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ACLS > SEC Filings for ACLS > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for AXCELIS TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for AXCELIS TECHNOLOGIES INC


8-Nov-2013

Quarterly Report


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 "Risk Factors" and others discussed elsewhere in this Form 10-Q. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements, except as may be required by law.

Overview

The semiconductor capital equipment industry is subject to significant cyclical swings in capital spending by semiconductor manufacturers. Capital spending is influenced by demand for semiconductors and the products using them, the utilization rate and capacity of existing semiconductor manufacturing facilities and changes in semiconductor technology, all of which are outside of our control. As a result, our revenue and gross margins fluctuate from year to year and period to period. Our established cost structure does not vary significantly with changes in volume. We may experience fluctuations in operating results and cash flows depending on our revenue as driven by the level of capital expenditures by semiconductor manufacturers.

In December 2012, we sold to Lam Research Corporation the intellectual property rights and other assets relating to our dry strip systems product line. The purchased intellectual property rights include, among other things, worldwide patent rights, patent applications, copyrights, industrial designs, know-how and related rights used by us in our dry strip products. Lam granted us a worldwide, non-exclusive, non-transferable, royalty free license to use the intellectual property rights sold by us. The license allowed us to make and sell 300 mm dry strip wafer processing equipment for semiconductor applications through September 2013. We will continue to sell dry strip systems for smaller wafers until December 2015 and support our installed base of dry strip systems indefinitely. Due to this continuing interest in the dry strip business, the sale of the intellectual property rights and other assets to Lam have been reported in continuing operations.

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 71.3% of total revenue for the nine months ended September 30, 2013; compared to 73.6% of revenue for the nine months ended September 30, 2012.

Weak industry conditions that we experienced in 2012 continued through the first quarter of 2013, but beginning in the second quarter of 2013 we entered a period of gradual market improvement which continued during the third quarter. Our financial results in 2013 reflect our investment of a significant portion of our resources in research and development programs related to our new leading edge Purion ion implantation platform and the market introduction and initial sales of Purion systems. These results also reflect our efforts to lower our breakeven revenue levels by maintaining tight control of discretionary spending. As a result of increasing revenues and cost containment, we expect to return to profitability in the fourth quarter of 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.

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.


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Management has not identified any need to make any material change in, and has not changed, any of our critical accounting estimates and judgments as described in Management's Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations



The following table sets forth our results of operations as a percentage of
total revenue:



                                      Three months ended          Nine months ended
                                         September 30,              September 30,
                                      2013          2012         2013          2012
Revenue:
Product                                  87.9 %        83.1 %       86.2 %        85.7 %
Services                                 12.1          16.9         13.8          14.3
Total revenue                           100.0         100.0        100.0         100.0
Cost of revenue:
Product                                  56.0          55.6         54.7          53.3
Services                                  9.2          12.2         11.2          10.3
Total cost of revenue                    65.2          67.8         65.9          63.6
Gross profit                             34.8          32.2         34.1          36.4
Operating expenses:
Research and development                 16.7          22.1         18.9          20.2
Sales and marketing                      10.9          12.2         11.8          11.5
General and administrative               12.6          14.2         14.0          13.0
Gain on sale of dry strip assets
and intellectual property                   -             -         (0.9 )           -
Restructuring charges                     0.2           1.3          1.7           2.3
Total operating expenses                 40.4          49.8         45.5          47.0
Loss from operations                     (5.6 )       (17.6 )      (11.4 )       (10.6 )
Other income (expense):
Interest expense                         (0.4 )           -         (0.2 )           -
Other, net                               (2.6 )        (1.4 )       (0.5 )        (0.6 )
Total other income (expense)             (3.0 )        (1.4 )       (0.7 )        (0.6 )
Loss before income taxes                 (8.6 )       (19.0 )      (12.1 )       (11.2 )
Income taxes                              1.1           0.5          0.8           0.9
Net loss                                 (9.7 )%      (19.5 )%     (12.9 )%      (12.1 )%


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Revenue



The following table sets forth our revenues.



                           Three months ended      Period-to-Period        Nine months ended      Period-to-Period
                             September 30,              Change               September 30,             Change
                            2013         2012         $           %        2013        2012           $          %
                                                           (dollars in thousands)
Revenues:
Product                  $    42,934   $ 37,093   $    5,841     15.7 %  $ 118,151   $ 136,096   $   (17,945 ) (13.2 )%
Percentage of revenues          87.9 %     83.1 %                             86.2 %      85.7 %
Services                       5,897      7,547       (1,650 )  (21.9 )%    18,907      22,664        (3,757 ) (16.6 )%
Percentage of revenues          12.1 %     16.9 %                             13.8 %      14.3 %
Total revenues           $    48,831   $ 44,640   $    4,191      9.4 %  $ 137,058   $ 158,760   $   (21,702 ) (13.7 )%

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

Product

Product revenue, which includes system sales, sales of spare parts and product upgrades, was $42.9 million, or 87.9% of revenue during the three months ended September 30, 2013, compared with $37.1 million, or 83.1% of revenue for the three months ended September 30, 2012. The year over year increase in product revenue is attributable to improved semiconductor market spending which has increased system revenue levels.

Services

Service revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $5.9 million, or 12.1 % of revenue for the three months ended September 30, 2013, compared with $7.5 million, or 16.9% of revenue for the three months ended September 30, 2012. Service revenue fluctuates from period to period based on capacity utilization at customers' manufacturing facilities, which affects the need for equipment service. The decrease during the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily due to cautious European aftermarket spending at the end of the 2013 quarter.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

Product

Product revenue was $118.2 million, or 86.2% of revenue for the nine months ended September 30, 2013, compared with $136.1 million, or 85.7% of revenue for the nine months ended September 30, 2012. The decrease in product revenue is attributable to the timing associated with the semiconductor industry cycle.

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 September 30, 2013 and December 31, 2012 was $4.1 million and $6.9 million, respectively. The decrease was mainly due to lower systems sales during the nine months ended September 30, 2013, and the timing of acceptance of deferred system sales.

Services

Service revenue was $18.9 million, or 13.8% of revenue for the nine months ended September 30, 2013, compared with $22.7 million, or 14.3% of revenue for the nine months ended September 30, 2012. Results for the first three quarters of 2013 were primarily driven by the timing associated with the semiconductor industry cycle.


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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 product line (the most significant of which is ion implant) and by aftermarket, as described below.

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

Ion Implant

Included in total revenue of $48.8 million during the three months ended September 30, 2013 is revenue from sales of ion implantation products and related service of $40.2 million, or 82.4% of total revenue, compared with $33.9 million, or 76.0%, of total revenue for the three months ended September 30, 2012. The dollar increase is due to the factors discussed above for product and services revenue. The increase in ion implant's share of total revenue for the 2013 period reflects a reduction in dry strip revenue following the sale of assets relating to the dry strip product line in December 2012, as discussed in the Overview.

Aftermarket

Our product revenue includes sales of spare parts and product upgrades as well as complete systems. We refer to the business of selling spare parts and product upgrades, combined with the sale of maintenance labor and service contracts and service hours, as the "aftermarket" business. Included in total revenue of $48.8 million during the three months ended September 30, 2013 is revenue from our aftermarket business of $28.6 million, compared to $31.9 million for the three months ended September 30, 2012. Aftermarket revenue fluctuates from period to period based on capacity utilization at customers' manufacturing facilities which affects the sale of spare parts and demand for equipment service. The decrease in aftermarket revenue for the three months ended September 30, 2013 as compared to the same period in 2012 was due to the factors discussed above for product and services revenue.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

Ion Implant

Included in total revenue of $137.1 million during the nine months ended September 30, 2013 is revenue from sales of ion implantation products and related service of $111.6 million, or 81.4% of total revenue, compared with $124.8 million, or 78.6%, of total revenue for the nine months ended September 30, 2012. The dollar decrease was due to the factors discussed above for product and services revenue.

Aftermarket

Included in total revenue of $137.1 million during the nine months ended September 30, 2013 is revenue from our aftermarket business of $87.5 million, compared to $96.8 million for the nine months ended September 30, 2012. The dollar decrease was due to the factors discussed above for product and services revenue.


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Gross Profit / Gross Margin



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



                          Three months ended      Period-to-Period        Nine months ended      Period-to-Period
                            September 30,              Change               September 30,             Change
                           2013         2012         $           %         2013        2012          $          %
                                                          (dollars in thousands)
Gross Profit:
Product                 $    15,595   $ 12,284   $    3,311     27.0 %  $   43,175   $ 51,404   $    (8,229 ) (16.0 )%
Product gross margin           36.3 %     33.1 %                              36.5 %     37.8 %
Services                      1,381      2,083         (702 )  (33.7 )%      3,480      6,287        (2,807 ) (44.6 )%
Services gross margin          23.4 %     27.6 %                              18.4 %     27.7 %
Total gross profit      $    16,976   $ 14,367   $    2,609     18.2 %  $   46,655   $ 57,691   $   (11,036 ) (19.1 )%
Gross margin                   34.8 %     32.2 %                              34.1 %     36.4 %

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

Product

Gross profit from product revenue was 36.3% for the three months ended September 30, 2013, compared to 33.1% for the three months ended September 30, 2012. The increase in gross profit of 3.2 percentage points is attributable to higher systems sales volumes and the related favorable absorption of fixed overhead costs, which increased gross profit 10.2 percentage points, offset by a 7.0 percentage point decrease in gross profit since revenue from our higher margin parts and upgrades represented a smaller percentage of total revenue.

Services

Gross profit from service revenue was 23.4% for the three months ended September 30, 2013, compared to 27.6% for the three months ended September 30, 2012. The decrease in gross profit is attributable to lower volumes, and changes in the mix and timing of service contracts.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

Product

Gross profit from product revenue was 36.5% for the nine months ended September 30, 2013, compared to 37.8% for the nine months ended September 30, 2012. The decrease in gross profit of 1.3% percentage points is due to an incremental reserve for excess inventory which reduced gross profit by 1.0 percentage point and lower systems sales volumes and the related unfavorable absorption of fixed overhead costs which reduced gross profit by 0.8 percentage points, offset by a 0.5 percentage point increase in gross profit resulting from an increased mix of parts and upgrade revenue.

Services

Service revenue gross margin was 18.4% for the nine months ended September 30, 2013, compared to 27.7% for the nine months ended September 30, 2012. The decrease in gross margin is attributable to lower sales volumes and the changes in the mix and timing of service contracts.


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Operating Expenses



The following table sets forth our operating expenses:



                          Three months ended       Period-to-Period        Nine months ended      Period-to-Period
                            September 30,               Change               September 30,             Change
                           2013         2012          $           %        2013         2012          $          %
                                                           (dollars in thousands)
Research and
development             $     8,148   $  9,851   $    (1,703 )  (17.3 )% $  25,857    $ 31,999   $    (6,142 ) (19.2 )%
Percentage of
revenues                       16.7 %     22.1 %                              18.9 %      20.2 %
Sales and marketing           5,330      5,470          (140 )   (2.6 )%    16,128      18,284        (2,156 ) (11.8 )%
Percentage of
revenues                       10.9 %     12.2 %                              11.8 %      11.5 %
General and
administrative                6,164      6,325          (161 )   (2.5 )% $  19,165      20,611        (1,446 )  (7.0 )%
Percentage of
revenues                       12.6 %     14.2 %                              14.0 %      13.0 %
Gain on sale of dry
strip assets and
intellectual property             -          -             -        -       (1,167 )         -        (1,167 )     -
Percentage of
revenues                        0.0 %      0.0 %                              (0.9 )%      0.0 %
Restructuring charges           112        578          (466 )  (80.6 )%     2,334       3,612        (1,278 ) (35.4 )%
Percentage of
revenues                        0.2 %      1.3 %                               1.7 %       2.3 %
Total operating
expenses                $    19,754   $ 22,224   $    (2,470 )  (11.1 )% $  62,317    $ 74,506   $   (12,189 ) (16.4 )%
Percentage of
revenues                       40.4 %     49.8 %                              45.5 %      47.0 %

Our operating expenses consist primarily of personnel costs, including salaries, commissions, bonuses, share-based compensation and related benefits and taxes; project material costs related to the design and development of new products and enhancement of existing products; and professional fees, travel and depreciation expenses.

Personnel costs are our largest expense, representing $11.3 million and $35.8 million, or 57.7% and 58.6%, of our total operating expenses, excluding the gain on sale of the dry strip assets and intellectual property and restructuring charges, for the three and nine-month periods ended September 30, 2013, respectively. For the three and nine-month periods ended September 30, 2012, personnel costs were $12.6 million and $41.3 million, or 58.0% and 58.3%, of our total operating expenses excluding restructuring charges.

We continue to maintain tight control over our discretionary spending. As a result of the industry conditions in the semiconductor industry, we took a number of actions during 2013 to reduce our operating expenses and manage our cash. These actions included a reduction in our global workforce; focusing our R&D spending on critical programs; and asking our employees to take three weeks of unpaid shutdowns.

The impact of these actions and our operating results are discussed below.

Research and Development



                    Three months ended        Period-to-Period         Nine months ended       Period-to-Period
                       September 30,               Change                September 30,              Change
                     2013         2012           $           %          2013        2012          $           %
                                                       (dollars in thousands)
Research and
development       $    8,148    $   9,851   $    (1,703 )   (17.3 )% $   25,857   $ 31,999   $    (6,142 )   (19.2 )%
Percentage of
revenues                16.7 %       22.1 %                                18.9 %     20.2 %


Table of Contents

Our ability to remain competitive depends largely on continuously developing innovative technology, with new and enhanced features and systems and introducing them at competitive prices on a timely basis. Accordingly, based on our strategic plan, we establish annual R&D budgets to fund programs that we expect will drive competitive advantages.

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

Research and development expense was $8.1 million during the three months ended September 30, 2013; a decrease of $1.7 million, or 17.3%, compared with $9.8 million during the three months ended September 30, 2012. The decrease included a reduction in payroll costs of $0.8 million. As we focused our R&D spend on critical programs, consulting, project material and related costs decreased by $0.5 million and depreciation expense for internal use assets used as demonstration and/or test systems decreased by $0.5 million.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

Research and development expense was $25.9 million during the nine months ended September 30, 2013; a decrease of $6.1 million, or 19.2%, compared with $32.0 million during the nine months ended September 30, 2012. The decrease included the reduction in payroll costs of $2.9 million as a result of lowering our headcount through reductions in force. As we focused our R&D spend on critical programs, consulting, project material and related costs decreased by $2.0 million and depreciation expense for internal use assets used as demonstration and/or test systems decreased by $1.3 million.

Sales and Marketing



                    Three months ended        Period-to-Period         Nine months ended       Period-to-Period
                       September 30,               Change                September 30,              Change
                     2013         2012          $            %          2013        2012          $           %
                                                       (dollars in thousands)
Sales and
marketing         $    5,330    $   5,470   $     (140 )     (2.6 )% $   16,128   $ 18,284   $    (2,156 )   (11.8 )%
Percentage of
revenues                10.9 %       12.2 %                                11.8 %     11.5 %

Our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force.

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

Sales and marketing expense was $5.3 million during the three months ended September 30, 2013; a decrease of $0.1 million, or 2.6%, compared with $5.4 million during the three months ended September 30, 2012. The decrease was primarily due to the reduction in payroll and related costs of $0.4 million partly attributable to the cost savings realized by one week of unpaid shutdown taken by our employees, offset in part by smaller increases in various other expense accounts.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

Sales and marketing expense was $16.1 million during the nine months ended September 30, 2013; a decrease of $2.2 million, or 11.8%, compared with $18.3 million during the nine months ended September 30, 2012. The decrease was primarily due to the reduction in payroll and related costs of $1.8 million as a result of lowering our headcount through reductions in force and the cost savings realized by three weeks of unpaid shutdown taken by our employees. As a result of our tightened control over discretionary spending, we reduced our travel and entertainment costs by $0.3 million and our utilities and other facility costs by $0.3 million.


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General and Administrative



                    Three months ended        Period-to-Period         Nine months ended        Period-to-Period
                       September 30,               Change                September 30,               Change
                     2013         2012          $            %          2013        2012          $            %
                                                       (dollars in thousands)
General and
administrative    $    6,164    $   6,325   $     (161 )     (2.5 )% $   19,165   $ 20,611   $    (1,446 )     (7.0 )%
Percentage of
revenues                12.6 %       14.2 %                                14.0 %     13.0 %

Our general and administrative expenses result primarily from the costs associated with our executive, finance, legal and human resource functions.

Three Months Ended September 30, 2013 Compared with Three Months Ended September 30, 2012

General and administrative expense was $6.2 million during the three months ended September 30, 2013; a decrease of $0.1 million, or 2.5%, compared with $6.3 million during the three months ended September 30, 2012, essentially flat for the third quarter.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

General and administrative expense was $19.2 million during the nine months ended September 30, 2013, a decrease of $1.4 million, or 7.0%, compared with $20.6 million during the nine months ended September 30, 2012. The decrease was primarily due to the reduction in salary and fringe benefits of $0.8 million as a result of lowering our headcount through reductions in force and the cost savings realized by three weeks of unpaid shutdown taken by our employees. As a result of our tightened control over discretionary spending, we reduced our professional fees by $0.3 million and our utilities and other facility costs by $0.4 million compared to the same period in 2012.

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