Axcelis Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Axcelis makes ion implantation and other semiconductor-processing equipment and provides aftermarket products and services. Amounts below are in millions of U.S. dollars except per-share data and percentages.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $86.9 | $67.5 | Up 28.7%; product revenue rose 31.9% to $82.0, while services revenue fell 8.1% to $4.9. |
| New system revenue | $55.2 | $37.0 | Up; management attributed the increase primarily to higher Purion system sales. |
| Aftermarket revenue | $31.6 | $30.5 | Modest increase. |
| Gross profit / margin | $34.7 / 40.0% | $23.4 / 34.7% | Margin improved 5.3 percentage points. |
| Operating income / margin | $10.7 / 12.4% | $2.5 / 3.8% | Higher revenue and product margins outweighed increased operating expenses. |
| Net income | $9.5 | $1.9 | Net margin was 11.0%, versus 2.9%. |
| Diluted EPS | $0.29 | $0.06 | Improved year over year. |
| Operating cash flow | $(2.7) | $(10.2) | Cash use narrowed, but working-capital needs remained significant. |
| Capital expenditures | $1.1 | $1.3 | Investing cash outflow. |
Balance sheet and liquidity
- At March 31, 2017, cash and cash equivalents were $69.4 million and restricted cash was $6.8 million; total cash, cash equivalents and restricted cash were $76.2 million.
- Current assets were $260.1 million and current liabilities were $52.8 million. Inventories were $115.6 million, up from $113.9 million at year-end 2016; accounts receivable rose to $67.1 million from $50.6 million.
- Total liabilities were $106.4 million. The principal financing obligation was $47.7 million from the 22-year headquarters sale-leaseback, accounted for as financing. Axcelis reported no credit facility.
- Management said existing cash was expected to cover anticipated short- and long-term cash requirements and that borrowing on reasonable terms would be possible if needed. Operating cash use reflected higher customer orders and related increases in receivables, inventory, prepaid and other assets.
Material changes, outlook and risks
- Product gross margin increased to 42.9% from 35.2%, including improved system-sale margins associated with lower costs; reduced mix of higher-margin parts and upgrades partly offset the improvement. Services gross margin turned negative, at (9.5)% versus 28.1%, primarily due to higher service-contract costs.
- Operating expenses rose 14.7% to $24.0 million, mainly reflecting higher headcount, incentive compensation, travel and stock-based compensation. There were no restructuring charges, compared with $0.3 million in Q1 2016.
- Income tax expense was $0.01 million, compared with a $0.5 million benefit in Q1 2016. Expiration of a tax statute of limitations led to reversals of a $0.3 million tax reserve and $0.2 million accrued interest. The company maintains a full valuation allowance on U.S. deferred tax assets.
- No specific numerical revenue or earnings guidance was provided. Management described Q1 results as solid, driven by higher Purion sales and strong gross-margin performance, and noted that semiconductor equipment demand is cyclical and depends on technology transitions, chip supply and demand, global economic conditions, and customer choices between Axcelis and competitors.
- Customer concentration is substantial: the ten largest customers generated 85.4% of Q1 revenue. Four customers each represented 16.3%–19.2% of revenue; three customers represented 24.9%, 21.5% and 12.7% of receivables, respectively.
- The filing reported no litigation believed likely to have a material adverse effect, no material changes to previously disclosed risk factors or market-risk disclosures, and effective disclosure controls. Adoption of new accounting guidance during the quarter had no material financial-statement impact, except for cash-flow presentation changes described in the filing.
Important facts for investors to verify
- Whether Purion system demand and the resulting product-margin improvement persist, and how much revenue remains deferred pending installation or customer acceptance; deferred revenue was $13.1 million at quarter-end.
- Whether service-contract costs and negative services gross margin improve, and whether aftermarket demand tracks customer factory utilization.
- Cash conversion and working-capital trends, especially receivables and inventory growth relative to sales and orders.
- Customer concentration and exposure to a small number of semiconductor manufacturers, including collections from major receivables.
- The financing and cash-flow implications of the $47.7 million sale-leaseback obligation, restricted cash, and the absence of a credit facility.
- Potential effects of semiconductor-industry cyclicality, competition, and adoption of the forthcoming revenue-recognition and lease accounting standards.