# Ultra Clean Holdings, Inc.: Form 10-Q for the period ended Sep 29, 2023

- Company: [Ultra Clean Holdings, Inc.](/companies/uctt.md) (CIK 1275014)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 16:05 ET
- Period: 2023-09-29
- Accession: 0000950170-23-060220
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1275014/000095017023060220/uctt-20230929.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1275014/000095017023060220/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-29 | $435.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-12-31 to 2023-09-29 | $1.29bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-29 | $369.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2022-12-31 to 2023-09-29 | $1.08bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-29 | $65.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-12-31 to 2023-09-29 | $206.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-29 | $7.4m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-12-31 to 2023-09-29 | $21.7m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-29 | $5.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-12-31 to 2023-09-29 | $30.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-29 | $12.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-12-31 to 2023-09-29 | $35.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-29 | $5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-12-31 to 2023-09-29 | $17.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-29 | −$14.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-12-31 to 2023-09-29 | −$27.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-29 | −$0.32 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-12-31 to 2023-09-29 | −$0.61 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-29 | −$0.32 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-12-31 to 2023-09-29 | −$0.61 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-29 | 45 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-12-31 to 2023-09-29 | 45 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-12-31 to 2023-09-29 | $100.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-12-31 to 2023-09-29 | $59.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-12-31 to 2023-09-29 | $23.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-29 | $342.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-29 | $925.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-29 | $1.85bn | us-gaap:Assets |
| Current liabilities | at 2023-09-29 | $293.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-29 | $950.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-29 | $838.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,780 characters.

*You should read the following discussion of our financial condition and results of operations in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on February 28, 2023. This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, gross margins and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties and other factors that may cause our actual results, performance or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the SEC on February 28, 2023. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.*

### Overview

Ultra Clean Holdings, Inc., (“UCT”, the “Company” or “We”) is a leading developer and supplier of critical subsystems, components, parts, and ultra-high purity cleaning and analytical services primarily for the semiconductor industry. 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: Products and Services. Our Products segment primarily designs, engineers and manufactures production tools, components and parts, and 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 segment 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 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 Asia Pacific, Europe and Middle East (“EMEA”) 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, such as new CPU architectures that enable higher performance servers necessary for cloud, artificial intelligence (“AI”) and machine learning applications. 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 advanced devices.

### Critical Accounting Estimates

Our Condensed 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 Condensed Consolidated Financial Statements. On an ongoing 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.

There have been no significant changes to our critical accounting policies, significant judgments and estimates disclosed in our Annual Report on Form 10-K subsequent to December 30, 2022. For further information on our critical and other significant accounting policies and estimates, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, as filed with the SEC.

### Results of Operations

Fiscal Year

Our fiscal year is the 52- or 53-week period ending on the Friday nearest December 31. Fiscal year 2023 is a 52-week period ending December 29, 2023, and fiscal year 2022 was a 52-week period ended December 30, 2022. The fiscal quarters ended September 29, 2023 and September 30, 2022 were both 13-week periods.

**Discussion of Results of Operations for the Three and Nine months ended September 29, 2023 compared to the Three and Nine months ended September 30, 2022**

### Revenues

*(Dollars in millions)*

| Revenues by Segment | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $380.9 | $556.3 | (31.5)% | $1,112.0 | $1,575.2 | (29.4)% |
| Services | 54.1 | 78.7 | (31.3)% | 177.8 | 232.7 | (23.6)% |
| Total revenues | $435.0 | $635.0 | (31.5)% | $1,289.8 | $1,807.9 | (28.7)% |
| Products as a percentage of total revenues | 87.6% | 87.6% |  | 86.2% | 87.1% |  |
| Services as a percentage of total revenues | 12.4% | 12.4% |  | 13.8% | 12.9% |  |

Total Products and Services revenues decreased in the three and nine months ended September 29, 2023, compared to the same periods in the prior year, primarily due to a weakened demand in the semiconductor industry driven largely by macroeconomic and geopolitical factors.

*(Dollars in millions)*

| Revenues by Geography | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $125.8 | $184.3 | (31.7)% | $393.7 | $558.9 | (29.6)% |
| International | 309.2 | 450.7 | (31.4)% | 896.1 | 1,249.0 | (28.3)% |
| Total revenues | $435.0 | $635.0 | (31.5)% | $1,289.8 | $1,807.9 | (28.7)% |
| United States as a percentage of total revenues | 28.9% | 29.0% |  | 30.5% | 30.9% |  |
| International as a percentage of total revenues | 71.1% | 71.0% |  | 69.5% | 69.1% |  |

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 and nine months period ended September 29, 2023, both U.S. and international revenues decreased, compared to the same periods in the prior year, primarily as a result of the global slowdown in semiconductor industry resulting in less demand for our products and services.

### Cost of Revenues

*(Dollars in millions)*

| Cost of revenues by Segment | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $329.3 | $459.3 | (28.3)% | $955.5 | $1,299.9 | (26.5)% |
| Services | 40.5 | 51.3 | (21.0)% | 128.0 | 151.4 | (15.5)% |
| Total Cost of revenues | $369.8 | $510.6 | (27.6)% | $1,083.5 | $1,451.3 | (25.3)% |
| Products cost as a percentage of total Products revenues | 86.5% | 82.6% |  | 85.9% | 82.5% |  |
| Services cost as a percentage of total Services revenues | 74.9% | 65.2% |  | 72.0% | 65.1% |  |

- 25 -

Total cost of revenues decreased for the three and nine months ended September 29, 2023 compared to the same periods in the prior year, due to lower demand for both Products and Services driven by reduced spending within the semiconductor industry globally.

Cost of Products revenues consists of purchased materials, direct labor and manufacturing overhead. Cost of Products revenues decreased $130.0 million and $344.4 million for the three and nine months ended September 29, 2023, respectively, compared to the same periods in the prior year, due to lower volume of sales driving decreased material costs, lower direct labor spending, unfavorable absorption of overhead costs and lower freight costs.

Cost of Services revenues consists of direct labor, manufacturing overhead and materials (such as chemicals, gases and consumables). Cost of Services revenues decreased $10.8 million and $23.4 million for the three and nine months ended September 29, 2023, respectively, compared to the same periods in the prior year, driven by lower volumes of service orders, resulting in decrease in labor costs (the largest component of Cost of Services) and lower material costs.

In both segments, costs of revenue as a percent of revenue increased as certain fixed costs remain regardless of volume.

### Gross Margin

*(Dollars in millions)*

| Gross Profit by Segment | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $51.6 | $97.0 | (46.8)% | $156.5 | $275.3 | (43.1)% |
| Services | 13.6 | 27.4 | (50.4)% | 49.8 | 81.3 | (38.8)% |
| Gross profit | $65.2 | $124.4 | (47.6)% | $206.3 | $356.6 | (42.1)% |
| **Gross Margin by Segment** |  |  |  |  |  |  |
| Products | 13.5% | 17.4% |  | 14.1% | 17.5% |  |
| Services | 25.1% | 34.8% |  | 28.0% | 34.9% |  |
| Total Company | 15.0% | 19.6% |  | 16.0% | 19.7% |  |

Gross profit and gross margins fluctuate with revenue levels, product mix, material costs, and labor costs. Products and Services gross profit and gross margin decreased for the three and nine months ended September 29, 2023, compared to the same periods in the prior year, primarily due to lower revenue levels and lower factory utilization.

### Operating Margin

*(Dollars in millions)*

| Operating Profit (Loss) by Segment | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Products | $7.7 | $26.8 | 71.2% | $27.3 | $50.1 | (45.5)% |
| Services | (2.0) | 9.5 | (121.1)% | 3.4 | 26.5 | (87.2)% |
| Operating profit | $5.7 | $36.3 | 84.3% | $30.7 | $76.6 | (59.9)% |
| **Operating Margin by Segment** |  |  |  |  |  |  |
| Products | 2.0% | 4.8% |  | 2.5% | 3.2% |  |
| Services | -3.7% | 12.1% |  | 1.9% | 11.4% |  |
| Total Company | 1.3% | 5.7% |  | 2.4% | 4.2% |  |

Operating profit and operating margin of Products decreased for the three and nine months period ended September 29, 2023, compared to the same period in the prior year, primarily due to decreases in business volumes and customer demands offset partially by the absence of net loss on divestitures.

Operating profit and operating margin of Services decreased for the three and nine months period ended September 29, 2023, compared to the same periods in the prior year, primarily due to the lower gross profit resulting from reduced customer demand.

### Research and Development

*(Dollars in millions)*

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $7.4 | $7.4 | 0.6% | $21.7 | $21.5 | 1.1% |
| Research and development as a percentage of total revenues | 1.7% | 1.2% |  | 1.7% | 1.2% |  |

- 26 -

Research and development expenses were generally consistent in the three and nine months ended September 29, 2023, compared to the same periods in the prior year.

### Sales and Marketing

*(Dollars in millions)*

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales and marketing | $12.8 | $13.5 | (5.5)% | $38.6 | $41.2 | (6.4)% |
| Sales and marketing as a percentage of total revenues | 2.9% | 2.1% |  | 3.0% | 2.3% |  |

Sales and marketing expense decreased $0.7 million and $2.6 million in the three and nine month periods ended September 29, 2023, compared to the same periods in the prior year, due to the decrease in compensation costs and related employee benefits.

### General and Administrative

*(Dollars in millions)*

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| General and administrative | $39.3 | $46.4 | (15.3)% | $115.3 | $139.9 | (17.6)% |
| General and administrative as a percentage of total revenues | 9.0% | 7.3% |  | 8.9% | 7.7% |  |

General and administrative expenses decreased $7.1 million and $24.6 million in the three and nine month periods ended September 29, 2023, compared to the same periods in the prior year, primarily driven by decreases in stock-based compensation expense, in amortization of intangible assets acquired through business combinations, in spending for certain third party professional services and in depreciation expense partially offset by an increase in restructuring costs. These restructuring costs primarily reflect employee severance costs and facilities consolidation costs to improve efficiencies in our operational activities and to reduce redundancies.

### Net Loss on Divestitures

In 2022, the Company sold four of its non-semiconductor operating subsidiaries of Fluid Solutions. As a result of these divestitures, the Company recorded a net loss of $20.8 million and $77.4 million for the three and nine months ended September 30, 2022, respectively.

### Interest and Other Expense, net

*(Dollars in millions)*

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $1.2 | $0.2 | 397.9% | $2.5 | $0.4 | 466.9% |
| Interest expense | $(12.3) | $(9.4) | 31.2% | $(35.9) | $(23.1) | 55.6% |
| Other expense, net | $(2.1) | $(2.1) | 0.1% | $(0.8) | $(2.5) | 68.0% |

Interest income increased $1.0 million and $2.1 million in the three and nine months ended September 29, 2023 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 increased $2.9 million and $12.8 million in the three and nine months ended September 29, 2023 compared to the same periods in the prior year, due primarily to higher interest rates.

Other expense, net, decreased $1.7 million in the nine month period ended September 29, 2023, compared to the same period in the prior year, due to the favorable foreign exchange transactions and remeasurements as the U.S. dollar strengthened in the current period partially offset by a loss from fair value adjustments.

### Provision for Income Taxes

*(Dollars in millions)*

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Percent Change | Nine Months Ended September 29, 2023 | September 30, 2022 | Percent Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Provision for income taxes | $5.3 | $12.1 | (56.2)% | $17.1 | $29.4 | (41.8)% |
| Effective tax rate | -70.7% | 48.3% |  | -488.6% | 57.2% |  |

The increase in the effective tax rate for the three and nine month periods ended September 29, 2023 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 federal and state valuation allowances.

Company management continuously evaluates the need for a valuation allowance on its deferred tax assets and, as of September 29, 2023, concluded that a full valuation allowance on its federal, state and certain of its foreign deferred tax assets remained appropriate.

### Liquidity and Capital Resources

#### Cash and cash Equivalents

The following table summarizes our cash and cash equivalents:

*(In millions)*

|  | September 29, 2023 | December 30, 2022 | Decrease |
| --- | ---: | ---: | ---: |
| Total cash and cash equivalents | $342.0 | $358.8 | $(16.8) |

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

*(In millions)*

|  | Nine Months Ended September 29, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Operating activities | $100.6 | $86.0 |
| Investing activities | (56.9) | (64.2) |
| Financing activities | (61.0) | (27.2) |
| Effects of exchange rate changes on cash and cash equivalents | 0.5 | (7.6) |
| Net decrease in cash and cash equivalents | $(16.8) | $(13.0) |

Our primary cash inflows and outflows were as follows:

- For the nine months ended September 29, 2023, we generated cash from operating activities of $100.6 million compared to $86.0 million for the nine months ended September 30, 2022. The $14.6 million increase in net cash from operating activities was driven by a $149.2 favorable change in net working capital offset in part by a $92.0 million decrease from non-cash items and by a $42.6 million decrease in net income.
- The major contributors in net changes in operating assets and liabilities for the nine months ended September 29, 2023 were as follows:
- Accounts receivable decreased $83.2 million primarily due to the timing of shipments and collections, inventories and prepaid expenses decreased $65.6 million and $7.5 million, respectively.
- Accounts payable decreased $61.2 million, income taxes payable decreased $8.9 million, and accrued compensation and related benefits decreased $11.8 million, primarily due to the timing of payments.
- Net cash used in investing activities during the nine months ended September 29, 2023 and September 30, 2022 consisted primarily of $59.2 million and $67.9 million purchases of property, plant and equipment, respectively.
- During the nine months ended September 29, 2023, cash used in financing activities was $61.0 million, compared to cash used in financing activities of $27.2 million in the nine months ended September 30, 2022. The change is due to $6.9 million higher principal payments on bank borrowings and to $23.7 million cash used in our share repurchase program initiated in the fourth quarter of fiscal year 2022.

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 September 29, 2023, we had cash of $342.0 million compared to $358.8 million as of December 30, 2022. 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 September 29, 2023.

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. For the nine months ended September 29, 2023, Fluid Solutions factored $7.4 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. 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 financing. 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 financing. 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 September 29, 2023, we have cash of approximately $213.9 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. For undistributed earnings of foreign subsidiaries which are not considered indefinitely reinvested, deferred taxes have been accrued.

#### Borrowing Arrangements

The following table summarizes our borrowings:

*(Dollars in millions)*

|  | September 29, 2023 Amount | Weighted- Average Interest Rate |
| --- | ---: | ---: |
| U.S. Term Loan | $483.2 | 8.7% |
| Fluid Solutions Debt Facilities | 6.0 | 8.3% |
| Debt issuance costs | (7.5) |  |
|  | $481.7 |  |

On March 31, 2021, the Company entered into a Second Amendment (the “Second Amendment”), to the credit agreement dated as of August 27, 2018 and amended as of October 1, 2018 (as amended by the Second Amendment, the “Credit Agreement”) to, among other things, (i) refinance and reprice $272.8 million of existing term B borrowings that will remain outstanding and (ii) obtain a $355.0 million senior secured incremental term loan B facility ((i) and (ii) collectively the “Term Loan”) with Barclays Bank, which increased the amount of term loan indebtedness outstanding under the Company’s 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 outstanding principal balance as of March 31, 2021, with the remaining principal paid upon maturity.

On August 19, 2022, we entered into a Third Amendment (the “Third Amendment”) to the credit agreement dated as of August 27, 2018 and amended as of October 1, 2018 and March 31, 2021 (as amended by the Third Amendment, the "Credit Agreement") to, among other things, increase the revolving credit facility portion of the Credit Facilities to $150.0 million with several banks and Barclays Bank as administrative agent.

The revolving credit facility has an available commitment of $150.0 million and a maturity date of February 27, 2025. The Company pays a quarterly commitment fee in arrears equal to 0.25% of the average daily available commitment outstanding. Outstanding letters of credit reduce the availability of the revolving credit facility and, as of September 29, 2023, the Company had $146.1 million, net of $3.9 million of outstanding letters of credit, available under this revolving credit facility.

The letter of credit facility has an available commitment of $50.0 million and a maturity date of August 27, 2025. The Company pays a quarterly fee in arrears equal to 2.5% (subject to certain adjustments to the Term Loan) 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 September 29, 2023, the Company had $3.9 million of outstanding letters of credit and $46.1 million of available commitments remaining under the letter of credit facility.

On June 29, 2023, the Company entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement to replace the LIBOR-based reference interest rate option with a reference interest option based upon Term SOFR under the Credit Agreement.

Under the Credit Facilities, the Company may elect that the Term Loan bear interest at a rate per annum equal to either (a) “ABR” (as defined in the Credit Agreement), plus the applicable margin or (b) the “Eurodollar Rate” (as defined in the Credit Agreement), based on SOFR, plus the applicable margin. The applicable margin for the Term Loan is equal to a rate per annum to either (i) at any time that the Company’s corporate family rating is Ba3 (with a stable outlook) or higher from Moody’s and BB- (with a stable outlook) or higher from S&P, (x) 3.50% for such Eurodollar term loans and (y) 2.50% for such ABR term loans or (ii) at all other times, (x) 3.75% for such Eurodollar term loans and (y) 2.75% for such ABR term loans. Interest on the Term Loan is payable on (1) in the case of such ABR term loans, the last day of each calendar quarter and (2) in the case of such Eurodollar term loans, the last day of each relevant interest period and, in the case of any interest period longer than three months, on each successive date three months after the first day of such interest period. At September 29, 2023, the Company had an outstanding amount under the Term Loan of $483.2 million, gross of unamortized debt issuance costs of $7.5 million. As of September 29, 2023, the interest rate on the outstanding Term Loan was 9.2%.

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 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. On July 27, 2023, the Company entered into a Fifth Amendment (“Amended Credit Agreement”) to provide the Company with certain relief under the consolidated fixed charge coverage ratio and consolidated total gross leverage ratio maintenance covenants described in the Credit Agreement (the “Financial Covenant Adjustments”), which are applicable only to the revolving credit facility portion of its credit facilities. The Financial Covenant Adjustments are effective during the period commencing with the fiscal period ended June 30, 2023, through to the fiscal period ending December 31, 2024, subject to certain anti-cash hoarding and minimum liquidity requirements during such period. At the election of the Company, and subject to demonstrating compliance with certain financial ratio tests, the Financial Covenant Adjustments may terminate earlier than December 31, 2024. Upon termination of the Financial Covenant adjustments, such financial maintenance covenants will revert to the levels set forth in the existing Credit Agreement and the anti-cash hoarding and minimum liquidity requirements will no longer be applicable. The Company currently has no revolving loans outstanding under the Credit Agreement. As of September 29, 2023, 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 $7.4 million). As of September 29, 2023, 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 $18.5 million. As of September 29, 2023, Fluid Solutions had $6.0 million of outstanding debt with average interest rate ranges from 7.5% to 8.4%.

As of September 29, 2023, the Company’s total bank debt was $481.7 million, net of unamortized debt issuance costs of $7.5 million. As of September 29, 2023, the Company had $146.1 million, $12.5 million and $7.4 million available to draw from our credit facilities in the U.S., Israel and Czech Republic, respectively.

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.

### Capital Expenditures

Capital expenditures were $59.2 million during the nine months ended September 29, 2023 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. The Company’s anticipated capital expenditures for the remainder of 2023 are expected to be financed primarily from our cash flow generated from operations.

### Contractual Obligations

The Company had commitments to various third parties to purchase inventories totaling approximately $422.5 million as of September 29, 2023.

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 September 29, 2023, 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.

## Market risk

As filed, 382 characters.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the period covered by this report. Refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for our fiscal year ended December 30, 2022, for a more complete discussion of the market risks we encounter.

## Controls and procedures

As filed, 4,988 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, our chief executive officer and our chief financial officer concluded the disclosure controls and procedures were not effective as of September 29, 2023, the end of the period covered by this Quarterly Report on Form 10-Q, due to the material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022.

### Previously Identified Material Weaknesses in Internal Control Over Financial Reporting

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, we previously identified material weaknesses in our internal control over financial reporting related to information technology general controls (“ITGCs”) over user access within our primary Enterprise Resource Planning (“ERP”) system, our primary revenue system for the Services segment, and related ERP access controls affecting the independent review of manual journal entry postings. Business process controls that depend on the affected information systems, or that depend on data or financial reports generated from the affected information systems to be accurate and complete, could be adversely affected.

These material weaknesses did not result in a misstatement to the consolidated financial statements or disclosures. Based on additional procedures and post-closing review, management concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented, in conformity with accounting principles generally accepted in the United States.

### Remediation Plan

Management has been executing and remains committed to implementing measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The following remediation actions are currently being implemented and are in progress:

- Reviewing all ITGCs to identify opportunities to expand and/or automate controls to address the design and operation of ITGCs on systems supporting our financial processes.
- Enhancing training programs addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to user access over IT systems impacting financial reporting.
- Strengthening policy documentation underlying ITGCs.
- Implementing an IT management review process and increased the frequency of testing plans to monitor ITGCs with a specific focus on systems supporting our financial reporting processes.
- Enhancing regular reporting on the remediation measures to the Audit Committee of the Board of Directors.

As we continue to evaluate and work to improve our internal control over financial reporting, we may decide to take additional measures to address control deficiencies or modify the remediation plans described above. We believe that these actions will remediate the material weaknesses, however the material weaknesses will not be considered remediated until the applicable controls have operated for a period of time in order to have sufficient samples to test. Management must conduct testing to conclude that these controls are operating effectively. While Management believes that the aforementioned plans will effectively remediate the material weaknesses prior to the end of fiscal 2023, there is no assurance on the exact timing of the completion of the remediation. As the remediation plans continue to be implemented, management may be required to take additional measures or modify the plan elements.

### Changes in Internal Control Over Financial Reporting

Except for the remediation efforts discussed above under “Remediation Plan”, there were no changes in internal control over financial reporting during the fiscal third quarter ended September 29, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 204 characters.

There were no material changes during the period covered in this report to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 30, 2022.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-060220. Last ingested by Listed: Nov 3, 2026, 22:13 ET. No prices; not investment advice.