, including those related to the Company’s methodology for valuing specific inventory categories; |
|
• |
Evaluating the appropriateness of and testing management’s process for determining the valuation of inventories, including: |
|
o |
Evaluating the reasonableness of qualitative adjustments and significant assumptions used by management including those related to forecasted demand and technological obsolescence; |
|
o |
Testing the completeness, accuracy, and relevance of the underlying data used in management’s estimate; |
|
o |
Testing the calculations related to the application of the methodology to specific inventory categories; and |
|
o |
Performing inquiries with appropriate financial and non-financial personnel, regarding obsolete or discontinued inventory models, cancelled sales orders and other factors to corroborate |
45
|
management’s assertions regarding qualitative judgments about slow moving and obsolete inventories. |
|
• |
Developing an independent expectation of inventory write-downs at year end based on historical trends and balances and comparing it to management’s estimate. |
/s/ Moss Adams LLP
San Francisco, California
February 23, 2021
We have served as the Company’s auditor since 2015.
46
Ultra Clean Holdings, Inc.
Consolidated Balance Sheets
|
|
December 25, |
|
|
December 27, |
|
||
|
|
2020 |
|
|
2019 |
|
||
(In millions, except par value) |
|
|||||||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
Accounts receivable, net of allowance for doubtful accounts of $ December 25, 2020 and December 27, 2019 |
|
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
Intangibles assets, net |
|
|
|
|
|
|
|
|
Deferred tax assets, net |
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
|
|
|
|
Other non-current assets |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Bank borrowings |
|
$ |
|
|
|
$ |
|
|
Accounts payable |
|
|
|
|
|
|
|
|
Accrued compensation and related benefits |
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
Other current liabilities |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
Bank borrowings, net of current portion |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 9) |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
UCT stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock — $ outstanding |
|
|
|
|
|
|
|
|
Common stock — $ issued and outstanding at December 25, 2020 and December 27, 2019, respectively |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Common shares held in treasury, at cost, and December 27, 2019 |
|
|
( |
) |
|
|
( |
) |
Retained earnings |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
( |
) |
Total UCT stockholders' equity |
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
Total equity |
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
|
|
|
$ |
|
|
(See accompanying Notes to Consolidated Financial Statements)
47
Ultra Clean Holdings, Inc.
Consolidated Statements of Operations
|
|
Fiscal Year Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
(In millions, except per share amounts) |
|
|||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
||
Total cost revenues |
|
|
|
|
|
|
|
|
|
|
||
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other income (expense), net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Income before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
( |
) |
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to UCT |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to UCT common stockholders: |
|
|||||||||||
Basic |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Diluted |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Shares used in computing net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
(See accompanying Notes to Consolidated Financial Statements)
48
Ultra Clean Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
|
|
Fiscal Year Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
(In millions) |
|
|||||||||||
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in cumulative translation adjustment |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Change in pension net actuarial loss |
|
|
( |
) |
|
|
( |
) |
|
— |
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives |
|
— |
|
|
— |
|
|
|
( |
) |
||
Adjustment for net loss realized and included in net income |
|
— |
|
|
— |
|
|
|
( |
) |
||
Total change in unrealized gain (loss) on derivative instruments |
|
— |
|
|
— |
|
|
|
( |
) |
||
Total other comprehensive income (loss), net of tax |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive income, net of tax, attributable to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to UCT |
|
$ |
|
|
|
|
( |
) |
|
|
|
|
(See accompanying Notes to Consolidated Financial Statements)
49
Ultra Clean Holdings, Inc.
Consolidated Statements of Cash Flows
|
|
Fiscal Year Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
(In millions) |
|
|||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities (excluding assets acquired, liabilities assumed and noncontrolling interests at acquisition): |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on the disposal of assets and business |
|
|
( |
) |
|
|
|
|
|
|
|
|
Gain from insurance proceeds |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Deferred income taxes |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Change in the fair value of financial instruments |
|
|
|
|
|
|
|
|
|
|
( |
) |
Changes in assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Inventories |
|
|
( |
) |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Accounts payable |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Accrued compensation and related benefits |
|
|
|
|
|
|
|
|
|
|
( |
) |
Income taxes payable |
|
|
|
|
|
|
( |
) |
|
|
|
|
Operating lease assets and liabilities |
|
|
( |
) |
|
|
|
|
|
|
— |
|
Other liabilities |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of equipment, including insurance proceeds |
|
|
|
|
|
|
|
|
|
|
— |
|
Acquisition of businesses, net of cash acquired |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on bank borrowings and finance leases |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Payment of contingent earn-out |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Payments of debt issuance costs |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Payments of dividends to a joint venture shareholder |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Employees’ taxes paid upon vesting of restricted stock units |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
|
- |
|
|
|
( |
) |
Net increase in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of income tax refunds |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment purchased included in accounts payable and other liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Impairment loss due to a facility fire covered by insurance |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Note receivable received in exchange for sale of UAMC |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Fair value of earn-out payment related to business acquisitions |
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
(See accompanying Notes to Consolidated Financial Statements)
50
Ultra Clean Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
|
|
Common Stock |
|
|
|
|
|
|
Treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-in Capital |
|
|
Shares |
|
|
Amount |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Total Stockholders’ Equity of UCT |
|
|
Noncontrolling Interests |
|
|
Total Equity |
|
||||||||||
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 29, 2017 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
Issuance under employee stock plans |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
||||||
Stock-based compensation expense |
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|||||||
Employees’ taxes paid upon vesting of restricted stock units |
|
|
( |
) |
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
|
( |
) |
||||||
Issuance of common stock in public offering |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
||||||
Noncontrolling interests from acquisition of QGT |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
||||||||
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
— |
|
|
|
( |
) |
|||||||
Balance December 28, 2018 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Issuance under employee stock plans |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
||||||
Stock-based compensation expense |
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|||||||
Employees’ taxes paid upon vesting of restricted stock units |
|
|
( |
) |
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
|
( |
) |
||||||
Net income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
||||||
Dividend payments to a joint venture shareholder |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
||||||||
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
— |
|
|
|
( |
) |
|||||||
Balance December 27, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Issuance under employee stock plans |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
||||||
Stock-based compensation expense |
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|||||||
Employees’ taxes paid upon vesting of restricted stock units |
|
|
( |
) |
|
— |
|
|
|
( |
) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
( |
) |
|
— |
|
|
|
( |
) |
||||||
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|||||||
Balance December 25, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(See accompanying Notes to Consolidated Financial Statements)
51
Ultra Clean Holdings, Inc.
Notes to Consolidated Financial Statements
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.
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 Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries and all intercompany accounts and transactions have been eliminated in consolidation.
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,
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
Foreign Currency Translation and Remeasurement
As of December 25, 2020, the functional currency of the Products business unit’s foreign subsidiaries is the U.S. dollar. The functional currency of the Service business unit’s foreign subsidiaries is the local currency except for that of its Singapore and Scotland entities, which is the U.S. dollar.
52
Due to the changes in economic factors in FDS and in Services’ entity in Scotland in fiscal 2020, the Company determined that the functional currency designation of FDS and Services’ entity in Scotland is the U.S. dollar, a change from the functional foreign currency utilized in the prior year. The impact of these changes was not significant.
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, 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 U.S. generally accepted accounting principles (“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 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 accounted for 10% or more of related) and their related revenues as a percentage of total revenues were as follows:
|
|
Fiscal Year Ended |
|
|
|||||||||||
|
|
2020 |
|
|
|
2019 |
|
|
|
2018 |
|
|
|||
Lam Research Corporation |
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
% |
Applied Materials, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total |
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
% |
53
Fair Value of Measurements
The Company measures its cash equivalents, derivative contracts, contingent earn-out liabilities, pension obligation 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.
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 Consolidated Balance Sheets at fair value. The Company records changes in the fair value of the derivatives in the accompanying Consolidated Statements of Operations as other income (expense), net, or as a component of AOCI in the accompanying 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, 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
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
. Direct costs incurred to develop software for internal use are capitalized and amortized over an estimated useful life of three or . 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.54
Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. The Company assesses the fair value of the assets based on the amount of the undiscounted future cash flows that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset are less than the carrying value of the asset. If the Company identifies an impairment, the Company reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
At the end of fiscal years 2020, 2019 and 2018, the Company assessed the useful lives of its long-lived assets, including property, plant and equipment as well as its intangible assets and concluded that
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 December 25, 2020 and 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. There were
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 Consolidated Balance Sheets. Deferred costs are amortized on an effective interest method basis over the contractual term.
55
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 Consolidated Financial Statements.
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 performs the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with 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 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.
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.
56
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.
The Company accounts for Global Intangible Low-Taxed Income (“GILTI”) as period costs when incurred.
Net Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options and restricted stock using the treasury stock method, except when such shares are anti-dilutive. See Note 14 to the Notes to 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
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 does not expect this new standard to have a material effect on its Consolidated Financial Statements.
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.
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 material impact on its Consolidated Financial Statements.
57
2. BUSINESS COMBINATIONS
Dynamic Manufacturing Solutions, LLC
On
During the second quarter of fiscal year 2020, DMS achieved the specified performance target of the earn-out, which resulted in the maximum payment of $
In the first quarter of fiscal year 2020, the Company completed the acquisition accounting and the valuation of the fair value of the assets acquired and the liabilities assumed.
Fair Market Values (In millions) |
|
|
|
|
Accounts receivable |
|
$ |
|
|
Inventories |
|
|
|
|
Property, plant and equipment |
|
|
|
|
Goodwill |
|
|
|
|
Intangible assets |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Accounts payable |
|
|
( |
) |
Other liabilities |
|
|
( |
) |
Total liabilities assumed |
|
|
( |
) |
Purchase price allocated |
|
$ |
|
|
The customer relationships intangible assets acquired from the acquisition of DMS has an estimated useful life of six years.
The results of operations for the Company for fiscal year ended December 27, 2019 included eight months of operating activities for DMS. Net sales of approximately $
58
Pro Forma Consolidated Results
The following unaudited pro forma consolidated results of operations assume the DMS acquisition was completed as of the beginning of the 2019 fiscal year.
|
|
Unaudited Pro Forma Information |
|
|
|
|
Year Ended |
|
|
|
|
December 27, |
|
|
|
|
2019 |
|
|
(In millions, except per share amounts) |
|
|||
Revenues |
|
$ |
|
|
Net loss |
|
$ |
( |
) |
Basic loss per share |
|
$ |
( |
) |
Diluted loss per share |
|
$ |
( |
) |
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 and to reflect the related income tax effect. The unaudited pro forma condensed 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 operations in future periods or the results that would have been realized had UCT and DMS been a combined company during the specified period. 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.
3. BALANCE SHEET INFORMATION
Inventories consisted of the following:
|
|
December 25, |
|
|
December 27, |
|
||||
(In millions) |
|
2020 |
|
|
2019 |
|
||||
Raw materials |
|
$ |
|
|
|
|
$ |
|
|
|
Work in process |
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
|
$ |
|
|
|
At December 25, 2020 and December 27, 2019, inventory balances were $
Property, plant and equipment, net, consisted of the following:
|
Useful Life |
|
December 25, |
|
|
December 27, |
|
||||
(In millions) |
(in years) |
|
2020 |
|
|
2019 |
|
||||
Land |
n/a |
|
$ |
|
|
|
|
$ |
|
|
|
Buildings |
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements |
* |
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software |
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
( |
) |
|
|
|
( |
) |
Construction in progress |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
$ |
|
|
|
|
$ |
|
|
|
* Lesser of estimated useful life or remaining lease term
59
Restructuring
During the first quarter of fiscal year 2020, the Company made a strategic decision to fully integrate Quantum Global Technologies, LLC’s (“QGT”) corporate office responsibilities from Quakertown, PA to UCT’s corporate office in Hayward, CA. As a result, the Company recorded a restructuring charge of $1.9 million for the fiscal year ended December 25, 2020, in general and administrative expense, primarily related to employee severance as well as the impaired value of the facility lease and losses on sale of equipment.
During the fourth quarter of fiscal year 2019, the Company made a strategic decision to close its machining operations in South San Francisco, CA. As a result, the Company recorded a restructuring charge of $
4. FAIR VALUE
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.
|
|
|
|
|
Fair Value Measurement at |
|
||||||||||
|
|
|
|
|
Reporting Date Using |
|
||||||||||
Description |
|
December 25, 2020 |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock purchase obligation |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Pension obligation |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
|
|
|
|
Fair Value Measurement at |
|
||||||||||
|
|
|
|
|
Reporting Date Using |
|
||||||||||
Description |
|
December 27, 2019 |
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earn-out liability |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Common stock purchase obligation |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Pension obligation |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
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 common stock purchase obligation is based on a combination of an income and market valuation approach. The income and market valuation approaches may incorporate Level 3 fair value measures for instances when observable inputs are not available. The more significant judgmental assumptions used to estimate the value of common stock purchase obligation include an estimated discount rate, a range of assumptions that form the basis of the expected future net cash flows (e.g., the revenue growth rates and operating margins), and a company specific beta. The significant judgmental assumptions used that incorporate market data, including the relative weighting of market observable information and the comparability of that information in the valuation models, are forward-looking and could be affected by future economic and market conditions.
60
The estimated fair value of pension obligation is based on expected years of service and average compensation. The valuation model used to value 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 follow:
(Dollars in millions, except rate/multiple) |
|
December 25, 2020 |
|
|
Valuation Techniques |
|
Unobservable Input |
|
Rate/Multiple |
|
|||
Common stock purchase obligation |
|
$ |
|
|
|
|
Discounted cash flow |
|
Revenue Multiple |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Multiple |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension obligation |
|
$ |
|
|
|
|
Projected unit credit method |
|
Discount rate |
|
|
|
% |
|
|
|
|
|
|
|
|
|
Rate on return |
|
|
|
% |
|
|
|
|
|
|
|
|
|
Salary increase rate |
|
|
|
% |
Following is a summary of the Level 3 activity:
(In millions) |
|
Contingent earn-out liability |
|
|
Common stock purchase obligation |
|
|
Pension obligation |
|
|||
As of December 27, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Fair value adjustments (DMS) |
|
|
|
|
|
|
- |
|
|
|
- |
|
Fair value adjustments (QGT) |
|
|
- |
|
|
|
|
|
|
|
- |
|
Benefits, payments and other adjustments |
|
|
( |
) |
|
|
- |
|
|
|
|
|
As of December 25, 2020 |
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
5. GOODWILL AND INTANGIBLE ASSETS
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.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. 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.
61
In the fourth quarters of 2020 and 2019, the Company conducted its annual impairment tests of goodwill and concluded that there was no goodwill impairment with respect to its reporting units.
Details of aggregate goodwill of the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|||
(In millions) |
|
Products |
|
|
Services |
|
|
Total |
|
|||
Balance at December 27, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Business combination |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 25, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 December 25, 2020 |
|
|
As of December 27, 2019 |
|
|
||||||||||||||||||
|
|
|
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 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Tradename |
4 - 6* |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
Intellectual property/know-how |
7 - 12 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
Recipes |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
Standard operating procedures |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
$ |
|
|
|
Total |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
* |
The Company concluded that the asset life of UCT tradename of $ |
Amortization expense was approximately $
|
|
Amortization |
|
|
(In millions) |
|
Expense |
|
|
2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
6. BORROWING ARRANGEMENTS
In August 2018, the Company entered into a credit agreement with Barclays Bank that provided a Term Loan, a Revolving Credit Facility, and a Letter of Credit Facility (the “Credit Facility”). UCT and certain of its subsidiaries have agreed to secure all of their obligations under the Credit Facility by granting a first priority lien in substantially
62
all of their respective personal property assets (subject to certain exceptions and limitations). In August 2018, the Company borrowed $
The Revolving Credit Facility has an initial available commitment of $
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
The Letter of Credit Facility has an initial available commitment of $
In 2020, Cinos China amended its existing Credit Agreement and entered into two additional Credit Agreements with a local bank that provide Revolving Credit Facilities for a total available commitment of $
Cinos Korea has Credit Agreements with various banks that provide Revolving Credit Facilities for a total available commitment of
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
As of December 25, 2020, the Company’s total bank debt was $
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.
63
As of December 25, 2020, the Company’s future debt principal payment obligations for the respective fiscal years were as follows:
|
|
Debt |
|
|
(In millions) |
|
(Principal only) |
|
|
2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
|
7. INCOME TAXES
The provision for income taxes consisted of the following:
|
Year Ended |
|
||||||||||||
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
||||||
(In millions) |
2020 |
|
|
2019 |
|
|
2018 |
|
||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
( |
) |
|
|
|
( |
) |
|
|
|
( |
) |
Total deferred |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total provision |
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Income before provision for income taxes was generated from the following geographic areas:
|
Year Ended |
|
||||||||||||
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
||||||
(In millions) |
2020 |
|
|
2019 |
|
|
2018 |
|
||||||
United States |
$ |
|
( |
) |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax income |
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
64
The effective tax rate differs from the U.S. federal statutory tax rate as follows:
|
|
Year Ended |
|
|
|||||||||||
|
|
December 25, |
|
|
|
December 27, |
|
|
|
December 28, |
|
|
|||
|
|
2020 |
|
|
|
2019 |
|
|
|
2018 |
|
|
|||
Federal income tax provision at statutory rate |
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
% |
State income taxes, net of federal benefit |
|
|
|
|
% |
|
|
( |
) |
% |
|
|
|
|
% |
Effect of foreign operations |
|
|
( |
) |
% |
|
|
( |
) |
% |
|
— |
|
% |
|
Change in valuation allowance |
|
|
( |
) |
% |
|
|
|
|
% |
|
|
( |
) |
% |
Foreign income inclusions |
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
% |
Adjustment for changes in tax law |
|
— |
|
% |
|
— |
|
% |
|
|
|
|
% |
||
Common stock purchase obligation |
|
|
|
|
% |
|
— |
|
% |
|
— |
|
% |
||
Income tax audit adjustment |
|
|
|
|
% |
|
— |
|
% |
|
— |
|
% |
||
Other |
|
|
( |
) |
% |
|
|
( |
) |
% |
|
|
|
|
% |
Effective Tax Rate |
|
|
|
|
% |
|
|
|
|
% |
|
|
|
|
% |
Significant components of deferred tax assets and liabilities are as follows:
|
|
Year Ended |
|
|||||||
|
|
December 25, |
|
|
December 27, |
|
||||
(In millions) |
|
2020 |
|
|
2019 |
|
||||
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
Inventory valuation and basis difference |
|
$ |
|
|
|
|
$ |
|
|
|
State taxes |
|
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
|
|
|
|
|
|
|
|
|
Interest expense limitation |
|
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
|
|
|
|
|
|
|
|
Net operating losses |
|
|
|
|
|
|
|
|
|
|
Tax credits |
|
|
|
|
|
|
|
|
|
|
Other timing differences |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
|
( |
) |
|
|
|
( |
) |
Total deferred tax assets |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
Undistributed earnings |
|
|
|
( |
) |
|
|
|
( |
) |
Operating lease right-of-use assets |
|
|
|
( |
) |
|
|
|
( |
) |
Depreciation |
|
|
|
( |
) |
|
|
|
( |
) |
Intangibles |
|
|
|
( |
) |
|
|
|
( |
) |
Goodwill |
|
|
|
( |
) |
|
|
|
( |
) |
Total deferred tax liabilities |
|
|
|
( |
) |
|
|
|
( |
) |
Net deferred tax liabilities |
|
$ |
|
( |
) |
|
$ |
|
( |
) |
The Company provides for U.S. income taxes on the earnings of its foreign subsidiaries to the extent required by the Tax Cuts and Jobs Act (TCJA). In a prior period, the Company has also recognized a deferred tax liability for taxes that would be withheld on a distribution of a portion of the undistributed earnings of one of its China subsidiaries. However, the Company has not provided for withholding taxes on the remaining portion of the undistributed earnings of its China subsidiary nor for the undistributed earnings of its other foreign subsidiaries that it intends to reinvest indefinitely outside the U.S. The Company has also historically remitted earnings from its Singapore subsidiary to the U.S. and may do so again in the future. However, the Company has not provided for withholding taxes on undistributed Singapore earnings as Singapore does not currently impose a withholding tax on dividends. If the Company changes its intent to reinvest its undistributed foreign earnings indefinitely or if a greater amount of
65
undistributed earnings is needed than the previous anticipated remaining unremitted foreign earnings, the Company could be required to accrue or pay foreign taxes on some or all of these undistributed earnings. As of December 25, 2020, the Company had undistributed earnings of foreign subsidiaries that are considered indefinitely invested outside of the U.S. of approximately $
The Company’s gross liability for unrecognized tax benefits as of December 25, 2020 and December 27, 2019 was $
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in millions):
Balance as of December 29, 2017 |
$ |
|
|
|
Increases related to current year positions |
|
|
|
|
Expiration of the statute of limitations |
|
|
- |
|
Balance as of December 28, 2018 |
$ |
|
|
|
Increases related to current year tax positions |
|
|
- |
|
Expiration of the statute of limitations for the assessment of taxes |
|
|
- |
|
Balance as of December 27, 2019 |
$ |
|
|
|
Increases related to current year tax positions |
|
|
- |
|
Expiration of the statute of limitations for the assessment of taxes |
|
|
( |
) |
Balance as of December 25, 2020 |
$ |
|
|
|
As of December 25, 2020, the Company had California net operating loss carryforwards (“NOLs”) of approximately $
On March 27, 2020, the previous U.S. President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) in response to the U.S. COVID-19 pandemic, which, among other things, suspends the
The Company files federal, state and foreign income tax returns in several U.S. and foreign jurisdictions. The federal statute of limitation has closed for years prior to 2017. State statutes of limitation are generally closed for years prior to 2016. The statute of limitation for significant foreign jurisdictions has closed for years prior to 2017.
During the fiscal quarter ended December 25, 2020, the Company recorded a net charge to provision for income taxes of approximately $
The Company has operated under a Development and Expansion Incentive (“DEI”) in Singapore that ended on December 25, 2020. However, the Company has reached an agreement in principle with the Singapore Economic Development Board for an extension of the DEI through 2023. The DEI will reduce the local tax on certain Singapore income from a statutory rate of
66
8. RETIREMENT PLANS
Defined Benefit Plan
Cinos Korea has a noncontributory defined benefit pension plan covering substantially all of its employees upon their retirement. The benefits 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 December 25, 2020, the benefit obligation of the plan is $
Employee Savings and Retirement Plan
The Company sponsors a 401(k) savings and retirement plan (the “401(k) Plan”) for all US employees who meet certain eligibility requirements. Participants could elect to contribute to the 401(k) Plan, on a pre-tax basis, up to
9. COMMITMENTS AND CONTINGENCIES
Commitment
The Company had commitments to various third parties to purchase inventories totaling approximately $
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 statement of operations and does not believe that any of these proceedings or other claims will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
10. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS
Noncontrolling Interests
QGT, through its wholly-owned subsidiary in Singapore, owns
67
The carrying value of the remaining
The Company is obligated to purchase shares owned by a Cinos Korea shareholder. A certain number of shares would be purchased at a fixed price per share, while the other remaining shares would be purchased based on 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 other shareholder has a put option. As of December 25, 2020, the fair value of the obligation of $
11. EMPLOYEE STOCK PLANS
Employee Stock Plans
The Company maintains 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 (RSAs), performance stock units (PSUs) and restricted stock units (RSUs). 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.
The estimated fair value of the Company’s equity-based awards, net of expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis over a weighted average period of
The Company uses historical data to estimate pre-existing forfeitures, and records stock-based compensation for those awards that are expected to vest at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates.
During fiscal years 2020, 2019 and 2018, the Company recorded $
Total stock-based compensation during the fiscal years 2020, 2019 and 2018, respectively, in various expense categories was as follows:
|
Year Ended |
|
|||||||||
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
(In millions) |
2020 |
|
|
2019 |
|
|
2018 |
|
|||
Cost of revenues (1) |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
( |
) |
|
— |
|
|
|
( |
) |
|
Net stock-based compensation expense |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
68
|
2003 Amended and Restated Stock Incentive Plan
Options
The 2003 Incentive Plan provides for the issuance of options and other stock-based awards. Options are generally granted at fair value at the date of grant as determined by the Board of Directors and have terms up to
Restricted Stock Units and Restricted Stock Awards
In fiscal years 2020, 2019 and 2018, the Company granted
RSUs and PSUs are granted to employees with a unit purchase price of
The following table summarizes the Company’s PSUs, RSUs and RSAs activities through the year ended December 25, 2020:
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
Intrinsic |
|
|
|
|
Number of |
|
|
Value |
|
||
|
|
Shares |
|
|
(in millions) |
|
||
Unvested restricted stock units and restricted stock awards at December 28, 2018 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Unvested restricted stock units and restricted stock awards at December 27, 2019 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
( |
) |
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
Unvested restricted stock units and restricted stock awards at December 25, 2020 |
|
|
|
|
|
$ |
|
|
Vested and expected to vest restricted stock units and restricted stock awards |
|
|
|
|
|
$ |
|
|
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
69
12. 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 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
The Company’s products are manufactured at our facilities in the U.S.A., China, Singapore and the Czech Republic. The Company provides services from operations in the U.S.A., Singapore, United Kingdom, Israel, Taiwan, South Korea, and China. 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. Transfer of control occurs at a specific point-in-time. Based on the enforceable rights included in our agreements or prevailing terms and conditions, products produced by the Company without an alternative use are not protected by an enforceable right of payment that includes a reasonable profit throughout the duration of the agreement. 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 December 25, 2020, an accrual for unpaid customer rebates of $
The Company’s principal markets include America, Asia and Europe. 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.
|
|
Year Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Singapore |
|
|
|
|
|
|
|
|
|
|
|
|
Korea |
|
|
|
|
|
|
|
|
|
|
|
|
Austria |
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan |
|
|
|
|
|
|
|
|
|
|
|
|
China |
|
|
|
|
|
|
|
|
|
|
|
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
70
13. LEASES
The Company leases offices, facilities and equipment in locations throughout the United States, Asia and Europe. 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.
|
|
Year Ended |
|
|||||
(Dollars in millions) |
|
December 25, 2020 |
|
|
December 27, 2019 |
|
||
Operating lease cost |
|
$ |
|
|
|
$ |
|
|
Short-term lease cost |
|
|
|
|
|
|
|
|
Sublease income |
|
|
( |
) |
|
|
( |
) |
Total lease cost |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
|
|
|
$ |
|
|
Weighted-average remaining lease term – operating leases |
|
|
|
|
|
|
|
|
Weighted-average discount rate – operating leases |
|
|
|
% |
|
|
|
% |
Future minimum payments under operating leases as of December 25, 2020 were summarized as follows:
(In millions) |
|
Operating Leases |
|
|
2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum lease payments |
|
|
|
|
Less: imputed interest |
|
|
|
|
Lease liability |
|
$ |
|
|
The Company entered into two new lease agreements in fiscal year 2020 with commencement dates in fiscal year
14. NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share:
|
|
Year Ended |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
(In millions, except share amounts) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to UCT |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation — basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation — diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common shares outstanding subject to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to UCT — basic |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Net income (loss) per share attributable to UCT — diluted |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
71
15. REPORTABLE SEGMENTS
The Company operates and reports financial results in
Segment |
|
Product or Services |
|
Markets Served |
|
Geographic Areas |
Products |
|
Weldments Machining Fabrication |
|
|
|
Asia Europe |
Services |
|
Analytics |
|
|
|
Asia Europe |
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 consolidated statements of operations.
Any intercompany sales and associated profit (and any other intercompany items) are eliminated from segment results. There were no significant intercompany eliminations for the periods presented.
|
|
Fiscal Year End |
|
|||||||||
|
|
December 25, |
|
|
December 27, |
|
|
December 28, |
|
|||
(In millions) |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total segment gross profit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
December 27, |
|
||
(In millions) |
|
|
|
|
|
2020 |
|
|
2019 |
|
||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
72
16. GOVERNMENT SUBSIDIES
From April through December of the current year, the Singapore government announced a series of relief measures for wages paid to local employees with the purpose of supporting employers during this period of economic uncertainty related to the COVID-19 pandemic, including the co-funding of wages incurred by local employers in fiscal 2020. The Company recorded a total amount $
The Company also received unconditional subsidies of $
17. UNAUDITED QUARTERLY FINANCIAL RESULTS
The following table sets forth statement of operations data for the periods indicated. The information for each of these periods is unaudited and has been prepared on the same basis as our audited Consolidated Financial Statements included herein and includes all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our unaudited operations data for the periods presented. Historical results are not necessarily indicative of the results to be expected in the future:
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
Fiscal |
|
||||||||||
(In million, except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Year (1) |
|
||||||||||
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Gross profit |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Net income |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Earnings per share — basic |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Earnings per share — diluted |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Gross profit |
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Net income (loss) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
Earnings (loss) per share — basic |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
Earnings (loss) per share — diluted |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
|
|
|
$ |
|
( |
) |
|
$ |
|
( |
) |
(1) |
Earnings per share is calculated independently each quarter and for the full year based upon their respective weighted average shares outstanding. Therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share reported. |
73
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not Applicable
Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures
Rule 13a-15 of the Securities and Exchange Act of 1934, as amended, requires that we conduct an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report, and we have a disclosure policy in furtherance of the same. This evaluation is designed to ensure that all corporate disclosure is complete and accurate in all material respects. The evaluation is further designed to ensure that all information required to be disclosed in our SEC reports is accumulated and communicated to management to allow timely decisions regarding required disclosures and recorded, processed, summarized and reported within the time periods and in the manner specified in the SEC’s rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our Chief Executive Officer and Chief Financial Officer supervise and participate in this evaluation, and they are assisted by our Chief Accounting Officer and other members of our Disclosure Committee.
We conducted the required evaluation, and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined by Securities Exchange Act Rule 13a-15(e)) were effective as of December 25, 2020.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f), including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our board of directors and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of the inherent limitations of any system of internal control. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses of judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper overriding of controls. As a result of such limitations, there is risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financing reporting was effective as of December 25, 2020.
Our independent registered public accounting firm, Moss Adams LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K, has expressed an unqualified opinion on the operating effectiveness of the Company’s internal control over financial reporting as of December 25, 2020, as stated in their report which appears in this Form 10-K.
74
Previously Identified Material Weaknesses Relating to Services Business Segment
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We previously disclosed in our 2019 Annual Report on Form 10-K, the following control deficiency that constituted a material weakness in our internal control over financial reporting:
• |
In August 2018, we acquired Quantum Global Technologies, LLC, a privately held company (now Services business). During fiscal year 2019, management proceeded to implement control processes and procedures to integrate the acquired business into the overall Company. During fiscal 2019, process improvements were made; however, we have determined that the control environment of Services business lacks the maturity and design effectiveness necessary to comply with the requirements of Sarbanes-Oxley Act of 2002. As of December 27, 2019, management concluded that due to deficiencies in the design and implementation of business process controls and information technology general controls relating to all relevant accounts and cycles within our Services business, material weaknesses existed. |
Remediation of Prior Material Weaknesses
During the course of fiscal year 2020, we executed the following actions to address the 2019 material weaknesses:
• |
Assessed key business cycles at material Services business locations to ensure that the processes, procedures and controls are adequately designed, clearly documented, standardized, appropriately communicated and executed timely to enhance control ownership throughout our Services business. |
• |
Strengthened the information technology general controls that supported our Services business’ critical process areas. |
• |
Enhanced our Services business’ monitoring procedures by implementing new training activities and hiring additional qualified personnel. |
• |
Ensured appropriate resources and controls were fully incorporated into the corporate oversight function. |
Based on the actions taken, as well as the testing and evaluation of the design and operating effectiveness of the controls, we concluded that the material weaknesses related to the design and implementation of business process controls and information technology general controls in all relevant Services business accounts and cycles, were remediated as of December 25, 2020.
Changes in Internal Control Over Financial Reporting
Other than the actions taken to remediate the 2019 material weaknesses described above, there were no changes in our internal control over financial reporting during the fiscal fourth quarter ended December 25, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. |
Other Information |
None.
75
PART III
Pursuant to Paragraph G (3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by reference from our definitive Proxy Statement to be filed with the SEC in connection with our 2019 Annual Meeting of Stockholders.
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this item concerning directors is incorporated by reference to the section entitled, “Election of Directors” in our Proxy Statement for the 2019 Annual Meeting of Stockholders.
For information with respect to Executive Officers, see Part I, Item 1 of this Annual Report on Form 10-K, under “Executive Officers.”
The information required by this item with respect to Section 16(a) beneficial reporting compliance is incorporated by reference to the section entitled, “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2019 Annual Meeting of Stockholders.
We have adopted a Code of Business Conduct and Ethics that is designed to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. This code of ethics is available on our website at www.uct.com. To the extent required by law, any amendments to, or waivers from, any provision of the code of ethics will be promptly disclosed to the public. To the extent permitted by such legal requirements, we intend to make such public disclosure by posting the relative material on our website in accordance with SEC rules.
Item 11. |
Executive Compensation |
The information required by this item regarding the security ownership of certain beneficial owners is incorporated by reference to the sections entitled “Executive Officer Compensation” and “Election of Directors” in our Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is incorporated by reference to the sections entitled “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for the 2019 Annual Meeting of Stockholders.
The table below summarizes our equity plan information as of December 25, 2020:
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(c) (1) |
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Number of Securities |
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(a) |
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Remaining Available |
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Number of Securities |
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(b) |
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for Future Issuance |
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to be Issued Upon |
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Weighted-Average |
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Under Equity |
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Exercise/Vest of |
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Exercise Price of |
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Compensation Plans |
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Outstanding Options, |
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Outstanding |
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(Excluding |
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(Shares in millions) |
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Awards |
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Options, Warrants |
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Securities Reflected |
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Plan Category |
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Warrants and Rights |
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and Rights |
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in Column (a) |
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Equity compensation plans approved by security holders: |
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1.7 |
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$ |
— |
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1.5 |
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Equity compensation plans not approved by security holders |
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— |
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— |
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— |
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Total |
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1.7 |
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$ |
— |
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1.5 |
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(1) |
Consists of the 2003 Stock Incentive Plan, as amended, and, for purposes of column (c), the Employee Stock Purchase Plan. Since restricted stock units do not have an exercise price, they are excluded from the calculations in column (b) of the table above. |
76
Item 13. |
Certain Relationships and Related Transactions |
The information required by this item is incorporated by reference to the section entitled “Certain Relationships and Related Party Transactions” in our Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 14. |
Principal Accountant Fees and Services |
The information required by this item is incorporated by reference to the section entitled “Ratification of the Appointment of Our Independent Registered Public Accounting Firm” in our Proxy Statement for the 2019 Annual Meeting of Stockholders.
77
Part IV
Item 15. |
Exhibits, Financial Statement Schedules |
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements:
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Form 10-K Page No. |
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44 |
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47 |
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48 |
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49 |
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50 |
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51 |
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52 |
2. Financial statement schedules not listed have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
78
Exhibit Index
Exhibit Number |
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Description |
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Form |
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File No. |
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Filing Date |
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Exhibit |
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Filed Herewith |
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2.1 |
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8-K |
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000-50646 |
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July 25, 2018 |
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2.1 |
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3.1 |
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Amended and Restated Certificate of Incorporation of Ultra Clean Holdings, Inc. |
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S-1/A |
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333-11904 |
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March 2, 2004 |
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3.1 |
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3.2 |
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10-Q |
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000-50646 |
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May 2, 2016 |
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3.1 |
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4.1 |
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S-1/A |
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333-11904 |
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March 8, 2004 |
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4.1 |
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4.2 |
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Description of Securities Registered Under Section 12 of the Exchange Act |
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X |
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10.1† |
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Ultra Clean Holdings, Inc. Amended and Restated Stock Incentive Plan (as amended) |
|
8-K |
|
000-50646 |
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May 24, 2019 |
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10.1 |
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10.2† |
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S-1/A |
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333-11904 |
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March 8, 2004 |
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10.6 |
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10.3† |
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S-1/A |
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333-11904 |
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March 8, 2004 |
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10.13 |
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10.4† |
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10-K |
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000-50646 |
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March 12, 2008 |
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10.18 |
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10.5† |
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Employee Stock Purchase Plan (restated as of October 21, 2004) |
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10-Q |
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000-50646 |
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November 8, 2004 |
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10.9.1 |
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10.6† |
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S-1/A |
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333-11904 |
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March 2, 2004 |
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10.10 |
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10.7† |
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Severance Policy for Executive Officers (amended as of October 26, 2018) |
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8-K |
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000-50646 |
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November 1, 2018 |
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10.1 |
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10.8† |
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Offer Letter between Ultra Clean Holdings, Inc. and James P. Scholhamer dated January 3, 2015 |
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8-K |
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000-50646 |
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January 5, 2015 |
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99.1 |
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10.9† |
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10-K |
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000-50646 |
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March 11, 2015 |
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10.18 |
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10.10† |
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10-K |
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000-50646 |
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March 9, 2016 |
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10.18 |
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10.11† |
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8-K |
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000-50646 |
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July 12, 2016 |
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99.1 |
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10.12† |
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8-K |
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000-50646 |
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July 12, 2016 |
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99.2 |
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10.13† |
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10-Q |
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000-50646 |
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August 9, 2017 |
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10.2 |
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79
Exhibit Number |
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Description |
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Form |
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File No. |
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Filing Date |
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Exhibit |
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Filed Herewith |
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10.14† |
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10-Q |
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000-50646 |
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August 8, 2018 |
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10.1 |
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10.15 |
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8-K |
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000-50646 |
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August 31, 2018 |
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10.1 |
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10.16 |
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8-K |
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000-50646 |
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August 31, 2018 |
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10.2 |
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10.17 |
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8-K |
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000-50646 |
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October 4, 2018 |
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10.1 |
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10.18† |
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Form of Change in Control Severance Agreement for Executive Officers |
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8-K |
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000-50646 |
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November 1, 2018 |
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10.2 |
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10.19 |
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8-K |
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000-50646 |
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December 17, 2020 |
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2.1 |
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21.1 |
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X |
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23.1 |
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Consent of Moss Adams LLP, Independent Registered Public Accounting Firm |
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X |
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24.1 |
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X |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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X |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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X |
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32.1 |
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X |
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32.2 |
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X |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
† |
Denotes management contract or compensatory plan. |
80
Item 16. |
Form 10-K Summary |
None
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Ultra Clean Holdings, Inc. |
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By: |
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/S/ JAMES P. SCHOLHAMER |
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James P. Scholhamer |
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Chief Executive Officer |
Date: February 23, 2021
KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints James P. Scholhamer and Sheri Savage, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission hereby ratifying and confirming that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
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Title |
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Date |
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/S/ CLARENCE L. GRANGER Clarence L. Granger |
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Chairman |
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February 23, 2021 |
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/S/ JAMES P. SCHOLHAMER James P. Scholhamer |
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Chief Executive Officer and Director (Principal Executive Officer) |
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February 23, 2021 |
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/S/ SHERI SAVAGE Sheri Savage |
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Chief Financial Officer (Principal Financial Officer)
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February 23, 2021 |
/S/ CHRIS P. SIU Chris P. Siu |
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Chief Accounting Officer (Principal Accounting Officer) |
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February 23, 2021 |
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/S/ EMILY M. LIGGETT Emily M. Liggett |
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Director |
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February 23, 2021 |
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/S/ THOMAS T. EDMAN Thomas T. Edman |
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Director |
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February 23, 2021 |
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/S/ BARBARA V. SCHERER Barbara V. Scherer |
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Director |
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February 23, 2021 |
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/S/ DAVID T. IBNALE David T. IbnAle |
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Director |
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February 23, 2021 |
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/S/ ERNEST E. MADDOCK Ernest E. Maddock |
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Director |
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February 23, 2021 |
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/S/ JACQUELINE A. SETO |
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Director |
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February 23, 2021 |
Jacqueline A. Seto |
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82
Exhibit 4.2
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
The following summary of the terms of our capital stock is not meant to be complete and is qualified by reference to the relevant provisions of the Delaware General Corporation Law (the “DGCL”) and our amended and restated certificate of incorporation (our “certificate of incorporation”) and our amended and restated bylaws (our “bylaws”). We have summarized certain portions of the Certificate of Incorporation and Bylaws below. This information does not purport to be complete and is subject in all respects to the applicable provisions of our certificate of incorporation and bylaws, which are incorporated by reference herein.
Authorized Capital Stock
Our Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.
Common Stock
As of December 27, 2019, there were 39,881,505 shares of common stock outstanding and three stockholders of record. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available therefor. In the event of the liquidation, dissolution or winding up of Ultra Clean, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
Our board of directors is authorized, subject to any limitations imposed by law, without stockholder approval, from time to time to issue up to 10,000,000 shares of preferred stock in one or more series, each series to have rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as our board of directors may determine. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our voting stock outstanding. We have no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.
Certain Provisions of Our Certificate of Incorporation and Bylaws
Our Bylaws vest the power to call special meetings of stockholders in our chairman of the board and our board of directors. Stockholders are permitted under our Certificate of Incorporation to act by written consent in lieu of a meeting.
To be properly brought before an annual meeting of stockholders, any stockholder proposal or nomination for the board of directors must be delivered to our secretary not less than 90 days nor more than 120 days prior to the first anniversary of the prior year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than 30 days prior to such anniversary date or delayed more than 70 days after such anniversary date, then to be timely such notice must be received by us no earlier than 120 days prior to such annual meeting and no later than the later of 70 days prior to the day of the meeting or the 10th day following the day on which public announcement of the date of the meeting was first made by us. Such notice must contain information specified in the Bylaws as to the director
nominee or proposal of other business, information about the stockholder making the nomination or proposal and the beneficial owner, if any, on behalf of whom the nomination or proposal is made, including name and address, class and number of shares owned, and representations regarding the intention to make such a proposal or nomination and to solicit proxies in support of it.
Certain Anti-Takeover Effects of Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law (“Section 203”). In general, Section 203 prohibits a publicly held Delaware corporation from engaging in various “business combination” transactions with any interested stockholder for a period of three years following the date of the transactions in which the person became an interested stockholder, unless:
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• |
the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; |
|
• |
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or |
|
• |
on or subsequent to such date, the business combination is approved by the board and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. |
A “business combination” is defined to include mergers, asset sales, and other transactions resulting in financial benefit to a stockholder. In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation’s voting stock.
The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Listing
Our common stock is listed on the NASDAQ Global Select Market under the symbol “UCTT.”
Transfer Agent and Registrar
The transfer agent and registrar for the shares of our common stock is Equiniti Trust Company.
2
Exhibit 21.1
Ultra Clean Holdings, Inc.
List of Subsidiaries
Ultra Clean Technology Systems and Service, Inc. (a California corporation)
Ultra Clean International Holding Company (a Cayman Islands corporation)
Ultra Clean Micro-Electronics Equipment (Shanghai) Co., Ltd. (a Chinese company)
Ultra Clean Pacific Holdings PTE., Ltd. (a Singapore company)
Ultra Clean Technology (Malaysia) SDN. BHD. (a Malaysia company)
Far East International Holdings Ltd (a Hong Kong company)
Ultra Clean Asia Pacific, Pte Ltd (a Singapore company)
American Integration Technologies LLC (a Delaware limited liability company)
Integrated Flow Systems, LLC (a California limited liability company)
UCT Thermal Solutions, Inc. (a Delaware corporation)
Dash Acquisition Subsidiary, LLC (a Delaware limited liability company)
UCT Fluid Delivery Solutions s.r.o (a Czech Republic company)
Quantum Global Technologies, LLC (a Delaware limited liability company)
QuantumClean Technologies (S) Pte. Ltd. (a Singapore company)
Quantum Global Technologies – Scotland (a Scotland corporation)
QuantumClean Global – Israel Ltd. (an Israel company)
QuantumClean Global Technologies Ireland Limited (an Ireland company)
Quantum Global Technologies Holding Company, LLC (a Delaware limited liability company)
Quantum Global Technologies – Korea (a South Korea corporation)
Quantum Global Technologies – Japan (a Japan corporation)
Quantum Global Technologies Korea Co., Ltd. (a South Korea company)
Cinos Co., Ltd. (a South Korea company)
Cinos Xian Clean Technology, Ltd. (a China company)
Quantum Global Technologies Company Limited – Taiwan Branch (a Taiwan corporation)
Tainan Quantum Technologies Co. Ltd. (a Taiwan company)
Sir Daibus Ltd. (an Israel company)
Bealish Ltd. (an Israel company)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-219447, No. 333-188995, No. 333-167530, No. 333-165782, No. 333-158108, No. 333-151335, No. 333-141989, No. 333-135147, No. 333-123820, No. 333-114051 and No. 333-235574) of our report dated February 23, 2021, relating to the consolidated financial statements of Ultra Clean Holdings, Inc. and the effectiveness of internal control over financial reporting of Ultra Clean Holdings, Inc. appearing in this Annual Report on Form 10-K for the year ended December 25, 2020.
/s/ Moss Adams LLP
San Francisco, California
February 23, 2021
EXHIBIT 31.1
CERTIFICATION
I, James P. Scholhamer, certify that:
1. |
I have reviewed this annual report on Form 10-K of Ultra Clean Holdings, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 23, 2021
/s/ James P. Scholhamer |
James P. Scholhamer |
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Sheri Savage, certify that:
1. |
I have reviewed this annual report on Form 10-K of Ultra Clean Holdings, Inc. |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 23, 2021
/s/ Sheri Savage |
Sheri Savage |
Chief Financial Officer |
EXHIBIT 32.1
ULTRA CLEAN HOLDINGS, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
The certification set forth below is being submitted in connection with the annual report on Form 10-K of Ultra Clean Holdings, Inc. for the year ended December 25, 2020 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
I, James P. Scholhamer, the Chief Executive Officer of Ultra Clean Holdings, Inc., certify that:
1. |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and |
2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Ultra Clean Holdings, Inc. |
Date: February 23, 2021
|
/s/ James P. Scholhamer |
James P. Scholhamer |
Chief Executive Officer |
EXHIBIT 32.2
ULTRA CLEAN HOLDINGS, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
The certification set forth below is being submitted in connection with the annual report on Form 10-K of Ultra Clean Holdings, Inc. for the year ended December 25, 2020 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
I, Sheri Savage, the Chief Financial Officer of Ultra Clean Holdings, Inc., certify that:
1. |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and |
2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Ultra Clean Holdings, Inc. |
Date: February 23, 2021
/s/ Sheri Savage |
Sheri Savage |
Chief Financial Officer
|
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