Ultra Clean Holdings Inc (UCTT) 2013 Q2 法說會逐字稿

Good afternoon. My name is Shonda 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 Mr. Casey Eichler, Chief Financial Officer, and Mr. Clarence Granger, Chairman and Chief Executive Officer. I would now like to turn the call over to Ms. Sheri Brumm. Ma'am, you may begin.

Thank you, operator. 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. We will begin by presenting 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 28, 2013. The press releases can be accessed by 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 expect the contents of this call as the Company's official guidance for the third quarter of fiscal 2013. 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 Litigations 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 to present the second quarter results.

Thank you, Sheri. Revenue for the second quarter was $110.1 million, an increase of approximately 10% from the prior quarter and an increase of 8% when compared to the same period a year ago. Semiconductor revenue for the second quarter was $95.1 million, an increase of 11%, and non-semiconductor revenue was $15 million, an increase of 1% when compared to the first quarter. Semiconductor revenue was 86% of total revenue for the quarter. Revenue outside of the US was 30% in the quarter, compared to 21% in the prior quarter. Three customers had revenues over 10%.

Gas delivery systems represented 54% of our revenue for the quarter. Gross margin for the second quarter increased to 14.6% compared to 13.8% in the first quarter. We are very pleased with the achieving of margin levels that we have not seen since 2007.

Operating expenses were $11 million or 10%, excluding amortization of intangibles, as compared to $11.6 million or 11.6% in Q1. The decrease of approximately $573,000 from the prior quarter was primarily due to lower outside service charges. Our operating expenses as a percent of revenue will be relatively flat in the third quarter, but our long-term target remains at 8%.

We had operating income of $3.6 million or 3.3% before interest expense and income taxes, compared to an operating income of $621,000 or 1% in the first quarter. Excluding amortization of intangibles, our operating income was $5.1 million or 4.6% in the second quarter. Interest expense for the quarter was $559,000, a decrease of $29,000 quarter-over-quarter.

An income tax expense of $581,000 was recorded in the second quarter. The tax rate for the third quarter should be modeled at 24%. Second quarter net income was $2.3 million or $0.08 per share.

Excluding amortization expense related to the merger with AIT, second quarter net income was $3.5 million or $0.12 per share, compared to $0.04 per share for the first quarter. Diluted share count was 28.8 million, up 176,000 shares compared to the prior quarter. Non-cash charges for the second quarter were $1 million are related to FAS 123R, $769,000 are related to depreciation, and $1.4 million are related to amortization of intangibles.

Turning to the balance sheet, cash was $71.3 million, an increase of $6.4 million from the prior quarter. We are very pleased that our cash balance is at an all-time high again for UCT this quarter. Net cash increased $8.8 million during the period. In managing our cash balances, we are looking to pay down a greater amount of the debt during the third quarter, thereby taking our gross cash number and outstanding debt down. We anticipate that net cash will be slightly higher next quarter.

Accounts receivable was $47.1 million, down $2.5 million from Q1, and days sales outstanding decreased to 38 days from 44 days. Accounts payable of $30.1 million decreased approximately $4.5 million quarter-over-quarter. Days payable outstanding at the end of the second quarter decreased to 29 days from 36 days at the end of the first quarter. Net inventory was $48.7 million, a decrease of $2.5 million over the prior quarter.

The reduction in inventory, as revenue increased 10%, reflects our continued focus on operational efficiency. Inventory levels are projected to stay flat or slightly decrease during the third quarter of 2013.

Now I'd like to ask Clarence to discuss the operating highlights for the second quarter. Clarence?

Thanks, Casey. The second quarter of 2013 was an exciting quarter for Ultra Clean from an operational execution perspective. During the quarter, we saw improvement in all key areas and record performance in some of them. We once again saw additional recovery in the semiconductor capital equipment industry.

Total revenue coming from semiconductor equipment sales increased greater than $9 million quarter-over-quarter, while other served markets stayed relatively flat. As Casey previously stated, our revenue for Q2 was $110.1 million, and our adjusted earnings per share was $0.12, excluding merger and amortization charges. On our previous earnings call, we had guided to Q2 revenue of $106 million to $111 million, and $0.07 to $0.11 adjusted earnings per share. We are pleased that we were able to achieve revenue near the top end of our guidance and to exceed our earnings per share guidance for the quarter.

Along with increased revenue and outstanding EPS, we were able to increase our margins by almost a full percentage point, from 13.8% in Q1 to 14.6% in Q2. And we were able to achieve an all-time high cash balance for the second quarter in a row.

I'll now review highlights of our activities for the second quarter. Our cash balance achievement for the quarter is one of our most significant accomplishments. This is the second quarter in a row that we've been able to achieve record cash balances.

In the second quarter, we increased our cash to a level of $71.3 million, while at the same time reducing our debt by nearly $2.4 million. As mentioned last quarter, one of the main reasons that we've been able to generate such cash levels is that we've concentrated heavily on operational execution. Among other accomplishments, operations continues to increase our gross margins while at the same time driving down inventory. Over the last four quarters, we have achieved gross inventory reductions of approximately $13 million, and we believe there are still opportunities for further reductions. We are very confident that, as a result of our operational execution, we will continue to generate cash, reduce our debt, and reduce our inventory balances.

In Q2, the percent of revenue coming from our Asian operations rose significantly. The second quarter saw 30% of our total revenue come from our Asian manufacturing operations, an increase from 21% of total revenue in Q1.

As mentioned in previous calls, AIT's heavily US-based manufacturing led to an increase in the percentage of our overall US manufacturing shortly after the acquisition. We are now starting to see increased manufacturing as a percentage of total sales within Asia. We anticipate this to continue, having a favorable impact on UCT's margins and profitability.

Another major accomplishment for the quarter was our gross margin achievement. During the second quarter, we achieved a gross margin of 14.6%, compared to 13.8% in Q1. Such margin levels have not been achieved since Q2 of fiscal 2007. As mentioned previously, these margins were achieved through our continued focus on operational efficiency, as well as our mix of revenue being shipped from outside of the US. Our long-term goal remains to achieve gross margins in the 15% to 18% range, and we are pleased that we are once again moving closer towards that goal.

On the new business front, during the quarter UCT realized an expansion of our partnership with DWFritz automation, a leader in precision automation based in Portland, Oregon. Over the last several quarters, our recently-acquired AIT facility in Chandler, Arizona has engaged with DWFritz in projects involving electromechanical systems integration for assembly and metrology. We have recently received a new business award from them that will represent approximately $2 million worth of business for UCT during Q3. This product will be manufactured at UCT's facility in Shanghai, and will be our first manufacturing effort for this customer in Asia.

We are excited about the collaboration with DWFritz and look forward to continue assisting them with their growth. Elsewhere, our new business pipeline remains strong, and we continue to work on several new business opportunities with other customers.

The second quarter marks the one year anniversary of our announcement to purchase AIT. While there is still a long way to go to achieve our ultimate goals, we view this as a very successful combination. A number of cost synergies have already been realized, and we are continuing to implement new cost savings, identified by the two entities.

We anticipate seeing further savings during the second half of 2013, both in our operations and our operating expense categories. We continue to be very excited about the potential of the addition of AIT brings to UCT.

I'd now like to shift to our guidance for the third quarter of 2013. We anticipate revenue being flat to slightly down during the quarter. Our revenue guidance for the third quarter is $103 million to $110 million, and our Q3 earnings guidance is for earnings per share to be in the range of $0.06 to $0.12, excluding amortization charges. As Casey discussed earlier, the tax rate for the third quarter should be modeled at 24%.

In summary, during the second quarter of 2013, we had several major achievements. For the second quarter in a row, our cash balance was at an all-time high, while reducing debt by nearly $2.4 million. Our gross margins improved by almost a full percentage point, quarter-over-quarter, and our inventory levels continued to decline with increased operational focus. UCT also realized an expanded partnership with DWFritz, and we continued integration activities related to combining AIT into UCT.

In closing, we remain confident that UCT's future is very bright, both from a long-term growth and operational execution perspective. With that, operator, we would now like to open the call for questions.

(Operator Instructions)

Edwin Mok.

Congrats for a great quarter. First question I guess on -- actually, just some logistics questions. So you mentioned there were three 10% customers. Are all those customers in the semicap space?

Yes.

Okay. That's helpful.

And then, I guess semicap actually came in pretty strong in the last -- in the June quarter. Any kind of commentary you can give regarding the September quarter, how that side of business is trending?

I think we -- I think the second quarter came in about in line with where we thought it would from a semiconductor perspective. So we did anticipate that strength. I would say, as you can imagine, semiconductor is likely to remain relatively flat in the third quarter.

I see. Okay. Great. That's helpful.

Anything incremental beyond the third quarter you can give us, in terms of any color you're getting from customer in terms of order trend, et cetera?

Yes, just in a -- from a very general sense, Edwin. We're certainly getting a very positive vibe from virtually all of our semiconductor customers. It certainly feels like Q4 is going to be a reasonably good quarter. But beyond that, and even more importantly, it certainly feels like all of our customers are very optimistic about 2014. So we've certainly heard a lot from our customers and a lot from analysts. I've heard increases in 2014 ranging anywhere from 10% to 27%. So we're optimistic about 2014.

Great. That sounds great.

Moving on to -- actually, before we move on to that. Just quickly on the Asian shipment, I noticed that it's up a lot sequentially, right? Is that all because of this greater semiconductor, or are you seeing a bigger shift on your customers' side to move to your Asian manufacturing?

Okay. I'm sorry, I missed the first part of your question. Could you repeat it?

Just the question on Asian shipment from your Asian facility. It moved up -- it increased a lot sequentially in the second quarter. I was wondering, is that a trend you're seeing in the customer side as pushing you to do that? Or is that just -- it's what happened at this quarter -- you have customers ordering more from products (multiple speakers)?

I would say we're moving gradually in that direction. This particular quarter, I would say one of our customers saw a significant migration in that direction. I wouldn't expect the continued rate of expansion in Asia to be as significant as it was in this past quarter, but I would expect to continue to see long-term increases in Asia.

I see (multiple speakers).

Both our semiconductor customers and some of these other newer customers that we're talking about are looking at Asian manufacturing.

Great. That's helpful.

On DWFritz, you mentioned that there's a $2 million order. Is that incremental increase from the second quarter or -- I thought you guys, although, shipped to that customer in the second quarter as well?

We had some smaller shipments to that customer in the second quarter. We had another customer in the second quarter that was a drop-in metrology customer that generated about $2 million in revenue. So most of the $2 million in revenue that we're talking about for Fritz in Q3 is incremental.

I see. So that leads me to the other part. So beyond Fritz, if I take your guidance, it implied that your non-semi is down. Is that mostly come from your medical customer?

Yes, (laughter) that's a very complicated question, Edwin. I really -- we're very heavily focused on one particular customer, so I don't really want to speculate about that particular customer overall. So -- but overall, our revenue is generally flat, with most of it probably -- whatever drop we see is probably mostly outside of semiconductor.

Okay. Great.

And then last question, and I'll let the other guys ask questions, but question on the long-term model. I think Casey mentioned that you're OpEx -- you're targeting your OpEx around 8% and you have a long-term margin at 15% to, let's say, 18% range, right? How do you think about that in terms of revenue? What revenue level do we think we need to get to before we can hit these numbers? I understand, obviously these are longer term, and you are doing more work, but assuming you achieve order the kind of improvement that you guys expect to achieve over the next few quarters, what revenue level do you need to get to get to those targets?

Yes, I have got to say, to your point, it's made up of two things. One is some of the improvements in some of the consolidation that we continue to do between the two companies. That will be helpful. And obviously to your point, revenue as well. Certainly, if we got back to the levels where the companies were combined at a year ago, that level, I think, would be a reasonable place to think that we could kind of get the OpEx back into line.

In the meantime, we're not waiting for those levels of revenue. We're going through and continuing to optimize the operating expense elements of the Company. But certainly at those levels, we would be within the range of guidance we're giving you.

I see. And any way you can remind us what revenue number that would be?

That was around $135 million -- $130 million to $135 million a quarter.

Great. That's very helpful.

Jagadish Iyer.

Yes. Two questions. First, on the gross margins for the second quarter, what is the biggest driver? And it -- obviously, you had a lot of these confluence of these lower inventories and a bigger mix of semi, so I just wanted to get a little bit more understanding of the moving parts and how we should be thinking about it for the third quarter.

Yes. I guess -- you want to -- (multiple speakers) you can think of, essentially, the factors of higher volume, improved operational efficiency, and more revenue out of Asia. It's really a combination of those three things, Jagadish. So trying to say which one's greater, it's kind of hard to do. They were all significant.

Okay.

And if I look at your commentary you have given for the next quarter in terms of your guidance, suggesting that probably your non-semi portion probably ticks down. So is it fair to say that your semi business should be at least flat, or maybe slightly better? Because this is actually looking better than what the semicon commentary (inaudible) by your customers who have (inaudible) they have indicated third quarter to be somewhat soft before they see a big ramp in the fourth quarter? Is that anything different, or is it just consistent with what you're seeing with your end customers?

It's consistent with what we're seeing with our end customers. The only thing I would caution, Jagadish, we are not seeing an increase in semiconductor. I was just trying to say that we are -- semiconductor is relatively flat.

Okay.

And then probably we'll see a big ramp in the fourth quarter?

I don't know about a big ramp. Certainly our customers are more optimistic about 2014, and they certainly seem a little bit optimistic about Q4. But most of their enthusiasm seems to be focused around 2014.

Yes, and just -- sorry, I didn't -- this one, Casey. So in terms of the margins for the next one or two quarters, so you're still going to continue to drive non-US sales portion so that we could probably see some for north of 14%? Is that a very fair assessment going forward?

Yes, on a margin basis we're already above the 14%. Obviously, we don't drive our customers as far as the -- their customers are driving them and where they're going to manufacture. We encourage people to transition products where it makes sense for them to take advantage of the supply chain and the benefits of low cost regions, but we only have so much control over that. But we are always encouraging our customers to try to take advantage of that. Part of the reason we built out an infrastructure that's a global supplier, global provider is so that our customers have those choices.

Dick Ryan, Dougherty & Company.

Casey, a housekeeping item. Do you happen to have the OpEx lines, R&D, sales and marketing, G&A, net of amortization?

The amortization was about $1.4 million. Okay? So if you take $1.4 million out of the OpEx number, the G&A would roughly be about $7.1 million, little shy of $7.1 million. So that's in the consolidated, the M&A -- or I'm sorry, the amortization is in that number and that was about a $1.45 million.

Okay. All right, thank you.

I think you briefly mentioned -- you talked about the non-semi business and made a passing comment about the pipeline. Can you give us a little more color on what you're seeing in the non-semi pipeline?

As far as new customers or the existing customers? From an existing customer standpoint, we were roughly flat Q1 to Q2, and so that's been a pretty steady part of our story and our business. And so we don't see the same type of movement that we see in the semi side of the business. I would say that while we have opportunities with existing customers and new customers within semi, we certainly are very focused in developing out some of these other markets that we've been talking about, and as Clarence has talked about over the last year or so, primarily being the energy where we are putting solar and LED and all those customers together, industrial, and then the medical side of the business. And so there's a lot of activity in that area as well, and it's not as consolidated of a market as semi-cap equipment tends to be. But we're seeing opportunities on both sides. I don't know if you want to add any color to that.

Yes, the only thing I would mention, Dick, is on last quarter's earnings call, we talked about having a drop-in company that generated about $2 million in revenue for us that was outside of semiconductor. It was in the consumer electronics space, industrial. And so we think there we're going to find a lot more of those companies where they're liable to drop -- $2 million drop-in for a quarter, and then not do anything for one or two quarters. We're working with several of those types of companies, and so it wouldn't surprise me if I was -- if we were able to talk about more of those again next quarter.

So that's kind of where a big part of our thrust is. Obviously, we remain very focused on our core semiconductor customers, but we're trying very hard to find other customers in other markets such as the industrial and consumer electronics. And we think that can be a good, solid growth driver for us. It's 1% or 2% here and there, but if we can keep picking up those kinds of customers, we think that can add significant growth for us outside of semiconductor capital equipment over the next year or so.

Okay. Great.

Anything happening on the LED side from your perspective?

For us it's been pretty slow, continues to be less than 1%.

Okay. Great.

Krishna Shankar.

Are you seeing any -- it sounds like the third quarter revenues will be relatively flattish to down. And then, as you look at your top three customers, do you feel that they have factored in some of the recent cautious guidance from Intel in terms of CapEx, taking it down a little more for the year? And what impact that might have on fourth quarter business from the semiconductor equipment sector?

I think our customers were already factoring that in. So I don't think that was a big surprise to them. We haven't had anybody make any significant guidance changes to us as a result of that.

Okay. And then Casey, on the $135 million to $140 million revenue level, can you remind us again what the target models you would achieve in that revenue range, $135 million to $140 million?

What I said was that the combined companies did around $135 million at the date of combination, or on the trailing quarters. And what that would do would get us inside of our model, which is the 15% to 18% on the gross margins. And particularly the question was addressing the operating expense was around 8%, and then the net operating margins of 8% to 10% that we've talked about. So when the question was being asked, I think the part of the model that they were thinking about was what gets you to the 8%.

I see. Okay. So you're still comfortable at that -- the $135 million revenue range, and that 8% operating margin at a 15% to 18% gross margins, you would hit in that range of revenues?

Yes. Obviously we're working very hard. We're not waiting for revenue to come. We're working very hard to continue to work down the operating expenses and be prudent. Every quarter there's a different mix to that. Obviously, earlier in the year, we have more audit-related costs and more payroll-related costs, as the year starts out. Throughout the course of the year then, you have investment in other areas of the Company, IT and other spots. So you try to blend that together so that you can have a natural run rate. But there's a bit of an ebb and flow that goes through operating expenses which, for us, as you know, are fairly thin when you look at R&D, sales and marketing, and all the G&A expense being right around 8% -- sorry, target 8%.

Okay. And then similar to the DWFritz business which, I guess, contributed about $2 million last quarter, is there anything in the hopper right now? Or do you feel that this is new business prospecting? Or do you feel that you may have similar customers and revenue increments here over the next couple of quarters?

Yes, Krishna, again this is Clarence. First, it wasn't DWFritz that contributed the $2 million in Q2. It was another similar kind of customer that made that contribution. The DWFritz contribution will impact Q3. So it's roughly $2 million in Q3. And yes, we have several other companies like that in the pipeline that we're working with right now. So I do -- I am optimistic that in 2014, we'll see several of those impacting UCT's overall performance favorably.

Terrific.

And my final question, can you talk a little bit on the AIT integration, how that's coming along? And what's that upside that exists there with the integration and efficiencies there?

Yes, I'm not going to try and quantify it. I'll give Casey a chance to do that. But I would say, at this point, we've basically taken care of a lot of the low hanging fruit, the easy stuff, combining freight carriers and where we're buying identical parts, finding -- figuring out who is buying it at the lowest price.

What we're getting into now is, how do we systematically take advantage? For example, AIT makes frames, and we want to use more of their frames rather than buying frames from outside suppliers. So our target will be to do more of that in the forthcoming year. It's -- the qualification process on that is fairly long. And so we've been working on some of those, and will be working on some more of those in the future. And I guess the other thing that is of significance from a standpoint of combined -- this isn't really efficiency, but from a combined new business opportunity, UCT has manufacturing facilities in Asia, both in Shanghai and in Singapore. Some of it -- of AIT's customers would like to see more manufacturing in that region.

And so we believe, over the next few quarters, we'll see more of those opportunities where we can work with AIT's customers and provide them additional manufacturing, in addition to the manufacturing that they provide them in the US, provide them some manufacturing capability in Asia. And so I think that will help us provide some incremental business opportunities. And then with regard to further efficiencies on the operating side, we still have separate business systems and we really have to start figuring out how we're going to combine UCT's and AIT's business systems, just to simplify things from a finance standpoint, accounts payable standpoint. All of these other areas that add a lot of soft costs.

So I think over the next year, you'll see that continue to occur and probably have a good positive impact on our overall expenses. I think it all links in to what Casey's talking about, about trying to drive down overall expenses. I think there -- one of the areas that we're high in is that we do have some duplication of expenses, and we need to figure out how to bring that in line. So Casey, what (multiple speakers)?

Patrick Ho.

Maybe if you could just give a little more color. You mentioned new business opportunities, both in semis and non-semis. Is -- are these business opportunities more heavily weighted to non-semi? Or do you see opportunities on the semi side to expand, I guess, your coverage with your key customers there?

Yes, on the semi side, I would say most of what opportunities we would see are in non-gas delivery related. So we would expect to grow larger modules and/or robots. On previous calls, I've mentioned that we've been awarded some robot assemblies from one of our largest customers. And that's really going to -- is starting to kick into volume now. And by the end of Q3, early Q4, we should be at a run rate of about $2 million a quarter with that one particular customer. So $8 million to $10 million a year kind of revenue. And we think there are other robotics opportunities with that customer. And so I would say on the semiconductor side, most of our growth is going to be in other modules, away from our traditional gas delivery system. But we feel that we're in a very stable position with our customers right now.

We've had some -- with their consolidations over time with Applied and Varian and Lam and Novellus. There was certainly a lot of dialogue about what was going to happen and how they would combine the two companies - their relative companies and what the impact of that would be on suppliers. And I think we've finally gotten beyond those kinds of questions and reached a level of equilibrium there. And now we're going back and figuring out how we can grow our revenue with those customers. All of that said, this year, as a result of our combination between AIT and UCT, one of the things that we've done -- for the first time ever, we have had extra resources available to us on the sales and business development side. And so what we've done is we have created a standalone new business development team that is -- there's several individuals on that team that are completely focused on new business development opportunities, most of which are outside of semiconductor. So again, I've mentioned a couple of times the industrial consumer electronics space.

I think there's some good opportunities for us to do outsourcing of large modules. In some cases -- in the case of DWFritz, we're actually building a complete turnkey tool for them. And this other customer that we were doing business for last quarter, $2 million, we built their total tool for them. So we think there are going to be more opportunities for these companies that maybe are a little smaller scale, as we start to focus on those opportunities more than we ever have. We've never really focused on those opportunities in the past.

So I think it's a combination of some incremental semiconductor opportunities, primarily in new areas that we haven't historically penetrated. And then significant new opportunities in markets outside of semiconductor capital equipment, frequently with smaller customers and new opportunities with those smaller customers. We've also added a couple of smaller medical customers, and I would expect to continue adding smaller medical customers over time and growing with our medical customers as they grow.

Great. That's really helpful. Maybe on the non-semiconductor side, in terms of the near term environment, are you experiencing any seasonality with any particular marketplace that's causing, I guess, the decline or the projected decline that you're suggesting for 3Q? Or are any of these marketplaces experiencing some type of, I guess, maybe market declines? What are some of the moving pieces there, at least in the near term, with the non-semi side?

Yes, I don't know that we see -- again, a particular weakness in the non-semi versus the semi, and we have guided to a range of flat or slightly down. And I think that is pretty balanced on both sides of the fence. Again, traditionally the non-semi business, as I said, has been much more consistent and steady, and obviously the semi, you know that business very well, Patrick, it's less that. And so I don't know that there's a bigger contributor in Q3, semi versus non-semi, as far as that softness. Now again, the thing that we are hearing people talk more about, people like yourself included, is the ability to see a more significant market for the semi side of the business in 2014. And we all know that that's a little ways out. But I think some of the things being pointed out by you and others are legitimate reasons to be optimistic, though you can't see it today.

Great. And maybe a final question from my end in terms of the long-term gross margin profile. So you've given us some of the variables that will move gross margins both near term and longer term. Is product mix, or semis versus non-semi -- how big of an influence will that be, say, 6 to 12 months from now, when you get some of these new customers on-board? When you see the mix change, how big of an influence will that be?

I don't think it really will be an influence, Patrick. The outsourced manufacturing model, 15% to 18% is what they're willing to bear. We continually try to improve our process and improve the supply chain, et cetera. But on the other hand, customers continue to try to get better and better pricing as they move their products through their life cycle. And so those always tend to balance out. But there's -- if we got a much bigger business in industrial or medical or one of these other verticals, it really wouldn't change the margin profile in a significant way.

We really try to focus on our value-add, Patrick. Essentially our customers are willing to pay a little higher margin than a traditional AMS company because we provide a little higher level of service. We typically get involved in engineering design with our customers, and design for manufacturability, and we typically get involved in building test equipment and test capability for them. And obviously, in the markets we serve, there's a relatively low volume and a high degree of engineering change and flux. And so our customers are willing to pay a little bit more than a traditional AMS company for that kind of capability and flexibility. But beyond that, it becomes noncompetitive, and so we think the sweet spot in general for all the products and markets we're serving is in that 15% to 18% range.

Great, so I just want to make sure I'm clear on this. It's much more the value of the products versus any (inaudible) particular market segment, so that's why you're able to get the gross margins higher over time?

Yes. Some customers that want more engineering and more design are going to pay a little bit of a premium. Customers that have fewer -- utilize fewer of our capabilities get a little bit lower margin. But by and large, we're trying to provide a full service to all of our customers in relatively low volume, high complex, high change environments. And that's the margins we can achieve under those circumstances, and, yes, it's irrespective of industry.

Great.

(Operator Instructions)

Jay Deahna.

There seems to be a lot of chatter out there about expectations for the flat panel display business to be better next year. And also, there's chatter out there about utilization rates and LED rising with, finally, some pick-up on the general lighting side. Are there any increases in RFQs or chatter or forecasts from your customers in those areas that, as you roll into the latter part of this year, or first half of next year, that they're asking you to get ready to do a little more there?

I guess what I would say is what we've actually seen, and we've actually seen increases in the flat panel market, so our order rate is going up in the flat panel. We have not seen increases in LED for our side of the business.

Okay. And are the LED folks just waiting for consolidation to absorb excess capacity? Or are they actually saying, sometime next year we might get going again with a pick-up in new capacity expansion?

Yes, I'm not really in a position to discuss that right now, Jay. We haven't heard anything that would indicate to us that there's -- things are going to get a lot better. I just have to be very conservative about that.

Fair enough. I get it. Now, there's a little something on your street estimates that I don't quite get versus your customers. So for example, if you look at an aggregate of applied materials, Lam research, Intuitive -- ISRG and KLA. You combine all those, it's a pretty good percentage of your business, over 50%, I presume. And in the first quarter, your sequential growth rate in revenues was almost exactly in line with those four customers aggregated together. And what you just reported for the second quarter is very much in line with what those four companies have guided. So now, if you look out over the next three or four quarters, would it be reasonable to assume that you could grow in line with the aggregate of those customers, relative to what consensus is expecting them to do and what they actually do?

We haven't done that same analysis, Jay, but what you're saying certainly isn't inconsistent. They are significant. They are all significant customers to UCT, and we are performing well for all of those customers.

The only difference, really, in the businesses, we're pretty much a turns business, and they have a non-turns element to what they do. The other probably significant difference is, they do have a fairly significant service in spares and replacement parts business. I don't know, it probably is 20 -- probably a close to one-third of their business, or 30% give or take. Yes, and that's a part of the business that we also don't participate in. So that can buffer them in times of softness, and can change the connection on the bookings versus turns. So it's never a direct one-for-one, but it's not unreasonable to think that we shouldn't perform roughly in line with the major customers that we have today.

But (multiple speakers) if 2014 is a good year for our customers, we think we will do very well. Because not only are we stable in our relationships with our existing customers, but we're very confident about adding new customers into 2014.

Right. See, what I find intriguing is, is that you met the growth of your customers through the first half of this year with -- while you were dropping out a chunk of your largest semi customer. And going forward, if that's stable and you've got new business coming in, I don't see how you could possibly under-perform the aggregate of those customers, especially if FPD or LED comes in. So what my conundrum is, is that I see that the consensus on the street for those four customers for 4Q and 1Q this year and into the early part of next year is expectations for sequential growth, yet several of the analysts that cover your company have modeling 4Q this year and 1Q next year to be sequentially down, one or both quarters. Which doesn't make sense to me at all, given what the street is modeling for your customers in aggregate and what we just heard out of semicon west. So if it turns out that the forecasting for your customers to be up in 4Q and 1Q is correct, is there any logical explanation as to why you wouldn't be?

Not after you've made that comment, and you've got most of those folks on the line, so I'm sure they're going to be calling you up and talking to you about it. But we try to give people an impression of what we think the business is, not only short-term and long-term. And if there are reasons people feel more positively or negatively about the outlook of the story, I guess they have to factor that in. But again, I think you make some valid points as to the market and what we're looking into. And you can tell we're pretty excited about it. So we just have to put our head down and keep delivering like we have, and I think we've delivered pretty well here this year.

But in terms of actual guidance, we're trying to focus -- the other than the actual guidance is just feelings and sense of what we're hearing in the industry. The actual guidance for Q3 is the numbers that we projected, and we're -- that's where we've got our greatest confidence and our greatest knowledge.

That makes perfect sense.

The last question I have is that for your -- if you look at your guidance for 2Q, the upper end of revenue is $111 million. The upper end of earnings was $0.11. If you look at your guidance for 3Q, the upper end of revenue is $110 million with earnings at $0.12. Is that primarily getting a little more operating leverage out of the model, number one?

Obviously, we did $110 million this quarter and we made $0.12, so we think we're going to do at least that well next quarter, if we were to hit the high end of our guidance.

Okay. And if you look at the last two quarters, you did the lower half of your earnings guidance and the higher half of your revenue guidance. That's not historically characteristic of the Company. Is -- why is that? And would we expect that to change as you generate more efficiencies in a merger or something?

Again, I think I've talked over the last few quarters about the benefits of the AIT acquisition, which obviously we did that and the whole semi side of the business took a fairly sharp downturn. But we still feel that that was a strategic acquisition that, over the course of combining these companies and moving forward, is going to provide a lot of value to shareholders and our customers. And then I've talked quite a bit about the operational efficiency that my team, Gino's team, all the operating division heads have spent a lot of time working very hard. And I do think that some of that leverage that you're seeing is coming through, and it's not a mistake or a one quarter event. It is something that we think we can continue to push.

Obviously, the more you get the engine tuned, the harder it is to get as much meaningful movement. But just like on the operating expenses, I said we're not going to just stand around and wait for revenue to come back. We're not going to stop pushing on all these initiatives. And I can tell you Gino Addiego, our COO is, as well as myself and everybody in the organization, very focused on this and, I think, doing a terrific job. So that helps. It helps because, as you know, on the last downturn it was so hard down and so hard up, we weren't able to get some of that performance that we really wanted to get and we feel pretty positioned right now to do it.

Great. Thank you.

Edwin Mok.

Sounds like Jay wanted to come back to the sell side.

But anyway, question I have on cash. You mentioned that you're going to pay off some debt. Can you tell me how much you plan to pay off?

It's going to depend on how the -- our cash flow works through the quarter. Obviously, we have cash in the US and also cash offshore. What we have been doing the last couple quarters is trying to take advantage of the cash throughout the quarter, but then generally, bringing back the debt on at the end to keep a balance of net cash that people are used to seeing. I think we're now at a cash level where, at the end of the quarter, we're not going to go back to borrowing the money down and then paying it back early in the next quarter. We're going to try to streamline that. So right now we have a revolver that started at -- I'm sorry, a term loan that started about $40 million, and it's probably down in the $30 million range right now. And then we've got a revolver that's at $40 million and, depending on the time in the quarter, we borrow some of that down and then pay it back. But it wouldn't surprise me to see if we wanted to use $10 million of cash, or $15 million of cash to bring that down in line.

What I didn't want people to do is look at our cash balance at the end of the quarter and feel, oh gosh, that's lower. I think you'll see our net cash, as I say, be flat or maybe improve a little bit. So we're going to -- we have generated cash as we've gone up from $90 million to $100 million to $110 million, and that's -- usually you're using cash in inventory and all that. That's a tribute to the operation team as well as the finance team.

We don't -- we're not done. Again, we're not stopping on any of this. We're going to keep pushing. And I know the goal is to continue to bring our inventory down, generate cash, and push so that we can push the debt down even more. And have money for opportunities that come up when sometimes you expect them, sometimes you don't. So we still are very anxious to continue to look at opportunities and build the business.

Great. Very helpful there.

So I just have one more question related to inventory. Did you have any previously written down inventory that you used that last quarter that helped the gross margin?

There -- always within a quarter, you've got some inventory that you'll use that you didn't know about, but there was no one-time event that was extraordinary to that level. But there's always -- we're constantly trying to look at the inventory and see if we can reuse it, either through designs or something else, but there wasn't anything I should be pointing out to you there.

This was not an inventory bluebird, Edwin. This was a performance-related.

That's exactly what I'm trying to get to. Okay. Great.

(Operator Instructions)

Jagadish Iyer.

I just had a one quick follow-up. This is referring to what Jay had asked. How should we be thinking about non-semi business in 2014? Can you give us the puts and takes in terms of what can be a big driver there, or how should we be thinking about it? Because if you look at '12 to '13, it has ticked down a little bit. So I just wanted to get a sense of what would be some upside there? Or what should -- how should we be looking at the non-semi portion for next year?

Sure. Obviously, outside of semiconductor, the LED space really drying up, and our relationship with FEI changing was -- what you're pointing at was a decline in non-semi. How you should look at it going forward is that we are very focused, and have had -- are having lots of conversations outside of semi to build that business back and then build it beyond that. The reality is, all these things start with a project. The project hopefully, as Clarence mentioned with DWFritz as an example, blooms into another project and a broader relationship. And it takes time to build these, but you've got to plant the seeds to able to get enough of them to sprout up and be able to really grow that side of the business.

And I think what Clarence was trying to communicate earlier is that he feels we've got a lot of those seeds planted and we probably have as much or more focus than we have ever had in the history of the Company at going off and working the business outside of semi. And that's very exciting to us, because it gives us a much better balance in the model and opens up a whole series of new markets. So I would say that what happened historically to bring those revenues down are something that we just have to live with and move forward with. But in front of us, in the future, we see our ability to penetrate these markets with the skill sets that Clarence talked about. I think our ability to do that's going to be very good.

Is it fair to say that '13 could potentially be the trough in the non-semi business, potentially? If you look at all of what you're seeing in terms of the activity that you think that could come to fruition in terms of the next 12 months?

Yes, I don't think that's unfair to say. But again, we're not guiding out into 2014 and what we're going to do there. But hopefully you're detecting a certain amount of optimism in Clarence's voice. He's driving a lot of that with Gino and others, and I certainly feel good about it, so --

Fair enough.

Dick Ryan.

Yes, Casey, one last number for me. Do you have cash flow from operations?

I think the cash flow from operations was -- I think it was -- I obviously don't have it super-handy. I want to say that it roughly was $10 million. Yes, I want to say it was $9 million to $10 million. I don't have -- I can give you a better number later, but I -- obviously, it will get published. But I think it was roughly $9 million to $10 million.

Okay. Great. Thank you.

Jay Deahna.

Hi again, and Edwin might be right.

But anyway, two quick ones. The first one is, the semiconductor business that was re-insourced, a little bit of a drag in your revenues in the first half of the year. Is that largely stabilized at this point?

We have made good progress on that, but we said it would be stabilized by the fourth quarter. So it's not yet stabilized, but we're getting there.

Okay. And then lastly, in your development pipeline, you talked about the new group there, is there anything in the pipeline that could be on the magnitude of an FEI, of somebody who's actually in-sourced, looking to do some big outsourcing or something along that line?

There are -- there is at least one that has that potential, but something of that magnitude would probably take several years. You would certainly start off with something smaller, maybe $10 million a year before you got to $30 million a year. But there are companies that could be of that size, ultimately.

Right. Thank you.

And there are no further questions at this time.

Certainly appreciate everybody's interest in dialing into the call today. Look forward to continue to help progress UCT going forward, and if there are any other questions, certainly people can call, and look forward to seeing you at the next conference.

Thank you for participating in today's conference call. You may now disconnect.