MKS Inc.

Ladies and gentlemen, thank you for standing by and welcome to the MKS Instruments fourth quarter and full year 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your host, David Rizek.

Good morning, everyone. I am David Rizek, Vice President of Investor Relations, and I am joined this morning by John Lee, President and Chief Executive Officer, and Seth Backshaw, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the fourth quarter and full year 2021, which are posted to our website, mksinst.com. As a reminder, various remarks about future expectations, plans, and prospects for MKS comprise forward-looking statements. Actual results may differ materially as a result of various important factors, including those discussed in yesterday's press release and in the most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q for the company. These statements represent the company's expectations only as of today, and should not be relied upon as representing the company's estimates or views as of any date subsequent to today, and the company disclaims any obligation to update these statements. During the call, we will be discussing various financial measures. All forward-looking financial measures exclude any contribution from Adatech Limited, the acquisition of which we expect to close by the end of the first quarter of 2022. Also, unless otherwise noted, All income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release for information regarding our use of non-GAAP financial results, including reconciliations to our GAAP financial measures. Now, I'll turn the call over to John.

Thanks, David. Good morning, everyone, and thank you for joining us today. Before I discuss our quarterly results and current market trends, I would like to take a moment to reflect on the past year. 2021 presented MKS with a number of unexpected challenges and unique circumstances, yet also significant opportunities for growth, and we seized them. Against this backdrop, I'm extremely proud of what our employees accomplished this past year as we marked our 60th anniversary. Our strong fourth quarter capped a year in which we delivered record performance in both semiconductor and advanced markets, despite unprecedented supply chain constraints and continuous COVID disruptions. We overcame these challenges by executing with laser focus on meeting our customers' needs while ensuring the safety and well-being of our employees, which remains our highest priority. Our focus on meeting our customers' needs did not impact our strategy for the long term. We invested in a number of areas to drive organic growth while executing on strategic M&A opportunities. Our acquisition of photon control which we closed in July, brought us critical temperature sensing, which is a seamless fit within our Surround the Chamber portfolio. And we expect our pending acquisition of Auditech will add valuable chemistry expertise, enhance the breadth of our innovation capabilities, and accelerate our customers' roadmaps in this era of miniaturization and complexity. We also made important strides in strengthening MKS by prioritizing our corporate social responsibility efforts we issued our inaugural CSR report in which we articulated our strong commitments to diversity, equity, and inclusion, as well as environmental management, employee development, and governance. All of these achievements combined with attractive industry tailwinds positions MKS for an exciting 2022. Now let me discuss our fourth quarter results in more detail. We delivered revenue of $764 million and net earnings per diluted share of $3.02, both above the midpoint of our guidance range. Sales to our semiconductor market further strengthened in the fourth quarter, growing 1% sequentially and 26% year-over-year. Our results were strong across the board, from our well-established vacuum subsystems portfolio to our emerging photonics business. With our broad and unmatched portfolio, which we estimate serves greater than 85% of WFE, We play in every critical semiconductor manufacturing process in the world today, including deposition, etch, wet clean, lithography, metrology, and inspection. Our performance this past quarter and year was a clear reflection of that. Demand across our vacuum portfolio was robust, led by another strong quarter in RF power solutions. We continue to extend our market leadership in RF power for dielectric etch, particularly for 3D NAND. We believe we took additional market share in RF power generators in 2021 on top of our gains in 2020. This puts us in an outstanding position looking ahead, and we anticipate industry investments into vertical scaling will be a driver for years to come. We are also executing on our strategy to gain share in RF power for conductor etch. As a reminder, this is a meaningful, untapped opportunity for us, and we believe we can harness the technical expertise and know-how that define our leadership in dielectric etch and extend that into our growing share position in conductor etch. In the past, we have talked about how important it is to secure design wins for the future growth, and we are now beginning to see revenue from these design wins in conductor etch. While we are still at an early stage, the incremental progress we are making is tangible and is corroborated by multiple OEMs ramping with MKSR power generators for conductor etch. We also delivered record quarterly revenue in a number of other categories, such as our market-leading pressure measurement and plasma and reactive gas solutions. We continue to see healthy demand for our dissolved ozone and dissolved ammonia solutions used in wet-clean applications, with particular interest from our foundry customers. We delivered another quarter of significant sequential and year-over-year growth in photonic solutions for semiconductor applications, driven by lithography, metrology, and inspection customers. as well as critical temperature sensing for etching customers. As we look ahead to the first quarter of 2022, we expect revenue in our semiconductor market to be consistent to slightly down with fourth quarter levels. Demand trends remain strong, but supply chain constraints will continue to be a factor near term. Shifting to our advanced markets, revenue exceeded our expectations, growing 6% sequentially in the fourth quarter and 1% year over year. We were pleased to see a recovery in revenue from industrial applications, and we also delivered healthy sequential growth in advanced electronics applications. Demand for our flexible PCB via drilling solutions was consistent with our expectations. As we look into the first quarter, we have less visibility than usual into the flex drilling market due to the uncertainty associated with supply chain constraints. As visibility improves, we are well positioned to quickly respond to our customers' needs. we continue to focus on our high-density interconnect via drilling opportunity, leveraging the successes we have already made in high-volume manufacturing. We received a follow-on multi-unit order for our Geo HDI solution from one of our key customers that had previously qualified us and has been operating multiple tools over the past year in high-volume production. We also received a follow-on design win from another customer, setting the stage for additional orders in the future as this customer expands deployment of our geo tool to more applications and facilities. Moving to the first quarter of 2022, we expect revenue from our advanced markets to be consistent to slightly down with fourth quarter levels. Before I hand the call over to Seth, I wanted to note that we continue to expect to close our pending acquisition of Adatech in the first quarter. Upon closing, MKS will occupy a unique position as a foundational provider of technology solutions across semiconductors, advanced electronics, and an array of attractive specialty industrial applications. The majority of applications in these markets are targeted at addressing the long-term trends of miniaturization and complexity in enabling advanced electronics. Our integration planning activities are on track to ensure that we are fully ready to hit the ground running once we close. In the meantime, as we continue to interact with the world-class employees at Autotech, we're even more excited about the opportunities that lie ahead for Autotech's electronics and general metal finishing businesses, and we look forward to welcoming the Autotech team to the MKS family. And now, I'd like to turn the call over to Seth. Thank you, John. MKS kept another record year of revenue and profitability, despite the well-known global challenges John discussed earlier. These results are both a reflection of the strong secular tailwinds MCAS is led to across our semiconductor and advanced markets, as well as the result of the hard work, talent, and dedication of our global employees. While its initial performance in 2021 is exceptional, we are excited to build upon this strong foundation with our pending acquisition of Adatech, which will accelerate our strategy of delivering an even more comprehensive set of technology solutions in the era of miniaturization and complexity. I will discuss our fourth quarter and four-year results and provide additional detail and guidance for the first quarter of 2022. Starting with the fourth quarter, sales were a record $764 million, up 16% year-over-year and up 3% sequentially. Fourth quarter sales to the semiconductor market set another record at $495 million, up 26% year-over-year and up 1% sequentially. reflecting broad-based demand across our portfolio and the strong execution of our world-class operations team. In the past earnings calls, we've discussed our breadth and unique exposure to all major semiconductor manufacturing processes, and our fourth quarter results reflected that diversity. Not only did sales of our vacuum subsystems to semiconductor customers grow 19% year-over-year, but sales of our photonic solutions portfolio grew organically more than 50% year-over-year, and grew 90% year-over-year with our photon control acquisition. We continue to execute on our strategy to gain share with key lithography, metrology, and inspection customers. Our photonic sales to the semiconductor market exited 2021 at well over a $300 million annual run rate. We continue to progress on additional design win opportunities. Fourth-quarter sales to our advanced markets were up $269 million, up 1% year-over-year, and up 6% sequentially. We saw a recovery in revenue from industrial applications and delivered strong sequential growth in sales to advanced electronics applications, such as PCB cutting and IC substrate drilling, more than offset seasonally muted flexible PCB via drilling systems demand. As John noted, we see an encouraging follow-on demand for our HDI solution from customers that have previously installed a geo-tool in high-volume manufacturing applications. We believe our success in deploying our HDI tool to high-volume environments is a clear indication of market acceptance, and once the ATT&CK transaction closes, we focus on leveraging our combined expertise in the HDI market to accelerate our customers' roadmaps and reduce their critical time-to-market. For the fourth quarter, the revenue split between our semiconductor and advanced markets was 65 percent and 35 percent, respectively. Fourth quarter gross margin was 46.4 percent, which exceeded the midpoint of our guidance by 40 basis points and grew 70 basis points year-over-year. Our gross margin performance, which includes previously anticipated increases in import costs, is a reflection of our strong operational execution and broad-based ongoing initiatives to continue to drive margin expansion through our long-standing profit and cash recovery program, which we discussed on our Annals Day in December 2020. Fourth-quarter operating expenses, $147 million, slightly down sequentially at the low end of our guidance range. Fourth-quarter operating margin was 27.1 percent, flat sequentially, and up 240 basis points year-over-year, reflecting effective cost control and strong operating leverage in our financial model. Adjusted EBITDA in the fourth quarter was $228 million, resulting in adjusted EBITDA margin of 30%. Net interest expense for the fourth quarter was $6 million, and a non-GAAP tax rate was approximately 16%. Net earnings for the fourth quarter were $168 million, worth $3.02 per diluted share. In terms of working capital, day sales outstanding were 53 days in the fourth quarter compared to 54 days at the end of the third quarter. Inventory returns were 2.8 times in the fourth quarter compared to 2.9 turns in the third quarter. Operating cash flow for the fourth quarter was a record $194 million, and free cash flow was also a record at $171 million. In the fourth quarter, we made a dividend payment of $12 million with 22 cents per share. Exiting the fourth quarter, we maintained a strong balance sheet and liquidity position with cash and short-term investments at a record over $1 billion, which well positions us ahead of the pending ad-tech acquisition. Our term loan principal balance was $824 million at the end of the fourth quarter. We exited the quarter with a $218 million net cash balance. Moving on to full-year 2021 results, sales for a record $2.9 billion, up 27% year-over-year. Building a record 2020 year, semiconductor sales for 2021 were up 32% to a record $1.8 billion, with broad-based strength across our vacuum and photonics portfolios. Advanced market sales were up 19% to a record $1.1 billion. Growth was led by strong results in advanced electronics applications, where we were well-positioned with an extensive array of lasers, optics, motion, and via drilling systems serving PCB, solar, display, and electronics components applications. As we highlight our annual stay, we expect advanced electronics applications to be a long-term growth driver for our advanced markets, given the increased need for advanced laser-based manufacturing processes to solve the miniaturization and complexity of electronics. That's exactly what we experienced in 2021. Moreover, we also experienced growth in our other advanced market applications, such as industrial, life and health science, and research and defense. 2021, the revenue split between our semiconductor and advanced markets was 62% and 38%, respectively. Gross margin was 46.8%, up 160 basis points from 2020. Operating margin was 27%, up 440 basis points from 2020. Our incremental growth in operating margins for 2021 was 53% and 43%, respectively. exceeding the long-term financial model we outlined at our analyst day. This strong operating leverage was achieved despite the global supply chain challenges and cost inflation we are experiencing. Net earnings were a record $634 million, or $11.38 per diluted share, both of which grew at twice the rate of our revenue growth. For 2021, operating cash flow was a record $640 million, or And free cash flow was a record $553 million. As John mentioned, ADATEC integration activities are progressing very well. In funding, the financing will coincide with the close of the acquisition. And until then, the financing remains subject to customary ticking fees. I'll now turn to our first quarter outlook, which excludes any contribution from ADATEC. We estimate first quarter revenue $750 million, plus or minus $30 million. This estimate includes the headwinds of industry-wide supply chain constraints, which we expect to persist through the first quarter. However, overall demand trends are expected to remain strong. We estimate first quarter gross margin of 45% plus or minus one percentage point. The primary driver behind the sequential decline in gross margin is higher cost inflation associated with supply chain constraints. We estimate operating expenses of $153 million, plus or minus $4 million. First quarter net expense is expected to be approximately $6 million, and our tax rate is expected to be 19 percent. Given these assumptions, we expect our first quarter net earnings of $2.57 per diluted share, plus or minus 25 cents. I'd like to now turn the call back to the operator for Q&A.