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AXCELIS TECHNOLOGIES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Certain statements in "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" and "Risk Factors" and others discussed elsewhere in this Form 10-Q. 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 The semiconductor capital equipment industry is subject to significant cyclical swings in capital spending by semiconductor manufacturers. Capital spending is influenced by demand for semiconductors and the products using them, the utilization rate and capacity of existing semiconductor manufacturing facilities and changes in semiconductor technology, all of which are outside of our control. As a result, our revenue and gross margins fluctuate from year to year and period to period. We typically become more efficient in manufacturing products as they mature. Our established cost structure does not vary significantly with changes in volume, which limits our ability to reduce costs in proportion to declining sales. Therefore, we experience fluctuations in operating results and cash flows depending on our revenue as driven by the level of capital expenditures by semiconductor manufacturers. In December 2012, we sold to Lam Research Corporation the intellectual property rights and other assets relating to our dry strip systems product line. The purchased intellectual property rights include, among other things, worldwide patent rights, patent applications, copyrights, industrial designs, know-how and related rights used by us in our dry strip products. Lam granted us a worldwide, non-exclusive, non-transferable, royalty free license to use the intellectual property rights sold by us. The license allows us to make and sell 300 mm dry strip wafer processing equipment for semiconductor applications through September 2013. We will continue to sell dry strip systems for smaller wafers until December 2015 and support our installed base of dry strip systems indefinitely. Due to this continuing interest in the dry strip business, the sale of the intellectual property rights and other assets to Lam have been reported in continuing operations. The sizable expense of building, upgrading or expanding a semiconductor fabrication facility is increasingly causing semiconductor companies to contract with foundries to manufacture their semiconductors. In addition, consolidation and partnering within the semiconductor manufacturing industry is increasing. We expect these trends to continue to reduce the number of our potential customers. Our net revenue from our ten largest customers accounted for 59.7% of total revenue for the three months ended March 31, 2013 compared to 79.5% of revenue for the three months ended March 31, 2012. Weak industry conditions that we experienced in 2012 continued through the first quarter of 2013. This resulted in a decline in our revenues, with ongoing weak system sales in addition to lower aftermarket revenues, which were negatively impacted by low fab utilization rates and customers holding back on spending for consumables, spare parts and upgrades. During this period of market uncertainty, we continued to align our organization with market demands. In addition to tight control of discretionary spending, we also implemented other actions including headcount reductions and an unpaid shutdown during the first quarter of 2013. Our financial results also reflect efforts in recent years to lower our breakeven revenue levels to avoid significant losses in a downturn, while continuing to invest a significant portion of our personnel and financial resources in research and development programs. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for future interim periods or years as a whole. 13 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates Management's discussion and analysis of our financial condition and results of operations are based upon Axcelis' consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going 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. 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 Conditions and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012. Results of Operations The following table sets forth our results of operations as a percentage of total revenue: Three months ended March 31, 2013 2012 Revenue: Product 84.6 % 86.4 % Service 15.4 13.6 Total revenue 100.0 100.0 Cost of revenue: Product 54.4 53.2 Services 13.8 9.5 Total cost of revenue 68.2 62.7 Gross profit 31.8 37.3 Operating expenses: Research and development 22.6 21.2 Sales and marketing 12.8 12.0 General and administrative 16.2 14.2 Gain on sale of dry strip assets and intellectual property (0.9 ) - Restructuring charges 4.4 5.2 Total operating expenses 55.1 52.6 Loss from operations: (23.3 ) (15.3 ) Other income (expense): Interest income - - Other, net 2.0 (1.6 ) Total other income (expense) 2.0 (1.6 ) Loss before income taxes (21.3 ) (16.9 ) Income taxes 0.8 1.3 Net loss (22.1 )% (18.2 )% 14 -------------------------------------------------------------------------------- Table of Contents Revenue The following table sets forth our revenues. Three months ended Period-to-Period March 31, change 2013 2012 $ % (dollars in thousands) Revenues: Product $ 34,452 $ 47,538 $ (13,086 ) (27.5 )% Percentage of revenues 84.6 % 86.4 % Service 6,274 7,468 (1,194 ) (16.0 )% Percentage of revenues 15.4 % 13.6 % Total revenues $ 40,726 $ 55,006 $ (14,280 ) (26.0 )% Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 Product Product revenue which includes system sales, sales of spare parts and product upgrades was $34.5 million, or 84.6%, of revenue during the three months ended March 31, 2013, compared with $47.5 million, or 86.4% or revenue for the three months ended March 31, 2012. The decrease in product revenue is attributable to continued weak semiconductor market spending. A portion of our revenue from system sales is deferred until installation and other services related to future deliverables are performed. The total amount of deferred revenue at March 31, 2013 and December 31, 2012 was $6.0 million and $6.9 million, respectively. The decrease was mainly due to the decrease in systems sales in the first quarter of 2013 and the timing of acceptance of deferred system sales. Service Service revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $6.3 million, or 15.4% of revenue for the three months ended March 31, 2013, compared with $7.5 million, or 13.6% of revenue for the three months ended March 31, 2012. Service revenue fluctuates from period to period based on capacity utilization at customers' manufacturing facilities, which affects the need for equipment service. The decrease during the first quarter of 2013 was primarily due to a decrease in fabrication utilization in the semiconductor industry as compared to the first quarter of 2012. Revenue Categories used by Management As an alternative to the line item revenue categories discussed above, management also uses revenue categorizations which look at revenue by product line (the most significant of which is ion implant) and by aftermarket, as described below. Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 Ion Implant Included in total revenue of $40.7 million during the three months ended March 31, 2013 is revenue from sales of ion implantation products and related service of $32.3 million, or 79.4% of total revenue, compared with $40.4 million, or 73.5%, of total revenue for the three months ended March 31, 2012. The dollar decrease was due to the factors discussed above for product revenue. 15 -------------------------------------------------------------------------------- Table of Contents Aftermarket Our product revenue includes sales of spare parts and product upgrades as well as complete systems. We refer to the business of selling spare parts and product upgrades, combined with the sale of maintenance labor and service contracts and service hours, as the "aftermarket" business. Included in total revenue of $40.7 million during the three months ended March 31, 2013 is revenue from our aftermarket business of $28.0 million, compared to $32.1 million for the three months ended March 31, 2012. 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. The decrease in aftermarket revenue in first quarter of 2013 as compared to same period in 2012 was due to a decrease in fabrication utilization in the semiconductor industry that began in the second half of 2012 and has continued through the first quarter of 2013. Gross Profit / Gross Margin The following table sets forth our gross profit / gross margin. Three months ended Period-to-Period March 31, change 2013 2012 $ % (dollars in thousands) Gross Profit: Product $ 12,271 $ 18,254 $ (5,983 ) (32.8 )% Product gross margin 35.6 % 38.4 % Service 672 2,282 (1,610 ) (70.6 )% Service gross margin 10.7 % 30.6 % Total gross profit $ 12,943 20,536 $ (7,593 ) (37.0 )% Gross margin 31.8 % 37.3 % Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 Product Gross profit from product revenue was 35.6% for the three months ended March 31, 2013, compared to 38.4% for the three months ended March 31, 2012. The decrease in gross profit of 2.8 percentage points was primarily due to an incremental reserve for excess inventory which reduced gross profit by 5.7 percentage points, offset by a 2.9 percentage point increase in gross profit resulting from the favorable impact of an increased mix of parts and upgrade revenue at higher margins. The incremental reserve of $2.1 million was for our 300mm dry strip components. The asset purchase agreement with Lam permitted us to manufacture and sell dry strip products through September 2013. Due to changes in the forecasted sales for our dry strip products that become known in the current period, we determined that a portion of the dry strip inventory components were not recoverable. Service Service revenue gross margin was 10.7% for the three months ended March 31, 2013, compared to 30.6% for the three months ended March 31, 2012. The decrease in gross margin is attributable to lower sales volume and the unfavorable absorption of fixed service costs. 16 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table sets forth our operating expenses: Three months ended Period-to-Period March 31, change 2013 2012 $ % (dollars in thousands) Research and development $ 9,206 $ 11,669 $ (2,463 ) (21.1 )% Percentage of revenues 22.6 % 21.2 % Sales and marketing 5,201 6,583 (1,382 ) (21.0 )% Percentage of revenues 12.8 % 12.0 % General and administrative 6,590 7,799 (1,209 ) (15.5 )% Percentage of revenues 16.2 % 14.2 % Gain on sale of dry strip assets and intellectual property (368 ) - (368 ) - Percentage of revenues (0.9 )% 0.0 % Restructuring charges 1,801 2,881 (1,080 ) (37.5 )% Percentage of revenues 4.4 % 5.2 % Total operating expenses $ 22,430 $ 28,932 $ (6,502 ) (22.5 )% Percentage of revenues 55.1 % 52.6 % Our operating expenses consist primarily of personnel costs, including salaries, commissions, bonuses, share-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. At $12.9 million, personnel costs are our largest expense, representing 61.2% of our total operating expenses, excluding the gain on sale of the dry strip assets and intellectual property of $0.4 million and restructuring charges of $1.8 million for the three months ended March 31, 2013, as compared to $15.4 million, or 59.0%, for the three months ended March 31, 2012. We continue to align our organization with market demands and tightened control over our discretionary spending. As a result of the current economic conditions in the semiconductor industry, we took a number of actions in the first quarter of 2013 to reduce our operating expenses and manage our cash. These actions included a reduction in our global workforce; focusing our R&D spending on critical programs; and asking our employees to take one week of unpaid shutdown. The impact of these actions and our operating results are discussed below. Research and Development Three months ended Period-to-period March 31, change 2013 2012 $ % (dollars in thousands) Research and development $ 9,206 $ 11,669 $ (2,463 ) (21.1 )% Percentage of revenues 22.6 % 21.2 % Our ability to remain competitive depends largely on continuously developing innovative technology, with new and enhanced features and systems and introducing them at competitive prices on a timely basis. Accordingly, based on our strategic plan, we establish annual R&D budgets to fund programs that we expect will drive competitive advantages. Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 Research and development expense was $9.2 million during the three months ended March 31, 2013; a decrease of $2.5 million, or 21.1%, compared with $11.7 million during the three months ended March 13, 2012. The decrease included the reduction in payroll costs of $0.9 million as a result of lowering our headcount through reductions in force and the cost 17 -------------------------------------------------------------------------------- Table of Contents savings realized by one week of unpaid shutdown taken by our employees. As we focused our R&D spend on critical programs, consulting, project material and related costs decreased by $1.0 million and depreciation expense for internal use assets used as demonstration and/or test systems decreased by $0.5 million. Sales and Marketing Three months ended Period-to-period March 31, change 2013 2012 $ % (dollars in thousands)Sales and marketing $ 5,201 $ 6,583 $ (1,382 ) (21.0 )% Percentage of revenues 12.8 % 12.0 % Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force. Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 Sales and marketing expense was $5.2 million during the three months ended March 31, 2013; a decrease of $1.4 million, or 21.0%, compared with $6.6 million during the three months ended March 13, 2012. The decrease was primarily due to the reduction in payroll and related costs of $0.7 million as a result of lowering our headcount through reductions in force and the cost savings realized by one week of unpaid shutdown taken by our employees. As a result of our tightened control over discretionary spending, we reduced our travel and entertainment costs by $0.2 million; consulting expenses by $0.2 million; and facilities related expenses by $0.1 million. General and Administrative Three months ended Period-to-period March 31, change 2013 2012 $ % (dollars in thousands)General and administrative $ 6,590 $ 7,799 $ (1,209 ) (15.5 )% Percentage of revenues 16.2 % 14.2 % Our general and administrative expenses result primarily from the costs associated with our executive, finance, legal and human resource functions. Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 General and administrative expense was $6.6 million during the three months ended March 31, 2013; a decrease of $1.2 million, or 15.5%, compared with $7.8 million during the three months ended March 13, 2012. The decrease was primarily due to the reduction in payroll and related costs of $0.9 million as a result of lowering our headcount through reductions in force and the cost savings realized by one week of unpaid shutdown taken by our employees. As a result of our tightened control over discretionary spending we reduced our professional fees and facilities related expenses during the three months ended March 31, 2013 as compared to the same period in 2012. 18 -------------------------------------------------------------------------------- Table of Contents Gain on Sale of Dry Strip Assets and Intellectual Property In December 2012, we sold our dry strip assets and intellectual property to Lam. A portion of the purchase consideration ($2.0 million) was contingent upon our achieving certain milestones. During the first quarter of 2013, we recorded $0.4 million for the proceeds received based on our achievement of a milestone. This amount was partially offset by additional costs associated with the lab system purchased. Restructuring Charges Three months ended Period-to-period March 31, change 2013 2012 $ % (dollars in thousands) Restructuring charges $ 1,801 $ 2,881 $ (1,080 ) (37.5 )% Percentage of revenues 4.4 % 5.2 % Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 We continue to align our organization with market demands. Due to the current economic conditions in the semiconductor industry, we implemented reductions in force in the periods presented to improve the focus of our operations, control costs, achieve future profitability and conserve cash. As a result of these actions, we recorded a restructuring expense for severance and related costs of $1.8 million and $2.9 million during the three-month periods ended March 31, 2013 and 2012, respectively. Other Income (Expense) Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012 Other income was $0.8 million for the three months ended March 31, 2013 compared with other expenses of $0.9 million for the three months ended March 31, 2012. Other income (expense) consists primarily of 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, interest earned on our invested cash balances and bank fees associated with maintaining our credit facility. During the three-month periods ended March 31, 2013 and 2012, we had no significant off-balance-sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Income Taxes Income tax expense was $0.3 million and $0.7 million for the three-month periods ended March 31, 2013 and 2012, respectively. Our income tax expense is due primarily to operating results of foreign entities in jurisdictions in Europe and Asia, where we earn taxable income. 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. Additionally, we do not recognize the tax benefit for such losses in the United States and certain European taxing jurisdictions. Liquidity and Capital Resources 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 product lines, and others relate to the uncertainties of global economies, including the availability of credit and the condition of the overall semiconductor equipment industry. Our established cost structure does not vary significantly with changes in volume, which limits our ability to reduce costs in proportion to declining sales. We have tried to reduce operating expense to achieve profitability towards the lower end of our quarterly revenue swings. Therefore, we experience fluctuations in operating results and cash flows depending on our revenue as driven by the level of capital expenditures by semiconductor manufacturers. During the three-month periods ended March 31, 2013 and 2012, the Company used $1.9 million and $9.7 million, respectively, of cash to support operating activities. The cash used by operations during the three months ended March 31, 19 -------------------------------------------------------------------------------- Table of Contents 2013 was predominately driven by the Company's loss from operations excluding non-cash charges for depreciation and amortization and stock based compensation expense, the decrease in purchases of inventories, and the increase in our accounts payable and accrued liability balances. Investing activities included $0.4 million in cash received for the achievement of a milestone associated with the Lam transaction and partially offset the use of cash in operations, resulting in cash and cash equivalents at March 31, 2013 of $42.4 million, compared to $45.0 million at December 31, 2012. Financing activities were not significant. Our revolving credit facility with a bank provides for borrowings up to $30.0 million based primarily on accounts receivable. The facility has certain financial covenants requiring us to maintain minimum levels of operating results and liquidity. The agreement will terminate on April 10, 2015. We use the facility to support letters of credit and for short term borrowing as needed. At March 31, 2013, our available borrowing capacity under the credit facility was $13.0 million and we were compliant with all covenants of the loan agreement. There were no borrowings against this facility during the three months ended March 31, 2013. 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. In the event that demand for our products declines in future periods, we believe we can align manufacturing and operating spending levels to the changing business conditions and provide sufficient liquidity to support operations. Commitments and Contingencies Significant commitments and contingencies at March 31, 2013 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, 2012. |