Sheri Brumm - VP of Finance Casey Eichler - EVP & CFO Clarence Granger - Chairman & CEO.

Edwin Mok - Needham & Company Dick Ryan - Dougherty & Company Patrick Ho - Stifel, Nicolaus Krishna Shankar - Roth Capital Colin Rusch - Northland Capital Markets Brian Freckmann - LS Capital Advisors LLC.

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology Second 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 Ms. Sheri Brumm, our Vice President of Finance, Mr. Casey Eichler, Chief Financial Officer and Mr. Clarence Granger, our Chairman and Chief Executive Officer. I'll now turn the call over to Ms. Brumm. You may begin your conference..

Thank you. Welcome to our second quarter 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.

Casey will begin by discussing the financial results for our second quarter and Clarence will follow with some remarks about the business. A few moments ago, we issued a press release reporting financial results for the second quarter ended June 27, 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 note that only the CEO and CFO are authorized to provide company guidance. If at any time after this call we communicate any material changes 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 events or circumstances that occur after this call. Now Casey will discuss the second quarter results..

Thank you, Sheri. Revenue for the second quarter was $132.7 million, a decrease of approximately 8% from the prior quarter and an increase of 20.5% when compared to the same period a year ago.

Semiconductor revenue for the second quarter was $101.6 million, a decrease of 17.2% from the prior quarter and non-semiconductor revenue was $31 million, an increase of 44.9% when compared to the first quarter. Revenue outside the U.S. was 33% in the quarter compared to 26% in the prior quarter. Four customers had revenue over 10% for the quarter.

Gas delivery systems represent 50% of our revenue for the second quarter as compared to 59% in the first quarter. Gross margin for the second quarter decreased to 18.9% compared to 16.2% in the first quarter.

Although the gross margin declined slightly quarter-over-quarter, primarily due to the 8% decrease in revenue, we were pleased with the margin performance in Q2. We've continued to believe that 15% to 18% gross margin is an appropriate target for our business.

Operating expenses were $11.9 million or 8.9%, excluding amortization of intangibles as compared to $12.9 million or 9% in Q1. Our operating expenses will decrease in Q3 but will increase as a percentage of revenue due to the revenue decline in the third quarter. We continue to work on driving our operating expenses below 9%.

Operating income was $8.1 million or 6.1% before interest expense and income taxes in the second quarter compared to $9.2 million or 6.4% in the first quarter. Excluding amortization of intangibles, our operating income was $9.3 million or 7% in the second quarter compared to $10.4 million or 7.2% in the first quarter.

Interest expense for the quarter was $665,000, a decrease of approximately $34,000 quarter-over-quarter. The effective tax rate for the first quarter was 20.7% or an expense of $1.6 million. The tax rate for the third quarter of 2014 should be continued to be modelled at 20%. Second quarter net income was $6 million or $0.20 per share.

Excluding amortization expense related to the merger with AIT, second quarter net income was $7 million or $0.23 per share compared to $0.27 per share in the first quarter. Diluted share count was $29.9 million down 36,000 shares compared to the prior quarter. Non-cash charges for the second quarter were $993,000 related to the FAS 123R.

$784,000 related to depreciation and $1.2 million related to amortization of intangibles. Turning to the balance sheet, cash was $69.4 million, a decrease of $4.9 million from the prior quarter. Net cash increased $3 million during the period to $13.5 million.

In managing our cash balance at quarter end, our outstanding debt went down to $55.9 million from $63.7 million in the first quarter. We anticipate that net cash will be up in the next quarter. Accounts receivable was $67.9 million, down $4.3 million from Q1 and day sales outstanding increased to 46 days from 45 days at the end of the first quarter.

Accounts payable of $45.5 million decreased approximately $9.9 million quarter-over-quarter. Days payable outstanding at the end of the second quarter decreased to 37 days from 41 days at the end of the first quarter. Net inventory was $67.1 million, a decrease of $400,000 over the prior quarter.

Inventory levels are projected to be lower during the third quarter of 2014. Now, Clarence will discuss our operating highlights for the second quarter.

Clarence?.

Thanks, Casey. As anticipated we saw a decline in revenues in the second quarter of 2014. Overall revenue declined 8% to $132.7 million. What has us very pleased is that we performed well from a gross margin perspective despite slowing industry demand. Our gross margin did decline from 16.2% to 15.9% as a result of the reduced volume.

But this was less of a decline than we had projected, which enabled us to exceed our EPS guidance. This gross margin performance indicates that our operational efficiency is improving despite slowing industry demand. During the quarter our non-semiconductor revenue grew from 14.8% of sales in Q1 to 23.4% of sales in Q2.

This helped to reduce the impact of the decline in semiconductor revenue. In Q3, semiconductor revenue will be slightly down and we will see a greater decline in our non-semiconductor business. The non-semiconductor sales decline in Q3 is the result of order timing with our customers and not the loss of any market share.

On our previous earnings call, we had guided to Q2 revenue of $128 million to $133 million and adjusted earnings per share excluding amortization charges of $0.18 to $0.21. Our actual EPS of $0.23 exceeded the high end of our guidance range by $0.02 while our revenue came in just below the high end of our guidance.

Also on the positive side, our balance sheet remains very strong and our net cash level at $13.5 million is the highest it's been since the acquisition of AIT. As Casey mentioned, we anticipate net cash to grow further in the third quarter. Finally the percentage of revenue coming from our Asian operations increased to 33% in Q2 compared to 26% in Q1.

I'll now review highlights of our activities for the second quarter. As previously stated, the major accomplishment for the quarter was continuing to stay within our targeted margin range despite declining industry demand.

We are continuing to work on our operational efficiency and anticipate it to continue improving in the areas of output per employee, increased inventory control and strengthening of our supply chain management organization. We expect continual improvement in these areas through the balance of 2014.

In Q2, the percentage of revenue coming from our Asian operations was 33% as compared to 26% in Q1. Some of our new non-semiconductor customers are beginning to utilize our Asian-based manufacturing facilities as well as our traditional semiconductor equipment customers.

The percentage of revenue from our Asian operations 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.

However as a long term trend, 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 further anticipate this trend to continue having a favorable impact on UCT's margins and profitability.

In Q2 we continue to make progress in new business development. While most of our new business development is focused outside of the semiconductor industry, we did have one significant win with one of our major semiconductor equipment customers this quarter.

When we acquired AIT in 2012, we mentioned that one of their technical competencies was in the area of frame manufacturing. Since that time, we have been working with one of our largest semiconductor equipment customers to quality our AIT facility to manufacture their value added frames.

The basic frame plus several other components that are mounted on to the frames make up the value-added frame and are the main backbone of a semiconductor processing tool. This past quarter we were qualified by this customer to manufacture several other key value-added frames.

This represents about an $8 million to $10 million incremental annual opportunity to UCT and is consistent with our strategy to move to more complex modules with our semiconductor equipment customers. We now supply this major customer with gas delivery systems, value-added frames, robots and process modules.

We believe that we're well positioned to benefit further as our semiconductor customers outsource larger portions of their tools. On the non-semiconductor side, while we have no new specific win that we are prepared to announce this quarter, we are continuing to work closely with many potential customers on new opportunities.

During Q2, 23.4% of our revenue came from customers in sectors other than semiconductor capital equipment as compared to 14.8% in Q1. This is the highest percentage of revenue we have had in our other served markets in several years and is a testament to the positive success we are having at expanding into new markets.

While we anticipate that this will drop to around 20% of our total revenue in Q3 due to some lumpiness in demand from these new customers, the overall long term trend is very positive. Shifting to our guidance for the third quarter of 2014, UCT is continuing to see softness in overall customer demand.

As a result, we anticipate revenue to decrease during the third quarter as compared to Q2. Our revenue guidance for the third quarter is $115 million to $120 million and our Q3 earnings guidance is for earnings per share to be in the range of $0.13 to $0.16, excluding amortization charges.

As Casey discussed earlier, the tax rate for the third quarter should be modeled at 20%. On a positive note, at the annual semicon trade show, less than two weeks ago, many of our customers were optimistic about the possibility of increase in demand in the fourth quarter of 2014 and continuing into 2015.

In summary, in Q2 we were able to achieve the high-end of guidance range for revenue and also beat the high-end of our range for earnings per share. Our operational efficiency as measured by our gross margin exceeded our expectations. We grew our shipments from Asia as a percentage of our total revenue.

We grew our shipments from industries other than semiconductor capital equipment. And finally we are very pleased that we have added-value added frame manufacturing business at an existing customer and that our new pipeline of business continues to be strong and growing.

Overall 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 Edwin Mok, Analyst. Your line is open..

Great. Thanks for taking my question and congrats for a great quarter.

So, first question, actually, just on the -- you mentioned that there are four customers that are over 10% for the quarter; is one of them non-SEM, and if so which -- on which SEM?.

It is -- we have customer outside of Semi, and it's a customer that we actually can't discuss much about, but it's been an increasing customer over the last few quarters..

Still there Edwin? Hello.

Operator, is the call still going?.

Yes sir, he is still on the line..

We might go to another caller and Edwin can dial back in, we might have lost him..

Thank you. Your next question comes from the line of Dick Ryan, Research Analyst. Your line is open..

Thank you. Good afternoon, guys..

Hi, Dick..

Casey, what's the strategy on the debt pay-down, you indicated another increase in net cash for Q3, what's your – what's your debt pay-down strategy?.

Obviously it's in two pieces. If you remember, we took initially $40 million in a revolver and $40 in a term. The term just terms out and is a consistent payment over the quarters of flat even consistent payment. On the revolver obviously we tend to take down parts of it during the course of the quarter.

Generally at the end of the quarter we'll borrow some money back just because we have a minimum cash requirement as one covenant, but we pretend to pretty quickly pay that down as you can see our interest is going down while rates are going up.

So, we are being pretty efficient about that, but we're going to continue to use a revolver as we need to depending on what we see in front of us for operational needs. But the term piece will just get paid down as a natural course of business..

Okay.

Clarence, you mentioned that semicon comments from your customers' Q4 and into next year maybe in a little more robust environment, are those specific conversations you're having with them, and if you look at the Q3 softness, are there cancellations or is it just timing or push outs? How would you look at the Q3 softness?.

So the Q4 and beyond, obviously some of that was just their public comments and their private comments seem to be consistent with their public comments. So, I would say that's overall what we're hearing from our major customers. In terms of push-outs, we didn't particularly see push-outs in Q3. So, just the order rate is what it was..

Okay.

One last one from me, I'll get back in line, Casey can you give us the cash flow from ops through Q2?.

Yeah. Generally the cash flow from operations was around $6 million I believe for the quarter..

Great. Thank you. Good job guys..

Thank you..

Your next question comes from the line of Patrick Ho, Senior Research Analyst. Your line is open..

Thank you very much.

Going back to the semi side for one second that incremental $8 million to $10 million off of the new business you won, is that something we should target for 2015 or does that immediately stop in 3Q?.

No. Patrick, this is Clarence. No, that's not going to start in Q3, that's more of a Q4 and Q1 of 2015 kind of deal. So, basically a couple million a quarter. We've got a few systems going out in Q3 and a few more in Q4, but to get to that $8 million to $10 million I'm talking about, will be into Q1 of next year..

Right, and then maybe going to the non-semi side for a second, you guys foresee a nice pickup based on a lot of the wins you've had over the last couple of quarters.

Can you get a little more specific, where you're seeing the pulls and pushes in terms of the specific non-semi markets? Are some starting to pick up whereas others, as you mentioned, are lumpy and falling off after a few good quarters, what specific markets can we see some of those levers being moved?.

I'll just start with a general comment that I've been saying I think you heard me say it, at Semicon West, as well as some of these other markets move a little differently in their cycle and so when you look at industrial and consumer and some of those markets, they can be more lumpy and so that can be less of a cap equipment cycle and more tied to the consumer and industrial markets that they serve.

So, that's what you're going to see, not only next quarter, but you're going to see going forward. We're still having a great success in those markets but they just have a little different cycle..

Yeah, I think that's going to always be the case Patrick with these guys, they tend to order in fairly large quantities to fill up a facility and then after that there seems to be a low period until they -- till they move again. But from a long term standpoint we are very comfortable with what we are doing in the consumer and industrial side.

It feels like very good long term customers and strong relationships. So we are comfortable there. I would say though, its much more lumpy then some of our other businesses such as the medical tends to be more stable over time as opposed to lumpy..

Great. And final question in terms of your own internal lead times and turnaround times.

Given how volatile the semiconductor industry is and your customers own inventory levels, if things were to start picking up towards the end of 3Q and 4Q, how quickly can you turn around your business, or your supply chain to get products, if your customer suddenly wanted a big ramp to meet their own customer demands?.

To give you an idea, Patrick, we're typically six to eight weeks from order to delivery. So we can move pretty fast and if they give us a heads up that potential orders are dropping in we can even perform quicker than that.

So, typically six to eight weeks is what we need and that to respond to the kinds of opportunities that they may be talking about..

Yes, right now I would say we've got plenty of facility capacity, supply chain is built out and ready, so that doesn't tend to be as big an issue.

Obviously, we have to flux direct labor as things move up and down and so the challenge is always making sure that you have the availability and the quick response not only on the upside on the downside from a direct labor standpoint..

We do flex that pretty quickly thought, because obviously right now with the slowdowns that we've experienced in the last couple of quarters, we're not working any over time or anything of that nature. So our first activity is to flex pretty significantly with over time.

So we could respond very quickly to any new opportunities or changing market conditions..

Great. Thanks a lot guys. .

Thanks, Patrick..

Your next question comes from the line of Krishna Shankar, Senior Research Analyst with Roth Capital. Your line is open..

Yes. Clarence and Casey congratulation on achieving the high end of guidance. .

Thank you..

A couple of -- given what your customers are saying about the improving tone to Q4, would you expect sequential revenue growth to perhaps commence again in Q4?.

Well again we are not guiding the Q4 at this point in time, but it certainly feels more positive than it has a lot in a little while..

Has that been driven by some of the big consumer electronics or industrial or medical, non semi business….

No, no, it would be mostly. We are still 75% to 80% semiconductor capital equipment. So the biggest growth driver still is that aspect of our business and if we were to see a good comeback in that space, that would be very positive for us..

Okay.

And then the extended value-added frame business that you added with the large sort of confirmed [edge and] (ph) deposition type customer and they have the potential to extend this type of business to the other large player within the segment?.

Yes, the customers that were providing us to -- the customer is one of our largest customers and they are participant in those markets and, yes there is a possibility to extend that to other players in that industry. So, it would be a longer term good opportunity for us..

Okay. Thank you..

You're welcome, Krishna..

Thank you. Your next question comes from line of Colin Rusch, Managing Director with Northland Capital. Your line is open..

Thanks so much guys.

Casey can you walk us through quarter-over-quarter gross margins just for the semicon business on a standalone basis?.

We don't break out across the industries, the margins or the margin profile. So, I won't do that, I can remind everybody that we did 15.2% for all of last year. We had 16.2% in Q1 and then we just did 15.9%. The highest quarter we've had in the history of the company or certainly most recently was Q4 of last year that was 17.1%.

But from a margin perspective, we've talked about all the industries generally being about the same margin profile and have the ability to achieve 15% to 18% margins and we'll get you from the 15% to the 18% is the content that you have in Asia or the mixed profile, you have in Asia where we get little better margin..

Okay. Great. And then in terms of the medical device business, can you just give us a sense of how that's trending, just kind of revenue and demand sell-through..

We have our one major customer and our business is -- trend similarly to theirs and they seem to be starting to introduce a new product and are starting to experience growth with that new product. So, we think we would see growth with that new product as they experience growth with that new product..

Okay, great.

And then just in terms of -- you guys have done a great job of continuing to pick up share and grow through cycles, as you look at this non-semi business becoming a more significant portion of your business, can you talk a little bit about what your customers are telling you about their trend lines in the order patterns just so we get a sense of figuring out how to layer that into, or layer it on top of the semi cap business?.

So, again, I'll talk a little bit. As Clarence mentioned a minute ago, the medical segment of the business tends to be pretty steady and pretty good growers if not a huge cycle typically in that market. Cap equipment I won't go through. Obviously you're very familiar with that.

The consumer and the industrial again, just to reemphasize, it is one that moves less in the same cycle as semi and more tied to in the consumer space, kind of consumer build-out or factory build-out in an industrial side whatever industrial market it's tied to.

So, it can be a little bit more of fits and starts, but as we get deeper penetration with those customers and more broad exposure, that will also smooth that out a little bit probably for us as well, but it does move a little bit differently..

Yes. Our goal, as Casey was pointing to, is to try and get as many of these customers as possible to balance our overall demand and so we now have multiple customers serving the consumer market and we think that's going to help stabilize our overall demand with those customers.

Right now it's fairly lumpy because we've had a few fairly large requirements and as those requirements slow down, we've seen a bit of a slow down but we expect over the long term as we continue to generate new customers in this field. Overall with time it will flatten out and stabilize and show good growth pattern..

Perfect. Thanks a lot guys. Great, thank you..

Welcome..

Your next question comes from the line of Brian Freckmann, PM from LS Capital. Your line is open..

Hi guys, I think my question has been asked, but just to be clear, given what your customers in the industry said at semicon, assuming your customers continue on their path, would it be fair to say that the third quarter should be the trough of revenue if you think about how much Q4 and Q1 for next year?.

Yes, again, we’re not giving guidance on Q4 and Q1 etcetera. Certainly what they implied was that in many cases the second half of 2014 would be similar to the first half of 2014, which would imply that there's going to be growth in the fourth quarter. We're not indicating that that's our situation at this point in time.

We're not giving that kind of guidance. But if our customers see growth in the fourth quarter, if our major semiconductor customers see growth in the fourth quarter, it is highly likely that we would see growth in the fourth quarter and beyond..

And just to be clear, we are tied more tightly to their shipments than their bookings. So when you're looking at customers, you want to kind of think about their shipments more than you do their bookings..

Yes, that makes sense. Okay guys, thank you very much..

You're welcome..

(Operator Instructions) Your next question comes from the line of Edwin Mok, Analyst from Needham & Company. Your line is open..

Hi, thanks. Sorry, I had a technical problem. Anyway, I have two quick follow-ups.

So first question is, last quarter you announced a large semiconductor customer win, I was wondering did that win contribute any revenue this quarter, and do we expect contribution from that customer to increase in the third quarter?.

Yes, we did see some revenue from that customer this quarter. We will expect to see a little more next quarter. What we've said is that that was our photolithography opportunity and that that would about $7 million to $10 million in annualized revenue. We can expect reaching that run rate probably by Q1 of next year..

Great.

Very good color and then second question is, you guys had a win, a crystal grow win previously right, is that business trending about where you were previously indicating?.

Yes, what we had said on that business opportunity that it would be greater than $20 million opportunity in 2014 and we're very confident that that's going to -- that that will be achieved..

Great, and then lastly….

We're well along that path..

Great. Very, very helpful. And then last question, Casey, I know that G&A came down quite a bit this quarter.

Is that any kind of one-time saving that we are seeing for the quarter, and assuming business will recover as we get to fourth quarter and 2015, given the G&A issue, we expect G&A to stay in this level?.

Yes, we always try to be efficient in the G&A area or the SG&A area but we did point out a couple of things last quarter that we said was going to guide down to lower expense this quarter.

You just have a little bit of seasonal first quarter increase and that's related to fees around the audit and the audit services in the year end, financial preparation that always tends to get bunched up, it used to be in the old days you divide it by four and spread it out over the year and now it's kind of on an as incurred basis and that tends to make a little bit more of that hit in Q1.

Second thing is, you have all the payroll expenses kick in as well as a few other tax -- payroll tax holidays that were in place went away. So, there's always a little bump there and then as the year goes on, that kind of bleeds out a little bit as well. So, it's a combination of those things.

I would suspect that as I mentioned in my comments OpEx would be down on a dollar basis next quarter. But obviously, revenue is coming down from a percentage basis that might not be the case but on a dollar basis I think we'll have a little bit more savings next quarter..

Great, very helpful. That's all I have. Thank you..

You bet. .

Thank you..

(Operator Instructions) There are no further questions at this time..

Terrific. Well, we appreciate the interest and the continued support and look forward to talking with you throughout the quarter and on the call in October. Thanks a lot..

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