Amtech Systems, Inc.

Good day, and welcome to the Amtech Systems Third Quarter Fiscal 2023 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 Third Quarter 2023 Conference Call. With me today on the call... are Bob Daigle, Chairman and Chief Executive Officer, Lisa Gibbs, Chief Financial Officer, and Paul Lancaster, Vice President of Sales and Customer Service. After close of market today, Amtech released its financial results for the fiscal third quarter of 2023. The earnings release is posted on the company's website at www.amtechsystems.com in the Investors section. Before we begin, I'd like to remind everyone that the Safe Harbor disclaimer in our public filing covers this call and our webcast. Some of the comments to be made during today's call 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 should 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, ongoing logistics, supply chain and labor challenges, capital allocation plans, the worldwide COVID-19 pandemic, and our ability to effectively integrate our acquisition of Intrepix, Inc., which we acquired in January of 2023. Other risk factors are detailed in our SEC filings, including our Form 10-K and Form 10-Q. Additionally, in today's conference call, we will be referring to non-GAAP financial measures as we discuss the third quarter financial results. You'll find a reconciliation of these non-GAAP measures to our actual GAAP results included in the press release issued today. I will now turn the call over to AMTEC's new Chief Executive Officer Bob Daigle.

Thank you, and good afternoon everyone, and thank you for joining our quarterly conference call. I'd like to take a couple of minutes to introduce myself and share some thoughts before I turn the call over to Paul and Lisa. I've spent over 30 years in the electronic materials industry, primarily at Rogers Corporation, a $3 billion publicly traded company where I held a variety of senior executive positions. My focus at Rogers was building profitable businesses, and during my tenure, I led a circuit materials business that supported the wireless industry and a power electronics business focused on semiconductor packaging and interconnects. The foundation for growing these businesses included introducing new products for markets with strong secular growth trends, and acquiring companies and technologies to close gaps in capabilities, all while focusing on margins to drive profitability and return on investment. During my two years on the Amtech board, it's become apparent to me that the company has tremendous promise. We have great products and are extremely well positioned to capitalize on several secular trends. The electric vehicle market will drive growth for silicon carbide semiconductors due to their ability to both improve efficiency and drive down battery costs. Over time, silicon carbide semiconductors will also benefit a wide array of power electronic applications. Within the broader semiconductor market, artificial intelligence applications will experience explosive growth in the coming years. and the high performance semiconductor processors needed to support AI will need advanced packaging. And across the broader electronics industry, the pandemic and global tensions have made it abundantly clear that a more resilient semiconductor and electronic assembly supply chain is needed. These secular trends will drive strong demand for our equipment and our consumables. Our mission is to fully capitalize on these growth opportunities while addressing operational issues and making supply chain improvements needed to create meaningful shareholder value from this growth. Lisa will get into the details concerning last quarter in a minute or so, but I want to express my disappointment in our third quarter operating performance. We will address our gaps in performance and prepare the company to deliver meaningful value from these growth opportunities. We'll be presenting more information about our targets and plans on the next earnings call. Now I'll turn it over to Paul to discuss our end markets.

Thank you, Bob. Looking at the demand environment, we are experiencing a persistent low demand for our advanced packaging and S&T products. which has been offset by continuous high demand for our high-temp belt furnaces used in a variety of applications, including electric vehicles. As it relates to our Paramax products servicing the advanced packaging and S&T markets, we believe our competitive advantage not only allows us to weather the current challenges, but also positions us favorably to capitalize on significant opportunities during the next up cycle. As we navigate through this phase, we are continuously strategizing and investing in research and development to enhance our product offerings, ensuring that we stay at the forefront of technology advancements. While we continue to have constructive conversations with leading OSATs, we remain cautious about the timing of a demand rebound for a semiconductor-related product due to uncertainties surrounding the macroeconomic outlook within the industry. Within the high-tech belt furnace market, the ongoing transition towards more complex systems and greater electrification, particularly in the automotive sector, has boosted the need for our high-performance furnaces. We are committed to meeting this rising demand and maintaining our reputation as a trusted supplier in the industry. In our materials and substrate division, we continue to see strong demand for our specialized silicon carbide products. As the industry works to grow both wafer capacity and output, many vendors are realizing the challenging differences between silicon carbide and silicon processing. Year-to-date bookings for our top silicon carbide customers are on par with their total bookings for the full fiscal prior year, and in some cases, greatly exceeding last year's total spent. Additionally, we have ongoing qualifications with new customers who are evaluating our silicon carbide consumables. Given our position as a longtime industry leader in the segments of the markets we serve, we believe our products are highly differentiated and provide significant improvements in total cost of ownership. As a result, as volumes increase, we expect demand for our consumable products to grow in line with overall industry wafer capacity estimates. As a reminder, our consumables sell into multiple end markets, and we are currently seeing some softness in silicon, sapphire, and ceramics, but we are very pleased with the continued demand of our silicon carbide-related consumables. In summary, while we're currently facing headwinds in this semi-division spending cycle, our strong competitive position instills confidence that we will emerge stronger during the next up cycle. Simultaneously, the high-end demand for our high-temperature belt furnaces and the optimistic prospects of silicon carbide in the materials and substrate division reinforces our commitment to innovation and excellence in providing cutting-edge solutions to our valued customers. I will now turn the call over to Lisa to review our financial results.

Thank you, Paul. Turning to our quarterly results, net revenues decreased 8% sequentially and increased 54% from the third quarter of fiscal 2022. The increase from prior year is primarily attributable to additional revenue from Intrepix of $7.2 million and increased shipments of our high temperature belt furnaces. Additionally, during the prior year of third quarter of fiscal 2022, our Shanghai factory was closed for two months due to COVID protocols. The sequential decrease is primarily due to approximately $1.5 million in revenue that shifted from the third quarter to the fourth quarter of fiscal 2023 due to three BTU customers pushing out delivery dates and operational challenges surrounding the implementation of our new ERP system at Pierre Hoffman. Gross margin decreased sequentially due primarily to product mix within our semi-segment. Gross margin increased when compared to the third quarter of fiscal 2022 as the prior year period was affected by the government mandated shutdown of our Shanghai manufacturing location. Selling, general and administrative or SG&A expenses decreased $1.1 million on a sequential basis and increased $3.1 million compared to the prior year period. The sequential decrease is due primarily to acquisition costs of $1.5 million in the prior sequential period, which were not incurred during the third quarter. Compared to the prior year, the increase is due primarily to added entropics SG&A of $1.9 million, inclusive of $.7 million of amortization of intangible assets, as well as increased consulting and ERP project expenses. Research, development, and engineering expenses increased $.3 million sequentially and increased $.2 million compared to the same prior year period. GAAP operating loss was $1.1 million compared to GAAP operating income of $.5 million in the second quarter of fiscal 2023 and GAAP operating income of $9.6 million in the same prior year period. The prior year period includes the gain on the sale-leaseback of our Massachusetts facility. The company has incurred amortization of intangible assets included in its GAAP financial statements related to the acquisition of Intrepix, Inc. The amount of an acquisition's purchase price allocated to Intangible Assets in term of its related amortization can vary significantly. The purchase price allocation reflected in our GAAP financial statements is preliminary. As we stated last quarter, the company expects to incur amortization of acquired Intangible Assets relating to Intrepix, Inc. of approximately $985,000 per quarter through December 31, 2023, and approximately $460,000 per quarter thereafter. Non-GAAP operating income was $0.4 million compared to non-GAAP operating income of $3.2 million in the second quarter of fiscal 2023 and non-GAAP operating loss of $2.8 million in the same prior year period. Income tax expense was $0.2 million for the three months into June 30th, 2023 compared to a benefit of $2.9 million in the preceding quarter and expense of $20,000 in the same prior year period. Income tax benefit for the three months ended March 31st, 2023 includes a one-time tax benefit of $3.2 million related to the release of a portion of our valuation allowance in connection with a deferred tax liability relating to the Intrepix acquisition. which resulted in recognition of previously recorded deferred tax assets. GAAP net loss for the third quarter of fiscal 2023 was $1 million or 7 cents per share. This compares to GAAP net income of $3.2 million or 23 cents per share for the preceding quarter and GAAP net income of $10.2 million or 73 cents per share for the third quarter of fiscal 2022. Non-GAAP net income for the third quarter of fiscal 2023 was $0.3 million or two cents per share. This compares to non-GAAP net income of $2.7 million or 19 cents per share for the preceding quarter and non-GAAP net loss of $2.1 million or 15 cents per share for the third quarter of fiscal 2022. Unrestricted cash and cash equivalents at June 30th, 2023 were $14.3 million compared to $17.7 million at March 31st, 2023. Approximately 64% of our cash balance as of June 30th, 2023 is held in the United States. The cash decrease this quarter was primarily due to a decrease in our contract liabilities, where our recent bookings have lowered down payments, purchases of PP&E, primarily driven by our ERP implementation, and the settlement of pre-acquisition Intrapex liabilities. We have full availability in our revolving line of credit of up to $8 million. To date, we have not borrowed any amounts under the revolver. Operating results can be significantly impacted positively or negatively by the timing of orders, system shipments, logistical challenges, and the financial results of semiconductor manufacturers. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Actual results may differ materially in the weeks and months ahead. Now turning to our outlook. For the fourth fiscal quarter ending September 30, 2023, we expect revenue and operating profit to improve incrementally over the third quarter of fiscal 2023. Operating results can be significantly impacted, positively or negatively, by the timing of orders, system shipments, logistical challenges, and the financial results of semiconductor manufacturers. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Actual results may differ materially in the weeks and months ahead. 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. I will now turn the call over to the operator for questions. Operator?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the 1 on your telephone keypad. And should you wish to cancel your request, please press the star followed by the 2. One moment, please, for your first question. Thank you. And your first question comes from the line of Mark Miller from Benchmark. Please go ahead.

Thank you for the question. I was wondering if you could break out the Entropix bookings and backlog last quarter.

Hi, Mark. You know, we put all of that into our material and substrate segment, so unfortunately we don't break out Entropix individually.

Okay. Cash, you've been consuming cash for three consecutive quarters. Do you have a break-even cash level, and what are your plans to do something about that?

Good question. We do have a break-even cash level. We've had things like the ERP implementation this quarter, some debt payments obviously ongoing, and some tax payments that were part of the assumed liabilities of our acquisitions. We've had strong subsequent cash receipts in July, and we continue to very much focus on cash collections and payment terms of our customers. And again, we have the revolving line of credit if we need to tap into it, but we haven't yet.

Final question, I'll jump back in and click you, is about the inventories. Inventories did decline somewhat in the third quarter, but they were up significantly from a year ago. Can you discuss that?

A lot of that relates to inventory builds that are related to our high-temperature belt furnaces that we build in Massachusetts and the raw materials that are necessary for those products. We have an enormous backlog that we're working through in that product area, as well as we have inventory added from the Entrepix acquisition.

Thank you.

Thank you, Mark.

Thank you. And your next question comes from the line of Kevin Carrigan from West Park Capital. Please go ahead.

Yeah, hi all. Great speaking with you again. And Bob, congrats on the CEO role. I was just kind of wondering, could you give us a little more color on the operational challenges on the ERP systems? You know, what are the challenges? How much of an impact to revenue were these challenges? And when do you kind of think they would get resolved?

Sure. ERP implementations are always challenging. As I'm sure you know, we implemented a system at Pierre Hoffman. They had a very antiquated system. It's been a big change for them. The production planning that was expected around that in terms of pulling in orders before go-live and then the ramp back up after go-live was disappointing to us. It certainly was an operational execution issue So, you know, big disappointment there. They've ramped production up significantly, so we're quite pleased with that. And we're continuing to work through, you know, some challenges, but I think that we're over that hill of the go-live, which was in early June. So, you know, I think we're getting there. And the amount of revenue we mentioned in the press release of 1.5 million, you know, that was a combined number. We had a few shipments at BTU where the customer shifted their pickup dates into July. And then the other part was the ERP. And so it's probably, you know, about 50-50 there.

Okay. Got it. That makes sense. And then just quickly, Lisa, you know, I think you just touched on it kind of in a previous question, but can you just kind of remind us what the focus is for for capital allocation for the rest of 2023 and kind of anything with share repurchases?

Well, you know, capital allocation, our big focus this next quarter is on cash collections, improving our cash conversion cycle, and really focusing on improving that. So from a capital allocation perspective, we talk about that at the board meeting every quarter. I think right now with our cash level, share repurchases are not – you know, the highest priority, but that continues to be a focal point of our capital allocation discussions each quarter.

Okay, great. Thank you.

Thank you.

Thank you. Once again, should you have a question, please press the star followed by the one. As we have no further questions at this time, I will now turn the call over to Mr. Deco for closing comments.

Thank you. I'd like to thank you for joining the conference call, and I look forward to meeting you in the weeks and months ahead as I get out on the road to meet with Amtech shareholders. Have a good evening.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.