What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 41 added, 42 removed, 206 unchanged (29% of the section changed)

12 unchanged sentences

2022 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.

As a result of the strength of the overall electronics market and the continued growth of the Purion product family in 2022, we delivered record full year revenue, operating profit and gross margin since our first full year as a public company in 2001.

Revenue for 2022 was $920.0 million, an increase of 38.9% from 2021 revenue of $662.4 million.

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Net income for the year was $183.1 million, an increase of 85.6% following a 97.4% 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.

The Company is in a strong competitive position as we participated in a period of extended industry growth in 2021 and 2022.

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.

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.

Axcelis had a number of important accomplishments in 2022:

● Axcelis’ revenue grew 39% year over year;

● Our full year revenue, gross margins and operating profit were all at record levels since our first full year as a public company in 2001;

● The market for mature semiconductor devices grew rapidly, producing greater than 80% of our systems shipments, and within that total, the electrification of the automotive market drove the power device market to contribute approximately 39% of our systems shipments;

● Our global footprint in growing markets continued to expand, including through multiple evaluations at key customers in memory, mature process technologies and advanced logic, sales of our Purion product extensions into the Silicon Carbide market, follow-on orders for our Purion products in Japan, and device qualification for leading edge CMOS Image Sensor processes;

● Rapid growth of our manufacturing capabilities through solid execution, strong supply chain partnerships and bringing online new capacity at both our Beverly, Massachusetts facility and Axcelis Asia Operations Center in South Korea.

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

The market for our systems and aftermarket products and services is represented by a relatively small number of companies.

In 2021, the top 20 semiconductor chip manufacturers accounted for approximately 92.0% of total semiconductor capital equipment spending, up from 90.4% in 2020.

In 2022, the top 20 semiconductor chip manufacturers accounted for approximately 89.0% of total semiconductor capital equipment spending, down from 92.0% in 2021.

Our net revenue from our ten largest customers accounted for 59.4% of total revenue for the year ended December 31, 2022 compared to 69.5% and 74.0% of revenue for the years ended December 31, 2021 and 2020, respectively.

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Period-to-Period

(dollars in thousands)

Percentage of revenue

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The total amount of deferred revenue at December 31, 2022 and 2021 was $154.8 million and $68.4 million, respectively.

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

The increase was primarily due to increases in system prepayments and the volume 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 $29.4 million, or 3.2% of revenue for 2022, compared with $28.0 million, or 4.2% of revenue for 2021.

3 unchanged sentences

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

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

● Systems and Customer Solutions 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 reflects capital investment decisions by our customers, which have differing economic drivers;

Aftermarket revenue reflects 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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Period-to-Period

(dollars in thousands)

Gross Profit:

3 unchanged sentences

Gross margin from product revenue was 44.7% for the twelve months ended December 31, 2022, compared to 44.9% for the twelve months ended December 31, 2021.

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

The slight decrease in gross margin is primarily attributable to changes in the mix of products.

Gross margin from services revenue was 11.3% for the twelve months ended December 31, 2022, compared to 5.6% for the twelve months ended December 31, 2021.

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Period-to-Period

(dollars in thousands)

Research and development

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project material costs related to the design and development of new products and enhancement of existing products;

and professional fees, travel and depreciation expenses.

and professional fees, facilities and amortization and depreciation expenses.

Personnel costs are our largest expense, representing $114.8 million, or 60.6% of our total operating expenses, for the year ended December 31, 2022;

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Period-to-Period

(dollars in thousands)

Research and development

2 unchanged sentences

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 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.

Research and development (“R&D”) expense was $78.4 million in 2022, an increase of $12.9 million, or 19.8%, compared with $65.4 million in 2021.

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 to support ongoing R&D projects.

Sales and Marketing

Period-to-Period

(dollars in thousands)

Sales and marketing

2 unchanged sentences

Sales and marketing expense was $53.6 million in 2022, an increase of $6.1 million, or 12.7%, compared with $47.5 million in 2021.

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.

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

General and Administrative

Period-to-Period

(dollars in thousands)

General and administrative

4 unchanged sentences

Other (Expense) Income

Other (expense) income consists primarily of interest expense relating to the lease obligation we incurred in connection with the 2015 sale of our headquarters facility (“sale leaseback”) and other financing obligations, foreign exchange gains and losses attributable to fluctuations of the U.S.

Other (expense) income consists of interest expense relating to the lease obligation we incurred in connection with the 2015 sale of our headquarters facility (“sale leaseback”) and other financing obligations, foreign exchange gains and losses attributable to fluctuations of the U.S.

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

Period-to-period

(dollars in thousands)

Other expense

Percentage of revenue

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, 2022 was $7.5 million, which includes $5.0 million of interest expense related to our sale leaseback obligation and $6.4 million of foreign currency translation losses, partially offset by interest income $4.6 million.

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 loss, 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.

Period-to-period

(dollars in thousands)

Income tax provision

Percentage of revenue

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

Income tax expense was $21.8 million for the years ended December 31, 2022 and 2021.

The effective tax rate for the year ended December 31, 2022 was 10.6% compared to 18.1% for year the ended December 31, 2021.

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.

The decrease in the effective tax rate in 2022 is due to Foreign-derived intangible income (“FDII”), which is taxed at a lower tax rate than the U.S.

statutory rate, resulting in a tax benefit of $20.5 million in the current year.

The full utilization of the U.S.

federal net operating losses allowed us to make use of the FDII in the current year.

At December 31, 2022, we had $31.7 million of net deferred tax assets worldwide relating to capitalized research and development costs and other temporary differences, which are available to reduce income taxes in future years.

We have recorded a $8.4 million valuation allowance against certain tax credits and state net operating losses due to the uncertainty of their realization.

6 unchanged sentences

For example, our sales and other factors are influenced by the uncertainties of global economies, including the availability of credit and the condition of the overall semiconductor capital equipment industry.

Our established cost structure does not vary significantly with changes in volume.

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

Our industry requires ongoing investments in operations and research and development that are not easily adjusted to reflect changes in revenue.

As a result, profitability and cash flows can fluctuate more widely than revenue.

In 2022, $215.6 million of cash was provided by operating activities.

5 unchanged sentences

At December 31, 2022, we had no bank debt.

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

In 2022, $257.3 million of cash was used in investing activities.

Capital expenditures were $10.7 million for the year ended December 31, 2022.

Total capital expenditures for 2022 are projected to be approximately

$13.0 million.

We held $246.6 million of short-term investments at December 31, 2022.

These short-term investments consist of U.S.

Government securities and agency investments.

In 2021, $8.7 million was used in investing activities for capital expenditures.

Total capital expenditures for 2023 are projected to be approximately $19.1 million.

Future capital expenditures beyond 2023 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.

1 unchanged sentence

These amounts were partially offset by $1.2 million in proceeds of stock option exercises and $1.7 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.

Cash used in financing activities was $52.4 million for the year ended December 31, 2021, 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 of principal reduction on our finance lease.

These uses of cash 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.

11 unchanged sentences

Operating leases

We have no off-balance sheet arrangements as of December 31, 2021.

We have net operating loss and tax credit carryforwards, the tax effect of which aggregate $33.7 million at December 31, 2021.

These carryforwards, which expire principally between 2022 and 2034, are available to reduce future income tax liabilities in the United States and certain foreign jurisdictions.

The table above includes lease agreements signed but not yet commenced as of December 31, 2022 and is based on the expected contractual commencement dates.

We have no off-balance sheet arrangements as of December 31, 2022, other than leases signed but not commenced.

See Note 18 – Income Taxes in the Notes to the Consolidated Financial Statements for information related to our unrecognized tax benefits.

We consider the undistributed earnings of our foreign subsidiaries as of December 31, 2022, to be indefinitely reinvested and, accordingly, no U.S.

6 unchanged sentences

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 expire in May 2023.

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.

6 unchanged sentences

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.

We believe that based on our current market, revenue, expense and cash flow forecasts, our existing cash, cash equivalents, short-term investments and borrowing capacity will be sufficient to satisfy our anticipated cash requirements for the short and long-term.

Related-Party Transactions

3 unchanged sentences

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