What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 41 added, 57 removed, 207 unchanged (32% of the section changed)

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We may also experience fluctuations in operating results and cash flows depending on our revenue level.

2020 was an exceptional year for Axcelis despite the many difficult logistical challenges brought on by the geo-political environment and the pandemic.

As a result of the strength of the overall electronics market and the continued growth of the Purion product family in 2020, we delivered our highest annual revenue in the last 15 years.

Net income increased 193.4% on a 38.4% increase in revenue from the prior year.

2021 was an exceptional year for Axcelis despite logistical challenges brought on by the geo-political environment and the COVID-19 pandemic.

As a result of the strength of the overall electronics market and the continued growth of the Purion product family in 2021, we delivered record full year revenue, operating profit and gross margin since becoming an independent public company in 2001.

Revenue for 2021 was $662.4 million, an increase of 39.6% from 2020 revenue of $474.6 million.

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Operating profit was $127.3 million in 2021, compared to $58.0 million in 2020.

Net income for the year was $50.0 million with diluted earnings per share of $1.46.

This compares to 2019 net income of $17.0 million and earnings per diluted share of $0.50.

Gross margin for the year was 43.2% compared to 41.8% in 2020.

Net income for the year was $98.7 million, an increase of 97.4% following a 39.6% increase in revenue from the prior year.

The Company is in a strong competitive position as we participate in a period of extended industry growth.

A focused strategy on ion implant, combined with the hard work and dedication of our employees and the encouragement and support of our customers and suppliers, enabled us to achieve numerous critical milestones in our drive to market leadership.

In 2020, we continued to expand the Purion installed base, growing our large and diverse group of customers.

We continued our focus on the mature process technology segment in 2020, launching both the Purion H200™ high current implanter, targeted for the production of power devices, and the Purion XEmax™ for image sensors.

Through the introduction of new Purion product extensions and continuous cost reduction measures, we maintained our gross margin year over year, making this the third consecutive year with gross margin greater than 40 percent.

We were able to rapidly grow our manufacturing and supply chain capabilities through smart capacity planning and execution, including the opening of our new Axcelis Asia Operations Center in South Korea and the expansion of clean manufacturing in Beverly.

In 2021, we continued to expand the Purion installed base, growing our large and diverse group of customers mainly in the mature process technology segment.

We continued our focus on the mature process technology segment in 2021, launching new Purion product extensions including the Purion H200™ high current implanter, targeted for the production of power devices, and the Purion XEmax™ used to manufacture image sensors.

Through the introduction of these new products and continuous cost reduction measures, we increased our gross margin year over year, making this the fourth consecutive year with gross margin greater than 40 percent.

We continue to work diligently to ensure that manufacturing and operating expense levels remain well aligned to business conditions.

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Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon Axcelis’ 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, revenue and expenses, and related disclosure of contingent assets and liabilities.

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The following year-to-year comparative statements include the 2021 and 2020 year periods.

For comparative statements for 2019 and 2018 periods, please refer to our 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 2, 2020.

For comparative statements for 2020 and 2019 periods, please refer to our 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2021.

The following table sets forth our results of operations as a percentage of total revenue:

Year ended December 31,

Total revenue

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Total revenue

2020 Compared with 2019

Product revenue, which includes new system sales, sales of spare parts, product upgrades and used system sales was $634.4 million or 95.8% of revenue in 2021, compared with $449.9 million or 94.8% of revenue in 2020.

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The total amount of deferred revenue at December 31, 2021 and 2020 was $68.4 million and $23.1 million, respectively.

The decrease was primarily due to a decrease in system prepayments in the current year.

The increase was primarily due to an increase in system prepayments in the current year and the number of systems sold.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $28.0 million, or 4.2% of revenue for 2021, compared with $24.7 million, or 5.2% of revenue for 2020.

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Management regularly disaggregates revenue in the following categories, which it finds relevant and useful:

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

● Systems and Customer Satisfaction and Innovation (also known as “aftermarket”) revenues, in which “CS&I” or “Aftermarket” revenue is

● Systems and Customer Satisfaction and Innovation (also known as “aftermarket”) revenue, in which “CS&I” or “Aftermarket” revenue is

The portion of Product revenue relating to spare parts, product upgrades and used systems combined with;

Service revenue, which is the labor component of aftermarket revenues

Aftermarket revenue reflect current fab utilization as opposed to System revenue, which reflect capital investment decisions by our customers, which have differing economic drivers;

Aftermarket revenue reflect current fab utilization as opposed to System revenue, which reflects 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;

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currently, management uses three end market categories:

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

The ion implant and CS&I/aftermarket revenue categories for the twelve month periods ended December 31, 2020 and 2019 are discussed below.

2020 Compared with 2019

Revenue from sales of ion implantation products and related service was $456.8 million, or 96.3% of total revenue in 2020, compared with $326.0 million, or 95.1%, of total revenue in 2019.

The increase in Ion Implant revenue in 2020 was primarily driven by an increase in the number of Purion systems sold.

Memory, mature process technology and leading edge foundry and logic.

The CS&I/aftermarket revenue categories for the twelve month periods ended December 31, 2021 and 2020 are discussed below.

CS&I/Aftermarket

We refer to the business of selling spare parts, product upgrades, and used systems, combined with the sale of maintenance labor and service contracts and service hours, as our Customer Satisfaction and Innovation (“CS&I”) function, also referred to as the “aftermarket” business.

Revenue from our aftermarket business was $207.8 million in 2021, compared to $180.9 million for 2020.

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Gross Profit / Gross Margin

The following table sets forth our gross profit:

The following table sets forth our gross profit (dollars in thousands):

Period-to-Period

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Total gross profit

2020 Compared with 2019

Gross margin from product revenue was 44.9% for the twelve months ended December 31, 2021, compared to 43.9% for the twelve months ended December 31, 2020.

The change in gross margin resulted from a decreased mix of higher margin parts and upgrade revenue.

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

Gross margin from services revenue was 5.6% for the twelve months ended December 31, 2021, compared to 4.3% for the twelve months ended December 31, 2020.

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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 drive competitive advantages.

2020 Compared with 2019

Accordingly, based on our strategic plan, we establish annual research and development budgets to fund programs that we expect will drive competitive advantages.

Research and development expense was $65.4 million in 2021, an increase of $3.6 million, or 5.8%, compared with $61.8 million in 2020.

The increase was primarily due to higher incentive based pay and increased depreciation associated with capital additions.

The increase was primarily due to higher payroll related costs due to increased headcount and incentive based pay as well as increased material and supplies expense and depreciation associated with capital additions to support ongoing projects.

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.

2020 Compared with 2019

Sales and marketing expense was $47.5 million in 2021, an increase of $8.8 million, or 22.7%, compared with $38.7 million in 2020.

The increase was primarily due to higher incentive based pay.

The increase was primarily due to higher payroll related costs due to increased headcount and incentive based pay as well as increased freight and project materials 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.

2020 Compared with 2019

General and administrative expense was $46.1 million in 2021, an increase of $6.2 million, or 15.5% compared with $40.0 million in 2020.

The increase was primarily due to higher incentive based pay.

The increase was primarily due to higher payroll related costs due to increased headcount and incentive based pay as well as increases in various other expenses to support growth.

Other (Expense) Income

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Percentage of revenue

2020 Compared with 2019

Other expense for the year ended December 31, 2021 was $6.9 million, which includes $5.1 million of interest expense related to our sale leaseback obligation and $2.5 million of foreign currency translation losses, slightly offset by other miscellaneous income of $0.3 million, a reversal of interest expense of $0.2 million relating to a tax position for which the statute of limitations expired and interest income of $0.2 million.

Other expense for the year ended December 31, 2020 was $2.2 million, which includes $5.2 million of interest expense related to our sale leaseback obligation, offset partially by $1.4 million of foreign currency translation gains, other miscellaneous income of $0.9 million and interest income of $0.7 million.

Other expense for the year ended December 31, 2019 was $3.3 million, which includes $5.2 million of interest expense related to our sale leaseback obligation, $0.6 million of foreign currency translation losses and other miscellaneous expense of $0.5 million, partially offset by interest income of $3.0 million.

Period-to-period

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Percentage of revenue

2020 Compared with 2019

Income tax expense was $21.8 million for the year ended December 31, 2021 compared to $5.9 million in the previous year.

The effective tax rate at December 31, 2020 was 10.6% percent compared to 18.6% at December 31, 2019.

The decrease in the effective tax rate is primarily due to a previously unrecognized tax benefit of $4.3 million.

The effective tax rate for the year ended December 31, 2021 was 18.1% compared to 10.6% for year the ended December 31, 2020.

The increase in the effective tax rate is primarily due to a previously unrecognized tax benefit of $4.3 million in the prior year.

We have significant net operating loss carryforwards in the United States and certain European jurisdictions, and as a result, we do not currently pay significant income taxes in those jurisdictions.

At December 31, 2021, we had $35.5 million of net deferred tax assets worldwide relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences, which are available to reduce income taxes in future years.

We have continued to maintain 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 attributes.

If future operating results of 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.

We have recorded a $7.7 million valuation allowance 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

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In 2021, $150.2 million of cash was provided by operating activities.

This compares to $13.6 million of cash used by operations in 2019.

This compares to $69.7 million of cash provided by operations in 2020.

Cash and cash equivalents at December 31, 2021 was $294.9 million, compared to $203.5 million at December 31, 2020.

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At December 31, 2021, we had no bank debt.

Capital expenditures were $7.4 million, slightly offset by a gain on sale of equipment, for a net $7.3 million of cash used in investing activities for the year ended December 31, 2020.

Capital expenditures were $8.7 million for the year ended December 31, 2021.

Total capital expenditures for 2021 are projected to be approximately $7.0 million.

Capital expenditures were $7.4 million for the year ended December 31, 2020.

Total capital expenditures for 2022 are projected to be approximately

$13.0 million.

Future capital expenditures beyond 2022 will depend on a number of factors, including the timing and rate of expansion of our business and our ability to generate cash to fund them.

Cash used in financing activities for the year ended December 31, 2021 was $52.4 million, which consisted of $50.0 million related to our stock repurchase program, $6.6 million related to net settlement of restricted stock issuances and $0.8 million related to principal reduction on our financing lease.

These amounts were partially offset by $3.7 million in proceeds of stock option exercises and $1.2 million in proceeds from our employee stock purchase plan.

Cash used in financing activities was $2.4 million for the year ended December 31, 2020, which consisted of $7.5 million related to our stock repurchase program, $3.9 million related to net settlement of restricted stock issuances, and $0.4 million of principal payment on our finance lease obligation.

These uses of cash were partially offset by $8.4 million in proceeds of stock option exercises and $1.0 million in proceeds from our employee stock purchase plan.

Cash used in financing activities for the year ended December 31, 2019 was $13.4 million, which consisted of $17.7 million related to our stock repurchase program, $1.6 million related to net settlement of restricted stock issuances, partially

offset by $5.1 million in proceeds of stock option exercises and $0.9 million in proceeds from our employee stock purchase plan.

We have outstanding letters of credit, surety bonds and deposits in the amount of $14.4 million to cover the security deposit under the lease of our headquarters, our workers’ compensation insurance program, customs and bank deposits and certain value added tax claims in Europe.

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As of December 31, 2021, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $10.4 million.

We have not, nor do we anticipate the need to, repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements.

Upon repatriation of those earnings, in the form of dividends or otherwise, we could be subject to withholding taxes payable to the various foreign tax jurisdictions.

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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.

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.

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The revolving credit facility terminates on July 31, 2023.

As of December 31, 2020, 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.

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

On January 12, 2021 we announced that our Board of Directors authorized a one-year share repurchase program of up to $100 million of our common stock.

These shares may be purchased in the open market or through privately negotiated transactions.

We have no obligation to repurchase shares under the authorization, and the timing, actual number and value of shares which are repurchased will depend on a number of factors, including the price of our common stock, general business and market conditions, and alternative investment opportunities.

We may suspend or discontinue the repurchase program at any time.

As of December 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 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 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 borrowing capacity will be sufficient to satisfy our anticipated cash requirements for the short and long-term.

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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-K

Item 7. Management’s Discussion and Analysis