Ultra Clean Holdings Inc (UCTT) 2014 Q4 法說會逐字稿

Afternoon, my name is Dustin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ultra Clean Technology fourth-quarter and FY2014 financial results conference call.

(Operator Instructions)

Joining us today is Ms. Sheri Brumm, our Vice President of Finance, Mr. Casey Eichler, Chief Financial Officer, and Mr. Jim Scholhamer, our Chief Executive Officer.

I would now like to turn the call over to Ms. Brumm. Ma'am, you may begin.

Thank you, operator.

Welcome to our fourth-quarter and FY2014 financial results conference call. Presenting today are Jim Scholhamer, UCT's Chief Executive Officer, and Casey Eichler, UCT's Chief Financial Officer. Casey will begin by presenting the financial results for our fourth-quarter and FY14, and Jim will follow with some remarks about the Business.

A few moments ago, we issued a press release reporting financial results for the fourth quarter and FY14 ended December 26, 2014. The press release can be accessed from the investor relations section of the UCT's website along with the information for the tape delay and replay of the live webcast at UCT.com. Together with our recently issued press release, this conference call enables the Company to comply with the SEC regulations for fair disclosure. Therefore, investors should accept the contents of this call as the Company's official guidance for the first quarter of FY15.

Investors should note that only the CEO and CFO are authorized to provide Company guidance. If it at any time after this call we communicate any material changes in guidance, it is our intent that such updates will be done officially via public forum, such as a press release or a publicly announced conference call. The matters that we discuss today include forward-looking statements as defined in the 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 to present the fourth quarter and FY14 results.

Thank you, Sheri.

Revenue for the fourth quarter was $120 million, an increase of approximately 2.5% from the prior quarter and a decrease of 5% when compared to the same period a year ago. FY2014, revenue was $514 million, a record high for UCT, compared to $444 million in FY13, an increase of 15.8% year-over-year. We were very pleased with our year-over-year revenue growth.

Semiconductor revenue for the fourth quarter was $102.2 million, an increase of 5.7% from the prior quarter, and non-semiconductor revenue was $17.8 million, a decrease of 12.3% when compared to the third quarter. Semiconductor revenue was 85.1% of total revenue for the quarter, for the fourth quarter, and 82.4% for FY2014. Revenue outside of the US was 30% in the fourth quarter, compared to 31% in the prior quarter, and 30% for FY14.

Two customers had revenue over 10% for the fourth quarter. Gas delivery systems represented 76.2% of our revenue for the fourth quarter. Gross margin for the fourth quarter increased to 15.3%, compared to 8.8% in the third quarter. For FY14, gross margin was 14.2%, compared to 15.2% in FY13.

As mentioned in our earnings call last quarter, one of our newer customers, GT Advanced Technologies filed for bankruptcy. As a result, approximately $9.3 million was written off in the third quarter. Since then, our supply chain organization has worked very hard with our suppliers to cancel inventory commitments associated with GTAT.

During the fourth quarter, we were able to recover approximately $1 million of the previously written off inventory commitments. On a pro forma basis, without the GTAT bankruptcy, our gross margin would have been 15.4% for FY14.

We continue to believe that 15% to 18% gross margin is an appropriate margin target for our business. Operating expenses were $12.2 million or 10.2%, excluding amortization of intangibles, as compared to $13 million or 11.1% in Q3.

The decline quarter over quarter was mainly due to the non-recurring charge associated with GTAT in the third quarter. Our operating expenses as a percentage of revenue will be up slightly in the first quarter of 2015, as compared to the fourth quarter of 2014, due to an increase in outside services, cost, and payroll taxes. We continue to work on driving our operating expenses below 9%.

Operating income was $4.9 million or 4.1% before interest expense and income taxes in the fourth quarter, compared to a loss of $4 million or 3.4% in the third quarter. For FY2014, operating income was $18.2 million or 3.5% before interest expense and income taxes, as compared to $15.9 million or 3.6% in FY2013.

Excluding amortization of intangibles, our operating income was $6.1 million, or 5.1% in the fourth quarter, and $23.1 million, or 4.5% for FY14. Interest expense for the quarter was $471,000, a decrease of approximately $126,000 quarter over quarter.

The effective tax rate for the fourth quarter was 23.1%, or an expense of $1.1 million. The overall tax rate for the fiscal year was effected by the $1.7 million valuation allowance on state deferred tax assets, which was expensed during Q3.

The 2014 tax rate includes an incremental 11.3% related to this valuation allowance. As a result, our tax rate for FY14 was 30.5%, and was 19.2% without the valuation allowance expense taken into consideration. The tax rate for first quarter of FY15 should be modeled at 28%, due to the increased US-based income associated with the Marchi acquisition.

Fourth-quarter net income was $3.5 million, or $0.12 per share, excluding amortization expense related to acquisitions. Fourth-quarter income was $4.5 million, or $0.15 per share, compared to a loss of $0.14 per share in the third quarter. FY2014 net income was $11.4 million, or $0.38 per share, compared to the net income of $10.4 million, or $0.36 in FY2013.

Excluding amortization expense related to acquisitions, FY14 net income was $15.3 million, or $0.51 per share, as compared to 2013 net income up $15.5 million, or $0.53 per share. The diluted share count was $29.9 million, flat with the prior quarter. Non-cash charges for the fourth quarter were $1.2 million related to FAS 123R, $793,000 related to depreciation, and $1.2 million related to amortization of intangibles.

Turning to the balance sheet, cash was $79 million, an increase of $3.9 million from the prior quarter. This cash balance is another record high for UCT. Net cash increased $3.2 million during the period to $30.8 million.

As mentioned in our press release on February 5, announcing the acquisition of Marchi Thermal Systems, we have also restructured our debt to improve the terms and finance the acquisition. As a result, our long-term and short-term debt position will change in the first quarter of 2015.

Accounts receivable was $61.8 million, up $4.4 million from Q3, and days sales outstanding increased to 46 days from 44 days at the end of the third quarter. Accounts payable of $48.9 million increased approximately $6.5 million quarter over quarter. Days payable outstanding at the end of the fourth quarter increased to 43 days from 36 days at the end of the third quarter.

Net inventory was $56.9 million, an increase of $1.5 million over the prior quarter. The increase in inventory is a result of our first-quarter 2015 forecast and the need for inventory ahead of the starting quarter. Inventory levels are projected to stay flat or slightly lower during the first quarter of 2015.

Shifting to our guidance for the first quarter of 2015, UCT is seeing a continued strength in our semiconductor sector of our Business. As a result, we anticipate (inaudible -- technical difficulties) increase in the first quarter.

Our revenue guidance for the first quarter is $123 million to $128 million. Our Q1 earnings guidance is for earnings per share to be in the range of $0.11 to $0.14, excluding amortization charges and other one-time charges. This forecast takes into account the charges that will be taken in association with the CEO transition of approximately $1.5 million, the cost associated with the Marchi acquisition of the $300,000 to $500,000, and the reversal of amortized bank charges of approximately $700,000 associated with our previous credit facility.

In addition, we are in the process of determining the purchase price accounting for the Marchi acquisition, therefore a new amortization of intangibles will be determined prior to the end of the first quarter. We will detail the new amortization and one-time costs associated with the Marchi acquisition in our next earnings call. As I mentioned earlier, the tax rate for the first quarter is expected to be approximately 28%.

In summary, I'm exceptionally proud of our entire team for delivering continued improvement in operational and financial performance during 2014. I'm pleased to introduce Jim Scholhamer. While he's only been here a few weeks he has already added value to the organization. I very much look forward to working with Jim as our new CEO.

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

Thank you, Casey.

I want to start out by saying that I'm extremely excited to be part of the UCT team. I have been on board now for several weeks, and I have been really impressed by the many talented and dedicated employees I have met. I look forward to leading UCT into its next phase of growth as we improve the performance of the Company.

I am dedicated to working with our customers and continuing to build a world-class organization that serves our customers as a leading systems integrator and complete outsourced solution. I want to thank Clarence Granger for all of his years of service here at UCT, and I look forward to working with Clarence as Chairman of the Board.

Now, I would like to discuss some highlights for the fourth quarter. During the fourth quarter of 2014, we continued to see strong revenues from our semiconductor sector of our business, with an increase in semiconductor revenue of approximately 6% quarter over quarter. Our total revenue of $120 million for the fourth quarter was at the high end of our guidance range.

On our previous earnings call, we had guided our fourth-quarter adjusted earnings per share, excluding amortization charges of $0.11 to $0.14, and revenue of $115 million to $120 million. We were able to achieve revenue and earnings per share at or above our guidance range for the quarter. In addition, we achieved record revenue of $514 million for FY14. This is a major accomplishment for UCT.

Finally, our cash level of $79 million was at a new record high for the second sequential quarter. We are very pleased with the overall health of the business and our position in the Semi Cap Equipment market. In Q4, the percentage of revenue coming from our Asian operations was 30%, as compared to 31% in Q3. This percentage fluctuates quarter to quarter based upon the mix of products going through our factories. While we continue to move products and revenue to Asia, the portion of our Asia revenue will drop in the short term, due to the Marchi acquisition.

At the end of last week, UCT came to an agreement with our customer, Intuitive Surgical, to transition to in-source manufacturing for their next generation robot, the da Vinci Xi Patient-Side Cart. UCT will continue to manufacture previous generation robots and also assist with the machine components and spare parts for current and future Intuitive production.

This was a mutual decision between our customer and UCT, based upon Intuitive Surgical's current manufacturing needs and UCT's desire to meet our model gross margin profile. The impact of this change is approximately $5 million to $6 million in revenue per quarter. While it's disappointing we couldn't meet the needs of both companies, UCT will continue to be a strong partner with Intuitive Surgical and look forward to doing business with them in the future.

I'd now like to talk about some new investments that we are making in 2015, and which will add to UCT's product portfolio and growth opportunities over the next several years. Most recently, on February 5, 2015, we announced the acquisition of Marchi Thermal Systems. Marchi is a manufacturer of custom designed heaters using chemical delivery systems. They design and manufacture application-specific thermal solutions to solve semiconductor equipment customers' temperature management challenges.

This acquisition further expand UCT's capability in the gas delivery systems for semiconductor and display products and opens up other opportunities across UCT's broad range of product offerings. As mentioned in our press release, we expect the addition of Marchi to be accretive to earnings immediately. The integration of this business will occur over the course of the next couple of quarters. We welcome Marchi's employees to the UCT team.

Another key investment for UCT during the fourth quarter was the acquisition of Prototype Asia LLC, combined with our investment in 3D printing operations in Southeast Asia. While this was not a large acquisition for UCT, it will allow us to lay a foundation in which to launch an additive manufacturing center located in Singapore.

Our new state-of-the-art technology will result in capabilities that complement our current products and services, as well as add cutting edge technology applications for our existing and new customers. Our goal is to continue to expand and capture new opportunities in manufacturing and integration, presented by the investment in this technology. We plan to have a grand opening of our additive manufacturing center during the second quarter of 2015.

In addition, UCT opened up a new prototype center in Fremont, California in November of 2014. This center will allow UCT to offer quick turn parts and modules required by our Semi Cap customers' stringent new product development needs. We will be able to assist our customers' success with their new products, while ensuring UCT has improved prospects as a potential supplier when such products transition to volume production.

Our prototype center expands our vertical integration capabilities for existing customer requirements. We expect the benefits of this investment to begin to be realized as our customers' new products gain traction in the marketplace.

Finally, we're expanding our Singapore facility to support our customers as they continue to focus on Southeast Asia. This expansion in increasing capacity directly supports the dramatic growth in our customer requirements within Southeast Asia and supports our customers' production needs as we continue to grow and strengthen in our semiconductor business.

In summary, I think 2015 will be another great year for the Company. The investments that we are making this year will allow us to accelerate our growth in the future. During the fourth quarter and FY14, we had several major achievements and we remain confident in UCT's future and long-term growth.

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

(Operator Instructions)

Dick Ryan, Dougherty & Company.

This is Ash for Dick. I wanted to talk to you about Intuitive Surgical first. Did you say it was $5 million to $6 million a quarter hit in revenue?

In revenue, correct.

What was the margin profile like?

We can't really discuss the margin profile specific to different customers, obviously we have a model of 15% to 18%, so that is something that we have talked about quite a bit, and as we have gone through the process of looking at different products, customers, and business, we've tried to continue to improve our margins. We talked about it over the last year, and get within over the last couple of years that 15% to 18%. And so, obviously, you can deduce that it was less than that 15% to 18%.

Casey, non-semi revenues were down $2.5 million, $3 million in the fourth quarter. Did that in-sourcing happen in the fourth quarter or is it starting in the first quarter?

The main thing there was GTAT. It didn't happen in the fourth quarter, so that is really first-quarter news that we're sharing today. Obviously, the GTAT was the big piece coming out of last year.

One question on the gross margin, the fourth quarter, 15.3%, does that include the $1 million benefit from GTAT in the fourth quarter?

Yes.

The non-GAAP kind of gross margin is that 14.5% then?

I believe that the non-GAAP-- well, again, it depends on all the things that you want to include in GAAP versus non-GAAP. As you can tell it's a fairly active quarter. I would say that that's probably a rough approximation.

I have one more-- the $123 million to $128 million sounds like a really strong guidance given what has happened with Intuitive Surgical. Is that mostly semi-driven? And how much is Marchi in that?

Marchi's going to-- we're not going to break out our segment report on Marchi, but Marchi is going to be, obviously, two months included in our quarter this quarter. As you can see from the revenue that we talked about when we did the announcement, it's not a huge revenue number on a quarter by quarter basis, but we think it is a huge opportunity for the Company.

I think that when you look at our guidance for the quarter, I think we are feeling good about the semi side of our Business, but to your point, semi is really going to dominate this year. That is why we have talked over the last quarter about the emphasis, obviously, with GTAT and now with Intuitive Surgical. Our emphasis in 2015 is going to be some of these new initiatives that Jim talked about, as well as deeper penetration, more broadly across our current existing customers.

That is really what the story's going to be all about this year. We continue to do new business, we continue to plant seeds outside the semi business and we feel good about that, but as you know, Ash, this isn't something that turns on in a quarter or two. It takes time.

One last one, when you had a press release in the Marchi acquisition, you said $18 million was the annual run rate. How much of that was actually going to UCT? UCT was a customer of Marchi, right?

Of Marchi, yes. It's pronounced Marchi. They were probably $2.5 million a quarter, something like that. You are right, they were a supplier to us as well, so they were supplying $2 million, $2.5 million per quarter probably.

Edwin Mok, Needham & Company.

This is Kim Donovan on for Edwin Mok. You said that 30% of revenue came from the operations in Asia, can you give us an impact-- an idea of what the impact may be of Asia manufacturing going forward, whether it's margins, mix, anything like that?

We've had a presence in Asia for a long time, and it's been primarily focused around China, though in the last few years we've added Singapore and Cebu, as well. We're continuing to see a move more focused towards Southeast Asia, and so I think you'll see us grow in the Southeast Asia area and Singapore in particular.

We're still committed to all of Asia, but I think a lot of our customers are tending to get focus more around Southeast Asia and Singapore than in China. We've set a target of about 50/50 between the revenue in Asia and revenue in the US, and we have been at around 30% to one third over this last year, and we think that will continue to grow over the next year, although we're not going to get to the 50% by the end of the year.

I would like to add, obviously we're heavily dependent on what our customers move as well. So we have many locations which are strategically located to be near where the customers need the product. Those things that constantly change from quarter to quarter, they ebb and flow. We will be moving along with our customers.

Patrick Ho, Stifel Nicolaus.

Casey, in terms of your inventory management, it was done really well this past quarter. Looking forward and you can correct me if I'm wrong, I think you said it is going to be flat quarter over quarter in March. Given the strong pick-up on the semi side of things, how are you managing that side of it, particularly given the volatility and a lot of the pulls and pushes that come along with that business?

As you know, we have had a fairly broad inventory initiative going on over the last year or 18 months, and I think that has given us a lot more efficiency.

I also have to give credit to our procurement supply chain team. Mark Bingham and his whole organization globally has done a great job of shortening up our lead time to help manage that inventory and get us a little better operating and financial efficiency there. At this point, we feel we have a pretty good grasp of how we can move the levers and keep it flat, even on an up quarter, so we are optimistic that we have the right material and the right timing on that material and so it is just a matter of execution and we're pretty confident we're going to be able to do that.

My follow up question, in terms of some of your semi opportunities, I think in the past you have mentioned about your forays into areas like lithography, into other process segments. If you could give an update in terms of how those penetrations are going, in terms of how much they can contribute on top of your traditional large customers?

I think that, as I have referenced in the past, the kind of kissing cousin of semi. You've got some of these markets like the consumer markets and even the energy markets like solar and some of these, it is a lot of the same players, and to a large degree, it's a lot of the same type of complex manufacturing. I think we continue to do well, but as you know, based on the GTAT situation and some other things, some of those businesses have a more lumpy cycle.

Consumer tends to be where it will come on for a couple of quarters and it might shut off for a couple of quarters if they burst for capacity. Versus more of the cyclical nature of the semi-cap equipment. I think we're doing a lot of the right things globally to get those kind of businesses and customers, but we have had to replant a lot of seeds here over the last quarter, and it's going to take a little while to develop that more fully.

Patrick, also if I could add, within semiconductor we really have a broad effort at not only gaining more share in the products and the platforms that were already present, but also expand our simpler products and components into adjacent platforms and to penetrate into platforms that we currently don't have business on, as well. It's really a multiple level approach at the different segments of the SAM and the TAM.

Krishna Shankar, ROTH Capital.

What was the mix between semi and non-semi as a percent of revenue this last quarter?

For the quarter, it was 85% or 85.1% semi. I said, for the year, it was about 82.4% for FY2014.

Looks like you are projecting a relatively good quarter in Q1 for the semi business, can you talk about your visibility on the rest of calendar year 2015 for the semi business? And any other set of potential new customers or additional levels of integration you're pursuing in the semi business?

I will give a couple of comments and then I'll have Jim add some color because of his depth of knowledge in this thing. For us, starting off as a gas delivery company and developing this Company over the last 10 years or so, we have tried to get not only broader extension outside of semi, but much deeper extension into the semiconductor customers.

A lot of the initiatives, not only like the ones that Jim talked about, the additive manufacturing and the prototyping, that adds ability for us to get much deeper and broader in our customers, but we also have been partnering with our customers in different ways to be able to meet their needs more quickly and get involved more early at an engineering level. Marchi is a good example of that, where we can really add value up front.

Visibility, I will make my standard comment, that we feel pretty good about what we're seeing, obviously, for Q1, have a pretty good indication out a quarter from that, and then from there, it really can change pretty quickly. Most people are saying that it is going to be up single digits this year, and I think that is a reasonable way to think about it. But quarter by quarter, you have to take it as it comes, but I think it feels like another decent year for semi if I listen to our customers and their comments they have been making.

Jim, I don't know if you'd like to add something to that?

I would definitely emphasize that the semi-cap equipment market is strong this year, and it looks to be strong for quite some time to come. Typically, we're going to follow roughly in that trend.

However, because the mix of the products and the platforms that we are on, there's going to be some significant variation from one quarter to the next, which is not related to the overall market or any major changes in share. It will tend to be product mix driven, whether one quarter is up or down versus the other. Really can't look at it so much quarter by quarter, more half year by half year is a little bit more accurate.

The revenues from your new deal with Intuitive Surgical, I guess, the $5 million or so per quarter revenues lost there, that'll basically be offset by the addition of Marchi, is that the way to think about it?

I think there a lot of ins and outs. Marchi is clearly an in, and then picking up some new business and some uptick in our customers' business in the semiconductor side, those obviously help cover the hole that Intuitive Surgical leaves.

(Operator Instructions)

Christian Schwab, Craig-Hallum Partners.

Casey, in the $5 million to $6 million, is that already out of the March quarter, or is there some of that $5 million to $6 million in it? How quickly does the $5 million to $6 million go away? That wasn't clear to me.

We said it was going to start in this quarter. I don't know if you will see the whole reduction in this quarter, but certainly by Q2 you'll see that. That is an approximation. Obviously their business goes up and down as well, so I'm trying to approximate the raw impact of that business. So like all businesses, that fluctuates and isn't a static number.

A lot of it depends on the use of the older generation products and the spares, the machining, and things that go along with that. I think it's a general indication of the gap that the decision leaves us.

I would add that we are still-- the business does not go to zero, we will still be making the older generation and spares and some machine components that they will need for their new generation, as well. As the older generation revenue slowly declines, you will see that slowly decline, but not to zero.

How big of a customer were they in 2014, roughly?

They were a smaller customer than they had been historically, and a lot of that is due to the semi business. Their size kind of cycled with semi a little bit. But they were certainly less than a 10% customer for the year.

They have kind of hovered between 5% and 10%, depending on the year.

It is a disproportionate share of the revenue we expect from Intuitive Surgical if I go with your 5% number, right Casey?

Yes. It certainly is two thirds of the revenue-related. Now again, this is an estimate because you are looking at-- again, I knew the question would be asked, I tried to size it in a way that I thought was responsible, but it depends on what happens moving forward.

As I said in my comments, they have been a good customer, I think we have been a good partner for them, but they have had a lot of changes in their business model and scrutiny in a different way. When they looked at how to deal with that and when we looked at what we needed to do in our model, it just didn't line up. So I think both companies treated that in a responsible way and we are appreciative of a continued relationship. I think there are other opportunities in the future, to be perfectly honest. But we are going with it one piece at a time.

If we look at the unfortunate GTAT experience and now Intuitive Surgical, as we go into 2015 and 2014, even with mid single digit year-over-year growth participation in 2015 versus 2014, can absolute revenues on a year-over-year basis be up?

That really depends on semi performance, I think as Jim indicated, and I talked about, as well. I think it can be up. We're not going to be like we were last year where we did, as we said, in the semi business, I think we were 15%, 16% up. The whole business grew probably half of that, so our revenues were up substantially.

Part of that was GTAT, some of that got backed out, but part of that was over performing the semi market. To your point, we have got some revenue gaps this year compared to last year, but I think we have traditionally outgrown the industry in semi and I think there was a few things that we are working on that can help accelerate that for us. But we have to see if those work out and go from there. It's not unreasonable to think that we would be flat or slightly up.

Lastly, as we look to the tax rate, it was a little bit higher than we had modeled. Should we be assuming a 28% tax rate for the entire year? I know you only said for Q1, but how should we be thinking about the rest of the year?

Just to clarify, looking backwards, last year we guided to about 20% tax rate. On a full year basis, we ended up just a little under that, actually. The way the taxes works, as you know, every quarter you true up for the full year, and Q4 then has the broadest true up, that is why we're little higher. We were about 23% in Q4, and that was just for the full year true up. Separating out the valuation allowance, obviously, for the California deferred tax asset that we took in Q3, and have already talked about.

Looking forward, obviously when you look at your blended tax rate, each part of your business has a different effective tax rate, and the US tends to be a higher rate. Marchi is a fantastic acquisition and has many wonderful qualities, but one of the qualities that drives the rate up a little bit is it is all US-based today. In the first quarter as we blend that in, I think that is going to impact our rate.

I'd go ahead and use 28% right now for the year. I think we might be able to work that down a little bit by the end of the year, so effectively we will start working back down into the low 20% to 25%. But really right now with all the moving pieces, I thought that was a responsible way to look at it and then we'll give a little better guidance as the dust settles next quarter.

There seem to be no further questions at this time.

It's been a very active year and an active quarter in Q4 and Q1 for UCT. I appreciate everybody's continued support. We look forward to continuing to explain the business, grow the business, and I think 2015 will also be an active year. I think it is going to be a very exciting year, so I thank you for everything.

Absolutely.

Thanks again.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may all disconnect.