Good day everyone, and welcome to the Ultra Clean Second Quarter 2022 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I would like to turn the conference call over to Rhonda Bennetto, Investor Relations. Ma'am, please go ahead..

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?.

Thanks, Rhonda, and thank you all for joining us today. I'm going to start with a brief review of our second quarter results and activities and provide some insight into how we feel the second half of this year will play out.

I'll also highlight how UCT's diversification strategy has become a compelling advantage, and then I'll turn the call over to Sheri for a financial review. After that, we will open up the call for questions.

The relaxation of China's COVID lockdown protocols, combined with strong execution at our other global sites, enabled us to reach revenue above the midpoint of our guided range.

After a comprehensive strategic review of our corporate structure and operations, we began the process of divesting some of our non-semi businesses during the quarter that we acquired with the Ham-Let acquisition. We continue to analyze ways to improve capital efficiency while remaining focused on our core semiconductor business.

For the second half of this year, we reiterate our belief that 2022 will be another year of growth for the WFE market and UCT. Broad-based rational spending supporting leading and trailing edge devices continues to keep demand elevated.

While some customer order flows and delivery schedules have been adjusted into the following quarters to align with ongoing supply chain constraints and capacity limitations, we have not seen any significant cancellations.

Trusted partners like UCT that anticipate and deliver beyond our customers' needs are becoming even more valuable within the semi eco business. We are focused on two priorities right now; optimizing our supply chain and adding capacity to meet near- and long-term demand.

While UCT has mostly been able to deliver on time, the industry remains challenged with shortages in the supply chain. We are working quickly and constructively with our customers to alleviate bottlenecks by accelerating new supplier qualifications, prioritizing shipments and collaborating to forecast trends that better support future demand.

Engagement with our customers has become much more in-depth and cohesive and is one of the many reasons why we continue to gain market share. Our investment in strategic capacity expansion ensures our assets are aligned to changing market and manufacturing conditions and will support sustainable near-and long-term demand.

In addition to our new facility in Malaysia, we are also expanding and realigning our product manufacturing footprint in the U.S., Europe and Israel to ramp production and increase flexibility to ensure business continuity.

Likewise, our Services division is investing to support increased wafer starts and the need for consistent high utilization for some of the world's largest chip makers. Our ability to deliver quality products and services on time anywhere in the world is why our customers choose to engage with us on their most challenging projects.

Our outlook for 2023 remains favorable. While there are signs of potential weakness in PC, low-end smartphones and some consumer electronics, those are being offset by strong demand in the high-performance computing, IoT, robotics and automotive sectors.

Today, the chip industry powers most aspects of our economy, so it's far less vulnerable to a single retail end market, and so is UCT. Our strategy to diversify well beyond gas panels over the past several years has positioned today's UCT to be more resilient to periodic weakness in any one specific sector.

Whether the emphasis is on memory, foundry, logic, analog, leading edge or trailing edge, domestic or international, UCT plays an integral role in all of these segments. We indirectly touch every chip that goes into every phone gaming device, laptop, tablet, server, smart car and more, which is why we expect to outperform the overall WFE market.

I would like to thank our highly capable global team for their hard work and commitment, ensuring UCT remains the partner of choice for our customers. We are very optimistic about the future and continue to invest in our products and services so that we can play a bigger and broader role in the industry alongside our customers.

And with that, I'll turn the call over to Sheri for a review of our financial results.

Sheri?.

Thanks, Jim, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. The easing of COVID restrictions in China and ongoing demand for our products and services resulted in total revenue for the second quarter of $608.7 million compared to $564.1 million in the prior quarter.

Products division revenue was $532 million compared to $486.8 million last quarter. And revenue from our Services division was $76.7 million compared to $77.3 million in Q1. Total gross margin for the second quarter was 20.3% compared to 20.5% last quarter.

Products gross margin was 17.8% compared to 18.2% in the prior quarter, and Services was 37.2% compared to 35.5% in Q1. As supply chain constraints ease, we expect gross margin will incrementally improve.

Margins can be influenced by material and transportation costs, manufacturing region, product mix and volume, so there will be variances quarter-to-quarter. Operating expense for the quarter was $55.9 million compared with $54.3 million in Q1. As a percentage of revenue, operating expense was 9.2% compared to 9.6% in the prior quarter.

Total operating margin for the quarter was 11.1% compared to 10.9% in the first quarter. Margin from our Products division was 10.2%, flat with the prior quarter, and Services margin was 16.9% compared with 15.7% in the prior quarter due to higher operating efficiency.

Based on 45.6 million shares outstanding, earnings per share for the quarter was $1.04 on net income of $47.4 million compared to $0.95 on net income of $43.3 million in the prior quarter. Our tax rate for the quarter was 15.2% compared to 16.4% in the last quarter. We expect our tax rate for 2022 to stay in the mid- to high teens.

Turning to the balance sheet. Our cash and cash equivalents were $421.4 million at the end of the second quarter compared to $367 million last quarter. Cash from operations was $85.9 million compared with negative $67.4 million in the prior quarter due to favorable timing of cash collections and payments and reduced inventory.

During the second quarter, we divested two of our noncore non-semi subsidiaries that came with the Ham-Let acquisition, and a third sale is pending. The impact of all three divestitures is reflected in our second quarter GAAP financial results. The majority of the write-offs include noncash items such as intangible assets and goodwill.

With demand still outpacing what the overall equipment industry can deliver, uncertainty around the global supply chain and COVID-related interruptions, we are keeping our guidance range wide. We project total revenue for the third quarter of 2022 between $585 million and $645 million. We expect EPS in the range of $0.94 to $1.18.

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

[Operator Instructions] Our first question today comes from Patrick Ho from Stifel. Please go ahead with your question..

Thank you very much, and congrats on a really nice quarter.

Jim, maybe first off, I wanted to make sure and get a clarification and just to make sure that you're emphasizing this correctly that any movements you're seeing with your products customer base is primarily due to the supply chain and issues that they're having and not on any changes in demand that you're seeing on your front..

Yes. Patrick, yes, that's correct. We saw from our two main customers sub-movements -- actually, we saw a little bit in the last quarter, but -- and they're basically pushing out one quarter and then the following quarter will push into the following quarter. So we saw some of that on the CMP line, and we saw some of that on the edge.

But everything is -- all the orders remain. They are reshuffling their schedules to line up better with when they can get the long lead time parts that are supply chain constrained from other suppliers. So they're trying to sit on less 99% build tools, waiting for that last few parts.

So that's the reason they're not lost or anything, and they're typically shifting one quarter out..

Great. That's really helpful there. And as my follow-up question also for you, Jim, in terms of your Services business, a lot of it is obviously dependent on wafer starts, good utilization rates. And there's obviously a lot of mix market volatility out there right now.

At the same time, do you believe the diversification on the Services side is helping you kind of mitigate some of the volatility that you're seeing in areas like the PC market and the low-end smartphones that you've mentioned before.

Is the diversity with your customer front as well as their markets helping you keep a steady Services business trend going forward?.

Yes, absolutely, Patrick. I think you see that in the -- although the revenue was similar to last quarter, the operating margin was certainly a nice additive. The Services grows in the longer term along with wafer starts. There are little dips when customers go through node transitions where they bring the utilization down as they switch nodes.

So you won't see every quarter it arise along with wafer starts. But if you draw a line over 8 quarters, you'll see that trend. So absolutely, it's a very stable revenue that slowly grows over time..

Great. Thanks again..

Thank you, Patrick..

[Operator Instructions] Our next question comes from Christian Schwab from Craig-Hallum Capital Group. Please go ahead with your question..

Good afternoon, guys.

Jim, remind me what is your guys' current lead times to your two largest customers?.

Yes. Good afternoon, Christian. Obviously, it depends on what we're shipping. Major modules are typically in the range of three to four months. Weldments, heaters are in the range of one to two months. So depending on what we're making, it's typically somewhere between a month to some of them as long as four months..

Okay. Great. And your commentary regarding growth in WFE and then optimism for WFE growth in '23.

Are any of your customers working with you and discussing ramping on the next-generation 3-nanometer node with you already? Or is that a little bit too early on your end?.

Yes, there is one customer that we're working with on the service side, on the 3-nanometer next node, but we haven't seen it from any other customers yet. Obviously, we're working with the largest litho provider on their next-gen tools right now, which are starting to roll out at the end of this year and into next year.

And those obviously will be used on those 3-and 5-nanometer nodes. If I can go back, one area where your question on lead times on fluid solutions, there's such tightness in supply in that area in capacity that actually the lead time on the fluid solutions parts are more like 9 months. But that's pretty typical in that space.

Those components are very difficult to come by right now..

Okay. That's very helpful.

And then my last question, do you think you're still gaining market share in the marketplace, one of your large customers that you kind of suggested and talked about before? And can you give us any update on how that's going? Or is that going to help over the next 1.5 years as far as outpacing growth of the WFE market?.

Yes. We've won market share in several different fronts. One is the outsourcing of gas panels from one of the OEMs who had in-sourced them, geez, 9, 10 years ago. So as they're beginning to try to make more room in their factories, we've been winning business from their own factories.

We've also been penetrating customers in the area of weldments and fluid solution products that we have not -- we have not serviced in much anything at all -- really any real volume at all. And so we're seeing some volume in those areas.

And then thirdly, in Malaysia, we're also seeing a lot of the new products that the customers have been developing starting up over in the Malaysia factory. So a lot of the Malaysia ramp has actually been new wins. We're at, I think, the quarter about $20 million out of Malaysia. And the majority of that revenue is from new wins from the customers..

Great. Thank you. No other questions..

Thank you, Christian..

[Operator Instructions] And it's showing no additional questions, I'd like to turn the floor back over to Mr. Scholhamer for closing remarks..

Yes. Thank you, everyone, for joining us today, and we look forward to speaking to you again next quarter..

And ladies and gentlemen, with that, we will conclude today's presentation. We do thank you for joining. You may now disconnect your lines..