Jim Scholhamer - Chief Executive Officer Casey Eichler - President and Chief Financial Officer Sheri Brumm - Senior Vice President, Finance and Chief Accounting Officer.

Arthur Su - Needham & Company Dick Ryan - Dougherty & Company.

Good afternoon and welcome to the Ultra Clean Technologies Second Quarter 2016 Conference Call. [Operator Instructions] Please also note today’s event is being recorded. I’d now like to turn the conference over to Sheri Brumm, Senior Vice President of Finance and Chief Accounting Officer. Please go ahead, ma’am..

Thank you, operator. Good afternoon everyone. Welcome to our second quarter 2016 financial results conference call. With me on today’s call are Jim Scholhamer, UCT’s Chief Executive Officer; and Casey Eichler, UCT’s Chief Financial Officer and President.

I will begin by discussing the financial results for the second quarter 2016 and Jim will follow with some remarks about the business. Earlier this afternoon, we issued a press release reporting financial results for the second quarter of 2016 ended June 24, 2016.

The press release can be accessed from the investor relations section of UCT’s website along with the information for the tape delay and replay of the live webcast at uct.com. Together with this press release, today’s 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 third quarter of 2016. 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 publicly announced conference call.

The matters that we discuss today include forward-looking statements as defined in the US 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. In today’s call, we will refer to both GAAP and non-GAAP results.

Non-GAAP measures include the amortization of intangibles, the impact of the valuation allowance and the impairment charges related to the closure of one of our facilities. A reconciliation of our non-GAAP net income and earnings per share is provided in the press release table. Now, let me begin with a review of the quarter’s results.

Results for the second quarter exceeded our expectations as industry-wide semiconductor capital equipment spending continued its upward trend. Revenue was $129.8 million, an increase of 15.7% from the prior quarter and 10.4% compared to the same period in 2015.

Semiconductor revenue of $117.1 million grew 10.6% from last quarter, accounting for 90.2% of total revenue compared to 94.3% last quarter due to strength in non-semiconductor markets. While semiconductor sales declined as a percent of total, they increased $11.2 million over the first quarter.

Non-semiconductor revenue more than doubled to $12.8 million or 9.8% of total revenue for the second quarter compared to 5.7% last quarter. This represented an increase of $6.4 million, due mainly to higher demand from the flat panel displays market.

Revenue from outside the US this quarter reached a record high of $58.5 million or 45% of total revenue, compared with 44% in the first quarter. The primary driver was the ongoing ramp in production for one of our OEM customers in Southeast Asia. During the quarter, two customers each accounted for more than 10% of revenue.

Higher revenue and increased factory utilization coupled with lower material and direct labor cost as a percent of revenue led to an improvement in gross margin for the second quarter to 14.7% from 13% in the first quarter. We expect to return to a targeted gross margin range of 15% to 18% for the third quarter.

Operating expenses for the quarter were $15.3 million, flat with the first quarter and down slightly from $15.4 million a year ago. We continue to look at ways to strengthen our operational model and improve our operating margins.

Excluding one-time charges and amortization of intangibles, operating expenses for the second quarter were $13.8 million or 10.6% of revenue compared to $13.7 million or 12.2% in the first quarter.

During the quarter, we incurred pretax charges of $1.4 million for intangible asset amortization and $70,000 for impairment related to the closure of one of our facilities.

Operating income was $3.7 million or 2.9% before interest expense and income taxes compared to an operating loss of $0.7 million or 0.6% for the first quarter and operating income of $3.4 million or 2.9% for the second quarter of 2015.

This sequential improvement was due primarily to the increase in revenue as well as our ongoing focus on efficiency initiatives. During the second quarter, we incurred a tax expense of $2.2 million. This tax charge includes the valuation allowance on our US deferred tax assets related to the company’s operating loss carry forwards.

Excluding the impact of the valuation allowance provision, the non-GAAP tax rate for the second quarter of fiscal 2016 would have been 26.9%. For the third quarter, we expect non-GAAP tax rate of 27%.

Interest expense for the quarter was $614,000, a decrease of approximately $78,000 compared to the prior quarter and an increase of $70,000 from the same period in 2015.

Second quarter net income was $0.7 million or $0.02 per share compared to the net loss of $3.2 million or $0.10 per share for the first quarter and net income of $2.2 million or $0.07 per share for the second quarter of 2015.

Excluding pretax charges for intangible assets amortization and impairment charges for the facility closure, second quarter net income was $3.2 million or $0.10 per share compared with break even in the first quarter and net income of $3.2 million or $0.10 per share for the second quarter of 2015.

Diluted shares outstanding were 32.8 million for the second quarter, an increase of 483,000 shares from the prior quarter. Non-cash charges for the second quarter were [$1 million] related to stock compensation, $1.5 million related to depreciation and $1.4 million related to amortization of intangibles.

Turning to the balance sheet, net cash increased $2.2 million in the quarter. We anticipate net cash will stay relatively flat in the third quarter. Cash on hand was $44.1 million, a decrease of $1.5 million from the prior quarter. This decrease was the result of debt payments along with fixed asset purchases.

Outstanding debt was $69.9 million, a decrease of $3.7 million from the previous quarter. Accounts receivable was $73.1 million, up $6.4 million from the prior quarter, primarily due to an increase in revenues in the second quarter. Days sales outstanding fell slightly to 51 days from 53 days at the end of the first quarter.

Accounts payable of $64.7 million grew $11.8 million over the prior quarter as inventory purchases were concentrated towards the end of the second quarter in anticipation of increased sales as we entered the third quarter. This resulted in our days payable outstanding increase to 53 days from 49 days at the end of the first quarter.

Net inventory was $90.3 million, an increase of $8.3 million over the prior quarter. As mentioned earlier, this increase was the result of higher demand early in the third quarter.

Looking at guidance, we expect to see continued momentum in the semiconductor capital equipment market during the third quarter, leading to a sequential increase in revenue. For the third quarter, we anticipate revenues of $133 million to $138 million.

Operating expenses are projected to increase next quarter due to one-time severance charges related to executive transition costs. Given this and the fact that we continue to be in a valuation allowance position, we expect GAAP diluted net income per share of approximately breakeven.

Excluding the intangible assets amortization of $1.4 million and executive transition cost of $1.2 million, we expect non-GAAP earnings per share to be in the range of $0.11 to $0.14 per share. Now, Jim will discuss our operating highlights for the second quarter.

Jim?.

Thanks, Sheri. The second quarter was a particularly strong one for UCT. We exceeded our expectations in the top and bottom line as the semiconductor capital equipment market continued its upward trend from the beginning of the year. Revenues grew by almost 16% and our earnings power improved significantly from breakeven to $0.10.

As we are improving our market position and optimizing our operations, implementing new processes and procedures, better utilizing our facilities and moving manufacturing closer to our customers, we are driving towards improved performance in creating higher value over the long term.

As technologies move towards 3D semiconductor device architectures and 10 nanometer, more complex deposition and edge processes are required. These trends are driving increased capital intensity in our core markets with our customers providing us the opportunity to play a more influential role in the value chain going forward.

Capitalizing on the momentum we are seeing in the industry, we have taken several steps to provide an increasingly more collaborative approach to working with our customers.

First, we hired a new Senior Vice President of Engineering, Michael Henderson, who has 25 years of extensive knowledge of manufacturing operations and experience with the unique challenges of ramping new materials and processes into high volume production, new product development, site transitions and outsource partner management.

In his new role, Michael will be focused on improving our production efficiency and supporting our customers in becoming a more integrated partner as we manufacture entire pieces of equipment and whole modules.

Second, in order to further penetrate key customers, we are moving the manufacturing of certain products closer to our customers for better collaboration and to more quickly address their changing needs, as well as decreasing their total blended cost.

This quarter, we continued to see growth in our Singapore manufacturing which is strategic to our major OEM customers. Last quarter, we announced our intention to make certain investments in our infrastructure in keeping with our strategy to become a more global company. An important step in achieving this is the modernization of our ERP system.

By installing a more scalable efficient system, we expect to not only improve our visibility, but to keep pace with our customers’ dynamic requirements while providing the highest ROI.

In keeping with the current trends, the largest contributors to overall semiconductor capital equipment growth for the remainder of 2016 are expected to be the ramp of 3D NAND, initial 10 nanometer production and increases in foundry and logic spending as the year progresses.

Additionally, in the display equipment market, OLED investment has been strong as these displays begin to enter the market in a meaningful way.

With our exposure to these high growth areas, we expect to outpace the semiconductor capital equipment market primarily due to the continuing requirements for deposition and edge processes which represent a significant portion of our business. With an improved industry outlook, we look for continued strength in the third quarter.

And finally, I would like to take this opportunity to thank Casey for his contributions over the past decade and wish him well in his future endeavors. He has played an integral role in the growth and success of UCT the last several years, including stepping off the Board to assume the CFO role in 2009.

He has been instrumental in ensuring the success of my transition to CEO of UCT, while working closely with Sheri Brumm, who as previously announced is assuming the role of CFO. Having joined UCT’s finance department seven years ago, Sheri has a deep understanding of our operations and financial structure.

Sheri was the Corporate Controller, Vice President of Finance and Director of Internal Audit at Credence Systems Corporation and also served in various accounting and finance roles at Protiviti and KLA-Tencor.

With Sheri at the helm of our finance team, I am confident that we have a talented team in place ready to seamlessly execute on our strategic plan and capitalize on the growth opportunities ahead With that, let me turn it over to Casey for him to say a few words.

Casey?.

Thanks, Jim. I appreciate the nice comments and I’m thankful I had the opportunity to be a part of UCT’s story over the last few years.

I want to thank everybody on the executive team and actually everybody globally in UCT for tirelessly working to build the organization to where it is a platform that can launch to a much bigger player in the contract manufacturing, particularly in the semiconductor.

With that, I had to tell you that I’m extremely confident with Jim and Sheri and their leadership and their ability to continue to create shareholder value. And I’ll turn it back over to the operator for questions and I’m happy to participate..

Thank you, Casey. So with that, operator, please, any questions, we’re now open for the call..

[Operator Instructions] Today’s first question comes from Edwin Mok of Needham & Company..

This is Arthur calling in for Edwin. Congrats on a great quarter. First question is on the semi side of the business, it seems like you guys posted good growth in the quarter.

I just want to understand if this is mostly due to rising trends in the industry or have you been able to secure some design wins in the quarter that you think will contribute longer term too?.

I think obviously as everyone knows the tide in the industry is rising right now, so that was a good portion of what we’re doing, but as well as we are starting to see some additional revenue from our new product..

Is there a way you can help us quantify that?.

We don’t really break it out like that. I think what you’re seeing is a very healthy growth in our semiconductor revenue on top of a very healthy growth in our non-semi revenue..

The second question is on the non-semi side of the business, stellar growth, you guys doubled revenues.

Just want to get a sense of the FPD industry and how it’s driving that side of the business? Do you see this more as a multi-quarter cycle and do you see this type of growth sustainable going forward?.

On the non-semi side, obviously a big portion of our non-semi growth is driven by flat panel display as you mentioned and that is something that there is a multi-year trend toward the transition from the typical [indiscernible] devices towards OLED, first starting with mobile and then working its way through laptop and also through television.

So we view that trend in the TFT, flat panel display industry as a multi-year trend..

And then my last question is just on – if there are any updates on the implementation of the new ERP process, just want to get a sense of how that’s progressing and when we can really start to see the payoff from that?.

Arthur, we’re kicking that off this quarter and it’s going very well so far. We will see it progress quite intensively during 2017..

And our next question comes from Dick Ryan of Dougherty..

Thank you and also congratulations on the quarter. Also, Casey, appreciate all the help you’ve provided over the years; it’s been very much appreciated. Sheri, I didn’t catch the stock based comp number for the quarter..

Yeah, it was $1.1 million..

$1.1 million.

And do you anticipate impairment charges from any facilities in Q3, you had what $70,000 in Q2?.

I do not at this point. We’re always obviously looking at that, but that’s not something that we’re anticipating at this point..

Jim, you mentioned improving market positions and I’m not sure if you can talk about opportunities to gain share or what you’re seeing in your efforts on that front?.

Dick, as you know, gaining share is a long term path and it’s something we started a year ago and we continue to progress pretty well. And as we’ve mentioned on many other calls, it takes a while for that to show up in revenue. But we’re continuing to see our improved share position at our major customers.

And in general, though, we’re also seeing on top of that the tide rising and helping us overall with the overall health of the semiconductor equipment business adding to our share gains and creating where we’re looking at a significantly higher third quarter and a very good second quarter..

With your communications with customers, I mean, how are you looking at the second half of the year? Can you give any sense of what you might be thinking beyond Q3?.

I think we read the same tea leaves you do. There’s typically, as always been in the industry, kind of a cyclical downturn, seasonal downturn in Q4, but it seems to be disconnected because of new technologies don’t take longer to hit and so new equipment spend has a longer span before it can show up at Christmas.

And so we believe that the capital equipment investment maybe somewhat disconnected from the normal seasonal effects and so we think there’s a potential for Q4 to be strong, but frankly we really don’t know..

And on the display side, is that going to come in lumps or is there any way to kind of determine if there’s more linear sorts of opportunities there?.

So display, the order there traditionally have been very lumpy, but the revenue has been a different story because of the delivery time and this equipment is massive to make these things. And so the orders might be lumpy, but the delivery and the revenue of product tend to be relatively smooth.

So I think there might be a hiccup here and there, but over the next few years as the display market transitions to OLED, orders will be very, very lumpy, but I expect the revenue to have a different attribute to that..

And our next question comes from Patrick Ho of Stifel..

This is [Brian] calling in for Patrick.

The first question for Jim on the flat panel side of the business, historically speaking, Jim, can you remind us roughly how large your flat panel related revenue has been in past years? And also a key customer of yours has talked about roughly tripling their addressable market in this market and so I was kind of curious given the strength in your longstanding relationship there, how fair is it to anticipate a continued high degree of collaboration and increasing market opportunity for UCT?.

The flat panel display business for us has been in the single digit as a percent of our revenue, probably mid single digit on average and obviously that’s gone – that whole market has gone up and down pretty dramatically as it’s gone through different phases.

But we expect to see continued strength; we see capital spending in that area to be at least twice. I think whatever you see the major players telling you it’s probably – that’s the best place to go. So we continue to see a lot of strength in that area.

So we expect our business in that area to double or triple over the next – as it has already and we expect that to continue. But it’s relative – like I said – of low to single digits part of our business.

And we have been – UCT has been engaged with our major customers in this space for many, many years and we continue to have a very good relationship and we expect that to continue..

I guess my next question is back on the semi equipment business, it’s now been a year, a year plus since you Miconex and the Marchi products, can you discuss what you’ve done in terms of integrating or aligning these products and services within the broader organization and I guess more importantly position UCT to increase its revenue footprint within existing customers?.

I think I’ll start with maybe some of the integration on the back office stuff with Sheri; then I’ll cover your next set of questions..

Brian, when we initially acquired all of them, we integrated the finance, HR, IT, that stuffs integrated very, very quickly. So from a back office perspective, that was done from the get-go. From a product standpoint, Jim can comment on that..

So from the product side, obviously it brought us into a new area of which we’re relatively new on the wet chemical, wet cleaning area and we’re starting to make some inroads there, but that takes some time.

And then we’re looking at how to expand that, but at the same time, there’s also been some collaborations in our main business where we’re able to take some of the things that we already know how to do and really collaborate and provide a more full solution on the wet chemical side with things that UCT has always traditionally done like frames, electrical assemblies and whole integration.

So we’re starting to some integration on product offerings to the customer, but these things take a while to develop..

This concludes our question-and-answer session. I’d like to turn the conference back over to Jim Scholhamer for any closing remarks..

Well, thank you everyone for joining the call and we appreciate you joining us. And we look forward to our next call in the next quarter. Thank you very much..

Thank you, sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day..