Axcelis Technologies, Inc. — Q3 2018 Form 10-Q
Business and period: Axcelis manufactures ion-implantation and other semiconductor-processing equipment and provides aftermarket parts, upgrades and services. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $95.4m | $104.5m | $336.9m | $294.2m |
| Gross profit / margin | $39.9m / 41.8% | $39.8m / 38.0% | $136.1m / 40.3% | $113.5m / 38.5% |
| Operating income / margin | $10.7m / 11.1% | $13.8m / 13.2% | $48.4m / 14.3% | $37.1m / 12.5% |
| Net income | $8.8m | $11.8m | $37.4m | $35.3m |
| Diluted EPS | $0.26 | $0.35 | $1.10 | $1.07 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $17.2m | $40.3m |
Revenue mix and drivers: Q3 systems revenue was $56.4m, down from $69.2m; aftermarket revenue rose to $39.0m from $35.3m. Management attributed the product-revenue decline primarily to the mix of tools sold. For the nine months, systems revenue increased to $215.8m from $186.9m, mainly on higher Purion system sales; aftermarket revenue increased to $121.1m from $107.3m. Total nine-month revenue grew 14.5%, while Q3 revenue declined 8.7% year over year.
Margins and expenses: Q3 gross margin improved 3.8 percentage points, primarily due to a higher mix of parts and upgrades; service margin also improved with changes in contract mix. Nine-month gross margin rose 1.8 points. Despite the Q3 gross-margin improvement, operating income and net income fell as revenue declined and operating expenses increased. Nine-month R&D rose 17.0% to $37.6m, and sales and marketing rose 18.3% to $25.2m; management cited headcount and product-development investment, including new Purion products.
Cash, liquidity and obligations: At September 30, 2018, cash and cash equivalents were $148.7m and restricted cash was $6.9m. Current assets were $367.3m versus current liabilities of $66.3m. Nine-month operating cash flow of $17.2m was below $40.3m in 2017, reflecting working-capital movements, including outflows from receivables, payables and other assets/liabilities. Capital expenditures were $3.9m. The company reported no credit facility and said existing cash, cash equivalents and borrowing capacity should meet anticipated short- and long-term needs. It had a $47.7m sale-leaseback financing obligation related to its headquarters; this is not presented as conventional funded debt.
Changes, outlook and risks
- Comparability: Axcelis adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year figures remain under ASC 605. Adoption increased Q3 2018 reported revenue by $0.6m versus the ASC 605 basis, but reduced nine-month revenue by $1.3m. The company recorded a $1.6m opening retained-earnings increase and deferred-revenue decrease. Consider these differences when comparing periods.
- Taxes and unusual items: The nine-month 2018 tax provision was $7.0m, versus a $1.6m tax benefit in 2017. 2018 included a $1.4m benefit related to the TCJA transition-tax calculation and a $0.3m benefit from expiration of an uncertain tax position; associated interest and penalties were reversed, reducing interest expense by $0.2m. The filing notes deferred tax assets of $90.3m at year-end 2017 and a $7.1m valuation allowance maintained against certain U.S. tax credits and state NOLs.
- Outlook: No specific revenue, earnings or margin guidance is provided. Management said it was pursuing organic and inorganic growth opportunities and considered current resources sufficient for anticipated requirements. It expected adoption of the new lease standard in January 2019 to add operating-lease right-of-use assets and liabilities, without a material impact on results or cash flows.
- Key risks and contingencies: The ten largest customers represented 76.4% of nine-month revenue; two customers individually represented 22.9% and 10.8%. Most revenue is generated outside the United States, exposing results to global industry conditions, political and tax developments, and foreign-exchange movements. Management noted customer capacity utilization can affect service and aftermarket demand. Inventory was $124.0m, including $91.8m of raw materials, and the company recorded a $1.7m nine-month provision for excess and obsolete inventory. The company reported no litigation it believed would materially adversely affect operations and no material change to previously disclosed risk factors.
Investor verification points
- Check the ASC 606 reconciliation when comparing reported 2018 results with 2017.
- Assess whether the Q3 decline in systems revenue reflects temporary sales mix or a sustained change in demand, and track Purion sales and aftermarket performance.
- Review the causes and durability of the decline in operating cash flow, particularly receivables, inventory and other asset/liability movements.
- Monitor customer concentration, overseas exposure, foreign-exchange effects and inventory levels and reserves.
- Verify the impact of tax reform, deferred tax assets and valuation allowances, and the future balance-sheet effect of lease accounting.