TMCnet News
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. Most of our cost structure does not automatically vary with changes in volume, so we must take action to align expenses to varying levels of revenue, at times incurring restructuring costs. As a result, we experience fluctuations in operating results and cash flows depending on our revenue as driven by the level of capital expenditures by semiconductor manufacturers. After a period of gradual market improvement that began in the second quarter of 2013, we entered a market pause in the second quarter of 2014, in which customers delayed purchasing decisions. We expect the industry to improve in late 2014, with improved conditions continuing into 2015. Growth may slow or accelerate from one quarter to another during this period. Our recent financial results reflect this industry pause. A successful semiconductor equipment manufacturer must not only provide some of the most technically complex products manufactured in the world but must also design its business to thrive during the inevitable low points in the cycle. Accordingly, we are taking further aggressive actions in the third quarter of 2014 to reduce and align manufacturing and operating expense levels to our current business conditions and maintain sufficient liquidity to support operations. Our first Purion H high current ion implanter was shipped in the second quarter of 2014, and we expect to continue to place Purion systems with customers in 2014. As the industry improves in late 2014, we expect to grow system sales of our full platform of Purion products. Our expectations regarding the industry environment and our own sales are forward looking statements. Actual future results may vary from our current expectations due to a variety of economic and business factors. 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 74.0% of total revenue for the six months ended June 30, 2014; compared to 70.0% of revenue for the six months ended June 30, 2013. 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, 2013. 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, 2014 2013 2014 2013 Revenue: Product 84.6 % 85.8 % 88.1 % 85.3 % Services 15.4 14.2 11.9 14.7 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Product 51.1 53.6 53.8 54.0 Services 13.7 11.2 10.7 12.4 Total cost of revenue 64.8 64.8 64.5 66.4 Gross profit 35.2 35.2 35.5 33.6 Operating expenses: Research and development 21.5 17.9 17.7 20.1 Sales and marketing 12.2 11.7 10.3 12.2 General and administrative 15.8 13.5 12.7 14.7 Gain on sale of dry strip assets and intellectual property 0.0 (1.7 ) 0.0 (1.3 ) Restructuring charges 0.4 0.9 0.4 2.5 Total operating expenses 49.9 42.3 41.1 48.2 Loss from operations (14.7 ) (7.1 ) (5.6 ) (14.6 ) Other income (expense): Interest income 0.0 0.0 0.0 0.0 Interest expense (0.6 ) (0.1 ) (0.5 ) (0.1 ) Other, net (0.9 ) (0.7 ) (0.1 ) 0.7 Total other income (expense) (1.5 ) (0.8 ) (0.6 ) 0.6 Loss before income taxes (16.2 ) (7.9 ) (6.2 ) (14.0 ) Income taxes 0.6 0.6 0.4 0.7 Net loss (16.8 )% (8.5 )% (6.6 )% (14.7 )% 14 -------------------------------------------------------------------------------- Table of Contents Revenue The following table sets forth our revenues. Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Revenues: Product $ 34,795 $ 40,769 $ (5,974 ) (14.7 )% $ 89,810 $ 75,220 $ 14,590 19.4 % Percentage of revenues 84.6 % 85.8 % 88.1 % 85.3 % Services 6,355 6,732 (377 ) (5.6 )% 12,180 13,006 (826 ) (6.4 )% Percentage of revenues 15.4 % 14.2 % 11.9 % 14.7 % Total revenues $ 41,150 $ 47,501 $ (6,351 ) (13.4 )% $ 101,990 $ 88,226 $ 13,764 15.6 % Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013 Product Product revenue, which includes system sales, sales of spare parts, product upgrades, and used systems was $34.8 million, or 84.6%, of revenue during the three months ended June 30, 2014, compared with $40.8 million, or 85.8% of revenue for the three months ended June 30, 2013. The year over year decrease in product revenue is attributable to system push-outs at a time of overall muted customer 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 June 30, 2014 and December 31, 2013 was $4.3 million and $4.7 million, respectively. The decrease was mainly due to the timing of systems sales during the three months ended June 30, 2014, and the timing of acceptance of deferred system sales. Services Service revenue, which remained relatively flat, includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $6.4 million, or 15.4% of revenue for the three months ended June 30, 2014, compared with $6.7 million, or 14.2% of revenue for the three months ended June 30, 2013. Service revenue fluctuates from period to period based on capacity utilization at customers' manufacturing facilities, which affects the need for equipment service. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Product Product revenue was $89.8 million, or 88.1% of revenue for the six months ended June 30, 2014, compared with $75.2 million, or 85.3% of revenue for the six months ended June 30, 2013. The increase in product revenue is attributable to improved semiconductor market spending, specifically during the first three months of 2014, which was partially offset by lower system sales during the three-months ended June 30, 2014. Services Service revenue was $12.2 million, or 11.9% of revenue for the six months ended June 30, 2014, compared with $13.0 million, or 14.7% of revenue for the six months ended June 30, 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 was primarily due to changes in the mix and timing of service contracts. 15 -------------------------------------------------------------------------------- Table of Contents 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 June 30, 2014 Compared with Three Months Ended June 30, 2013 Systems Included in total revenue of $41.2 million during the three months ended June 30, 2014 is revenue from sales of systems of $10.9 million, or 26.4% of total revenue, compared with $16.6 million, or 35.0%, of total revenue for the three months ended June 30, 2013. The decrease was due primarily to the factors described above for product revenue. 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 $41.2 million during the three months ended June 30, 2014 is revenue from our aftermarket business of $30.3 million, which is relatively flat when compared to $30.9 million for the three months ended June 30, 2013. 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 tools. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Systems Included in total revenue of $102.0 million during the six months ended June 30, 2014 is revenue from sales of systems of $43.3 million, or 42.5% of total revenue, compared with $29.3 million, or 33.2% of total revenue for the six months ended June 30, 2013. The increase was due to higher sales of Purion systems in an improved semiconductor equipment market during the first three months of 2014, which was partially offset by lower system sales during the three-months ended June 30, 2014. Aftermarket Included in total revenue of $102.0 million during the six months ended June 30, 2014 is revenue from our aftermarket business of $58.7 million, or 57.5%, flat compared to $58.9 million, or 66.8% for the six months ended June 30, 2013. 16 -------------------------------------------------------------------------------- Table of Contents 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 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Gross Profit: Product $ 13,774 $ 15,312 $ (1,538 ) (10.0 )% $ 34,987 $ 27,582 $ 7,405 26.8 % Product gross margin 39.6 % 37.6 % 39.0 % 36.7 % Services 710 1,425 (715 ) (50.2 )% 1,237 2,096 (859 ) (41.0 )% Services gross margin 11.2 % 21.2 % 10.2 % 16.1 % Total gross profit $ 14,484 $ 16,737 $ (2,253 ) (13.5 )% $ 36,224 $ 29,678 $ 6,546 22.1 % Gross margin 35.2 % 35.2 % 35.5 % 33.6 % Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013 Product Gross profit from product revenue was 39.6% for the three months ended June 30, 2014, compared to 37.6% for the three months ended June 30, 2013. The increase in gross profit is due to an increased mix of parts and upgrade revenue partially offset by lower systems sales volumes. Services Gross profit from service revenue was 11.2% for the three months ended June 30, 2014, compared to 21.2% for the three months ended June 30, 2013. The decrease in gross profit is due to lower sales volumes and the mix of service contracts. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Product Gross profit from product revenue was 39.0% for the six months ended June 30, 2014, compared to 36.7% for the six months ended June 30, 2013. The increase in gross profit is due to 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 10.2% for the six months ended June 30, 2014, compared to 16.1% for the six months ended June 30, 2013. The decrease in gross profit is due to lower sales volumes and the mix of service contracts. 17 -------------------------------------------------------------------------------- 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 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Research and development $ 8,845 $ 8,503 $ 342 4.0 % $ 18,102 $ 17,709 $ 393 2.2 % Percentage of revenues 21.5 % 17.9 % 17.7 % 20.1 % Sales and marketing 5,037 5,594 (557 ) (10.0 )% 10,513 10,796 (283 ) (2.6 )% Percentage of revenues 12.2 % 11.7 % 10.3 % 12.2 % General and administrative 6,494 6,412 82 1.3 % 12,975 13,001 (26 ) (0.2 )% Percentage of revenues 15.8 % 13.5 % 12.7 % 14.7 % Gain on Sale of Dry Strip Assets and Intellectual Property - (799 ) 799 (100.0 )% - (1,167 ) 1,167 (100.0 )% Percentage of revenues 0.0 % (1.7 )% 0.0 % (1.3 )% Restructuring charges 160 421 (261 ) (62.0 )% 360 2,222 (1,862 ) (83.8 )% Percentage of revenues 0.4 % 0.9 % 0.4 % 2.5 % Total operating expenses $ 20,536 $ 20,131 $ 405 2.0 % $ 41,950 $ 42,561 $ (611 ) (1.4 )% Percentage of revenues 49.9 % 42.3 % 41.1 % 48.2 % Our operating expenses consist primarily of personnel costs, including salaries, commissions, expected incentive plan payouts, 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. Personnel costs are our largest expense, representing $11.8 million and $24.4 million, or 58.0% and 58.7%, of our total operating expenses for the three and six-month periods ended June 30, 2014, respectively. For the three and six month periods ended June 30, 2013, personnel costs were $11.6 million and $24.5 million, or 58.4% and 59.9%, of our total operating expenses, excluding the gain on sale of the dry strip assets and intellectual property and restructuring charges,. Research and Development Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Research and development $ 8,845 $ 8,503 $ 342 4.0 % $ 18,102 $ 17,709 $ 393 2.2 % Percentage of revenues 21.5 % 17.9 % 17.7 % 20.1 % 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 June 30, 2014 Compared with Three Months Ended June 30, 2013 Research and development expense was $8.8 million during the three months ended June 30, 2014; relatively flat when compared with $8.5 million during the three months ended June 30, 2013. 18 -------------------------------------------------------------------------------- Table of Contents Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Research and development expense was $18.1 million during the six months ended June 30, 2014; relatively flat when compared with $17.7 million during the six months ended June 30, 2013. Sales and Marketing Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Sales and marketing $ 5,037 $ 5,594 $ (557 ) (10.0 )% $ 10,513 $ 10,796 $ (283 ) (2.6 )% Percentage of revenues 12.2 % 11.7 % 10.3 % 12.2 % Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force. Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013 Sales and marketing expense was $5.0 million during the three months ended June 30, 2014; a decrease of $0.6 million, or 10.0%, compared with $5.6 million during the three months ended June 30, 2013. The decrease was primarily due to lower new tool evaluation costs. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 Sales and marketing expense was $10.5 million during the six months ended June 30, 2014; relatively flat when compared with $10.8 million during the six months ended June 30, 2013. General and Administrative Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) General and administrative $ 6,494 $ 6,412 $ 82 1.3 % $ 12,975 $ 13,001 $ (26 ) (0.2 )% Percentage of revenues 15.8 % 13.5 % 12.7 % 14.7 % Our general and administrative expenses result primarily from the costs associated with our executive, finance, legal and human resource functions. Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013 General and administrative expense was $6.5 million during the three months ended June 30, 2014; compared with $6.4 million during the three months ended June 30, 2013, essentially flat for the second quarter. Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013 General and administrative expense was $13.0 million during the six months ended June 30, 2014 and June 30, 2013. 19 -------------------------------------------------------------------------------- Table of Contents Gain on Sale of Dry Strip Assets and Intellectual Property Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Gain on Sale of Dry Strip Assets and Intellectual Property $ - $ (799 ) $ 799 (100.0 )% $ - $ (1,167 ) $ 1,167 (100.0 )% Percentage of revenues 0.0 % (1.7 )% 0.0 % (1.3 )% In December 2012, we sold our dry strip assets and intellectual property to Lam. A portion of the purchase consideration (up to $2.0 million) was contingent upon our achieving certain milestones. During the three and six-month periods ended June 30, 2013, the Company recorded $0.8 million and $1.2 million, respectively, for the milestones achieved. These amounts were partially offset by additional costs associated with the lab system purchased by Lam. Restructuring Charges Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Restructuring charges $ 160 $ 421 $ (261 ) (62.0 )% $ 360 $ 2,222 $ (1,862 ) (83.8 )% Percentage of revenues 0.4 % 0.9 % 0.4 % 2.5 % 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 restructuring expense for severance and related costs during the three and six-month periods ended June 30, 2014 and 2013, respectively. Other Income (Expense) Three months ended Period-to-Period Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Other income (expense) $ (617 ) $ (362 ) $ (255 ) (70.4 )% $ (574 ) $ 471 $ (1,045 ) (221.9 )% Percentage of revenues (1.5 )% (0.8 )% (0.6 )% 0.6 % 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 our term loan. The $0.3 million increase in other expense for the three month period ended June 30, 2014 compared with the three month period ended June 30, 2013, related primarily to the interest expense on our term loan. The $1.0 million increase in other expense for the six month period ended June 30, 2014 compared with the six month period ended June 30, 2013, was primarily due a reduction of foreign exchange gains of $0.6 million in 2014 compared to 2013 and due to interest expense on our term loan of $0.4 million. 20 -------------------------------------------------------------------------------- Table of Contents During the three and six-month periods ended June 30, 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 Six months ended Period-to-Period June 30, Change June 30, Change 2014 2013 $ % 2014 2013 $ % (dollars in thousands) Income taxes $ 231 $ 263 $ (32 ) (12.2 )% $ 426 $ 596 $ (170 ) (28.5 )% Percentage of revenues 0.6 % 0.6 % 0.4 % 0.7 % 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 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. 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. Most of our cost structure does not automatically vary with changes in volume, so we must take action to align expenses to varying levels of revenue, at times incurring restructuring costs. As a result, we experience fluctuations in operating results and cash flows depending on these changes. During the six month periods ended June 30, 2014 and 2013, the Company used $11.9 million and $10.8 million, respectively, of cash to support operating activities. The net cash used by operating activities during the six months ended June 30, 2014 was predominately driven by the Company's loss from operations excluding non-cash charges for depreciation and amortization and stock based compensation, increases in inventories and accounts payables and other liabilities partially offset by decreases in accounts receivable and other assets and liabilities. In that period, net cash used for investing activities of $0.6 million was for capital expenditures. Net cash provided by financing activities in the same period was $1.8 million, primarily due to the exercise of stock options. These changes resulted in cash and cash equivalents at June 30, 2014 of $35.6 million, compared to $46.3 million at December 31, 2013. We have a revolving credit facility with Silicon Valley Bank dated October 31, 2013 and amended on August 1, 2014 with a Waiver and Amendment Agreement. Under this revolving credit facility, we have the ability to borrow up to $10.0 million on a revolving basis during its two year term. Our ability to borrow under this line of credit is limited to 80% of the then current amount of qualified accounts receivable. At June 30, 2014, our available borrowing capacity under the credit facility was $8.9 million. There were no borrowings against this facility during the six months ended June 30, 2014. We were in compliance with all covenants related to the credit facility, with the exception of the Minimum Adjusted Net Income covenant, which was waived under the Waiver and Amendment Agreement. 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. Monthly principal payments, based on a ten year amortization schedule, will commence in August 2014, with the remaining principal amount due in July 2016. The Business Loan Agreement was amended in May 2014 to defer to September 30, 2014 the effectiveness of a covenant establishing a minimum ratio of net income to debt service expense, waiving the Company's non-compliance with that covenant at March 31, 2014. The Company was in compliance with all covenants associated with the term loan during the second 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. 21 -------------------------------------------------------------------------------- Table of Contents In light of the current industry environment, we are taking further aggressive actions in the third quarter of 2014 to reduce and align manufacturing and operating expense levels to our current business conditions and maintain sufficient liquidity to support operations. Our expectations regarding our liquidity are forward looking statements. Actual future results may vary from our current expectations due to a variety of economic and business factors. Commitments and Contingencies Significant commitments and contingencies at June 30, 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. |