Amtech Systems, Inc. — Q1 FY2019 Form 10-Q
Business context and period. Amtech manufactures thermal-processing and wafer-handling equipment and related consumables for semiconductor, solar, and polishing markets. This unaudited quarter ended December 31, 2018, compared with the three months ended December 31, 2017. The company notes that its markets are cyclical and that quarterly results may not indicate full-year performance.
Key financial metrics
Amounts are in millions of dollars, except per-share data and ratios.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $29.5 | $73.6 |
| Gross profit / gross margin | $9.1 / 31% | $20.3 / 28% |
| Operating income (loss) | $(1.9) | $7.8 |
| Net income (loss) | $(2.4) | $6.5 |
| Diluted EPS | $(0.17) | $0.42 |
| Cash used in operating activities | $(0.6) | $(14.6) |
| Cash used in investing activities | $(0.2) | $(0.1) |
- Revenue by segment: Solar $7.5 million, down 85%; Semiconductor $19.0 million, down 9%; Polishing $3.0 million, down 15% year over year.
- Margins and costs: Consolidated gross margin rose to 31% from 28%, despite lower gross profit, reflecting segment and product mix. Solar gross margin fell to 5% from 23%; Semiconductor margin increased to 40% from 36%; Polishing margin declined to 41% from 44%. SG&A was $8.2 million versus $10.6 million. R&D, engineering and development expense, net of grants, was $1.9 million versus $2.0 million. Restructuring charges were $0.9 million.
- Liquidity and debt: Cash and cash equivalents were $56.0 million and restricted cash $5.0 million at quarter end. Working capital was $77.0 million; the current ratio was 3.0:1. Total debt was approximately $8.3 million, including $0.4 million current maturities. Total liabilities were $50.6 million.
- Cash movement: Cash, cash equivalents and restricted cash declined $1.5 million to $61.0 million, including a $0.7 million adverse exchange-rate effect. Operating cash use was substantially lower than the prior-year quarter, when working-capital movements included a large decline in contract liabilities.
Material changes versus the prior period
- Revenue fell 60%, primarily because the prior-year quarter included shipments for a large Solar turnkey project; no turnkey revenue was recorded in the current quarter. Semiconductor demand also softened after what management believes may have been a cyclical peak in FY2018.
- Backlog declined 37% to $41.3 million from $65.9 million year over year. New orders fell 34% to $24.7 million from $37.3 million.
- The Solar segment reported a $2.8 million operating loss, compared with $5.4 million operating income a year earlier. Semiconductor and Polishing remained profitable, but their operating income also decreased.
- Management adopted ASC 606 on October 1, 2018 using the modified retrospective method, with no opening retained-deficit adjustment and no material effect on operating results. Prior-year figures were not restated. The company also retrospectively adopted the restricted-cash cash-flow presentation standard.
Outlook, commentary, risks and unusual items
- Solar restructuring: A Netherlands workforce reduction of approximately 35–40 employees, or about 20%, is intended to lower annualized operating costs by approximately $3.0 million once fully implemented. Management expected completion by the end of FY2019’s third quarter; further Solar restructuring remained under review, with no assurance of outcome or timing.
- Turnkey contract termination: In December 2018, the customer terminated Phase II of a Solar turnkey contract. Amtech will not complete final installation and integration; final settlement remained under review. The remaining work was removed from backlog, with no material effect on reported financial condition or results. Management said it did not expect future orders related to this project or other turnkey projects.
- Leadership and severance: CEO, President and director Fokko Pentinga stepped down effective December 6, 2018. The separation agreement included $864,000 gross severance and $458,500 for other amounts due, as well as accelerated vesting of time-based options. The quarter included restructuring expense primarily related to his departure.
- Competition and cyclicality: Management cited lower prices, liberal payment terms and stronger local presence from Chinese equipment competitors, making Solar expansion opportunities harder to win. Semiconductor-market weakness and technology and demand shifts also pose risks.
- Tax and commitments: Amtech maintained full valuation allowances on specified deferred tax assets, including Solar-related foreign assets and certain tax carryforwards. Unrecorded purchase obligations were $16.0 million. Legal outcomes are described as inherently unpredictable; the filing does not provide a clear estimate of possible losses for claims where no accrual is appropriate.
- Capital allocation and liquidity: The board authorized repurchases of up to $4.0 million over one year, but none occurred during the quarter. Management believed available liquidity was sufficient for at least the next twelve months, while noting that additional capital for growth may not be available on satisfactory terms. No formal revenue or earnings guidance was provided in the filing.
Important facts for investors to verify
- Progress, costs and realized savings from the Solar restructuring, including whether the stated $3.0 million annualized reduction is achieved.
- Final settlement and any cash, margin or other consequences of the terminated Phase II turnkey contract.
- Subsequent Solar, Semiconductor and Polishing order trends, and whether backlog converts to shipments; the filing warns orders may be delayed or canceled.
- Cash generation, working-capital movements, $16.0 million of purchase obligations, and the company’s ability to fund operations and growth.
- Customer concentration: one Semiconductor customer represented 13% of quarterly revenue and one customer represented 17% of quarter-end backlog.
- Potential effects of the valuation allowances and any changes in the recoverability of deferred tax assets.