Axcelis Technologies, Inc. — Q1 2018 Form 10-Q
Business context and period: The filing covers the unaudited three months ended March 31, 2018, compared with Q1 2017. Axcelis makes ion-implantation and other semiconductor-processing equipment and provides aftermarket products and services. Management attributed stronger results mainly to increased Purion system sales, supported by spending in memory and mature-process markets.
Financial performance
Amounts are in millions of dollars except per-share data. Balance-sheet figures compare March 31, 2018 with December 31, 2017.
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $122.2 | $86.9 | Up 40.6% |
| Product revenue | $116.0 | $82.0 | Up 41.5%; growth primarily from Purion systems |
| Systems revenue | $85.5 | $55.2 | Up; 70.0% of revenue versus 63.6% |
| Aftermarket revenue | $36.7 | $31.6 | Up approximately 16% |
| Gross profit / margin | $47.2 / 38.6% | $34.7 / 40.0% | Profit up 35.8%; margin down 1.4 percentage points |
| Operating expenses | $28.7 | $24.0 | Up 19.4%, primarily from increased headcount |
| Operating income / margin | $18.5 / 15.1% | $10.7 / 12.4% | Income up 72.7% |
| Net income | $13.9 | $9.5 | Up 46.4% |
| Diluted EPS | $0.41 | $0.29 | Up $0.12 |
| Cash from operations | $8.5 | $(2.7) | Improved, principally reflecting net income; inventory absorbed cash |
| Capital expenditures | $0.7 | $1.1 | Cash outflow |
- Margins: Product gross margin was 41.1%, down from 42.9%, because systems made up a larger share of product sales and parts/upgrades a smaller share. Services remained loss-making at an 8.0% gross margin, although improved from negative 9.5%.
- Liquidity: Cash and cash equivalents were $141.0 million, with $7.5 million restricted, for total cash, cash equivalents and restricted cash of $148.5 million. Current assets were $361.6 million and current liabilities $77.1 million. Inventory was $135.0 million, up from $120.5 million at year-end.
- Debt and obligations: The balance sheet includes a $47.7 million sale-leaseback financing obligation for the headquarters lease. The company reported no credit facility; management said it believed it could borrow on reasonable terms if needed.
- Other balance-sheet items: Total assets were $505.1 million; total liabilities $133.6 million; and stockholders’ equity $371.5 million. Deferred revenue was $18.5 million.
Material changes and notable items
- Revenue from Asia was $97.7 million, compared with $63.2 million; Asia accounted for most reported revenue. The company also signed an agreement with SCREEN Semiconductor Solutions to establish a Purion sales and service network in Japan.
- Two customers accounted for 25.9% and 15.4% of Q1 revenue; the ten largest customers together accounted for 87.6%. This compares with four customers each contributing 16.3%–19.2% in Q1 2017.
- Axcelis adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-period figures remain under ASC 605. For Q1, adoption increased reported revenue by $1.0 million and net income by $0.8 million versus the pro forma ASC 605 presentation. Adoption also increased opening retained earnings and reduced deferred revenue by $1.6 million.
- The income tax provision was $3.6 million versus $11,000. The prior-year provision reflected the prior valuation allowance treatment; the company said it has significant U.S. and certain European net operating loss carryforwards and does not currently pay significant income taxes in those jurisdictions. It retained a $7.1 million valuation allowance against certain U.S. tax attributes.
- Q1 comprehensive income was $15.0 million, including $1.1 million of other comprehensive income, mainly foreign-currency translation adjustments.
Outlook, risks and contingencies
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management believes current cash, cash equivalents and borrowing capacity should meet anticipated short- and long-term cash needs. It also noted that business ramps can require significant cash investment.
- Demand and concentration risks: Results depend on semiconductor-equipment spending and global economic conditions. Customers may reduce, defer or cancel purchases; revenue is highly concentrated among a small number of customers and heavily weighted to Asia.
- Operating risks: Revenue and aftermarket demand can fluctuate with customer capacity utilization. Inventory reserves depend on forecasts and product-life assumptions. Service gross margins were negative in both comparison periods.
- Tax and accounting: The company was still evaluating certain provisional effects of the 2017 Tax Cuts and Jobs Act; it made no change to its estimated transition-tax liability in Q1. The new lease-accounting standard was expected to be adopted January 1, 2019, with additional assets and liabilities expected, but no material impact on results or cash flows anticipated.
- Legal and controls: Axcelis reported no litigation it believed could materially adversely affect operations, no material change in risk factors, and effective disclosure controls. It reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Purion system demand and customer spending remain strong, particularly given customer and geographic concentration.
- Whether product mix continues to pressure gross margin and whether services can move toward profitability.
- Whether higher inventory converts into shipments and cash, and how working-capital needs change with business growth.
- The effects of ASC 606 on revenue timing, deferred revenue and comparability with prior periods, as well as final tax-reform estimates.
- The terms and cash implications of the headquarters sale-leaseback obligation and future lease-accounting adoption.