Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-30941
AXCELIS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
34-1818596
(State or other jurisdiction ofincorporation or organization)
(IRS EmployerIdentification No.)
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 ☒ No ☐.
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 ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
(Do not check if a smaller reporting company)
Emerging growth company ☐
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐ No ☒
As of August 1, 2017 there were 31,223,801 shares of the registrant’s common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016
Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016
Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016
Notes to Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Critical Accounting Estimates
Results of Operations
Liquidity and Capital Resources
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
2
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
Six months ended
June 30,
2017
2016
Revenue:
Product
$
96,539
58,859
178,517
121,034
Services
6,251
5,592
11,166
10,938
Total revenue
102,790
64,451
189,683
131,972
Cost of revenue:
57,689
34,638
104,486
74,902
6,039
4,682
11,421
8,523
Total cost of revenue
63,728
39,320
115,907
83,425
Gross profit
39,062
25,131
73,776
48,547
Operating expenses:
Research and development
11,256
8,478
21,151
17,114
Sales and marketing
7,485
5,790
14,534
11,750
General and administrative
7,791
6,232
14,848
12,274
Restructuring charges
—
282
Total operating expenses
26,532
20,500
50,533
41,420
Income from operations
12,530
4,631
23,243
7,127
Other (expense) income:
Interest income
111
54
180
108
Interest expense
(1,336)
(1,338)
(2,447)
(2,385)
Other, net
16
(238)
(138)
(297)
Total other expense
(1,209)
(1,522)
(2,405)
(2,574)
Income before income taxes
11,321
3,109
20,838
4,553
Income tax (benefit) provision
(2,611)
172
(2,600)
(332)
Net income
13,932
2,937
23,438
4,885
Net income per share:
Basic
0.46
0.10
0.78
0.17
Diluted
0.42
0.72
0.16
Shares used in computing net income per share:
Basic weighted average common shares
30,589
29,097
30,183
29,066
Diluted weighted average common shares
33,168
30,701
32,779
30,607
See accompanying Notes to these Consolidated Financial Statements
3
Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss):
Foreign currency translation adjustments
489
(456)
2,404
593
Amortization of actuarial gains/losses and other adjustments from pension plan
29
26
57
52
Total other comprehensive income (loss)
518
(430)
2,461
645
Comprehensive income
14,450
2,507
25,899
5,530
4
Consolidated Balance Sheets
December 31,
ASSETS
Current assets:
Cash and cash equivalents
108,558
70,791
Accounts receivable, net
48,561
50,573
Inventories, net
122,574
113,853
Prepaid expenses and other current assets
9,985
5,512
Total current assets
289,678
240,729
Property, plant and equipment, net
31,617
30,840
Long-term restricted cash
6,793
6,864
Other assets
26,654
23,798
Total assets
354,742
302,231
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
27,606
24,996
Accrued compensation
12,170
5,142
Warranty
3,537
2,426
Income taxes
255
240
Deferred revenue
13,832
10,335
Other current liabilities
4,957
4,592
Total current liabilities
62,357
47,731
Sale leaseback obligation
47,692
47,586
Long-term deferred revenue
1,070
674
Other long-term liabilities
5,185
4,785
Total liabilities
116,304
100,776
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.001 par value, 30,000 shares authorized; none issued or outstanding
Common stock, $0.001 par value, 75,000 shares authorized; 31,180 shares issued and outstanding at June 30, 2017; 29,518 shares issued and outstanding at December 31, 2016
31
30
Additional paid-in capital
546,491
535,408
Accumulated deficit
(308,266)
(331,704)
Accumulated other comprehensive income (loss)
182
(2,279)
Total stockholders’ equity
238,438
201,455
Total liabilities and stockholders’ equity
5
Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
2,432
2,061
Deferred taxes
(2,910)
480
Stock-based compensation expense
2,580
2,079
Provision for excess and obsolete inventory
1,014
815
Changes in operating assets & liabilities:
Accounts receivable
2,699
(26,448)
Inventories
(7,527)
(1,540)
(4,253)
(3,054)
Accounts payable and other current liabilities
10,788
3,721
3,859
5,875
7
50
Other assets and liabilities
(730)
(5,627)
Net cash provided by (used in) operating activities
31,397
(16,703)
Cash flows from investing activities
Expenditures for property, plant and equipment
(1,849)
(1,859)
Net cash used in investing activities
Cash flows from financing activities
Net settlement on restricted stock grants
(1,134)
(2)
Financing fees and other expenses
(117)
Proceeds from Employee Stock Purchase Plan
349
Proceeds from exercise of stock options
9,290
556
Net cash provided by financing activities
8,505
437
Effect of exchange rate changes on cash and cash equivalents
(357)
143
Net increase (decrease) in cash, cash equivalents and restricted cash
37,696
(17,982)
Cash, cash equivalents and restricted cash at beginning of period
77,655
85,825
Cash, cash equivalents and restricted cash at end of period
115,351
67,843
6
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, used equipment 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 period 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, 2016 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, 2016.
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 that date. However, unexpired awards granted under the 2000 Stock Plan 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 14 to the consolidated financial statements in the Company’s 2016 Annual Report on Form 10-K.
The Company recognized stock-based compensation expense of $1.5 million and $1.2 million for the three month periods ended June 30, 2017 and 2016, respectively. The Company recognized stock-based compensation expense of $2.6 million and $2.1 million for the six month periods ended June 30, 2017 and 2016, 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.
In the three month periods ended June 30, 2017 and 2016, the Company issued 1.2 million and 0.3 million shares of common stock, respectively, related to stock option exercises, shares issued under the ESPP and vesting of restricted stock units. In the three month periods ended June 30, 2017 and 2016, the Company received proceeds of $7.1 million and $0.4 million, respectively, related to stock option exercises and ESPP purchases.
In the six month periods ended June 30, 2017 and 2016, the Company issued 1.7 million 0.6 million shares of common stock, respectively, related to stock option exercises, shares issued under the ESPP and vesting of restricted stock units. In the six month periods ended June 30, 2017 and 2016, the Company received proceeds of $9.6 million and $0.6 million, respectively, related to stock option exercises and ESPP purchases.
Note 3. Computation of Net Earnings per Share
Basic earnings per share is computed by dividing income 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 per share is similar to basic earnings per share, except that the denominator is increased by the number of additional common shares that would have been outstanding if the potentially dilutive common shares issuable for stock options, restricted stock units and employee stock purchase plan accounts had been issued, calculated using the treasury stock method.
The components of net earnings per share are as follows:
Three months ended June 30,
Six months ended June 30,
(in thousands, except per share data)
Net income available to common stockholders
Weighted average common shares outstanding used in computing basic income per share
Incremental options and RSUs
2,579
1,604
2,596
1,541
Weighted average common shares outstanding used in computing diluted net income per share
Net income per share
Diluted weighted average common shares outstanding does not include options and restricted stock units outstanding to purchase six thousand and 0.9 million common equivalent shares for the three month periods ended June 30, 2017 and 2016, respectively, and does not include options and restricted stock units outstanding to purchase 0.3 million and 0.9 million common equivalent shares for the six month periods ended June 30, 2017 and 2016, respectively, as their effect would have been anti-dilutive.
Note 4. Accumulated Other Comprehensive Income (Loss)
The following table presents the changes in accumulated other comprehensive income (loss), net of tax, by component for the six months ended June 30, 2017:
Foreign
Defined benefit
currency
pension plan
Total
(in thousands)
Balance at December 31, 2016
(1,591)
(688)
Other comprehensive income and pension reclassification
Balance at June 30, 2017
813
(631)
Note 5. Cash, cash equivalents and restricted cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.
(dollars in thousands)
Total cash, cash equivalents and long-term restricted cash
8
The restricted cash balance of $6.8 million as of June 30, 2017 includes a $5.9 million letter of credit associated with the security deposit for the sale leaseback transaction, a $0.8 million letter of credit relating to workers’ compensation insurance and a $0.1 million deposit relating to customs activity. The restricted cash balance of $6.9 million as of June 30, 2016 includes the $5.9 million letter of credit associated with the security deposit for the sale leaseback transaction, a $0.9 million letter of credit relating to workers’ compensation insurance and a $0.1 million deposit relating to customs activity.
Note 6. Inventories, net
The components of inventories are as follows:
Raw materials
79,850
82,263
Work in process
27,532
14,117
Finished goods (completed systems)
15,192
17,473
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, 2017 and December 31, 2016, inventories are stated net of inventory reserves of $8.5 million and $8.8 million, respectively.
Note 7. 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.
The changes in the Company’s standard product warranty liability are as follows:
Balance at January 1 (beginning of year)
2,666
3,555
Warranties issued during the period
2,577
1,551
Settlements made during the period
(1,090)
(2,399)
Changes in estimate of liability for pre-existing warranties during the period
(281)
520
Balance at June 30, (end of period)
3,872
3,227
Amount classified as current
2,958
Amount classified as long-term
335
269
Total warranty liability
9
Note 8. Fair Value Measurements
Certain assets on the Company’s 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) Fair Value Measurements
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 following table sets forth the Company’s assets by level within the fair value hierarchy:
June 30, 2017
Fair Value Measurements
Level 1
Level 2
Level 3
Assets
Cash equivalents:
Money market funds
92,756
December 31, 2016
54,170
(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 assets
10
and non-current cash assets, accounts payable and accrued expenses approximate fair value due to their short-term maturities.
Note 9. Financing Arrangements
Sale Leaseback Obligation
On January 30, 2015, the Company sold its corporate headquarters facility for $48.9 million. As part of the sale, the Company also entered into a 22-year lease agreement. The sale leaseback is accounted for as a financing arrangement for financial reporting and, as such, the Company has recorded a financing obligation of $47.7 million as of June 30, 2017. The associated lease payments are deemed to include both an interest component and payment of principal, with the underlying liability being extinguished at the end of the original lease term. The Company posted a collateralized security deposit of $5.9 million in the form of an irrevocable letter of credit at the time of the closing. Upon the termination of a credit facility in October 2015, this letter of credit was cash collateralized.
Note 10. 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.
In the first quarter of 2017, the Company adopted Accounting Standard Update (ASU) 2016-09, “Compensation — Stock Compensation.” See Note 13 for further discussion. As a result of the implementation of this ASU, the Company recorded a net tax benefit of approximately $2.6 million primarily due to $2.8 million in excess tax benefits on the exercise of nonqualified stock options and the vesting of restricted stock during the three months ended June 30, 2017.
During the first quarter of 2017, the statute of limitations expired with respect to certain tax positions for which the Company had previously recorded a reserve. The related tax reserve of $0.3 million and accrued interest of $0.2 million that had been recorded were reversed during the six month period ended June 30, 2017.
At December 31, 2016, the Company had $124.0 million of deferred tax assets worldwide relating to net operating loss carryforwards, tax credit carryforwards and other temporary differences, which are available to reduce income taxes in future years. With the exception of the deferred tax assets recognized related to the excess tax benefits stated above, the Company maintains a 100% domestic valuation allowance, reducing the carrying value of those deferred tax assets in the United States to zero. The Company will continue to maintain a full valuation allowance for those tax assets until accounting principles require the release of the allowance based on expectations of continuing profitability.
Note 11. Concentration of Risk
For the three months ended June 30, 2017, four customers accounted for 27.3%, 21.6%, 12.8% and 10.5% of consolidated revenue, respectively. For the six months ended June 30, 2017, four customers accounted for 22.3%, 19.2%, 15.7% and 13.3% of consolidated revenue, respectively.
For the three months ended June 30, 2016, three customers accounted for 14.8%, 11.7% and 10.4%, of consolidated revenue, respectively. For the six months ended June 30, 2016, two customers accounted for 16.4% and 14.1% of consolidated revenue, respectively.
At June 30, 2017, three customers accounted for 20.3%, 18.2% and 15.3% of consolidated accounts receivable, respectively. At December 31, 2016, four customers accounted for 22.0%, 12.3%, 12.0% and 10.6% of accounts receivable, respectively.
11
Note 12. Contingencies
(a) Litigation
The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. The Company is not presently a party to any litigation that it believes might have a material adverse effect on 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 13. Recent Accounting Guidance
Accounting Standards or Updates Adopted
In July 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-11, “Simplifying the Measurement of Inventory,” which changes the inventory measurement principles for entities using the first-in, first-out (FIFO) or average cost methods. For entities utilizing one of these methods, the inventory measurement principle changes from lower of cost or market to the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the reasonably predictable costs of completion, disposal and transportation. The Company adopted this ASU prospectively in the first quarter of 2017, which did not have a material impact on our financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09 “Compensation — Stock Compensation,” which changes the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amended guidance eliminates the requirement to record excess tax benefits as a reduction in current taxes payable and an increase to additional paid-in capital. The Company adopted this ASU in the first quarter of 2017, in part prospectively and in part retrospectively, as permitted by the ASU.
The Company prospectively adopted the provisions of ASU No. 2016-09 relating to the accounting for excess tax benefits, which resulted in the recognition of approximately $2.8 million of tax benefit for the six month period ending June 30, 2017.
The Company retrospectively adopted the provisions of ASU 2016-09 related to the presentation of employee taxes. These provide that when an employer withholds shares for taxes on vesting of equity compensation, the value withheld is presented as a financing activity on the statement of cash flows. This resulted in a $1.1 million and a two thousand dollar reduction in net cash provided by financing activities for the six month periods ended June 30, 2017 and 2016, respectively. Prior to adoption, these amounts were reflected within cash flows from operating activities.
The Company has also elected to continue to estimate a forfeiture rate associated with our stock-based awards and related expense.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 203): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This ASU requires the statement of cash flows to explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statement of cash flows. On January 1, 2017, the Company early adopted this ASU retrospectively, resulting in $6.9 million of restricted cash being included in the beginning balances of cash, cash equivalents and
12
restricted cash balances on the statement of cash flows for the periods presented. Please see Note 5 for additional information.
Accounting Standards or Updates Not Yet Effective
In May 2014, the FASB issued 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. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers” (Topic 606): Identifying Performance Obligations and Licensing, which further clarifies performance obligations in a contract with a customer. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers” (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides a more narrow interpretation of ASU No. 2014-09. These ASUs (collectively referred to as “Topic 606”) are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods.
We are in the process of comparing our current revenue recognition policies to the requirements of Topic 606 for each of our revenue categories. While we have not identified any material differences in the amount and timing of revenue recognition for the categories we have reviewed to date, our evaluation is not complete, and we have not concluded on the overall impact of adopting Topic 606. We intend to adopt Topic 606, effective January 1, 2018, using the modified retrospective approach.
In February 2016, the FASB issued ASU No. 2016-02 “Leases.” The ASU requires lessees to recognize the rights and obligations created by most leases as assets and liabilities on their balance sheet and continue to recognize expenses on their income statement over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. We are currently evaluating the impact of ASU 2016-02 on the consolidated financial statements and disclosures.
In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments.” The ASU is intended to add or clarify guidance on the classification of certain receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU 2016-15 on the consolidated financial statements and disclosures.
In March 2017, the FASB issued ASU No. 2017-07 “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The ASU is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment applies to all entities offering a defined benefit pension plan, other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in the ASU require an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within the annual period. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We are currently evaluating the impact of ASU 2017-07 on the consolidated financial statements and disclosures.
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 under “Risk Factors” in Part II, Item 1A to our annual report on Form 10-K for the year ended December 31, 2016, which discussion is incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.
Axcelis 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 worldwide. Consolidation and partnering within the semiconductor manufacturing industry has resulted in a small number of customers representing a substantial portion of our business. Our ten largest customers accounted for 83.3% of total revenue for the six months ended June 30, 2017.
Our product development and manufacturing activities occur primarily in the United States. Axcelis’ equipment and service products are highly technical and are sold primarily through a direct sales force in the United States, Europe and Asia.
In the second quarter of 2017, we delivered strong financial results driven by substantially higher Purion system sales than in the first quarter and consistent gross margin performance. Higher revenues in the quarter were the result of customers’ increasing selection of Purion ion implanters and strong memory and mature process spending. The impact of a new accounting standard regarding the accounting for the tax benefits associated with equity compensation had a positive effect upon our net income and earnings per share. Please see Note 10 and Note 13 for further discussion.
Management’s discussion and analysis of our financial condition and results of operations included herein and in our Annual Report on Form 10-K for the year ended December 31, 2016 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, 2016.
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The following table sets forth our results of operations as a percentage of total revenue:
93.9
%
91.3
94.1
91.7
6.1
8.7
5.9
8.3
100.0
56.1
53.7
55.1
56.8
7.3
6.0
6.5
62.0
61.0
61.1
63.3
38.0
39.0
38.9
36.7
11.0
13.2
11.2
13.0
9.0
7.7
8.9
7.6
9.7
7.8
9.3
0.2
25.9
31.9
26.7
31.4
12.1
7.1
12.2
5.3
0.1
(1.3)
(2.1)
(1.8)
0.0
(0.4)
(0.1)
(0.2)
(1.2)
(2.4)
(1.9)
10.9
4.7
3.4
(2.5)
0.3
(1.4)
(0.3)
13.4
4.4
12.3
3.7
Revenue
The following table sets forth our revenue:
Period-to-Period
Change
37,680
64.0
57,483
47.5
Percentage of revenue
659
11.8
228
2.1
38,339
59.5
57,711
43.7
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Three Months Ended June 30, 2017 Compared with Three Months Ended June 30, 2016
Product revenue, which includes system sales, sales of spare parts, product upgrades and used systems was $96.5 million, or 93.9%, of revenue during the three months ended June 30, 2017, compared with $58.9 million, or 91.3% of revenue for the three months ended June 30, 2016. The $37.7 million increase in product revenue for the three month period ending June 30, 2017, in comparison to the same period in 2016, was primarily driven by an increase in the number of Purion systems sold.
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, 2017 and December 31, 2016 was $14.9 million and $11.0 million, respectively. The increase in deferred revenue is primarily due to the higher revenue in the quarter and the timing of the acceptance of system sales.
Services 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 6.1% of revenue for the three months ended June 30, 2017, compared with $5.6 million, or 8.7% of revenue for the three months ended June 30, 2016. Although services revenue typically increases with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.
Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016
Product revenue was $178.5 million, or 94.1%, of revenue during the six months ended June 30, 2017, compared with $121.0 million, or 91.7% of revenue for the six months ended June 30, 2016. The $57.5 million increase in product revenue for the six month period ending June 30, 2017, in comparison to the same period in 2016, was primarily driven by an increase in the number of Purion systems sold.
Services revenue was $11.2 million, or 5.9% of revenue for the six months ended June 30, 2017, compared with $10.9 million, or 8.3% of revenue for the six months ended June 30, 2016. Although services revenue typically increases with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.
Revenue Categories used by Management
As an alternative to the line item revenue categories discussed above, management also uses revenue categorizations which divide revenue into new systems sales and “aftermarket,” meaning sales of spare parts, product upgrades and used systems, combined with the sale of maintenance labor and service contracts and services hours.
New Systems
Included in total revenue of $102.8 million during the three months ended June 30, 2017 is revenue from sales of new systems of $62.4 million, or 60.7% of total revenue, compared with $33.7 million, or 52.2%, of total revenue for the three months ended June 30, 2016. The increase was due to higher sales of our Purion systems sold in the recent quarter.
Aftermarket
Included in total revenue of $102.8 million during the three months ended June 30, 2017 is revenue from our aftermarket business of $40.4 million, compared to $30.8 million for the three months ended June 30, 2016. The significant increase was due to a large sale of upgrades to one customer in Asia. 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.
Included in total revenue of $189.7 million during the six months ended June 30, 2017 is revenue from sales of new systems of $117.7 million, or 62.0% of total revenue, compared with $70.7 million, or 53.6%, of total revenue for the six months ended June 30, 2016. The increase was due to higher sales of our Purion systems sold in the six month period ended June 30, 2017.
Included in total revenue of $189.7 million during the six months ended June 30, 2017 is revenue from our aftermarket business of $72.0 million, compared to $61.3 million for the six months ended June 30, 2016. The significant increase was due to a large sale of upgrades to one customer in Asia.
Gross Profit / Gross Margin
The following table sets forth our gross profit / gross margin.
Gross Profit:
38,850
24,221
14,629
60.4
74,031
46,132
27,899
60.5
Product gross margin
40.2
41.2
41.5
38.1
212
910
(698)
(76.7)
(255)
2,415
(2,670)
(110.6)
Services gross margin
16.3
(2.3)
22.1
Total gross profit
13,931
55.4
25,229
52.0
Gross margin
36.8
Gross margin from product revenue was 40.2% for the three months ended June 30, 2017, compared to 41.2% for the three months ended June 30, 2016. The decrease in gross margin of 1.0 percentage points resulted from a mix of slightly lower margin parts and upgrades.
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Gross margin from services revenue was 3.4% for the three months ended June 30, 2017, compared to 16.3% for the three months ended June 30, 2016. The decrease in gross margin in the recent period is primarily attributable to increased costs on service contracts.
Gross margin from product revenue was 41.5% for the six months ended June 30, 2017, compared to 38.1% for the six months ended June 30, 2016. The increase in gross margin of 3.4 percentage points resulted from improved margins on Purion systems.
Gross margin from services revenue was (2.3)% for the six months ended June 30, 2017, compared to 22.1% for the six months ended June 30, 2016. The decrease in gross margin in the recent period is primarily attributable to increased costs on service contracts.
Operating Expenses
The following table sets forth our operating expenses:
2,778
32.8
4,037
23.6
1,695
29.3
2,784
23.7
1,559
25.0
2,574
21.0
(282)
(100.0)
6,032
29.4
9,113
22.0
31.3
Our operating expenses consist primarily of personnel costs, including salaries, commissions, expected incentive plan payouts, stock-based compensation and related benefits and taxes; project material costs related to the design and development of new products and enhancement of existing products; and professional fees, travel and depreciation expenses.
Personnel costs are our largest expense, representing $16.6 million or 62.7% of our total operating expenses for the three month period ended June 30, 2017. For the six month period ended June 30, 2016, personnel costs were $31.2 million or 61.7% of our total operating expenses. The higher personnel costs for both the three and six months ended June 30, 2017 are primarily due to increased incentive plan expense and to a lesser extent increased headcount.
Research and Development
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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.
Research and development expense was $11.3 million during the three months ended June 30, 2017; a $2.8 million increase from $8.5 million during the three months ended June 30, 2016. The increase is primarily due to an investment in increased headcount to support the development of new Purion products and incentive plan expense.
Research and development expense was $21.2 million during the six months ended June 30, 2017; a $4.0 million increase from $17.1 million during the six months ended June 30, 2016. The increase is primarily due to an investment in increased headcount to support the development of new Purion products and incentive plan expense.
Sales and Marketing
Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.
Sales and marketing expense was $7.5 million during the three months ended June 30, 2017; an increase of $1.7 million, or 29.3%, compared with $5.8 million during the three months ended June 30, 2016. The increase is primarily due to incentive plan expense and to a lesser extent increased headcount.
Sales and marketing expense was $14.5 million during the six months ended June 30, 2017; an increase of $2.8 million, or 23.7%, compared with $11.8 million during the six months ended June 30, 2016. The increase is primarily due to incentive plan expense and to a lesser extent increased headcount.
General and Administrative
Our general and administrative expenses result primarily from the costs associated with our executive, finance, information technology, legal and human resource functions.
19
General and administrative expense was $7.8 million during the three months ended June 30, 2017; an increase of $1.6 million, or 25.0%, compared to $6.2 million during the three months ended June 30, 2016. The increase is primarily due to increased incentive plan expense.
General and administrative expense was $14.8 million during the six months ended June 30, 2017; an increase of $2.6 million, or 21.0%, compared to $12.3 million during the six months ended June 30, 2016. The increase is primarily due to increased incentive plan expense.
Restructuring Charges
Period-to-period
change
In the first quarter of 2016, due to changes in customer service contracts resulting from a consolidation in our customer base, we had severance and other costs related to a reduction in force.
Other (Expense) Income
Other (expense) income
313
20.6
169
6.6
Other (expense) income consists primarily of foreign exchange gains and losses attributable to fluctuations against local currencies of the countries in which we operate, interest expense related to the sale leaseback of our headquarters and interest earned on our invested cash balances. Other expense was $1.2 million for the three months ended June 30, 2017, compared with $1.5 million for the three months ended June 30, 2016. The $0.3 million decrease in other expense for the three month period ended June 30, 2017 compared to the three month period ended June 30, 2016, was primarily due to fluctuations in currency exchange. During both of the three month periods ended June 30, 2017 and 2016, the Company recorded $1.3 million in deemed interest expense associated with the lease payments for our headquarters in Beverly, which is being accounted for as a financing obligation.
The $0.2 million decrease in other expense for the six month period ended June 30, 2017 compared to the six month period ended June 30, 2016, was primarily due to fluctuations in currency exchange.
During the three and six month periods ended June 30, 2017 and 2016, with the exception of operating lease agreements entered into by the Company, we had no significant off-balance-sheet risk such as exchange contracts, option contracts or other foreign hedging arrangements.
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Income Tax (Benefit) Provision
Income tax
(2,783)
(1,618.0)
(2,268)
683.1
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 such losses in the United States and certain European taxing jurisdictions, and will not do so until we have sufficient income such that these tax benefits can be utilized. The Company will continue to maintain a full valuation allowance for these tax assets until accounting principles require the release of the allowance based on expectations of continuing profitability.
During the three months ended June 30, 2017, the Company recorded a tax benefit of approximately $2.8 million as a discrete item in relation to excess tax benefits associated with the exercise of nonqualified stock options and vesting of restricted stock. This resulted in a net tax benefit of $2.6 million for the three months ending June 30, 2017.
During the three months ended March 31, 2017, the statute of limitations expired with respect to certain tax positions for which the Company had previously recorded a reserve. The related tax reserve of $0.3 million and accrued interest of $0.2 million were reversed.
During the three months ended March 31, 2016, the statute of limitations associated with tax positions previously taken by the Company expired. The related tax reserve of $0.6 million and accrued interest of $0.3 million were reversed.
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The Company had $108.6 million in unrestricted cash and cash equivalents at June 30, 2017, in addition to $6.8 million in restricted cash, primarily comprised of the $5.9 million security deposit under the lease on our headquarters. Management believes that maintaining a strong cash balance is necessary to provide funding for potential ramps in our business, which can require significant cash investment to meet sudden demand.
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, other than cost of goods sold, does not vary significantly with changes in volume. We experience fluctuations in operating results and cash flows depending on these factors.
During the six months ended June 30, 2017, the Company generated $31.4 million of cash in operating activities. This was predominately driven by strong sales and collection efforts resulting in decreases in accounts receivable as well as increases to accounts payable, offset by increases in inventories, prepaid expenses, deferred income taxes, other current assets and other assets and liabilities. In comparison, during the six months ended June 30, 2016, the Company used $16.7 million of cash in operating activities.
Investing activities for the six months ended June 30, 2017 and 2016 resulted in cash outflows of $1.8 million and $1.9 million, respectively, used for capital expenditures.
Financing activities for the six months ended June 30, 2017 provided net cash of $8.5 million, primarily relating to the proceeds from the exercise of stock options. In comparison, financing activities for the six months ended June 30, 2016 provided net cash of $0.4 million, primarily due to proceeds from the exercise of stock options.
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. We currently have no credit facility but management believes we would be able to borrow on reasonable terms if needed.
Commitments and Contingencies
Significant commitments and contingencies at June 30, 2017 are consistent with those discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 17 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As of June 30, 2017, there have been no material changes to the quantitative information about market risk disclosed in Item 7A to our annual report on Form 10-K for the year ended December 31, 2016.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during the three months ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
As of June 30, 2017, there have been no material changes to the risk factors described in Item 1A to our annual report on Form 10-K for the year ended December 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
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Item 6. Exhibits.
The following exhibits are filed herewith:
ExhibitNo
Description
3.1
Amended and Restated Certificate of Incorporation of the Company adopted May 6, 2009. Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on May 11, 2009.
3.2
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Axcelis Technologies, Inc., effective June 30, 2016, as filed with the Secretary of State of the State of Delaware. Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Commission on July 5, 2016.
3.3
Bylaws of the Company, as amended as of May 13, 2014. Incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed with the Commission on May 19, 2014.
10.1
Axcelis Technologies, Inc. 2012 Equity Incentive Plan, as amended through May 16, 2017. Filed herewith.
31.1
Certification of the Principal Executive Officer under Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302 of the Sarbanes-Oxley Act), dated August 4, 2017. Filed herewith.
31.2
Certification of the Principal Financial Officer under Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302 of the Sarbanes-Oxley Act), dated August 4, 2017. Filed herewith.
32.1
Certification of the Principal Executive Officer pursuant to Section 1350 of Chapter 63 of title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act), dated August 4, 2017. Filed herewith.
32.2
Certification of the Principal Financial Officer pursuant to Section 1350 of Chapter 63 of title 18 of the United States Code (Section 906 of the Sarbanes-Oxley Act), dated August 4, 2017. Filed herewith.
101
The following materials from the Company’s Form 10-Q for the quarter ended June 30, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (Unaudited). Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATED: August 4, 2017
By:
/s/ KEVIN J. BREWER
Kevin J. Brewer
Executive Vice President and Chief Financial Officer
Duly Authorized Officer and Principal Financial Officer