Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements within "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under "Liquidity and Capital Resources" below and under “Risk Factors” in Part I, Item 1A to our annual report on Form 10-K for the year ended December 31, 2020 , which discussion is incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.
Overview
We are primarily a producer of ion implantation equipment used in the fabrication of semiconductor chips in the United States, Europe and Asia. 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. 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 71.4% 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.
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. As a result of the Entity List classification, we are required to obtain export controls licenses for all U.S. 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, and could create future delays.
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations included herein and in our Annual Report on Form 10-K for the year ended December 31, 2020 are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions. Management’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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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
The following table sets forth our results of operations as a percentage of total revenue:
Three months ended
Nine months ended
September 30,
September 30,
2021
2020
2021
2020
Revenue:
Product
95.7
%
94.9
%
95.4
%
94.8
%
Services
4.3
5.1
4.6
5.2
Total revenue
100.0
100.0
100.0
100.0
Cost of revenue:
Product
52.7
51.1
52.6
53.7
Services
4.0
5.3
4.3
5.0
Total cost of revenue
56.7
56.4
56.9
58.7
Gross profit
43.3
43.6
43.1
41.3
Operating expenses:
Research and development
9.4
13.5
10.7
12.9
Sales and marketing
6.5
8.8
7.4
7.8
General and administrative
6.8
8.7
7.3
8.2
Total operating expenses
22.7
31.0
25.4
28.9
Income from operations
20.6
12.6
17.7
12.4
Other (expense) income:
Interest income
—
0.1
—
0.2
Interest expense
(0.7)
(1.2)
(0.8)
(1.1)
Other, net
(0.5)
0.8
(0.4)
0.2
Total other expense
(1.2)
(0.3)
(1.2)
(0.7)
Income before income taxes
19.4
12.3
16.5
11.7
Income tax provision
3.8
2.5
2.7
1.7
Net income
15.6
%
9.8
%
13.8
%
10.0
%
Revenue
The following table sets forth our product and services revenue:
Three months ended
Period-to-Period
Nine months ended
Period-to-Period
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Revenue:
Product
$
169,151
$
104,799
$
64,352
61.4
%
$
435,916
$
334,126
$
101,790
30.5
%
Percentage of revenue
95.7
%
94.9
%
95.4
%
94.8
%
Services
7,543
5,606
1,937
34.6
%
20,828
18,235
2,593
14.2
%
Percentage of revenue
4.3
%
5.1
%
4.6
%
5.2
%
Total revenue
$
176,694
$
110,405
$
66,289
60.0
%
$
456,744
$
352,361
$
104,383
29.6
%
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Three months ended September 30, 2021 compared with three months ended September 30, 2020
Product
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 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
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.
Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
Product
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
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:
● Systems and Aftermarket revenues, in which “Aftermarket” is:
A. The portion of Product revenue relating to spare parts, product upgrades and used equipment, combined with
B. Services revenue, which is the labor component of Aftermarket revenues
(Aftermarket purchases reflect current fab utilization as opposed to Systems purchases which reflect capital investment decisions by our customers, which have differing economic drivers);
● Revenue by geographic regions, since economic factors impacting customer purchasing decisions may vary by geographic region; and
● Revenue by our customer market segments, since they can be subject to different economic drivers at
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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.
Aftermarket revenue categories for recent periods are discussed below.
Three months ended September 30, 2021 compared with three months ended September 30, 2020
Aftermarket
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.
Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
Aftermarket
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
The following table sets forth our gross profit / gross margin:
Three months ended
Period-to-Period
Nine months ended
Period-to-Period
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Gross Profit:
Product
$
75,950
$
48,372
$
27,578
57.0
%
$
195,693
$
145,008
$
50,685
35.0
%
Product gross margin
44.9
%
46.2
%
44.9
%
43.4
%
Services
562
(211)
773
366.4
%
1,268
601
667
111.0
%
Services gross margin
7.5
%
(3.8)
%
6.1
%
3.3
%
Total gross profit
$
76,512
$
48,161
$
28,351
58.9
%
$
196,961
$
145,609
$
51,352
35.3
%
Gross margin
43.3
%
43.6
%
43.1
%
41.3
%
Three months ended September 30, 2021 compared with three months ended September 30, 2020
Product
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.
Services
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.
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Nine months ended September 30, 2021 compared with nine months ended September 30, 2020
Product
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.
Services
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
The following table sets forth our operating expenses:
Three months ended
Period-to-Period
Nine months ended
Period-to-Period
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Research and development
$
16,707
$
14,867
$
1,840
12.4
%
$
49,015
$
45,513
$
3,502
7.7
%
Percentage of revenue
9.4
%
13.5
%
10.7
%
12.9
%
Sales and marketing
11,415
9,763
1,652
16.9
%
33,979
27,404
6,575
24.0
%
Percentage of revenue
6.5
%
8.8
%
7.4
%
7.8
%
General and administrative
11,996
9,649
2,347
24.3
%
33,226
28,726
4,500
15.7
%
Percentage of revenue
6.8
%
8.7
%
7.3
%
8.2
%
Total operating expenses
$
40,118
$
34,279
$
5,839
17.0
%
$
116,220
$
101,643
$
14,577
14.3
%
Percentage of revenue
22.7
%
31.0
%
25.4
%
28.9
%
Our operating expenses consist primarily of personnel costs, including salaries, commissions, incentive-based compensation, stock-based compensation and related benefits and taxes; project material costs related to the design and development of new products and enhancement of existing products; and professional fees, travel and depreciation expenses.
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
Three months ended
Period-to-Period
Nine months ended
Period-to-Period
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Research and development
$
16,707
$
14,867
$
1,840
12.4
%
$
49,015
$
45,513
$
3,502
7.7
%
Percentage of revenue
9.4
%
13.5
%
10.7
%
12.9
%
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
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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
Three months ended
Period-to-Period
Nine months ended
Period-to-Period
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Sales and marketing
$
11,415
$
9,763
$
1,652
16.9
%
$
33,979
$
27,404
$
6,575
24.0
%
Percentage of revenue
6.5
%
8.8
%
7.4
%
7.8
%
Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.
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
Three months ended
Period-to-Period
Nine months ended
Period-to-Period
September 30,
Change
September 30,
Change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
General and administrative
$
11,996
$
9,649
$
2,347
24.3
%
$
33,226
$
28,726
$
4,500
15.7
%
Percentage of revenue
6.8
%
8.7
%
7.3
%
8.2
%
Our general and administrative expenses result primarily from the costs associated with our executive, finance, information technology, legal and human resource functions.
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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
Three months ended
Period-to-period
Nine months ended
Period-to-period
September 30,
change
September 30,
change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Other expense
$
(2,181)
$
(290)
$
1,891
(652.1)
%
$
(5,579)
$
(2,539)
$
3,040
(119.7)
%
Percentage of revenue
(1.2)
%
(0.3)
%
(1.2)
%
(0.7)
%
Other (expense) income consists primarily of interest expense relating to the finance lease obligation we incurred in connection with the 2015 sale of our headquarters facility and other financing obligations, foreign exchange gains and losses attributable to fluctuations of the U.S. 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 $2.2 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 $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
Three months ended
Period-to-period
Nine months ended
Period-to-period
September 30,
change
September 30,
change
2021
2020
$
%
2021
2020
$
%
(dollars in thousands)
Income tax provision
$
6,698
$
2,807
$
3,891
138.6
%
$
12,261
$
6,119
$
6,142
100.4
%
Percentage of revenue
3.8
%
2.5
%
2.7
%
1.7
%
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 $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 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.
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
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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 $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. 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. Some of these relate specifically to the operations of our business, for example, the rate of sale of our products, and others relate to the uncertainties of global economic conditions, including the availability of credit and the condition of the overall semiconductor equipment industry. Our established cost structure, other than cost of goods sold, does not vary significantly with changes in volume. We experience fluctuations in operating results and cash flows depending on these factors. Stock repurchases, as discussed below, also reduce our cash balances.
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. Securities and Exchange Commission (the “SEC”), we qualify as a “well-known seasoned issuer,” which allows us to file shelf registration statements to register an unspecified amount of securities that are effective upon filing. On May 29, 2020, we filed such a shelf registration statement with the SEC for the issuance of an unspecified amount of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, from time to time at prices and on terms to be determined at the time of any such offering. This registration statement was effective upon filing and will remain in effect for up to three years from filing, prior to which time we may file another shelf registration statement to maintain the availability of this financing option.
On July 31, 2020, we entered into a Senior Secured Credit Facilities Credit Agreement (the “Credit Agreement”) with Silicon Valley Bank. The Credit Agreement provides for a revolving credit facility in an aggregate principal amount not to exceed $40.0 million. Our obligations under the Credit Agreement are secured by a security interest, senior to any current and future debts and to any security interest, in all of our rights, title, and interest in, to and under substantially all of our assets, subject to limited exceptions, including permitted liens. The revolving credit facility terminates on July 31, 2023. 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
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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.
We believe that based on our current market, revenue, expense and cash flow forecasts, our existing cash, cash equivalents and equity and debt financing capacity will be sufficient to satisfy our anticipated cash requirements for the short and long-term.
Commitments and Contingencies
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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.
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