Amtech Systems, Inc.

Good day, and welcome to the Amtech Systems Second Quarter 2022 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 2022 Conference Call. With me on the call today are Michael Wang, Chief Executive Officer, Lisa Gibbs, Chief Financial Officer, and 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 2022. The earnings release is posted on the company's website at www.amteksystems.com in the Investors section. Before we begin, I'd like to remind everyone that the Safe Harbor disclaimer in our public filings covers this call and our webcast. Some of the comments to be made during the call today will contain forward-looking statements and assumptions that are subject to risks and uncertainties, including but not limited to those contained in our SEC filings, all of which are posted within the investor section of our corporate website. The company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of today. These statements are not a guarantee of future performance and actual results could 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 demand for our 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, ongoing logistics, supply chain and labor challenges, capital allocation 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 Mike Wang, Chief Executive Officer.

Thank you, Erica, and everyone else for joining us today. I would like to start off by thanking our global team for their extraordinary efforts. We have been navigating through several challenges on an unparalleled scale the past couple of years. No doubt the experience has increased our resiliency and furthered our commitment to all of our stakeholders. I also want to let all of our Shanghai employees know that our thoughts are with them and their families. We will overcome this challenge together as we have prior storms. Stay strong. Moving on, the robust demand for our products continued in the second quarter with bookings of $33.7 million, up 4% over a strong second quarter in 2021. Backlog of $53.6 million, up 102% year over year, and a revenue of $28.6 million up 44% year-over-year, representing yet another record over the past three years. As many of you are aware, at the end of the second quarter, the Chinese government mandated a COVID lockdown throughout the Shanghai area. While this lockdown had limited impact on our second quarter results, given the robust overall demand environment, our manufacturing operation in Shanghai has remained closed since a mandated closure. which in effect will have an impact on our third quarter results. Our Shanghai factory producing our advanced packaging and SMT products has represented approximately half our revenues, depending on product mix, over the past four quarters. On May 5th, with support from our key customers, we have received notice that we have been cleared by the Chinese government for reopening. There are several steps and submissions required before being permitted to reopen, and we will be limited in the number of workers allowed into our factory upon such reopening. As of today, we could have the factory reopen in the next few weeks, with the government allowing approximately 10% to 15% of our workforce to return. We continue to expect limited shipments out of Shanghai in fiscal Q3 due to staffing, shipping, and supply chain limitations and the possibility of rolling closures if COVID numbers increase. Unfortunately, due to the extraordinary nature of the situation and the uncertainty of both the timing of a full reopening of our facility and the reopening of our customers and suppliers, disruptions are likely to last beyond the third quarter. Once our factory fully reopens and the local supply chain returns to normal, we will take advantage of our larger capacity to quickly ramp up production to serve the growing backlog. Despite this closure, demand in the market, including from our Chinese customers, remains strong. Our customers understand we are not alone in this situation, and our larger strategic customers wrote letters of support our application to reopen. To date, no customers have canceled orders. In fact, we continue to receive sizable new orders even during the closure. Looking beyond these near-term uncertainties, we strongly believe our leadership and select growth markets with exposure to several secular tailwinds creates significant opportunities to drive increased profitability and shareholder value as demand accelerates and we realize the operating leverage built into our current business model. I will now turn the call over to Paul go into more details in our end markets. Paul?

Thank you, Michael. Expanding further on the demand environment, we continue to see strong interest in the market for capacity expansion initiatives, both for advanced packaging as well as SMT applications. In the second quarter, for example, we booked a $4.7 million order for advanced packaging products. As we mentioned last quarter, and to place this level of demand in context, In prior buying cycles, our backlog for the semiconductor segment was typically fulfilled over one to two quarters. With the combination of higher demand and longer lead times from our suppliers, our current backlog is extending into the second fiscal quarter of 2023. Moving on to our material and substrate segment, in the second quarter, we saw bookings increase nearly 100% year over year, and gross margin for this segment improved to 48%. driven by increasing strength in our consumable products as our customers continue to expand manufacturing capacity. Within the silicon carbide wafer market specifically, we have seen increases in consumable demand which aligns with the broader market commentary related to rising device output. While still early in the long-awaited multi-year ramp of wafer manufacturing capacity, industry demand continues to strengthen. driven by increasing awareness of the benefits of silicon carbide over traditional silicon in applications including electric vehicles, renewable energy, communication, and high-voltage industrial applications. With the sheer magnitude of potential end market demand in the coming years, interest in the market continues to increase, with several newer entrants looking to qualify manufacturing processes, including our specialized templates and products. Given our long history in the market and the significant cost of ownership benefits of our consumable products, we are seeing a broadening of discussions with players throughout the industry. Related to capital equipment, we continue to have good dialogue with both existing and potential new customers executing initial phases of wafer capacity expansion. However, component shortages are extending lead times across the industry. For instance, equipment providers for complementary wafer manufacturing steps are currently quoting lead times of up to 18 months, which may limit the pace of new capacity expansion and timing of orders for our products. With that said, given our established market-leading position in consumables, two new machine platforms to expand our existing machine product line and recently completed capacity expansion investments. we remain as excited as ever as the mid- to long-term opportunities in front of us come into focus. While we are encouraged by heightened demand across all our served markets, we remain cautious about the ongoing market uncertainties, such as the Shanghai lockdown, which are difficult to predict. Beyond this specific headwind impacting the third quarter, industry-wide challenges such as supply chain constraints, inflation, increases in freight cost and availability, coupled with rising labor costs continue to impact our business and require ongoing management and vigilance. I'll now turn the call over to Lisa.

Thank you, Paul. Net revenues increased 5% sequentially and 44% from the second quarter of fiscal 2021, with a sequential increase primarily attributable to strong shipments of our advanced packaging equipment and the increase from the prior year quarter due to higher shipments across all of our product lines. Gross margin increased sequentially and from the second quarter of fiscal 2021, primarily due to a more favorable product mix. Selling, general, and administrative SG&A expenses decreased $0.2 million on a sequential basis, primarily due to lower shipping and logistics costs, partially offset by increased employee-related expenses. SG&A increased $2.1 million compared to the prior year period, due primarily to $0.6 million in higher commissions on higher sales, $0.6 million in employee-related expenses, $0.4 million in higher shipping expenses driven by higher revenues and increased shipping rates, and $0.2 million in added SG&A from our acquisition of Intersurface Dynamics in March 2021. Operating income was $2.6 million compared to operating income of $1.2 million in the first quarter of fiscal 2022 and operating income of $0.2 million in the same prior year period. Income tax provision was $0.7 million for the three months ended March 31, 2022, compared to $0.2 million in the preceding quarter and $0.5 million in the same prior year period. Net income for the second quarter of fiscal 2022 was $2 million or 14 cents per share. This compares to net income of $1 million or 7 cents per share for the preceding quarter and net loss of $0.2 million or two cents per share for the second quarter of fiscal 2021. Unrestricted cash and cash equivalents at March 31st, 2022 were $27.9 million compared to $32.2 million at December 31st, 2021. Approximately 77% of our cash is held in the United States. We used $1.4 million during the quarter for the repurchase of 143,000 430 shares of our common stock. $3.6 million remains available for repurchases under our current authorization. Turning to the sale leaseback agreement that we announced in 8K on April 28, 2022, our subsidiary, BTU International, entered into a purchase and sale agreement with a third party for the sale of their headquarters in Billerica, Massachusetts. The sale price for the property is $21.5 million, $500 $500,000 of which was paid as a non-refundable deposit with the remainder due at closing. We expect to close in June, and closing is subject to the execution of a leaseback of the premises. Terms of the leaseback are expected to include a base rent of $1.5 million per year and an absolute triple net lease for a two-year term. The Billerica building did not suit our needs and was age and energy inefficient. During the leaseback period, we will conduct a search and eventually relocate to another building that better suits our Billerica operations. Assuming a June closing, we expect to recognize a gain on this transaction in our fiscal third quarter ending June 30, 2022, of approximately $11 to $12 million net of tax. We believe we will be able to utilize our net operating losses from a tax perspective, subject to an 80% federal limitation. Additionally, we expect a net cash inflow of approximately $15 to $16 million after settling the outstanding mortgage and related sale expenses. With this transaction, we are very pleased to take advantage of a strong real estate market to unlock valuable capital in our business. As we have stated in the past, we have an objective to grow our revenue and expand our operations through strategic acquisitions, while at the same time pursuing organic growth. With the enhanced financial flexibility generated by this transaction, Management and our Board of Directors will continue to evaluate various capital allocation priorities, including M&A, operational, and other opportunities that will drive long-term value creation for our shareholders. Now turning to our outlook. Due to the uncertainty surrounding the local government's policies on COVID shutdowns, we are assuming a slow ramp to reopen our factory in Shanghai, which has represented approximately half our revenues, depending on product mix, over the past four quarters. Therefore, this outlook assumes very few shipments out of Shanghai through June 30, 2022. For the quarter ending June 30, 2022, our fiscal third quarter, revenues are expected to be in the range of $14 million to $16 million. Gross margin for the quarter ending June 30, 2022 is expected to be in the upper 20% range with negative operating margins. This outlook excludes the gain that will be recognized from the sale-leaseback transaction, which is expected to close in June. The company's outlook reflects the anticipated ongoing closure of our Shanghai factory and logistical impacts and the related delays for goods shipped to and from China. Actual results may differ materially in the weeks and months ahead. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, increasing shipping and logistical costs, and the financial results of semiconductor manufacturers. A portion of Amtech's results is denominated in RMBs, a Chinese currency. The outlook provided 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 will be star 1 if you would like to signal with questions. Our first question today comes from Craig Irwin with Roth Capital Partners.

Good afternoon. This is Andrew on for Craig, and thank you for taking my questions. Bit of a two-parter here. You guys had really strong gross margins in the quarter ahead of where you got it to, so can you provide a little bit more color on the puts and takes in each line of business? And secondly, kind of talk to any initiatives you guys have taken to combat the supply chain issues, whether it be through sourcing or shipping out end products.

That's all from me. Thanks. And again, your line is open. Please go ahead with your response. And again, speakers, perhaps you just placed your line on mute. Please go ahead with your response. And please continue.

Hi, Andrew from Roth. I was in the middle of answering your question when I think we got cut off. Are you still there?

I am, thank you.

Okay, so I believe your question was around the stronger gross margin performance. It really is attributable to product mix, and that is exactly the reason that we talk about, you know, quite a bit. We saw some very strong performance from our material and substrate segment in our consumables area, which drives a higher gross margin profile. So that was a big contributor.

And we'll go ahead and take our next question from Jeff.