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spk03: Good day and welcome to the UCP third quarter 2021 earnings call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Rhonda Benetto. Please go ahead.
spk11: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are Jim Schulhammer, Chief Executive Officer, and Sherry Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business, and Sherry will follow with the financial review, and then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections, and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. And with that, I'd like to turn the call over to Jim. Jim?
spk05: Thank you, Rhonda, and thank you all for joining us today. I'm going to start with a review of our third quarter performance and share my thoughts on the industry and how UCT continues to raise the ceiling on performance and consistently outperform the markets we serve. After that, I'll turn the call over to Sherry for a financial review, and then we will open up the call for questions. UCT has demonstrated solid company-wide execution through this extended expansion of WFE growth over multiple quarters. Our Q3 results reflect the strength of our business and the tremendous demand we're seeing from customers worldwide. Revenue for the quarter of $553.7 million and earnings per share of $1.07 are the highest recorded in UCT's history. Using the midpoint of our fourth quarter guidance, we anticipate year-over-year revenue growth for 2021 of approximately 50% and EPS rising by 49%. The growth trajectory of our end markets is accelerating, our customer base is growing, and our opportunity pipeline is expanding. This is shaping up to be a truly extraordinary year of outperformance for UCT. Technology advances continue to drive the underlying shift in the need for semiconductors. Because the number of uses for chips has increased so significantly over the past few years and will continue to evolve, we see ongoing strength into 2022. We believe the long-term upward trajectory of the WFD market is sustainable and that high levels of demand for our products and services will continue for the foreseeable future. UCT's remarkable performance is a result of several competitive advantages, one of the most important being the broad diversification of our products and services. We indirectly touch many of the chips that go into a wide variety of electronic devices. We make the machines that make the next-generation technology and have a notable presence in the most critical elements of the semiconductor production process. UCT's exposure to the entire fab construction, equipment build-out, and production support ecosystems make us better able to navigate fluctuations within subsegments of the broader semiconductor ecosystem. Another important advantage is our ability to leverage our global manufacturing network to meet our customers' increasing requirements. With over two dozen locations worldwide, we are able to scale with our customers and are optimized for business continuity execution. The timing of our new vertically integrated manufacturing facility in Malaysia is extraordinary as it provides additional capacity at a crucial time for our product customers. Initial production began on time in early September, and we shipped our first products by late September. We are actively working with our customers to accelerate production and will continue to ramp output and revenue through 2022. We are also making other strategic investments to support our medium and long-term growth strategy. Semiconductor manufacturers worldwide have plans to break ground on at least 10 new high-volume fabs in 2022. to meet the accelerating demand for chips. UCT has never been more ideally situated to increase our capabilities, expand our presence, and play an even more vital role in our customers' success. The last accomplishment I want to highlight is our ability to deliver on time and under pressure. I would like to acknowledge our employees and specifically call out our dedicated procurement team for their ongoing engagement with our strategic partners who understand the unique requirements of low volume, high value, high complexity products. We actively engage with our suppliers using a collaborative planning and forecasting model that has enabled us to maximize our output capability and be recognized by our customers for our on-time delivery across key markets. In summary, it was a truly exceptional quarter for UCT on many levels. We are excited about the opportunity in front of us as semiconductors become even more strategically relevant. UCT's consistent ability to meet our customers' most urgent needs positions us very well for long-term, sustainable growth as the leading semiconductor manufacturer. I want to sincerely thank every one of our employees, suppliers, and partners for their partnership, commitment, and incredibly hard work, and we look forward to speaking with you again in a few months. And with that, I'll turn the call over to Sherry to review our financial activities and performance.
spk09: Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. I am very pleased to report total record revenue for the quarter of $553.7 million, up 7.5% from the prior quarter. Our products division was up 8.9% to $481.9 million. which includes our first full quarter of revenue from omelet of 64.4 million. Our services division was down slightly to 71.7 million due to delayed shipments as we were challenged with labor shortages at our Hillsborough site, which have now been mostly resolved. Total gross margin for the third quarter rose to 21.6% and remains at the high end of our model compared to 21.2% last quarter. Products gross margin increased to 19.3% compared to 18.8% last quarter, and services rose to 36.9% compared to 36.2% last quarter. Margins can be influenced by customer concentration, geography, product mix, and volume, so there will be variances quarter to quarter. Operating expenses for the quarter was $50.9 million compared with $48.9 million in Q2. As a percentage of revenue, operating expense declined slightly to 9.2% compared to 9.5% in the prior quarter. Total operating margin for the quarter improved to 12.4% compared to 11.7% in the second quarter. Margin from our products division increased to 11.9% compared to 10.9% in the prior quarter. Operating margin from our services division was 15.4%, compared to 16.7 in the prior quarter due to lower volumes. Based on 45.4 million shares outstanding, earnings per share for the quarter increased to $1.07 on net income of 48.8 million, compared to 99 cents on net income of 43.7 million in the prior quarter. Our tax rate for the quarter was 15.5%, compared to 17.6% last quarter. We expect our tax rate for 2021 to stay in the mid to high teens. Turning to the balance sheet, our cash and cash equivalents were $457 million at the end of the third quarter compared to $451.4 million last quarter. Cash from operations increased by $2.2 million to $53.3 million compared to $51.1 million in the prior quarter. During the third quarter, we made another payment on our Term B loan in the amount of $25 million, bringing our voluntary payments for the year to $50 million. For the fourth quarter, we anticipate revenue between $590 million and $630 million, an increase of 10.2% using the midpoint, and we expect EPS in the range of $1.12 to $1.29. Periodically, we need to align our fiscal year end with the calendar year end. As a result, the fourth quarter will be a 14-week quarter versus the usual 13 weeks. And with that, I'd like to turn the call over to the operator for questions.
spk02: Thank you. We will now begin the question and answer session.
spk03: To ask your question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.
spk02: At this time, we will pause momentarily to assemble our roster. And the first question today comes from Patrick Ho with Stiefel.
spk03: Please go ahead.
spk01: Thank you very much, Anne. Congrats on the really nice execution in a difficult environment. Jim, maybe first off, as it relates to the supply chain, you know, given your results, you obviously outperformed expectations. But what were some of the key moving parts that, one, you faced in terms of the supply chain challenges itself? And secondly, how were you able to react to ensure that you were able to deliver, particularly in the products end, you know, the necessary parts to customers?
spk05: Yeah. Hi, Patrick. You know, it's interesting. A lot of the parts that are a bottleneck one week are a different bottleneck, you know, in three weeks. So I think, you know, I think the big difference is, you know, even such things like cable sometimes can be troublesome. I think the big difference is that we're really working backward as far as we can with our suppliers to give them the best forecast and actually POs, you know, long into the future to try to help them, you know, better with their planning. I think that was That was one of the keys. I think another key is that we're able to, you know, we have over two dozen sites, like I mentioned, so we're able to, you know, when we have bottlenecks in one place, we're able to kind of move it around, you know, to a different site. So I think, you know, hats off to our procurement, our supply chain team, and our ops team. You know, I think they were really flexible, but they really knocked down, you know, multiple different, you know, challenges, including freight is another thing. and they knocked down multiple various challenges throughout the quarter.
spk01: Great. Maybe my follow-up question for Sherry, again, you guys performed really well in the gross margin line given the difficult challenges, but the environment is also seeing, as Jim just mentioned, elevated freight costs, procuring parts, just a lot of these supply chain issues. issues creating incremental costs. I guess, how were you able to balance and manage that situation to get the gross margins above expectations?
spk09: Yeah, I think first off, obviously volumes play a big role in this, as well as the fact that we have quite a few things shipping out of our Asia facilities that continue to grow as a percentage of our total revenue. We have seen freight costs go up just as an order of magnitude back in 2019, and we were spending about 1.6% of revenue on freight. Now it's upwards of 2.5%, 2.7%, depending upon the quarter. So those costs have gone up significantly, but I think the volume plays quite significantly into it as well as obviously our new acquisition of Omelette. They have very good gross margins as well, so that really helps in addition.
spk10: Great, thank you very much. Thanks, Patrick.
spk03: The next question comes from Tom Differly with Z.A. Davidson. Please go ahead.
spk08: Yes, thank you. And just to follow up on Patrick's question, Sherry, is there, when you look at that, you know, that basis point or 100 basis point increase in the freight cost, do you view that as a more, you know, midterm, longer term permanent increase? Or is that, could you consider that just a near-term adder that's going to go away at some point over the next few quarters?
spk09: I think it will come down a bit over the next couple quarters. You know, it's just I think we're in the height of some of the supply chain issues that we've seen. And obviously freight is one of those key factors. There are not enough truck drivers and there are not enough planes right now. So I think once that starts to work itself out, then we can hopefully see some of those costs come down. But, you know, it may not come down to 2019 levels, but I think they should come down over the next couple quarters, I would anticipate.
spk08: Okay. And when you have to expedite a shipment to meet an important customer's needs, is that reimbursable through that customer or do you have to foot the bill?
spk09: It depends. It depends on whether they are obviously accelerating something for us to actually meet their demand or if for some reason we have an issue with the supply chain that we're managing. So it just really is dependent upon the situation. But if one of our customers is pulling something in very quickly, we obviously can be able to get reimbursed for that.
spk08: Great. Okay. And then, Jim, congratulations on the shipment out of Malaysia, the new facility there. We have been hearing, though, from others that labor has been an issue with COVID in Malaysia. I wonder if that has impacted your ramp or your scheduled ramp there.
spk05: No, it has not. We've been fortunate. You know, we're in the northern part of Malaysia, and a lot of those COVID issues are related to two of the southern regions in Malaysia. So we've just been very fortunate that that hasn't been an impact to us. At this point, you know, obviously... doesn't contribute a significant amount of revenue yet. But I think we're going to continue to keep our dexterity in place so that we can switch between China, Singapore, Malaysia, North America, even our Philippine plant as needed because you just never know where COVID may flare up.
spk08: Yeah, absolutely. Okay. And then finally, when you look at the expansion of the Hamlet business, How do you view the rollout of, you know, the time it takes to get new tooling up and running, maybe go through some qualifications? I mean, how do you view how quickly you can increase capacity over the next year?
spk05: Yeah, mostly for new tooling, the qualification is a very simple process. There's nothing that's delayed by the customer in most cases. Typically, the lead time of these tools and installation is around three to four quarters. We did approve a batch of investment even before the deal closed in April. So we're seeing some of that investment come online by the very tail end of this year. And then we made a few other investments along the way. And we think those will start coming in more like the first quarter, second quarter of next year. But we expect we'll be able to start ramping of the revenue. It's been ramping up very nicely. We've been able to get some efficiency gains and squeeze out some more, you know, through this quarter. But I expect to see, you know, a bigger increase in revenue starting in the first quarter of next year.
spk08: Okay. Well, thank you, and thanks for your time today.
spk10: Thanks, Tom.
spk02: Thank you. The next question comes from Krish Sankar with Cowan. Please go ahead. Chris, your line is open if you would like to ask a question.
spk07: Hi, this is Robert Mertens on behalf of Chris. Thanks for taking my question. Maybe just a quick follow-up on supply chain issues just in the greater industry at large. Is there any worry that your customers could be impacted by supply you know, ramps at other facilities or that that could have a carry-on effect into your ordering pattern or any sort of inventory builds?
spk05: I'm not sure I follow your question. Are customers of the OEM ramping at other facilities? You mean like land bringing up Malaysia plant or more capacity being added by applied? I'm not sure I follow your question.
spk07: Sorry, if there's any sort of impact to their business from supply chain issues that could have an effect on their ordering patterns with your businesses or any sort of worry that maybe customers are building up inventory in case there are any sort of issues with having to be flexible with their supply chain down the road.
spk05: Yeah, I mean, the supply chain issues are affecting everyone, you know, even, you Our customers, everyone's working through those issues, so that's nothing new. I don't think it, you know, it typically is more of an inconvenience or a nuisance of delaying, you know, shipments, you know, a few weeks. It tends not to be a dramatic change. But I don't, I think it's kind of stabilized at the level where you still have to work it pretty hard. to get what you need to get it out close to the date that the customer needs. But I don't think it's getting any worse, and I think eventually it should start getting better, you know, maybe in the fourth quarter or the first quarter of next year.
spk10: Great. Thank you. I appreciate the color on that. You're welcome.
spk03: The next question comes from Christian Schwab with Craig Helm Capital Group. Please go ahead.
spk04: Hey, congratulations, guys on really fabulous execution. Can you remind us of your current visibility, you know, given the supply chain and lead times changing, you know, across the board, you know, is your visibility, you know, purely better than it than it usually is? Or has it changed in the last few quarters? Or is it longer than typical? Can you just remind us of that, please?
spk05: Yeah, yeah, Christian. The lead time, or the visibility typically that we've had in a normal environment is around one quarter, even where the third month of the quarter that we're looking forward to is a little bit spongy. Now I think we have pretty good visibility through the first quarter, and we're seeing continued strength into the second quarter. So our visibility is around It's getting close to three-quarters of a pretty good bottoms-up, you know, purchase orders and pretty strong forecast going forward.
spk04: Right. You know, not to connect dots, but it seems like that increased visibility that you had allowed you to also go and procure aggressively with purchase orders in hand from your suppliers. you know, to kind of eliminate some of the bottlenecks maybe that other people have been having? Is that fair to say?
spk05: Yeah, absolutely. And, you know, we work hand-in-hand, you know, with our customers and through backwards of the supply chain. So, you know, even when our customers don't have hard orders to us, they'll make commitments to cover our liability as we make hard orders back to our supply chain so that we're covered on areas like forecast, you know, where there's no hard PO yet. So I think the OEMs are really, you know, working pretty smartly to try to help, you know, give the visibility as deep and as far down the supply chain as possible. There tends to be problems that occur that are three or four layers deep in the supply chain.
spk04: Right, right. Okay. And so can you just remind us on the Malaysia additional facility, You know, do we plan on filling that capacity, you know, due to, you know, WFE growth and, you know, and your ability to be more predisposed to heavier concentrations of etch and depth historically, you know, as a percentage of WFE, which is, you know, historically the last few years outgrown that number in general. You know, or is it also a combination of line of sight on market share gains from, you know, existing customers who might be outsourcing more? Can you help us, you know, kind of frame in our heads how you plan on filling that capacity over time and remind us how much it is?
spk05: Sure. It's around 600 to 800 million in revenue annually of capacity. We're also using part of that to bring over the Hamlet product capacity, capability, production capability to expand because we see a lot of opportunity there. When we first built Malaysia, I think out of the $800 million, I think it was maybe half to two-thirds we thought would be filled by transitioning from higher-cost regions to lower-cost regions. Now the way the industry has outgrown and our share gains have especially for outsourcing opportunities where we've seen a lot of share gains against our customers' own fabrications. I think it's probably more like, if I were to estimate, three-quarters or more is due to market industry and outsourcing growth and the opportunity to actually transition from higher-cost regions to lower-cost regions. It's actually a smaller percentage of what we anticipate that plant to be used for.
spk03: okay great um that's wonderful no other questions thanks guys thank you christian drive safe as a reminder if you have a question please press star then one to be joined into the queue the next question comes from quinn bolton with needham and company please go ahead hey jim uh congratulations on the nurse results i'm going to apologize because i missed most of the prepared comments but
spk06: Wanted to ask two questions in response to the last question. You talked about some share gains and maybe you made some comments in the prepared script, but wondering if you can address that share gain opportunity. If I look at your results versus those of your nearest competitor, you're clearly growing much, much faster in the near term. And I understand that your competitor was constrained by operations in Malaysia, but I'm wondering To the extent that your competitors are constrained, how quickly can an OEM move a module or a gas panel from another supplier to UCT?
spk05: Yeah, the share gains I'm talking about are more, you know, they don't move quickly. They're more planned outsourcing moves by our two major customers. There's not a lot of movement. You know, I think the issues that some of our peers are having are obviously short term and clearly force majeure type of issues. So it's just, you know, unfortunate, but I don't think that's really, that's not really the shared game that I'm talking about. I'm talking about mostly winning, winning outsourcing opportunities, you know, from our two major customers. And, you know, maybe even some of those go see some of those are, you know, intended to go straight into our new Malaysia factory. So that is, when you look at the SAM, the biggest opportunities actually are customers, you know, needing to really move more and more of their production out of their facilities because they've grown so dramatically. So that's the major area I'm talking about.
spk06: But, I mean, do you see any opportunity for OEMs to kind of shift, you know, systems from one major, you know, module vendor to another? Or do you think that to the extent, you know, your big competitors, whether they're, you know, direct competitors or some of the larger contract manufacturers to the extent that they're constrained. Do you think that that demand, you know, stays with that supplier and it just pushes from one quarter to the next?
spk05: Yeah. You know, short term, you know, they can adjust, you know, the ratio, how much business they give each of us, but long-term share gains are typically done through a long-term planning process. So even when one, one of our peers struggle or, you know, If we were to struggle, there might be kind of a shift of share from 50-50 to 55-45 or something like that in the short term. But they tend to move them back to the balance after those issues are resolved. So I think what I'm really talking about is the things that don't go away are when they take it out of their own facility, close down their production of a certain module or a certain capability. and move it to UCT. Those are the real sticky supplies, you know, market share wins, and that's really where we focus. There's not a lot of long-term movement between us and our competitors.
spk06: Got it. That sounds like any share from competitors that you pick up is pretty transitory is what it sounds like you're telling us.
spk05: Yeah, and that, and also you have to remember there's a lot of commerce that goes on between you know, all of us in the ecosystem, you know, Celestica, I-Corps, Benchmark, Jabil, you know, we're actually all, we're not only competitors, but we're also customers and suppliers to each other. So there's a lot of commerce going on, you know, behind the scenes to kind of help the, you know, the end customer get out what they need. So oftentimes, you know, we support each other to, you know, when we're coming through issues of delivery, you know, we try to make sure that the end customer is met. So So that obviously, you know, that's obviously, you know, you might see a short-term bump in revenue from things like that. But, you know, long-term, you know, the real opportunity is really the huge amount of insourcing that still needs to move outsourcing from the OEMs. That's really where we focus.
spk06: Understood. Thank you for that additional color. Tim, the second question I had was, I think a quarter ago, you were saying you were holding off on some of the Homlet qualifications, especially on your gas panels, given how constrained the Homlet business was. Sounds like Homlet is still constrained in the near term, but you just talked about some additional tooling coming online by year end and more tooling coming on by the end of the second quarter. And Knowing that these qualifications probably take two to three quarters, I'm wondering if you're starting that activity now to try to get components qualified so that by the end of the qualification period, you know, that aligns pretty well with that additional tooling coming on for Homlet.
spk05: Yeah, I think you have to think about qualifications two different ways. Qualifications, just by adding a new tool into the factory, but you're making the same product that you're already qualified to make for the customer. That is a very simple, very quick process. So that does not take two to three quarters. That takes, you know, within a quarter, you know, within a few weeks. The qualifications that take a while are selling components to a customer that hasn't used those components in the past, and that's where you have to run a lot of lab tests and things like that. That we started while we started. We actually started that before the acquisition because we were working with Hamlet in the key supplier that we wanted to grow. So that started well over a year ago, and that's going very well. At this point, if we can bring the capacity, as fast as we can bring capacity out, we can sell the product. It's a race to expand. Got it.
spk06: Okay. That's what I wanted to know. Thank you very much. All right.
spk10: Thank you, Quinn.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Jim Shoalhammer for any closing remarks.
spk05: Thank you for joining us today, and we look forward to talking to you again in the new year, 2022. Thank you very much.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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