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Ultra Clean Holdings, inc (NASDAQ:UCTT)
Q3 2021 Earnings Call
Oct 27, 2021, 4:45 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to UCT's Third Quarter 2021 Earnings Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Rhonda Bennetto. Please go ahead.

Rhonda Bennetto -- Vice President 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, 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?

Jim Scholhamer -- Chief Executive Officer

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 will turn the call over to Sheri for a financial review, and then, we will open up the call for questions.

UCT has demonstrated solid companywide execution through this extended expansion of WFE growth over multiple quarters. Our Q3 result 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 per chips have increased though 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 WFE 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 buildout and production support ecosystems make us better able to navigate fluctuations within sub segments 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 and 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 wanted 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 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 Sheri to review our financial activities and performance.

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. I'm 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 Ham-Let 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 Hillsboro 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 $0.99 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 to $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.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question today comes from Patrick Ho with Stifel. Please go ahead.

Patrick Ho -- Stifel -- Analyst

Thank you very much and congrats on a really nice execution in a difficult environment. Jim, maybe first off, as it relates to the supply chain, given your results, you obviously outperformed the 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 the products end, the necessary parts to customers?

Jim Scholhamer -- Chief Executive Officer

Yes. Hi, Patrick. It's interesting. A lot of the parts that are bottleneck one week are different bottleneck in three weeks. So I think, the big difference is 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 long into the future to try to help them better with their planning. I think that was one of the keys. I think another key is that we're able to -- we have over 2,000 sites, like I mentioned, so we're able to -- when we have bottlenecks on one place, we're able to kind of move it around to a different site. So I think, hats off to our procurement, our supply chain team and our ops team. I think, they were really flexible, but they really knocked down multiple different challenges, including freight is another thing and they knocked down multiple various challenges throughout the quarter.

Patrick Ho -- Stifel -- Analyst

Great. And maybe my follow-up question for Sheri. Again, you guys performed really well on the gross margin line given the difficult challenges, but the environment is also seeing, as you just mentioned, elevated freight costs, procuring parts, just a lot of these supply chain issues creating incremental cost. I guess, how were you able to balance and manage that situation to get the gross margins above expectations?

Sheri Savage -- Chief Financial Officer

Yes, 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's continue to grow as a percentage of our total revenue. We have seen freight cost go up, but just as 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 there are new acquisition of Ham-Let. They have very good gross margins as well, so that really helps in addition.

Patrick Ho -- Stifel -- Analyst

Great. Thank you very much.

Jim Scholhamer -- Chief Executive Officer

Thanks, Patrick.

Operator

The next question comes from Tom Diffely with D.A. Davidson. Please go ahead.

Thomas Diffely -- D.A. Davidson -- Analyst

Yes, thank you. And just to follow-up on Patrick's question. Sheri, is there -- when you look at that basis point or 100 basis point increase in the freight cost, do you view that as a more mid term, longer term permanent increase or is that -- could you consider that just a near term powder that's going to go away at some point over the next few quarters?

Sheri Savage -- Chief Financial Officer

I think, it will come down a bit over the next couple of quarters. It's just that 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 it may not come down to 2019 levels, but I think, they should come down over the next couple of quarters, I would anticipate.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. And when you have to expedite shipment to meet the important customers' needs, is that reimbursable through that customer or do you have to put the bill?

Sheri Savage -- Chief Financial Officer

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 calling something in very quickly, we obviously can be able to get reimbursed for that.

Thomas Diffely -- D.A. Davidson -- Analyst

Great. Okay. And then, Jim, congratulations on the shipment out of Malaysia, new facility there. We have been hearing though from others that there is -- labor has been an issue with COVID in Malaysia. I wonder, if that has impacted your ramp or your scheduled ramp there?

Jim Scholhamer -- Chief Executive Officer

No, it has not. We have been fortunate. 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, obviously, it 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.

Thomas Diffely -- D.A. Davidson -- Analyst

Yes, absolutely. Okay. And then, finally, when you look at the expansion of the Ham-Let business, how do you view the rollout of 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?

Jim Scholhamer -- Chief Executive Officer

Yes, mostly for new tooling, the qualification is math. It's a very simple process. There was nothing that's delayed by the customer in most cases. Typically, on 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 in the -- 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 up the revenue. It's been ramping up very nicely. We've been able to get some efficiency gains and squeeze out some more through this quarter, but I expect to see a bigger increase in revenue starting in the first quarter of next year.

Thomas Diffely -- D.A. Davidson -- Analyst

Okay. Well, thank you and thanks for your time today.

Jim Scholhamer -- Chief Executive Officer

Thanks, Tom.

Sheri Savage -- Chief Financial Officer

Thank you.

Operator

The next question comes from Krish Sankar with Cowen. Please go ahead. Krish, your line is open, if you would like to ask questions.

Robert Mertens -- Cowen & Company -- Analyst

Hi. This is Robert Mertens on behalf of Krish. 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, ramps at other facilities or that could have a carry-on effect into your ordering pattern or any sort of inventory builds?

Jim Scholhamer -- Chief Executive Officer

I'm not sure I followed your question. Our customers, the OEMs, ramping at other facilities, you mean like a man bringing up Malaysia plant or more capacity being added by the client? I'm not sure I followed your question.

Robert Mertens -- Cowen & Company -- Analyst

Sorry, if there is any sort of impact to their business from supply chain issues that could have 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?

Jim Scholhamer -- Chief Executive Officer

Yes, I mean the supply chain issues are affecting everyone, even our peers, our customers and everyone's working through those issues, so that's nothing new. I don't think, it typically is more of an inconvenience or a new sense of delaying shipments, a few weeks. It tends not to be a dramatic change, but I don't -- I think, it kind of stabilized that at the level, where you still have to work it pretty hard to get what you need to get 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, maybe in the fourth quarter or the first quarter of next year.

Robert Mertens -- Cowen & Company -- Analyst

Great. Thank you. Appreciate the color on that.

Jim Scholhamer -- Chief Executive Officer

You are welcome.

Operator

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

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

Hey, congratulations guys on really fabulous execution. Can you remind us of your current visibility, given the supply chain and lead times changing across the more? Is your visibility materially better 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?

Jim Scholhamer -- Chief Executive Officer

Yes. Yes, Christian. The lead time or the visibility typically that we have had in a normal environment is around one quarter, even with the third month of the quarter that we are looking forward 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 getting close to three quarters of a pretty good bottoms up purchase orders and pretty strong forecast going forward.

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

Right. The end of that year, that's connect for -- but it seems like that increased visibility that you had allowed you to also go in from here aggressively with purchase orders in hand from your suppliers to kind of eliminate some of the bottlenecks maybe than other people and is that fair to say?

Jim Scholhamer -- Chief Executive Officer

Yes, absolutely. And we work in hand with our customers and through backwards to the supply chain. So even when our customers don't have hard orders to us, they will make commitment to cover our liability as we make hard orders back to our supply chain, so that we're covered on areas like forecast where there is no hard PO yet. So I think though OEMs are really working pretty smartly to try to help give the visibility as deep and as far down the supply chain as possible but there tend to be problems that occur that are three or four layers deep in the supply chain.

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

Right, right. And so could you just remind us on the relation of additional facility, is -- do we plan on filling that capacity due to WFE growth and your ability to be more predisposed to heavier concentrations of edging down historically as a percentage of WFE, which is historically last few years of growing that number in general? But -- or is it also a combination of line of sight on market share gains from existing customers who might be outsourcing more? Can you help us kind of frame in our heads how you plan on filling that capacity over time and remind us how much it is?

Jim Scholhamer -- Chief Executive Officer

Sure. It's around $600 million to $800 million in revenue annually of capacity. We're also using part of that to bring over the Ham-Let product capacity, capability production capabilities will 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 against for outsourcing opportunities is where we've seen a lot of share gains that gets our customers on fabrications. I think, it's probably more like, I would 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 is actually a smaller percentage of what we anticipate that plant to be used for.

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

Great. That's wonderful. No other questions. Thanks guys.

Jim Scholhamer -- Chief Executive Officer

Thank you, Christian. Drive safe.

Operator

[Operator Instructions] The next question comes from Quinn Bolton with Needham and Company. Please go ahead.

Quinn Bolton -- Needham and Company -- Analyst

Hey, Jim, congratulations on the nice results. I'm going to apologize, because I missed most of the prepared comments, but 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?

Jim Scholhamer -- Chief Executive Officer

Yes, the share gains I am talking about our more -- they don't move quickly. They're more planned outsourcing moves by our two major customers. There is not a lot of movement. I think, the issues that some of our peers are having are obviously short-term and clearly, force majeure type of issues. It's unfortunate, but I don't think that's really -- that's not really the share gain that I'm talking about. I'm talking about mostly winning, winning outsourcing opportunity from our two major customers and maybe even some of those go -- see some of those are intended to go straight into our new Malaysia factory. So that -- when you look at the SAM, the biggest opportunity is actually our customers leading 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.

Quinn Bolton -- Needham and Company -- Analyst

But I mean, do you see any opportunity for OEMs to kind of shift systems from one major module vendor to another or do you think that to the extent your peer competitors whether they're -- through our competitors or some of the larger contract manufacturers to the extent that they are constrained, you think that that demand stays with that supplier and it just pushes from one quarter to the next?

Jim Scholhamer -- Chief Executive Officer

Yes. Short term, they can adjust 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 of our peers struggle or if we were to struggle, there might be little a kind of a shift of share from 50-50 to 55-45 or something like that in the short term, but those -- 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 the -- when they take it out of their own facility, close down their production of a certain modular, certain capability and move it to UCT, those are the real sticky supply market share wins and that's really where we are focused, but there's is not a lot of long-term movement between us and our competitors.

Quinn Bolton -- Needham and Company -- Analyst

Got it. So it sounds like any share from competitors that you pick up is pretty transitory is what it sounds like you're telling us.

Jim Scholhamer -- Chief Executive Officer

Yes. And that and obviously, you have to remember there's a lot of comments that goes around between us -- all of us in the ecosystem, Celestica, Ichor, Benchmark, Jabil, we're actually all -- we're not only competitors, but we are also the customers and suppliers to each other. So there's a lot of what's going on behind the scenes to kind of help the end customer get out what they need, so oftentimes we support each other to -- when we are coming through issues of delivery. We tried to make sure that the end customer is met. So that obviously -- those -- that's obviously, you might see a short term bump in revenues and things like that, but long term, the real opportunity is really the huge amount of in-sourcing that still needs to move outsourcing from the OEM, that's really where we are focused.

Quinn Bolton -- Needham and Company -- Analyst

Understood. Thank you for that additional color. Jim, the second question I had was, I think a quarter ago, you were saying you were holding off on some of the Ham-Let qualifications, especially on your gas panels, given how the constrained the Ham-Let business was. Sounds like Ham-Let is still constrained in the near term, but you just talked about some additional tooling coming online by year 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 that aligns pretty well with that additional tooling coming on for Ham-Let.

Jim Scholhamer -- Chief Executive Officer

Yes. I think, you have to think about qualifications two different ways. Qualification but 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 within a quarter, within a few weeks. The qualifications that take a while are family components to the 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've started -- while we started -- we actually started that before the acquisition, because we were working with Ham-Let as a 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.

Quinn Bolton -- Needham and Company -- Analyst

Got it. Okay. That's what I wanted to know. Thank you very much.

Jim Scholhamer -- Chief Executive Officer

All right. Thank you, Quinn.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Scholhamer for any closing remarks.

Jim Scholhamer -- Chief Executive Officer

Thank you for joining us today, and we look forward to talking to you again in the New Year 2022. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Rhonda Bennetto -- Vice President Investor Relations

Jim Scholhamer -- Chief Executive Officer

Sheri Savage -- Chief Financial Officer

Patrick Ho -- Stifel -- Analyst

Thomas Diffely -- D.A. Davidson -- Analyst

Robert Mertens -- Cowen & Company -- Analyst

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

Quinn Bolton -- Needham and Company -- Analyst

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