Axcelis Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Axcelis makes ion implantation and other semiconductor-processing equipment and provides aftermarket products and services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $119.3 | $102.8 | $241.5 | $189.7 |
| Gross profit / margin | $49.0 / 41.0% | $39.1 / 38.0% | $96.2 / 39.8% | $73.8 / 38.9% |
| Operating income / margin | $19.3 / 16.1% | $12.5 / 12.1% | $37.8 / 15.6% | $23.2 / 12.2% |
| Net income | $14.7 | $13.9 | $28.6 | $23.4 |
| Diluted EPS | $0.43 | $0.42 | $0.84 | $0.72 |
- Revenue grew 16.1% in Q2 and 27.3% in the first half, driven principally by higher Purion system sales and growth in aftermarket business. Q2 systems revenue was $73.9 million and aftermarket revenue $45.4 million; first-half amounts were $159.4 million and $82.1 million, respectively.
- Q2 product gross margin improved to 43.2% from 40.2%, primarily on improved Purion margins. Services gross margin was 5.8% versus 3.4% in Q2; for the first half, services remained negative at (0.8%), improving from (2.3%).
- Q2 net income increased more slowly than operating income; the period included a $3.0 million tax provision versus a $2.6 million tax benefit in Q2 2017. The first-half tax provision was $6.5 million versus a $2.6 million benefit in 2017.
Cash, liquidity and obligations
- At June 30, 2018, cash and cash equivalents were $147.3 million, with a further $7.6 million restricted; current assets were $362.9 million and current liabilities $66.7 million.
- First-half operating cash flow was $15.3 million, down from $31.4 million in 2017, despite higher net income. Inventory growth and decreases in accounts payable and other current liabilities were significant cash uses. Capital expenditures were $1.7 million.
- The company reported a $47.7 million sale-leaseback financing obligation related to its headquarters. It had no credit facility and stated that existing cash, cash equivalents and borrowing capacity should meet anticipated short- and long-term requirements.
Changes, outlook and risks
- Operating results improved year over year, with higher revenue, gross margin and operating income. Operating expenses rose 12.1% in Q2 and 15.5% in the first half, primarily reflecting additional personnel to support growth and Purion development.
- Axcelis adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior periods were not restated. Adoption increased reported revenue by $0.8 million in Q2 and $1.8 million in the first half. On a pro forma ASC 605 basis, revenue would have been $118.5 million and $239.7 million, respectively, and net income $14.0 million and $27.1 million. This limits direct comparability.
- No numerical earnings or revenue guidance was provided. Management described Q2 results as solid and said current forecasts and liquidity were sufficient for anticipated needs. The company also noted that semiconductor demand and customer capacity utilization can affect system and aftermarket sales.
- Risks include substantial international exposure and customer concentration: Asia generated $88.5 million of Q2 revenue, and the ten largest customers represented 77.2% of first-half revenue. One customer accounted for 23.9% of Q2 revenue. Management cited potential economic, political, tax and foreign-exchange disruptions. Foreign-currency movements contributed to higher other expense.
- The company reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. It expected adoption of the new lease standard in 2019 to add operating-lease right-of-use assets and liabilities, without a material impact on results or cash flows.
Important facts for investors to verify
- Whether Purion system demand and improved product margins persist, and how much growth is attributable to systems versus aftermarket activity.
- Why operating cash flow fell despite higher earnings, including inventory and working-capital trends.
- The effect of ASC 606 on reported growth and deferred revenue; reported adoption adjustments lifted 2018 revenue relative to the prior accounting basis.
- Exposure to major customers, Asian markets, semiconductor-industry cyclicality and currency movements.
- Future tax expense and cash taxes following the 2017 valuation-allowance release, including realization of deferred tax assets.