Ultra Clean Holdings, inc (UCTT) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

Ultra Clean Holdings, inc (UCTT 3.52%)
Q2 2021 Earnings Call
Aug 2, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Ultra Clean Technology Second Quarter 2021 Conference Call. [Operator Instructions]

I would now like to turn the conference over to Rhonda Bennetto. Please go ahead.

Rhonda Bennetto -- Senior Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone and thank you for joining us. With me today are Jim Scholhamer, Chief Executive Officer; and Sheri Savage, Chief Financial Officer. Jim will begin with some prepared remarks about the business and Sheri will follow with the financial review. 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?

Jim Scholhamer -- Chief Executive Officer

Thank you, Rhonda and good afternoon, everyone. Thank you for joining us today. I'm going to start with a brief review of our second quarter performance while sharing my thoughts on the industry and how UCT continues to increase its value within the semiconductor ecosystem. After that, I'll turn the call over to Sheri for a financial review. And then we will open up the call for questions.

By maximizing our current market position and capabilities and consistently working to meet customer demand, UCT again reached new revenue and EPS milestones. Total revenue for the second quarter was just over $515 million, a 50% increase year-over-year and EPS grew 32% to nearly $1. Over the past five years, we have consistently outperformed the markets we serve. This track record combined with our commitment to investing in our future paves the way for a very exciting roadmap for growth in 2021 and beyond.

As the semiconductor industry continues to be stretched by record high demand, we are leveraging our leading position as a partner of choice to help our customers and their customers accelerate the rapid migration toward next generation devices. The global semiconductor industry has historically been driven by demand from electronics such as smart phones and computers. More recently, continued enhancement of existing products and the inclusion of emerging technologies such as AI, 5G networks and high performance computing applications are creating sustained demand increases across a much broader end market. This megatrend is enabling greater visibility with multi-year record breaking industry capex plans for leading and trailing edge capacity to support the extent of that [Phonetic].

UCT's broad spectrum of products and services are increasingly relevant to the success of our customers and this gives us a significant competitive advantage. We are one of the few semiconductor focused manufacturers with the proven ability to sustainably support the dynamic product roadmaps and stringent quality levels required for advanced chip manufacturing. To ensure we are ideally positioned to deliver value quickly and efficiently to our customers worldwide, we are making strategic investments to expand our capacity to provide additional leading edge and specialty capabilities to support our growth strategy over the long term.

Our new state-of-the-art facility in Malaysia is on schedule and customer qualifications are beginning this month. Fortunately, we are located at Northern Malaysia where COVID cases remained low compared to the rest of the country. So we have seen no interruptions to speak of. We remain on track to start initial production in early September and expect to progressively ramp this year and into 2022 to meet our customers' increasing needs. The timing of this additional capacity is a deal as it strategically expands our capabilities on existing and new customer platform and an optimal time.

Our product capacity expansion program stretches beyond Malaysia and include strategic investments designed to capture that many significant profitable growth opportunities we see. Not only a wafer fab production equipment, but also in service, sub-fab [Phonetic] support equipment and fab infrastructure as well as the industry continues to transform at a very rapid pace. We will continue to engage with our customers to design, manufacture and service the best products in the best way possible to address their needs in a sustainable manner. The global pandemic continues to be a risk factor as the Delta variant is spreading quickly across many regions.

Like we have done since the pandemic began, UCT will continue prioritizing the health and well being of all its employees while ensuring business continuity. All safety protocols in our BCP playbook remain in place at each site and all UCT facilities remain fully operational. We are extremely grateful that we have had zero employee to employee transfers of the virus within our 6,000 plus global workforce since the pandemic began. We continue to work closely with our supply chain to increase resilience and provide business continuity across all our products and service lines.

2021 is shaping up to be another year of outperformance for UCT. Our growing suite of capabilities, additional capacity, strong balance sheet ideally positions us to capitalize on the robust demand trends returning considerable value to our shareholders over the long term. Before handing the call over to Sheri, I want to again thank our employees and our suppliers and partners for their 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 Sheri to review our financial activities and performance. Sheri?

Sheri Savage -- Chief Financial Officer

Thanks, Jim and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. Total revenue for the quarter was $515.2 million, up 23.4% from the prior quarter. Our Products division was up 28% to $442.5 million, which includes nearly a full quarter of revenue from Ham-Let amounting to $58.2 million. Our Services division was up slightly to $72.7 million.

Total gross margin for the second quarter remains at the high end of our model at 21.2% compared to 21.3% last quarter. Products gross margin was 18.8% compared to 18.2% last quarter and services was 36.2% compared to 36% last quarter. Margins can be influenced by customer concentration, geography, product mix and volumes, sure [Phonetic] there will be variances quarter-to-quarter. Operating expense for the quarter was $48.9 million compared to $38.1 million in Q1 due to the acquisition of Ham-Let. As a percentage of revenue, operating expense was 9.5% compared to 9.1% in the prior quarter.

Total operating margin for the quarter was 11.7% compared to 12.2% in the first quarter. Margin from our Products division with 10.9% compared to 11.7% in the prior quarter. And Services division was 16.7% compared to 14.3% in the prior quarter. As we mentioned when we purchased Ham-Let, their operating margins are below our typical products margin range. With synergies, we will continue to improve the product's operating margin over the coming quarters.

Based on 44.3 million shares outstanding, earnings per share for the quarter were $0.99 on net income of $43.7 million compared to $0.92 on net income of $38.2 million in the prior quarter. Our tax rate for the quarter was 17.6% compared to 18% last quarter. We expect our tax rate for 2021 to stay in the high teens.

Turning to the balance sheet, our cash and cash equivalents were $454 million at the end of the second quarter compared with $264 million last quarter. A significant portion of the increase was a result of the equity offering in April, 2021. Cash from operations was $51.1 million compared to $65.6 million in the prior quarter. During the second quarter, we made an additional voluntary payment on our Term B loan in the amount of $25 million. Before we review our guidance for the third quarter, I wanted to share a change to our services joint venture in Korea.

We have recast our arrangement to purchase additional shares of the JV to remain much more flexible. This change will not impact revenue or operating margin, reduce our reported EPS in future quarters. In the third quarter, we anticipate revenue between $520 million and $560 million, an increase of 5% using the midpoint and we expect EPS in the range of $0.94 to $1.10. Our EPS guidance includes a $0.03 to $0.04 impact from the joint venture change I just noted.

And with that, I'd like to turn the call over to the operator for questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Krish Sankar with Cowen and Company. Please go ahead.

Krish Sankar -- Cowen and Company -- Analyst

Yeah, hi, thanks for taking my question. I actually have three of them. First one for Jim on Sheri. Just a quick housekeeping question. You said Ham-Let was $58 million in June. How much is Ham-Let in your September guidance? And then I have few other questions.

Sheri Savage -- Chief Financial Officer

We have not -- we didn't break that out, but I would anticipate it would be similar to -- up to the amount that they did in the Q2 timeframe.

Krish Sankar -- Cowen and Company -- Analyst

Got it, got it. Okay, fair enough. Thanks, Sheri for that. And then a question for Jim, what is the visibility today? Is it into the December quarter or is it in 2022? And the reason I'm asking is that, in the past year, you have always outgrown WFE. And since the last earnings call, the WFE outlook has increased over 30% this year. But do the math, that basically means that December revenue had to be flat to up if you want to outpace WFE. So I'm just kind of curious what is it that will [Indecipherable] if maybe give any color until December houses.

Jim Scholhamer -- Chief Executive Officer

Yeah, Chris. Thank you. We certainly are not forecasting out through December or through the March quarter. But I think it's safe to say that all throughout the industry, we see a pretty solid forecast out through the end of the year and into next year. At this point, it's really a case for the whole industry more gated by the ability to really produce the WFE tools rather than orders, orders on hand. So I think we see an unusually long trail of orders heading out several quarters which normally we don't see.

Krish Sankar -- Cowen and Company -- Analyst

Got it. Got it. And then a final question for Sheri. I just want to check on the operating leverage, clearly revenue has increased in June, but margins were kind of flattish, and then kind of the guidance based on September, it looks like revenue is improving but EPS is kind of still not that much. So is Ham-Let unique [Phonetic] or do you think that incremental operating leverage kind of waning now that the easy moves up.

Sheri Savage -- Chief Financial Officer

Yeah, know from an online and definitely accretive to the gross margin. But as I mentioned in previous calls, they are not accretive yet from an operating margin perspective. We anticipate that we'll be able to get them into our products range of 8% to 10% in the next couple of quarters. They're adding a specific amount of opex etc. in cost that will continue to work on along with revenue synergies over the next couple of quarters. So that's what will help us see that operating leverage as we continue to move forward with them. So that's really the one of the key contributors as well as we have to continue to add specific [Technical Issues] so that we can continue to grow, so that we will continue to work on that as we have look forward.

Krish Sankar -- Cowen and Company -- Analyst

Thanks, Sheri. Thanks, Jim.

Sheri Savage -- Chief Financial Officer

Welcome.

Operator

The next question comes from Quinn Bolton with Needham and Co. Please go ahead.

Quinn Bolton -- Needham & Company -- Analyst

Hey, guys, congratulations on the results and outlook. Jim wanted to start with the overall industry capacity constraints and specific to UCT. How are you feeling about your ability to manufacture to demand? I know you've got Malaysia ramping in September, but how tight are things now? And do you feel that your business is constrained through your manufacturing footprint or do you think you should be able to meet demand based on your manufacturing capacity today?

Jim Scholhamer -- Chief Executive Officer

Yeah. Thanks, Quinn. I think overall, we're doing a pretty good job of keeping up with demand and making the deliveries that we're expected to make. It's more a case of the ability of the whole industry to really absorb the other parts. If we make a module on time or we make a tool on time, there's other elements to that have to also be ready. So I think it's really a case where the whole industry, our customers and our peers are also kind of hand in the mouth right now. So even when we're able to make deliveries, we're a little bit constrained when the whole -- the whole tool is ready to go, if you would. So, but I think we're doing, we're doing a pretty good job and keeping up. But I think one of the few times that have been in the industry where maybe 20, 30 years ago it happened in the late '90s where the revenue is really gated by, not by orders, but by the ability of the whole industry to keep up with things.

Quinn Bolton -- Needham & Company -- Analyst

Got it. Second question from me, I know you've only had Ham-Let under your belt for about a quarter now but wondering if you could give us any update on your ability to begin qualifying those components on your gas panels to try to capture additional value in that in that sale.

Jim Scholhamer -- Chief Executive Officer

Yeah, thanks for that question. Demand is really strong across the board for Ham-Let we're definitely making progress with all the engineering and drawings changes needed to really set that up, the book to bill in that business is really high right now. And so that work where we're doing the qualifications and getting in place is really setting us up for next year and I think at this point, we're doing everything we can be kind of increase the capacity of Ham-Let to just to meet the orders on hand is definitely, I'd say around the time that we closed on the business we saw orders really spiked up pretty dramatically in that space.

Quinn Bolton -- Needham & Company -- Analyst

That's great. And then lastly for Sheri. Maybe I missed it, but can you just walk us through the JV change and why that's dilutive to EPS by $0.03 to $0.04 a quarter.

Sheri Savage -- Chief Financial Officer

Yeah, absolutely. This was something that was put in place by quantum clean QuantumClean before we purchased them. And basically, there was no obligation to buy up to 86% of the JV. As a result, we were able to consolidate profits up 86%. So what we're doing is basically taking away the obligation and making it optional. And we still own a majority of the JV, greater than 50% and really what it allows us to do is it gives us as, as we continue to look at M&A is core to our strategy, it really allows us to maintain flexibility with our capital. So that is more beneficial to shareholders. And if we decide we want to buy up to that amount we will, but it just gives us more optionality versus obligation.

Quinn Bolton -- Needham & Company -- Analyst

So, will you just effectively be recording a higher minority interest so that you historically had 86% of that JV flowing through your income statement, and now that it's, you don't have the obligation, you'll have a lower than 86% of profits effectively flowing through the income statement.

Sheri Savage -- Chief Financial Officer

Correct. Revenue and operating margin will stay the same or have a bigger adjustment of profit below the line in other income. So you'll see a little bit larger back out a profit in the other income and interest line and that's what the effective three to four senses.

Quinn Bolton -- Needham & Company -- Analyst

Got it. Thank you.

Sheri Savage -- Chief Financial Officer

You're welcome.

Operator

Next question comes from Patrick O'Rourke with Stifel. Please go ahead.

Patrick O'Rourke -- Stifel -- Analyst

Thank you very much and congrats on the nice quarter and outlook. Jim maybe to follow-up on -- for the capacity constraint question, I look at it from a different angle of supply constraints, based on your results and outlook, it looks like you manage that very well. One, did you experience any, I guess, meaningful supply constraints. And secondly, if not, what have you've been doing differently or have you been able to procure the necessary supply to keep up with your customers' end demand?

Jim Scholhamer -- Chief Executive Officer

Yeah. Thanks, Patrick. We've definitely had some level of constraint happening from some of the kind of build -- built-in OPMs, we call them original part manufacturers, so that definitely throttled back our ability. We could have delivered more revenue. Now, we met the customers' needs. But we could have delivered more if we had been able to secure more of some of those OPM parts. I think when Kuala Lumpur got hit with the two -- 10 day or two-week shutdown, we were not affected. And some of our competitors were that we were able to pick up some additional business within this quarter and probably this quarter a little bit as well.

So there's some puts and takes. Overall, I would say we've been able to meet the customers' needs. But because of some of those constrictions we were, capably were constrained on delivering the amount of revenue. We could have delivered more revenue in this quarter without those issues.

Patrick O'Rourke -- Stifel -- Analyst

Great, that's helpful. And maybe a question for Sheri, in terms of gross margins, as you mentioned, there's a lot of moving parts to it. But as you get the Malaysia facility ramps up, typically, there are start-up costs associated with it. But given the -- I guess the high demand that we're seeing out there, am I right to assume that you could absorb that capacity faster and I guess, the normal time start-up cost could be a little bit less and you can get gross margins or I guess you can keep gross margins at these elevated levels because of the high demand.

Sheri Savage -- Chief Financial Officer

Yeah, I do think that we are able to absorb the majority of those costs. Malaysia is going to really be something that's probably more impactful to 2022. But I think as we slowly started up, I don't see there being a huge, huge drag on our margin as a result of that.

Patrick O'Rourke -- Stifel -- Analyst

Great, thank you very much.

Jim Scholhamer -- Chief Executive Officer

Thank you, Patrick.

Operator

Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Hey guys, congrats on another good quarter and outlook. Can you help us understand what the -- remind us probably, how much revenue you could get from the Malaysian facility in '22 and it would it be running at full capacity by the end of '22 or do you think it would take longer?

Jim Scholhamer -- Chief Executive Officer

Yeah, hi, Christian. Thank you. Yeah, the full capacity when it's all built out in two to three years, the maximum is roughly around $600 million in revenue. There's always some legal room in there as well. I think through 2022, I think our estimate is somewhere around a third, that would be utilized at -- but the $600 million is not -- we acquired some additional hiring and building out of different cleanrooms and things so -- so we're doing the capacity in different stages. So, ultimate capacity is $600 million. But roughly a third of that is available, will be -- is available right now and we expect to have that kind of build out by the end of the next year.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Great. And given kind of the tightness in the strength of the wafer front-end equipment market integral [Phonetic] are you already securing orders for your September production and end of '22 for that facility as we sit here today.

Jim Scholhamer -- Chief Executive Officer

Yeah, one of the phenomena that we're seeing is a lot more working together with our customers to secure long lead time deals from them, which therefore we are able to cover that -- cover those deals back to our supply chain. So we're getting a lot of great cooperation from our customers to really put the money down and put the orders in and work, then we're able to lay out long-term orders with the supply chain. So that's definitely one of the things that as we're entering our third year of this big ramp, we're seeing a lot improved cooperation between all parties. So I think we're in good shape.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

And then lastly, would you guys still expect as we go through the wafer front-end equipment spending cycle for you guys to outgrow WFE by at least 10 points on a go-forward basis? Everything you're seeing still suggest that point to that.

Jim Scholhamer -- Chief Executive Officer

Yeah, definitely, absolutely, I mean, obviously this year, if you look at the inorganic, the acquisition of Ham-Let, that kind of puts us already in that in that territory. And then on top of that, we're doing very well with the organic side of our growth equation, which is share gain, continued outsourcing that we're seeing from our customers, continued penetration of little, deliver space where we're heavily engaged. So I think I am very confident that this year we will do -- we will easily hit the 10 points and hopefully much beyond that.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Great. No other questions. Thanks, guys.

Jim Scholhamer -- Chief Executive Officer

Thank you.

Sheri Savage -- Chief Financial Officer

Thanks.

Operator

Our next question comes from Dick Ryan with Colliers. Please go ahead.

Dick Ryan -- Colliers -- Analyst

Thank you. So Jim, can you give us your views on WFE and wafer starts kind of the second half of this year and maybe some commentary on next year?

Jim Scholhamer -- Chief Executive Officer

Yeah, I think WFE, I think a lot of the prognosis is, I think we're in pretty, pretty much the same boat as our customers. I think they're looking at roughly $80 billion -- $80 billion plus perhaps. I think we kind of see that there. Wafer starts are a little bit slower, just because the fab they're running full out, so there's is no utilization to really soak up, so the wafer starts are growing as the equipment goes in. So we're seeing wafer starts growth, but it's really at this point a little bit tapped out due to I think every single fab that we know is running at full capacity.

So I think I think we're in pretty much lockstep with what the big OEMs like a pioneer what you're saying I think which is roughly $80 million to $85 million. And I think also, they're are also predicting a pretty strong 2022 as well. And I think also the consensus is the second half of this year will continue to grow.

Dick Ryan -- Colliers -- Analyst

Okay. How much revenue was pushed out of the quarter with the constraints that you saw?

Jim Scholhamer -- Chief Executive Officer

I mean I think I wouldn't say pushed out, but I would definitely term it, we probably could have done another $20 million, $30 million or so, but I think many companies have the same story.

Dick Ryan -- Colliers -- Analyst

Yeah. And then Sheri, were there any margin hits of material cost, logistic issues from the supply constraints that hit the quarter?

Sheri Savage -- Chief Financial Officer

I think one of the things that we're still trying -- still seeing is, freight cost being quite high, I think a lot of companies are seeing that as being kind of one of those expenses that have come in higher than we had pre-COVID. So I would say that that's something that I would anticipate probably being ongoing, but I think the margin still did very well despite having such expenses flow through.

Dick Ryan -- Colliers -- Analyst

Sure. Thank you.

Sheri Savage -- Chief Financial Officer

Thanks.

Jim Scholhamer -- Chief Executive Officer

Thanks, Dick.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jim if there's any closing remarks.

Jim Scholhamer -- Chief Executive Officer

Thank you everybody for joining us today. We appreciate it. And we really look forward to speaking with you again next quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Rhonda Bennetto -- Senior Vice President of Investor Relations

Jim Scholhamer -- Chief Executive Officer

Sheri Savage -- Chief Financial Officer

Krish Sankar -- Cowen and Company -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

Patrick O'Rourke -- Stifel -- Analyst

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Dick Ryan -- Colliers -- Analyst

More UCTT analysis

All earnings call transcripts