AXCELIS TECHNOLOGIES, INC. Certain statements within "Management's Discussion and Analysis of Financial Condition and Results of Operations" are forward-looking statements that involve risks and uncertainties. Words such as may, will, should, would, anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify such forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Factors that might cause such a difference include, among other things, those set forth under "Liquidity and Capital Resources" below and under "Risk Factors" in Part I, Item 1A to our annual report on Form 10-K for the year endedDecember 31, 2020 , which discussion is incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may
be required by law. Overview We are primarily a producer of ion implantation equipment used in the fabrication of semiconductor chips inthe United States ,Europe andAsia . In addition, we provide extensive worldwide aftermarket service and support, including spare parts, equipment upgrades and maintenance services to the semiconductor industry. Our product development and manufacturing activities currently occur primarily inthe United States although we are adding additional manufacturing capacity inSouth Korea that should come online by year end 2021. Our equipment and service products are highly technical and are sold through a direct sales force inthe United States ,Europe andAsia . Consolidation and partnering within the semiconductor manufacturing industry has resulted in a small number of customers representing a substantial portion of our business. Our ten largest customers accounted for 71.1% of total revenue for the six months endedJune 30, 2021 . In the first half of 2021, we delivered strong financial performance driven by strong semiconductor industry fundamentals and an increasing demand for our Purion products, especially in the high growth power device market. The rapid acceleration of the electrification of the automotive industry is creating substantial demand for power devices and image sensors, which is driving sustainable growth for the Purion product extensions specifically developed
for these markets. Despite the many difficult logistical challenges brought on by trade tensions betweenthe United States andChina 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. InDecember 2020 , theUnited States Commerce Department placed one of our major Chinese customers, Semiconductor Manufacturing International Corporation ("SMIC"), on theU.S. export controls Entity List. As a result of the Entity List classification, we are required to obtain export controls licenses for allU.S. shipments to this customer. Although we have begun receiving these licenses, this situation did delay some shipments to this customer in the first half of 2021. Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of operations included herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2020 are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions. Management's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 19 Table of Contents
Management has not identified any need to make any material change in, and has not changed, any of our critical accounting estimates and judgments as described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Results of Operations The following table sets forth our results of operations as a percentage of total revenue: Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 Revenue: Product 95.2 % 95.3 % 95.3 % 94.8 % Services 4.8 4.7 4.7 5.2 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Product 52.1 53.3 52.5 54.8 Services 4.5 4.5 4.5 4.9 Total cost of revenue 56.6 57.8 57.0 59.7 Gross profit 43.4 42.2 43.0 40.3 Operating expenses: Research and development 11.3 13.0 11.5 12.7 Sales and marketing 8.3 7.7 8.1 7.3 General and administrative 7.6 8.2 7.6 7.9 Total operating expenses 27.2 28.9 27.2 27.9 Income from operations 16.2 13.3 15.8 12.4 Other (expense) income: Interest income - 0.1 - 0.2 Interest expense (0.9) (1.1) (0.8) (1.1) Other, net - 0.3 (0.4) (0.1) Total other expense (0.9) (0.7) (1.2) (1.0) Income before income taxes 15.3 12.6 14.6 11.4 Income tax provision 2.6 1.8 2.0 1.4 Net income 12.7 % 10.8 % 12.6 % 10.0 % Revenue
The following table sets forth our product and services revenue:
Three months ended Period-to-Period Six months ended Period-to-Period
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Revenue:
Product $ 140,156 $ 117,194 $ 22,962 19.6 % $266,765$ 229,327 $ 37,438 16.3 % Percentage of revenue 95.2 % 95.3 % 95.3 % 94.8 % Services 7,118 5,771 1,347 23.3 % 13,285 12,629 656 5.2 % Percentage of revenue 4.8 % 4.7 % 4.7 % 5.2 %
Total revenue$ 147,274 $ 122,965 $ 24,309 19.8 % $
280,050$ 241,956 $ 38,094 15.7 % 20 Table of Contents
Three months ended
Product Product revenue, which includes systems sales, sales of spare parts, product upgrades and used systems was$140.2 million , or 95.2% of revenue during the three months endedJune 30, 2021 , compared with$117.2 million , or 95.3% of revenue for the three months endedJune 30, 2020 . The$23.0 million increase in product revenue for the three-month period endingJune 30, 2021 , in comparison to the same period in 2020, was primarily driven by an increase in the number of systems sold.
A portion of our revenue from systems sales is deferred until installation and other services related to future performance obligations are performed. The total amount of deferred revenue atJune 30, 2021 andDecember 31, 2020 was$35.5 million and$23.1 million , respectively. The increase in deferred revenue was primarily due to customer prepayments for systems. Services Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was$7.1 million , or 4.8% of revenue for the three months endedJune 30, 2021 , compared with$5.8 million , or 4.7% of revenue for the three months endedJune 30, 2020 . Although services revenue typically increases with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers' manufacturing facilities, which affects
the need for equipment service.
Six months endedJune 30, 2021 Compared with Six months endedJune 30, 2020
Product Product revenue was$266.8 million , or 95.3% of revenue during the six months endedJune 30, 2021 , compared with$229.3 million , or 94.8% of revenue for the six months endedJune 30, 2020 . The$37.4 million increase in product revenue for the six-month period endingJune 30, 2021 , in comparison to the same period in 2020, was primarily driven by an increase in the number of systems sold and to a lesser extent revenue increases in spare parts, product upgrades and used systems. Services
Services revenue was
Revenue Categories used by Management
In addition to the line item revenue categories discussed above, management also regularly disaggregates revenue in the following categories, which it finds relevant and useful:
Ion implant revenue separate from revenue from legacy non-ion implant product
? lines, given that ion implantation systems are the primary driver of our growth
and strategic objectives;
? Systems and Aftermarket revenues, in which "Aftermarket" is:
A. The portion of Product revenue relating to spare parts, product upgrades and
used equipment, combined with
B. Services revenue, which is the labor component of Aftermarket revenues
(Aftermarket purchases reflect current fab utilization as opposed to Systems
purchases which reflect capital investment decisions by our customers, which
have differing economic drivers);
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Revenue by geographic regions, since economic factors impacting customer
? purchasing decisions may vary by geographic region; and
Revenue by our customer market segments, since they can be subject to different
economic drivers at different periods of time, impacting a customer's
? likelihood of purchasing capital equipment during any particular period.
Currently, management references three customer market segments: memory, mature
technology processes and leading edge foundry and logic.
The ion implant and Aftermarket revenue categories for recent periods are discussed below.
Three months ended
Ion Implant Included in total revenue of$147.3 million during the three months endedJune 30, 2021 is revenue from sales of ion implant products and services of$142.9 million , or 97.0% of total revenue, compared with$118.7 million , or 96.6%, of total revenue for the three months endedJune 30, 2020 . The remaining$4.4 million of revenue for the three months endedJune 30, 2021 was non-ion implant parts and services. Aftermarket Included in total revenue of$147.3 million during the three months endedJune 30, 2021 is revenue from our Aftermarket business of$47.1 million , compared to$46.2 million for the three months endedJune 30, 2020 . The remaining$100.2 million of revenue for the three months endedJune 30, 2021 was from system sales. Aftermarket revenue fluctuates from period to period based on capacity utilization at customers' manufacturing facilities, which affects the sale of spare parts and demand for equipment service. Aftermarket revenue can also fluctuate from period to period based on the demand for system upgrades or
used equipment.
Six months endedJune 30, 2021 Compared with Six months endedJune 30, 2020
Ion Implant Included in total revenue of$280.1 million during the six months endedJune 30, 2021 is revenue from sales of ion implant products and services of$271.6 million , or 97.0% of total revenue, compared with$233.8 million , or 96.6%, of total revenue for the six months endedJune 30, 2020 . The remaining$8.5 million of revenue for the six months endedJune 30, 2021 was non-ion
implant parts and services. Aftermarket
Included in total revenue of
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Gross Profit / Gross Margin
The following table sets forth our gross profit / gross margin:
Three months ended Period-to-Period Six months ended Period-to-Period
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Gross Profit:
Product $ 63,468 $ 51,675 $ 11,793 22.8 % $ 119,743 $ 96,636 $ 23,107 23.9 %
Product gross margin 45.3 % 44.1 % 44.9 % 42.1 %
Services 546 224 322 (143.8) % 706 812 (106) (13.1) %
Services gross margin 7.7 % 3.9 % 5.3 % 6.4 %
Total gross profit $ 64,014 $ 51,899 $ 12,115 23.3 % $ 120,449 $ 97,448 $ 23,001 23.6 %
Gross margin 43.4 % 42.2 % 43.0 % 40.3 %
Three months ended
Product Gross margin from product revenue was 45.3% for the three months endedJune 30, 2021 , compared to 44.1% for the three months endedJune 30, 2020 . The increase resulted from improved gross margins on parts and upgrades and Purion systems. Services
Gross margin from services revenue was 7.7% for the three months endedJune 30, 2021 , compared to 3.9% for the three months endedJune 30, 2020 . The increase in gross margin is attributable to changes in the mix of service contracts. Six months endedJune 30, 2021 Compared with Six months endedJune 30, 2020
Product Gross margin from product revenue was 44.9% for the six months endedJune 30, 2021 , compared to 42.1% for the six months endedJune 30, 2020 . The increase in gross margin resulted from an increased mix of higher margin parts and upgrades and improved margins on Purion systems. Services Gross margin from services revenue was 5.3% for the six months endedJune 30, 2021 , compared to 6.4% for the six months endedJune 30, 2020 . The decrease in gross margin is attributable to changes in the mix of service contracts. 23 Table of Contents Operating Expenses
The following table sets forth our operating expenses:
Three months ended Period-to-Period Six months ended Period-to-Period
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Research and
development $ 16,623 $ 16,040 $ 583 3.6 % $ 32,308 $ 30,646 $ 1,662 5.4 %
Percentage of
revenue 11.3 % 13.0 % 11.5 % 12.7 %
Sales and marketing 12,177 9,437 2,740 29.0 % 22,564 17,641 4,923 27.9 %
Percentage of
revenue 8.3 % 7.7 % 8.1 % 7.3 %
General and
administrative 11,217 10,041 1,176 11.7 % 21,230 19,077 2,153 11.3 %
Percentage of
revenue 7.6 % 8.2 % 7.6 % 7.9 %
Total operating
expenses $ 40,017 $ 35,518 $ 4,499 12.7 % $ 76,102 $ 67,364 $ 8,738 13.0 %
Percentage of
revenue 27.2 % 28.9 % 27.2 % 27.9 %
Our operating expenses consist primarily of personnel costs, including salaries,
commissions, incentive based compensation, stock-based compensation and related
benefits and taxes; project material costs related to the design and development
of new products and enhancement of existing products; and professional fees,
travel and depreciation expenses.
Personnel costs are our largest expense, representing $25.4 million or 63.5% of
our total operating expenses for the three months ended June 30, 2021 , compared
to $22.8 million or 64.3% of our total operating expenses for the three months
ended June 30, 2020 . Personnel costs were $47.5 million or 62.4% of our total
operating expenses for the six months ended June 30, 2021 , compared to
$42.8 million or 63.5% of our total operating expenses for the six months ended
June 30, 2020 . The higher personnel costs for the three and six months ended
June 30, 2021 is primarily due to an increase in personnel expenses to support
growth.
Research and Development
Three months ended Period-to-Period Six months ended Period-to-Period
June 30, Change June 30, Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Research and development $ 16,623 $ 16,040 $ 583 3.6 % $ 32,308 $ 30,646 $ 1,662 5.4 %
Percentage of revenue 11.3 % 13.0 % 11.5 % 12.7 %
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
Research and development expense was$16.6 million during the three months endedJune 30, 2021 , an increase of$0.6 million , or 3.6%, compared with$16.0 million during the three months endedJune 30, 2020 . The increase is primarily due to higher personnel expenses and incentive based pay expense. Six months endedJune 30, 2021 Compared with Six months endedJune 30, 2020 Research and development expense was$32.3 million during the six months endedJune 30, 2021 , an increase of$1.7 million , or 5.4%, compared with$30.6 million during the six months endedJune 30, 2020 . The increase is primarily due to higher personnel expenses, supplies and materials costs for ongoing projects and increased depreciation associated with capital additions. 24 Table of Contents Sales and Marketing Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) Sales and marketing$ 12,177 $ 9,437 $ 2,740 29.0 %$ 22,564 $ 17,641 $ 4,923 27.9 % Percentage of revenue 8.3 % 7.7 % 8.1 % 7.3 %
Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.
Three months ended
Sales and marketing expense was$12.2 million during the three months endedJune 30, 2021 , an increase of$2.7 million , or 29.0%, compared with$9.4 million during the three months endedJune 30, 2020 . The increase is primarily due to increases in freight expense and project material costs as well as higher personnel related expenses. Six months endedJune 30, 2021 Compared with Six months endedJune 30, 2020 Sales and marketing expense was$22.6 million during the six months endedJune 30, 2021 , an increase of$4.9 million , or 27.9%, compared with$17.6 million during the six months endedJune 30, 2020 . The increase is primarily due to increases in freight expense and project material costs as well as higher personnel related expenses. General and Administrative Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2021 2020 $ % 2021 2020 $ % (dollars in thousands) General and administrative$ 11,217 $ 10,041 $ 1,176 11.7 %$ 21,230 $ 19,077 $ 2,153 11.3 % Percentage of revenue 7.6 % 8.2 % 7.6 % 7.9 %
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
General and administrative expense was
Six months endedJune 30, 2021 Compared with Six months endedJune 30, 2020
General and administrative expense was
Other (Expense) Income
Three months ended Period-to-period Six months ended Period-to-period
June 30, change June 30, change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Other expense $ (1,249) $ (808) $ 441 54.6 % $ (3,398) $ (2,249) $ 1,149 51.1 %
Percentage of revenue (0.9) % (0.7) % (1.2) % (1.0) %
25
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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 $1.2 million for the three months ended June 30, 2021 ,
compared with $0.8 million for the three months ended June 30, 2020 . The
increase in other expense was primarily due to an increase in foreign currency
exchange losses. Other expense was $3.4 million for the six months ended June
30, 2021 , compared with $2.2 million for the six months ended June 30, 2020 . The
increase in other expense was primarily due to an increase in foreign currency
exchange losses of $0.6 million as well as a reduction of $0.5 million in
interest income when compared to the six-month period ended June 30, 2020 .
During the six-month periods ended June 30, 2021 and 2020, we had no significant
off-balance-sheet risk such as exchange contracts, option contracts or other
hedging arrangements.
Income Tax Provision
Three months ended Period-to-period Six months ended Period-to-period
June 30, change June 30, change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands)
Income tax provision $ 3,842 $ 2,271 $ 1,571 (69.2) % $ 5,563 $ 3,312 $ 2,251 68.0 %
Percentage of revenue 2.6 % 1.8 % 2.0 % 1.4 %
Income tax expense was $3.8 million for the three months ended June 30, 2021 ,
compared to $2.3 million for the three months ended June 30, 2020 . The $1.5
million increase was primarily due to a $7.2 million increase in pretax income.
Income tax expense was $5.6 million during the six months ended June 30, 2021 ,
compared to $3.3 million for the six months ended June 30, 2020 . The $2.3
million increase was primarily due to a $13.1 million increase in pretax income.
The effective tax rate for the three and six months ended June 30, 2021 and
2020, respectively, was less than the U.S. statutory rate of 21% due to
favorable discrete items related to equity compensation in those periods as well
as Federal research and development tax credits that reduce the annual tax rate.
We had $51.4 million and $57.9 million of net deferred tax assets worldwide
relating to net operating loss carryforwards, tax credit carryforwards and other
temporary differences, as of June 30, 2021 and December 31, 2020 , respectively.
These deferred tax assets are available to reduce income taxes in future years.
We have 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 tax assets. If future operating results of the Company within 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.
.
Liquidity and Capital Resources
We had$219.7 million in unrestricted cash and cash equivalents atJune 30, 2021 , in addition to$0.8 million in restricted cash. Management believes that maintaining a strong cash balance is necessary to provide funding for potential ramps in our business which can require significant cash investment to meet sudden demand. Additionally, we are using cash in our 2021 stock repurchase program and are considering both organic and inorganic opportunities to drive future growth, for which cash resources will be necessary. Our liquidity is affected by many factors. Some of these relate specifically to the operations of our business, for example, the rate of sale of our products, and others relate to the uncertainties of global economic conditions, including the availability of credit and the condition of the overall semiconductor equipment industry. Our established cost structure, other than cost of goods sold, does not vary significantly with changes in volume. We experience fluctuations in operating results and cash flows depending on these factors. Stock repurchases, as discussed below, also reduce our cash balances. 26 Table of Contents During the six months endedJune 30, 2021 , we generated$45.9 million of cash related to operating activities. During the six months endedJune 30, 2020 , we generated$56.6 million of cash related to operating activities. Investing activities for the six months endedJune 30, 2021 and 2020 resulted in cash outflows of$2.4 million and$3.0 million , respectively, used for capital expenditures. Financing activities for the six months endedJune 30, 2021 resulted in a cash usage of$28.3 million . During the first six months of 2021,$25.0 million in cash was used to repurchase our common stock and$6.5 million was used for payments to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, where shares are withheld by the Company, as well as$0.4 million relating to the reduction of the liability under the finance lease of our corporate headquarters. These amounts were partially offset by$3.6 million of proceeds from the exercise of stock options and purchase of shares under our 2020 ESPP during the first six months of 2021. In comparison, financing activities for the six months endedJune 30, 2020 resulted in cash usage of$3.7 million ,$7.5 million of which related to the repurchase of our common stock and$3.9 million related to payments made to government tax authorities for income tax withholding on employee compensation arising from the vesting of RSUs, as well as$0.1 million relating to the reduction of our financing lease liability. These amounts were partially offset by$7.8 million of proceeds related to the exercise of stock options and purchase of shares under our prior employee stock purchase plan during the
first six months of 2020.
Under the rules of theU.S. Securities and Exchange Commission (the "SEC"), we qualify as a "well-known seasoned issuer," which allows us to file shelf registration statements to register an unspecified amount of securities that are effective upon filing. OnMay 29, 2020 , we filed such a shelf registration statement with theSEC 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. OnJuly 31, 2020 , we entered into a Senior Secured Credit Facilities Credit Agreement (the "Credit Agreement") withSilicon 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 onJuly 31, 2023 . As ofJune 30, 2021 , we were in compliance with all covenant requirements of the Credit Agreement. As of such date, no borrowings had been made under the Credit Agreement, although a letter of credit for$5.9 million reduces the funds available for borrowing under the credit line. We have no immediate plans to borrow under the Credit Agreement, but 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 withSilicon Valley Bank inMarch 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 theFederal 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 atJune 30, 2021 are consistent with those discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 16 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . 27 Table of Contents
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