Sheri Brumm - VP of Finance Casey Eichler - Chief Financial Officer, Senior Vice President Clarence Granger - Chairman of the Board, Chief Executive Officer.

Krishna Shankar - Roth Capital Edwin Mok - Needham Dick Ryan - Dougherty Patrick Ho - Stifel, Nicolaus Steve Baughman - Divisar Capital.

Good afternoon. My name is (Inaudible), and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology Third 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 will now turn the call over to Ms. Brumm. You may begin your conference..

Thank you. Welcome to our third 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 third 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 third quarter ended September 26, 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 fourth 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 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 third quarter results..

Thank you, Sheri. At the beginning of our fourth quarter, a new customer, GT Advanced Technologies, Inc. filed for bankruptcy. This event had an impact on our earnings for the third quarter of 2014.

We believe that collectability of our outstanding AR with GTAT, as well as the value of our on-hand inventory and vendor commitments related to GTAT has been impaired. As a result, approximately $2.8 million of revenue was reversed and $1.6 million of account receivables has been written off to bad debt in third quarter.

In addition, approximately $4.6 million of on-hand and in-transit inventory was written off to cost of goods sold in the third quarter. In the following discussion, I will walk through our GAAP financial results and I will also provide a pro forma perspective prior to the adjustments described earlier. Now, I will go through our third quarter results.

Revenue for the third quarter was $117 million, a decrease of approximately 11.8% from the prior quarter and an increase of 9.2% when compared to the same period a year ago. On a pro forma basis, revenue for the third quarter was $119.8 million, a decrease of 9.7% from the prior period, and an increase of 11.8% from the same period a year ago.

Semiconductor revenue for the third quarter was $96.7 million on both, a GAAP and pro forma basis, a decrease of 4.9% from the prior quarter. Non-semiconductor revenue was $20.3 million, a decrease of 34.5% when compared to the second quarter, an increase of 46.7% from the same period a year ago.

On a pro forma basis, non-semiconductor revenue for the third quarter was $23.1 million, a decrease of 25.6% from the second quarter and an increase of 66.6% from the same period a year ago. Revenue outside the U.S. for the quarter was 30.7% and 31.8% on a pro forma basis compared to 32.8% in the second quarter.

Three customers each accounted for sales of over 10% for the quarter. Gas delivery systems for the third quarter represented 67% of our revenue and 65.5% on a pro forma basis as compared to 50.2% in the second quarter. Gross margin for the third quarter decreased to 8.8%. On a pro forma basis decreased to 14.8% compared to 15.9% in the second quarter.

The gross margin decline quarter-over-quarter on a pro forma basis was primarily due to 9.7% decrease in pro forma revenue. We continue to believe that 15% to 18% gross margin is an appropriate target for our business.

Operating expenses were $13 million or 11.1%, excluding amortization of intangibles and $11.5 million or 9.6%on a pro forma basis as compared to $11.9 million or 8.9% in Q2. Our operating expenses will be slightly higher in the fourth quarter. We continue to work on driving our operating expenses below 9%.

Operating loss for the quarter was $4 million or 3.4% before interest expense and income taxes. On a pro forma basis, operating income for the quarter was $5 million or 4.2% before interest expense and income taxes compared to $8.1 million or 6.1% in the second quarter.

On a pro forma basis, excluding amortization of intangibles, our operating income was $62 million 5.2% compared to $9.3 million or 7% in the second quarter. Interest expense for the quarter was $597,000, a decrease of approximately $68,000 quarter-over-quarter.

The company carries a deferred tax asset DTA related to its State net operating loss carry forwards and timing differences. We reviewed the sustainability of the DTAs on a quarterly basis. During the third quarter, it was determined that future realization of the State DTAs were impaired due impart to the bankruptcy previously discussed.

As a result, UCT booked a $1.7 million valuation allowance on its DTAs. Tax expense for the third quarter was $862,000. The Tax expense on a pro forma basis without the bankruptcy charges and evaluation allowance were an expense of $844,000. The tax rate for the fourth quarter of 2014 should be modeled at 20%.

The third quarter net loss was $5.3 million or $0.18 a share. On a pro forma basis, the third quarter net income was $3.7 million or $0.12 per share and $4.7 million $0.16 per share excluding amortization charges compared to $0.20 and $0.23 per share in the second quarter. The diluted share count was 29.9, up 32,000 shares compared to prior quarter.

Non-cash charges for the third quarter were $1.2 million related to FAS 123R, $786,000 related to depreciation and $1.2 million related to amortization of intangibles. Turning to the balance sheet, we are very pleased with our cash with an all-time high of $75.1 million, an increase of $5.8 million from the prior quarter.

Net cash increased $14.2 million during the period to $27.7 million. In managing our cash balances at quarter end, our outstanding debt was paid down to $47.5 million from $55.9 million in the second quarter. We anticipate that net cash will be flat to slightly up again next quarter.

Accounts receivable was $57.5 million, down $10.5 million from Q2, with $4.3 million of the decrease associated with GTAT write-off and the remainder due to a decrease in revenue quarter-over-quarter. Day sales outstanding decreased to 44 days from 46 days at the end of the second quarter.

Accounts payable of $42.4 million decreased approximately $3.1 million from the prior quarter. Days payable outstanding decreased to 36 days at the end of the third quarter from 37 days at the end of the second quarter.

Net inventory was $55.4 million, a decrease of $11.7 million over the prior quarter, which includes the write-off of $1.5 million related to on-hand GTAT inventory. Inventory levels are projected to be slightly higher during the fourth quarter of 2014 in anticipation of early 2015 shipments.

Now, Clarence will discuss the operating highlights for the third quarter.

Clarence?.

Thanks, Casey. As Casey mentioned earlier, one of our newer customers GTAT, filed for bankruptcy two weeks ago. While GTAT was only approximately a 5% customer to UCT, we are extremely disappointed in this development as we saw them as a very promising long-term customer.

Unfortunately, their bankruptcy has significantly affected our earnings for the third quarter. Going into Q3, we had anticipated that revenues would decline quarter-over-quarter due to some softness in the semiconductor sector of our business. On a pro forma basis, excluding the impact of GTAT, we actually performed quite well during the quarter.

Our revenue was at $119.8 million and our EPS was at $0.16, both at the high-end of our guidance range. Also, on the positive side, our balance sheet remained extremely strong with cash all-time high and the expectation of further cash growth going forward. Additionally, our net inventory declined $10.3 million, not including the impact of GTAT.

This is a 15% decline quarter-over-quarter. Although our gross margin did declined from 15.9% in the prior quarter to 14.8% in the third quarter on a pro forma basis, this was the result of reduced revenue volume and with less of a decline than we had projected, enabling us to meet the high-end of our pro forma EPS guidance.

Our gross margin performance and the decrease in inventory indicate that our operational efficiency continues to improve despite reduced demand. During the quarter, we saw a slight decline in semiconductor sales of $96.7 million versus $101.6 million in Q2.

In Q4, we will begin to see a recovery in our semiconductor revenue and we will see a greater decline in our non-semiconductor business, due to the GTAT bankruptcy. Non-semiconductor sales declined in Q3, as a result of the GTAT revenue reversal.

On our previous earnings call, we had guided Q3 revenue from $115 million to $220 million and earnings per share excluding amortization charges of $0.13 to $0.16. Our actual pro forma EPS of $0.16 was at the high-end of guidance, while our revenue came in just below the high-end of guidance.

As mentioned earlier, we anticipate net cash remained to remain flat or grow slightly in the fourth quarter. I will now review highlights of our activities for the third quarter. Increasing net liquidity was one of our most significant accomplishments during the third quarter.

We increased our cash to a level of $75.1 million, while at the same time reducing our debt by nearly $8.4 million. We were able to generate such cash levels by focusing our efforts on operational efficiency and driving down inventory levels. We expect continual improvement in these areas through the balance of 2014 and 2015.

In Q3, the percentage of revenue coming from our Asian operations was 30.7% and 31.8% on a pro forma basis as compared to 32.8% in Q2. A majority of our revenue in Asia is from our traditional semiconductor equipment customers.

The percentage of revenue from our Asian manufacturing facilities fluctuates quarter-to-quarter based upon the mix of products going through our factories during a particular period as well as changes in our customer 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 anticipate that this trend will continue to have a favorable impact on UCT's margins and profitability.

In Q3, we continue to make progress in new business development. As I mentioned last quarter, we were qualified to manufacture several of the key value-added frames for one of our major semiconductor equipment customers.

This represents about an $8 million $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 are now ramping the volume production on these frame assemblies, which is leading to more new business opportunities.

On the non-semiconductor side, while we have no new specific wins that we are prepared to announce this quarter, we are continuing to work closely with many customers on new opportunities. Shifting to our guidance for the fourth quarter of 2014, UCT is beginning to see a recovery within the semiconductor capital equipment sector of our business.

Prior to the GTAT bankruptcy announcement, we had anticipated revenue to increase during the fourth quarter when compared to Q3. However, all GTAT revenue has been removed from our forecast and we anticipate our revenue for the fourth quarter to be at $115 million $220 million.

Our Q4 earnings per share guidance is $0.11 to $0.14 excluding amortization charges. As Casey discussed earlier, the tax break for the fourth quarter should be modeled at 20%. In summary, in Q3, we were able to achieve the high end of our guidance range for revenue and earnings per share on a pro forma basis.

Our operational efficiency as measured by our cash generation exceeded our expectations and we are very pleased to have the highest level of cash in our company's history. Despite the news concerning GTAT, we are very optimistic about the remainder of 2014 and 2015.

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..

(Operator Instructions) First question comes from Krishna Shankar with Roth Capital..

Casey and Clarence, your fourth quarter semiconductor revenue guidance, I guess, it's up slightly.

Can you talk about kind of the drivers in the semiconductor business went from Q3 to Q4? Also, with respect to the GTAT impairment, what are the chances of sort of recovering some of these things that you have written off from the bankruptcy court?.

Krishna, this is Clarence. I will talk about the semiconductor opportunity in Q4 and beyond and I will let Casey talk about the impairment charges. First of all, what we are seeing is a general beginning of an increase in demand from our semiconductor equipment customers.

I think that has been widely forecasted in the industry and we are starting to see it in Q4, increase in the order of 4% to 5% kind of factor going into Q4. It is basically with all of our customers.

Some of it is favorably impacted too by the additional frame business that we are receiving and also the photolithography business that we have announced a couple quarters ago that's also ramping..

Yes. I would say in a situation like this, as Clarence mentioned, it's very disappointing, but what you try to do you is take a very realistic approach, so we looked at everything he took know what we felt was an appropriate charge across the board for the relationship.

To your point, you know, you always hope that there will be opportunity as they find their way through their problems to be able to recoup some of that, not only the AR, but the inventory that we talked about, so being an optimist, I would like to think it is pretty good that we are going to pick up something out of that that being the Chief Financial Officer, we felt we need to take a full charge related to the relationship at this point and then hopefully we can - a little better place..

Are normal charges anticipated in Q4 or beyond?.

No..

Okay. Thank you..

You bet. Welcome..

Your next question comes from Edwin Mok with Needham..

Great. Thanks for taking my question. First thing is, I actually want to - semi first, right? Clarence, I remember both the litho customer as well as the framing business. My understanding is those are ramping from 3Q to 4Q or they are increasing in 3Q to 4Q, right? You sound pretty conservative on the 4Q semi guidance.

Is it just lack of visibility to be more aggressive or because you also mentioned there is a general improvement in the [customer] business?.

Sure. Edwin, this is Clarence. Basically, it is based on what we have seen in the way of order demand from our customers so far. Obviously, it's still early, so there is a possibility that they could be increasing demand later in the quarter.

That has happened, but we are basing our guidance numbers on the input that we receive from our customers to-date..

Okay. That's fair. Then on the non-semi side, GTAT obviously is a - this 3Q number, but it got full quarter guidance imply some decline on non-semi.

Where are you seeing softness beyond GTAT?.

What we talked about was the consumer electronics portion of our business. We had talked about that in our previous call, where we had said that that business was kind of lumpy, so it was slowing down a little bit in Q3.

We expect, you know, that that will be a very strong portion of our business going forward, so the areas you know in general the biggest growth areas still remain industrial and consumer electronics associated opportunities and we do have quite a few of those coming up..

Great. That is very helpful..

Yes. They tend to be very lumpy, so we will get orders for many millions of dollars for a quarter or two and then nothing for quarter two..

Casey, I have a question for you regarding your OpEx.

You mentioned your OpEx can be up, but is it increasing when you exclude the amortization charge and also the bad debt expense on GTAT?.

Yes.

I mean, I think it might be up slightly primarily driven by service providers as you know as we come into the year end and Q4 and Q1 seem to be little heavier related to the year-end filings, K filings filing and all the work that is done for SOX and other things around that as we lead into another quarter, so I don't see a big change across the board in that area, but that is an area where I think we will get a little bit extra and so that is why I said that it would be slightly up..

I see.

Then one question I have on, I noticed that the gas delivery system mix has increased this quarter, right? Is it just due to timing of shipment or is this some trend that we should read into that?.

No. I would not read any trend into that Edwin. As I said that total photolithography and the value-added frames don't really include gas delivery, so it just happens to be that we saw some increase in the demand. We are starting to see some stronger demand, primarily from our semiconductor customers for gas delivery..

I see. Okay. Last question and then I will let others ask. Just quickly on gross margin, how should we think about the December quarter? This quarter, on a per forma basis, you guys said 14.8%, which is down quite a bit from the June quarter.

Has any of that due of GTAT or should we (Inaudible) level improve in the December quarter?.

Yes. I mean, as always it's a little bit our mix between Asia and U.S. changed a little bit, products mix changes a little bit. As you mentioned GTAT will not be in there obviously.

Then we look at what our customers are - look the order and what the mix is there, so I don't think there is anything dramatic change to think about there, but with the revenues coming down and the mix being a little bit different.

This quarter, it did come down to 14.8% on a pro forma basis and I think that what we have kind of modeled in for this quarter has reflected in the mix, in the Asia mix that we think we see in front of us..

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

You next question comes from Dick Ryan with Dougherty..

Thank you.

Casey, could you give us the cash flow, some ops numbers for the quarter?.

Yes. It depends a little bit on how you are looking at it. Obviously, with all this going on in the quarter, but the rough cash flow from operations was close to about $15 million..

Okay..

Well, it's a complicated quarters and appreciate it..

Yes. Just to clarify, the inventory write-off is that all-in cogs and the bad debt.

Was that in G&A?.

Bad debt was indeed in G&A. The inventory does go through cogs. Then obviously it was the back out as we talked about from revenue as well for the quarter, so there was three kinds of components, if you will..

Yes.

On the business development trend, - and you don't have any new announcements you indicated Clarence, but can you kind of give us a sense of what sort of activity you are seeing in those efforts?.

I would say right now that we are seeing growth opportunities in the semiconductor side. Both with photolithography and the value-added frames, we think both of those could lead to some additional revenue opportunities, so I think we are seeing some pretty solid positions on the semiconductor side and growth within those areas.

On the non-semiconductor side, we absolutely believe that we are going to see some growth in the industrial consumer side. We have got quite a few people that we are working with very closely. As soon as those people see some demand, we think we think we will be a beneficiary of that..

How is your medical business working?.

It's okay. You know, I won't say it's great. It's definitely not a growth - It's not growing as much as we would like to see it growth. From that standpoint, I would say there is bigger growth opportunities on the industrial side. It is a little harder to penetrate the medical side..

Sure. Okay. Great. Thank you..

You are welcome..

Thanks, Dick..

(Operator Instructions) Your next question comes from Patrick Ho from Stifel, Nicolaus..

Thank you very much.

Clarence, in terms of the semi pickup that you are starting to see, can you give a little bit of color in terms of when you are starting the pick up - that has start in 3Q, some of the activity or was this kind of a recent thing that you started seeing at the beginning of the current quarter?.

Well, I would say it was towards the - we typically only - I mean, while we do get forecast, we typically don't get hard orders until about six weeks before we actually ship, so that is the kind of timeframe.

As far back with semicon, we had customers telling us that they thought there was going to be a pause in Q2 and Q3 and then start to see a recovery in Q4, so I would not say that generically the information was generally positive.

You know of as far back as July, but in terms of starting to get specific orders, we are just starting to see those fairly recently. I would say in general, most of our customers are projecting that 2015, in particular the beginning of 2015 should be stronger..

Great. That's helpful.

Kind of a big picture question for you Clarence, in terms of the changing landscape, especially of your customer base, how do you look at future years particularly with the consolidation of some of your largest customers? How do you see some of the opportunities potentially growing as some of these big mergers take place?.

Well, fortunately our largest customers do seem to be very focused on outsourcing, so that has been a good strong trend for us. I would say if anything, the largest customers are even more focused on outsourcing than ever before.

And so as we expand our capabilities by adding frame making capabilities to the acquisition of AIT that we did a couple of years ago, our customers are seeing us as having a broader base capability than they traditionally viewed UCT, so I believe that is positioning us well to grow as our customers grow.

In terms of specifics such as Applied Materials acquiring TEL. As I have mentioned before, we really don't have any business to speak of with TEL at this point in time. It's the AMAT model tends to be which does have a higher gross margin than the TEL model.

If the AMAT model tends to be successful in the combined merger, then we would hope that we would have additional opportunities to grow our business. I don't see anything negative. You know a few years ago, there were questions about whether people are going to in-source more or what their strategies were going to be.

I think, we have got that well behind us now. I think, everything is very stable and growing from our perspective in terms of the semiconductor side, so I am very excited about that and obviously we are finding diversification opportunities through some of our additional capabilities..

Great. Final question for me on the non-semi side of things. With some recent customer announcements or at least on the LED side of things, how do you see that portion of your business as you go into Q4 and maybe perhaps a little bit of early color in the first half of 2015..

Yes. Again, so we ended up doing a little retrenchment, obviously, associated with the GTAT. They had been very good opportunity for us diversifying in the new space. We think our - just from an overview perspective, despite all this, 2015-2014 for UCT will be a record revenue year. It will be a record cash year.

Without GTAT, it would have been a record operating income and record gross margin year, so it is very frustrating that this situation occurred with GTAT, but other than that our model seems to be working very well and our strategic direction seems to be working out very well. In terms of 2015, I expect we will have some challenges.

Obviously, things on the non-semi side are going to ramp up. In certain areas, they are going to ramp down and in other areas that we are very confident that 2015 will be another record year for UCT and a big part of that will be our activities in the non-semiconductor sector..

Great. Thank you..

You are welcome..

Your next question comes from Steve Baughman with Divisar Capital..

Afternoon, guys. Thanks for taking the question. Clarence, I just wondered if maybe you can follow up and give a little bit more color on kind of what you guys were seeing at sort of the far end of your forecast window.

I think Casey made a comment that we should expect inventories to be up at the end of this quarter kind of reflecting some early shipments into semiconductor customers early in 2015 and just kind of wondering what you guys can say about that..

Yes. I guess, you know, the thing is obviously this is our Q3 core earnings call with guidance into Q4, but in general I would say we are very optimistic about Q1 of 2015. Certainly all of our customers are indicating that that should be quarter from Q4 as you have pointed out.

Casey mentioned, we anticipate inventory going up a little bit in anticipation of Q1 order increases. I am certainly not prepared to quantify that at this point in time, but all the signals are positive from our customers..

How usual, Clarence, is it for you guys to have that level of sort of, I guess, hits from your customers that they are going to want you to be ready to ship strongly. I guess, what is that, now 10 weeks out or something..

Yes, so what happens is because we are - the products that we make for the semiconductor portion of our business, they are literally all customized for the end user, so Samsung will have a different design for the subsystems that we provide than Intel would or TSMC, so it is very important that we get from our customers their build plan.

They share with us their build plan that go to their factory so that we can anticipate what these orders might be and specifically what end customer might be receiving these.

Because of that, we tend to get our customers build plan, which go out typically six months, so we have got some level of visibility into our customers manufacturing schedules up to six-month out although obviously those the schedule change quite frequently, but we have some reasonable indications that go beyond our typical manufacturing cycle times..

Great. That's helpful. Then my only other question was, you guys have obviously done a very nice job since the AIT acquisition of generating cash within the business and flipping your balance sheet from being in a net debt position to a net cash position. I wonder what you can say about kind of capital allocation from here.

Are there more opportunities like AIT or are there other opportunities to deploy that cash?.

Yes. I think there are more. I believe, I talked in the past [cash]. We are not really trying to do a roll up here, so we are not super aggressive about it. We are constantly looking at opportunities to be able to either more verticalizing a more complete story in the semi-cap business or outside of that in some of these other industries.

We are probably a little bit snake-bit from the '08 '09 downturn, where we wish we would have had a little more cash to be able to take advantage of some things, so when you look at running $0.5 billion business, I don't think our cash position is excessive, but I do think it gives us the flexibility and the ability to react in situations where we can build the business not only organically, but non-organically, so that's probably where our heads at around that and we continue to look at different opportunities..

I guess what I would add onto that is, that we have done significant acquisitions. In 2006, we acquired Sieger Engineering in 2012 we acquired AIT. Both of which have been very successful for UCT in expanding our customer base expanding our capabilities and growing our revenues and margin.

Given a right opportunity, we are not opposed to the idea of an M&A..

Great. Thanks very much guys. It is helpful..

You are welcome..

Thank you, Steve..

(Operator Instructions) We have no further questions at this time..

Well, I appreciate it operator and I appreciate everybody for joining us today. I look forward to seeing most of you over during the quarter. If you have any other questions, please feel free to let us know, but we look forward to talking to you soon. Thank you..

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