Axcelis Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparative figures are for the same periods in 2019. Axcelis makes ion implantation equipment for semiconductor manufacturing and provides related aftermarket parts and services. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Change | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|---|
| Revenue | $110.4m | $69.5m | +59.0% | $352.4m | $235.2m |
| Gross profit / margin | $48.2m / 43.6% | $30.6m / 44.0% | Margin down 0.4 pts | $145.6m / 41.3% | $99.8m / 42.4% |
| Operating income | $13.9m | $1.9m | $44.0m | $11.0m | |
| Net income | $10.8m | $0.7m | $35.3m | $7.3m | |
| Diluted EPS | $0.32 | $0.02 | $1.04 | $0.22 |
Q3 product revenue rose 63% to $104.8m, primarily on more systems sold; services revenue was $5.6m. Systems revenue was $70.2m and aftermarket revenue was $40.2m. Asia Pacific generated $90.0m of Q3 revenue. For the nine months, systems revenue was $229.4m and aftermarket revenue was $123.0m.
Product gross margin declined to 46.2% in Q3 and 43.4% year to date, which management attributed to a lower mix of higher-margin parts and upgrades and changes in Purion system mix. Q3 services gross margin was negative 3.8%, attributed to service-contract mix. Operating expenses increased in dollars but fell as a percentage of revenue; higher incentive-based pay was a key driver of expense growth.
Cash, liquidity, and obligations
- Cash and cash equivalents were $212.0m at September 30, 2020, up from $139.9m at year-end 2019; restricted cash was $0.8m.
- Nine-month operating cash flow was $75.7m, versus cash use of $0.3m in 2019. Capital spending was $5.6m, implying operating cash flow less capital spending of approximately $70.1m.
- Current assets were $435.8m and current liabilities $69.4m. Total liabilities were $130.0m.
- Finance lease obligations were $48.3m, primarily related to the headquarters sale-leaseback; no borrowings were outstanding on the new $40m revolving credit facility. A $5.9m letter of credit reduces available revolver capacity. Axcelis reported compliance with the facility covenants.
- Management said existing cash and financing capacity should meet anticipated short- and long-term cash needs. It cited potential business ramps and organic or inorganic growth opportunities as reasons to maintain liquidity.
Material changes, outlook, and risks
- Revenue and earnings increased substantially year over year, driven chiefly by higher system sales, including demand for Purion systems. Nine-month revenue rose 49.8%; nine-month net income increased to $35.3m from $7.3m.
- Despite higher gross profit, gross margin declined year over year in both the quarter and nine-month period due to product and service mix.
- No numerical earnings or revenue guidance is provided in the filing. Management said it was monitoring COVID-19 impacts. It identified possible supply shortages, customer demand shifts, purchase delays or cancellations, and travel or installation restrictions as risks, while noting strong performance through the first nine months.
- U.S. export controls adopted in June 2020 cover certain semiconductor equipment shipments to military end users in China. In September, the Commerce Department required license applications before shipping covered products to SMIC or its subsidiaries; this could affect sales or shipment timing.
- Customer concentration is significant: the ten largest customers represented 76.3% of nine-month revenue, and three customers accounted for 38.3% of Q3 revenue. Three customers represented 42.6% of receivables at quarter-end.
- The $50m share repurchase authorization was suspended at the end of Q1 due to COVID-19 uncertainty, not terminated. The company repurchased $7.5m of stock in the first nine months; none in Q3.
- Management reported no litigation it believes would materially adversely affect operations. It also reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether system demand and Purion sales remain strong, and how customer and geographic mix affects future margins.
- Whether product and service gross margins recover from the reported declines, particularly given mix-related pressures.
- Customer concentration and the potential effect of COVID-19, supply-chain constraints, or export licensing requirements on orders, shipments, and collections.
- Cash-flow sustainability, inventory growth to $159.7m from $140.4m at year-end, and the company’s planned use of cash and revolver availability.
- Realizability of deferred tax assets: the company reported $58.2m of net deferred tax assets and a $9.2m U.S. valuation allowance.