MKS Inc.

Good day and thank you for standing by.

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 Batchelor, Senior Vice President and Chief Financial Officer. Yesterday, after market close, we released our financial results for the first quarter of 2022, 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 our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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. Unless otherwise noted, all forward-looking financial measures excluding any contribution from Adatech Limited, the acquisition of which is still pending. Also, unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Please refer to our press release and the presentation materials posted to our website for information regarding our non-GAAP financial results, a reconciliation of our GAAP and non-GAAP financial measures, and certain pro forma financial information. Now, I'll turn the call over to John.

Thanks, David. Good morning, everyone, and thank you for joining us today. I'm very pleased with our Q1 results, especially given the significant industry supply chain challenges. First quarter revenue of $742 million was within 1% of the midpoint of our guidance range. Profitability was strong, with net earnings per diluted share of $2.71, exceeding the midpoint of our guidance range, and an increase of 6% year over year. We credit this profitability to excellent execution at our factories and an emphasis on cost control. while continuing to make targeted R&D investments across our portfolio. We believe our performance highlights prudent management of our expenses while still investing in the long-term growth of our business. While underlying demand trends remain very healthy, industry supply chain constraints are limiting growth, which is particularly true in our semiconductor business. Before I review the key trends across our end markets, I want to explain a change in how we will present our revenue. Beginning with this quarter, we have divided what we previously referred to as our advanced markets into two separate end markets, advanced electronics and specialty industrial. We believe this change better represents the end markets we serve and will enable you to better understand the key drivers of our business. There will be no change to our semiconductor market, which includes deposition, etch, lithography, metrology, inspection, wet clean, and packaging applications. In the first quarter, revenue from our semiconductor market comprised 66% of overall revenue. Advanced electronics represents revenue from advanced printed circuit board, solar, display, and electronic component applications. We view our advanced electronics market as a close cousin to the semiconductor market, each of which benefits from the same defining trends of miniaturization and complexity. We believe packaging technologies will become increasingly critical to enabling better performance, design, and cost of electronic devices, from high-end smartphones to electric vehicles to high-performance microprocessors for data centers and artificial intelligence. And advanced PCBs and package substrates are the next key drivers of these trends, underscoring the strategic rationale of our pending acquisition of Adatech, where we plan on leveraging Adatech's electroplating solutions and our advanced laser drilling solutions to accelerate our customers' roadmaps. In the first quarter, revenue from our advanced electronics market comprised 11% of overall revenue. Our specialty industrial market represents a broad array of industrial, life sciences, research, and defense applications. These are businesses that leverage our domain expertise in semiconductor and advanced electronics. They represent a collection of proprietary technologies with strong margins, In the first quarter, revenue from our specialty industrial market comprised 23% of overall revenue. Now I'd like to provide more detail on our first quarter results and my thoughts on second quarter demand trends. Sales to our semiconductor market declined 1% sequentially in the first quarter, in line with our expectations, reflecting continued supply chain constraints, as well as a temporary shutdown at our Shenzhen facility due to local government COVID-19 measures. Our operations and engineering teams continue to respond to these challenges with agility, flexibility, and determination in partnership with our customers and suppliers. Overall, semiconductor demand trends remain robust in the first quarter, with broad-based strength across our vacuum and photonics portfolio. We continue to see strong demand for our RF power solutions for dielectric etch applications, as well as for our dissolved ozone solutions for advanced foundry applications especially in new fab expansions. I'm also pleased to announce that we commenced the shipment of our new clean line solution in the first quarter. This innovative system is a compact remote plasma source used to reduce buildup of byproducts that arise from vacuum processing, which improves fab yields and lowers preventative maintenance costs. It is a direct result of our surround the chamber strategy as it leverages our expertise across our RF power, remote plasma, valve, and integrated process solutions teams to deliver a unique solution, which again demonstrates the strength of MCAS's innovation engine. We are seeing very positive interest from multiple customers. We also continue to see strong demand for our photonics solutions, with particular strength in our precision motion subsystems, securing design wins across multiple backend applications, including annealing and advanced packaging lithography. As we look to the second quarter, demand trends in our semiconductor market remain very strong. However, we expect supply chain constraints to remain a factor. Accordingly, we expect revenue from our semiconductor market to be consistent to slightly down as compared to first quarter levels. Before I discuss our advanced electronics and specialty industrial markets, I want to share my thoughts on 2021 critical subsystem market share data published earlier this month by the independent market research firm, Tech Insights, formerly VLSI. The report validated that MKS has continued to take share in the overall critical subsystem category in 2021. In fact, their research shows MKS is now the market leader in RF power supplies. This achievement was a culmination of many years of targeted investments, innovation, execution, and close collaboration with our customers. I'm extremely proud of the MK's team for achieving this milestone, which took hard work, dedication, and expertise. And we see additional opportunities on the horizon for RF power, fueled by continued industry investments into vertical scaling. Tech Insights also highlighted our share gains across other critical subsystem categories, such as RF matching networks, remote plasma sources, pressure sensing, residual gas analyzers, and linear motion subsystems. As a critical subsystem leader with the broadest set of capabilities in the industry, we are well-positioned to capitalize on many opportunities that lie ahead in the semiconductor market. Moving to our advanced electronics market, revenue in the first quarter declined 15% sequentially and 29% year-over-year. Declines were primarily a result of softer industry demand for flexible PCB via drilling equipment. we believe our customers have taken a risk-averse approach to expanding flex PCB capacity at this time, given the growing uncertainty resulting from factors such as supply chain constraints, geopolitical tensions, inflation risk, and its impact on consumer end demand. As we look to the second quarter, we expect revenue from advanced electronics to be down sequentially, led by continued softness and flexible PCB equipment spending, Excluding flexible PCB via drilling, our advanced electronics revenue is expected to be consistent with first quarter levels. Revenue from our specialty industrial market declined 1% sequentially but grew 2% year-over-year. We saw good sequential and year-over-year growth in life sciences applications, offsetting seasonal softness in research spending. For the second quarter, we expect revenue from our specialty industrial market to remain consistent with first quarter levels. Before I hand the call over to Seth, I wanted to share a few thoughts regarding our pending acquisition of Adatek. As you may have seen, on April 1st, we announced an extension of the date for completing the acquisition to September 30th, 2022. The strategic benefits of acquiring Adatek have become increasingly compelling as the trends towards advanced packaging continue to accelerate. We believe the unique combination of MCAS's laser drilling and Adatek's advanced electroplating solutions will allow MCAS to become a foundational enabler of electronic devices, spanning from the transistors on a chip to the interconnects in an advanced PCB. The defining trends of miniaturization and complexity that have driven continuous innovation in the semiconductor industry for decades are rapidly disrupting the PCB and package substrate landscape. And just like what we did in SAMI more than two decades ago, we are positioning ourselves to be at the forefront of these trends. We believe Adatech's general metal finishing business will fit nicely within our specialty industrials business, sharing the common thread of leveraging core domain expertise to address a wide variety of specialty industrial applications. We continue to work with China's State Administration for Market Regulation to obtain regulatory clearance, which is the remaining jurisdiction for which approval is a condition to closing. And we're looking forward to closing the transaction and welcoming the talented Adatech team to MCAS. With that, I'd like to turn the call over to Seth. Thank you, John. I will first provide additional detail on updated end market classification, then cover our first quarter 2022 results, followed by guidance for the second quarter. Let's start with advanced electronics, which is a key enabler of laser-based manufacturing solutions for cutting-edge electronics applications. This market includes flexible and HDI PCB via drilling, laser and vacuum processing solutions for solar and display applications, a number of other precision manufacturing applications for electronic devices. We believe our unique Surround the Workpiece portfolio of lasers, motion, optics, and other photonics solutions, combined with our applications expertise from our Equipment Solutions Division, provide us with a unique opportunity to be the go-to enabler of advanced electronics manufacturing. These applications offer attractive secular growth, although there may be some level of cyclicality, given this market is tied to capital equipment spending. Looking ahead, our pending acquisition of Adtech would add critical electrical plating solutions for advanced interconnects. With these solutions, along with our laser drilling systems, we believe we're well positioned to optimize the interconnect and accelerate customer roadmaps for next-generation electronic devices. We also believe Adtech's electronics business would add a large base of stable recurring revenue with a strong margin profile. For 2021, revenues from advanced electronics market comprised 15% of MCAS's total revenue, and on a pro forma basis with EdTech's 2021 reported financial results, it would have comprised 32% of overall revenue. A specially industrial market represents a broad array of leading technologies across industrial, life and health sciences, research, and defense markets. Examples of applications include vacuum solutions for synthetic diamond manufacturing, lasers for ophthalmic surgery, vibration isolation for advanced research, and infrared zoom lenses for both commercial and defense application. This market provides more stable revenues and strong margins in cash flow. In this market, we leverage product and technology capabilities that we developed from our investments in the semiconductor and advanced electronics markets. Adtech's general metal finishing business would fall into our specialty industrial market. Similar to our existing specialty industrial applications, there's important domain expertise in chemistry that is leveraged across a wide array of applications, such as surface finishing, in functional coatings for electric vehicles, renewable energy, and a host of other industrial and commercial applications. In 2021, revenues from our specialty industrial market comprised 23 percent of MCAS's total revenue. On a pro forma basis, PADTEC's 2021 reported financial results would have comprised about 27 percent of overall revenue. In addition to dividing our advanced market to two separate markets, we also modified the names of three divisions. Our vacuum analysis division is now our vacuum solutions division. Our light and motion division is now our photonic solutions division, and our equipment and solutions division is now our equipment solutions division. A historical snapshot of our results, broken down by our divisions, in new markets for the prior three years is available in the investor relations section of our website. With that, let's now discuss our first quarter results, and I'll look for the second quarter. Sales for the first quarter was $742 million. It declined 3% sequentially, but up 7% year-over-year. While overall revenue was below the midpoint of our guidance, we were very pleased with how we executed in the quarter, giving ongoing global supply chain constraints, as well as temporary shutdown of our CENGEN facility due to local COVID-19 restrictions. In the first quarter, semiconductor sales were $488 million, down 1% sequentially, but up 19% year-over-year, reflecting broad-based demand for my vacuum and photonic solutions. While supply chain constraints draw much attention these days, our relentless focus on innovation is as strong as ever. The market share gains we delivered in 2021 are a clear reflection of our ability to accelerate our customer roadmaps. We are innovating areas key to advanced semiconductor manufacturing, including vertical scaling, atomic layer processing, advanced lithography, metrology and inspection, as well as wet clean applications. We have significant domain expertise across each of these areas, and there are many cases where we combine our broad expertise to introduce new solutions that create new market applications, such as our clean line solution that John discussed. We have a long track record of gaining market share. We continue to leverage new opportunities. Moving to advanced electronics market, the first quarter was $82 million. It declined 15% sequentially and 29% year-over-year. The primary driver behind the decline was the softer industry demand for flexible PCB-V drilling equipment. As a result of the factors John highlighted, we expect demand for a flexible PCB-V equipment to remain relatively muted in the second quarter. This market continues to be a long-term secular grower, but given our exposure to the capital equipment spending of this industry, our quarterly revenue remains lumpy. For context, between 2019 and 2021, Plexil PCB equipment revenue grew at a 40% compounded annual growth rate. We continue to work closely with HDI PCV via drilling beta customers to drive further qualifications while continuing to generate interest from new customers. We have dozens of tools in high-volume manufacturing running 24-7, which is a clear validation of our technology. One of the attractions of this market is that it is sticky once you get designed in. While we would like to have made faster progress gaining share, we are encouraged by the customer conversations and the performance of our offerings. Moreover, we're excited about the growing attention on advanced HDI PCBs and packaged substrates and the role these play in optimizing performance, cost, and designs of advanced electronic devices. We expect this to become more critical to enabling high-end smartphone applications, those high-performance servers, wearables, electric vehicles, and other electronic devices. Importantly, these increasing market requirements align very well with MCAS and Adtex capabilities, and we believe our combined capabilities will allow us to optimize the interconnect and drive better and faster solutions for our customers. Turning now to a specially industrial market, revenue was $172 million in the first quarter, declining 1% sequentially but growing 2% year-over-year. On a sequential basis, we saw growth in life and health sciences and defense applications offset by seasonal softness in the research market. Our first quarter gross margin was 45%, which is at the midpoint of our guidance. As expected, we were negatively impacted by higher inflation, but we were pleased with how we executed our gross margin despite revenue being below the midpoint. While first quarter research and development expenses remained flat sequentially, reflecting continued investment in product development, first quarter operating expenses were down $3 million sequentially to $144 million and below our guidance range as a result of strong cost controls as well as the timing of certain equity compensation expenses, which will be reflected in the second quarter. First quarter operating margin was 25.6%. 100 basis points above the midpoint of our guidance to near the high end of our guidance range. Operating income was $190 million, up $11 million year-over-year. First quarter adjusted EBITDA was $211 million. Adjusted EBITDA margin was 28.4%. Net interest expense for the first quarter was $6 million, and our tax rate was approximately 18%. Net earnings for the first quarter were $151 million, or $2.71 per diluted share. Actually, in the first quarter, we maintained a strong balance sheet and liquidity position, with cash and short-term investments at a record of $1 billion, which well positions us ahead of the pending ad tech acquisition. Our term loan principal balance was $822 million at the end of the first quarter, We exited the first quarter with a $231 million net cash balance. In terms of working capital, day sales outstanding were 59 days at the end of the first quarter compared to 53 days at the end of the fourth quarter, reflecting the timing of revenue during the quarter. Inventory returns were 2.6 times at the end of the first quarter compared to 2.8 times at the end of the fourth quarter, which was impacted by supply chain constraints. These metrics, combined with the annual bonus payment, resulted in first quarter operating cash flow of $41 million and free cash flow of $22 million. Consistent with prior quarters, we had dividend payment of $12 million, or 22 cents per share. I'll now turn to our second quarter outlook. Even though business levels remain robust, we expect second quarter revenue of $730 million, plus or minus $30 million, primarily due to continued supply chain constraints. Based on anticipated product mix and revenue levels, we estimate second quarter gross margin of 43.5%, plus or minus one percentage point. Like many other companies, we're not immune to exceptional macroeconomic inflationary challenges impacting our markets. However, we have a strong track record of driving continuous improvement in our operating model We will continue to take all necessary steps to counteract these inflationary impacts over time. We expect operating expenses of $156 million, plus or minus $4 million. The sequential increase is largely due to timing of annual compensation increases. For the second quarter, net interest expense is expected to be approximately $6 million, and our tax rate is expected to be approximately 18%. Given these assumptions, we expect second quarter net earnings of $2.28 per diluted share, plus or minus 24 cents. Before I turn the call back to the operator, I'd like to share a few thoughts on our pending acquisition of Adatech. I am pleased to announce we successfully re-syndicated our debt financing earlier this month, following the expiration of the previous syndication. Our updated financing includes a term loan B with a $3.6 billion U.S. dollar tranche, In a €600 million tranche, both of which were substantially oversubscribed, we also diversified our lending base with a $1 billion term loan egg. Funding will coincide with the close of the pending acquisition of AdTech. Given the current debt market environment, the price was understandably somewhat higher this time around. However, we are very pleased with the final terms in the mix of debt capital we achieved. We believe the successful pricing demonstrates lenders' belief in the strong credit profile of the combined company. We are confident the cash flow generation of the combined company will position us to aggressively delever the balance sheet consistent with prior acquisitions. We're also pleased with AdTech's business performance as evidenced by their full year 2021 results released on April 4th. In fact, on a pro forma basis, 2021 adjusted EBITDA for the combined company would amount to $1.3 billion. Adatech has also performed slightly better than we expected when we performed our initial due diligence. Furthermore, we originally announced the acquisition. We say that we expected net leverage at closing to be slightly below 3.5 times. Given the extension of the timing of the transaction, this has paid cash flow generation for both MCAS and Adatech, we now anticipate a more favorable net leverage ratio at closing. MCAS is in a strong position to drive shareholder value creation by capitalizing on a number of attractive secular trends, and we believe Adatech would further enhance those efforts. I'd like to now turn the call back to the operator for Q&A.