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Item 2. Management’s Discussion and Analysis

2024-07-26 compared with 2024-05-06 · 101 added, 84 removed, 136 unchanged (58% of the section changed)

11 unchanged sentences

UCT offers its customers an integrated outsourced solution for major subassemblies, improved design-to-delivery cycle times, design for manufacturability, prototyping and part and component manufacturing, as well as tool chamber parts cleaning and coating, and micro-contamination analytical services.

We report results for two operating segments:

We report results for two segments:

Products and Services.

22 unchanged sentences

Fiscal year 2024 is a 52-week period ending December 27, 2024 and fiscal year 2023 was a 52-week ended December 29, 2023.

The fiscal quarters ended March 29, 2024 and March 31, 2023 were both 13-week periods.

Discussion of Results of Operations for the Three months ended March 29, 2024 compared to the Three months ended March 31, 2023

Three Months Ended

The fiscal quarters ended June 28, 2024 and June 30, 2023 were both 13-week periods.

Discussion of Results of Operations for the Three and Six months ended June 28, 2024 compared to the Three and Six months ended June 30, 2023

Three Months Ended Six Months Ended

Revenues by Segment

(Dollars in millions)

2024 March 31,

2024 June 30,

Change June 28,

2024 June 30,

Products $ 452.7 $ 362.5 24.9 % $ 871.2 $ 731.1 19.2 %

3 unchanged sentences

Services as a percentage of total revenues 12.3 % 14.0 % 12.3 % 14.5 %

Products revenues increased $49.9 million from the three months ended March 31, 2023 to the three months ended March 29, 2024.

For the three and six months ended June 28, 2024, Products revenues increased compared to the same periods in the prior year.

The increase in Products revenues was primarily due to an increase in customer demand, along with an overall market improvement in the semiconductor industry and in part due to the acquisition of HIS in October 2023.

Services revenues decreased $5.5 million from the three months ended March 31, 2023 to the three months ended March 29, 2024 , primarily due to decrease in demand across its customer base.

Three Months Ended

Services revenues increased $4.4 million from the three months ended June 30, 2023 to the three months ended June 28, 2024 primarily due to increase in demand across its customer base.

Services revenues decreased $1.0 million from the six months ended June 30, 2023 to the six months ended June 28, 2024 primarily due to lower memory demand.

Three Months Ended Six Months Ended

Revenues by Geography

(Dollars in millions)

2024 March 31,

2024 June 30,

Change June 28,

2024 June 30,

United States $ 146.2 $ 134.1 9.0 % $ 287.1 $ 267.9 7.2 %

4 unchanged sentences

Revenues by geographic area are categorized based on the customer’s location to which the products were shipped or services were performed.

For the three months period ended March 29, 2024, U.S.

revenues increased $7.2 million, compared to the same period in the prior year, primarily as a result of the acquisition of HIS in October 2023, whose customers are primarily U.S.

International revenues increased $37.2 million in the three months period ended March 29, 2024, compared to the same period in the prior year, primarily as a result of market improvement driving higher customer demand.

For the three and six months ended June 28, 2024, U.S.

revenues increased compared to the same periods in the prior year, primarily as the result of the October 2023 acquisition of HIS, whose customers are primarily U.S.

International revenues increased in the three and six months ended June 28, 2024 compared to the same periods in the prior year primarily as a result of market improvement driving higher customer demand.

Cost of Revenues

Three Months Ended

Three Months Ended Six Months Ended

Cost of revenues by Segment

(Dollars in millions)

2024 March 31,

2024 June 30,

Change June 28,

2024 June 30,

Products $ 383.9 $ 311.1 23.4 % $ 738.0 $ 626.2 17.9 %

4 unchanged sentences

Cost of Products revenues consists of purchased materials, direct labor and manufacturing overhead.

Cost of Products revenues increased $38.9 million for the three months ended March 29, 2024 compared to the same period in the prior year.

The increase was due to higher sales volumes driving increased material costs of $38.3 million.

Cost of Products revenues increased $72.8 million and $111.8 million for the three and six months ended June 28, 2024 compared to the same periods in the prior year.

The increase was due to higher sales volumes driving increased material costs of $63.6 million and $101.9 million for the three and six months ended June 28, 2024, respectively.

Cost of Services revenues consists of direct labor, overhead and materials (such as chemicals, gases and consumables).

Cost of Services revenues decreased $4.1 million for the three months ended March 29, 2024, respectively, compared to the same periods in the prior year, driven by lower volumes of service orders, resulting in decreased labor related costs (the largest component of Cost of Services) of $3.1 million.

Three Months Ended

Cost of Services revenues increased $1.4 million for the three months ended June 28, 2024 compared to the same period in the prior year driven by higher volumes of service orders, resulting in increased overhead costs of $1.4 million.

Cost of Services revenues decreased $2.7 million for the six months ended June 28, 2024 compared to the same period in the prior year driven by lower volumes of service orders resulting in decreased labor related costs of $3.7 million.

Three Months Ended Six Months Ended

Gross Profit by Segment

(Dollars in millions)

2024 March 31,

2024 June 30,

Change June 28,

2024 June 30,

Products $ 68.8 $ 51.4 33.9 % $ 133.2 $ 104.9 27.0 %

6 unchanged sentences

Gross profit and gross margins fluctuate with revenue levels, product mix, material costs, and labor costs.

Products gross profit and gross margin increased for the three months ended March 29, 2024, compared to the same period in the prior year, primarily due to higher revenue levels, product shift and volume shift from high to low cost regions.

Services gross profit decreased for the three months ended March 29, 2024, compared to the same period in the prior year, primarily due to lower revenue levels.

Services gross margin increased for the three months ended March 29, 2024, compared to the same period in the prior year, due to site efficiencies.

Products gross profit and gross margin increased for the three and six months ended June 28, 2024 compared to the same periods in the prior year primarily due to higher revenue levels, product shift and volume shift from higher to lower cost regions.

Services gross profit increased for the three and six months ended June 28, 2024 compared to the same periods in the prior year primarily due to higher revenue levels.

Operating Margin

Three Months Ended

Three Months Ended Six Months Ended

Operating Profit by Segment

(Dollars in millions)

2024 March 31,

2024 June 30,

Change June 28,

2024 June 30,

Products $ 18.8 $ 10.8 74.1 % $ 33.5 $ 19.5 71.8 %

5 unchanged sentences

Total Company 4.4 % 3.0 % 4.0 % 2.9 %

Operating profit and operating margin of Products increased for the three months period ended March 29, 2024, compared to the same period in the prior year, primarily due to increases in business volumes and customer demands offset partially

by an increase in restructuring costs and by an increase in the amortization of intangibles in conjunction with the acquisition of HIS.

Operating profit and operating margin of Services decreased for the three months period ended March 29, 2024, compared to the same period in the prior year, primarily due to the lower gross profit resulting from reduced customer demand.

Operating profit and operating margin of Products increased for the three and six months period ended June 28, 2024 compared to the same periods in the prior year primarily due to increases in business volumes and customer demand partially offset by an increase in share-based compensation expense and by an increase in the amortization of intangibles in conjunction with the acquisition of HIS.

Operating profit and operating margin of Services increased for the three and six months period ended June 28, 2024 compared to the same periods in the prior year primarily due to the higher gross profit resulting from increased customer demand.

Research and Development

Three Months Ended

(Dollars in millions) March 29,

2024 March 31,

Three Months Ended Six Months Ended

(Dollars in millions) June 28,

2024 June 30,

Change June 28,

2024 June 30,

Research and development $ 7.1 $ 7.2 (1.4) % $ 14.1 $ 14.3 (1.4) %

Research and development as a percentage of total revenues 1.4 % 1.7 % 1.4 % 1.7 %

Research and development expenses were consistent in the three months ended March 29, 2024, compared to the same period in the prior year.

Research and development expenses were consistent in the three and six months ended June 28, 2024 compared to the same periods in the prior year.

Sales and Marketing

Three Months Ended

(Dollars in millions) March 29,

2024 March 31,

Three Months Ended Six Months Ended

(Dollars in millions) June 28,

2024 June 30,

Change June 28,

2024 June 30,

Sales and marketing $ 14.8 $ 12.7 16.5 % $ 28.5 $ 25.8 10.5 %

Sales and marketing as a percentage of total revenues 2.9 % 3.0 % 2.9 % 3.0 %

Sales and marketing expenses were consistent in the three months ended March 29, 2024, compared to the same period in the prior year.

Sales and marketing expenses increased for the three and six months period ended June 28, 2024 compared to the same periods in the prior year primarily due to the increase in employee related expenses.

General and Administrative

Three Months Ended

(Dollars in millions) March 29,

2024 March 31,

Three Months Ended Six Months Ended

(Dollars in millions) June 28,

2024 June 30,

Change June 28,

2024 June 30,

General and administrative $ 43.7 $ 35.6 22.8 % $ 88.3 $ 76.0 16.2 %

General and administrative as a percentage of total revenues 8.5 % 8.4 % 8.9 % 8.9 %

General and administrative expenses increased $4.2 million in th e three months ended March 29, 2024, compared to the same period in the prior year, primarily driven by increases in amortization of intangible assets acquired through business combinations and in restructuring costs in addition to a combination of other factors, none of which were individually significant.

The restructuring costs primarily reflect employee severance costs and facilities consolidation costs to improve efficiencies in our operational activities and to reduce redundancies.

General and administrative expenses increased $8.1 million and $12.3 million in the three and six months ended June 28, 2024 compared to the same periods in the prior year primarily driven by increases in amortization of intangible assets acquired through business combinations and in share-based compensation expense in addition to a combination of other factors, none of which were individually significant.

Interest and Other Expense, net

Three Months Ended

(Dollars in millions) March 29,

2024 March 31,

Three Months Ended Six Months Ended

(Dollars in millions) June 28,

2024 June 30,

Change June 28,

2024 June 30,

Interest income $ 1.4 $ 0.8 75.0 % $ 2.8 $ 1.3 115.4 %

Interest expense $ (11.7) $ (11.8) (0.8) % $ (23.9) $ (23.6) 1.3 %

Other expense, net $ (3.8) $ 2.8 (235.7) %

Interest income increased $0.9 million in the three months ended March 29, 2024 compared to the same period in the prior year, primarily due to higher interest income earned on cash and cash equivalent balances attributed to higher interest rates in the current period.

Interest expense increased $0.4 million in the three months ended March 29, 2024 compared to the same period in the prior year, due primarily to higher interest rates.

Other expense, net, decreased $6.6 million in the three months ended March 29, 2024, compared to the same period in the prior year, due to the unfavorable foreign exchange transactions and remeasurements and due to the loss from the change of the fair value of contingent earn-out of $1.3 million.

Other income (expense), net $ 17.4 $ (1.5) (1260.0) % $ 13.5 $ 1.3 938.5 %

Interest income increased $0.6 million and $1.5 million in the three and six months ended June 28, 2024 compared to the same periods in the prior year primarily due to higher interest income earned on cash and cash equivalent balances attributed to higher interest rates in the current period.

Interest expense was consistent in the three and six months ended June 28, 2024 compared to the same periods in the prior year.

Other income (expense), net, increased $18.9 million in the three months ended June 28, 2024 compared to the same period in the prior year primarily due to the gain from the change in the fair value of contingent earn-out of $24.1 million offset partially by the $3.6 million of debt financing costs incurred in conjunction with the amended credit agreement.

Other income (expense), net, increased $12.2 million in the six months ended June 28, 2024 compared to the same period in the prior year primarily due to the gain from the change in the fair value of contingent earn-out of $22.8 million offset partially by the $3.6 million of debt financing costs and by the $7.5 million unfavorable foreign exchange transactions and remeasurements.

Provision for Income Taxes

Three Months Ended

(Dollars in millions) March 29,

2024 March 31,

Three Months Ended Six Months Ended

(Dollars in millions) June 28,

2024 June 30,

Change June 28,

2024 June 30,

Provision for income taxes $ 8.5 $ 8.3 2.4 % $ 18.4 $ 11.8 55.9 %

Effective tax rate 28.3 % 8300.0 % 56.4 % 295.0 %

The increase in the effective tax rate for the three months ended March 29, 2024 compared to the same period in the prior year is primarily attributable to changes in the geographic mix of worldwide earnings and financial results in jurisdictions which are taxed at different rates and the impact of losses in jurisdictions with full federal and state valuation allowances.

The increase also reflects the impact of the expiration of a reduced tax rate incentive on a portion of our earnings in certain international subsidiaries and thus we are applying the local corporate statutory tax rate on those earnings.

We are in the process of renewing the international tax incentive;

when renewed will make an adjustment to its effective tax rate in that period.

Company management continuously evaluates the need for a valuation allowance on its deferred tax assets and, as of March 29, 2024, concluded that a full valuation allowance on its federal, state and certain of its foreign deferred tax assets remained appropriate.

The decrease in the effective tax rate for the three and six months ended June 28, 2024 compared to the same periods in the prior year is primarily attributable to changes in the geographic mix of worldwide earnings and financial results in jurisdictions which are taxed at different rates and the impact of losses in jurisdictions with full valuation allowances on deferred tax assets.

Company management continuously evaluates the need for a valuation allowance on its deferred tax assets and, as of June 28, 2024, concluded that a full valuation allowance on its U.S.

federal, state and certain of its foreign deferred tax assets remained appropriate.

Liquidity and Capital Resources

1 unchanged sentence

The following table summarizes our cash and cash equivalents:

(In millions) March 29,

(In millions) June 28,

2024 December 29,

2023 Decrease

2023 Increase

Total cash and cash equivalents $ 319.5 $ 307.0 $ 12.5

The following table summarizes the Condensed Consolidated Statements of Cash Flow information:

Three Months Ended

(In millions) March 29,

2024 March 31,

Six Months Ended

(In millions) June 28,

2024 June 30,

Operating activities $ 33.0 $ 64.4

2 unchanged sentences

Effects of exchange rate changes on cash and cash equivalents (2.1) 1.0

Net decrease in cash and cash equivalents $ (14.0) $ (36.7)

Net increase (decrease) in cash and cash equivalents $ 12.5 $ (38.0)

Our primary cash inflows and outflows were as follows:

• For the three months ended March 29, 2024, we generated cash from operating activities of $9.8 million compared to $28.0 million for the three months ended March 31, 2023.

The $18.2 million decrease in net cash from operating activities was driven by a $16.4 million unfavorable change in net working capital and by a $7.6 million decrease in net income offset in part by a $5.8 million increase from non-cash items included in net income.

• The major contributors in net changes in operating assets and liabilities for the three months ended March 29, 2024 were as follows:

• For the six months ended June 28, 2024, we generated cash from operating activities of $33.0 million compared to $64.4 million for the six months ended June 30, 2023.

The $31.4 million decrease in net cash provided by operating activities was driven by a $43.3 million unfavorable change in net working capital and by a $10.1 million decrease in non-cash items included in net income offset in part by an increase in net income of $22.0 million.

• The major contributors in net changes in operating assets and liabilities for the six months ended June 28, 2024 were as follows:

◦ Accounts receivable increased $26.1 million primarily due to the timing of shipments and collections and $25.4 million increase in inventories due to increased production levels.

◦ Accounts payable increased $25.1 million, income taxes payable increased $2.1 million, and accrued compensation and related benefits decreased $10.6 million, primarily due to the timing of payments.

• Net cash used in investing activities during the three months ended March 29, 2024 and March 31, 2023 consisted primarily of $18.0 million and $27.3 million purchases of property, plant and equipment, respectively.

• During the three months ended March 29, 2024, cash used in financing activities was $4.5 million, compared to cash used in financing activities of $36.2 million in the three months ended March 31, 2023.

When compared to

the same period in the prior year, the change in cash used in financing activities is due to $17.5 million higher principal payments on bank borrowings and to $14.2 million cash used in our share repurchase program.

◦ Accounts payable increased $41.4 million, income taxes payable increased $1.4 million, and accrued compensation and related benefits increased $1.5 million, primarily due to the timing of payments.

• Net cash used in investing activities during the six months ended June 28, 2024 and June 30, 2023 consisted primarily of $31.0 million and $47.0 million purchases of property, plant and equipment, respectively.

• During the six months ended June 28, 2024, the cash provided in financing activities was $12.5 million compared to cash used in financing activities of $56.9 million in the six months ended June 30, 2023.

The $69.4 million increase in net cash provided by financing activities is due to the $23.5 million net cash proceeds from the amended credit agreement, a decrease of $23.8 million in principal payments on bank borrowings, and a $23.7 million decrease in share repurchases offset partially by the additional $2.5 million payment of debt issuance costs.

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 March 29, 2024, we had cash and cash equivalents of $293.0 million compared to $307.0 million as of December 29, 2023.

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 March 29, 2024.

As of June 28, 2024, we had cash and cash equivalents of $319.5 million compared to $307.0 million as of December 29, 2023.

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 June 28, 2024.

Fluid Solutions has an existing factoring arrangement with a financial institution in which a portion of its accounts receivable are sold on a non-recourse basis.

As of March 29, 2024, Fluid Solutions factored $6.9 million under this arrangement.

As of June 28, 2024, Fluid Solutions factored $6.9 million under this arrangement.

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.

5 unchanged sentences

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.

As of March 29, 2024, we have cash of approximately $204.0 million in our foreign subsidiaries.

As of June 28, 2024, we have cash of approximately $244.0 million in our foreign subsidiaries.

It is not practicable to determine the tax liability that might be incurred if the undistributed earnings of these foreign subsidiaries were to be distributed.

7 unchanged sentences

Debt issuance costs (8.3)

At March 29, 2024, the Company had an outstanding amount under the Term Loan of $475.4 million, gross of unamortized debt issuance costs of $5.5 million.

As of March 29, 2024, the interest rate on the outstanding Term Loan was 9.2%.

As of March 29, 2024, the Company had $146.1 million, net of $3.9 million of outstanding letters of credit, available under this revolving credit facility.

As of March 29, 2024, the Company was in compliance with the financial covenants contained within the Amended Credit Agreement.

At June 28, 2024, the Company had an outstanding amount under the Term Loan of $496.9 million, gross of unamortized debt issuance costs of $8.3 million.

As of June 28, 2024, the interest rate on the outstanding Term Loan was 9.0%.

As of June 28, 2024, the Company had $146.1 million, net of $3.9 million of outstanding letters of credit, available under this revolving credit facility.

As of June 28, 2024, the Company was in compliance with the financial covenants contained within the Amended Credit Agreement.

The Company 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 7.0 million euros (approximately 7.5 million).

As of March 29, 2024, no debt was outstanding under this revolving credit facility.

As of June 28, 2024, no debt was outstanding under this revolving credit facility.

Fluid Solutions has credit facilities with various financial institutions in Israel that provides borrowings of up to $11.0 million.

As of March 29, 2024, Fluid Solutions had $5.3 million of outstanding debt with average interest rate ranges from 7.6% to 7.8%.

As of March 29, 2024, the Company’s total bank debt was $475.2 million, net of unamortized debt issuance costs of $5.5 million.

As of March 29, 2024, the Company had $146.1 million, $5.7 million and $7.6 million available to draw from our credit facilities in the U.S., Israel and Czech Republic, respectively.

As of June 28, 2024, Fluid Solutions had $6.0 million of outstanding debt with average interest rate ranges from 7.5% to 7.8%.

As of June 28, 2024, the Company’s total bank debt was $494.6 million, net of unamortized debt issuance costs of $8.3 million.

As of June 28, 2024, the Company had $146.1 million, $5.0 million and $7.5 million available to draw from our credit facilities in the U.S., Israel and Czech Republic, respectively.

See Note 6 - Borrowing Arrangements, of our Condensed Consolidated Financial Statements, included in Part 1 of this Form-10Q for additional information.

Capital Expenditures

Capital expenditures were $18.0 million during the three months ended March 29, 2024 and were primarily attributable to the capital invested in our manufacturing facilities worldwide as well as costs associated with the ongoing design and implementation of our new enterprise resource planning system.

Capital expenditures were $31.0 million during the six months ended June 28, 2024 and were primarily attributable to the capital invested in our manufacturing facilities worldwide.

The Company’s anticipated capital expenditures for the remainder of 2024 are expected to be financed primarily from our cash flow generated from operations and cash on hand.

Contractual Obligations

The Company had commitments to various third parties to purchase inventories totaling approximately $364.8 million as of March 29, 2024.

The Company had commitments to various third parties to purchase inventories totaling approximately $497.8 million as of June 28, 2024.

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 March 29, 2024, we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification arrangements.

As of June 28, 2024, 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis