What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-03 · 61 added, 142 removed, 123 unchanged (62% of the section changed)

13 unchanged sentences

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 60.7% of total revenue for the nine months ended September 30, 2022.

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

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

Axcelis’ strong results in the first nine 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 84% of shipments during the first nine months of 2022 going to mature foundry/logic customers.

Our ten largest customers accounted for 64.7% of total revenue for the three months ended March 31, 2023.

The first three months of 2023 exhibited continued strong demand for our capital equipment, despite a downturn in the memory segment of our industry that is causing other semiconductor equipment makers to experience lower revenues than the same period in the prior year.

Supply chain performance improved, but has not completely recovered from the challenges seen in prior periods.

Axcelis’ strong results in the first three months of 2023 demonstrate our ability to meet demand and manage supply chain difficulties.

Our performance is closely related to the growing mature process technology market, with 89% of shipments during the first three months of 2023 going to mature foundry/logic customers.

Critical Accounting Estimates

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Three months ended

Nine months ended

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Total revenue

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Income from operations

Other (expense) income:

Other income (expense):

Interest income

Interest expense

Total other expense

Total other income (expense)

Income before income taxes

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(dollars in thousands)

Percentage of revenue

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Total revenue

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

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $221.5 million, or 96.7% of revenue during the three months ended September 30, 2022, compared with $169.2 million, or 95.7% of revenue for the three months ended September 30, 2021.

The $52.4 million increase in product revenue for the three-month period ending September 30, 2022, in comparison to the same period in 2021, was primarily driven by an increase in the number of systems sold.

Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was $246.0 million, or 96.8% of revenue, during the three months ended March 31, 2023, compared with $196.5 million, or 96.5% of revenue, for the three months ended March 31, 2022.

The $49.5 million increase in product revenue for the three-month period ending March 31, 2023, in comparison to the same period in 2022, was primarily driven by an increase in systems revenue.

Deferred revenue includes payments received in advance of system sales as well as deferral of revenue from systems sales for installation and other future performance obligations.

The total amount of deferred revenue at September 30, 2022 and December 31, 2021 was $122.6 million and $68.4 million, respectively.

The increase in deferred revenue was primarily due to the number of systems sold and payments received in advance of sales.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $7.6 million, or 3.3% of revenue for the three months ended September 30, 2022, compared with $7.5 million, or 4.3% of revenue for the three months ended September 30, 2021.

The total amount of deferred revenue at March 31, 2023 and December 31, 2022 was $201.7 million and $154.7 million, respectively.

The increase in deferred revenue was primarily due to payments received in advance of sales.

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $8.0 million, or 3.2% of revenue, for the three months ended March 31, 2023, compared with $7.1 million, or 3.5% of revenue, for the three months ended March 31, 2022.

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, 2022 Compared with Nine months ended September 30, 2021

Product revenue was $632.0 million, or 96.6% of revenue during the nine months ended September 30, 2022, compared with $435.9 million, or 95.4% of revenue for the nine months ended September 30, 2021.

The $196.1 million increase in product revenue for the nine-month period ending September 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 $21.9 million, or 3.4% of revenue for the nine months ended September 30, 2022, compared with $20.8 million, or 4.6% of revenue for the nine months ended September 30, 2021.

Revenue Categories used by Management

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Aftermarket and Systems Revenue

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

Included in total revenue of $229.2 million during the three months ended September 30, 2022 is revenue from our Aftermarket business of $58.1 million, compared with $50.5 million of aftermarket revenue for the three months ended September 30, 2021.

Included in total revenue of $254.0 million during the three months ended March 31, 2023 is revenue from our Aftermarket business of $58.8 million, compared with $51.8 million of Aftermarket revenue for the three months ended March 31, 2022.

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 $171.1 million of revenue for the three months ended September 30, 2022 was from system sales, compared with $126.2 million of systems revenue for the three months ended September 30, 2021.

The remaining $195.2 million of revenue for the three months ended March 31, 2023 was from system sales, compared with $151.8 million of systems revenue for the three months ended March 31, 2022.

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

Nine months ended September 30, 2022 Compared with Nine months ended September 30, 2021

Included in total revenue of $653.9 million during the nine months ended September 30, 2022 is revenue from our Aftermarket business of $165.7 million, compared with $149.4 million of aftermarket revenue for the nine months ended September 30, 2021.

The remaining $488.2 million of revenue for the nine months ended September 30, 2022 was from system sales, compared with $307.3 million of systems revenue for the nine months ended September 30, 2021.

Gross Profit / Gross Margin

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Gross Profit:

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Total gross profit

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

Gross margin from product revenue was 46.3% for the three months ended September 30, 2022, compared to 44.9% for the three months ended September 30, 2021.

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

Gross margin from services revenue was 10.1% for the three months ended September 30, 2022, compared to 7.5% for the three months ended September 30, 2021.

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

Nine months ended September 30, 2022 Compared with Nine months ended September 30, 2021

Gross margin from product revenue was 45.8% for the nine months ended September 30, 2022, compared to 44.9% for the nine months ended September 30, 2021.

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

Gross margin from services revenue was 12.1% for the nine months ended September 30, 2022, compared to 6.1% for the nine months ended September 30, 2021.

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

Gross margin from product revenue was 42.0% for the three months ended March 31, 2023, compared to 45.2% for the three months ended March 31, 2022.

The decrease in gross margin primarily resulted from a less favorable mix of system shipments and to a lessor extent, higher supply chain costs.

Gross margin from services revenue was 9.8% for the three months ended March 31, 2023, compared to 12.4% for the three months ended March 31, 2022.

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

Operating Expenses

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Research and development

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and professional fees, travel and depreciation expenses.

Personnel costs are our largest expense, representing $31.4 million or 62.6% of our total operating expenses for the three months ended September 30, 2022, compared to $24.9 million or 62.1% of our total operating expenses for the three months ended September 30, 2021.

Personnel costs were $83.0 million or 61.0% of our total operating expenses for the nine months ended September 30, 2022, compared to $72.3 million or 62.2% of our total operating expenses for the nine months ended September 30, 2021.

The higher personnel costs for the three and nine months ended September 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.

Personnel costs are our largest expense, representing $30.7 million or 58.2%, of our total operating expenses for the three months ended March 31, 2023, compared to $24.2 million or 59.2%, of our total operating expenses for the three months ended March 31, 2022.

The higher personnel costs for the three months ended March 31, 2023 are primarily due to increases in personnel-related expenses to support growth.

Research and Development

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Research and development

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

Accordingly, based on our

strategic plan, we establish annual R&D budgets to fund programs that we expect will solve customers’ high value, high impact, ion implantation challenges.

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

Research and development expense was $20.6 million during the three months ended September 30, 2022, an increase of $3.9 million, or 23.1%, compared with $16.7 million during the three months ended September 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.

Nine months ended September 30, 2022 Compared with Nine months ended September 30, 2021

Research and development expense was $56.3 million during the nine months ended September 30, 2022, an increase of $7.3 million, or 14.8%, compared with $49.0 million during the nine months ended September 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.

Accordingly, based on our strategic plan, we establish annual research and development budgets to fund programs that we expect will solve customers’ high value, high impact, ion implantation challenges.

Research and development expense was $23.8 million during the three months ended March 31, 2023, an increase of $6.8 million, or 40.1%, compared with $17.0 million during the three months ended March 31, 2022.

The increase is primarily due to higher personnel expenses as well as an increase in the cost of project materials and related services for ongoing projects.

Sales and Marketing

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Sales and marketing

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Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.

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

Sales and marketing expense was $14.6 million during the three months ended September 30, 2022, an increase of $3.2 million, or 27.7%, compared with $11.4 million during the three months ended September 30, 2021.

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

Nine months ended September 30, 2022 Compared with Nine months ended September 30, 2021

Sales and marketing expense was $38.6 million during the nine months ended September 30, 2022, an increase of $4.6 million, or 13.5%, compared with $34.0 million during the three months ended September 30, 2021.

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

Sales and marketing expense was $14.1 million during the three months ended March 31, 2023, an increase of $2.9 million, or 25.3%, compared with $11.3 million during the three months ended March 31, 2022.

The increase is primarily due to higher personnel expenses and travel-related expense.

General and Administrative

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General and administrative

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Our general and administrative expenses result primarily from the costs associated with our executive, finance, information technology, legal and human resource functions.

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

General and administrative expense was $15.0 million during the three months ended September 30, 2022, an increase of $3.0 million, or 24.9%, compared with $12.0 million during the three months ended September 30, 2021.

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

Nine months ended September 30, 2022 Compared with Nine months ended September 30, 2021

General and administrative expense was $41.2 million during the nine months ended September 30, 2022, an increase of $7.9 million, or 23.9%, compared with $33.2 million during the nine months ended September 30, 2021.

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

Other (Expense) Income

General and administrative expense was $14.7 million during the three months ended March 31, 2023, an increase of $2.2 million, or 17.2%, compared with $12.6 million during the three months ended March 31, 2022.

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

Other Income (Expense)

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Other expense

Other income (expense):

Percentage of revenue

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 $8.2 million for the three months ended September 30, 2022, compared with $2.2 million for the three months ended September 30, 2021.

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

Other expense was $17.2 million for the nine months ended September 30, 2022, compared with $5.6 million for the nine months ended September 30, 2021.

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

During the nine-month periods ended September 30, 2022 and 2021, we had no significant off-balance-sheet risk such as exchange contracts, option contracts or other hedging arrangements.

Other income (expense) consists of interest earned on our invested cash balances, interest expense relating to the finance lease obligation we incurred in connection with the 2015 sale of our headquarters facility and other financing obligations as well as 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.

Other income was $1.5 million for the three months ended March 31, 2023, compared with other expense of $3.0 million for the three months ended March 31, 2022.

The $4.6 million change in other income (expense) compared to the same prior year period was primarily due to an increase in interest income of $3.8 million and a decrease in exchange loss of $0.6 million.

During the three-month periods ended March 31, 2023 and 2022, 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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Income tax provision

Percentage of revenue

Income tax expense was $4.7 million for the three months ended September 30, 2022, compared to $6.7 million for the three months ended September 30, 2021.

The $2.0 million decrease was primarily due to the FDII deduction on export sales.

Income tax expense was $13.0 million for the nine months ended September 30, 2022, compared to $12.3 million for the nine months ended September 30, 2021.

The $0.7 million increase was primarily due to a $63.9 million increase in pretax income offset by the FDII deduction on export sales.

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

September 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 $28.4 million and $35.5 million as of September 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.

We have recorded a $9.3 million valuation allowance in the U.S.

Income tax expense was $5.2 million for the three months ended March 31, 2023, compared to $4.3 million for the three months ended March 31, 2022.

The $0.9 million increase was primarily due to an increase in taxable income.

The effective tax rate for the three months ended March 31, 2023 was less than the U.S.

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

The deferred income taxes of $35.4 million and $31.7 million as of March 31, 2023 and December 31, 2022, 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.

As of March 31, 2023, we have recorded a $10.9 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 $308.6 million in unrestricted cash and cash equivalents at September 30, 2022 and $33.6 million in short-term investments, in addition to $0.8 million in restricted cash.

At March 31, 2023, we had $164.5 million in unrestricted cash and cash equivalents and $280.2 million in short-term investments, in addition to $6.7 million in restricted cash.

Management believes that maintaining a strong cash balance is necessary to fund a continuing ramp 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.

Additionally, we are using cash to repurchase shares as part of our 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.

Some of these relate specifically to the operations of our business, for example, the rate of sales 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 industry requires ongoing investments in operations and research and development that are not easily adjusted to reflect changes in revenue.

1 unchanged sentence

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

During the nine months ended September 30, 2022 and 2021, we generated $93.2 million and $112.1 million, respectively, of cash related to operating activities.

Investing activities for the nine months ended September 30, 2022 resulted in cash outflows of $40.5 million, $6.9 million of which was used for capital expenditures and $33.6 million used to purchase short-term investments.

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

Financing activities for the nine months ended September 30, 2022 resulted in a cash usage of $53.1 million.

During the first nine months of 2022, $45.0 million in cash was used to repurchase our common stock and $9.3 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 $0.7 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

These amounts were partially offset by $1.9 million of proceeds from the exercise of stock options and purchase of shares under our 2020 ESPP during the first nine months of 2022.

In comparison, financing activities for the nine months ended September 30, 2021 resulted in cash usage of $40.7 million, $37.5 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 $0.6 million relating to the reduction of our financing lease liability.

These amounts were partially offset by $3.9 million of proceeds related to the exercise of stock options during the first nine months of 2021.

During the three months ended March 31, 2023 and 2022, we generated $34.6 million and $25.8 million, respectively, of cash related to operating activities.

Investing activities for the three months ended March 31, 2023 resulted in cash outflows of $33.0 million, $2.2 million of which was used for capital expenditures and $61.8 million of which was used to purchase short-term investments, offset by $31.0 million related to maturities of short-term investments.

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

Financing activities for the three months ended March 31, 2023 resulted in a cash usage of $16.7 million.

During the first three months of 2023, $12.5 million in cash was used to repurchase our common stock and $3.9 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 to cover taxes, as well as $0.3 million relating to the reduction of the liability under the finance lease of our corporate headquarters.

In comparison, financing activities for the three months ended March 31, 2022 resulted in cash usage of $23.1 million, $20.0 million of which related to the repurchase of our common stock and $3.3 million of which 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 $0.5 million of proceeds related to the exercise of stock options during the first three months of 2022.

Under the rules of the U.S.

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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.

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, 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 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.

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 April 5, 2023 we terminated the Senior Secured Credit Facilities Credit Agreement, as amended (the “Credit Agreement”), with Silicon Valley Bank that we entered into on July 31, 2020.

The Credit Agreement provided for a revolving credit facility covering borrowings and letters of credit in an aggregate principal amount not to exceed $40.0 million.

Our obligations under the Credit Agreement were 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.

Upon termination, these liens and all other obligations under the credit agreement, were released.

A letter of credit remained at Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (successor by purchase to the Federal Deposit Insurance Corporation as Receiver for Silicon Valley Bridge Bank, N.A.) as successor to Silicon Valley Bank, in the amount of $5.9 million, securing our lease on our corporate headquarters.

This letter of credit was transitioned to a cash collateral arrangment on March 30, 2023, and is classified as long-term restricted cash on our balance sheet at March 31, 2023.

We believe that based on our current market, revenue, expense and cash flow forecasts, our existing cash and cash equivalents 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, 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 March 31, 2023 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 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Quantitative and Qualitative Disclosures about Market Risk.

As of September 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.

As of March 31, 2023, there have been no material changes to the quantitative information about market risk disclosed in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2022.

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