Axcelis Technologies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Axcelis makes semiconductor processing equipment, including ion implantation and dry-strip systems, and provides related aftermarket service and support. Amounts below are in millions of dollars unless noted.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $93.4 | $58.2 | $186.6 | $106.7 |
| Gross profit / margin | $34.1 / 36.6% | $19.9 / 34.1% | $65.2 / 35.0% | $32.9 / 30.8% |
| Operating income (loss) / margin | $6.2 / 6.7% | $(3.7) / (6.3)% | $8.6 / 4.6% | $(14.1) / (13.2)% |
| Net income (loss) | $4.2 | $(4.5) | $6.0 | $(15.6) |
| Diluted EPS | $0.04 | $(0.04) | $0.06 | $(0.15) |
Product revenue was $84.3 million in Q2 and $170.9 million for the first half; system sales were $53.7 million and $108.5 million, respectively. Service revenue was $9.0 million in Q2 and $15.6 million for the first half. The filing attributes the increase in product and system sales to a stronger semiconductor market, higher customer capital spending, and traction for the Optima HDx and Optima XEx systems.
Operating expenses rose year over year: first-half R&D was $23.6 million, sales and marketing $15.5 million, and general and administrative $17.5 million. Management cited increased product-development activity, payroll and selling costs. Service gross margin fell to 29.9% in Q2 from 38.2%, and to 26.0% for the first half from 37.6%, primarily due to higher fixed service costs and mix and timing of service contracts. Product gross margin improved, principally from higher system volume and fixed-cost absorption.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $37.9 million at June 30, 2011, down from $45.7 million at year-end 2010.
- Operating cash flow was negative $8.1 million for the first half, compared with positive $2.2 million a year earlier. Inventory growth used $13.9 million of cash; management said spending supported anticipated system sales.
- Capital expenditures were $1.2 million in the first half. No borrowings are shown on the balance sheet; the filing does not report a separate debt balance.
- The amended revolving facility permits up to $30 million of borrowings, primarily based on receivables. Available borrowing capacity was $28.4 million at June 30; the company reported covenant compliance. The facility expires April 10, 2015.
- Current assets were $231.3 million and current liabilities $62.5 million. Inventory was $124.3 million, up from $109.7 million at December 31, 2010.
Changes, outlook, and risks
Compared with 2010, Axcelis returned to profitability in both the quarter and first half, with higher revenue and improved gross and operating margins. System sales drove much of the increase. Aftermarket revenue was $39.7 million in Q2 and $78.0 million in the first half, versus $36.1 million and $68.5 million in the comparable periods.
Management’s 2011 plan anticipated improved revenue, positive operating cash flow, and reduced working capital versus 2010. It expected third-quarter cash generation, mainly from conversion of working-capital items, particularly receivables. Management said existing cash was expected to fund anticipated needs for the foreseeable future and that spending could be adjusted if demand weakened. These are management expectations, not quantified earnings guidance.
- The business is cyclical and depends on semiconductor manufacturers’ capital spending, facility utilization, technology shifts, and access to credit. Management warned that customer consolidation may increase customer concentration and pricing pressure.
- Three customers represented approximately 43.6% of Q2 revenue; three customers accounted for 37.8% of receivables at quarter-end. Customer dependence is therefore material.
- Other expense was $1.2 million in Q2, primarily from foreign-exchange losses, compared with $0.3 million of other income a year earlier.
- Warranty liability rose to $4.4 million from $2.7 million at year-end, including $1.1 million of increases in estimates for existing warranties during the first half.
- The company reported no litigation believed likely to have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls. Revenue recognition for some systems depends on installation and customer acceptance; deferred revenue was $13.3 million at June 30.
Key facts for investors to verify
- Whether system demand and the anticipated market traction for Optima and Integra products continued after Q2.
- Whether inventory converted into sales and receivables into cash as management expected, and whether operating cash flow improved.
- Whether customer concentration, service-margin pressure, and warranty estimates changed in subsequent periods.
- Whether the company maintained credit-facility covenant compliance and adequate liquidity under weaker-demand scenarios.