Ultra Clean Holdings Inc (UCTT) 2012 Q3 法說會逐字稿

Good afternoon. My name is Katherine 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 Mr. Casey Eichler, Chief Financial Officer, and Mr. Clarence Granger, Chairman and Chief Executive Officer. I'd now like to turn the call over to Mr. Eichler. Sir, you may begin your conference.

Welcome to our third-quarter financial results conference call. Presenting today is Clarence Granger, Ultra Clean's Chairman and Chief Executive Officer, and Casey Eichler, Ultra Clean's Chief Financial Officer. Casey will begin by presenting 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 28, 2012. 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 FCC 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 2012. 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 forums, such as a press release or a publicly announced conference.

The matters that we discussed 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.

Now, here is Casey with the third-quarter financial highlights.

Thank you, Sheri. Before I get started, I'd like to remind everyone that this is the first quarter that we're presenting combined results for UCT in Advanced Integration Technologies since the merger closed on July 3, 2012.

Revenue for the third quarter was $100.8 million or a decrease of 1% from the prior quarter, and a decrease of 4% when compared to the same period a year ago. Semiconductor revenue for the third quarter was $86.6 million, a decrease of 1%, and non-semiconductor revenue was $14.2 million, which is flat when compared to the second quarter. Semiconductor revenue was 86% of total revenue for the quarter, and non-semiconductor revenue was 14%. Revenue outside the US was 26% in the quarter compared to 37% in the prior quarter. Three customers had revenues over 10% for the quarter, and gas delivery systems represented 48% of total revenue.

Gross margin for the third quarter increased to 14.2% compared to 14% in the second quarter and 12.2% in the same period a year ago. As we have discussed, over the past few quarters, our margin profile has been improving due to operational changes and cost initiatives that have been implemented. In addition, the merger with AIT contributed to improving our margins. We would expect to see margin improvement as we continue to integrate the combined companies.

Operating expenses were $15.8 million or 15.6% in the third quarter included in operating expenses, our transaction costs of $2.5 million and $2 million of amortization associated with the merger with AIT. Excluding these costs, our operating expenses were $11.2 million or 11.1% in the third quarter.

Our operating expenses as a percentage of revenue will be in the range of 11% to 12% in Q4, excluding ongoing charges for amortization associated with the merger with AIT. Operating expenses as a percentage of revenue should decline during 2013, as we continue to integrate the combined companies. We incurred an operating loss of $1.4 million or 1.4% before interest expense and income taxes, compared to operating profit of $4.9 million or 4.8% in the second quarter.

Excluding M&A-related costs, our operating income was $3.1 million or 3.1% in the third quarter. Interest expense for the quarter was $813,000, an increase of $800,000 related to debt incurred to finance the merger with AIT. An income tax and benefit of $539,000 was recorded in the third quarter. The tax rate for the fourth quarter should be modeled at 24%.

Third quarter net loss was $1.7 million or $0.06 per share. Excluding transaction costs and amortization expense, related to the merger with AIT, third-quarter net income was $1.7 million or $0.06 per share. This compares to a net income of $3.9 million or $0.17 per share in the second quarter. The fully diluted share count was 28.1 million shares, an increase of 4.4 million shares from the prior quarter, due to the merger with AIT.

Non-cash charges for the third quarter were $1.4 million related to FAS 123R, depreciation of $900,000, and $2 million related to amortization associated with the merger with AIT. Amortization should be modeled at $2 million per quarter for the next year.

Turning to the balance sheet, cash was $58.3 million, an increase of $7.2 million from the prior quarter. Our net cash position went down approximately $67 million in Q3, due to the borrowing of $79.7 million on our new bank facility associated with the merger with AIT. Accounts Receivable was $47.5 million, up $5.6 million from Q2. And days sales outstanding increased to 42 days from 37 days. Accounts payable of $34.1 million increased approximately $8.3 million quarter-over-quarter. Days payable outstanding at the end of the third quarter increased to 35 days from 26 days at the end of the second quarter.

Net inventory was 63.3 million, an increase of 18.9 million over the prior quarter due to the combination with AIT. UCT's inventory decreased by 2.6 million during the quarter. Inventory levels are projected to decrease in the fourth quarter.

Now, Clarence will discuss our operating highlights for the fourth quarter. Clarence?

Thanks, Casey. The third quarter has been a period of transition as we began to merge AIT and UCT. This integration process is going very smoothly, and we are very pleased to have AIT become part of the UCT family.

As part of the integration activities, we have already begun to see certain synergies between UCT and AIT. We have been able to obtain cost savings surrounding combined company freight contracts and the closing of a small AIT facility in Santa Clara. We have also started to evaluate using AIT manufactured frames and sheet metal in current UCT products.

As mentioned in our last earnings call, the combination with AIT adds several new customers and new manufacturing capabilities to the Company. We continue to be very excited about the new opportunities that the addition of AIT brings.

As anticipated, we have seen an industry slowdown during the third quarter. As Casey previously stated, our revenue for Q3 was $100.8 million, and our adjusted earnings per share were $0.06, excluding M&A charges. On our previous earnings call, we had guided to Q3 revenue of $107 million to $112 million, and $0.10 to $0.14 earnings per share. During the quarter, we issued revised revenue guidance of $96.0 million to $101 million.

Although revenue declined $1.1 million quarter-over-quarter, we were able to improve our gross margins to 14.2% through the addition of AIT into our business, and continuing operational improvements within UCT. In addition, UCT generated cash during the third quarter. Our gross cash position grew to an all-time high of $58.3 million. We anticipate that we will continue our trend of generating cash during the fourth quarter. During Q4, operations will heavily concentrate on further inventory reductions and controlling companywide spending as this industry slowdown continues.

I will now review highlights of our activities for the third quarter. In Q3, 26% of our total revenue came from our Asian manufacturing operations -- a decrease from 37% of total revenue in Q2. Because AIT manufactures roughly 95% of its products within the US, we expect a short-term decline in our overall percentage of revenue from Asia. However, we expect the trend of increased manufacturing in Asia to continue, as our customers shift more of their manufacturing requirements to Asia. This will continue to have a favorable impact on UCT's margins.

During our mid-quarter guidance update, we mentioned that one of our larger semiconductor customers has decided to in-source a portion of their gas panel business in the future, and could have a negative quarterly impact of 7% to 9% on total revenue by the end of 2013. We still believe that this will not materially impact our business in 2012.

Also, we have several exciting new opportunities with multiple new customers, which will help UCT continue to grow when the industry begins to recover. Among these opportunities, our recently issued press release detailing our new partnership with DWFritz Automation. We are very pleased that we will be partnering with them to provide integration of their complex electromechanical systems and systems testing. We have an opportunity to provide DWFritz with a vertical integration value proposition leveraging our frame fabrication, sheet metal fabrication, machining, and integration operations.

In addition, we have an initial order with a new metrology customer. Through outsourcing, this customer will be able to increase their gross margin on this product, and allow them to keep focused on intellectual property and technical design capabilities. We are pleased to announce that we expect to receive $2 million to $3 million in orders from this platform in 2013. We are very hopeful for additional opportunities in 2013 from this new customer.

Overall, our pipeline of new business opportunities remains very strong. I'd now like to shift to our guidance for the fourth quarter of 2012.

We anticipate that industry-wide demand will remain slow during the quarter. Our revenue guidance for the fourth quarter is $94 million to $99 million. Our Q4 earnings guidance is for earnings per share to be in the range of $0.01 to $0.05, excluding amortization charges. As Casey discussed earlier, the tax rate for the fourth quarter should be modeled at 24%.

In summary, during the third quarter of 2012, we started integration activities related to combining AIT into UCT. This integration is proceeding very smoothly, and we have already identified several areas of cost savings during this process. With the addition of AIT, we saw flat revenue quarter-over-quarter, with slightly higher margins.

Our gross cash position is at an all-time high and will continue to grow further in Q4. Our new business pipeline is strong and growing. And while industry demand will remain slow during the fourth quarter, we are very familiar with this type of slowdown and will take appropriate actions to deal with it quickly.

With that, Operator, we would now like to open the call for questions.

Operator?

(Operator Instructions) Edwin Mok.

Thanks for taking my questions. So, first, I have a question regarding the fourth quarter guidance. I was curious, what are the moving parts between semi and non-semi? Are they trending similarly? And I guess within non-semi, how is the LED business coming along?

So, with regard to the ratio between semi and non-semi, we are actually seeing again a little bit of a decline in semi in Q4. The non-semi elements are remaining relatively stable or growing. On the LED side, we are seeing some very slight growth in LED in the fourth quarter; but again, it's a very small. We're still on the order of 1% to 2% of overall revenue.

I see. Great. And then if I take your reported results, right? -- and you mentioned that Asia was down by over 30%, right? -- is that largely because of the UCT coal business, you know, so after all the industry slowdown. And then just kind of a follow-up question around that is, how did the AIT revenue -- how did they do this past quarter? And what is baked into your guidance for the fourth quarter?

Sure. First of all, with regard to Asia, the primary reason that our percentage of revenue declined in Asia was because AIT has almost no revenue in Asia. 95% or more of their revenue comes from the US. So, as they enter into the mix, that's what drove our percentage of revenue in Asia down. Although our overall revenue on the UTC side declined, the UCT portion of revenue in Asia remained relatively flat.

So, the significant decline in Asia was associated with AIT. And we do expect that to recover -- grow as we move forward. We do expect more Asian opportunities for business going forward. And that's good for UCT, because we do get a tax benefit and we get higher profitability out of Asia. So, that's a favorable thing.

With regard to the semiconductor portion of our business and AIT in Q4, actually AIT saw very little decline in Q3. Most of the semiconductors portion of our decline was on the UCT side. In Q4, most of the semiconductor portion of our decline will be on the AIT side. So I think they were just lagging UCT a little bit, actually, on the UTC side. And long-term, we aren't going to split out UCT and AIT. But just to give you a general idea in this first quarter of combination, the AIT side of the semiconductor business is going down a little more than actually the UCT side, I think is actually going up on the semiconductor side in Q4.

Interesting. Very, very helpful with that. And then in terms of visibility, I know typically, you guys don't have much beyond the current quarter, right? But how does your customer build plan look like right now? Do you have any kind of color you can shed on at least early 2013?

Yes, normally, we'd try to give you a little color, Edwin, but frankly, at the end of the year, it gets even cloudier. Nobody seems to really know what's going to go on in Q1. I don't think it's going to be a huge swing either way in Q1. But we really haven't gotten any significant guidance from any of our customers at this time.

I see. Okay, helpful. I guess lastly, I have -- actually, it's two more questions, sorry. One -- lastly, in terms of related to revenue, you mentioned there was a new customer, a metrology customer. I was just curious, has that started to revenue in the fourth quarter? And then in terms of the size of that customer, is that a huge customer? Multibillion-dollar customer? Or is it hundreds of million-dollar customer? Just trying to get a sense in terms of the management of that opportunity.

Sure. Yes, sure. Let me give you a little sense. First of all, it is a new customer in the metrology area. What we've said is, in 2000 -- and we will ship revenue in Q4, and it should be a $2 million to $3 million customer for this one particular platform in 2013. We think we'll be able to capture additional platforms.

It is not a multibillion-dollar customer. My guess would be that you might be thinking of KLA. But KLA is already a customer to UCT and was a greater than 10% customer to AIT. So this is a new player, a new customer for UCT in the metrology area. It is a publicly traded company and is of reasonable size, and we think offers a good new long-term outsourcing opportunity for UCT.

Since you mentioned KLA, I have to slip in this question. Was KLA one of the top -- one of the three 10% customers in the quarter?

No. Not at this point. (multiple speakers) But they are a good sizable customer.

I see. Okay, that's helpful. And one last question and I'll go away. In terms of gross margin, if I kind of look at your guidance, it implies somewhat flattish gross margins. Even though when I go back a few quarters ago, you were doing $110 million and your gross margin was at that level, right? So my question, I guess, is, if I assume business can recover in 2013 and your revenue go back above that $110 million revenue level, right, how do you kind of think about what kind of margin leverage you can get out of your model?

Again, as we combine the companies going forward, what we've talked about is, they're certainly having a better margin profile coming out. We're not going to specifically give guidance out a few quarters. But at the -- you get back to those revenue levels, and I think you're going to see us be able to achieve our target margin level, back -- when you glue it back into the periods that you're talking about.

So I think there is definitely a profile improvement from both the AIT acquisition as well as the work that we've been doing. And we look forward to showing that to you. But we should, as you saw recently, we were back, in the beginning of 2011, we were doing kind of these levels or less at significantly more revenue. So we think that we're very encouraged by our opportunity to do that, and look forward to the chance to prove it as those revenue levels come back.

(multiple speakers) So, we've said our target range is 15% to 18% gross margin, and it feels like we're moving in that direction.

Sounds great. That's all I have. Thanks.

Jagadish Iyer.

Thanks, Casey. Thanks, Clarence. Two questions. First on -- a little bit on the gross margin side. I would have expected your gross margins in the third quarter to be a little bit better, given that AIT is such an accretive acquisition. Is it fair to say that more savings from synergies are still ahead? And is it fair to say that 15% could potentially be exceeded sometime in 2013? And then I have a follow-up.

Well, again, for -- to get to those levels, we'd have to know what revenue is going to be out in 2013. As Clarence referenced, that's pretty hard to tell right now, especially towards the end of the year. But as I've stated, I mean, we were at 14.2% this quarter [at] 100 million. If you look back, we've done significantly more revenue over the last year or so in that level. And I think that would definitely get us into the 15% to 18% area.

You know, while AIT -- again, and the operational efficiencies have helped improve the margins, obviously, there was a significant downturn in the industry that took a lot of revenue out. And so there's a certain amount of scale that you have to have to be able to greatly improve the margins. We were able to improve the margins on a little less or roughly flat revenue 2Q to Q3. And I think seeing some strength come into the beginning of next year, you're going to see more proof that -- like we were showing at the end of this year, that we have the ability to improve the margin profile, not only on a UCT basis but on a combined basis.

The only thing I'd add to that, Jagadish, is, you saw the 14.2% in Q3. We really didn't have any synergies as a result of the combination of AIT and UCT in Q3. We'll start to see some of those in Q4, and then more significantly in Q1 and Q2 of next year.

Okay. And Casey, how should we think about overall OpEx going forward in '013? You know, not explicit guidance, but generally, how should we be thinking about the OpEx?

Again, as Clarence said, some of those synergies will come out of operating expenses. And so, I think we'll be able to improve, as I said in my comments, our margins -- our op margins in 2013. There are some benefits there to scale. Obviously, when you have revenue decline like it has over the last couple of quarters, that works against you. But I think we're going to have the opportunity not only with scale, but also with -- as Clarence referenced, expense synergies that we'll be able to improve upon over next year.

Okay. Just quickly on -- Clarence, you had mentioned about the in-sourcing from your particular customer. I was just wondering how much of this has been offset by all this new opportunities that you have mentioned? You know, you've said about 7% to 9% of your revenues in the calendar fourth quarter potentially as you exit '013 could be impacted by that. Can you tell us how much of these new opportunities that you think may be able to offset that, please?

Yes, basically, Jagadish, so (multiple speakers) --

(multiple speakers) Before Clarence starts, let me clarify -- he didn't say 7% to 9% in the fourth quarter. That's what I heard you say, he said [7% to 9%].

I'm sorry?

By the fourth quarter of 2013.

Right. So you're thinking fourth quarter of 2013.

Yes.

Okay.

Yes. So, Jagadish, basically the way you can think of this is, we don't expect any significant decline in Q4. We would probably expect the decline to be linear starting in Q1 of 2013. So, it's roughly 2% per quarter starting in 2013. And you can see if I'm talking about new opportunities like the one I just described, where it's on an order of a couple of percent on an annualized basis, if we get four or five of these new wins, it should offset what we're expecting in the way of revenue declines.

Okay. Finally, Casey, any use of cash, any other thoughts on cash usage? Thanks.

Well, obviously, we continue to look at opportunities to build the Company both organically and non-organically. But having taken on the new debt around this acquisition, what we're trying to do is generate cash and be able to get ourselves the opportunity to either pay down the line, look at new opportunities. And so, that would be the use of cash for us. It's just operating or paying down our revolver.

Thank you.

(Operator Instructions). Krishna Shankar.

Yes, Casey and Clarence, you mentioned three 10% customers. Would I be right in assuming AMAT, the combined LAM Novellus entity, and perhaps ASM Cinematography -- or who's the third guy?

Yes, that's correct.

You -- oh, I'm sorry, you said ASM Lithography, Krishna. No. It's ASM International.

ASM International, that's what I meant. I'm sorry, yes. Okay. All right. And then KLA you said is a significant customer but not quite 10%?

Yes. They're not quite -- they're not a 10% customer.

Okay. And then for some of these synergies to evolve to get you to 15% to 18% gross margin, do you need a significant pickup in terms of order volumes, so that you can rationalize facilities? Or you know, other operating synergies so that you can get to some of these gross margin improvements, regardless of the level of business over the next three to four quarters?

Yes, I mean, as we discussed when we announced the acquisition or the merger, it was not based on synergies to get it to be accretive in the second half of this year or for next year. And so this is not something that we see it being hugely accretive off of those synergies. But whenever you put organizations together, there are facilities, there are ERP systems, there are certain rules that you're going to consolidate and make more efficient and more effective.

And so we are going through the process second half of this year of analyzing and understanding where best to leverage those different facilities and those different opportunities. So that when we move forward, we can have the best platform possible. So we are going through that process, as Clarence mentioned. I think that's going well. And we will pick up the synergy over next year. I wouldn't say getting to those operating or those gross margins, that isn't dependent necessarily as much on that as it is on some recovery in the level of business from the semi side of the business.

Okay. And then, Clarence, can you flesh out for us more the DWFritz automation partnership? And what market area those guys focus on, and what the synergies are between your capabilities and what they do?

Yes, they make inspection equipment for the consumer electronics market. And they tend to contract to some other larger companies in terms of their manufacturing services. Mostly they do the design and then they're looking to outsource. They do manufacturing themselves, but they've decided that, given the -- their focus is really on equipment design as opposed to the manufacturing. And so they are very interested in working with us on manufacturing some of these test systems that are used for testing consumer electronics.

And so, we think this year, it should be about somewhere between a $1 million and a $2 million a year business for us. And we would expect it to double or triple next year for us. And so -- and that's just with one product and they have multiple product lines. So, they're primarily an engineering design house. I believe they have roughly 100 employees. They've been around a long time, well-respected. And they were looking for a partner that could do manufacturing to support their engineering designs.

Okay. And then the final question, how is your healthcare and medical equipment outsourcing business, and Intuitive Surgical, and any others to report on there?

Yes, I mean, we are working, trying to increase our customer base; our relationship with Intuitive Surgical remains very strong. We are working to add new customers to that base. And I did mention that we had added one smaller one. We hope to have other medical customers to be able to talk about in the near future.

Great. Thank you.

And there are no further questions at this time.

All right. Well, I appreciate it, Operator. And I appreciate everyone for joining us today. And we look forward to continuing to grow and build the Company in the future, and seeing all of you. So, thanks a lot.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.