Axcelis Technologies, Inc. — Q2 2019 Form 10-Q
Business and period: Axcelis makes ion implantation and other semiconductor-processing equipment and provides aftermarket parts, upgrades and services. This unaudited report covers the quarter and six months ended June 30, 2019; amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $74.3m | $119.3m | $165.8m | $241.5m |
| Gross profit / margin | $31.7m / 42.8% | $49.0m / 41.0% | $69.3m / 41.8% | $96.2m / 39.8% |
| Operating income / margin | $2.0m / 2.7% | $19.3m / 16.1% | $9.1m / 5.5% | $37.8m / 15.6% |
| Net income | $0.6m | $14.7m | $6.6m | $28.6m |
| Diluted EPS | $0.02 | $0.43 | $0.19 | $0.84 |
- Revenue and mix: Q2 revenue fell 37.7% year over year, primarily due to fewer systems sold. Product revenue declined 38.9% to $68.7m; services revenue declined 17.9% to $5.6m. Systems revenue was $37.2m and aftermarket revenue $37.1m. For the first half, revenue declined 31.4% year over year.
- Profitability: Q2 product gross margin improved to 45.9% from 43.2%, which management attributed to better Purion system margins; overall gross margin rose 1.8 percentage points. However, operating income fell sharply as revenue contracted while operating expenses remained nearly flat at $29.7m. R&D increased 9.3% to $13.7m.
- Cash flow: First-half operating cash flow was negative $20.3m, versus positive $15.3m a year earlier, driven mainly by inventory purchases, vendor payments and prior-year incentive compensation. Capital expenditures were $8.8m, versus $1.7m.
- Liquidity and obligations: June 30 cash and cash equivalents were $136.3m, down from $178.0m at year-end; restricted cash was $6.8m. Current assets were $345.4m and current liabilities $52.1m. The company reported no credit facility. Finance lease obligations totaled $48.5m, chiefly related to its headquarters sale-leaseback; total operating and finance lease liabilities were $55.0m.
Changes, outlook and risks
- Management cited an industry slowdown as the principal driver of weaker first-half revenue, but said gross-margin improvement supported solid performance at the lower revenue level. It continued investment in product extensions.
- In response to the slowdown, the company recorded $1.0m of Q2 headcount-related expense, accrued at quarter-end. It also reported $1.3m of inventory-obsolescence provision for the first half.
- Management said existing cash, cash equivalents and borrowing capacity should meet anticipated short- and long-term cash requirements. It provided no specific revenue or earnings guidance in the supplied filing text.
- The company repurchased 0.9m shares for $14.0m during the first half under a $35m authorization; approximately $21.0m remained available at June 30. Management noted cash may be needed for business ramps and organic or inorganic growth opportunities.
- Customer concentration is significant: the ten largest customers represented 77.4% of first-half revenue. Four customers each accounted for 11.2%–14.8% of first-half revenue. Three customers represented 46.7% of receivables at quarter-end.
- Deferred revenue declined to $14.1m from $22.6m at year-end, primarily reflecting fewer system sales and, to a lesser extent, timing of acceptances. The tax valuation allowance rose to $7.7m due to uncertainty about using certain R&D credits.
- The company reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether system demand and customer capital spending recover, and how that affects revenue, operating leverage and cash generation.
- Whether improved Purion margins persist and whether service margins and aftermarket demand stabilize.
- Inventory levels, inventory reserves and working-capital trends, given the first-half operating cash outflow.
- Customer concentration and the timing of system installations, acceptances and deferred-revenue recognition.
- Use of the remaining repurchase authorization relative to liquidity needs, investment opportunities and the company’s growth plans.