What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-06 · 108 added, 56 removed, 144 unchanged (53% of the section changed)

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In addition, we provide extensive worldwide aftermarket service and support, including spare parts, equipment upgrades and maintenance services to the semiconductor industry.

Our product development and manufacturing activities occur primarily in the United States.

Our product development and manufacturing activities currently occur primarily in the United States although we are adding additional manufacturing capacity in South Korea that should come online by year end 2021.

Our equipment and service products are highly technical and are sold through a direct sales force in the United States, Europe and Asia.

Consolidation and partnering within the semiconductor manufacturing industry has resulted in a small number of customers representing a substantial portion of our business.

Our ten largest customers accounted for 79.8% of total revenue for the three months ended March 31, 2021.

In the first three months of 2021, we delivered strong financial performance driven by demand for our Purion products and gross margins of 42.5% despite the many difficult logistical challenges brought on by trade tensions between the United States and China and the COVID-19 pandemic.

We are continuing to work closely with our customers across market segments, even during this difficult time, to provide them with the best ion implant solutions for their specific manufacturing challenges.

Our ten largest customers accounted for 71.1% of total revenue for the six months ended June 30, 2021.

In the first half of 2021, we delivered strong financial performance driven by strong semiconductor industry fundamentals and an increasing demand for our Purion products, especially in the high growth power device market.

The rapid acceleration of the electrification of the automotive industry is creating substantial demand for power devices and image sensors, which is driving sustainable growth for the Purion product extensions specifically developed for these markets.

Despite the many difficult logistical challenges brought on by trade tensions between the United States and China and COVID-19, we are continuing to work closely with our customers across market segments to provide them with the best ion implant solutions for their specific manufacturing challenges.

In December 2020, the United States Commerce Department placed one of our major Chinese customers, Semiconductor Manufacturing International Corporation (“SMIC”), on the U.S.

export controls Entity List.

This same customer was identified by the Commerce Department in September 2020 as subject to a military end use rule that required us to obtain export controls licenses from the Commerce Department to ship high energy systems, but not our high current systems, ordered by this customer.

As a result of the Entity List classification, we are required to obtain export controls licenses for all U.S.

shipments to this customer.

We did not receive any export controls licenses for this customer in the quarter ended March 31, 2021.

This situation is currently delaying shipments to this customer.

Although we have begun receiving these licenses, this situation did delay some shipments to this customer in the first half of 2021.

Critical Accounting Estimates

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Actual results may differ from these estimates under different assumptions or conditions.

Management has not identified any need to make any material change in, and has not changed, any of our critical accounting estimates and judgments as described in Management’s Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Management has not identified any need to make any material change in, and has not changed, any of our critical accounting estimates and judgments as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.

Results of Operations

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Total revenue

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Percentage of revenue

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Total revenue

Three months ended March 31, 2021 Compared with Three months ended March 31, 2020

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $126.6 million, or 95.4% of revenue during the three months ended March 31, 2021, compared with $112.1 million, or 94.2% of revenue for the three months ended March 31, 2020.

The $14.5 million increase in product revenue for the three

month period ending March 31, 2021, in comparison to the same period in 2020, was primarily driven by an increase in sales of spare parts, product upgrades and used systems.

Three months ended June 30, 2021 Compared with Three months ended June 30, 2020

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $140.2 million, or 95.2% of revenue during the three months ended June 30, 2021, compared with $117.2 million, or 95.3% of revenue for the three months ended June 30, 2020.

The $23.0 million increase in product revenue for the three-month period ending June 30, 2021, in comparison to the same period in 2020, was primarily driven by an increase in the number of systems sold.

A portion of our revenue from systems sales is deferred until installation and other services related to future performance obligations are performed.

The total amount of deferred revenue at March 31, 2021 and December 31, 2020 was $22.1 million and $23.1 million, respectively.

The net decrease in deferred revenue was primarily due to the recognition of revenue on tool acceptances.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $6.2 million, or 4.6% of revenue for the three months ended March 31, 2021, compared with $6.9 million, or 5.8% of revenue for the three months ended March 31, 2020.

The total amount of deferred revenue at June 30, 2021 and December 31, 2020 was $35.5 million and $23.1 million, respectively.

The increase in deferred revenue was primarily due to customer prepayments for systems.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $7.1 million, or 4.8% of revenue for the three months ended June 30, 2021, compared with $5.8 million, or 4.7% of revenue for the three months ended June 30, 2020.

Although services revenue typically increases with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.

Six months ended June 30, 2021 Compared with Six months ended June 30, 2020

Product revenue was $266.8 million, or 95.3% of revenue during the six months ended June 30, 2021, compared with $229.3 million, or 94.8% of revenue for the six months ended June 30, 2020.

The $37.4 million increase in product revenue for the six-month period ending June 30, 2021, in comparison to the same period in 2020, was primarily driven by an increase in the number of systems sold and to a lesser extent revenue increases in spare parts, product upgrades and used systems.

Services revenue was $13.3 million, or 4.7% of revenue for the six months ended June 30, 2021, compared with $12.6 million, or 5.2% of revenue for the six months ended June 30, 2020.

Revenue Categories used by Management

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The ion implant and Aftermarket revenue categories for recent periods are discussed below.

Three months ended March 31, 2021 Compared with Three months ended March 31, 2020

Included in total revenue of $132.8 million during the three months ended March 31, 2021 is revenue from sales of ion implant products and services of $128.8 million, or 97.0% of total revenue, compared with $115.0 million, or 96.7%, of total revenue for the three months ended March 31, 2020.

The remaining $4.0 million of revenue for the three months ended March 31, 2021 was non-ion implant parts and services.

Included in total revenue of $132.8 million during the three months ended March 31, 2021 is revenue from our Aftermarket business of $51.8 million, compared to $36.7 million for the three months ended March 31, 2020.

The remaining $81.0 million of revenue for the three months ended March 31, 2021 was from system sales.

Three months ended June 30, 2021 Compared with Three months ended June 30, 2020

Included in total revenue of $147.3 million during the three months ended June 30, 2021 is revenue from sales of ion implant products and services of $142.9 million, or 97.0% of total revenue, compared with $118.7 million, or 96.6%, of total revenue for the three months ended June 30, 2020.

The remaining $4.4 million of revenue for the three months ended June 30, 2021 was non-ion implant parts and services.

Included in total revenue of $147.3 million during the three months ended June 30, 2021 is revenue from our Aftermarket business of $47.1 million, compared to $46.2 million for the three months ended June 30, 2020.

The remaining $100.2 million of revenue for the three months ended June 30, 2021 was from system sales.

Aftermarket revenue fluctuates from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the sale of spare parts and demand for equipment service.

Aftermarket revenue can also fluctuate from period to period based on the demand for system upgrades or used equipment.

Six months ended June 30, 2021 Compared with Six months ended June 30, 2020

Included in total revenue of $280.1 million during the six months ended June 30, 2021 is revenue from sales of ion implant products and services of $271.6 million, or 97.0% of total revenue, compared with $233.8 million, or 96.6%, of total revenue for the six months ended June 30, 2020.

The remaining $8.5 million of revenue for the six months ended June 30, 2021 was non-ion implant parts and services.

Included in total revenue of $280.1 million during the six months ended June 30, 2021 is revenue from our Aftermarket business of $98.9 million, compared to $82.8 million for the six months ended June 30, 2020.

The remaining $181.2 million of revenue for the six months ended June 30, 2021 was from system sales.

Gross Profit / Gross Margin

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Gross Profit:

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Total gross profit

Three months ended March 31, 2021 Compared with Three months ended March 31, 2020

Gross margin from product revenue was 44.4% for the three months ended March 31, 2021, compared to 40.1% for the three months ended March 31, 2020.

The increase in gross margin resulted from improved margins on Purion systems.

Gross margin from services revenue was 2.6% for the three-month periods ended March 31, 2021, compared to 8.6% for the three months ended March 31, 2020.

Three months ended June 30, 2021 Compared with Three months ended June 30, 2020

Gross margin from product revenue was 45.3% for the three months ended June 30, 2021, compared to 44.1% for the three months ended June 30, 2020.

The increase resulted from improved gross margins on parts and upgrades and

Purion systems.

Gross margin from services revenue was 7.7% for the three months ended June 30, 2021, compared to 3.9% for the three months ended June 30, 2020.

The increase in gross margin is attributable to changes in the mix of service contracts.

Six months ended June 30, 2021 Compared with Six months ended June 30, 2020

Gross margin from product revenue was 44.9% for the six months ended June 30, 2021, compared to 42.1% for the six months ended June 30, 2020.

The increase in gross margin resulted from an increased mix of higher margin parts and upgrades and improved margins on Purion systems.

Gross margin from services revenue was 5.3% for the six months ended June 30, 2021, compared to 6.4% for the six months ended June 30, 2020.

The decrease in gross margin is attributable to changes in the mix of service contracts.

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Research and development

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and professional fees, travel and depreciation expenses.

Personnel costs are our largest expense, representing $22.0 million or 61.1% of our total operating expenses for the three months ended March 31, 2021, compared to $19.9 million or 62.6% of our total operating expenses for the three months ended March 31, 2020.

The higher personnel costs for the three months ended March 31, 2021 is primarily due to an increase in personnel to support growth.

Personnel costs are our largest expense, representing $25.4 million or 63.5% of our total operating expenses for the three months ended June 30, 2021, compared to $22.8 million or 64.3% of our total operating expenses for the three months ended June 30, 2020.

Personnel costs were $47.5 million or 62.4% of our total operating expenses for the six months ended June 30, 2021, compared to $42.8 million or 63.5% of our total operating expenses for the six months ended June 30, 2020.

The higher personnel costs for the three and six months ended June 30, 2021 is primarily due to an increase in personnel expenses to support growth.

Research and Development

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Research and development

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Accordingly, based on our strategic plan, we establish annual R&D budgets to fund programs that we expect will solve customers’ high value, high impact, ion implantation challenges.

Three months ended March 31, 2021 Compared with Three months ended March 31, 2020

Research and development expense was $15.7 million during the three months ended March 31, 2021, an increase of $1.1 million, or 7.4%, compared with $14.6 million during the three months ended March 31, 2020.

The increase is primarily due to higher supplies and materials costs for ongoing projects, increased depreciation associated with capital additions and an increase in personnel expenses.

Three months ended June 30, 2021 Compared with Three months ended June 30, 2020

Research and development expense was $16.6 million during the three months ended June 30, 2021, an increase of $0.6 million, or 3.6%, compared with $16.0 million during the three months ended June 30, 2020.

The increase is primarily due to higher personnel expenses and incentive based pay expense.

Six months ended June 30, 2021 Compared with Six months ended June 30, 2020

Research and development expense was $32.3 million during the six months ended June 30, 2021, an increase of $1.7 million, or 5.4%, compared with $30.6 million during the six months ended June 30, 2020.

The increase is primarily due to higher personnel expenses, supplies and materials costs for ongoing projects and increased depreciation associated with capital additions.

Sales and Marketing

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Sales and marketing

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Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.

Three months ended March 31, 2021 Compared with Three months ended March 31, 2020

Sales and marketing expense was $10.4 million during the three months ended March 31, 2021, an increase of $2.2 million, or 26.6%, compared with $8.2 million during the three months ended March 31, 2020.

The increase is primarily due to higher freight expense and project material costs as well as higher personnel related expenses.

Three months ended June 30, 2021 Compared with Three months ended June 30, 2020

Sales and marketing expense was $12.2 million during the three months ended June 30, 2021, an increase of $2.7 million, or 29.0%, compared with $9.4 million during the three months ended June 30, 2020.

The increase is primarily due to increases in freight expense and project material costs as well as higher personnel related expenses.

Six months ended June 30, 2021 Compared with Six months ended June 30, 2020

Sales and marketing expense was $22.6 million during the six months ended June 30, 2021, an increase of $4.9 million, or 27.9%, compared with $17.6 million during the six months ended June 30, 2020.

The increase is primarily due to increases in freight expense and project material costs as well as higher personnel related expenses.

General and Administrative

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General and administrative

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Our general and administrative expenses result primarily from the costs associated with our executive, finance, information technology, legal and human resource functions.

Three months ended March 31, 2021 Compared with Three months ended March 31, 2020

General and administrative expense was $10.0 million during the three months ended March 31, 2021, an increase of $1.0 million, or 10.8%, compared with $9.0 million during the three months ended March 31, 2020.

Three months ended June 30, 2021 Compared with Three months ended June 30, 2020

General and administrative expense was $11.2 million during the three months ended June 30, 2021, an increase of $1.2 million, or 11.7%, compared with $10.0 million during the three months ended June 30, 2020.

The increase is primarily due to an increase in personnel expenses and incentive based pay expense.

Six months ended June 30, 2021 Compared with Six months ended June 30, 2020

General and administrative expense was $21.2 million during the six months ended June 30, 2021, an increase of $2.2 million, or 11.3%, compared with $19.1 million during the six months ended June 30, 2020.

The increase is primarily due to an increase in personnel expenses and incentive based pay expense.

Other (Expense) Income

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Other expense

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dollar against local currencies of certain of the countries in which we operate as well as interest earned on our invested cash balances.

Other expense was $2.1 million for the three months ended March 31, 2021, compared with $1.4 million for the three months ended March 31, 2020.

This increase was primarily due to an increase in foreign currency exchange losses of $0.5 million as well as a reduction of $0.4 million in interest income when compared to the three month period ended March 31, 2020.

During the three-month periods ended March 31, 2021 and 2020, we had no significant off-balance-sheet risk such as exchange contracts, option contracts or other hedging arrangements.

Other expense was $1.2 million for the three months ended June 30, 2021, compared with $0.8 million for the three months ended June 30, 2020.

The increase in other expense was primarily due to an increase in foreign currency exchange losses.

Other expense was $3.4 million for the six months ended June 30, 2021, compared with $2.2 million for the six months ended June 30, 2020.

The increase in other expense was primarily due to an increase in foreign currency exchange losses of $0.6 million as well as a reduction of $0.5 million in interest income when compared to the six-month period ended June 30, 2020.

During the six-month periods ended June 30, 2021 and 2020, we had no significant off-balance-sheet risk such as exchange contracts, option contracts or other hedging arrangements.

Income Tax Provision

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Income tax provision

Percentage of revenue

Income tax expense was $1.7 million for the three months ended March 31, 2021, compared to $1.0 million for the three months ended March 31, 2020.

The $0.7 million increase was primarily due to a $6.0 million increase in pretax income partially offset by a tax benefit of $0.2 million due to the expiration of a statute of limitations on an uncertain tax position.

The effective tax rate for the three months ended March 31, 2021 and 2020, respectively, was less than the U.S.

Income tax expense was $3.8 million for the three months ended June 30, 2021, compared to $2.3 million for the three months ended June 30, 2020.

The $1.5 million increase was primarily due to a $7.2 million increase in pretax income.

Income tax expense was $5.6 million during the six months ended June 30, 2021, compared to $3.3 million for the six months ended June 30, 2020.

The $2.3 million increase was primarily due to a $13.1 million increase in pretax income.

The effective tax rate for the three and six months ended June 30, 2021 and 2020, respectively, was less than the U.S.

statutory rate of 21% due to favorable discrete items related to equity compensation in those periods as well as Federal research and development tax credits that reduce the annual tax rate.

We had $54.9 million and $57.9 million of net deferred tax assets worldwide relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences, as of March 31, 2021 and December 31, 2020, respectively.

We had $51.4 million and $57.9 million of net deferred tax assets worldwide relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences, as of June 30, 2021 and December 31, 2020, respectively.

These deferred tax assets are available to reduce income taxes in future years.

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Liquidity and Capital Resources

We had $206.8 million in unrestricted cash and cash equivalents at March 31, 2021, in addition to $0.7 million in restricted cash.

We had $219.7 million in unrestricted cash and cash equivalents at June 30, 2021, in addition to $0.8 million in restricted cash.

Management believes that maintaining a strong cash balance is necessary to provide funding for potential ramps in our business which can require significant cash investment to meet sudden demand.

Additionally, we are considering both organic and inorganic opportunities to drive future growth, for which cash resources will be necessary.

Additionally, we are using cash in our 2021 stock repurchase program and are considering both organic and inorganic opportunities to drive future growth, for which cash resources will be necessary.

Our liquidity is affected by many factors.

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We experience fluctuations in operating results and cash flows depending on these factors.

We may also engage in stock repurchases, as discussed below.

During the three months ended March 31, 2021, we generated $15.1 million of cash related to operating activities.

During the three months ended March 31, 2020, we generated $39.7 million of cash related to operating activities.

Investing activities for both three months ended March 31, 2021 and 2020 resulted in cash outflows of $1.3 million, respectively, used for capital expenditures.

Financing activities for the three months ended March 31, 2021 resulted in a cash usage of $11.7 million.

During the first three months of 2021, $11.6 million in cash was used to repurchase our common stock and $2.4 million was used for payments to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, where shares are withheld by the Company, as well as $0.2 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $2.5 million of proceeds from the exercise of stock options during the first three months of 2021.

In comparison, financing activities for the three months ended March 31, 2020 resulted in cash usage of $4.1 million, $7.5 million of which related to the repurchase of our common stock and $1.2 million related to payments made to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs.

These amounts were partially offset by $4.5 million of proceeds related to the exercise of stock options and purchase of shares under our prior employee stock purchase plan during the first three months of 2020.

Stock repurchases, as discussed below, also reduce our cash balances.

During the six months ended June 30, 2021, we generated $45.9 million of cash related to operating activities.

During the six months ended June 30, 2020, we generated $56.6 million of cash related to operating activities.

Investing activities for the six months ended June 30, 2021 and 2020 resulted in cash outflows of $2.4 million and $3.0 million, respectively, used for capital expenditures.

Financing activities for the six months ended June 30, 2021 resulted in a cash usage of $28.3 million.

During the first six months of 2021, $25.0 million in cash was used to repurchase our common stock and $6.5 million was used for payments to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, where shares are withheld by the Company, as well as $0.4 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $3.6 million of proceeds from the exercise of stock options and purchase of shares under our 2020 ESPP during the first six months of 2021.

In comparison, financing activities for the six months ended June 30, 2020 resulted in cash usage of $3.7 million, $7.5 million of which related to the repurchase of our common stock and $3.9 million related to payments made to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, as well as $0.1 million relating to the reduction of our financing lease liability.

These amounts were partially offset by $7.8 million of proceeds related to the exercise of stock options and purchase of shares under our prior employee stock purchase plan during the first six months of 2020.

Under the rules of the U.S.

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The revolving credit facility terminates on July 31, 2023.

As of March 31, 2021, we were in compliance with all covenant requirements of the Credit Agreement.

As of such date, no borrowings had been made under the Credit Agreement, although a letter of credit for $5.9 million, previously issued by Silicon Valley Bank, had been rolled under the Credit Agreement, reducing the funds available for borrowing under the credit line.

As of June 30, 2021, we were in compliance with all covenant requirements of the Credit Agreement.

As of such date, no borrowings had been made under the Credit Agreement, although a letter of credit for $5.9 million reduces the funds available for borrowing under the credit line.

We have no immediate plans to borrow under the Credit Agreement, but we will use the facility for letters of credit, for ongoing working capital needs and to fund general corporate purposes, as desired.

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Commitments and Contingencies

Significant commitments and contingencies at March 31, 2021 are consistent with those discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Significant commitments and contingencies at June 30, 2021 are consistent with those discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Quantitative and Qualitative Disclosures about Market Risk.

As of March 31, 2021, there have been no material changes to the quantitative information about market risk disclosed in Item 7A to our Annual Report on Form 10-K for the year ended December 31, 2020.

As of June 30, 2021, there have been no material changes to the quantitative information about market risk disclosed in Item 7A to our Annual Report on Form 10-K for the year ended December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis