Amtech Systems, Inc.

Good day, and welcome to the Amtech Systems second quarter 2021 earnings conference call. Please note that this event is being recorded. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us for Amtech Systems fiscal second quarter 2001 conference call. With me on the call today are Michael Wang, Chief Executive Officer, and Lisa Gibbs. Chief Financial Officer. Also joining us is Paul Lancaster, Amtek's Vice President of Sales and Customer Service. After close of market today, Amtek released its financial results for the fiscal second quarter of 2021. The earnings release is posted on the company's website at www.amteksystems.com in the Investors section. During today's call, management will make forward-looking statements. All such forward-looking statements are based on information available as of this date and the company assumes no obligation to update any such forward-looking statements. These statements are not a guarantee of future performance and actual results may differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are changes in the technologies used by customers and competitors, change in volatility and the demand for products, the effect of changing worldwide political and economic conditions, including trade sanctions, the effect of overall market conditions, including the equity and credit markets, and market acceptance risks, capital allocations plans, and the worldwide COVID-19 pandemic. Other risk factors are detailed in the company's SEC filings, including its Form 10-K and Forms 10-Q. I will now turn the call over to Michael Wang, Chief Executive Officer.

Thank you, Erica. AMTEC continued to deliver strong momentum in the second quarter with revenues of $19.8 million coming in at the high end of our expectations. Activity within the semi-market continues at a strong pace with record bookings and with continued upside opportunities across our served markets. For our advanced packaging products, market forecasts continue to point to a strong outlook in 2021, and we have seen this translate to continued order activity. At this point, we are approaching near 100% capacity utilization at our Shanghai facility, given the increased business demand and have taken steps to both increase interim capacity as well as move to a larger facility later this summer. Within the power semi-market, our customers have moved forward with their capacity expansion plans that were previously placed on hold due to the pandemic. In the second quarter, we received orders for six 300-millimeter diffusion furnaces from one customer that pulled in their capacity expansion project due in part to the strong global demand of power chips particularly for automotive applications. These tools are scheduled to ship the second half of Candler 2021. In addition, the dialogue with our other customers remain very robust as they evaluate their multi-year expansion plans. Overall, we continue to be pleased with the performance of our semi-segment. Following a year of strong growth in advanced packaging applications in 2020, we are seeing demand continue into 2021 as industry shortages continue to accelerate capital expansion plans. Illustrating this strength in the second quarter, our book-to-bill ratio for the semi-segment grew to over 1.7 to 1. Since growth rates for our products tend to correlate with the overall Semi-CapEx spending, we believe the strength in demand we are experiencing will continue in line with the broader industry. Moving on to our silicon carbide and LED segment, In the second quarter, we completed the acquisition of IDI, a small technology token to bolster our offering in the substrate consumable space and incorporate wafer processing coolants and chemicals to our existing consumable machine product lines. While early from a product development standpoint, we believe that over the mid to long term, there is great opportunity to expand our SAM and generate meaningful synergies for both the integration of product roadmaps and cross-selling with existing customers. By leveraging Amtek's and IDI's strong customer relationships and products, we believe we can introduce differentiated consumable solutions into the silicon, optics, and ceramics market and increase both our share of wallet as well as the value we deliver to customers. We expect IDI to contribute approximately $400,000 to $500,000 of revenue per quarter as it continues to sell to existing products. As I develop additional products and take advantage of synergies on joint product roadmaps, that number will grow, which we anticipate will be early in our fiscal year 2022. As part of this expansion of our product offering, we have realigned our silicon carbide and LED segment, now called material and substrate, to better reflect the opportunities we are targeting moving forward. As part of this change, we have recently promoted George Mazur to lead the new material and substrate segment. George began his career at Gear Systems focused on wafering and silicon materials. And after a long and tender career, transitioned to sales leadership roles in several high technology companies, including those focused on processing tools for silicon carbide applications. It's George's combination of deep technical experience within the wafer processing industry, as well as his proven track record of building and leading highly effective organizations that we believe make him a great fit to drive growth in this segment going forward. Related to near-term customer demand dynamics within the material and substrate segment, discussions with customers remain active. Customer orders for equipment have begun to roll into backlog with an expectation of shipments in the next six months. It is important to note that these orders are not directly related to soap and carbide but rather are a resumption of demand from other industries such as silicon, optics, and ceramics. During the pandemic, these customers were greatly impacted as new machine purchases decreased significantly for all of 2020. We are encouraged to see this portion of our business return as it signals a broad-based recovery is underway across many of our served markets. It helps absorb the incremental fixed costs in our PR Hoffman facility as we weight the ramp of silicon carbide. As it relates to the larger multi-year capacity expansion plans of silicon carbide wafer producers, we continue to maintain a healthy dialogue with our customers and await the finalization of their plans to increase wafer output. As a reminder, the lead times for our products are often shorter than those of device manufacturing equipment, and as such, we would expect to see an uptick in demand once new production volume wafering capacity is brought online to service the needs of new device manufacturing facilities. Given our market-leading position in consumables, roadmap for new machine platforms, and recently completed capacity expansion investments for our silicon carbide manufacturing operations, we remain as excited as ever about the mid- to long-term opportunities in front of us. We believe in our leadership in the market segments with exposure to several secular tailwinds creates significant opportunity to drive increased profitability and shareholder value as demand accelerates and we realize the operating leverage built into our current business model. Before turning the call over to Lisa to discuss our second quarter financial results, I would like to take a moment to address the recent cybersecurity event we experienced. As we previously announced on forums AK on April 12th, we detected a data incident in which attackers acquired data and disabled some of the technology systems used by one of our subsidiaries. Upon learning of the incident, we engaged external counsel retained a team of third-party forensics, incidents response, and security professionals to investigate and determine the full scope of this incident. We also alerted law enforcement. Previously disabled technology systems are back up and running, and our network is safe and secure. Despite this disruption, production continued in our facilities. I would like to take this moment to thank our employees and our team of professionals who worked tirelessly during the recovery operations and continue to serve our customers in a safe and secure way. With that, I'll now throw the call to Lisa.

Thank you, Michael. Net revenues increased 10% sequentially and increased 37% from the second quarter of fiscal 2020, with the sequential increase primarily attributed to strong shipments of SMT equipment. The same prior year period was affected by the COVID-19 pandemic. Gross margin decreased in the second quarter of fiscal 2021 on a sequential basis, primarily due to product mix, with increased multi-unit sales at lower margins and increased mix of lower margin SMT sales. Gross margin increased in the second quarter of fiscal 2021 compared to the same per year period due to increased capacity utilization. Selling, general, and administrative, or SG&A expenses, increased $0.5 million sequentially and $0.3 million compared to the same prior year period due primarily to increased freight, M&A consulting, and legal fees. Research and development increased $0.6 million sequentially and $1 million compared to the same prior year period as some of our engineers completed specific customer design work and shifted to strategic R&D projects. Operating income in the second quarter of fiscal 2021 was $0.2 million compared to operating income of $1.1 million in the first quarter of fiscal 2021 and operating loss of $1 million in the same prior year period. Income tax provision was $.5 million for the three months ended March 31st, 2021, compared to a provision of $.1 million in the preceding quarter, which included a tax benefit of $.3 million related to the reversal of previously recorded uncertain tax positions. and 0.2 million dollars in the same per year period. Our effective tax rate continues to be higher than the statutory rate due to higher income in foreign jurisdictions. Lost from continuing operations net of tax for the second quarter of fiscal 2021 was 0.2 million dollars or two cents per share. This compares to lost from continuing operations of 0.5 million dollars or four cents per share for the second quarter of fiscal 2020 an income of $.7 million or 5 cents per share in the preceding quarter. As I just walked through, fiscal Q2 results were affected by many different variables, ranging from a less favorable product mix compared to fiscal Q1 2021, increased SG&A due to a number of factors, some of which we will continue to deal with, such as freight and logistics costs. Others, like the M&A costs, were unique to this quarter. As we stated previously, we are focused on profitable revenue growth and our cost structure, and we are also making investments in new product development and next generation platforms of our existing products. We believe these investments are important and necessary for longer term sustained growth. With new orders of $32.5 million and a consolidated book to bill of 1.6 to 1 this quarter, we see tremendous opportunities in our future. Turning to cash, unrestricted cash and cash equivalents at our continued operations at March 31st, 2021 were $40.4 million compared to $45.6 million at December 31st, 2020. This decrease is primarily due to the acquisition of IDI during the quarter. Approximately 86% of our cash balance is held in the United States. Now turning to our outlook. For the quarter ending June 30th, 2021, our fiscal third quarter, Revenues are expected to be in the range of $21 million to $23 million. Gross margin for the fiscal third quarter is expected to be approximately 40%, with operating margin breakeven to slightly positive, inclusive of approximately $1 million of one-time cost relating to our cybersecurity incident. Accounting rules require us to expense these costs as incurred without accruing for potential insurance reimbursement. We will have a gain in a future quarter once our insurance claim has been approved and paid. The semiconductor equipment industry is cyclical and inherently impacted by changes in market demand. And the recent semiconductor shortages may also have impacts on our customers and supply chain. Our outlook reflects the anticipated ongoing logistical impacts and related delays for goods shipped to and from China and expenses relating to our subsidiary cybersecurity incident. Actual results may differ materially in the weeks and months ahead. Additionally, operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, and the financial results of semiconductor manufacturers. A portion of Amtek's results are denominated in RMBs, a Chinese currency. The outlook provided in this press release is based on an assumed exchange rate between the United States dollar and the RMB. Changes in the value of the RMB in relation to the United States dollar could cause actual results to differ from expectations. Now let's turn the call over to the operator for questions. Operator?

Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 if you would like to signal with questions, star 1. Our first question will come from Craig Irwin with Roth Capital Partners.

Good evening, and thanks for taking my questions. Lisa, I really appreciate you breaking out the expense from the cybersecurity incident. Can you maybe provide us a little bit more color on the M&A fee in the quarter, your other impacts on SG&A? Traditionally, you've done a very, very good job keeping the spending there tight. we'd like to get to sort of an operating number.

Understand, Craig. I would say that, you know, we had probably a couple of hundred thousand on M&A, you know, add in maybe a hundred thousand in consulting, and then, you know, a couple of hundred thousand in freight and logistics that we expect to be kind of ongoing.

Understood. Understood. So all in, it looks like you're probably – tracking very well I would say you know that's generally yes we're keeping a focus on it and you know I also you know would remind everyone that you know part of that SG&A is variable with our Commission's on higher sales as well understood understood so then you know the contribution from your acquisition over the next couple quarters usually there's some expense for integration Can you maybe sort of talk about the component of your revenue guidance from this new property? And then, you know, are there some restructuring or integration expenses that you're going to incur over the next few quarters? And, you know, do you expect it to be accretive in 22? Any color there is helpful.

Sure. Sure. As Mike indicated, right now we expect a revenue, a top line contribution in the range of $400,000 to $500,000 per quarter. Very good gross margins as consistent with consumables. Modest operating margin at this point. Not any significant integration or restructuring costs, but we will be looking to realize those synergies we talked about and see some growth there at the top line and better contribution to operating margin. starting in our fiscal 2022.

Understood, understood. So moving over to PR Hoffman, you guys have done a lot of work there to prepare for the growth that's coming in this silicon carbide wafer industry. Can you maybe talk a little bit about whether or not you're shipping any cassettes? And I don't know if I'm using the correct diction there, but any templates or cassettes for 8-inch wafers yet? Have you been sampling these products? There's quite a lot of enthusiasm out there for what commercial adoption of 8-inch can do for the finished cost of not just the wafers but the end devices and the rate of adoption in the end market.

Hi, Craig. This is Mike. What I can say is that we have been sampling 8-inch consumables with our customers currently.

So sampling. Okay, excellent. So then, you know, to move to commercial production, you're tooled up, and it would really just be a demand pull from your customers at this point?

Yes.

Okay, okay. Then the next question is your OSAT business has been doing great over the last couple quarters. It seems like that momentum is growing. Continuing, is there an opportunity for you to increase capacity in your Chinese facility? Is that something you would consider? Or if demand exceeds what you can produce in that facility, would you be more likely to maybe use outsource suppliers or assemblers to help you deliver the volumes that the market demands?

Sure. We're moving to a new facility later this summer. That's in progress right now. We're very excited. It will have increased capacity for us. But we're already doing creative things right now to increase our capacity at our existing location. Some of it may be outsourcing or adding a little bit of space in the next door location. A lot of different creative thoughts going into how we can meet our customer demand at this time. But certainly by the end of this summer, we will we will have that increased additional capacity and it would be a great problem to have if we start to even outgrow that.

Okay, and then last question if I may. R&D was quite a bit higher this quarter than it has been actually for the last couple years. you know, about, you know, $1.9 million. Can you maybe break out for us what's driving the higher expense? I mean, is there a slate of new products that you're looking to bring to market, or, you know, are there specific initiatives that you can call out that, you know, point to, you know, future products that would broaden the revenue funnel?

Sure. You're absolutely right. And I think you will know that these businesses traditionally did not get a lot of R&D investment in previous solar years. So some of it is catching up there. But I hope that in the next couple of quarters, we can talk more to you about the things that we're working on. It's very exciting. Some of it is new products to serve markets that we're excited about. Some of it is next generation platforms or upgrades to certain areas of our existing equipment. So we don't expect this to be sustained for the longer term, but definitely necessary important investments for our longer term revenue growth. And we hope to be able to talk to you about them in the next few quarters.

But a similar run rate for the next couple of quarters, is that fair?

You know, it was higher this quarter. I hope it will dip a little bit in the next couple of quarters, but not significantly. It will stay at this range for the next few quarters.

Great. Thank you so much for taking my questions. Congratulations on the strong revenue growth.

Thank you, Craig. Thank you.

And our next question will come from Jeff Osborne with Cowan & Company.

Hey, Michael. Lisa, good to speak with you. A couple questions on my end. The housekeeping, the million-dollar-ish insurance charge, where would that show up in the P&L?

It'll show up in SG&A.

SG&A, okay. And then the six units in backlog, the 300-millimeter units for the second half, You know, given it's a multi-unit order, and you flagged multi-unit orders this quarter, dragging down gross margins sequentially, I'm just trying to think about the September and December quarter as those shift. Would it be a little bit, you know, touch below 40, maybe in the high 30s, or how do we think about that?

I think that's a fair statement, yes.

Okay. And remind me, it's been some time since you shipped those in volumes. I'm just given COVID. Those ballpark are what, about $1.5, $2 million a piece? Is that a reasonable assumption?

That's slightly less. A little bit lower than that range.

A little bit lower? Okay. And then, you know, can you, Michael, give us a sense of the, you know, the urgency with your customers, just given everything that's going on on the demand for the auto side? You know, people expanding, you know, I'm trying to get a sense of what level of energy your sales team has in terms of engagement. You know, certainly seeing it in the book to build, but I'm just trying to get a sense of how much momentum there is over the coming quarters.

You know, what I could say is that my sales team is very active, more so than they have been in the past few quarters. and there is a sense of urgency among our top-tier customers to quickly expand their capacity. So things are clicking right now in terms of opportunities. All these engagements in the past are turning into orders, so there's a lot of strong momentum going forward right now.

That's great to hear. I just had a few follow-ups on IDI. First of all, where are they located? Can you give us a sense of how many folks are on board there?

They're located in Connecticut. It's a small operation, less than 10 employees.

Got it. Is there any current overlap with your existing customer base or is this all new incremental customers that you're capturing?

There is a There is a good amount of overlap with our existing customer base in the new material and substrate segment, and we're excited about that. One of the goals is to align our product roadmap and capture the natural synergies that we have with this acquisition. So definitely excited about the future potential. The team that we brought on, although it was a small tuck-in acquisition, They are well known in the wet chemical industry.

Got it. And then my last question, Michael, is just the gross margin profile of what was formerly known as the silicon carbide LED segment the past three quarters has been somewhat more depressed relative to historics. How much of that is attributable to the expansion of PR Hoffman and sort of the underutilization of that new facility? the lower revenue or is there pricing? I'm just trying to get a sense of what are the variables driving the losses in that segment currently.

Jeff, it really is kind of the first two primarily that you mentioned. So we added capacity, so increased annual rent expense. We added some new equipment, so increased depreciation. And the polishing machine sales through 2020 have been very, very low. So it's a combination of both of those. I think with the increased equipment orders that Mike referenced, we're seeing increased order activity even in April here. I expect to see that improve. It's going to be a stepped improvement each quarter, so I think it's going to be a few quarters out before we see them return to normalized ranges, but we expect improvement over the next few quarters with better revenues.

Makes sense, Lisa. I appreciate your thoughts.

Okay.

Thanks, Jeff. And our next question will come from Mark Miller with the Benchmark Company.

Congratulations on your orders and the improvement in the backlog. I just wanted to talk about you said the diffusion furnaces would be roughly high 30 margins. What about the remainder or your backlog as a whole in terms of the margin profile? Will it be similar to recent margins or below or above what you've been posting for margins in terms of what's in the backlog currently?

I think that the backlog will be probably similar to slightly lower than what our margins have been. We have seen an uptick in these multi-unit orders, and that does drive a little bit of a lower margin profile.

You mentioned IDI will have good margins. Will those margins be above the corporate average?

Yes, they should be, absolutely. The consumables have a great margin profile, and as they grow, that will be a really nice addition for us.

Okay. You expect that to be immediately accretive?

Well, yes. We expect $400,000 to $500,000 of revenue per quarter, strong consumable-type gross margins with modest contribution to operating margin at this point.

Any help on the taxes going forward this year would be appreciated for modeling.

Well, you know, we continue to have a high tax provision each quarter as we have a lot of our income generated from foreign jurisdictions where we don't have our net operating losses to utilize. So I think, you know, the range of this quarter certainly was high. You know, I would like to bring that down a little bit, but it will continue to run at this rate. somewhat of this clip for a while until some of our U.S. income returns. We do have some NOLs to use there.

Is that similar in terms of dollar amount or similar in terms of percent of revenues?

I think it's probably similar in terms, a little bit lower, ideally a little bit lower in terms of dollar amount, I would say.

Thank you. Okay.

Thanks, Mark.

Thank you, Mark.

Thank you. And that does conclude the question and answer session and today's conference call. We do thank you for your participation. Have an excellent day.