Amtech Systems, Inc. (ASYS) Q1 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Amtech Systems' First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Lisa Gibbs, Chief Financial Officer. Please go ahead, ma'am.

Good afternoon, and thank you for joining us for Amtech Systems' first quarter fiscal year 2020 results conference call. With me on the call today are J.S. Whang, Amtech's Executive Chairman; Michael Whang, our Chief Executive Officer; and Robert Hass, our Executive Vice President. Today, Amtech released its financial results for the first quarter of fiscal 2020. That earnings release will be posted on the Company's website at amtechsystems.com. During today's call, management will make forward-looking statements. All such forward-looking statements are based on information available to us as of this date, and we assume no obligation to update any such forward-looking statements. These statements are not a guarantee of future performance, and actual results could differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are changes in the technologies used by our customers and competitors; change in volatility and the demand for our products; the effect of changing worldwide political and economic conditions, including trade sanctions; the effect of overall market conditions, including the equity and credit markets and market acceptance risks; and our capital allocation plans. Other risk factors are detailed in our Securities and Exchange Commission filings, including our Form 10-K and Forms 10-Q. I will now turn the call over to Robert Hass, our Executive Vice President. Robert?

Thank you, Lisa. On January 28, 2020, we announced the sale of our shares of Tempress Group Holding B.V. to an independent foundation. I would like to provide some additional details on the foundation structure and why the sale of Tempress to the foundation was in the best interest for Amtech and our shareholders. The Foundation, Stichting Continuiteit Tempress, is an independent legal entity formed under Dutch law and created for the sole benefit of the employees, customers and suppliers of Tempress. The foundation is governed by an independent Board with restructuring expertise and no affiliation with Amtech. The foundation is a stand-alone entity with no shareholders, partners or members. Effective with the closing of the sale of Tempress, Amtech no longer has any financial interest in the future losses or profits of Tempress or the Foundation, and has no further involvement or connection with and no control over the Foundation, other than the right to receive loan repayments upon occurrence of certain events and receive limited information from the Foundation pursuant to the covenants set forth in the term loan agreement with Tempress. Our objectives in selling Tempress were to stop the losses resulting from our solar operations, which were over $10 million in 2019 alone, and to dedicate our internal resources to our power semiconductor strategy without the continuing distraction of the solar operations and its losses. As we stated in the press release, we went through a robust sales process with an independent financial adviser that spanned nearly one year. And the parties who emerged as potential buyers offered terms that were unfavorable to us and most required a large cash infusion from Amtech. We evaluated these offers along with other options, which included keeping Tempress and restructure it ourselves in preparation for another sales attempt, wind it down or selling our Tempress shares to an independent foundation where it can go through the restructuring and sales process independent of Amtech. Keeping Tempress would have required the infusion of more cash, resulting in continuation of management's distraction and the burden of the ongoing losses, all while maintaining the uncertainty of whether it could be sold on more acceptable terms in the future. Winding down Tempress would be extremely costly and time-consuming due to the obligations to suppliers and customers and severance to employees required under Dutch law. Thus, neither restructuring or winding down Tempress would achieve our objectives. In both scenarios, we would have continued losses during the restructuring and sale or wind down of Tempress, which, on a cumulative basis, could possibly be higher than what we have recorded for this quarter, while still retaining significant uncertainty. In working with our Dutch legal advisers, we closely examined the Foundation option. The Foundation is a stand-alone entity incorporated under Dutch law through the filing of a deed of incorporation. Given the unfavorable terms offered by prospective buyers during our almost year-long effort to sell Tempress and after considerable review and deliberation, management and our Board concluded that selling Tempress to an independent foundation for a nominal amount was the best option for Amtech to effectively and efficiently exit the solar business and focus on its power semiconductor strategy. The cash on Tempress' balance sheet is primarily customer deposits. The loan provides Tempress with the working capital necessary to remain a going concern to fulfill orders and give the Foundation time to restructure Tempress and position it for an eventual sale. This week, Tempress met the first milestone in the loan agreement and repaid $500,000, bringing the loan balance down to $1.7 million. Amtech, our management team and our Board of Directors have no further involvement of any sort in Tempress. The sale to the Foundation allows for the continuation of the business for the benefit of Tempress' employees, vendors and customers and allows us to now focus 100% on the opportunities that are ahead in power semiconductor. Thus, this Foundation sale accomplishes our objectives and we believe is in the best interest of Amtech's shareholders. I will now turn the call over to J.S. Whang, our Executive Chairman. J.S.?

Thank you, Robert. Thank you for joining our call today. We look to the future 100% focused on our semiconductor business and the opportunities they present as the solar business is now behind us. In line with that, our Board has decided that it is the right time to promote Michael Whang, previously Chief Operating Officer, to Chief Executive Officer of Amtech. Michael has been overseeing U.S. semiconductor businesses and has in-depth knowledge of power semiconductor and silicon carbide markets we serve. He has worked side-by-side with the leadership of our semiconductor divisions, has ongoing discussions with our customers regarding their forward needs and has been instrumental in developing our power semiconductor and silicon carbide strategic growth plan, our roadmap to future successes. As the Executive Chairman, I look forward to working with the Michael to capitalize on the growth opportunities in front of us. In the January 28 press release, we also announced the retirement of Robert Hass, who many of you have spoken with over time. Robert contributed much to Amtech over his 27 years with the Company. And I speak for the entire Amtech team as we wish him the very best in his retirement. I will now turn the call to Michael Whang, our Chief Executive Officer. Michael?

Thank you, J.S. With the completion of our solar divestiture, we can now focus our full and diligent attention on our semiconductor and silicon carbide businesses and the growth opportunities they present. We have well-recognized brands, great products, distinguished role technologies, dedicated and talented employees and excellent service capabilities. We have a diverse global customer base of market leaders with attractive long-term growth profiles. We are on a very exciting path. We are focused on new product development to drive and sustain organic growth. We look to continue to evaluate strategic acquisitions to expand our product and technology portfolios and build upon our strengths in areas that we believe will outgrow the overall semi market. We are diligently focused on continuous improvement as we invest in capacity expansion, our people, our technologies and our management systems. While we are pleased that our first quarter performance exceeded our expectations, we continue to look to the second half of 2020 for solid growth to return in the industry. We are confident that we have very strong platforms to deliver value-enhancing results in an improving operating environment. BTU is a solid consistently profitable business with a worldwide customer base and diversified back-end semi product portfolio that supports many end markets and touches all key geographies. We look to grow through deeper penetration of our markets, product development as well as by highly selective acquisitions to advance or expand our capabilities. We have never ending focus on product development. In November 2019, BTU featured Aqua Scrub. Our patent-pending technology at a trade show in Munich, and again, just this week in San Diego at the APEX trade show. There was strong interest in its capabilities to deal with flux management in a more efficient way. In addition to Aqua Scrub, in San Diego, the team featured a vacuum reflow oven, a low voice sonar reflow solution. Bruce is a leader in emerging 300-millimeter clustered HTR diffusion furnaces for power chips and has more than 100 tubes installed worldwide. In Q1, we shipped the first 300-millimeter HTR furnace to our second customer. I am also pleased to announce Bruce received another significant new order for its full 300-millimeter clustered HTR diffusion furnace solution from a top-tier global power semi customer in Asia. This recent order further validates our power semi strategy and the increased interest in our highly successful and proven 300-millimeter horizontal diffusion furnace solution. Moving on to PR Hoffman. We have added capacity with a much anticipated move to our new facility in early spring. This new facility dramatically positions us well for higher volumes, productivity and the capability for several years going forward. PR Hoffman is a premier brand in semi substrate polishing in consumable markets and as a market leader, we are seeking an uptick in quoting activities, which is a good leading indicator of strengthening marketplace. Plus, the world is pushing aggressively towards silicon carbide for next-gen application. The SiC substrate in device market size is expected to grow significantly over the next several years, and we are well positioned to participate as this growing demand for advanced power chips intensifies. We have a strong team of engineers ready to respond to our customers' unique requests for high-value solutions. I am excited with the recent changes and investments in our people and technology as we pivot towards our new power semi strategy. We are ready for the opportunities that are before us. I very much look forward to updating you on our forward progress. Lastly, I want to touch upon what's happening in the coronavirus in China. First, we are monitoring the health and wellbeing of our employees and partners. Second, we are navigating a very dynamic situation, making it quite difficult for us to forecast our fiscal Q2 results. As you saw in the press release, we broadened our revenue range and took that range down to account for a slow return to normal operations in mid-February. If the situation causes material changes to our outlook, then we'll provide an update to you. And now I turn it over to Lisa to review our first quarter financial results.

Thank you, Michael. Net revenues increased slightly compared to the preceding quarter and decreased 11% from the first quarter of fiscal 2019. Semiconductor revenue in fiscal Q1 2020 includes the shipment of our 300-millimeter diffusion furnace to a new top-tier power semiconductor customer, which contributed to the sequential increase in revenue. Semiconductor revenue decreased compared to the prior year quarter due primarily to lower diffusion furnace shipments. Silicon carbide/LED revenue decreased sequentially due primarily to lower machine shipments and was relatively flat compared to the prior year quarter. At December 31, 2019, our total backlog was $13.4 million, a decrease from a backlog of $15.9 million at September 30, 2019, which is adjusted to exclude R2D. The decrease is due primarily to shipments of our 300-millimeter HCR diffusion furnace and other shipments that were not immediately replaced with new orders. Backlog includes customer orders that are expected to ship within the next 12 months. Gross margin increased in the first quarter of fiscal 2020 compared to the prior year quarter, primarily due to a favorable product mix, while decreasing on a sequential basis primarily due to a higher-margin product mix in the fourth quarter of fiscal 2019. Selling, general and administrative expense, or SG&A, in the first quarter of fiscal 2020 was $5.9 million compared to $6.1 million in the preceding quarter and $6.6 million in the first quarter of fiscal 2019. Sequentially, SG&A decreased due primarily to lower employee-related expenses partially offset by higher legal fees related to our solar divestitures. SG&A decreased compared to the prior year quarter with the prior year quarter including legal and other costs relating to the departure of our former CEO, and in the current period, lower commissions on lower diffusion furnace sales partially offset by increased legal expenses relating to our solar divestitures. Looking at income tax expense. We had a provision for the first quarter of fiscal 2020 for both continuing and discontinued operations of $60,000 compared to $600,000 in the first quarter of fiscal 2019. The provision for fiscal 2020 represents taxes primarily in our foreign jurisdictions. We were able to offset our U.S. federal income taxes due with the tax benefit received from the sale of R2D. We recognized a pretax loss from the sale of our automation division, R2D, of $2.8 million. Loss from continuing operations net of tax for the first quarter of fiscal 2020 was $1.3 million or $0.09 per share. This is compared to income of $0.2 million or $0.02 per share for the first quarter of fiscal 2019, an income of $1 million or $0.07 per share in the preceding quarter. Turning to cash. Unrestricted cash and cash equivalents at our continuing operations at December 31, 2019, were $52.7 million compared to $53 million at September 30, 2019. As of December 31, 2019, approximately 16% of our unrestricted cash and cash equivalents at our continuing operations was held outside the United States, mostly in China. Last quarter, I discussed our capital allocation plan. Our teams are hard at work with our internal investments, product development, IT systems and capacity expansion. We are pursuing acquisition opportunities. And on February 4, our Board of Directors renewed our share repurchase plan. We believe we have a sound capital allocation plan that will drive profitable growth for Amtech and create value for our shareholders. Now turning to our outlook. As Michael indicated, we do want to caution investors that the coronavirus is expected to have an impact on our second quarter results. Our outlook reflects the January 27 announcement by China's government to extend the Lunar New Year holiday and keep enterprises closed until February 9 due to the coronavirus outbreak. Our outlook also builds an estimated time we believe will be required for employees and the supply chain to resume normal work and production levels. The outlook does not account for any future measures taken by the Chinese government in response to the health crisis that could further delay businesses from returning to a normal operating schedule, which could cause our results to be materially lower than the outlook. Lastly, the outlook reflects some historical softness that occurs in our fiscal Q2, attributable to seasonality and the Chinese New Year. For the quarter ending March 31, 2020, our second fiscal quarter, revenues are expected to be in the range of $10 million to $14 million. Gross margin for the quarter ending March 31, 2020, is expected to be in the upper 20s to 30% range with operating margin negative. Additionally, in fiscal Q2, we expect to record a pretax loss on the divestiture of Tempress in the range of $12.5 million to $13 million, of which approximately $7.3 million is the recognition of previously recorded accumulated foreign currency translation losses. The total pretax loss is not expected to have a material effect on our cash balances from our continuing operations. We also expect to recognize a significant tax benefit relating to this loss, which can be carried over to future years. The semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Additionally, operating results can be significantly impacted positively or negatively by the timing of orders, system shipments and the financial results of semiconductor manufacturers. A portion of Amtech's results are denominated in RMB, a Chinese currency. The outlook provided in this press release is based on an assumed exchange rate between the United States dollar and RMB. Changes in the value of the RMB in relation to the United States dollar could cause actual results to differ from expectations. Now let's turn the call over to the operator for questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Craig Irwin with ROTH Capital Partners. Please go ahead.

Hi, good evening, and thanks for taking my questions. So as we look down the runway in 2020. I know there are a number of sort of external factors that cloud visibility a little bit. But you did make the strategic decision in the last few months to move Hoffman to a new space. Can you maybe describe what you see as the visibility for increased sales out of Hoffman, both on the equipment and the consumables side? What do you see as the primary drivers there? And are there any other points of diversification in that business that supported your decision to increase your commitment?

Hi Craig, this is Mike. Thanks for your call. When we look forward into the later part of this year, and then also 2021, we still see significant growth drivers from Hoffman's customer base. If you follow all the leading SiC wafer manufacturers, they all have very large considerable planned capacity expansions. And quite a few of them are also running through or experiencing the same headwinds that we are facing today. So in some sense, we are tied to the CapEx expansion of these large players. However, we're still very bullish on the long-term demand for silicon carbide devices, wafers. The forward-looking applications are there. There is a real demand for it, unlike solar, which was heavily subsized. I'm very excited. This has been a long time that I felt this excitement in our future prospects.

Okay. That's really good to hear. So then there's the expectation that there will be between three and five major fabs built for silicon carbide devices over the next – single-digit number, yes, small single-digit number, hopefully. Can you maybe describe for us what the potential content is for your diffusion process in a typical semiconductor plant? How we should look at that for conventional silicon-based power semiconductors versus silicon carbide? And do you see potentially a greater opportunity still serving the silicon demand given that the world is still really short MOSFETs and IGBTs.

So in terms of silicon carbide devices, we currently have no say with our fusion furnace right now. I want to make that clear. However, for silicon-based power ICs, and also just general power chips, we do see a growing trend to move from 8-inch to 12-inch. The economics are there. The current leader, Infineon, has shown the value of that economics and more and more of our Tier 1 customers are either, at the very least, investigating it or asking for budgetary quotes to move into 12-inch power chip manufacturing. For silicon carbide, all of that is dependent on the SiC wafer manufacturers and their capacity expansion for the substrates. And so we're preparing ourselves with the new facility. We're working on some new products. And where we stand right now is that as long as we execute, and we are executing, we're going to meet their next CapEx cycle that's expected towards, we believe, the end of this year.

Excellent. Excellent. And then last question, if I may? Your $53 million in cash, give or take, is a pretty nice war chest now that you've completed your restructuring. It allows you to look towards investment for the future. Would you be more likely to invest in new products and new business initiatives organically? Or do you consider Amtech to be in an acquisitive mode where you could potentially acquire competitors or adjacent products, adjacent technologies that supplement the existing portfolio?

So Craig, that's going to be a combination of both. We have to make investments in organic growth. I will remind everyone and you that when we focus on solar for many years, we neglected our U.S. semi operations. And now we have to catch-up and also be very competitive with our peers. Also, from an acquisition standpoint, we are constantly and recently looking at opportunities, either direct acquisitions that fit well within our value chain or adjacent. And acquisitions have been in Amtech's DNA. We've gone through several, and we've been successful.

Excellent. That's good to hear. Well, keep up the solid execution and we look forward to continue progress.

Thanks, Craig.

Thank you, Craig.

Our next question will come from Jeff Osborne of Cowen and Company. Please go ahead.

Hey, good afternoon, guys. Craig asked most of the questions that I had in mind. But could you just level-set us on China and corona? What your headcount is there in terms of staffing as a percentage of the total? And then revenue exposed either directly or indirectly as you sort of formulated the guidance?

So I'll try to answer that, Jeff. So we have approximately 175 to 200 employees in our Shanghai factory for BTU. Shanghai provides the majority of our reflow oven revenue. So there is a great amount of uncertainty right now. We've never faced this. The only thing that I vaguely remember now was the H1N1 outbreak back in 2009. And I don't remember, unfortunately, how we cope with that. So we're navigating through unchartered waters. Thankfully, all of our employees and our partners are in good health and in good condition. They're itching to get back to work. Outside of what Lisa mentioned, we're just keeping an eye out for any changes. The expectation right now is we will start resuming operations after – or the February 10.

Yes, on Monday. So Jeff, we looked at a number of different models and how this could impact and to a wide end, as Mike mentioned, our revenue range for our outlook. And we'll just watch it closely. And if we certainly hope February is more productive and better than we anticipate, there's a material update to provide. We will do so.

Makes sense, completely understandable. Maybe just following up on one of Craig's other questions around PR Hoffman. And you mentioned, Michael, the visibility that your customers have in terms of multiyear expansions of 5x, 10x, 30x in some cases of expansion of capacity. Can you just give us some insight into the conversations around – you mentioned quoting activity has picked up for PR Hoffman. Is the intent of your customers and your relationship with them to have this be a one-off every three to six months purchasing cycle? Or is there any sort of sitting down and coming up with a master plan over multiple years of – here's the number of polishing tools we'll need over a multiple iterative process to avoid one-off negotiations. I'm just trying to get a sense of how strategic you are as part of that process, if at all?

So we've had a number of discussions with our leading customers and SiC in terms of consumables and machines. They've been, unfortunately for us, coy on the exact nature and timing of their expansion, other than just giving kind of like one-liners like "be prepared." This is what we need, right? We are heavily invested in our future capacity expansion. So in terms of aligning with them, we – they tell us where to go, and we follow that they have certain needs, and they're different across each customers. And then we find a path to provide a very competitive solution for them. As time goes on, I do predict there'll be more closer discussions in terms of exact timing and nature. But outside of that, I'm not at liberty right now to say anything more.

Makes sense. May be just one follow-up on that. Hopefully, you can answer. But with the quotes today, you alluded to better visibility in the second half of the year on broader semiconductor applications. I assume silicon carbide is in that. Is there a reasonable lag of sort of two quarters from a quote today to when you would record revenue or what historically in the SiC/LED segment has that delta been?

Yes. I would safely say is, it will be approximately two quarters worth of lag.

Okay, that's all I had. Thank you.

Okay. Thanks, Jeff.

And our next question will come from Mark Miller with The Benchmark Company. Please go ahead.

Just wondering if you can give us any insights about OpEx and tax benefit in the March quarter?

I think that we'll still continue to have some legal fees within this quarter. So I would expect OpEx to remain fairly flat. The tax situation, it will depend on where our income is generated in terms of foreign jurisdictions, but we will be able to continue to offset our U.S. income like we did this quarter.

Okay. What was cash flow from operations in the December quarter?

Cash flow from operations in the December quarter. I'm pulling that right now. It looks like it was just negative $168,000.

Was there any CapEx in the quarter?

There is some CapEx in there, a little bit of picking the odds.

Thank you.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Lisa Gibbs for any closing remarks. Please go ahead, ma'am.

Thank you for your time today and for your interest in Amtech. This concludes today's call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.