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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) 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. Our established cost structure does not vary significantly with changes in volume. We may experience fluctuations in operating results and cash flows depending on our revenue as driven by the level of capital expenditures by semiconductor manufacturers. Consolidation and partnering within the semiconductor manufacturing industry has resulted in a small number of customers representing a substantial portion of our business. Our net revenue from our ten largest customers accounted for 81.2% of total revenue for the three months ended March 31, 2014 compared to 59.7% of revenue for the three months ended March 31, 2013. A successful semiconductor equipment manufacturer must not only provide some of the most technically complex products manufactured in the world but also must design its business to thrive during the inevitable low points in the cycle. The industry has been in a period of gradual market improvement since the second quarter of 2013, which is expected to continue into 2015, although growth may slow or accelerate from one quarter to another during this period. Our recent financial results reflect increasing sales of our innovative Purion ion implantation systems, and our continued investment in research and development programs related to our Purion ion implantation products. These results also reflect our efforts to lower our breakeven revenue levels by maintaining tight control of discretionary spending. Throughout 2014 we expect to continue to grow Purion system sales and maintain tight control of our cost structure. In the event that industry conditions cause the demand for our products to decline in future periods, we believe that we can align manufacturing and operating expense levels to changing business conditions and maintain sufficient liquidity to support operations. Our expectations for system sales, revenue growth, and profitability are subject to risks that may cause our actual results to differ materially from our expectations. These risks include the timing and degree of customer acceptance of our products, the continuing demand for ion implantation equipment, overall activity levels of semiconductor manufacturing, competitive pressure on sales and pricing, increases in material and other production costs that cannot be recouped in product pricing and global economic, political and financial conditions. 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. 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, 2013. 13 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of operations as a percentage of total revenue: Three months ended March 31, 2014 2013 Revenue: Product 90.4 % 84.6 % Services 9.6 15.4 Total revenue 100.0 100.0 Cost of revenue: Product 55.6 54.4 Services 8.7 13.8 Total cost of revenue 64.3 68.2 Gross profit 35.7 31.8 Operating expenses: Research and development 15.2 22.6 Sales and marketing 9.0 12.8 General and administrative 10.7 16.2 Gain on sale of dry strip assets and intellectual property - (0.9 ) Restructuring charges 0.3 4.4 Total operating expenses 35.2 55.1 Income (loss) from operations 0.5 (23.3 ) Other income (expense): Interest income - - Interest expense (0.4 ) - Other, net 0.5 2.0 Total other income 0.1 2.0 Income (loss) before income taxes 0.6 (21.3 ) Income taxes 0.3 0.8 Net income (loss) 0.3 % (22.1 )% Revenue The following table sets forth our revenues. Three months ended Period-to-Period March 31, change 2014 2013 $ % (dollars in thousands) Revenues: Product $ 55,015 $ 34,452 $ 20,563 59.7 % Percentage of revenues 90.4 % 84.6 % Services 5,825 6,274 (449 ) (7.2 )% Percentage of revenues 9.6 % 15.4 % Total revenues $ 60,840 $ 40,726 $ 20,114 49.4 % Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 Product Product revenue which includes system sales, sales of spare parts, product upgrades and used systems was $55.0 million, or 90.4% of revenue during the three months ended March 31, 2014, compared with $34.5 million, or 84.6% of 14 -------------------------------------------------------------------------------- Table of Contents revenue for the three months ended March 31, 2013. The increase in product revenue is attributable to improved semiconductor market spending which has increased system revenue levels. 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, 2014 and December 31, 2013 was $4.1 million and $4.7 million, respectively. The decrease was mainly due to the timing of system shipments and the timing of acceptance of deferred system sales. Services Service revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $5.8 million, or 9.6% of revenue for the three months ended March 31, 2014, compared with $6.3 million, or 15.4% of revenue for the three months ended March 31, 2013. Although service revenue should increase 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. The slight decrease during the first quarter of 2014 was primarily due to changes in the mix and timing of service contracts as compared to the first quarter of 2013. 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 systems and aftermarket as described below. Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 Systems Included in total revenue of $60.8 million during the three months ended March 31, 2014 is revenue from sales of systems of $32.5 million, or 53.4% of total revenue, compared with $12.7 million, or 31.2%, of total revenue for the three months ended March 31, 2013. The increase was due to higher sales of Purion systems in an improved semiconductor equipment market. Aftermarket We refer to the business of selling spare parts, product upgrades and used systems, combined with the sale of maintenance labor and service contracts and service hours, as the "aftermarket" business. Included in total revenue of $60.8 million during the three months ended March 31, 2014 is revenue from our aftermarket business of $28.3 million, compared to $28.0 million for the three months ended March 31, 2013. Aftermarket revenue generally increases with the expansion of the installed base of systems, but can fluctuate from period to period based on capacity utilization at customers' manufacturing facilities which affects the sale of spare parts and demand for equipment service. 15 -------------------------------------------------------------------------------- Table of Contents Gross Profit / Gross Margin The following table sets forth our gross profit / gross margin. Three months ended Period-to-Period March 31, change 2014 2013 $ % (dollars in thousands) Gross Profit: Product $ 21,213 $ 12,271 $ 8,942 72.9 % Product gross margin 38.6 % 35.6 % Services 527 672 (145 ) (21.6 )% Service gross margin 9.0 % 10.7 % Total gross profit $ 21,740 $ 12,943 $ 8,797 68.0 % Gross margin 35.7 % 31.8 % Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 Product Gross profit from product revenue was 38.6% for the three months ended March 31, 2014, compared to 35.6% for the three months ended March 31, 2013. The increase in gross profit of 3.0 percentage points resulted from the net effect of higher systems sales volume and the related favorable absorption of fixed overhead costs, a lower provision for excess inventory and a decreased mix of parts and upgrade revenue. Services Gross profit from service revenue was 9.0% for the three months ended March 31, 2014, compared to 10.7% for the three months ended March 31, 2013. The decrease in gross profit is attributable to changes in the mix of service contracts. 16 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table sets forth our operating expenses: Three months ended Period-to-Period March 31, change 2014 2013 $ % (dollars in thousands) Research and development $ 9,257 $ 9,206 $ 51 0.6 % Percentage of revenues 15.2 % 22.6 % Sales and marketing 5,476 5,201 275 5.3 % Percentage of revenues 9.0 % 12.8 % General and administrative 6,481 6,590 (109 ) (1.7 )% Percentage of revenues 10.7 % 16.2 % Gain on sale of dry strip assets and intellectual property - (368 ) 368 (100.0 )% Percentage of revenues 0.0 % (0.9 )% Restructuring charges 200 1,801 (1,601 ) (88.9 )% Percentage of revenues 0.3 % 4.4 % Total operating expenses $ 21,414 $ 22,430 $ (1,016 ) (4.5 )% Percentage of revenues 35.2 % 55.1 % 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 $12.6 million, personnel costs are our largest expense, representing 59.5% of our total operating expenses, excluding restructuring charges of $0.2 million, for the three months ended March 31, 2014, as compared to $12.9 million, or 61.2%, for the three months ended March 31, 2013. Research and Development Three months ended Period-to-period March 31, change 2014 2013 $ % (dollars in thousands) Research and development $ 9,257 $ 9,206 $ 51 0.6 % Percentage of revenues 15.2 % 22.6 % 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, 2014 Compared with Three Months Ended March 31, 2013 Research and development expense was $9.3 million during the three months ended March 31, 2014; an increase of less than $0.1 million, or 0.6%, compared with $9.2 million during the three months ended March 31, 2013. The increase included higher research and development supplies and related costs offset by a reduction in payroll costs. 17 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Three months ended Period-to-period March 31, change 2014 2013 $ % (dollars in thousands)Sales and marketing $ 5,476 $ 5,201 $ 275 5.3 % Percentage of revenues 9.0 % 12.8 % 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, 2014 Compared with Three Months Ended March 31, 2013 Sales and marketing expense was $5.5 million during the three months ended March 31, 2014; an increase of $0.3 million, or 5.3%, compared with $5.2 million during the three months ended March 31, 2013. The change was primarily due to increases in payroll related costs and stock-based compensation expense. General and Administrative Three months ended Period-to-period March 31, change 2014 2013 $ % (dollars in thousands) General and administrative $ 6,481 $ 6,590 $ (109 ) (1.7 )% Percentage of revenues 10.7 % 16.2 % 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, 2014 Compared with Three Months Ended March 31, 2013 General and administrative expense was $6.5 million during the three months ended March 31, 2014; a decrease of $0.1 million, or 1.7%, compared with $6.6 million during the three months ended March 31, 2013. The decrease was primarily due to a reduction in payroll and related costs partially offset by an increase in professional service fees relating to our patents. 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 a lab system purchased by Lam. The Company is no longer eligible to achieve additional milestones. Restructuring Charges Three months ended Period-to-period March 31, change 2014 2013 $ % (dollars in thousands)Restructuring charges $ 200 $ 1,801 $ (1,601 ) (88.9 )% Percentage of revenues 0.3 % 4.4 % Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 We continue to align our organization with market demands. 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 $0.2 million and $1.8 million during the three-month periods ended March 31, 2014 and 2013, respectively. Other Income Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013 Other income was less than $0.1 million for the three months ended March 31, 2014 compared with other income of $0.8 million for the three months ended March 31, 2013. 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, bank fees associated with our financing arrangements and interest expense related to the term loan. During the three-month periods ended March 31, 2014 and 2013, we had no significant off-balance-sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Income Taxes Three months ended Period-to-period March 31, change 2014 2013 $ % (dollars in thousands) Income taxes $ 195 $ 333 $ (138 ) (41.4 )% Percentage of revenues 0.3 % 0.8 % We incur income tax expense relating principally to operating results of foreign entities in Europe and Asia, where we earn taxable income. We have significant net operating loss carryforwards in the United States and certain European tax 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 losses in the United States and certain European tax jurisdictions as we believe it is more likely than not that these benefits will not be recognized. 19 -------------------------------------------------------------------------------- Table of Contents The Financial Accounting Standards Board issued Accounting Standards Update (ASU) Number 2013-11 in July 2013 which requires that a reserve for an unrecognized tax benefit be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions. We have adopted this ASU effective January 1, 2014. This adoption did not have a material impact on our consolidated balance sheets. 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 products, 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. We experience fluctuations in operating results and cash flows depending on these changes in revenue levels. During the three-month periods ended March 31, 2014 and 2013, the Company used $4.0 million and $1.9 million, respectively, of cash to support operating activities. The cash used by operations during the three months ended March 31, 2014 was predominately driven by the Company's income from operations excluding non-cash charges for depreciation and amortization, and stock based compensation expense; the increase in accounts receivable, the increase in prepaid expenses and other current assets, and the decrease in our accounts payable and accrued liability balances. Investing activities included $0.2 million used for capital expenditures. Financing activities included $1.3 million of cash received upon exercise of stock options. Our revolving credit facility with Silicon Valley Bank provides for borrowings of up to $10.0 million on a revolving basis during a two year term ending October 31, 2015, based primarily on accounts receivable. The Company's ability to borrow under this line of credit is limited to 80% of the then current amount of qualified accounts receivable. At March 31, 2014, our available borrowing capacity under the credit facility was $8.9 million and we were in compliance with all covenants related to the credit facility. There were no borrowings against this facility during the three months ended March 31, 2014. The revolving credit facility is used by the Company to support letters of credit and for short-term borrowing, as needed. We make monthly interest payments on our $15.0 million mortgage under a July 2013 Business Loan Agreement with Northern Bank & Trust Company. The loan bears interest at 5.5% per annum. Principal payments, based on a ten year amortization schedule, will commence in August 2014, with the remaining principal amount due in July 2016. The Company's financial results for the quarter ended March 31, 2014 caused the Company to not meet the Debt Service Ratio covenant in the Business Loan Agreement, which covenant was waived by Northern Bank & Trust Company. In addition, the parties have entered into a letter agreement dated as of May 2, 2014, which amended the Debt Service Ratio covenant to defer its effectiveness until September 30, 2014. We were in compliance with all other covenants associated with the mortgage during the first quarter of 2014. 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. 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. Our expectation for adequate liquidity is subject to risks that may cause our actual results to differ materially from our expectations. These risks include the timing and degree of customer acceptance of our products, the continuing demand for ion implantation equipment, overall activity levels of semiconductor manufacturing, competitive pressure on sales and pricing, increases in material and other production costs that cannot be recouped in product pricing and global economic, political and financial conditions. Commitments and Contingencies Significant commitments and contingencies at March 31, 2014 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, 2013. 20 -------------------------------------------------------------------------------- Table of Contents |