AXCELIS TECHNOLOGIES INC - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended June 30, 2014

 

Or

 

 

For the transition period from               to               

 

Commission file number 000-30941

 

AXCELIS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

108 Cherry Hill Drive

Beverly, Massachusetts 01915

(Address of principal executive offices, including zip code)

 

(978) 787-4000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o .

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes o  No x

 

As of July 29, 2014 there were 111,586,627 shares of the registrant’s common stock outstanding.

 

 

Table of Contents

 

Table of Contents

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013	3
	Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013	4
	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Overview	13
	Critical Accounting Estimates	14
	Results of Operations	14
	Liquidity and Capital Resources	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24

 

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PART 1—FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Axcelis Technologies, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Revenue:
Product		$	34,795		$	40,769		$	89,810		$	75,220
Services		6,355			6,732			12,180			13,006
Total revenue		41,150			47,501			101,990			88,226
Cost of revenue:
Product		21,021			25,457			54,823			47,638
Services		5,645			5,307			10,943			10,910
Total cost of revenue		26,666			30,764			65,766			58,548
Gross profit		14,484			16,737			36,224			29,678
Operating expenses:
Research and development		8,845			8,503			18,102			17,709
Sales and marketing		5,037			5,594			10,513			10,796
General and administrative		6,494			6,412			12,975			13,001
Gain on sale of dry strip assets and intellectual property		—			(799		)	—			(1,167		)
Restructuring charges		160			421			360			2,222
Total operating expenses		20,536			20,131			41,950			42,561
Loss from operations		(6,052		)	(3,394		)	(5,726		)	(12,883		)
Other income (expense):
Interest income		2			3			4			6
Interest expense		(257		)	(51		)	(508		)	(115		)
Other, net		(362		)	(314		)	(70		)	580
Total other income (expense)		(617		)	(362		)	(574		)	471
Loss before income taxes		(6,669		)	(3,756		)	(6,300		)	(12,412		)
Income taxes		231			263			426			596
Net loss		$	(6,900	)	$	(4,019	)	$	(6,726	)	$	(13,008	)
Net loss per share
Basic and Diluted		$	(0.06	)	$	(0.04	)	$	(0.06	)	$	(0.12	)
Shares used in computing net loss per share:
Basic and diluted weighted average common shares		111,212			108,409			110,932			108,319

 

See accompanying Notes to these Consolidated Financial Statement

 

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Axcelis Technologies, Inc.

Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Net loss		$	(6,900	)	$	(4,019	)	$	(6,726	)	$	(13,008	)
Other comprehensive income (loss):
Foreign currency translation adjustments		759			119			82			(1,959		)
Amortization of actuarial gains from pension plan		6			8			12			16
Total other comprehensive income (loss)		765			127			94			(1,943		)
Comprehensive loss		$	(6,135	)	$	(3,892	)	$	(6,632	)	$	(14,951	)

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

		June 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	35,588		$	46,290
Accounts receivable, net		32,067			36,587
Inventories, net		106,650			95,789
Prepaid expenses and other current assets		7,572			6,242
Total current assets		181,877			184,908
Property, plant and equipment, net		31,340			32,006
Long-term restricted cash		825			825
Other assets		12,539			15,810
Total assets		$	226,581		$	233,549
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	17,379		$	19,451
Accrued compensation		3,975			4,845
Warranty		1,326			1,316
Income taxes		430			417
Deferred revenue		4,227			4,387
Current portion of long-term debt		1,054			471
Other current liabilities		3,681			4,573
Total current liabilities		32,072			35,460
Long-term debt		13,946			14,529
Long-term deferred revenue		101			322
Other long-term liabilities		7,136			7,236
Total liabilities		53,255			57,547
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.001 par value, 30,000 shares authorized; none issued or outstanding		—			—
Common stock, $0.001 par value, 300,000 shares authorized; 111,643 shares issued and 111,523 shares outstanding at June 30, 2014; 110,225 shares issued and 110,105 shares outstanding at December 31, 2013		112			110
Additional paid-in capital		514,946			510,992
Treasury stock, at cost, 120 shares at June 30, 2014 and December 31, 2013		(1,218		)	(1,218		)
Accumulated deficit		(346,347		)	(339,621		)
Accumulated other comprehensive income		5,833			5,739
Total stockholders’ equity		173,326			176,002
Total liabilities and stockholders’ equity		$	226,581		$	233,549

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Six months ended
		June 30,
		2014			2013
Cash flows from operating activities
Net loss		$	(6,726	)	$	(13,008	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		2,299			2,719
Gain on sale of dry strip assets and intellectual property		—			(1,167		)
Deferred taxes		334			52
Stock-based compensation expense		2,182			1,644
Provision for excess and obsolete inventory		244			2,370
Changes in operating assets & liabilities:
Accounts receivable		4,493			(5,587		)
Inventories		(10,917		)	431
Prepaid expenses and other current assets		(1,334		)	(1,049		)
Accounts payable and other current liabilities		(3,860		)	5,642
Deferred revenue		(377		)	(891		)
Income taxes		13			(48		)
Other assets and liabilities		1,794			(1,905		)
Net cash used for operating activities		(11,855		)	(10,797		)
Cash flows from investing activities
Proceeds from sale of dry strip assets and intellectual property		—			1,200
Purchases of property, plant, and equipment		(567		)	(336		)
Decrease in restricted cash		—			2
Net cash (used for) provided by investing activities		(567		)	866
Cash flows from financing activities
Proceeds from exercise of stock options		1,583			206
Proceeds from Employee Stock Purchase Plan		227			197
Net cash provided by financing activities		1,810			403
Effect of exchange rate changes on cash and cash equivalents		(90		)	(819		)
Net decrease in cash and cash equivalents		(10,702		)	(10,347		)
Cash and cash equivalents at beginning of period		46,290			44,986
Cash and cash equivalents at end of period		$	35,588		$	34,639

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1.         Nature of Business

 

Axcelis Technologies, Inc. (“Axcelis” or the “Company”) was incorporated in Delaware in 1995, and is a worldwide producer of ion implantation and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe and Asia. In addition, the Company provides extensive aftermarket service and support, including spare parts, equipment upgrades, and maintenance services to the semiconductor industry.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary for a fair presentation of these financial statements have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for other interim periods or for the year as a whole.

 

The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Axcelis Technologies, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Note 2.         Stock-Based Compensation

 

The Company maintains the Axcelis Technologies, Inc. 2012 Equity Incentive Plan (the “2012 Equity Plan”), which became effective on May 2, 2012, and permits the issuance of options, restricted stock, restricted stock units and performance awards to selected employees, directors and consultants of the Company. The Company’s 2000 Stock Plan (the “2000 Stock Plan”), expired on May 1, 2012 and no new grants may be made under that plan after this date.  However, awards granted under the 2000 Stock Plan prior to the expiration remain outstanding and subject to the terms of the 2000 Stock Plan. The Company also maintains the Axcelis Technologies, Inc. Employee Stock Purchase Plan (the “ESPP”), an Internal Revenue Code Section 423 plan.

 

The 2012 Equity Plan and the ESPP are more fully described in Note 13 to the consolidated financial statements in the Company’s 2013 Annual Report on Form 10-K.

 

The Company recognized stock-based compensation expense of $1.0 million and $0.8 million for the three-month periods ended June 30, 2014 and 2013, respectively.  The Company recognized stock-based compensation expense of $2.2 million and $1.6 million for the six-month periods ended June 30, 2014 and 2013, respectively.  These amounts include compensation expense related to restricted stock units, non-qualified stock options and stock to be issued to participants under the ESPP.

 

Note 3.         Gain on Sale of Dry Strip Assets and Intellectual Property

 

In December 2012, the Company sold certain of its dry strip assets and all of its dry strip intellectual property to Lam Research Corporation (“Lam”). A portion of the purchase consideration (up to $2.0 million) was contingent upon the Company achieving certain milestones. The Company recorded $0.8 million and $1.2 million for the proceeds received based on its achievement of milestones during the three and six months ended June 30, 2013, respectively. These amounts were partially offset by additional costs associated with the lab system purchased by Lam.

 

Note 4.         Computation of Net Loss per Share

 

Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings (loss) per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued, calculated using the treasury stock method.

 

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The components of net loss per share are as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
		(in thousands, except per share data)
Net loss attributable to common stockholders		$	(6,900	)	$	(4,019	)	$	(6,726	)	$	(13,008	)
Weighted average common shares outstanding used in computing basic and diluted net loss per share		111,212			108,409			110,932			108,319
Net loss per share
Basic and Diluted		$	(0.06	)	$	(0.04	)	$	(0.06	)	$	(0.12	)

 

The Company incurred net losses for the three and six-month periods ended June 30, 2014 and June 30, 2013, and has excluded the incremental shares attributable to outstanding stock options, restricted stock and restricted stock units from the calculation of net loss per share because the effect would have been anti-dilutive. The following table sets forth the number of incremental shares excluded from the calculation above:

 

		Three months ended June 30,				Six months ended June 30,
		2014		2013		2014		2013
		(in thousands)
Incremental shares excluded from the calculation of net loss per share		4,047		2,183		4,625		2,159

 

Note 5.         Accumulated Other Comprehensive Income

 

The following table presents the changes in accumulated other comprehensive income, net of tax, by component for the six months ended June 30, 2014:

 

		Foreign currency			Defined benefit pension plan			Total
		(in thousands)
Balance at December 31, 2013		$	6,070		$	(331	)	$	5,739
Other comprehensive income before reclassifications		82			—			82
Amounts reclassified from accumulated other comprehensive income (1)		—			12			12
Net current-period other comprehensive income		82			12			94
Balance at June 30, 2014		$	6,152		$	(319	)	$	5,833

 

(1)         Amount presented before taxes as the tax effect is not material to the consolidated financial statements.

 

Note 6.         Inventories, net

 

The components of inventories are as follows:

 

		June 30,			December 31,
		2014			2013
		(in thousands)
Raw materials		$	63,103		$	56,942
Work in process		31,893			27,462
Finished goods (completed systems)		11,654			11,385
		$	106,650		$	95,789

 

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When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. Purchasing and usage alternatives are also explored to mitigate inventory exposure. As of June 30, 2014 and December 31, 2013, inventories are stated net of inventory reserves of $24.3 million and $25.1 million, respectively.

 

During the three and six months ended June 30, 2013, the Company recorded a charge to cost of sales of $0 and $2.1 million, respectively, for 300mm dry strip components. Under the terms of the agreement with Lam, the Company was permitted to manufacture and sell 300 mm dry strip products through September 2013.  Due to changes in the forecasted sales of the Company’s dry strip products that became known during the six months ended June 30, 2013, a portion of the dry strip inventory components was determined to be non-recoverable.

 

Note 7.         Restructuring Charges

 

During 2013, the Company initiated reductions in force to control costs and improve the focus of its operations in order to achieve future profitability and conserve cash. As of December 31, 2013, less than $0.1 million of these costs were accrued and unpaid.

 

During the six months ended June 30, 2014, the Company implemented further actions, which resulted in restructuring charges for severance and related costs of $0.4 million. The liability at June 30, 2014 of $0.1 million is expected to be paid primarily in the third quarter of 2014.

 

Changes in the Company’s restructuring liability, which consist primarily of severance and related costs, included in amounts reported as other current liabilities, are as follows:

 

		(in thousands)
Balance at December 31, 2013		$	43
Severance and related costs		360
Cash payments		(318		)
Balance at June 30, 2014		$	85

 

Note 8.         Product Warranty

 

The Company generally offers a one year warranty for all of its systems, the terms and conditions of which vary depending upon the product sold. For all systems sold, the Company accrues a liability for the estimated cost of standard warranty at the time of system shipment and defers the portion of systems revenue attributable to the fair value of non-standard warranty. Costs for non-standard warranty are expensed as incurred. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated product failure rates, material usage and service labor costs. The Company periodically assesses the adequacy of its recorded liability and adjusts the amount as necessary.

 

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The changes in the Company’s standard product warranty liability are as follows:

 

		Six months ended June 30,
		2014			2013
		(in thousands)
Balance at January 1 (beginning of year)		$	1,428		$	1,801
Warranties issued during the period		832			925
Settlements made during the period		(978		)	(705		)
Changes in estimate of liability for pre-existing warranties during the period		79			(536		)
Balance at June 30 (end of period)		$	1,361		$	1,485
Amount classified as current		$	1,326		$	1,419
Amount classified as long-term		35			66
Total warranty liability		$	1,361		$	1,485

 

Note 9.         Fair Value Measurements

 

Certain of the assets and liabilities on the Company’s consolidated balance sheets are reported at their “Fair Value”.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

(a)         Fair Value Hierarchy

 

The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

 

Level 1     applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2     applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3     applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

(b)         Assets Measured at Fair Value on a Recurring Basis

 

The Company’s money market funds are included in cash and cash equivalents in the consolidated balance sheets, and are considered a level 1 investment as they are valued at quoted market prices in active markets. The Company’s term loan is carried at amortized cost which approximates fair value based on current market pricing of similar debt instruments and is categorized as level 2 within the fair value hierarchy.

 

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The following table sets forth the Company’s assets and liabilities by level within the fair value hierarchy.

 

		June 30, 2014 Fair Value Measurements
		Level 1			Level 2			Level 3			Total
		(in thousands)
Assets
Cash equivalents:
Money market funds		$	6,153		$	—		$	—		$	6,153
Liabilities
Term loan		$	—		$	15,000		$	—		$	15,000

 

		December 31, 2013 Fair Value Measurements
		Level 1			Level 2			Level 3			Total
		(in thousands)
Assets
Cash equivalents:
Money market funds		$	10,504		$	—		$	—		$	10,504
Liabilities
Term loan		$	—		$	15,000		$	—		$	15,000

 

(c)          Other Financial Instruments

 

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents (which are comprised primarily of deposit and investment accounts), accounts receivable, prepaid expenses and other current and non-current assets, restricted cash, accounts payable and accrued expenses approximate fair value due to their short-term maturities.

 

Note 10.       Financing Arrangements

 

Term Loan

 

The Company has a Business Loan Agreement dated July 5, 2013 with Northern Bank & Trust Company which provides for a three year term loan of $15.0 million secured by the Company’s real estate in Beverly, Massachusetts.  The loan bears interest at 5.5% per annum, with payments of principal beginning August 5, 2014.  Interest is payable monthly.  All outstanding principal and interest on the term loan is due and payable on July 5, 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.

 

Credit Facility

 

The Company has 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, the Company has the ability to borrow up to $10.0 million on a revolving basis during its two year term.  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 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.  The Company was 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.

 

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Note 11.       Income Taxes

 

Income tax expense relates principally to operating results of foreign entities in jurisdictions, primarily in Europe and Asia, where the Company earns taxable income. The Company has significant net operating losses in the United States and certain other tax jurisdictions and, as a result, does not pay significant income taxes in those jurisdictions.

 

As of December 31, 2013, the Company’s valuation allowance related to income taxes was approximately $147.5 million.  The Company is in a three year cumulative loss position in the United States.  As a result, the Company maintains a 100% valuation allowance to reduce the carrying value of the related deferred tax assets to zero.  The Company will continue to maintain a full valuation allowance for those tax assets until sustainable future levels of profitability are evident.

 

Note 12.       Concentration of Risk

 

For the three months ended June 30, 2014, two customers accounted for approximately 15.9% and 11.1% of consolidated revenue. For the six months ended June 30, 2014, two customers accounted for approximately 24.5% and 12.5% of consolidated revenue.

 

For the three months ended June 30, 2013, three customers accounted for approximately 15.1%, 14.7%, and 10.6% of consolidated revenue. For the six months ended June 30, 2013, one customer accounted for approximately 10.6% of consolidated revenue.

 

At June 30, 2014, three customers accounted for 15.0%, 13.4%, and 12.7% of consolidated accounts receivable. At December 31, 2013, the Company had three customers which accounted for 23.2%, 14.2% and 13.6% of consolidated accounts receivable.

 

Note 13.       Contingencies

 

(a)         Litigation

 

The Company is not presently a party to any litigation that it believes might have a material adverse effect on its business operations. The Company is, from time to time, a party to litigation that arises in the normal course of its business operations.

 

(b)         Indemnifications

 

The Company’s system sales agreements typically include provisions under which the Company agrees to take certain actions, provide certain remedies and defend its customers against third-party claims of intellectual property infringement under specified conditions and to indemnify customers against any damage and costs awarded in connection with such claims. The Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

 

Note 14.       Recent Accounting Guidance

 

Effective January 1, 2014, the Company adopted Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. ASU 2013-11 amended the presentation requirements of ASC 740, Income Taxes, and requires that a reserve for an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. The ASU became effective for annual periods, and interim periods within those years, beginning after December 15, 2013, which is fiscal 2014 for the Company. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

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Accounting Standards or Updates Not Yet Effective

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently assessing the potential impact of ASU No.  2014-09 on its financial statements.

 

Note 15.       Subsequent Event

 

In order to align manufacturing and operating expense levels to changing business conditions, the Company is implementing a headcount reduction in the third quarter of 2014. The Company anticipates recording employee termination benefits and other related costs of approximately $2.0 million during the third quarter of 2014.

 

Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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.

 

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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 June 30,				Six months ended 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	)%

 

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Revenue

 

The following table sets forth our revenues.

 

		Three months ended June 30,						Period-to-Period Change					Six months ended June 30,						Period-to-Period 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.

 

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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.

 

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Gross Profit / Gross Margin

 

The following table sets forth our gross profit / gross margin.

 

		Three months ended June 30,						Period-to-Period Change					Six months ended June 30,						Period-to-Period 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.

 

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