Organization and Significant Accounting Policies (Policies) | 9 Months Ended |
Sep. 27, 2013 |
Accounting Policies [Abstract] | ' |
Organization | ' |
Organization — Ultra Clean Holdings, Inc. (the “Company”) is a leading developer and supplier of critical subsystems, primarily for the semiconductor capital equipment industry. The Company also leverages the specialized skill sets required to support semiconductor capital equipment to serve the technologically similar markets in the flat panel, medical, energy and research industries, collectively referred to as “Other Addressed Industries”. The Company develops, designs, prototypes, engineers, manufactures and tests subsystems which are highly specialized and tailored to specific steps in the semiconductor manufacturing process as well as the manufacturing processes in Other Addressed Industries. Revenue is derived from the sale of gas delivery systems and other critical subsystems including chemical mechanical planarization (CMP) subsystems, chemical delivery modules, top-plate assemblies, frame assemblies, process modules and other high level assemblies. |
The Company’s customers are primarily original equipment manufacturers (OEMs) in industries it supports, providing customers complete subsystem solutions that combine the Company’s expertise in design, test, component characterization and highly flexible manufacturing operations with quality control and financial stability. This combination helps the Company to drive down total manufacturing costs, reduce design-to-delivery cycle times and maintain high quality standards for the Company’s customers. The Company believes these characteristics, as well as the Company’s standing as a leading supplier of gas delivery systems and other critical subsystems, place the Company in a strong position to benefit from the demand for subsystem outsourcing. |
Basis of Presentation | ' |
Basis of Presentation — The unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q include the accounts of the Company and its subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). This financial information reflects all adjustments which are, in the opinion of the Company, normal, recurring and necessary to present fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. Certain information and footnote disclosures normally included in our annual financial statements, prepared in accordance with GAAP, have been condensed or omitted. The Company’s December 28, 2012, balance sheet data was derived from audited financial statements as of that date. |
In July 2012, the Company completed its acquisition of American Integration Technologies LLC (“AIT”). Beginning in the third quarter of fiscal 2012, the acquired business is included in the Company’s consolidated results of operations. |
Principles of Consolidation | 'Principles of Consolidation — The Company’s condensed consolidated financial statements include the accounts of the Company and its subsidiaries and all intercompany accounts and transactions have been eliminated in consolidation |
Foreign Currency Translation | ' |
Foreign Currency Translation — The Company has reviewed its non-U.S. subsidiaries (of which all of its non-U.S. asset base resides in Asia) that operate in a local currency environment to determine their functional currency by examining how and in what currency each subsidiary generates cash through billings and cash receipts and how and in what currency the subsidiary expends cash through payment of its vendors and payment of its workforce. Also, these subsidiaries’ individual assets and liabilities that are primarily denominated in the local foreign currency are examined for their impact on the Company’s cash flows. All have been determined to have the U.S. dollar as its functional currency. Foreign currency transaction gains and losses are recorded in other income (expense), net. |
Use of Accounting Estimates | ' |
Use of Accounting Estimates — The presentation of condensed financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. Actual amounts may differ from those estimates. |
Certain Significant Risks and Uncertainties | ' |
Certain Significant Risks and Uncertainties — The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, any of the following areas could have a negative effect on the Company in terms of its future financial position, results of operations or cash flows: the general state of the U.S. and world economies, the highly cyclical nature of the industries the Company serves; the loss of any of a small number of customers; ability to obtain additional financing; inability to meet certain debt covenants; failure to successfully integrate completed acquisitions; ineffectiveness in pursuing acquisition opportunities; regulatory changes; fundamental changes in the technology underlying semiconductor, flat panel, solar and medical device manufacturing processes or manufacturing equipment; the hiring, training and retention of key employees; successful and timely completion of product design efforts; and new product design introductions by competitors. |
Concentration of Credit Risk | ' |
Concentration of Credit Risk — Financial instruments which subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company sells its products primarily to semiconductor capital equipment manufacturers in the United States. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral. |
Significant sales to customers | ' |
Significant sales to customers — The Company had significant sales to three customers, each of which accounted for 10% or more of sales for the three months ended September 27, 2013 and September 28, 2012. The Company had significant sales to three customers, each of which accounted for 10% or more of sales for the nine months ended September 27, 2013 and two of which counted for 10% or more of sales for the nine months ended September 28, 2012. Sales to each of these customers as a percentage of total sales were as follows: |
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| | Three months ended | | | Nine months ended | |
| | September 27, | | | September 28, | | | September 27, | | | September 28, | |
2013 | 2012 | 2013 | 2012 |
Applied Materials, Inc. | | | 32.9 | % | | | 29.4 | % | | | 33.1 | % | | | 39.6 | % |
Lam Research Corporation (1) | | | 37.4 | % | | | 27.5 | % | | | 33.2 | % | | | 34.4 | % |
ASM International (2) | | | 10.8 | % | | | 19.5 | % | | | 13.4 | % | | | — | |
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Total | | | 81.1 | % | | | 76.4 | % | | | 79.7 | % | | | 74 | % |
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-1 | In June 2012, Lam Research Corporation completed the acquisition of Novellus Systems, Inc., one of the Company’s customers. The sales percentages for Lam Research Corporation for the nine months ended September 28, 2012, reflect the inclusion of sales to Novellus Systems, Inc., from the beginning of fiscal 2012 for comparison purposes. | | | | | | | | | | | | | | | |
-2 | Sales to ASM International are the result of the Company’s acquisition of AIT during the third quarter of 2012. | | | | | | | | | | | | | | | |
Three customers’ accounts receivable balances: Applied Materials, Inc., Lam Research Corporation and ASM International were individually greater than 10% of accounts receivable as of September 27, 2013 and as of December 28, 2012, and, in the aggregate, represented approximately 79% and 84%, respectively, of accounts receivable. |
Fair Value of Financial Instruments | ' |
Fair Value of Financial Instruments-The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and bank borrowings. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their fair value because of their short-term nature. |
The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value in the following hierarchy: |
Level I — Quoted prices in active markets for identical assets or liabilities, |
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Level 2 — Observable inputs other than the Level I prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities, |
Level 3 — Unobservable inputs in which there is little or no market data, and that are significant to the fair value of the assets or liabilities. |
The Company’s only financial asset measured at fair value on a recurring basis is an overnight sweep account invested in money market funds which are presented as cash and cash equivalents with a carrying value and fair value of $17.9 million at September 27, 2013, based on Level 2 inputs. The Company’s only financial liability measured at fair value is the amount outstanding under our credit facility. Specifically, the fair value of outstanding borrowings under our term loan was based on level 2 inputs and fair value was determined using quoted prices for similar liabilities in inactive markets and our outstanding borrowings under our revolving credit facility were based on level 2 inputs and fair value was determined using inputs other than quoted prices that are observable, specifically, discounted cash flows of expected payments at current borrowing rates. The Company’s carrying value approximates fair value for our long term loan and revolving credit facility. |
Fiscal Year | ' |
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. |
Income Taxes | ' |
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. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. |
Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense. |
The determination of the Company’s tax provision is subject to judgments and estimates. The carrying value of the Company’s net deferred tax assets, which is made up primarily of tax deductions, assumes the Company will be able to generate sufficient future income to fully realize these deductions. In determining whether the realization of these deferred tax assets may be impaired, the Company makes judgments with respect to whether it is likely to generate sufficient future taxable income to realize these assets. The Company has a valuation allowance on the deferred tax assets of one of its China subsidiaries in the amount of $851,000 as of September 27, 2013 and December 28, 2012. |
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position. Management believes that it has adequately provided for any adjustments that may result from these tax audits, however, the outcome of tax audits cannot be predicted with certainty. |
Product Warranty | ' |
Product Warranty — The Company provides a warranty on its products for a period of up to two years and reserves for expected warranty liabilities at the time of sale based on historical activity. The determination of such reserves requires the Company to make estimates of product return rates and expected costs to repair or replace the products under warranty. If actual return rates and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of sales may be required in future periods. Components in the reserve for warranty costs consisted of the following for the periods set forth below (in thousands): |
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| | Nine months ended | | | | | | | | | |
| | September 27, | | | September 28, | | | | | | | | | |
2013 | 2012 | | | | | | | | |
Beginning balance | | $ | 152 | | | $ | 350 | | | | | | | | | |
Change in reserve | | | 70 | | | | (4 | ) | | | | | | | | |
Warranty claims | | | (119 | ) | | | (112 | ) | | | | | | | | |
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Ending balance | | $ | 103 | | | $ | 234 | | | | | | | | | |
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Revenue Recognition | ' |
Revenue Recognition — Product revenue is generally recorded upon shipment. In arrangements which specify title transfer upon delivery, revenue is not recognized until the product is delivered. The Company recognizes revenue when persuasive evidence of an arrangement exists, shipment or delivery, as applicable, has occurred, price is fixed or determinable and collectability is reasonably assured. If the Company has not substantially completed a product or fulfilled the terms of a sales agreement at the time of shipment, revenue recognition is deferred until fulfillment. The Company’s standard arrangement for its customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions. |
The Company assesses collectability based on the credit worthiness of the customer and past transaction history. The Company performs on-going credit evaluations of customers and generally does not require collateral from customers. |
Research and Development Costs | ' |
Research and Development Costs — Research and development costs are expensed as incurred. |
Net Income (loss) per Share | ' |
Net Income (loss) per Share — Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share is calculated by dividing net income (loss) 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 7 to Condensed Consolidated Financial Statements). |
Comprehensive Income (Loss) | ' |
Comprehensive Income (Loss) — The Company reports by major components and as a single total, the change in its net assets during the period from non-owner sources. Comprehensive income (loss) for all periods presented was the same as net income (loss). |
Segments | ' |
Segments — The Financial Accounting Standards Board’s (FASB) guidance regarding disclosure about segments in an enterprise and related information establishes standards for the reporting by public business enterprises of information about reportable segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the reportable segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Company operates in one reporting segment. |
Business Combinations | ' |
Business Combinations—The Company recognizes assets acquired (including goodwill and identifiable intangible assets) and liabilities assumed at fair value on the acquisition date. Subsequent changes to the fair value of such assets acquired and liabilities assumed are recognized in earnings, after the expiration of the measurement period, for a period not to exceed 12 months from the acquisition date. Acquisition-related expenses and acquisition-related restructuring costs are recognized in earnings in the period in which they are incurred. |
Stock-Based Compensation Expense | ' |
Stock-Based Compensation Expense |
The Company maintains stock-based compensation plans which allow for the issuance of equity-based awards to executives, directors and certain employees of the Company. These equity-based awards include stock options, restricted stock awards and restricted stock units which can be either time-based or performance-based. The Company also maintains an employee stock purchase plan that provides for the issuance of shares to all eligible employees of the Company at a discounted price. |
Stock-based compensation expense includes compensation costs related to estimated fair values of stock options and awards granted. The estimated fair value of the Company’s equity-based awards, net of expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis over a weighted average period of four years for stock options (three years for restricted stock units and one year for restricted stock awards) and will be adjusted for subsequent changes in estimated forfeitures and future option grants. |
The Company applies the fair value recognition provisions based on the FASB’s guidance regarding stock-based compensation. The exercise price of each stock option equals the market price of the Company’s stock on the date of grant. The estimated fair value of the Company’s equity-based awards, less expected forfeitures, is amortized over the awards’ vesting periods on a straight-line basis over the applicable vesting period and will be adjusted for subsequent changes in estimated forfeitures and future option grants. Most options are scheduled to vest over four years and expire no later than ten years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the expected term of the awards; the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. The Company estimates the expected term of share-based awards granted based on the Company’s historical option term experience. The Company estimates the volatility of its common stock based upon the Company’s historical stock price volatility over the length of the expected term of the options. The Company bases the risk-free interest rate that it uses in the option valuation model on U.S. Treasury zero-coupon bond issues with remaining maturities similar to the expected term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest. The Company also considers, each quarter, whether there have been any significant changes in facts and circumstances that would affect the forfeiture rate. |
Stock Options | ' |
Stock Options |
The following table summarizes information with respect to options granted, exercised and canceled in the nine months ended September 27, 2013 and outstanding at September 27, 2013: |
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| | Number of Shares | | | Weighted Average | | | Weighted Average | | | Aggregate Intrinsic | |
Exercise Price | Remaining | Value |
| Contractual Term | |
| (years) | |
Outstanding at December 2012 | | | 1,514,113 | | | $ | 6.98 | | | | 4 | | | $ | 1,444,653 | |
Granted | | | | | | | | | | | | | | | | |
Exercised | | | (111,657 | ) | | $ | 1.15 | | | | | | | | | |
Canceled | | | (38,173 | ) | | $ | 11.73 | | | | | | | | | |
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Outstanding at September 27, 2013 | | | 1,364,283 | | | $ | 7.32 | | | | | | | $ | 2,112,313 | |
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Vested and expected to vest at September 27, 2013 | | | 1,364,274 | | | $ | 7.32 | | | | | | | $ | 2,112,310 | |
Vested and exercisable at September 27, 2013 | | | 1,363,885 | | | $ | 7.32 | | | | | | | $ | 2,112,174 | |
There were no options granted by the Company during either of the nine month periods ended September 27, 2013 or September 28, 2012. |
The total unamortized expense of the Company’s unvested options, net of forfeitures, as of September 27, 2013, was less than $0.1 million. |
Employee Stock Purchase Plan | ' |
Employee Stock Purchase Plan |
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. Under the ESPP, substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 95 percent of the fair market value of the Company’s stock at the end of each applicable purchase period. |
Restricted Stock Units and Restricted Stock Awards | ' |
Restricted Stock Units and Restricted Stock Awards |
The Company grants Restricted Stock Units (“RSU’s”) to certain employees and Restricted Stock Awards (“RSA”) to non-employee directors as part of the Company’s long term equity compensation plan. |
Restricted Stock Units — RSU’s are granted to employees with a per share or unit purchase price of zero dollars and either have time based or performance based vesting. RSU’s typically vest over three years, subject to the employee’s continued service with the Company. For purposes of determining compensation expense related to these RSU’s, the fair value is determined based on the closing market price of the Company’s common stock on the date of RSU grant. The expected cost of the grant is reflected over the service period, and is reduced for estimated forfeitures. The Company granted 193,200 RSU’s during the quarter ended March 29, 2013, with a weighted average fair value of $5.39 per share and the Company granted 548,900 RSU’s (including 110,375 performance stock units) during the quarter ended March 30, 2012, with a weighted average fair value of $8.21 per share. The Company granted 408,000 RSU’s (including 152,750 performance stock units) during the quarter ended June 28, 2013 with a weighted average fair value of $6.06 per share and the Company granted 4,450 RSU’s during the quarter ended June 29, 2012 with a weighted average fair value of $6.41 per share. The Company granted 149,950 RSU’s during the quarter ended September 27, 2013, with a weighted average fair value of $6.87 per share and granted 6,000 RSU’s during the quarter ended September 28, 2012 with a weighted average fair value of $6.06 per share. During the nine months ended September 27, 2013 95,457 vested shares were withheld to satisfy withholding tax obligations, resulting in the net issuance of 440,647 shares. As of September 27, 2013 approximately $5.6 million of stock-based compensation cost, net of forfeitures, related to RSU’s remains to be recognized, of which substantially all is expected to be recognized over an estimated period of less than three years. As of September 27, 2013 a total of 1,263,633 RSU’s remain outstanding with an aggregate intrinsic value of $8.8 million and a weighted average remaining contractual term of 1.2 years. |
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Restricted Stock Awards —The total unamortized expense of the Company’s unvested restricted stock awards as of September 27, 2013, was approximately $0.1 million. |
The following table summarizes the Company’s restricted stock unit and restricted stock award activity for the nine months ended September 27, 2013: |
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| | Number of | | | | | | | | | | | | | |
Shares | | | | | | | | | | | | |
Unvested restricted stock units and restricted stock awards at December 28, 2012 | | | 1,312,706 | | | | | | | | | | | | | |
Granted | | | 786,150 | | | | | | | | | | | | | |
Vested | | | (566,104 | ) | | | | | | | | | | | | |
Forfeited | | | (238,185 | ) | | | | | | | | | | | | |
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Unvested restricted stock units and restricted stock awards at September 27, 2013 | | | 1,294,567 | | | | | | | | | | | | | |
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The following table shows the Company’s stock-based compensation expense included in the condensed consolidated statements of operations (in thousands): |
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| | Three months ended | | | Nine months ended | |
| | September 27, | | | September 28, | | | September 27, | | | September 28, | |
2013 | 2012 | 2013 | 2012 |
Cost of sales(1) | | $ | 159 | | | $ | 422 | | | $ | 883 | | | $ | 1,237 | |
Research and development | | | 69 | | | | 91 | | | | 216 | | | | 256 | |
Sales and marketing | | | 127 | | | | 118 | | | | 356 | | | | 324 | |
General and administrative | | | 771 | | | | 786 | | | | 1,990 | | | | 2,249 | |
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Total stock-based compensation expense | | | 1,126 | | | | 1,417 | | | | 3,445 | | | | 4,066 | |
Income tax benefit | | | (173 | ) | | | (341 | ) | | | (644 | ) | | | (926 | ) |
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Total stock-based compensation expense, net of income tax benefit | | $ | 953 | | | $ | 1,076 | | | $ | 2,801 | | | $ | 3,140 | |
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| -1 | As of September 27, 2013 and September 28, 2012, there were no stock-based compensation expenses capitalized in inventory. | | | | | | | | | | | | | | |