UCTT US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Annual Report on Form 10-K contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties. Forward-looking statements can also be identified by words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will be,” “will continue,” “will likely results, and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in “Item 1A — Risk Factors” above. The following discussion should be read in conjunction with the Consolidated Financial Statement and notes thereto included in Item 8 of this report. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

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 complex devices.

Critical Accounting Estimates

Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure at the date of our Consolidated Financial Statements. On an on-going basis, we evaluate our estimates and judgments, including those related to inventories, income taxes, business combinations and goodwill, intangible assets and long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We consider certain accounting policies related to revenue recognition, inventory valuation, accounting for income taxes, business combinations,

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valuation of goodwill, intangible assets and long-lived assets to be critical policies due to the estimates and judgments involved in each.

Revenue Recognition

Our revenues for fiscal years 2022, 2021 and 2020, were highly concentrated with a small number of OEM customers in the semiconductor capital equipment industry. We recognize revenue when promised goods or services (performance obligations) are transferred to a customer in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. We perform the following five steps to determine when to recognize revenue:

1.

Identification of the contract(s) with customers – Our standard arrangement for our customers includes a signed purchase order or contract, no right of return of delivered products and no customer acceptance provisions. We assess collectability based on the creditworthiness of the customer and past transaction history. We perform on-going credit evaluations of, and do not require collateral from, our customers.

2.

Identification of the performance obligations in the contract – Our performance obligations include delivery of promised goods or services.

3.

Determination of the transaction price – The transaction price of our contracts with customers may include both fixed and variable consideration. We include variable consideration in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We generally invoice our customers upon shipment of goods and completion of services with payment due within 30 to 90 days after issuance.

4.

Allocation of the transaction price to the performance obligations in the contract – For contracts that contain multiple performance obligations, we allocate the transaction price to the performance obligations on a relative standalone selling price basis. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract.

5.

Recognition of revenue when, or as, a performance obligation is satisfied – We recognize revenue from products sold at a point in time when we have satisfied our performance obligation by transferring control of the goods to the customer, which typically occurs at shipment or delivery. Revenue from service agreements is recognized upon completion of the services, which typically occurs upon shipment to the customer.

Inventory Valuation

We write down the carrying value of our inventory to net realizable value for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon inventory age and assumptions about future demand and market conditions. We assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts on a periodic basis.

Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell, if less than its cost. The inventory write-downs are established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of demand and market value in determining inventory valuation are estimates related to economic trends, market conditions, and future demand for our products. If actual demand and market conditions are less favorable than our projections, additional inventory write-downs may be required. If the inventory value is written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a subsystem or as separate inventory. For fiscal years 2022, 2021 and 2020, we wrote down inventories of $5.0 million, $6.1 million, and $3.4 million, respectively.

Accounting for Income Taxes

The determination of our tax provision is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region and is subject to judgments and estimates. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required.

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not more likely than not, we must increase our provision for taxes by recording a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be recoverable. In determining whether the realization of these deferred tax assets may be impaired, we make judgments with respect to whether we are likely to generate sufficient future taxable income to realize these assets. In order to reverse a valuation allowance, U.S. GAAP suggest that we review our recent cumulative income/loss as well as determine our ability to generate sufficient future taxable

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income to realize our net deferred tax assets. As of December 30, 2022, we maintained full valuation allowances on our U.S. federal and state and certain of our foreign deferred tax assets in the amount of $53.1 million as we believe it is more likely than not that these deferred tax assets will not be realized.

In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on the results of our operations and financial position. We believe we have adequately reserved for our uncertain tax positions; however, no assurance can be given that the final tax outcome of these matters will not be different than what we expect. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

Business Combinations

In accordance with accounting for business combinations, we allocate the purchase price of acquired companies to the identified tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We may engage third-party valuation firms to assist management in reviewing management’s identification and determination of the fair values of acquired intangible assets such as customer relationships and tradenames. Such valuations require management to make significant estimates and assumptions. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

Goodwill, Intangibles Assets, and Long-lived Assets

Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed.

We evaluate our goodwill and indefinite life tradename for impairment, at the reporting unit level, on an annual basis, and whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. In addition, we evaluate our identifiable intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

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Significant changes in the manner of our use of the acquired assets or the strategy of our overall business;

•

Significant negative changes in revenue of specific products or services;

•

Significant negative industry or economic trends; and

•

Significant decline in our stock price for a sustained period.

We continually apply judgment when performing these evaluations and continuously monitor for events and circumstances that could negatively impact the key assumptions in determining fair value, including long-term revenue growth projections, undiscounted cash flows, discount rates, recent market valuations from transactions by comparable companies, volatility in our market capitalization and general industry, market and macroeconomic conditions. It is possible that changes in such circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing fair value, would require us to record a non-cash impairment charge.

Results of Operations

Fiscal Year

Our fiscal year is the 52 or 53 week period ending on the Friday nearest December 31. Fiscal years 2022 and 2020, each contained 52 weeks. Fiscal year 2021, contained 53 weeks.

A discussion regarding our financial condition and results of operations for fiscal 2022, compared to fiscal 2021, is presented below. The results of operations for 2021, and the discussion below reflect nine months of activity resulting from the acquisition of Ham-Let.

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A discussion regarding our financial condition and results of operations for fiscal 2021, compared to fiscal 2020, can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.uct.com/investors.

Discussion of Results of Operations

Revenues

Year Ended

Revenues by Segment December 30, Percent December 31, Percent December 25,

Products as a percentage of total revenues 87.4 % 85.8 % 80.9 %

Services as a percentage of total revenues 12.6 % 14.2 % 19.1 %

Total Products revenue increased $270.8 million in fiscal year 2022 over fiscal year 2021, primarily due to an increase in customer demand in the semiconductor industry, in particular, the wafer fabrication equipment industry and in part due to the inclusion of Fluid Solutions for the full twelve month period in 2022.

Total Services revenues were relatively flat in fiscal year 2022 compared to fiscal year 2021.

Year Ended

Revenues by Geography December 30, Percent December 31, Percent December 25,

Unites States as a percentage of total revenues 38.6 % 34.9 % 41.6 %

International as a percentage of total revenues 61.4 % 65.1 % 58.4 %

On a geographic basis, revenue represents products were shipped or services performed in our U.S. and international locations. Both U.S. and foreign revenues increased in absolute terms in fiscal 2022 over fiscal 2021, due to an overall global increase in semiconductor and general industry demand.

Cost of Revenues

Year Ended

Products cost as a percentage of total Products revenues 82.5 % 82.0 % 82.6 %

Services cost as a percentage of total Services revenues 65.8 % 64.8 % 64.4 %

Total cost of revenues increased $237.7 million in fiscal year 2022 over fiscal year 2021, due to higher demand for Products and higher labor costs for Services.

Cost of Products revenues consists of purchased materials, direct labor and manufacturing overhead. Cost of products revenues increased $233.6 million for fiscal 2022 compared to fiscal 2021. The increases were due to higher volume of sales driving increased material costs, as well as higher direct labor spending and overhead costs and in part due to the inclusion of Fluid Solutions for the full twelve months in fiscal year 2022 as compared to nine months in fiscal year 2021.

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Cost of Services revenues consists of direct labor, manufacturing overhead and materials (such as chemicals, gases and consumables). Cost of services revenues increased $4.1 million in fiscal 2022 compared to the prior year driven by an increase in labor costs.

Gross Margin

Year Ended

Gross Profit by Segment December 30, Percent December 31, Percent December 25,

Gross Margin by Segment

Products and Services gross margin decreased in fiscal year 2022 over fiscal year 2021, due to higher labor and overhead costs.

Operating Margin

Year Ended

Operating Margin by Segment

Total Company 5.1 % 8.8 % 8.7 %

Operating profit and operating margin of Products decreased in fiscal year 2022 compared to fiscal year 2021, primarily due to the $77.4 million net loss recorded from the divestiture of subsidiaries partially offset by the higher demand and the inclusion of Fluid Solutions gross profit for the full twelve months in fiscal year 2022 as compared to nine months in fiscal year 2021.

Operating profit and operating margin of Services decreased in fiscal year 2022 compared to fiscal year 2021, due to lower gross profit.

Research and Development

Year Ended

December 30, Percent December 31, Percent December 25,

Research and development as a percentage of total revenues 1.2 % 1.2 % 1.1 %

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Research and development expenses consist primarily of activities related to new component testing and evaluation, test equipment and fixture development, product design, the advancement of cleaning and coating and analytical processes, and other product-development activities. Research and development expenses increased $4.0 million in fiscal year 2022 compared to fiscal year 2021, primarily due to an increase in personnel-related expenses associated with an overall increase in headcount.

Sales and Marketing

Year Ended

December 30, Percent December 31, Percent December 25,

Sales and marketing as a percentage of total revenues 2.3 % 2.3 % 1.8 %

Sales and marketing expenses consist primarily of salaries and commissions paid to our sales employees, salaries paid to our engineers who partner with sales and service employees to help determine the components and configuration requirements for new products and other costs related to the sales of our products. Sales and marketing expenses increased $6.2 million in fiscal year 2022 over fiscal year 2021, due to the inclusion of Fluid Solutions’ sales and marketing activities for the full twelve months and an increase in personnel-related costs driven by higher headcount.

General and Administrative

Year Ended

December 30, Percent December 31, Percent December 25,

General and administrative as a percentage of total revenues 7.8 % 8.2 % 9.3 %

General and administrative expenses increased $12.7 million in fiscal year 2022 over fiscal year 2021, due to the inclusion of Fluid Solutions’ general and administrative activities for the full twelve months in fiscal year 2022 and higher personnel-related expenses driven by higher headcount.

Interest and Other Income (Expense), net

Year Ended

December 30, Percent December 31, Percent December 25,

Other income (expense), net $ 0.9 (111.8 ) % $ (7.6 ) 33.3 % $ (5.7 )

Interest expense increased $9.7 million in fiscal year 2022 over fiscal year 2021 due to a higher average debt balance and higher interest rates on our variable rate debt due to rising LIBOR rates in 2022.

Other income (expense), net, increased $8.5 million in fiscal year 2022 over fiscal year 2021 primarily due to the absence of loss from the change in the fair value of forward contracts in conjunction with the acquisition of Ham-Let.

Provision for Income Taxes

Year Ended

December 30, Percent December 31, Percent December 25,

The change in respective tax rates reflects, primarily, changes in the geographic distribution of our worldwide earnings. For fiscal year 2022, our effective tax rate was higher than the federal statutory rate of 21.0% primarily due to an increase in the valuation allowance.

For the year ended December 30, 2022, the Company concluded that a full valuation allowance against its U.S. federal and state deferred tax assets continues to be necessary. The Company also concluded that some of its foreign

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deferred tax assets acquired as part of the QGT and Ham-Let acquisitions required a valuation allowance. As of December 30, 2022, the total U.S. and foreign valuation allowances for deferred tax assets were $43.4 million and $9.7 million, respectively.

Our ability to realize deferred tax assets depends on our ability to generate sufficient future taxable income. In assessing our future taxable income, we have considered all sources of future taxable income available to realize our deferred tax assets, including the taxable income from future reversal of existing temporary differences, carry forwards, and tax-planning strategies. If changes occur in the assumptions underlying our tax planning strategies or in the scheduling of the reversal of our deferred tax liabilities, the valuation allowance may need to be adjusted in the future.

The Company remitted earnings from one of its subsidiaries in Singapore in 2022. The Company has no plans to remit other foreign earnings other than possibly from a subsidiary in Singapore. We may change our intent to reinvest certain of our undistributed foreign earnings indefinitely, which could require us to accrue or pay taxes on some or all of these undistributed earnings.

Liquidity and Capital Resources

Cash and cash Equivalents

The following table summarizes our cash and cash equivalents:

Year Ended

December 30, December 31,

The decrease in cash and cash equivalents in fiscal year 2022, compared to fiscal year 2021, was primarily due to the cash provided by operating activities of $47.2 million offset by the cash used in financing activities of $56.0 million and $96.2 million used in investing activities.

Cash Flows

Year Ended

December 30, December 31, December 25,

Effects of exchange rate changes on cash and cash equivalents (2.7 ) (1.4 ) 1.4

Net increase (decrease) in cash and cash equivalents $ (107.7 ) $ 266.2 $ 37.8

Our primary cash inflows and outflows were as follows:

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We generated net cash from operating activities of $47.2 million in fiscal year 2022, compared to $211.6 million in fiscal year 2021. The $164.4 million decrease was driven by a decrease of $76.0 million in net income and decrease of $169.0 million in the net change from operating assets and liabilities partially offset by the increase of $80.6 million in non-cash items.

•

The major contributors to the net change in operating assets and liabilities, net of effects of acquisition and business dispositions, in fiscal year 2022 were as follows:

o

Accounts receivable increased $15.7 million primarily due to the increase in revenues and the timing of collections.

o

Inventories increased $84.4 million as a result of inventory receipts in excess of consumption. This was driven by customer demand below forecast.

o

Accounts payable decreased $68.4 million primarily due to the increases in inventories and the timing of payments.

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•

Cash used in investing activities was $96.2 million in fiscal year 2022 compared to $404.8 million in fiscal year 2021. During fiscal year 2022, net cash used for investing activities primarily consisted of $100.1 million related to purchases of property, plant and equipment. During fiscal year 2021, net cash used for investing activities primarily consisted of $353.2 million related to an acquisition and $59.3 million for purchases of property, plant and equipment.

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Cash used in financing activities was $56.0 million in fiscal year 2022 compared to cash provided in financing activities of $460.8 million in fiscal year 2021. During fiscal year 2022, net cash provided by financing activities primarily consisted of debt repayment of $39.7 million and $12.1 million of shares repurchased. During fiscal year 2021, net cash provided by financing activities primarily consisted of new borrowings of $415.2 million, proceeds from issuance of common stock of $193.6 million, partially offset with repayment on debt and debt issuance costs of $140.7 million and $7.3 million of taxes paid upon the vesting of restricted stock units.

We believe we have sufficient capital to fund our working capital needs, satisfy our debt obligations, maintain our existing capital equipment, purchase new capital equipment and make strategic acquisitions from time to time. As of December 30, 2022, we had cash and cash equivalents of $358.8 million compared to $466.5 million as of December 31, 2021. Our cash and cash equivalents, cash generated from operations and borrowings under our term loan described below, were our principal sources of liquidity as of December 30, 2022.

We have an existing factoring arrangement with a financial institution in which a portion of its accounts receivable are sold on a nonrecourse basis. In fiscal year 2022, we factored $6.5 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 financings. If required, additional financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, our stockholders’ equity interest will be diluted and these securities might have rights, preferences and privileges senior to those of our current stockholders. We may also require the consent of our new lenders to raise additional funds through equity or debt financings. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.

In 2017, we determined that a portion of the current year and future year earnings of one of our China subsidiaries may be distributed in the future and, accordingly, we provided for the related withholding taxes in our Consolidated Financial Statements. As of December 30, 2022, we had undistributed earnings of approximately $512.0 million from our foreign subsidiaries that are indefinitely invested outside of the U.S. As of December 30, 2022, we have cash of approximately $266.9 million in our foreign subsidiaries.

Borrowing Arrangements

December 30, December 31,

Fluid Solutions Debt Facilities 9.0 4.2 % 8.9 1.0 %

Cinos China Credit Facilities — — 1.4 4.1 %

Debt issuance costs (10.2 ) (13.4 )

In August 2018, the Company entered into a Credit Agreement with Barclays Bank that provided a Term Loan, a Revolving Credit Facility and a Letter of Credit Facility (the “Credit Facility”). UCT and certain of its subsidiaries have agreed to secure all of their obligations under the Credit Facility by granting a first priority lien in substantially all of their respective personal property assets (subject to certain exceptions and limitations). In August 2018, the Company borrowed $350.0 million under the Term Loan.

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On March 31, 2021, the Company entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement to, among other things, (i) refinance and reprice $272.8 million of existing Term Loan 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. 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 LIBOR, 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. On March 29, 2021, the Company elected that the Term Loan outstanding as of March 31, 2021 accrue interest based on the “Eurodollar Rate” for an initial interest period of one month. Pursuant to the Second Amendment to the Credit Agreement, the Credit Facilities contains customary LIBOR replacement provisions in the event LIBOR is discontinued. At December 30, 2022, the Company had an outstanding amount under the Term Loan of $515.0 million, gross of unamortized debt issuance costs of $10.2 million. As of December 30, 2022, the interest rate on the outstanding Term Loan was 7.8%.

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 December 30, 2022, the Company had $146.6 million, net of $3.4 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 December 30, 2022, the Company had $3.4 million of outstanding letters of credit and $46.6 million of available commitments remaining under the letter of credit facility.

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. The Company was in compliance with all financial covenants during the year ended December 30, 2022.

Fluid Solutions has credit facilities with various financial institutions that provides borrowings of up to $18.5 million. As of December 31, 2021, Fluid Solutions had $9.0 million of outstanding debt with interest rate of 4.2%.

In 2020, Cinos China amended its existing credit agreement with a local bank that provides a term loan of RMB 10.0 million (approximately $1.4 million) which matured on September 23, 2022.

Fluid Delivery Systems (“FDS”) has a credit agreement with a local bank in the Czech Republic that provides for a revolving credit facility in the aggregate of up to 5.0 million euros (approximately $5.3 million). As of December 30, 2022, the Company had no outstanding amount under this revolving credit facility.

As of December 30, 2022, the Company’s total bank debt was $513.8 million, net of unamortized debt issuance costs of $10.2 million. As of December 30, 2022, we had $146.6 million, $5.3 million and $9.5 million available to draw from our credit facilities in the U.S., Czech Republic and Israel, respectively.

The fair value of our long-term debt was based on Level 2 inputs, and fair value was determined using quoted prices for similar liabilities in inactive markets. The carrying value of our long-term debt approximates fair value.

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Capital Expenditures

Capital expenditures were $100.1 million for the year ended December 30, 2022, primarily attributable to the capacity expansion of our Ireland, Malaysia, Israel and certain U.S. facilities.

Contractual Obligations

The Company had commitments to various third parties to purchase inventories totaling approximately $274.1 million on December 30, 2022.

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification against certain liabilities to our customers, which may include claims of losses by their own customers resulting out of property damages, bodily injuries or deaths, or infringement of intellectual property rights by our products. Our potential liability arising out of intellectual property infringement claims by any third party is generally uncapped. As of December 30, 2022, we have not incurred 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.

During the periods presented, we do not have unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Recently Issued and Adopted Accounting Pronouncement

For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on UCT’s Consolidated Financial Statements, see Note 1, “Organization and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including credit risk, foreign currency exchange rate risk and interest rate risk.

Credit Risk

A substantial majority of our trade receivables are derived from sales to OEMs. We believe the net accounts receivable balances from our two largest customers (38.5% as of December 30, 2022) do not represent a significant credit risk, based on cash flow forecasts, balance sheet analysis, and past collection experience. For more information about the customers that represent our accounts receivable balance, see Note 1, Organization and Significant Accounting Policies.

We have adopted credit policies and standards intended to accommodate industry growth and inherent risk. We believe credit risks are moderated by the financial stability of our major customers. We assess credit risk through quantitative and qualitative analysis. From these analyses, we establish shipping and credit limits and determine whether we will seek to use one or more credit support protection devices, such as obtaining a parent guarantee, prepayment or standby letter of credit.

Foreign Currency Exchange Rate Risk

We operate in international markets, which expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. Dollar and various foreign currencies. Historically, the majority of our revenue contracts and arrangements with third party suppliers are denominated in U.S. Dollars. Separately, a portion of our expenses, primarily the cost to manufacture, cost of personnel to deliver technical support on our products and professional services, sales and sales support and research and development, are denominated in foreign currencies.

Revenue resulting from selling in currencies and costs incurred in local currencies are exposed to foreign currency exchange rate fluctuations which can affect our operating income. As foreign currency exchange rates vary, operating income may differ from expectations. Increases in the value of the U.S. Dollar relative to other currencies would make our products more expensive relative to competing products priced in such other currencies, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. Dollar relative to other currencies could result in our foreign suppliers raising their prices in order to continue doing business with us. However, we do not expect foreign currency exchange rate fluctuations to have a material effect on our results of operations.

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We use derivative instruments, such as foreign currency exchange contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. These contracts reduce, but do not entirely eliminate the impact of currency exchange rates movement on our assets and liabilities.

Interest Rate Risk

We are exposed to market risk due to changing interest rates under our credit facilities. Our Credit Facility is comprised of a Term B loan and a revolving credit agreement with interest rates as described under Note 7 of Notes to the Consolidated Financial Statements.

At the end of fiscal 2022, the Term B loan had a balance of $515.0 million. A hypothetical 100 basis points increase in our borrowing rates at the end of fiscal 2022, would result in approximately $4.0 million annual increase in interest expense on this existing principal balance.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm 42

Consolidated Balance Sheets as of December 30, 2022 and December 31, 2021 45

Notes to Consolidated Financial Statements 50

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

Ultra Clean Holdings, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Ultra Clean Holdings, Inc. (the “Company”) as of December 30, 2022 and December 31, 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years ended December 30, 2022, December 31, 2021 and December 25, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 30, 2022 and December 31, 2021, and the consolidated results of its operations and its cash flows for each of the three years ended December 30, 2022, December 31, 2021 and December 25, 2020, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment in Item 9A:

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•

The Company did not design and maintain effective information technology general controls for its primary Enterprise Resource Planning (ERP) system used in the preparation of the consolidated financial statements and the primary revenue system for its Services segment; and,

•

The Company did not design and maintain effective controls to timely detect and independently review instances where individuals with access to post a journal entry may also have edited or created the journal entry for its primary ERP.

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. We considered the material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 30, 2022, and our opinion on such consolidated financial statements was not affected.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Inventories

As described in Notes 1 and 4 to the consolidated financial statements, the Company’s consolidated inventories balance was $443.9 million as of December 30, 2022. The Company values its inventories at the lower of cost (first-in, first-out) or net realizable value. Obsolete inventory or inventory in excess of management’s estimated usage is written-down to its estimated market value less costs to sell, if less than its cost. Inherent in the estimates of market value are management’s estimates related to economic trends and future demand for the Company’s products. As disclosed by management, if these factors are less favorable than those projected, additional inventory write-downs may be required.

The valuation of inventories, specific to write downs, requires management to make significant assumptions and especially complex judgments about the future salability of the inventory and its net realizable value. These assumptions include the assessment of net realizable value by inventory category considering economic trends, future usage and market demand for their products. Additionally, management makes qualitative judgments related to slow moving and obsolete inventories. Given the significant judgments made by management, auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an

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increased extent of effort. Taking into account our risk assessment for each of the various locations and components, the most relevant procedures we performed to address this critical audit matter included:

•

Evaluating the Company’s process used in developing the estimate for excess and obsolete inventory by:

o

Evaluating the methodology used by management to develop its estimate for reasonableness;

o

Testing the completeness, accuracy, and relevance of the underlying data used by management to develop the estimate;

o

Evaluating the reasonableness of specified inputs supporting management's estimate, including the age of inventory items, historic inventory trends, and historic write-off activity;

o

Evaluating the reasonableness of qualitative adjustments, including those related to forecasted demand;

o

Performing inquiries with appropriate financial personnel, regarding obsolete or discontinued inventory models, cancelled sales orders and other factors to corroborate management’s assertions regarding qualitative judgments about slow moving and obsolete inventories; and

o

Testing the mathematical accuracy of the calculations related to the application of the Company’s methodology to specific inventory categories.

•

Developing an independent expectation of inventory write-downs at year end based on historical trends and balances and comparing it to management’s estimate.

Additionally, in response to the material weaknesses identified, we also lowered the threshold for investigating differences between the recorded amount and our independent expectation that we would have otherwise used if the Company’s controls were designed and operating effectively. In addition, we substantively verified the completeness and accuracy of system generated reports utilized in the estimate, including tracing to source records, on a test basis, as required to verify accuracy.

Consolidated Financial Statements - Impact of Material Weaknesses

As discussed in Management’s Report on Internal Control Over Financial Reporting, the Company identified material weaknesses in their internal control over financial reporting associated with (i) not designing and maintaining effective information technology general controls for its primary Enterprise Resource Planning (ERP) system used in the preparation of the consolidated financial statements and the primary revenue system for its Services segment, and (ii) not designing and maintaining effective controls to timely detect and independently review instances where individuals with access to post a journal entry may also have edited or created the journal entry for its primary ERP.

These material weaknesses not only impact the Company’s controls over the specific areas identified, but also related business process controls that rely on information produced by the systems and reports which affect substantially all financial statement account balances and disclosures; and result in a critical audit matter that required us to increase the extent of our audit effort, including the need to modify the nature and extent of audit procedures performed as well audit evidence obtained.

Addressing the matters involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the nature and extent of audit procedures performed and evidence obtained. We increased the number of selections we would have otherwise made if the Company’s controls were designed and operating effectively. In addition, we utilized original source documents for audit evidence, rather than system reports or other information generated by systems affected by the material weaknesses identified.

/s/ Moss Adams LLP

San Francisco, California

February 28, 2023

We have served as the Company’s auditor since 2015.

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Ultra Clean Holdings, Inc.

Consolidated Balance Sheets

December 30, December 31,

(In millions, except par value)

ASSETS

Current assets:

Cash and cash equivalents $ 358.8 $ 466.5

Prepaid expenses and other current assets 42.4 41.3

Property, plant and equipment, net 279.6 242.3

Deferred tax assets, net 36.0 37.6

Operating lease right-of-use assets 99.0 83.4

Other non-current assets 10.8 9.3

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accrued compensation and related benefits 52.5 46.8

Operating lease liabilities 17.1 17.3

Other current liabilities 45.3 50.0

Bank borrowings, net of current portion 493.0 529.9

Deferred tax liabilities 52.2 54.9

Operating lease liabilities 80.3 65.9

Other liabilities 9.2 12.9

Commitments and contingencies (See Note 10)

Equity:

UCT stockholders’ equity:

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

Accumulated other comprehensive loss (5.4 ) (0.2 )

Total UCT stockholders' equity 887.9 848.9

Noncontrolling interests 49.1 43.8

(See accompanying Notes to Consolidated Financial Statements)

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Ultra Clean Holdings, Inc.

Consolidated Statements of Operations

Year Ended

December 30, December 31, December 25,

(In millions, except per share amounts)

Revenues:

Cost of revenues:

Operating expenses:

Net loss on divestitures 77.4 — —

Other income (expense), net 0.9 (7.6 ) (5.7 )

Income before provision for income taxes 88.3 154.3 99.7

Less: Net income attributable to noncontrolling interests 10.0 6.9 2.8

Net income attributable to UCT $ 40.4 $ 119.5 $ 77.6

Net income per share attributable to UCT common stockholders:

Shares used in computing net income per share:

(See accompanying Notes to Consolidated Financial Statements)

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Ultra Clean Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss)

Year Ended

December 30, December 31, December 25,

(In millions)

Other comprehensive income (loss):

Change in cumulative translation adjustment, net of tax (9.9 ) (5.0 ) 6.5

Change in pension net actuarial gain (loss), net of tax 1.2 0.4 (0.1 )

Change in fair value of derivatives, net of tax 1.0 (0.7 ) —

Total other comprehensive income (loss) (7.7 ) (5.3 ) 6.4

Comprehensive income attributable to UCT $ 35.2 $ 114.2 $ 84.0

(See accompanying Notes to Consolidated Financial Statements)

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Ultra Clean Holdings, Inc.

Consolidated Statements of Cash Flows

Year Ended

December 30, December 31, December 25,

(In millions)

Cash flows from operating activities:

Amortization of intangible assets 30.0 33.4 19.8

Amortization of debt issuance costs 3.9 3.4 1.9

Loss (gain) on the disposal of assets (0.2 ) 0.2 (1.4 )

Net loss on divestiture 77.4 — —

Gain from insurance proceeds — (7.3 ) (1.0 )

Deferred income taxes (0.2 ) (3.2 ) 0.4

Change in the fair value of financial instruments 1.0 12.4 7.7

Changes in assets and liabilities, net of effects of acquisitions:

Prepaid expenses and other current assets (4.5 ) (4.2 ) 1.2

Other non-current assets (3.4 ) (0.8 ) (0.1 )

Accrued compensation and related benefits 7.1 1.8 9.7

Income taxes payable (0.1 ) 7.7 2.8

Operating lease assets and liabilities (2.2 ) (1.1 ) (1.1 )

Other liabilities (1.0 ) 0.5 (7.4 )

Net cash provided by operating activities 47.2 211.6 97.3

Cash flows from investing activities:

Purchases of property, plant and equipment (100.1 ) (59.3 ) (36.4 )

Divestiture of subsidiaries 3.4 — —

Proceeds from sale of equipment, including insurance proceeds 0.5 7.7 6.6

Settlement of forward contracts in conjunction with acquisition — (10.4 ) —

Acquisition of businesses, net of cash acquired — (342.8 ) —

Net cash used in investing activities (96.2 ) (404.8 ) (29.8 )

Cash flows from financing activities:

Principal payments on bank borrowings (39.7 ) (131.8 ) (105.5 )

Repurchase of shares (12.1 ) — —

Payments of debt issuance costs (0.7 ) (8.9 ) —

Proceeds from issuance of common stock 0.7 193.6 0.6

Proceeds from bank borrowings — 415.2 76.7

Others (0.3 ) — (1.4 )

Net cash provided by (used in) financing activities (56.0 ) 460.8 (31.1 )

Effect of exchange rate changes on cash and cash equivalents (2.7 ) (1.4 ) 1.4

Net increase (decrease) in cash and cash equivalents (107.7 ) 266.2 37.8

Cash and cash equivalents at beginning of period 466.5 200.3 162.5

Cash and cash equivalents at end of period 358.8 $ 466.5 $ 200.3

Supplemental cash flow information:

Income taxes paid, net of income tax refunds $ 36.8 $ 23.1 $ 16.4

Non-cash investing and financing activities:

(See accompanying Notes to Consolidated Financial Statements)

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Ultra Clean Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

Common Stock Treasury shares

(In millions)

Issuance under employee stock plans 0.8 — 0.6 — — — — 0.6 — 0.6

Stock-based compensation expense — — 12.8 — — — — 12.8 — 12.8

Other comprehensive income — — — — — — 6.4 6.4 — 6.4

Issuance under employee stock plans 0.7 — 0.8 — — — — 0.8 — 0.8

Stock-based compensation expense — — 15.8 — — — — 15.8 — 15.8

Dividend income — — — — — — — — (0.1 ) (0.1 )

Acquisition of Ham-Let — — — — — — — — 1.9 1.9

Reclassification related to Cinos Korea — — — — — — — — 16.5 16.5

Other comprehensive income — — — — — — (5.3 ) (5.3 ) - (5.3 )

Issuance under employee stock plans 0.7 — 0.7 — — — — 0.7 — 0.7

Stock-based compensation expense — — 19.1 — — — — 19.1 — 19.1

Dividend income — — — — — — — — (0.3 ) (0.3 )

Divestiture of a subsidiary — — — — — — — — (1.9 ) (1.9 )

Other comprehensive income — — — — — — (5.2 ) (5.2 ) (2.5 ) (7.7 )

(See accompanying Notes to Consolidated Financial Statements)

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Ultra Clean Holdings, Inc.

Notes to Consolidated Financial Statements

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Ultra Clean Holdings, Inc., (the “Company” or “UCT”) a Delaware corporation, was founded in November 2002 and became a publicly traded company on the NASDAQ Global Market in March 2004. The Company is a 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. The Company’s Products business 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. The Company’s Services business provides ultra-high purity parts cleaning, process tool part recoating, surface encapsulation and high sensitivity micro contamination analysis primarily for the semiconductor device makers and wafer fabrication equipment markets.

Fiscal Year

The Company uses a 52-53 week fiscal year ending on the Friday nearest December 31. All references to quarters refer to fiscal quarters and all references to years refer to fiscal years.

Principles of Consolidation

The Company’s Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries and all intercompany accounts and transactions have been eliminated upon consolidation.

Noncontrolling interests

Noncontrolling interests are recognized to reflect the portion of the equity of the majority-owned subsidiaries which is not attributable, directly or indirectly, to the controlling stockholder. The Company’s consolidated entities include partially-owned entities, which are (1) Cinos Co., Ltd (“Cinos Korea”), a South Korean company that provides outsourced cleaning and recycling of precision parts for the semiconductor industry through its operating facilities in South Korea and whose results the Company consolidates and (2) Cinos Xian Clean Technology, Ltd. (“Cinos China”), a Chinese entity that is majority owned by Cinos Korea. The interest held by others in Cinos Korea and in Cinos China are presented as noncontrolling interests in the accompanying Consolidated Financial Statements. The noncontrolling interests will continue to be attributed their share of gains and losses even if that attribution results in a deficit noncontrolling interests’ balance.

Segments

The Financial Accounting Standards Board’s (“FASB”) guidance regarding disclosure about segments in an enterprise and related information establishes standards for the reporting by public business enterprises of information about reportable segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the reportable segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is the Chief Executive Officer. The Company operates two reportable segments: Products and Services. The Company has three operating segments as of December 30, 2022 with two operating segments within the Product reportable segment and one operating segment within the Services reportable segment. See Note 16 to the Company’s Consolidated Financial Statements.

Foreign Currency Translation and Remeasurement

As of December 30, 2022, the functional currency of the Products business’ foreign subsidiaries, excluding the subsidiaries of Ham-Let (Israel-Canada) Ltd. (“Ham-Let” or “Fluid Solutions”), is the U.S. Dollar. The functional

50

currency of the Ham-Let subsidiaries in Singapore, United Kingdom, Netherlands, Taiwan and China, is their local currency, except for Israel, which is the U.S. Dollar. The functional currency of the Services division’s foreign subsidiaries is the local currency, except for that of its Singapore, Scotland and Ireland entities, which is the U.S. Dollar.

For the Company’s foreign subsidiaries where the local currency is the functional currency, the Company translates the financial statements of these subsidiaries to U.S. Dollars using month-end exchange rates for assets and liabilities, and average exchange rates for revenue, costs and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (“AOCI”) within UCT stockholders’ equity. For the Company’s foreign subsidiaries where the U.S. Dollar is the functional currency and functional currency differs from their local currency, any gains and losses resulting from the remeasurement of the assets and liabilities of these subsidiaries are recorded in other income (expense), net.

Use of Estimates

The presentation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include, but not limited to, inventory valuation, accounting for income taxes, business combinations, valuation of goodwill, intangible assets and long-lived assets. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustments. Actual amounts may differ from those estimates.

Cash and Cash Equivalents

The Company considers currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the United States and internationally.

Concentration of Credit Risk

Financial instruments which subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company sells its products and provides services primarily to semiconductor capital equipment manufacturers in the United States. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral.

The Company’s most significant customers (having individually accounted for 10% or more of revenues) and their related revenues as a percentage of total revenues were as follows:

Year Ended

Two customers’ accounts receivable balances, Lam Research Corporation and Applied Materials, Inc. were individually greater than 10.0% of accounts receivable as of December 30, 2022 and December 31, 2021, in the aggregate approximately 38.5% and 39.0% of accounts receivable, respectively.

Fair Value of Measurements

The Company measures its cash equivalents, derivative contracts, pension obligation and common stock purchase obligation (prior to the reclass to non-controlling interests) at fair value on a recurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

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Level 2 — Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.

Level 3 — Unobservable inputs that are supported by little or no market activities.

Derivative Financial Instruments

The Company uses forward contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions typically expected to occur within 24 months. The purpose of the hedge is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated costs and eventual cash flows. The Company recognizes derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. The Company records changes in the fair value of the derivatives in the accompanying Consolidated Statements of Operations as other income (expense), net, or as a component of AOCI in the accompanying Consolidated Balance Sheets.

Inventories

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

Inventory write downs inherently involve judgments based on assumptions about expected future demand and the impact of market conditions on those assumptions. Although the Company believes that the assumptions it used in estimating inventory write downs are reasonable, significant changes in any one of the assumptions in the future could produce a significantly different result. There can be no assurances that future events and changing market conditions will not result in significant increases in inventory write downs. For further discussion of the Company’s inventory see Note 4 of Notes to the Consolidated Financial Statements.

Property, Plant andEquipment

Property, plant and equipment are stated at cost, or, in the case of equipment under finance leases, the present value of future minimum lease payments at inception of the related lease. The Company also capitalizes interest on borrowings related to eligible capital expenditures. Capitalized interest is added to the cost of the qualified assets and is subject to depreciation. Depreciation and amortization are computed using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the leases. Useful lives range from three to fifty years. Direct costs incurred to develop software for internal use are capitalized and amortized over an estimated useful life of three to ten years. Costs related to the design or maintenance of internal use software are expensed as incurred. Capitalized internal use software is included in computer equipment and software. For further discussion of the Company’s property, plant and equipment see Note 4 of Notes to the Consolidated Financial Statements.

Long-lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. The Company assesses the fair value of the assets based on the amount of the undiscounted future cash flows that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset are less than the carrying value of the asset. If the Company identifies an impairment, the Company reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

At the end of fiscal years 2022, 2021 and 2020, the Company assessed the useful lives of its long-lived assets, including property, plant and equipment as well as its intangible assets and concluded that no impairment was required.

Leases

The Company determines if an arrangement is a lease, or contains a lease, at the inception of the arrangement and reassesses that conclusion if the arrangement is modified. When the Company determines the arrangement is a lease, or

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contains a lease, at lease inception, it then determines whether the lease is an operating lease or a finance lease. Operating and finance leases with lease terms of greater than one year result in the Company recording a right-of-use (“ROU”) asset and lease liability on its balance sheet. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are initially recognized based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses the implicit interest rate if readily determinable or when the implicit interest rate is not readily determinable, the Company uses its incremental borrowing rate.

The incremental borrowing rate is not a commonly quoted rate and is derived through a combination of inputs including the Company’s credit rating and the impact of full collateralization. The incremental borrowing rate is based on the Company’s collateralized borrowing capabilities over a similar term of the lease payments. The Company utilizes the incremental borrowing rate based on bank loan rates at the respective locations for leases where appropriate and the consolidated group bank loan rate where the Company does not have local bank financings.

The operating lease ROU asset also includes any lease payments made in advance and is reduced by any lease incentives. Specific lease terms used in computing the ROU assets and lease liabilities may include options to extend or terminate the lease when the Company believes it is reasonably certain that it will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company has elected not to recognize ROU assets and lease liabilities that arise from short-term (12 months or less) leases for any class of underlying asset. Operating leases are included in operating lease ROU assets, other current liabilities, and long-term operating lease liabilities on the Company’s consolidated balance sheet. The Company’s finance leases at December 30, 2022 were not significant. For further discussion of the Company’s leases see Note 14 of Notes to the Consolidated Financial Statements.

Goodwill and Indefinite Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment annually or more frequently if indicators of potential impairment exist. Intangible assets are presented at cost, net of accumulated amortization, and are amortized on either a straight-line method or on an accelerated method over their estimated future discounted cash flows. The Company reviews goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable, such as when reductions in demand or significant economic slowdowns in the semiconductor industry are present. There were no impairments of the Company’s goodwill and purchased intangible assets in fiscal year 2022. For further discussion of the Company’s goodwill and intangible assets see Note 6 of Notes to the Consolidated Financial Statements.

Deferred Debt Issuance Costs

Debt issuance costs incurred in connection with obtaining debt financing are deferred and presented as a direct deduction from Bank Borrowings in the accompanying Consolidated Balance Sheets. Deferred costs are amortized on an effective interest method basis over the contractual term.

Defined Benefit Pension Plan

The Company has several noncontributory defined benefit pension plans covering substantially all of the employees of two of its foreign entities upon termination of their employee services. The benefits for these plans are based on expected years of service and average compensation. The net period costs are recognized as employees render the services necessary to earn the postretirement benefits. The Company records annual amounts relating to the pension plan based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current and expected rates of return and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive gain (loss) and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under the plan are reasonable based on its experience and market conditions. For

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further discussion of the Company’s defined benefit pension plan see Note 9 of Notes to the Consolidated Financial Statements.

Revenue Recognition

Revenue is recognized when the Company satisfies performance obligations as evidenced by the transfer of control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company performs the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with its customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. The Company infrequently sells certain finished goods inventory on a bill and hold basis. The terms of the bill and hold agreement provide that title to the specified inventory is transferred to the customer prior to shipment and the Company has the right to payment (prior to physical delivery) which results in recorded revenue as determined under the revenue recognition standard.For further discussion of the Company’s revenue recognition see Note 13 of Notes to the Consolidated Financial Statements.

Shipping and Handling Costs

Shipping and handling costs are included as a component of cost of revenues.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock-Based Compensation Expense

The Company maintains stock-based compensation plans which allow for the issuance of equity-based awards to directors and certain employees. These equity-based awards include restricted stock awards (“RSAs”), performance stock units ("PSUs") and restricted stock units (“RSUs”). The RSAs and RSUs use the closing price of stock price on the day preceding the grant date as a proxy for fair value and compensation expense. The PSUs contain market conditions, and compensation expense is measured using a Monte Carlo simulation model and recognized over the derived service period based on the expected market performance as of the grant date. 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. For further discussion of the Company’s employees stock plans see Note 12 of Notes to the Consolidated Financial Statements.

Government Subsidies

Government subsidies are recognized where there is reasonable assurance that the subsidy will be received and all attached conditions will be complied with. When the subsidy relates to an expense item, it is recognized as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. When the subsidy relates to an asset, it is recognized as income in equal amounts over the expected useful life of the related asset. When the subsidy does not relate to specific expenses or assets, the income is accounted for in the period where there is reasonable assurance that the subsidy will be received. For further discussion of the Company’s government subsidies see Note 17 of Notes to the Consolidated Financial Statements.

Income Taxes

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

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evidence that historical results provide, we consider recent cumulative income (loss). A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

Income tax positions must meet a more likely than not recognition threshold to be recognized. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.

The Company accounts for Global Intangible Low-Taxed Income as period costs when incurred. For further discussion of the Company’s income taxes see Note 8 of Notes to the Consolidated Financial Statements

Net Income per Share

Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income per share is calculated by dividing net income by the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options and restricted stock using the treasury stock method, except when such shares are anti-dilutive. In accordance with ASC 718, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of in-the-money stock options and restricted stock units. This results in the assumed buyback of additional shares, thereby reducing the dilutive impact of equity awards. For further information of the Company’s income per share see Note 15 of Notes to Consolidated Financial Statements.

Business Combinations

The Company recognizes assets acquired (including goodwill and identifiable intangible assets), liabilities assumed and noncontrolling interest at fair value on the acquisition date. Subsequent changes to the fair value of such assets acquired and liabilities assumed are recognized in earnings, after the expiration of the measurement period, a period not to exceed 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. For further discussion of the Company’s business combinations see Note 2 of Notes to the Consolidated Financial Statements

Accounting Standards Recently Adopted

The Company did not adopt any new accounting standards during fiscal year 2022 that had a significant impact on the Company’s Consolidated Financial Statements.

Accounting Standards Not Yet Adopted

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

2. BUSINESS COMBINATIONS

Ham-Let (Israel-Canada) Ltd.

On March 31, 2021, the Company acquired all of the outstanding common shares of Ham-Let for a total purchase consideration of $362.9 million paid in cash. The Company’s primary reason for this acquisition was to broaden UCT’s relevance to the semiconductor equipment market and provide access to a new set of customers in the semiconductor fab infrastructure market. Ham-Let operations are conducted and reported under the products segment. The Company borrowed an additional $355.0 million from its existing credit facility to finance the acquisition. See further discussion in Note 7 to the Notes to Consolidated Financial Statements.

The Company announced the acquisition of Ham-Let and the expected cash consideration for the equity valuation at that time was approximately 934.7 million Israeli New Shekel (“ILS”) or $287.1 million. US GAAP requires the recording of the purchase price of the acquired entity at the spot rate on acquisition date, rather than the cash amount hedged and paid. A loss of $10.4 million on the forward hedge contract that was adjusted for measurement period adjustments, was recorded in the accompanying Consolidated Statements of Operations as other income (expense), net for the year ended December 31, 2021.

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The Company has assigned the purchase price of Ham-Let to the tangible assets, liabilities, identifiable intangible assets acquired and noncontrolling interest, based on their estimated fair values. The excess of purchase price over the aggregate fair value was recorded as goodwill. Goodwill associated with the acquisition is primarily attributable to the future technology, market presence and knowledgeable and experienced workforce. The fair value assigned to identifiable intangible assets acquired was determined using the income approach taking into account the Company’s consideration of a number of inputs, including a third-party analysis that was based upon estimates and assumptions provided by the Company. These estimates and assumptions were determined through established and generally accepted valuation techniques and with the assistance of a valuation specialist.

In the first quarter of fiscal year 2022, the Company completed the acquisition accounting and the valuation of the fair value of the assets acquired and the liabilities assumed. None of the goodwill recorded as part of the acquisition is deductible for income tax purposes.

The following table summarizes the fair values of assets acquired, liabilities assumed and noncontrolling interest at the date of acquisition, including all measurement period adjustments:

(In millions) Amount

Cash and cash equivalents $ 20.1

Accounts receivable 51.6

Inventories 73.7

Prepaid expenses and other assets 17.3

Property, plant and equipment 52.1

Purchased intangible assets 118.6

Deferred tax assets 0.8

Operating lease right-of-use assets 27.7

Other non-current assets 2.2

Total assets acquired 461.5

Bank borrowings (5.0 )

Accounts payable (30.8 )

Accrued compensation and related benefits (10.5 )

Other current liabilities (12.0 )

Deferred tax liabilities (10.7 )

Operating lease liabilities (23.8 )

Other liabilities (4.0 )

Total liabilities assumed (96.8 )

Noncontrolling interests (1.8 )

Total consideration transferred $ 362.9

The following table summarizes the intangible assets acquired and the useful lives of these assets:

Purchased

UsefulLife Intangible Assets

(In years) (In millions)

Customer relationships 10 $ 69.0

Trade names 5 9.8

Total purchased intangible assets $ 118.6

The results of operations for the Company for the year ended December 31, 2021 included operating activities for Ham-Let since its acquisition date of March 31, 2021. For the year ended December 31, 2021, net revenue of approximately $187.5 million, attributable to Ham-Let was included in the consolidated results of operations. For the year ended December 31, 2021, results of operations included charges of $13.9 million attributable to amortization of purchased intangible assets. In addition, acquisition-related costs of $10.0 million were included in the results of operations for the

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year ended December 31, 2021. Acquisition costs are included in general and administrative expenses in the Company’s consolidated results of operations.

Unaudited Pro Forma Consolidated Results

The following unaudited pro forma consolidated results of operations assume the acquisition was completed as of the beginning of the year of the reporting periods presented.

The unaudited pro forma consolidated results of operations for the years ended December 31, 2021 and December 25, 2020 (in millions, except per share amounts) are summarized as follows:

December 31, December 25,

Basic earnings per share $ 3.04 $ 1.13

Diluted earnings per share $ 2.98 $ 1.11

The unaudited pro forma results above include adjustments related to the purchase price allocation and financing of the acquisition, primarily to increase amortization for the identifiable intangible assets, to increase interest expense for the additional debt incurred to complete the acquisition, to record the $11.6 million cumulative loss related to the forward contracts entered into, in conjunction with the acquisition and to reflect the related income tax effect. The unaudited pro forma results for the year ended December 25, 2020 include acquisition related costs of $14.5 million.

The unaudited pro forma combined financial information has been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated financial position or results of income in future periods or the results that would have been realized had UCT and Ham-Let been a combined company during the specified periods. The unaudited pro forma combined financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies, or any liabilities that may result from integration activities.

3. BUSINESS DIVESTITURES

In 2022, the Company executed the sale of four of its non-semiconductor operating subsidiaries of Fluid Solutions. Each of these entities is reported within the Products reportable segment. The purpose of the divestitures is to remain focused on its core semiconductor business. As a result of these divestitures, the Company recorded a net loss of $77.4 million during fiscal year 2022, which was recorded in the Consolidated Statements of Operations. The recorded net loss includes the write-off of intangible assets, goodwill and net assets of $27.8 million, $19.7 million and $29.9 million, respectively. Goodwill has been allocated to the divestitures based on the relative fair value of each component in relation to its respective reporting unit. See Note 6 Goodwill and Intangible Assets for further discussion.

4. BALANCE SHEET INFORMATION

Inventories consisted of the following:

December 30, December 31,

The inventory write-downs are recorded on the basis of obsolete inventory or specific identified inventory in excess of estimated usage.

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Property, plant and equipment, net, consisted of the following:

Useful Life December 30, December 31,

Leasehold improvements * 81.3 67.3

Computer equipment and software 3-10 68.3 57.7

Furniture and fixtures 5 5.1 5.2

Accumulated depreciation (146.0 ) (116.0 )

Construction in progress 56.8 38.7

* Lesser of estimated useful life or remaining lease term

5. FAIR VALUE

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following table summarizes, for assets or liabilities measured at fair value, the respective fair value and the classification by level of input within the fair value hierarchy:

Fair Value Measurement at

Reporting Date Using

(In millions)

Prepaid expenses and other current assets:

Forward contracts $ 0.3 $ — $ 0.3 $ —

Other non-current assets:

Plan assets $ 2.2 $ — $ — $ 2.2

Other liabilities:

Pension obligation $ 1.6 $ — $ — $ 1.6

Fair Value Measurement at

Reporting Date Using

(In millions)

Other liabilities:

Forward contracts $ 0.8 $ — $ 0.8 $ —

Pension obligation $ 4.0 $ — $ — $ 4.0

The estimated fair value of foreign currency forward contracts is based upon quoted market prices obtained from independent pricing services for similar derivative contracts and these financial instruments are characterized as Level 2 assets in the fair value hierarchy.

The estimated fair value of pension obligation is based on expected years of service and average compensation. The valuation model used to value pension obligation utilizes mortality rate, inflation, interest rate risks and changes in the life expectancy for pensioners. These assumptions are routinely made in the appraisal process by the independent actuary thus resulted in a Level 3 classification. As of December 30, 2022, the Company's aggregate pension benefit obligations is $10.2 million and was exceeded by the fair value of the pension plan assets of $10.8 million, resulting in overfunded pension benefit obligations of $0.6 million. The Company recognizes the overfunded or underfunded status of defined

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benefit pension plans, measured as the difference between the fair value of the plan assets and the benefit obligation. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability.

There were no transfers from Level 1 or Level 2. Fair value adjustments were noncash, and therefore did not impact the Company’s liquidity or capital resources. Qualitative information about Level 3 fair value measurements is as follow:

Plan assets, net $ 0.6 Projected unit credit method Discount rate 2.7% - 5.2%

Rate on return 4.7% - 4.9%

Salary increase rate 2.0% - 3.0%

Following is a summary of the Level 3 activity:

(In millions) Plan assets Pension Obligation

Benefits, payments and other adjustments 2.6 2.0

6. GOODWILL AND INTANGIBLE ASSETS

The Company’s methodology for allocating the purchase price relating to an acquisition is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the consideration transferred over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed.

To test goodwill for impairment, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company concludes it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the Company does not proceed to perform a quantitative impairment test. If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative goodwill impairment test will be performed by comparing the fair value of each reporting unit to its carrying value. A quantitative impairment analysis, if necessary, considers the income approach, which requires estimates of the present value of expected future cash flows to determine a reporting unit’s fair value. Significant estimates include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates, and future economic and market conditions. A goodwill impairment charge is recognized for the amount by which the reporting unit’s fair value is less than its carrying value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment. The Company regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends and lower projections of profitability that may impact future operating results.

In the fourth quarters of 2022 and 2021, the Company conducted its annual impairment tests of goodwill and concluded that there was no goodwill impairment with respect to its reporting units. Additionally, we performed an impairment analysis in Q2 and Q3 of 2022 with the divesture of Fluid Solutions subsidiaries and concluded no impairment with respect to our reporting units.

In connection with the divestiture of certain Fluid Solutions subsidiaries during fiscal year 2022, the Company wrote off goodwill and intangible assets of $19.7 million and $27.8 million, respectively.

Details of aggregate goodwill of the Company are as follows:

(In millions) Products Services Total

Measurement period adjustments (1.5 ) — (1.5 )

Divestiture of subsidiaries (19.7 ) — (19.7 )

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Intangible Assets

Intangible assets are generally recorded in connection with a business acquisition. The Company evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, the Company reviews indefinite lived intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable and tests definite lived intangible assets at least annually for impairment. Management considers such indicators as significant differences in product demand from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.

Details of intangible assets were as follows:

Gross Gross

Useful Life Carrying Accumulated Carrying Carrying Accumulated Carrying

* The Company concluded that the asset life of UCT tradename of $9.0 million is indefinite and is therefore not amortized but is reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

The Company amortizes its intangible assets on a straight-line or accelerated basis over the estimated economic life of the assets. Amortization expense was approximately $30.0 million for the year ended December 30, 2022, $33.4 million for the year ended December 31, 2021, and $19.8 million for the year ended December 25, 2020. Amortization expense related to recipes, standard operating procedures and certain intellectual property/know-how is charged to cost of revenues and the remainder is charged to general and administrative expense. As of December 30, 2022, future estimated amortization expense is expected to be as follows:

Amortization

(In millions) Expense

7. BORROWING ARRANGEMENTS

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

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maturity. 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 LIBOR, 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. On March 29, 2021, the Company elected that the Term Loan outstanding as of March 31, 2021 accrue interest based on the “Eurodollar Rate” for an initial interest period of one month. Pursuant to the Second Amendment to the Credit Agreement, the Credit Facilities contains customary LIBOR replacement provisions in the event LIBOR is discontinued. At December 30, 2022, the Company had an outstanding amount under the Term Loan of $515.0 million, gross of unamortized debt issuance costs of $10.2 million. As of December 30, 2022, the interest rate on the outstanding Term Loan was 7.8%.

On August 19, 2022, the Company 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 with Barclays Bank as the 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 December 30, 2022, the Company had $146.6 million, net of $3.4 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 February 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 December 30, 2022, the Company had $3.4 million of outstanding letters of credit and $46.6 million of available commitments remaining under the letter of credit facility.

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. The Company was in compliance with all financial covenants as of the fiscal year ended December 30, 2022.

In 2020, Cinos China amended its existing credit agreement with a local bank that provides a term loan of RMB 10.0 million (approximately $1.4 million) which matured on September 23, 2022.

Fluid Delivery Systems (FDS) has a credit agreement with a local bank in the Czech Republic that provides for a revolving credit facility in the aggregate of up to 5.0 million euros (approximately $5.3 million). As of December 30, 2022, no debt was outstanding under this revolving credit facility.

Fluid Solutions has credit facilities with various financial institutions that provides borrowing up to $18.5 million. As of December 30, 2022, Fluid Solutions had an $9.0 million outstanding balance under this facility with interest rate of 4.2%.

As of December 30, 2022, the Company’s total bank debt was $513.8 million, net of unamortized debt issuance costs of $10.2 million. As of December 30, 2022, the Company had $146.6 million, $5.3 million and $9.5 million available to draw from its credit facilities in the U.S., Czech Republic and Israel, 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.

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As of December 30, 2022, the Company’s future debt principal payment obligations for the respective fiscal years were as follows:

Debt

(In millions) (Principal only)

8. INCOME TAXES

Income before provision for income taxes was generated from the following geographic areas:

Year Ended

December 30, December 31, December 25,

The provision for income taxes consisted of the following:

Year Ended

December 30, December 31, December 25,

Current:

Federal $ (0.8 ) $ - $ (0.1 )

Deferred:

The effective tax rate differs from the U.S. federal statutory tax rate as follows:

Year Ended

December 30, December 31, December 25,

Federal income tax provision at statutory rate 21.0 % 21.0 % 21.0 %

State income taxes, net of federal benefit (1.6 ) % (0.1 ) % 0.6 %

Effect of foreign operations (6.7 ) % (10.3 ) % (8.3 ) %

Change in valuation allowance 24.3 % 2.9 % (0.1 ) %

Foreign income inclusions 4.0 % 4.9 % 4.6 %

Nondeductible executive compensation 1.8 % 1.8 % - %

Excess tax benefits related to stock-based compensation (0.3 ) % (3.1 ) % - %

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