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Item 2. Management’s Discussion and Analysis

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

Beginning in 2021, we commenced an initiative to add additional manufacturing capacity in South Korea that is expected to 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 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.

Our ten largest customers accounted for 71.4% of total revenue for the nine months ended September 30, 2021.

In the first nine months of 2021, we delivered strong financial performance driven by robust 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.

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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.

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

Critical Accounting Estimates

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Total revenue

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Total revenue

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.

Three months ended September 30, 2021 compared with three months ended September 30, 2020

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $169.2 million, or 95.7% of revenue during the three months ended September 30, 2021, compared with $104.8 million, or 94.9% of revenue for the three months ended September 30, 2020.

The $64.4 million increase in product revenue for the three-month period ending September 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 June 30, 2021 and December 31, 2020 was $35.5 million and $23.1 million, respectively.

The total amount of deferred revenue at September 30, 2021 and December 31, 2020 was $58.2 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.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $7.5 million, or 4.3% of revenue for the three months ended September 30, 2021, compared with $5.6 million, or 5.1% of revenue for the three months ended September 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.

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Product revenue was $435.9 million, or 95.4% of revenue during the nine months ended September 30, 2021, compared with $334.1 million, or 94.8% of revenue for the nine months ended September 30, 2020.

The $101.8 million increase in product revenue for the nine-month period ending September 30, 2021, in comparison to the same period in 2020, was primarily driven by an increase in the number of systems sold.

Services revenue was $20.8 million, or 4.6% of revenue for the nine months ended September 30, 2021, compared with $18.2 million, or 5.2% of revenue for the nine months ended September 30, 2020.

Revenue Categories used by Management

In addition to the line item revenue categories discussed above, management also regularly disaggregates revenue in the following categories, which it finds relevant and useful:

● Ion implant revenue separate from revenue from legacy non-ion implant product lines, given that ion implantation systems are the primary driver of our growth and strategic objectives;

● Systems and Aftermarket revenues, in which “Aftermarket” is:

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● Revenue by geographic regions, since economic factors impacting customer purchasing decisions may vary by geographic region;

● Revenue by our customer market segments, since they can be subject to different economic drivers at different periods of time, impacting a customer’s likelihood of purchasing capital equipment during any particular period.

● Revenue by our customer market segments, since they can be subject to different economic drivers at

different periods of time, impacting a customer’s likelihood of purchasing capital equipment during any particular period.

Currently, management references three customer market segments:

memory, mature technology processes and leading edge foundry and logic.

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

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 categories for recent periods are discussed below.

Three months ended September 30, 2021 compared with three months ended September 30, 2020

Included in total revenue of $176.7 million during the three months ended September 30, 2021 is revenue from our Aftermarket business of $50.5 million, compared to $40.2 million for the three months ended September 30, 2020.

The remaining $126.2 million of revenue for the three months ended September 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.

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Included in total revenue of $456.7 million during the nine months ended September 30, 2021 is revenue from our Aftermarket business of $149.4 million, compared to $123.0 million for the nine months ended September 30, 2020.

The remaining $307.3 million of revenue for the nine months ended September 30, 2021 was from system sales.

Gross Profit / Gross Margin

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Total gross profit

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.

Three months ended September 30, 2021 compared with three months ended September 30, 2020

Gross margin from product revenue was 44.9% for the three months ended September 30, 2021, compared to 46.2% for the three months ended September 30, 2020.

The decrease in gross margin resulted from a decreased mix of higher margin parts and upgrades and changes in the mix of Purion systems.

Gross margin from services revenue was 7.5% for the three months ended September 30, 2021, compared to (3.8)% for the three months ended September 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.

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Gross margin from product revenue was 44.9% for the nine months ended September 30, 2021, compared to 43.4% for the nine months ended September 30, 2020.

The increase resulted from improved margins on Purion systems and increased margins on parts and upgrades.

Gross margin from services revenue was 6.1% for the nine months ended September 30, 2021, compared to 3.3% for the nine months ended September 30, 2020.

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

Operating Expenses

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and professional fees, travel and depreciation expenses.

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.

Personnel costs are our largest expense, representing $24.9 million or 62.1% of our total operating expenses for the three months ended September 30, 2021, compared to $22.2 million or 64.8% of our total operating expenses for the three months ended September 30, 2020.

Personnel costs were $72.3 million or 62.2% of our total operating expenses for the nine months ended September 30, 2021, compared to $65.0 million or 63.9% of our total operating expenses for the nine months ended September 30, 2020.

The higher personnel costs for the three and nine months ended September 30, 2021 is primarily due to increases in personnel-related expenses to support growth as well as an increase in incentive-based pay expense due to strong financial performance.

Research and Development

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Our ability to remain competitive depends largely on continuously developing innovative technology, with new and enhanced features and systems and introducing them at competitive prices on a timely basis.

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 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.

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 September 30, 2021 compared with three months ended September 30, 2020

Research and development expense was $16.7 million during the three months ended September 30, 2021, an increase of $1.8 million, or 12.4%, compared with $14.9 million during the three months ended September 30, 2020.

The increase is primarily due to higher personnel expenses largely driven by increases in incentive-based pay expense and, to a lesser extent, supplies and materials cost for ongoing projects.

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Research and development expense was $49.0 million during the nine months ended September 30, 2021, an increase of $3.5 million, or 7.7%, compared with $45.5 million during the nine months ended September 30, 2020.

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

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 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.

Three months ended September 30, 2021 compared with three months ended September 30, 2020

Sales and marketing expense was $11.4 million during the three months ended September 30, 2021, an increase of $1.7 million, or 16.9%, compared with $9.8 million during the three months ended September 30, 2020.

The increase is primarily due to higher incentive-based pay expense and freight expense.

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

Sales and marketing expense was $34.0 million during the nine months ended September 30, 2021, an increase of $6.6 million, or 24.0%, compared with $27.4 million during the nine months ended September 30, 2020.

The increase is primarily due to increases in higher personnel-related expenses and to a lesser extent freight and project material expense.

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 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.

Three months ended September 30, 2021 compared with three months ended September 30, 2020

General and administrative expense was $12.0 million during the three months ended September 30, 2021, an increase of $2.3 million, or 24.3%, compared with $9.6 million during the three months ended September 30, 2020.

The increase is primarily due to an increase in incentive-based pay expense.

Nine months ended September 30, 2021 compared with nine months ended September 30, 2020

General and administrative expense was $33.2 million during the nine months ended September 30, 2021, an increase of $4.5 million, or 15.7%, compared with $28.7 million during the nine months ended September 30, 2020.

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

Other (Expense) Income

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

Other expense was $2.2 million for the three months ended September 30, 2021, compared with $0.3 million for the three months ended September 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.

Other expense was $5.6 million for the nine months ended September 30, 2021, compared with $2.5 million for the nine months ended September 30, 2020.

The increase in other expense was primarily due to an increase in foreign currency exchange losses of $2.5 million as well as a reduction of $0.5 million in interest income when compared to the nine-month period ended September 30, 2020.

During the nine-month periods ended September 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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Percentage of revenue

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.

Income tax expense was $6.7 million for the three months ended September 30, 2021, compared to $2.8 million for the three months ended September 30, 2020.

The $3.9 million increase was primarily due to a $20.6 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.

Income tax expense was $12.3 million during the nine months ended September 30, 2021, compared to $6.1 million for the nine months ended September 30, 2020.

The $6.2 million increase was primarily due to a $33.7 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.

The effective tax rate for the three and nine months ended September 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 $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.

We have a $9.1 million valuation allowance in the U.S.

against certain tax credits and state net operating losses due to the uncertainty of their realization based on long-term Company forecasts and the expiration dates on these tax assets.

If future operating results of the Company within the U.S.

or these foreign jurisdictions are significantly less than our expectations, it is reasonably possible that we would be required to record an additional valuation allowance on our deferred tax assets in the future.

The Deferred income taxes of $44.2 million and $57.9 million as of September 30, 2021 and December 31, 2020, respectively, reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for

financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards.

We have recorded a $10.2 million valuation allowance in the U.S.

against certain tax credits and state net operating losses due to the uncertainty of their realization.

Realization of our net deferred tax assets is dependent on future taxable income.

We believe it is more likely than not that such assets will be realized;

however, ultimate realization could be impacted by market conditions and other variables not known or anticipated at this time.

Liquidity and Capital Resources

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

We had $271.1 million in unrestricted cash and cash equivalents at September 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.

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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.

During the nine months ended September 30, 2021 and 2020, we generated $112.1 million and $75.7 million, respectively, of cash related to operating activities.

Investing activities for the nine months ended September 30, 2021 and 2020 resulted in cash outflows of $5.7 million and $5.6 million, respectively, used for capital expenditures.

Financing activities for the nine months ended September 30, 2021 resulted in a cash usage of $40.7 million.

During the first nine months of 2021, $37.5 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 units are withheld by the Company for taxes, as well as $0.6 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $3.9 million of proceeds from the exercise of stock options and purchase of shares under our 2020 ESPP during the first nine months of 2021.

In comparison, financing activities for the nine months ended September 30, 2020 resulted in cash usage of $3.4 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 $0.3 million relating to the reduction of our financing lease liability.

These amounts were partially offset by $8.3 million of proceeds related to the exercise of stock options and purchase of shares under our prior employee stock purchase plan during the first nine 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 June 30, 2021, we were in compliance with all covenant requirements of the Credit Agreement.

As of September 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.

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.

We entered into a First Amendment to the Credit Agreement with Silicon Valley Bank in March 2021 to (i) align the covenants with our 2021 stock repurchase program, and (ii) establish terms to transition from a Eurodollar based interest rate option to an interest rate benchmark using a secured overnight financing rate (known as “SOFR”) published by the Federal Reserve Bank of New York.

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Commitments and Contingencies

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.

Significant commitments and contingencies at September 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 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.

As of September 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