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Item 2. Management’s Discussion and Analysis

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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 69.8% of total revenue for the three months ended March 31, 2022.

For Axcelis and the rest of our industry, the first quarter of 2022 has been a continuation of the unprecedented demand for chips and the capital equipment required to produce them that characterized 2021.

At the same time, supply chain challenges also continued during the quarter.

Axcelis’ strong results in the first three months of 2022, demonstrate our ability to meet demand and manage supply chain difficulties.

The growing mature process technology market continues to be an area of strength for Axcelis, with 81% of first quarter shipments going to mature foundry/logic customers.

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 received licenses as needed, export controls remain an evolving topic for the U.S.

government and changes in this area could create delays in future shipments.

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.

Our ten largest customers accounted for 62.9% of total revenue for the six months ended June 30, 2022.

For Axcelis and the rest of our industry, the first half of 2022 has been a continuation of the unprecedented demand for chips and the capital equipment required to produce them that characterized 2021.

At the same time, supply chain challenges also continued during the first half of 2022.

Axcelis’ strong results in the first six months of 2022, demonstrate our ability to meet demand and manage supply chain difficulties.

The growing mature process technology market continues to be an area of strength for Axcelis, with 82% of first half 2022 shipments going to mature foundry/logic customers.

Critical Accounting Estimates

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Total revenue

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Total revenue

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $196.5 million, or 96.5% of revenue during the three months ended March 31, 2022, compared with $126.6 million, or

95.4% of revenue for the three months ended March 31, 2021.

The $69.9 million increase in product revenue for the three-month period ending March 31, 2022, in comparison to the same period in 2021, was primarily driven by an increase in the number of systems sold.

Three months ended June 30, 2022 Compared with Three months ended June 30, 2021

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $213.9 million, or 96.7% of revenue during the three months ended June 30, 2022, compared with $140.2 million, or 95.2% of revenue for the three months ended June 30, 2021.

The $73.7 million increase in product revenue for the three-month

period ending June 30, 2022, in comparison to the same period in 2021, 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, 2022 and December 31, 2021 was $74.8 million and $68.4 million, respectively.

The total amount of deferred revenue at June 30, 2022 and December 31, 2021 was $71.5 million and $68.4 million, respectively.

The increase in deferred revenue was primarily due to 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 $7.1 million, or 3.5% of revenue for the three months ended March 31, 2022, compared with $6.2 million, or 4.6% of revenue for the three months ended March 31, 2021.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $7.3 million, or 3.3% of revenue for the three months ended June 30, 2022, compared with $7.1 million, or 4.8% of revenue for the three months ended June 30, 2021.

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, 2022 Compared with Six months ended June 30, 2021

Product revenue was $410.5 million, or 96.6% of revenue during the six months ended June 30, 2022, compared with $266.8 million, or 95.3% of revenue for the six months ended June 30, 2021.

The $143.7 million increase in product revenue for the six-month period ending June 30, 2022, in comparison to the same period in 2021, was primarily driven by an increase in the number of systems sold.

Services revenue was $14.3 million, or 3.4% of revenue for the six months ended June 30, 2022, compared with $13.3 million, or 4.7% of revenue for the six months ended June 30, 2021.

Revenue Categories used by Management

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

Included in total revenue of $203.6 million during the three months ended March 31, 2022 is revenue from our Aftermarket business of $51.8 million, consistent with $51.8 million of aftermarket revenue for the three months ended March 31, 2021.

The remaining $151.8 million of revenue for the three months ended March 31, 2022 was from system sales.

Aftermarket and Systems Revenue

Three months ended June 30, 2022 Compared with Three months ended June 30, 2021

Included in total revenue of $221.2 million during the three months ended June 30, 2022 is revenue from our Aftermarket business of $55.8 million, compared with $47.1 million of aftermarket revenue for the three months ended June 30, 2021.

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.

The remaining $165.4 million of revenue for the three months ended June 30, 2022 was from system sales, compared with $100.2 million of systems revenue for the three months ended June 30, 2021.

Systems revenue fluctuates from period to period based on our customers’ capital spending.

Six months ended June 30, 2022 Compared with Six months ended June 30, 2021

Included in total revenue of $424.8 million during the six months ended June 30, 2022 is revenue from our Aftermarket business of $107.6 million, compared with $98.9 million of aftermarket revenue for the six months ended June 30, 2021.

The remaining $317.2 million of revenue for the six months ended June 30, 2022 was from system sales, compared with $181.2 million of systems revenue for the six months ended June 30, 2021.

Gross Profit / Gross Margin

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Total gross profit

Gross margin from product revenue was 45.2% for the three months ended March 31, 2022, compared to 44.4% for the three months ended March 31, 2021.

Three months ended June 30, 2022 Compared with Three months ended June 30, 2021

Gross margin from product revenue was 45.9% for the three months ended June 30, 2022, compared to 45.3% for the three months ended June 30, 2021.

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

Gross margin from services revenue was 12.4% for the three months ended March 31, 2022, compared to 2.6% for the three months ended March 31, 2021.

Gross margin from services revenue was 13.9% for the three months ended June 30, 2022, compared to 7.7% for the three months ended June 30, 2021.

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

Six months ended June 30, 2022 Compared with Six months ended June 30, 2021

Gross margin from product revenue was 45.6% for the six months ended June 30, 2022, compared to 44.9% for the six months ended June 30, 2021.

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

Gross margin from services revenue was 13.2% for the six months ended June 30, 2022, compared to 5.3% for the six months ended June 30, 2021.

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 $24.2 million or 59.2% of our total operating expenses for the three months ended March 31, 2022, compared to $22.0 million or 61.1% of our total operating expenses for the three months ended March 31, 2021.

The higher personnel costs for the three months ended March 31, 2022 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.

Personnel costs are our largest expense, representing $27.4 million or 60.9% of our total operating expenses for the three months ended June 30, 2022, compared to $25.4 million or 63.5% of our total operating expenses for the three months ended June 30, 2021.

Personnel costs were $51.6 million or 60.1% of our total operating expenses for the six months ended June 30, 2022, compared to $47.5 million or 62.4% of our total operating expenses for the six months ended June 30, 2021.

The higher personnel costs for the three and six months ended June 30, 2022 are 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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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.

Research and development expense was $17.0 million during the three months ended March 31, 2022, an increase of $1.3 million, or 8.2%, compared with $15.7 million during the three months ended March 31, 2021.

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

Three months ended June 30, 2022 Compared with Three months ended June 30, 2021

Research and development expense was $18.7 million during the three months ended June 30, 2022, an increase of $2.1 million, or 12.7%, compared with $16.6 million during the three months ended June 30, 2021.

The increase is primarily due to higher personnel expenses including an increase in incentive-based pay expense as well as an increase in project materials and related services for ongoing projects.

Six months ended June 30, 2022 Compared with Six months ended June 30, 2021

Research and development expense was $35.7 million during the six months ended June 30, 2022, an increase of $3.4 million, or 10.5%, compared with $32.3 million during the six months ended June 30, 2021.

The increase is primarily due to higher personnel expenses including an increase in incentive-based pay expense as well as an increase in project materials and related services for 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.

Sales and marketing expense was $11.3 million during the three months ended March 31, 2022, an increase of $0.9 million, or 8.7%, compared with $10.4 million during the three months ended March 31, 2021.

Three months ended June 30, 2022 Compared with Three months ended June 30, 2021

Sales and marketing expense was $12.7 million during the three months ended June 30, 2022, an increase of $0.5 million, or 4.3%, compared with $12.2 million during the three months ended June 30, 2021.

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

Six months ended June 30, 2022 Compared with Six months ended June 30, 2021

Sales and marketing expense was $24.0 million during the six months ended June 30, 2022, an increase of $1.4 million, or 6.3%, compared with $22.6 million during the three months ended June 30, 2021.

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

General and administrative expense was $12.6 million during the three months ended March 31, 2022, an increase of $2.6 million, or 25.6%, compared with $10.0 million during the three months ended March 31, 2021.

The increase is primarily due to an increase personnel expenses and professional fees.

Three months ended June 30, 2022 Compared with Three months ended June 30, 2021

General and administrative expense was $13.6 million during the three months ended June 30, 2022, an increase of $2.4 million, or 21.3%, compared with $11.2 million during the three months ended June 30, 2021.

The increase is primarily due to an increase in personnel expenses and professional fees.

Six months ended June 30, 2022 Compared with Six months ended June 30, 2021

General and administrative expense was $26.2 million during the six months ended June 30, 2022, an increase of $5.0 million, or 23.3%, compared with $21.2 million during the six months ended June 30, 2021.

The increase is primarily due to an increase in personnel expenses and professional fees.

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 $3.0 million for the three months ended March 31, 2022, compared with $2.1 million for the three months ended March 31, 2021.

Other expense was $5.9 million for the three months ended June 30, 2022, compared with $1.2 million for the three months ended June 30, 2021.

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

During the three-month periods ended March 31, 2022 and 2021, we had no significant off-balance-sheet risk such as exchange contracts, option contracts or other hedging arrangements.

Other expense was $9.0 million for the six months ended June 30, 2022, compared with $3.4 million for the six months ended June 30, 2021.

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

During the six-month periods ended June 30, 2022 and 2021, 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 $4.3 million for the three months ended March 31, 2022, compared to $1.7 million for the three months ended March 31, 2021.

The $2.6 million increase was primarily due to a $27.7 million increase in pretax income.

During the three months ended March 31, 2022, an international tax audit commenced, and we have determined that it is not more likely than not that certain tax positions being examined by the tax authorities will be sustained.

Therefore, we have recorded a liability of $0.7 million related to our estimated exposure as of March 31, 2022.

We will assess this tax reserve in subsequent quarters until final settlement.

The effective tax rate for the three months ended March 31, 2022 was less than the U.S.

statutory rate of 21% due to forecasted Foreign Derived Intangible Income (FDII), Federal research and development tax credits and a favorable discrete item related to equity compensation that reduces the annual tax rate.

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

Income tax expense was $4.0 million for the three months ended June 30, 2022, compared to $3.8 million for the three months ended June 30, 2021.

The $0.2 million increase was primarily due to a $25.4 million increase in pretax income offset by the FDII deduction on export sales.

Income tax expense was $8.3 million for the six months ended June 30, 2022, compared to $5.6 million for the six months ended June 30, 2021.

The $2.7 million increase was primarily due to a $53.1 million increase in pretax income offset by the FDII deduction on export sales.

The effective tax rate for the three and six months ended June 30, 2022 was less than the U.S.

statutory rate of 21% due to forecasted FDII deductions, Federal research and development tax credits and a favorable discrete item related to equity compensation that reduces the annual tax rate.

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

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

The Deferred income taxes of $36.2 million and $35.5 million as of March 31, 2022 and December 31, 2021, 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 $8.6 million valuation allowance in the U.S.

The deferred income taxes of $33.7 million and $35.5 million as of June 30, 2022 and December 31, 2021, 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.

have recorded a $8.9 million valuation allowance in the U.S.

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

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Liquidity and Capital Resources

We had $297.1 million in unrestricted cash and cash equivalents at March 31, 2022, in addition to $0.8 million in restricted cash.

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

We had $287.2 million in unrestricted cash and cash equivalents at June 30, 2022, in addition to $0.8 million in restricted cash.

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

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

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

During the three months ended March 31, 2022 and 2021, we generated $25.8 million and $15.1 million, respectively, of cash related to operating activities.

Investing activities for the three months ended March 31, 2022 and 2021 resulted in cash outflows of $1.5 million and $1.3 million, respectively, used for capital expenditures.

Financing activities for the three months ended March 31, 2022 resulted in a cash usage of $23.1 million.

During the first three months of 2022, $20.0 million in cash was used to repurchase our common stock and $3.3 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 $0.2 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $0.5 million of proceeds from the exercise of stock options during the first three months of 2022.

In comparison, financing activities for the three months ended March 31, 2021 resulted in cash usage of $11.7 million, $11.6 million of which related to the repurchase of our common stock and $2.4 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 $0.2 million relating to the reduction of our financing lease liability.

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

During the six months ended June 30, 2022 and 2021, we generated $29.2 million and $45.9 million, respectively, of cash related to operating activities.

Investing activities for the six months ended June 30, 2022 and 2021 resulted in cash outflows of $3.4 million and $2.4 million, respectively, used for capital expenditures.

Financing activities for the six months ended June 30, 2022 resulted in a cash usage of $40.7 million.

During the first six months of 2022, $32.5 million in cash was used to repurchase our common stock and $9.2 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 $0.5 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $1.5 million of proceeds from the exercise of stock options and purchase of shares under our 2020 ESPP during the first six months of 2022.

In comparison, financing activities for the six months ended June 30, 2021 resulted in cash usage of $28.3 million, $25.0 million of which related to the repurchase of our common stock and $6.5 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 $0.4 million relating to the reduction of our financing lease liability.

These amounts were partially offset by $3.6 million of proceeds related to the exercise of stock options during the first six months of 2021.

Under the rules of the U.S.

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The revolving credit facility terminates on July 31, 2023.

As of March 31, 2022, we were in compliance with all covenant requirements of the Credit Agreement.

As of June 30, 2022, 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 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 entered into a First Amendment to the Credit Agreement with Silicon Valley Bank in March 2021 to (i) align

the covenants with our 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 March 31, 2022 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, 2021.

Significant commitments and contingencies at June 30, 2022 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, 2021.

Quantitative and Qualitative Disclosures about Market Risk.

As of March 31, 2022, 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, 2021.

As of June 30, 2022, 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, 2021.

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