Casey Eichler - Chief Financial Officer, Senior Vice President Clarence Granger - Chairman, Chief Executive Officer.

Krishna Shankar - Roth Capital Edwin Mok - Needham & Company Patrick Ho - Stifel, Nicolaus Colin Rusch - Northland Capital Markets C.J. Muse - ISI Group.

Good afternoon. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology First Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Joining us today is Mr. Casey Eichler, Chief Financial Officer; and Mr. Clarence Granger, Chairman and Chief Executive Officer. I will now turn the call over to Mr. Eichler. Sir, you may begin your conference. .

Thank you, Laurel. Welcome to our First Quarter and Financial Results Conference Call. Presenting today are Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer; and Casey Eichler, Ultra Clean's Chief Financial Officer.

I will begin by discussing the financial results for our first quarter Clarence will follow with some remarks about the business. A few moments ago, we issued a press release, reporting financial results for the first quarter ended March 28, 2014.

The press release can be accessed from the Investor Relations section of Ultra Clean's website, along with the information for the tape delay and replay of the live webcast at uct.com. Together with our recently issued press release, this conference call enables the company to comply with the SEC regulations for fair disclosure.

Therefore, investors should accept the contents of this call as the company's official guidance for the second quarter of fiscal 2014. Investors should note that only the CEO and CFO are authorized to provide company guidance.

If at any time after this call, we communicate any material change in guidance, it is our intent that such updates will be done officially via public forum, such as a press release or a publicly announced conference call. The matters that we discuss today include forward-looking statements as defined in the U.S.

Private Securities Litigation Reform Act of 1995 related to matters, including our future financial performance, new product orders and shipments and industry growth.

Investors are cautioned that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Some of those risks and uncertainties are detailed in our filings with the Securities and Exchange Commission.

The company disclaims any obligation to publicly update or revise any such forward-looking statements or to reflect the events or circumstances that occur after this call. Now, I will discuss the first quarter results.

Revenue for the first quarter was $144.2 million, an increase of approximately 14.2% from the prior quarter and an increase of 43.6% when compared to the same period a year ago. We are very pleased that this is our highest revenue achievement as a public company.

The credit for this significant accomplishment is shared by the entire team at UCT and results of commitment and hard work. Semiconductor revenue for the first quarter was $122.8 million, an increase of 5% from the prior quarter and non-semiconductor revenue was $21.4 million, an increase of 128.9% when compared to the fourth quarter.

Revenue outside the U.S. was 26% in the quarter compared to 29% in the prior quarter. Three customers had revenue over 10% for the quarter and gas delivery systems represented 59% of our revenue for the first quarter. Gross margin for the quarter decreased to 16.2% compared to 17.1% in the fourth quarter.

Although, we did stay within our targeted gross margin range, it's disappointing that our gross margin declined quarter-over-quarter. The decline was primarily due to geographic customer and product mix. We continue to believe that 15% to 18% gross margin is the appropriate margin target for our business.

Operating expenses were $12.9 million or 9%, excluding amortization of intangibles as compared to $11.8 million or 9.3% in Q4. Our operating expenses as a percentage of revenue will be down slightly in the second quarter of 2014 from the first quarter. We continue to work to drive our operating expenses below 9%.

Operating income was $9.2 million or 6.4% before interest expense and income taxes in the first quarter compared to $8.3 million or 6.5% in the fourth quarter. Excluding amortization of intangibles, our operating income was 10.4 million or 7.2% in the first quarter compared to $9.8 million or 7.8% in the fourth quarter.

Interest expense for the quarter was $699,000, an increase of approximately $25,000 quarter-over-quarter. The effective tax rate for the first quarter was 17.3% or an expense of $1.5 million. The tax rate for the second quarter of 2014 should continue to be modeled at 20%.

First quarter net income was $7.1 million or $0.24 per share, excluding amortization expense related to the merger with AIT first quarter net income was $8.1 million or $0.27 per share compared to $0.26 per share in the fourth quarter. The diluted share count was 29.9 million, up 438,000 shares compared to the prior quarter.

Non-cash charges for the first quarter were $1 million related FAS 123R, $779,000 related to depreciation and $1.2 million related to amortization of intangibles. Turning to the balance sheet, cash was $74.3 million, an increase of $13.9 million from the prior quarter. Net cash increased $5.3 million during the period to $10.5 million.

In managing our cash balances at quarter end, our outstanding debt went up to $63.7 million from $55.1 million in the fourth quarter. We anticipate that net cash will be up next quarter. Accounts receivable was $72.2 million, up $4.7 million from Q4 and days sales outstanding decreased to 45 days from 48 days at the end of the fourth quarter.

Accounts payable of $55.4 million increased approximately $1.4 million quarter-over-quarter. Days payable outstanding at the end of the first quarter decreased to 41 days from 46 days at the end of the fourth quarter. Net inventory was $67.5 million, an increase of $3.5 million over the prior quarter.

The increase in inventory is a result of an increase in our work-in-progress and finished goods' inventory shift early in Q2. Inventory levels are projected to be lower during the second quarter of 2014. Now, Clarence will discuss our operating highlights for the first quarter.

Clarence?.

Thanks, Casey. I am very pleased that during our first quarter of 2014, we saw record revenue for the company. Total revenue for UCT was $144.2 million.

Total revenue coming from semiconductor equipment sales increased greater than $5.9 million quarter-over-quarter, yet the percentage of our sales coming from this industry went down compared with Q4 2013, indicating greater growth in our other served markets.

On our previous earnings call, we had guided to Q1 adjusted earnings per share, excluding amortization charges of $0.28 to $0.31 and revenue of $135 million to $140 million. Although we achieved record revenue above the high end of our guidance range, our gross margin declined quarter-over-quarter to 16.2%.

As a result, our earnings per share were just below the low-end of our guidance. Our gross margin was negatively impacted during the quarter by our product mix; start up costs associated with one of our new products and a percentage of revenue from our Asian operations.

Each quarter, UCT manufactures a different mix of products, each with slightly different gross margins. In this quarter, the mix played a negative role in our margins as compared to Q4. In addition, we added a new product for one of our customers that experienced higher startup costs than we had anticipated.

Finally, the percentage of revenue coming from our Asian operations declined to 26% in Q1 compared to 29% in Q4. As a result, the percentage of shipments from our U.S. operations increased. The U.S. shipments are typically at lower overall gross margin. We are still pleased that our gross margins were within our company target of 15% to 18%.

I will now review highlights of our activities for the first quarter. The major accomplishment for the quarter was our revenue achievement. As Casey pointed out, this is the highest revenue that UCT has achieved in our nearly 10 years as a publicly traded company and has been the culmination of an extensive effort by our entire operations team.

Although our margin declined quarter-over-quarter, we continue to see improved operational efficiency. Our operational efficiency has improved in the areas of output per employee, increased inventory control and strengthening of our supply chain management organization. We expect to continue these efficiencies as we progressed through 2014.

In Q1, the percentage of revenue coming from our Asian operations was 26% as compared to 29% in Q4. This percentage fluctuates quarter-to-quarter based upon the mix of products going through our factories during a particular period as well as due to changes in our customer’s demand.

While on a percentage basis, this was the decline the dollars shipped from our Asian operations stayed relatively flat between the fourth and first quarter. As mentioned in previous calls, AIT's heavily U.S.-based manufacturing led to an increase in the percentage of our overall U.S. manufacturing shortly after the acquisition.

We anticipate that we will continue to see increased manufacturing in Asia, through the transfer of existing products to our Asian facilities and through new customer opportunities. We also anticipate this trend to continue having a favorable impact on UCT's margins and profitability.

As we move through 2014, we continue to see additional new business opportunities. We are working with several new customers that we are very excited about. Specifically during Q1, we added a new customer in the semiconductor photolithography space. We have been working with this customer for over a year, on the qualification of a major subsystem.

In Q1, we successfully completed the transition of this new business in the volume production. We anticipate that the revenue achieved from this customer will be in the range of $7 million to $10 million in 2014, with additional growth potential in future years.

During Q1, 85% of our revenue came from semiconductor equipment customers as compared to 93% in Q4 2013. This is more in alignment with our traditional levels based upon normal customer mix.

We anticipate seeing the mix of our revenue change quarterly depending upon our customers' demand, but with a gradual upward bias in the non-semiconductor space as most of our new business opportunities are outside of that market.

Shifting to our guidance for the second quarter of 2014, UCT is beginning to see softness in the semiconductor sector of our business. As a result, we anticipate revenue to decrease during the quarter as compared to Q1.

Our revenue guidance for the second quarter is $128 million to $133 million and for Q2 earnings guidance is for earnings per share to be in the range of $0.18 to $0.21, excluding amortization charges. As Casey discussed earlier, the tax rate for the second quarter should be modeled at 20%.

In summary, our revenue hit a new record level for the quarter. Although our gross margins did not meet our expectations in Q1, we do anticipate them remaining within our 15% to 18% targeted range for Q2. We anticipate seeing our shipments from Asian operations continue to increase during 2014.

Finally, we are very pleased that we have added one significant new customer and that our new business pipeline continues to be strong and growing. Overall, we remain confident that UCT's future is very bright both, from a long-term growth and an operational execution perspective. With that, operator, we would now like to open the call for questions..

Thank you. (Operator Instructions). Your first question comes from the line of Krishna Shankar with Roth Capital. Your line is open..

Yes.

Casey and Clarence, the product mix issue and the geographic shipment locations that you mentioned, will that trend continue in Q2 in terms of its impact on gross margin both, the product mix and new startup cost and the geographic trends?.

Krishna, this is Clarence. What I would say is these things are to be variable as we go from quarter-to-quarter, so we do obviously have projected in a similar gross margin to Q1 and our Q2 forecast, so I would say we expect a certain amount of this to continue..

Okay. Then the weakness in the semiconductor business that you mentioned, what you attribute that to, I mean, is that just the timing of certain spending.

I mean, can you give a little more color on what kind of weakness you are seeing in the semi side of the business?.

I guess, I think that's pretty consistent with what we've seen from other potential customers, our other customers in the semiconductor space and also what we've seen from other analyst projections, so this isn't any significant market share loss or whatever. It's just an overall shift in the industry..

Okay, and what areas of strength do you see in the non-semiconductor business, or what is new in terms of growth and….

Well, again, last quarter we had talked about crystal growth sector, where we said we expected greater than $20 million in revenue in 2014. That is running along as anticipated from a revenue and growth rate, so that's going to be a significant addition to UCT in 2014. As I just mentioned, we have added a new customer in the photolithography space.

Now that customer is primarily in the semiconductor space, but that will add another $7 million to $10 million in revenue for UCT in 2014, so we continue to see a very strong pipeline out there. We are very focused.

Again, most of 70% to 80% of our new business opportunity is outside of the semiconductor space, but we are very committed and see very, strong, growth potentials in those markets outside the semiconductor..

Okay. Thank you..

You are welcome, Krishna..

Your next question comes from the line of Edwin Mok with Needham & Company. Your line is open..

Hi. Thanks for taking my question. Sorry for the background noise, but first question I have actually on your guidance. Can you give us just some color to mix of semi versus non-semi, is it roughly the same more semi, less semi. Just give some color around that..

Yes. I am not going to give a specific number, but our non-semi will be growing as a percentage of our overall revenue in Q2, so the drop that we are seeing is mostly in the semiconductor space..

Great. That very helpful actually just to get my hands around that, but talk about the new wins you guys have on the litho area, sounds pretty exciting and so is that something that start to contribute in the second quarter.

Is it more like second half and this $7 million to $10 million is actually a pretty fast ramp compared to some of the other wins that you have, right.

Is it a pretty sizable subsystem that you guys are doing for this customer?.

It is a pretty sizable subsystem. We have been working on it for about a year.

We have shipped several qualification units and we are now qualified for production volume, so yes obviously we haven't talked about it until we were certain that it was going to happen, but now it's to the point where we are transitioning to a production stage, so is it quick? Well, as I say, we've been working on it for over a year, but it is a good opportunity obviously.

It's a customer that we wanted to penetrate for years and this is getting our foot in the door in another major player in the semiconductor space that we haven't participated in before..

I see, so it is something that you guys have started to generate revenue then.

Am I correct on that?.

That's correct. You'll see revenues in Q2, not inconsequential revenues in Q2..

Great. Very, very helpful. Then talk a little bit about the cost structure. I think, you guys gave some color, right? Gross margin to be flat in the coming quarter and OpEx down a little bit.

With the lower revenue, but your gross margin being flat, is it just mix is more flavorable this quarter versus off quarter? I would imagine there should be some margin pressure, particularly on lower revenue, right?.

Yes. I don't think we said that. If you kind of do the analysis, there will be some component that’s revenue based that would lead to slightly lower gross margins in Q2..

Okay. That's very helpful. Then I guess lastly talking a little bit longer term, I mean, obviously you guys [signing our] [ph] customer, which is very positive, right? Longer term, do you see more opportunity outside or within semi or is it going to be always round this, I guess, 20% plus or minus, mix on semi versus non-semi..

No. Edwin, again, this is Clarence. I absolutely believe that most of our growth opportunities are going to be outside of semi. Most of our new business development activity, obviously this one that I'm just talking about today is in semi, but most of our new business development opportunities are in other spaces.

The biggest growth space seems right now to be in industrial for us and seems like a really good opportunity and there seem to be new opportunities coming along in that space quite regularly now..

The only thing I would add to that is, not only does it provide a broader market for us to address, but it also isn't going to have the same cycle that the semi-has, so it helps to balance that model a little bit as well..

Great. That's all I have. Thank you..

Thank you, Edwin..

Your next question comes from the line of Patrick Ho with Stifel, Nicolaus. Please go ahead..

Thank you very much and congratulations on the nice quarter.

Clarence, if you can just give a little bit of color in terms of when you started seeing the slowdown on the semi side of things and I guess, do you believe at this point you have seen a level of stability in terms of this decline and this pause that we are seeing or is there the possibility given your short lead times and things if it get worse or things potentially even get better as the quarter progresses?.

I doubt, Patrick. In terms of how recently we started to know this, maybe a month ago or a few weeks ago certainly and we started to see some slowdown. Is there a chance that it could turn around in the quarter? Probably not in Q2, I think, I would say Q3 remains uncertain.

I've obviously seen several analysts' projections that indicate Q2 and Q3 might be down a little bit then hopefully will recover in Q4, but we really don't have that kind of visibility. I'm just trying to tell you what we see right now.

Obviously it could start to get better in Q3 or could continue to slide in Q3 at this point it’s difficult for us to tell..

Right.

Maybe combining two items that you talked about on this call, the non-semis business and the growth opportunities there as well as the margin profile, can you give a little bit of color how you manage, I guess, both the startup cost especially as you get these new wins and how you can try and keep, I guess, the margin profile within that 15% to 18% range? What are some of the variables you have to balance to keep the overall gross margins in that range relative to some of the new business you are trying to ramp up?.

Yes, Patrick. I would say that whether it would be a new customer or an existing customer or are ramping up a new product, there's quite a bit of costs associated with that on the front end. Obviously, if it's a new customer, there can be a little bit more.

You are trying to get your profile on the customer and on the product over time obviously within the range that we talked about, but it's not unusual to have a little bit of pressure on the frontend.

Obviously with the new customer you want to make sure you're getting off to the right start and with an existing customer even though you have that relationship a new product is not all that much different from a new customer, so as you get more and more experience under your belt, obviously you are going to have the opportunity to find savings in the way that you build those products and move those products through the lifecycle, but initially there can be some pressure in transmission in particular.

Existing customer, we were trying to be very responsive to their situation and that was a more expensive proposition than was anticipated..

This is Clarence. Let me add something to that, Patrick. Also, as products become more complex and as we move away from our more traditional gas delivery subsystem business, then some of these new startups become a little more complex and causes us a little challenge..

That's great. Then final question may be overall gross margins as we look at the June quarter. I apologize if we went into a little bit more details, because I got on a little bit late.

You mentioned geographical customer and mix impacting, the March quarter, what do you see which levers do you see I guess being the key variables for the June quarter gross margins..

Yes. I think that when we look at the June quarter, I think some of those are going to come back in our favor a little bit and some will continue to be as they were in Q1.

In Q4, we had a situation where things lined up pretty favorably across the board, In Q1, we had kind of the opposite experience is not usually you would have it kind of line up one way or the other you tend to have a mix and I would say that we are going to have a little bit more of a heavy mix in Q2 albeit on lower revenue, we are going to have a little bit more of a mix when it comes to the margin outside of the business and so we were not going to get what we got in Q4 Q1 or an all kind of lines up on one side or the other.

As Clarence said, it's kind of ebbs and flows..

Great. Thank you very much..

Welcome Patrick..

Your next question comes from the line of Colin Rusch with Northland Capital Markets. Your line is open..

Thank you, guys. Could you just talk about the need for continuing to build out in the Northeast and the U.S.

and how much customer service you are going to need in that area? Do you have the facility you need? Is there more you need to do there?.

No. I think, we have got plenty of capacity both, in Asia and in the U.S. to handle our customers' needs.

Obviously, as we ramp customers in some of these different markets, you might want to pick up some expertise that's different from selling to expertise that you have, but as we talked about removing being down quarter-on-quarter, we are also going to look at opportunities to make sure that we have the right labor balance going into the quarter, but from a facility standpoint, equipment standpoint, et, cetera, we have the ability to service what we just got done and actually more so or not in a position where we have to think about doing anything different the short-term facilities..

Colin, this is Clarence.

Did I mishear you? Did you say the Northeast?.

Yes..

Yes. We don't have any facilities in the Northeast, and we don't anticipate putting any facilities in the Northeast. I assume you mean, Northeastern U.S..

Yes. That's exactly what I needed to get to..

Yes. We don't really see any need for facilities in the Northeast now or in the foreseeable future.

We have facilities in Austin and Chandler, near Phoenix and then we have the facilities in the San Francisco Bay area and then on our Asian facilities, but what we are not getting any strong push from any customers to have facilities in the Northeast U.S..

All right. Perfect. Then on R&D spending, how should we think about that on a normalized level going forward..

We actually had a nice half year and as you move into working with customers and arrange new customers, should we be thinking about a little bit higher levels on an ongoing basis..

No. I think, that our R&D level is pretty reasonable right now.

We have built and obviously as Clarence said, a lot of these things we have been working on for a while like a new customers that Clarence has talked about and some of the other opportunities, so over the last few quarters we have kept R&D growing a little bit to handle those needs, but I don't see anything particular into Q2 and Q3 to the increased dramatically, so we do get paid for certain amount from our customers, so our customers typically will play us at certain level the NRE, non-recurring engineering, so that doesn't have a negative impact.

It's just that when cost go above and beyond the normal or when we are trying to venture into a new area where we don't have specific customer and we are just targeting it for future development, so as Casey said I think our R&D might go up a little bit, but I when expected to go up dramatically..

Perfect.

Then one final one, any sense of life on MOCVD?.

Well it's still on the order of 1% for us of revenue so our perspective Again, I am just not sure where that's going. We are not trying to project the overall industry. We are just trying to project from a perspective of UCT and we are not participating strongly at this point in time..

Perfect. Thanks a lot guys..

You're welcome..

(Operator Instructions) Your next question comes from the line of Gregory (Inaudible) Advisors. You line is open..

Thank you. Yes, so with regard to the crystal growth, that's been you know moving along here.

The gross margin, do you expect them to be in the same range as the other businesses and maturity be in that 15 through 18%?.

Yes. Gregory, I would expect those to be in the same exact range..

Okay. The industrial business that seems like a nice positive surprise in terms of great interest there.

I know that the medical I believe was a bigger part of the non-semi side of things, so has that side of the business in terms of new possibilities slowed down a little bit or are they both have good expectations?.

Well, we have gotten a few wins. As Clarence has mentioned today and then as we talk about growth in the past that I think have been a significant contributor and we have been working on for quite a while.

There is also opportunities in the medical area that we are working on in our new business opportunities area even when they mature could have the same time the size, but today we are seeing more things evolve more quickly in that industrial areas than in some of the seeds that we that that we plant from medical perspective..

Okay. Thank you..

You bet. Welcome..

Your next question comes from the line of C.J. Muse with ISI Group..

Good afternoon. Thank you for taking my question. I guess first question, I am curious that based on the tools that you shipped in Q1 and your visibility in to Q2. What can you share in terms of strength, weakness that you are seeing either by products or geographies or end markets..

We don't really get into that. C.J., we serve the entire span of semiconductor capital equipment tools, all the way from CMP tools to CMH to PVD and now looking at photolithography, so we just don't try and divided it up by geography. It's not it's not critical to us.

It's not is not relevant to us, so when I am talking about things slowing down a little bit, I'm talking about it from an overall perspective not one specific product or segment..

Okay. Next one is a follow-up. In terms of your inventory, I guess ex-customers were in the supply chain.

Is that where you wanted to be or given the downtick we are seeing, is that the near-term actually you have to deal with?.

Yes. C.J., so we basically everything we build is custom to the end-user. For example, even though we might be building a tool, a subsystem for AMAT or Lam, it is custom for the end-user, Samsung or TSMC or whomever, so our customer - we don't build the inventory.

The only thing we build that goes to some level of inventory is the medical robots, but everything else we build is custom in one-off, so our customers don't have an accumulated inventory to speak of.

Sometimes, we get last minute order cancellations and things of that nature but we don't really have to deal with an inventory situation either within UCT or within our customer, so I would say at this point in time our customers' inventories are relatively low in terms of what we have seen from UCT, so I don't think that not a big concerned to us..

Okay. Great. Thank you..

(Operator Instructions) There are no further questions at this time. I would turn the call back to the presenters..

I appreciate it. Thanks for all the questions and we look forward to probably talking seeing most of you through the course of the quarter, so thanks a lot..

This concludes today's conference call. You may now disconnect..