AXCELIS TECHNOLOGIES INC ACLS
August 13, 2009 - 3:17pm EST by
rasputin998
2009 2010
Price: 0.50 EPS -$1.00 $0.20
Shares Out. (in M): 104 P/E NA 3.0x
Market Cap (in $M): 52 P/FCF NA 2.0x
Net Debt (in $M): -56 EBIT -100 20
TEV ($): -4 TEV/EBIT NA 0.1x

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Description

The common stock of Axcelis Technologies, Inc. (ACLS) is currently trading at below half our estimate of its net liquidation value.  At this price, the stock offers a substantial margin of safety plus a valuable - yet negatively priced - option on the business of a one-time technological leader with substantial operating leverage to a recovery within the highly cyclical semiconductor capital equipment space.  

Liquidation Value

Our summary analysis of Axcelis' liquidation value, based upon the company's latest quarterly filing for the period ending June 30, 2009, is presented below. 

Item

Balance Sheet Amt ($MM)

Recovery Factor (%)

Liquidation Value ($MM)

Cash

56.698

100%

56.698

Accts Receivable

23.305

80%

18.644

Inventory

132.985

50%

66.493

Prepaids

11.160

100%

11.160

Property

48.876

70%

34.213

Other Assets

11.157

100%

11.157

 

 

Total Assets

198.364

Current Liabilities

36.418

100%

36.418

LT Deferred Revs

1.402

100%

1.402

Other LT Liabilities

3.567

100%

3.567

 

 

Total Liabilities

41.387

 

 

Net Assets

156.978

 

 

Additional Burn

40.000

 

 

Net after Burn

116.978

Net liquidated assets of $117mm after burn equates to $1.12 per share on 104mm shares outstanding.

Notes:

1.  Balance sheet receivables and inventories are recorded net of reserves, but are nonetheless haircut further as shown above.

2.  Current Liabilities include $8mm in deferred revenue, which presumably would be offset by undiscounted inventories, but the offsetting assets are nonetheless discounted again in this analysis.

3.  Axcelis' 417,000 square foot, owned building in Beverly, Massachusetts was appraised at above $80mm in the 4th quarter of 2008, but is valued here at $34mm.  Our information indicates that the building is currently being marketed to corporations in the healthcare industry that are interested in the facility's cleanroom buildout.

4.  The company has state and federal net operating loss carryforwards (NOLs) in excess of $230mm, and foreign NOLs in excess of $10mm.  These are fully reserved against, but would be available to the shield future operating income of a going concern as they do not begin to expire until 2018.  We assigned zero value to the NOLs in this analysis.

5.  In March, 2008, Sumitomo Heavy Industries and Texas Pacific Group bid $6.00 per share for the company.  Axcelis' board rejected the bid, stating, "...the proposal undervalues Axcelis and is not in the best interests of Axcelis and its shareholders."

6.  The company has over 1,100 employees but no pension funding issues as its only retirement program is a defined contribution plan.

 

So here we have an enterprise that had a $600mm bid on the table just 18 months ago, with a liquidation value in excess of $115mm, now trading at a market value of approximately $50mm. 

Clearly the market anticipates a longer, deeper additional burn than the $40mm we are projecting.  While the $20.8mm loss in the latest quarter lends credence to the market's view, when we adjust for one-time items associated with the sale of their SEN joint venture interest, the repayment of a convertible note, and the business' ongoing restructuring, the actual burn was less than $15mm.  Mathematically, our $40mm burn estimate to breakeven will prove conservative if next quarter's burn falls below $10mm and the company trends towards profitability over the following three quarters.  We are fairly confident that this will be the case. 

Our discussions with management and industry participants, along with information on capacity utilization among the foundries provided by reports from Axcelis' customers (Taiwan Semi) and competitors (Mattson and Varian), strongly indicate that the industry is in the early stages of a new order cycle and that Axcelis should garner its fair share of this demand.  Some discussion about Axcelis' industry, its position in the industry, and the events that led to its current distress will help clarify our investment case.

 

Business Overview and History

Axcelis was spun out of Eaton Corp in 2000.  Its main business is the provision of ion implantation equipment to semiconductor chip manufacturers.  The company also offers dry strip equipment, curing systems, and aftermarket support to its customers.

Ion implantation is a central process in embedding transistors into silicon chips.  An ion implanter is a large, technologically advanced machine that injects electrically charged particles into the wafer.  Typical process flows require twenty implant steps, and the most advanced processes require 30 or more steps.  Three different types of implanters have been developed to cover the range of these processes required in chip fabrication: medium current, high current and high energy.  Axcelis' major competitor in the high current and high energy systems is Varian Semiconductor Equipment Associates.  These machines cost between two and three million dollars per unit.

Axcelis was caught without a leading edge product in 2005 when it maintained its position in "multi-wafer" or "batch" high current implantation devices and its customers shifted from multi-wafer tools to single-wafer tools for those devices.  By the time Axcelis could develop and ship their single-wafer high current and high energy products, the damage was already done.  The recession had depressed demand for this expensive capital equipment and Axcelis had no opportunity to recapture its lost market share.

The financial impact from this loss of position was devastating.  Revenues declined from over $500mm in 2004 to $250mm in 2008.  Gross profits receded from $212mm to $63mm over the same time period.  Axcelis believes it now has competitive products in all of its lines, and that they will be able to reverse a meaningful portion of their market share loss.  Indeed, when Sumitomo bid $5.20 and later $6.00 per share for the company in early 2008, Axcelis accused Sumitomo of trying to take advantage of a temporarily depressed share price.

 Unfortunately things got even worse as we entered 2009.  The recession and credit crisis left Axcelis without the liquidity to pay off an $85mm note that came due on January 15, 2009.  The issue was ultimately resolved when the company negotiated the sale of its interest in SEN, its Japanese JV, to its joint venture partner, Sumitomo Heavy Industries, for net proceeds of $122mm.

 With the SEN sale, Axcelis is out of the woods as far as bankruptcy risk goes, at least for the next year.  Furthermore, significant partnerships and product wins have recently been announced:  on July 14 the company announced an agreement with Shanghai-based Kingstone Semiconductor to jointly develop advanced ion implantation equipment; on July 22 they reported that China-based Semiconductor Manufacturing International Corporation (SMIC) made Axcelis' Optima HD high dose implanter its tool of record for that process in its advance logic production; on July 30 they announced multiple wins for their Optima XE high energy implanter from two major manufacturers in Asia; and on August 5 they announced a sales and support agreement with France-based Ion Beam Services (IBS). 

A wide confluence of industry information further confirms our view of a turnaround in Axcelis' end markets.  In its July earnings conference call, Applied Materials provided much higher guidance and reported a substantial rebound in silicon orders.  On August 3, Gartner reported soaring DRAM spot prices and cited concerns about shortages in the latter half of this year, particularly with regard to DDR3 technologies where Axcelis' devices are heavily exposed.  On July 30 Taiwan Semi announced a substantial year over year increase in its capex budget, with second half spending up $1.7bb from the $600mm it spent in the first half.

 

Price Target

Our conversations with management suggest that with even modest normalization, service and spare parts revenue should be expected to grow to $150mm annually (from $92mm annualized in the June quarter), and product revenue should grow to $100mm annually (from $45mm annualized in the June quarter).  With 50% margins on service/spare parts revenues and a 40% margin on product revenues, gross margin should total $115mm.  Subtracting Research, Selling, General, and Admin expenses of $90mm yields EBIT of $25mm, which should equate to cash earnings given the lack of debt and the tax shields. 

An eight to ten multiple on cash earnings or a two multiple on gross margin puts a reasonable valuation on the company of $200mm-$250mm, or $2.00 to $2.50 per share.  Finally, if one adds 10 cents on the dollar for the NOLs, or $23mm, to the latest undiscounted tangible book of $236mm from the latest quarter, the sum is $260mm, or $2.50 per share.  An acquirer could use any of these valuation techniques to justify a $2.25 purchase price and still regard it as a lowball takeout given the easy synergies available in reducing the SG&A and R&D expense lines.

  

Catalyst

Greater visibility on order book over the next several months

Order deliveries consummated toward year end

Cashflow and profitability appears towards the middle of 2010

Strategic buyer for company appears by the end of 2010

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    Description

    The common stock of Axcelis Technologies, Inc. (ACLS) is currently trading at below half our estimate of its net liquidation value.  At this price, the stock offers a substantial margin of safety plus a valuable - yet negatively priced - option on the business of a one-time technological leader with substantial operating leverage to a recovery within the highly cyclical semiconductor capital equipment space.  

    Liquidation Value

    Our summary analysis of Axcelis' liquidation value, based upon the company's latest quarterly filing for the period ending June 30, 2009, is presented below. 

    Item

    Balance Sheet Amt ($MM)

    Recovery Factor (%)

    Liquidation Value ($MM)

    Cash

    56.698

    100%

    56.698

    Accts Receivable

    23.305

    80%

    18.644

    Inventory

    132.985

    50%

    66.493

    Prepaids

    11.160

    100%

    11.160

    Property

    48.876

    70%

    34.213

    Other Assets

    11.157

    100%

    11.157

     

     

    Total Assets

    198.364

    Current Liabilities

    36.418

    100%

    36.418

    LT Deferred Revs

    1.402

    100%

    1.402

    Other LT Liabilities

    3.567

    100%

    3.567

     

     

    Total Liabilities

    41.387

     

     

    Net Assets

    156.978

     

     

    Additional Burn

    40.000

     

     

    Net after Burn

    116.978

    Net liquidated assets of $117mm after burn equates to $1.12 per share on 104mm shares outstanding.

    Notes:

    1.  Balance sheet receivables and inventories are recorded net of reserves, but are nonetheless haircut further as shown above.

    2.  Current Liabilities include $8mm in deferred revenue, which presumably would be offset by undiscounted inventories, but the offsetting assets are nonetheless discounted again in this analysis.

    3.  Axcelis' 417,000 square foot, owned building in Beverly, Massachusetts was appraised at above $80mm in the 4th quarter of 2008, but is valued here at $34mm.  Our information indicates that the building is currently being marketed to corporations in the healthcare industry that are interested in the facility's cleanroom buildout.

    4.  The company has state and federal net operating loss carryforwards (NOLs) in excess of $230mm, and foreign NOLs in excess of $10mm.  These are fully reserved against, but would be available to the shield future operating income of a going concern as they do not begin to expire until 2018.  We assigned zero value to the NOLs in this analysis.

    5.  In March, 2008, Sumitomo Heavy Industries and Texas Pacific Group bid $6.00 per share for the company.  Axcelis' board rejected the bid, stating, "...the proposal undervalues Axcelis and is not in the best interests of Axcelis and its shareholders."

    6.  The company has over 1,100 employees but no pension funding issues as its only retirement program is a defined contribution plan.

     

    So here we have an enterprise that had a $600mm bid on the table just 18 months ago, with a liquidation value in excess of $115mm, now trading at a market value of approximately $50mm. 

    Clearly the market anticipates a longer, deeper additional burn than the $40mm we are projecting.  While the $20.8mm loss in the latest quarter lends credence to the market's view, when we adjust for one-time items associated with the sale of their SEN joint venture interest, the repayment of a convertible note, and the business' ongoing restructuring, the actual burn was less than $15mm.  Mathematically, our $40mm burn estimate to breakeven will prove conservative if next quarter's burn falls below $10mm and the company trends towards profitability over the following three quarters.  We are fairly confident that this will be the case. 

    Our discussions with management and industry participants, along with information on capacity utilization among the foundries provided by reports from Axcelis' customers (Taiwan Semi) and competitors (Mattson and Varian), strongly indicate that the industry is in the early stages of a new order cycle and that Axcelis should garner its fair share of this demand.  Some discussion about Axcelis' industry, its position in the industry, and the events that led to its current distress will help clarify our investment case.

     

    Business Overview and History

    Axcelis was spun out of Eaton Corp in 2000.  Its main business is the provision of ion implantation equipment to semiconductor chip manufacturers.  The company also offers dry strip equipment, curing systems, and aftermarket support to its customers.

    Ion implantation is a central process in embedding transistors into silicon chips.  An ion implanter is a large, technologically advanced machine that injects electrically charged particles into the wafer.  Typical process flows require twenty implant steps, and the most advanced processes require 30 or more steps.  Three different types of implanters have been developed to cover the range of these processes required in chip fabrication: medium current, high current and high energy.  Axcelis' major competitor in the high current and high energy systems is Varian Semiconductor Equipment Associates.  These machines cost between two and three million dollars per unit.

    Axcelis was caught without a leading edge product in 2005 when it maintained its position in "multi-wafer" or "batch" high current implantation devices and its customers shifted from multi-wafer tools to single-wafer tools for those devices.  By the time Axcelis could develop and ship their single-wafer high current and high energy products, the damage was already done.  The recession had depressed demand for this expensive capital equipment and Axcelis had no opportunity to recapture its lost market share.

    The financial impact from this loss of position was devastating.  Revenues declined from over $500mm in 2004 to $250mm in 2008.  Gross profits receded from $212mm to $63mm over the same time period.  Axcelis believes it now has competitive products in all of its lines, and that they will be able to reverse a meaningful portion of their market share loss.  Indeed, when Sumitomo bid $5.20 and later $6.00 per share for the company in early 2008, Axcelis accused Sumitomo of trying to take advantage of a temporarily depressed share price.

     Unfortunately things got even worse as we entered 2009.  The recession and credit crisis left Axcelis without the liquidity to pay off an $85mm note that came due on January 15, 2009.  The issue was ultimately resolved when the company negotiated the sale of its interest in SEN, its Japanese JV, to its joint venture partner, Sumitomo Heavy Industries, for net proceeds of $122mm.

     With the SEN sale, Axcelis is out of the woods as far as bankruptcy risk goes, at least for the next year.  Furthermore, significant partnerships and product wins have recently been announced:  on July 14 the company announced an agreement with Shanghai-based Kingstone Semiconductor to jointly develop advanced ion implantation equipment; on July 22 they reported that China-based Semiconductor Manufacturing International Corporation (SMIC) made Axcelis' Optima HD high dose implanter its tool of record for that process in its advance logic production; on July 30 they announced multiple wins for their Optima XE high energy implanter from two major manufacturers in Asia; and on August 5 they announced a sales and support agreement with France-based Ion Beam Services (IBS). 

    A wide confluence of industry information further confirms our view of a turnaround in Axcelis' end markets.  In its July earnings conference call, Applied Materials provided much higher guidance and reported a substantial rebound in silicon orders.  On August 3, Gartner reported soaring DRAM spot prices and cited concerns about shortages in the latter half of this year, particularly with regard to DDR3 technologies where Axcelis' devices are heavily exposed.  On July 30 Taiwan Semi announced a substantial year over year increase in its capex budget, with second half spending up $1.7bb from the $600mm it spent in the first half.

     

    Price Target

    Our conversations with management suggest that with even modest normalization, service and spare parts revenue should be expected to grow to $150mm annually (from $92mm annualized in the June quarter), and product revenue should grow to $100mm annually (from $45mm annualized in the June quarter).  With 50% margins on service/spare parts revenues and a 40% margin on product revenues, gross margin should total $115mm.  Subtracting Research, Selling, General, and Admin expenses of $90mm yields EBIT of $25mm, which should equate to cash earnings given the lack of debt and the tax shields. 

    An eight to ten multiple on cash earnings or a two multiple on gross margin puts a reasonable valuation on the company of $200mm-$250mm, or $2.00 to $2.50 per share.  Finally, if one adds 10 cents on the dollar for the NOLs, or $23mm, to the latest undiscounted tangible book of $236mm from the latest quarter, the sum is $260mm, or $2.50 per share.  An acquirer could use any of these valuation techniques to justify a $2.25 purchase price and still regard it as a lowball takeout given the easy synergies available in reducing the SG&A and R&D expense lines.

      

    Catalyst

    Greater visibility on order book over the next several months

    Order deliveries consummated toward year end

    Cashflow and profitability appears towards the middle of 2010

    Strategic buyer for company appears by the end of 2010

    Messages


    SubjectInventory
    Entry08/17/2009 09:30 AM
    Membermrsox977

    Thank you for the post.  Perhaps you could address the working capital situation and the Co's ability to operate as a going concern.  I ask this because when you look back over time, inventories have increased to a dramatically high percentage of sales.  With no current cash flow, and a relatively high inventory level, how will they finance new inventory to get 'back in the game' ?  Thanks.


    SubjectRE: Inventory
    Entry08/18/2009 09:57 PM
    Memberrasputin998

    Thank you for your question.  You bring up an issue that perpetually plagues the semi cap equipment space.  The fabs effectively force their suppliers to extend financing for egregiously long periods as orders are spec'd, produced, and shipped for testing and qualification before payment is remitted.  Over time this would seem to be unsustainable, but that is how it has been and still is. 

    That said, if I gave the perception that Axcelis' current inventory is somehow obsolete or does not include new, monetizeable product then I was unclear.  The liquidation analysis and associated haircuts were presented to highlight the margin of safety I think we have from a valuation perspective, even under extreme assumptions.  I did not mean to imply that the company's inventory is old and has to be liquidated as it attempts to start anew.

    It is our understanding that the inventory shown on the balance sheet represents relatively fresh product and should support the 2010 sales we are modelling.  Specifically, the breakdown of the roughly $130mm of inventory is approximately as follows:

    $50mm is related to parts supporting the service business.  This should easily support $150mm in service revenue as the inventory can be run relatively leanly.  It has already been qualified, is held to be shipped on short notice, and is coupled with labor revenue that represents about 70% of each order ticket.

    $20mm is related to the lines other than ion implantation (primarily dry stripping).  These lines have always been current and the inventory is fairly fresh (i.e., all produced within the last 12-18 months).

    $20mm is physically at the foundries, with testing being completed and/or awaiting qualification.  Our understanding is that it is highly likely that this will be recognized as revenue and converted to cash within the next three quarters.

    This leaves $40mm, which we believe is current product. 

    We also believe Axcelis has about $15mm of fully written off product that is still saleable.  Additionally, there are some quirks to the new product development accounting in this space which leaves Axcelis holding some of its most recent production unrecognized on its balance sheet.

    With the cash on hand, we are comfortable that our revenue projection can be met without extraordinary external financing.


    Subjectproperty
    Entry08/26/2009 10:35 AM
    Memberheffer504

    i think you are off with the building value.  according to the cfo, the property was appraised for 60m, and is now worth less.  they may even have to take an impairment.  also, they looked into selling/leasing the space, but there is no way they can do it cost effectively.  just for what it's worth...


    SubjectRE: property
    Entry08/26/2009 04:19 PM
    Memberrasputin998

    Looking at it more closely, I agree with you.  The CFO had mentioned to us that the building was appraised at over $80mm about 18 months ago, and I had checked the 2008 10-k to see if this was still the case.  The K shows the undepreciated building value at $80mm and further that an appraisal in Q4 08 determined that the building's fair value was in excess of its book carrying value (see Note 6, p. F-16 in the 2008 10-K).  However, I neglected to account for the depreciation that was recorded on the books.  That's an explanation, not an excuse.  I apologize for the error.  The $60mm makes sense.

    Nonetheless, in my liquidation analysis above I use $35mm, which seems conservative even given your info about a prospective impairment.  I wasn't trying to make any case here for imminent monetization of the building - only that it was a relatively attractive property that gives some support to our margin of safety in a downside scenario and that management was examining options there that might prove fruitful in a better environment.  This still seems to be the case and it was nonetheless a very minor aspect of the analysis.

    I would add that I don't think the opportunity here is in some sort of liquidation and distribution of proceeds.  The liquidation analysis demonstrates that the market is valuing the company at an extremely depressed level.  We believe there is strong but early evidence that their business is turning.  If this turns out to be true, the stock is likely to trade at multiples of the 50 cent market value at the time of the writeup or even the current 70 cents, once a turn becomes apparent.  Either the market will revalue the stock or a strategic buyer will appear. 

    On the downside, if we're wrong and the business doesn't recover at all, there appears to be ample margin of safety to wind things down, liquidate, and pay shareholders in excess of current prices.  It looks like a heads you win, tails you don't lose investment.


    SubjectCurrent thinking
    Entry11/02/2009 10:54 AM
    Membermaggie1002

    Hi Rasputin, thanks for submitting this interesting idea.  I wonder if you have any change in fundamental sentiment and explanation for the recent magnitude of the stock decline except perhaps mo in/mo out.  Thanks in advance.


    SubjectRE: Current thinking
    Entry11/03/2009 12:36 PM
    Memberrasputin998

    Hi Maggie -

    Thanks for the question.  I don't have much insight on the upcoming announcement as they are pretty good about being quiet going into earnings.  The newsflow has been consistently positive and supportive of our thesis that the burn is going to dissipate, perhaps going to cashflow breakeven as soon as the 4th quarter.  Since the writeup, they have announced several high energy wins, a dry-strip order and multiple upgrade orders.  Varian mentioned some difficulty getting customers to buy new units on their conference call, but that might actually be beneficial to Axcelis' upgrade business.  With liquidation value above $1.00 and book value at $2.00, the current trading price (78 cents as I write) seems inconsistent with the obvious orderflow. 

    Maybe someone knows something that we don't, but I doubt it.  The stock ran awfully quickly from 70 cents to $1.80 without much to explain it, so maybe this is just the other side of the mo in/mo out trade, as you put it.  We lightened some into the rally almost solely for portfolio management reasons since we had a large position, but it still represents a significant part of our fund.  Even at 1.80 we couldn't justify exiting the position as we think the holdback in orders over the last year has only increased future demand by the OEMs for capacity.


    SubjectRE: RE: Current thinking
    Entry09/28/2010 08:44 AM
    Membermrsox977
    Hi rasputin - just curious if you have exited at these levels ?  The Company popped back into my radar as I was reading over the recent Delaware Supreme Court decision that they had been involved in.  Thanks !
     
    mrS

    SubjectRE: RE: RE: Current thinking
    Entry09/28/2010 02:56 PM
    Memberrasputin998
    We had reduced our position on the way up, but started buying again when the stock traded below $1.50. 
    The company's business is still ramping as bookings continue to improve and they seem poised to recapture some of their lost market share.  With working capital being converted to cash at better levels than we had discounted, the stock is currently trading at around the enterprise's orderly liquidation value. 
    Once the inventory liquidation is complete, we expect new orders to be filled at their historical gross margin of around 40% (vs about zero currently).  At some point over the next few quarters, it should become apparent that Axcelis can earn 30-40 cents per share annually on a normalized basis.
    - R
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