UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2004 |
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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
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AXCELIS TECHNOLOGIES, INC. |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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34-1818596 |
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(State or other
jurisdiction of |
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(IRS Employer Identification No.) |
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108
Cherry Hill Drive |
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(Address of principal executive offices, including zip code) |
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(978) 787-4000 |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of class |
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Name of each exchange on which registered |
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None |
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None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.
Indicate by check mark if whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o.
As of August 4, 2004 there were 99,949,743 shares of the registrant’s common stock outstanding.
2
AXCELIS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three months ended |
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Six months ended |
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2004 |
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2003 |
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2004 |
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2003 |
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Revenue |
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Systems |
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$ |
106,834 |
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$ |
53,910 |
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$ |
198,590 |
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$ |
106,477 |
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Services |
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41,178 |
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30,761 |
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80,270 |
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60,599 |
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Royalties, primarily Sumitomo Eaton Nova Corporation |
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3,336 |
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1,258 |
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6,713 |
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3,023 |
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151,348 |
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85,929 |
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285,573 |
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170,099 |
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Cost of revenue |
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82,948 |
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57,655 |
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166,997 |
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112,385 |
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Gross profit |
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68,400 |
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28,274 |
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118,576 |
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57,714 |
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Operating expenses |
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Research & development |
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15,927 |
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15,927 |
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31,364 |
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32,103 |
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Selling |
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12,836 |
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11,509 |
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24,435 |
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23,607 |
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General & administrative |
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11,607 |
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9,099 |
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22,702 |
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19,542 |
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Amortization of intangible assets |
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612 |
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365 |
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1,224 |
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730 |
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40,982 |
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36,900 |
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79,725 |
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75,982 |
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Income (loss) from operations |
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27,418 |
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(8,626 |
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38,851 |
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(18,268 |
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Other income (expense) |
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Equity income of Sumitomo Eaton Nova Corporation |
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7,578 |
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1,298 |
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13,147 |
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4,493 |
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Interest income |
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338 |
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523 |
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634 |
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1,054 |
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Interest expense |
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(1,702 |
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(1,571 |
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(3,374 |
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(3,111 |
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Other—net |
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(55 |
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(557 |
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(646 |
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(678 |
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6,159 |
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(307 |
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9,761 |
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1,758 |
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Income (loss) before income taxes |
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33,577 |
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(8,933 |
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48,612 |
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(16,510 |
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Income taxes (credit) |
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(894 |
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69,945 |
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560 |
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68,694 |
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Net income (loss) |
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$ |
34,471 |
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$ |
(78,878 |
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$ |
48,052 |
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$ |
(85,204 |
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Basic net income (loss) per share |
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$ |
0.35 |
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$ |
(0.80 |
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$ |
0.48 |
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$ |
(0.87 |
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Diluted net income (loss) per share |
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0.33 |
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(0.80 |
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0.47 |
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(0.87 |
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Shares used in computing |
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Basic net income (loss) per share |
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99,286 |
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98,289 |
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99,247 |
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98,284 |
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Diluted net income (loss) per share |
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107,763 |
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98,289 |
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107,724 |
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98,284 |
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See accompanying Notes to Consolidated Financial Statements
3
AXCELIS TECHNOLOGIES, INC.
(In thousands, except per share amounts)
(Unaudited)
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June 30, |
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December 31, |
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ASSETS |
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Current assets |
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Cash & cash equivalents |
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$ |
139,095 |
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$ |
93,249 |
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Restricted cash |
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3,370 |
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3,800 |
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Short-term investments |
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18,616 |
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14,972 |
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Accounts receivable, net |
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106,756 |
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73,751 |
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Inventories |
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122,259 |
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123,985 |
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Other current assets |
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16,356 |
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20,102 |
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Total current assets |
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406,452 |
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329,859 |
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Property, plant & equipment, net |
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77,604 |
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80,927 |
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Investment in Sumitomo Eaton Nova Corporation |
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85,455 |
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73,327 |
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Goodwill |
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46,773 |
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46,774 |
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Intangible assets |
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18,895 |
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20,119 |
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Restricted cash, long-term portion |
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2,616 |
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2,616 |
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Other assets |
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27,783 |
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31,973 |
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$ |
665,578 |
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$ |
585,595 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
40,731 |
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$ |
36,335 |
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Accrued compensation |
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19,224 |
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15,061 |
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Warranty |
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15,762 |
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17,000 |
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Income taxes |
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5,694 |
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7,109 |
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Deferred revenue |
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30,923 |
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14,441 |
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Other current liabilities |
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14,218 |
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11,925 |
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Total current liabilities |
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126,552 |
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101,871 |
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Long-term debt |
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125,000 |
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125,000 |
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Other long-term liabilities |
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10,683 |
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5,474 |
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Stockholders’ equity |
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Preferred stock |
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— |
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— |
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Common stock |
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100 |
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99 |
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Additional paid-in capital |
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454,550 |
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451,389 |
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Deferred compensation |
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(590 |
) |
(811 |
) |
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Treasury stock |
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(1,218 |
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(1,218 |
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Retained earnings deficit |
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(53,455 |
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(101,507 |
) |
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Accumulated other comprehensive income |
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3,956 |
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5,298 |
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403,343 |
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353,250 |
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$ |
665,578 |
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$ |
585,595 |
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See accompanying Notes to Consolidated Financial Statements
4
AXCELIS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six months ended |
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2004 |
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2003 |
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Operating activities |
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Net income (loss) |
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$ |
48,052 |
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$ |
(85,204 |
) |
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Adjustments required to reconcile net income (loss) to net cash provided by (used for) operating activities |
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Depreciation and amortization |
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10,006 |
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11,712 |
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Amortization of intangible assets |
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1,224 |
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730 |
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Stock compensation expense, net of forfeitures |
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133 |
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85 |
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Undistributed income of Sumitomo Eaton Nova Corporation |
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(13,147 |
) |
(4,493 |
) |
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Deferred income taxes |
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— |
|
73,685 |
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Changes in operating assets & liabilities |
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Accounts receivable |
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(33,151 |
) |
(9,900 |
) |
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Inventories |
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1,219 |
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6,243 |
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Other current assets |
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(2,669 |
) |
(3,106 |
) |
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Accounts payable & other current liabilities |
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9,641 |
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(7,816 |
) |
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Deferred revenue |
|
21,508 |
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— |
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Income taxes |
|
(1,415 |
) |
(5,340 |
) |
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Other assets and liabilities |
|
(343 |
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(6,875 |
) |
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Other—net |
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— |
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(1,777 |
) |
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Net cash provided by (used for) operating activities |
|
41,058 |
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(32,056 |
) |
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Investing activities |
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Purchases of short-term investments, net |
|
(3,644 |
) |
(1,934 |
) |
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Proceeds from sale of building |
|
5,958 |
|
— |
|
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Expenditures for property, plant & equipment |
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(1,995 |
) |
(2,170 |
) |
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Decrease in restricted cash |
|
430 |
|
135 |
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Other-net |
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— |
|
75 |
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Net cash provided by (used for) investing activities |
|
749 |
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(3,894 |
) |
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Financing activities |
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|
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Proceeds from the exercise of stock options |
|
1,310 |
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— |
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Proceeds from employee stock purchase plan |
|
2,436 |
|
2,147 |
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Net cash provided by financing activities |
|
3,746 |
|
2,147 |
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Effect of exchange rate changes on cash |
|
293 |
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(91 |
) |
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Net increase (decrease) in cash & cash equivalents |
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45,846 |
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(33,894 |
) |
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Cash & cash equivalents at beginning of period |
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93,249 |
|
146,298 |
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Cash & cash equivalents at end of period |
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$ |
139,095 |
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$ |
112,404 |
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See accompanying Notes to Consolidated Financial Statements
5
AXCELIS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In thousands, except per share amounts)
Note 1. Nature of Business and Basis of Presentation
Axcelis Technologies, Inc. (“Axcelis” or the “Company”), is a worldwide producer of ion implantation, dry strip, rapid thermal processing and photostabilization equipment used in the fabrication of semiconductors 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. The Company owns 50% of the equity of a joint venture with Sumitomo Heavy Industries, Ltd. in Japan. This joint venture, which is known as Sumitomo Eaton Nova Corporation, or SEN, licenses technology from the Company relating to the manufacture of ion implantation products and has exclusive rights to manufacture and sell these products to the territory of Japan. SEN is the leading producer of ion implantation equipment in Japan.
The accompanying unaudited consolidated financial statements have been prepared in accordance with 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 (except for adjustments to record a valuation allowance for deferred tax assets in 2003 and to record the reversal of income taxes payable in 2004 (see Note 9) and to reflect a change in estimate relating to unfunded pension liabilities and other benefit claims in 2003 (see Note 10)), considered necessary for a fair presentation 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.
Certain prior year amounts have been reclassified to conform with the current year presentation.
The balance sheet at December 31, 2003 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, 2003.
Note 2. Revenue Recognition
The Company’s revenue recognition policy involves significant judgment by management. As described in detail below, the Company considers a broad array of facts and circumstances in determining when to recognize revenue, including contractual obligations to the customer, the complexity of the customer’s post delivery acceptance provisions, and the installation process. In the future, if the post delivery acceptance provisions and installation process become more complex or result in a materially lower rate of acceptance than we now experience, the Company may have to revise its revenue recognition policy, which could affect the timing of revenue recognition.
For revenue arrangements prior to July 1, 2003 Axcelis generally recognized the full sale price at the time of shipment to the customer. The costs of system installation at the customer’s site were accrued at the time of shipment for installation and acceptance testing performance obligations incurred at the time of sale. The Company recognized the full sales price at the time of shipment as management believes that the customer’s post delivery acceptance provisions and installation process were established to be routine, commercially inconsequential and perfunctory because the process was a replication of the pre-shipment procedures. Also, customer payment terms typically provide that the majority of the purchase price is payable upon shipment. Terms do generally contain delayed payment arrangements for a portion of the purchase price, which are typically time-based.
In November 2002, the Financial Accounting Standards Board’s Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. EITF 00-21 became effective for revenue arrangements entered into in periods beginning after June 15, 2003. For revenue arrangements occurring
6
on or after July 1, 2003, the Company has revised its revenue recognition policy to comply with the provisions of EITF 00-21.
In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” SAB 104 supersedes Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements (“SAB 101”). SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. As a result, the adoption of this pronouncement did not have any impact on the Company’s consolidated financial statements.
Axcelis’ revenue transactions include sales of systems under multiple element arrangements. Revenue under these arrangements is allocated to each element, except systems, based upon its estimated fair market value. The amount of revenue allocated to systems is calculated on a residual method. Under this method, the total value of the arrangement is allocated first to the undelivered elements, with the residual amount being allocated to systems revenue. The value of the undelivered elements includes (a) the greater of (i) the fair value of the installation or (ii) the portion of the sales price that will not be received until the installation is completed (the “retention”) plus (b) the fair value of all other undelivered elements. The amount allocated to installation is based upon hourly rates and the estimated time to complete the service. The fair value of all other undelivered elements is based upon the price charged when these elements are sold separately. System revenue is generally recognized upon shipment provided title and risk of loss has passed to the customer, evidence of an arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance. Revenue for installation services is recognized at the time of customer acceptance. Revenue for other elements is recognized at the time products are shipped or the related services are performed.
Management continues to believe recognition of systems revenue at the time of shipment is appropriate because the customer’s post delivery acceptance provisions and installation process have been established to be routine, commercially inconsequential and perfunctory because the process is a replication of the pre-shipment procedures. The majority of Axcelis’ systems are designed and tailored to meet the customer’s specifications as outlined in the contract between the customer and Axcelis. To ensure that the customer’s specifications are satisfied, per contract terms, many customers request that newer systems are to be tested at Axcelis’ facilities prior to shipment, normally with the customer present, under conditions that substantially replicate the customer’s production environment and the customer’s criteria are confirmed to have been met. Customers for mature products generally do not require pre-shipment testing. Axcelis has never failed to successfully complete a system installation. Should an installation not be successfully completed, the contractual provisions do not provide for forfeiture, refund or other purchase price concession beyond those prescribed by the provisions of the Uniform Commercial Code applicable generally to such transactions.
In the small number of instances where Axcelis is unsure of meeting the customer’s specifications or obtaining customer acceptance upon shipment of the system or for initial shipments of systems with new technologies, Axcelis will defer the recognition of systems revenue until written customer acceptance of the system. This deferral period is generally within twelve months of shipment.
Service revenue includes revenue from spare parts, equipment upgrades and maintenance services. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Revenue related to time and material services is recorded when the services are performed. Revenue related to spare parts sales is recognized upon the later of shipment or when the title and risk of loss passes to the customer.
Note 3. Net Income (Loss) Per Share
Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share,” requires two presentations of earnings per share, “basic” and “diluted.” 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 includes the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued. A reconciliation of net income and shares used in computing basic and diluted earnings per share follows:
7
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Three Months Ended June 30, 2004 |
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Six Months Ended June 30, 2004 |
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Income |
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Shares |
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Per Share |
|
Income |
|
Shares |
|
Per Share |
|
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|
|
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|
|
|
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|
|
|
|
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|
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|
||||
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
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Income available to common stockholders |
|
$ |
34,471 |
|
99,286 |
|
$ |
0.35 |
|
$ |
48,052 |
|
99,247 |
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Effect of Diliutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Options |
|
|
|
2,227 |
|
|
|
|
|
2,227 |
|
|
|
||||
|
Convertible bonds |
|
|
|
6,250 |
|
|
|
|
|
6,250 |
|
|
|
||||
|
Interest on convertible bonds, net of tax |
|
1,448 |
|
|
|
|
|
2,897 |
|
|
|
|
|
||||
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|
|
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|
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|
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||||
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Dilued EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income available to common stockholders adjusted for options and conversion of bonds |
|
$ |
35,919 |
|
107,763 |
|
$ |
0.33 |
|
$ |
50,949 |
|
107,724 |
|
$ |
0.47 |
|
|
|
|
Three Months Ended June 30, 2003 |
|
Six Months Ended June 30, 2003 |
|
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|
|
Income |
|
Shares |
|
Per Share |
|
Income |
|
Shares |
|
Per Share |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income available to common stockholders |
|
$ |
(78,878 |
) |
98,289 |
|
$ |
(0.80 |
) |
$ |
(85,204 |
) |
98,284 |
|
$ |
(0.87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Effect of Diliutive Securities |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income available to common stockholders adjusted for options and conversion of bonds |
|
$ |
(78,878 |
) |
98,289 |
|
$ |
(0.80 |
) |
$ |
(85,204 |
) |
98,284 |
|
$ |
(0.87 |
) |
The Company has excluded 6,511 and 6,514 of common stock equivalents attributable to outstanding stock options and restricted stock, computed using the treasury stock method, and conversion of the notes, computed using the if converted method, from the computation of diluted earnings per share for the three and six months ended June 30, 2003, respectively, because they were not dilutive.
Note 4. Comprehensive Income (Loss)
The components of comprehensive income (loss) follow:
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
34,471 |
|
$ |
(78,878 |
) |
$ |
48,052 |
|
$ |
(85,204 |
) |
|
Foreign currency translation adjustments |
|
(4,076 |
) |
803 |
|
(1,342 |
) |
1,199 |
|
||||
|
Comprehensive income (loss) |
|
$ |
30,395 |
|
$ |
(78,075 |
) |
$ |
46,710 |
|
$ |
(84,005 |
) |
8
Note 5. Inventories
The components of inventories follow:
|
|
|
June 30, |
|
December 31, |
|
||
|
|
|
|
|
|
|
||
|
Raw materials |
|
$ |
82,954 |
|
$ |
84,773 |
|
|
Work-in-process |
|
32,751 |
|
32,292 |
|
||
|
Finished goods |
|
6,554 |
|
6,920 |
|
||
|
|
|
$ |
122,259 |
|
$ |
123,985 |
|
Note 6. Restructuring
In 2003 the Company recorded a restructuring charge of $4.9 million related to severance and other benefits associated with reduction in force actions, which reduced headcount by approximately 200 permanent positions. At June 30, 2004, $4.7 million had been paid, of which $0.3 million was paid in the second quarter of 2004 and $0.7 million was paid during the six months ended June 30, 2004. The remaining balance of $0.2 million is expected to be paid by the end of the third quarter of 2004.
Note 7. Product Warranty and Installation
The Company offers a one to three year warranty for all of its products, the terms and conditions of which vary depending upon the product sold. Prior to July 1, 2003, the Company estimated the warranty and product installation costs that may be incurred and recorded a liability in the amount of such costs at the time product revenue was recognized. Subsequent to July 1, 2003, in connection with the change in its revenue recognition policy (see Revenue Recognition), the Company no longer accrues the estimated costs of its installation but defers the revenue related to the greater of the fair value of the installation services or the amount of revenue that is contingent upon the completion of the installation services. Factors that affect the Company’s determination of warranty and installation 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 warranty liability and adjusts the amount as necessary.
Changes in the Company’s product warranty and installation liability are as follows:
|
|
|
2004 |
|
2003 |
|
||
|
Balance at December 31 |
|
$ |
17,000 |
|
$ |
16,625 |
|
|
Warranties and installations issued during the period |
|
13,526 |
|
12,875 |
|
||
|
Settlements made during the period |
|
(15,014 |
) |
(12,949 |
) |
||
|
Changes in liability for pre-existing warranties and installation during the period |
|
250 |
|
(1,603 |
) |
||
|
Balance as of June 30 |
|
$ |
15,762 |
|
$ |
14,948 |
|
Note 8. Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” Axcelis has elected to follow the provisions of Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees,” to account for stock-based awards to employees. Under APB No. 25, compensation expense with respect to such awards is not recognized, if on the date the awards were granted, the exercise price was not less than the market value of the common shares.
As required by SFAS No. 123 the following pro forma information is presented as if Axcelis had accounted for stock-based awards to its employees granted subsequent to 1995 under the fair value method. The fair values of the options granted and shares purchased under the Employee Stock Purchase Plan have been estimated at the date of grant using the Black-Scholes options valuation model. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because Axcelis’ options have
9
characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
For purposes of the following pro forma information, the estimated fair values of the options are assumed to be amortized to expense over the options’ vesting periods.
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
34,471 |
|
$ |
(78,878 |
) |
$ |
48,052 |
|
$ |
(85,204 |
) |
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(6,070 |
) |
(4,178 |
) |
(10,394 |
) |
(9,364 |
) |
||||
|
Pro forma net income (loss) |
|
$ |
28,401 |
|
$ |
(83,056 |
) |
$ |
37,658 |
|
$ |
(94,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) per share |
|
|
|
|
|
|
|
|
|
||||
|
Basic – as reported |
|
$ |
0.35 |
|
$ |
(0.80 |
) |
$ |
0.48 |
|
$ |
(0.87 |
) |
|
Basic – pro forma |
|
0.29 |
|
(0.85 |
) |
0.38 |
|
(0.96 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted – as reported |
|
$ |
0.33 |
|
$ |
(0.80 |
) |
$ |
0.47 |
|
$ |
(0.87 |
) |
|
Diluted – pro forma |
|
0.28 |
|
(0.85 |
) |
0.37 |
|
(0.96 |
) |
||||
Note 9. Income Taxes
The Company has deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences, which are available to reduce taxable income in future periods. The aggregate amount of deferred tax assets before valuation allowance was $91.6 million at December 31, 2003. SFAS No. 109, “Accounting for Income Taxes,” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the Company operates, length of carryback and carryforward periods, existing sales backlog and projections of future operating results. Where there are cumulative losses in recent years, SFAS No. 109 creates a strong presumption that a valuation allowance is needed. This presumption can be overcome in very limited circumstances.
As of March 31, 2003 and December 31, 2002, the Company’s evaluation of the realization of these assets was based upon evidence of cumulative historical profitability and estimates of future taxable income. The Company was profitable in year 2000 but was not profitable in years 2001 and 2002. Projections of future earnings were based on revenue assumptions consistent with industry forecasts for the next three years along with the necessary operating expenses to support the Company’s revenue assumptions. Based on these projections, the Company estimated that the loss carryforwards would be fully utilized. During the second quarter of 2003, the Company entered a three year cumulative loss position and revised its projections of the amount and timing of future earnings. Due to these factors as well as the uncertainty of the amount and timing of profitability in future periods, the Company increased its valuation allowance by $69.7 million to record a full valuation allowance for all future tax benefits during the second quarter of 2003.
The Company expects to record a full valuation allowance on future tax benefits until it can sustain an appropriate level of profitability and until such time, the Company would not expect to recognize such future tax benefits in its future results of operations. However, going forward, if there is sufficient evidence, in accordance with the provisions of SFAS No. 109, to support the ultimate realization of income tax benefits attributable to net operating losses, tax credit carryforwards and other deductible temporary differences, a reduction in the valuation allowance may be recorded and the carrying value of deferred tax assets may be restored, resulting in a non-cash credit to earnings.
Income tax expense, primarily attributable to foreign operations, for the three and six month periods ended June 30, 2004 has been reduced by $4.0 million from reversal of income tax accruals recorded in prior years related to the underlying tax matters that were resolved in the second quarter of 2004.
10
Note 10. General and Administrative Expenses
General and administrative expenses for the three and six month periods ended June 30, 2003 were reduced by $1.7 million, representing an adjustment to reflect a change in estimate relating to an overaccrual for unfunded pension liabilities and other benefit claims recorded in prior periods.
Note 11. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (FIN 46). FIN 46 provides a new consolidation model that determines control and consolidation based on potential variability in gains and losses. The provisions of FIN 46 are effective for enterprises with variable interests in variable interest entities created after January 31, 2003. For public companies with variable interest in variable interest entities created before February 1, 2003, the provisions of FIN 46 are to be applied no later than March 31, 2004. The Company has determined that its equity investment in SEN does not constitute a variable interest entity that would require consolidation. Accordingly, FIN 46 did not have any impact on the Company’s consolidated financial statements.
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,” “Outlook,” and “Risk Factors” in this MD&A. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting forward-looking statements.
We are a worldwide producer of ion implantation, dry strip, rapid thermal processing and photostabilization equipment used in the fabrication of semiconductors. In addition, we provide extensive aftermarket service and support, including spare parts, equipment upgrades, and maintenance services. We own 50% of the equity of a joint venture, known as SEN, with Sumitomo Heavy Industries, Ltd. in Japan. SEN licenses technology from the Company relating to the manufacture of ion implantation products and has exclusive rights to manufacture and sell these products to the territory of Japan. SEN is the leading producer of ion implantation equipment in Japan.
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 the Company’s control. As a result, the Company’s revenues and gross margins, to the extent affected by increases or decreases in volume, can fluctuate significantly from year to year and period to period. The Company’s expense base is largely fixed and does not vary significantly with changes in volume. Therefore, the Company expects to experience significant fluctuations in operating results and cash flows depending on the level of capital expenditures by semiconductor equipment manufacturers.
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.
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, revenues and expenses, and related disclosure of contingent assets and liabilities. On
11
an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, income taxes, accounts receivable, inventory and warranty obligations. Management bases its estimates 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.
The Company believes the following accounting policies are critical in the portrayal of our financial condition and results of operations and require management’s most significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
The Company’s revenue recognition policy involves significant judgment by management. As described in detail below, the Company considers a broad array of facts and circumstances in determining when to recognize revenue, including contractual obligations to the customer, the complexity of the customer’s post delivery acceptance provisions, and the installation process. In the future, if the post delivery acceptance provisions and installation process become more complex or result in a materially lower rate of acceptance than we now experience, the Company may have to revise its revenue recognition policy, which could affect the timing of revenue recognition.
For revenue arrangements prior to July 1, 2003 Axcelis generally recognized the full sale price at the time of shipment to the customer. The costs of system installation at the customer’s site were accrued at the time of shipment for installation and acceptance testing performance obligations incurred at the time of sale. The Company recognized the full sales price at the time of shipment as management believes that the customer’s post delivery acceptance provisions and installation process were established to be routine, commercially inconsequential and perfunctory because the process was a replication of the pre-shipment procedures. Also, customer payment terms typically provide that the majority of the purchase price is payable upon shipment. Terms do generally contain delayed payment arrangements for a portion of the purchase price, which are typically time-based.
In November 2002, the Financial Accounting Standards Board’s Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the arrangement consideration should be measured and allocated to the separate units of accounting. EITF 00-21 became effective for revenue arrangements entered into in periods beginning after June 15, 2003. For revenue arrangements occurring on or after July 1, 2003, the Company has revised its revenue recognition policy to comply with the provisions of EITF 00-21.
In December 2003, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” SAB 104 supersedes Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements (“SAB 101”). SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“the FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. As a result, the adoption of this pronouncement did not have any impact on the Company’s consolidated financial statements.
Axcelis’ revenue transactions include sales of systems under multiple element arrangements. Revenue under these arrangements is allocated to each element, except systems, based upon its estimated fair market value. The amount of revenue allocated to systems is calculated on a residual method. Under this method, the total value of the arrangement is allocated first to the undelivered elements, with the residual amount being allocated to systems revenue. The value of the undelivered elements includes (a) the greater of (i) the fair value of the installation or (ii) the portion of the sales price that will not be received until the installation is completed (the “retention”) plus (b) the fair value of all other undelivered elements. The amount allocated to installation is based upon hourly rates and the estimated time to complete the service. The fair value of all other undelivered elements is based upon the price charged when these elements are sold separately. System revenue is generally recognized upon shipment provided title and risk of loss has passed to the customer, evidence of an arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance. Revenue for installation services is recognized at the time of customer acceptance. Revenue for other elements is recognized at the time products are shipped or the
12
related services are performed.
Management continues to believe recognition of systems revenue at the time of shipment is appropriate because the customer’s post delivery acceptance provisions and installation process have been established to be routine, commercially inconsequential and perfunctory because the process is a replication of the pre-shipment procedures. The majority of Axcelis’ systems are designed and tailored to meet the customer’s specifications as outlined in the contract between the customer and Axcelis. To ensure that the customer’s specifications are satisfied, per contract terms, many customers request that newer systems are to be tested at Axcelis’ facilities prior to shipment, normally with the customer present, under conditions that substantially replicate the customer’s production environment and the customer’s criteria are confirmed to have been met. Customers for mature products generally do not require pre-shipment testing. Axcelis has never failed to successfully complete a system installation. Should an installation not be successfully completed, the contractual provisions do not provide for forfeiture, refund or other purchase price concession beyond those prescribed by the provisions of the Uniform Commercial Code applicable generally to such transactions.
In the small number of instances where Axcelis is unsure of meeting the customer’s specifications or obtaining customer acceptance upon shipment of the system or for initial shipments of systems with new technologies, Axcelis will defer the recognition of systems revenue until written customer acceptance of the system. This deferral period is generally within twelve months of shipment.
Service revenue includes revenue from spare parts, equipment upgrades and maintenance services. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Revenue related to time and material services is recorded when the services are performed. Revenue related to spare parts sales is recognized upon the later of shipment or when the title and risk of loss passes to the customer.
Deferred Tax Assets
The Company has deferred tax assets resulting from tax credit carryforwards, net operating losses and other deductible temporary differences, which are available to reduce taxable income in future periods. The aggregate amount of deferred tax assets before valuation allowance was $91.6 million at December 31, 2003. SFAS No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the Company operates, length of carryback and carryforward periods, existing sales backlog and projections of future operating results. Where there are cumulative losses in recent years, SFAS No. 109 creates a strong presumption that a valuation allowance is needed. This presumption can be overcome in very limited circumstances.
As of March 31, 2003 and December 31, 2002, the Company’s evaluation of the realization of these assets was based upon evidence of cumulative historical profitability and estimates of future taxable income. The Company was profitable in year 2000 but was not profitable in years 2001 and 2002. Projections of future earnings were based on revenue assumptions consistent with industry forecasts for the next three years along with the necessary operating expenses to support the Company’s revenue assumptions. Based on these projections, the Company estimated that the loss carryforwards would be fully utilized within three years. During the second quarter of 2003, the Company entered a three year cumulative loss position and revised its projections of the amount and timing of future earnings. Due to these factors as well as the uncertainty of the amount and timing of profitability in future periods, the Company increased its valuation allowance by $69.7 million to record a full valuation allowance for all future tax benefits during the second quarter of 2003.
The Company expects to record a full valuation allowance on future tax benefits until it can sustain an appropriate level of profitability and until such time, the Company would not expect to recognize any significant tax benefits in its future results of operations. However, going forward, if there is sufficient evidence, in accordance with the provisions of SFAS No. 109, to support the ultimate realization of income tax benefits attributable to net operating losses, tax credit carryforwards and other deductible temporary differences, a reduction in the valuation allowance may be recorded and the carrying value of deferred tax assets may be restored, resulting in a non-cash credit to earnings.
Goodwill and Other Intangible Assets
We account for our acquisitions under the purchase method of accounting pursuant to Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations.” Goodwill represents the excess of cost over net assets,
13
including all identifiable intangible assets of acquired businesses that are consolidated. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized. Other intangible assets that are separable from goodwill and have determinable useful lives are valued separately and amortized over their useful lives. Such other identifiable intangible assets consist mainly of developed technology and customer related intangibles and are generally amortized over periods ranging from five to ten years. We have determined that all of our other intangible assets have finite lives.
The Company performs an annual impairment review of our goodwill. Impairment reviews may be performed more frequently if there are other indicators of impairment. The annual impairment test consists of determining the fair market value of the business unit through a discounted cash flow analysis. Management’s best judgments are employed in determining future market conditions that impact this discounted cash flow analysis. As a result of our annual review conducted as of December 31, 2003, we determined that there was no impairment of our goodwill. If we determine through the impairment review process that goodwill has been impaired, we would record the impairment charge in our statement of operations as a non-cash charge to earnings.
We assess the impairment of intangible assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:
• a significant underperformance relative to expected operating results;
• a significant change in the manner of our use of the acquired asset or the strategy for our overall business;
• a significant negative industry or economic trend; and
• our market capitalization relative to net book value.
As part of this assessment, we review the expected future undiscounted cash flows to be generated by the assets. When we determine that the carrying value of intangibles may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.
Accounts Receivable—Allowance for Doubtful Accounts
Axcelis records an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Axcelis’ customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be necessary.
Inventory—Allowance for Excess and Obsolescence
Axcelis records an allowance for estimated excess and obsolete inventory. The allowance is determined using management’s assumptions of future materials usage, based on estimates of future demand and market conditions. If actual market conditions become less favorable than those projected by management, additional inventory write-downs may be required.
Product Warranty and Installation Costs
The Company offers a one to three year warranty for all of its products, the terms and conditions of which vary depending upon the product sold. Prior to July 1, 2003, the Company estimated the costs that may be incurred under its standard warranty and product installation obligation and recorded a liability in the amount of such costs at the time product revenue was recognized. Subsequent to July 1, 2003, in connection with the change in its revenue recognition policy (see Revenue Recognition), the Company no longer accrues the estimated costs of its installation but defers the revenue related to the greater of the fair value of the installation services or the amount of revenue that is contingent upon the completion of the installation services. Factors that affect the Company’s warranty and installation 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 warranty liability and adjusts the amount as necessary.
14
The following table sets forth our results of operations as a percentage of net sales for the periods indicated:
|
|
|
Three months ended |
|
Six months ended |
|
||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
Systems |
|
70.6 |
% |
62.7 |
% |
69.5 |
% |
62.6 |
% |
|
Services |
|
27.2 |
|
35.8 |
|
28.1 |
|
35.6 |
|
|
Royalties |
|
2.2 |
|
1.5 |
|
2.4 |
|
1.8 |
|
|
|
|
100.0 |
|
100.0 |
|
100.0 |
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
45.2 |
|
32.9 |
|
41.5 |
|
33.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other costs and expenses |
|
|
|
|
|
|
|
|
|
|
Research & development |
|
10.5 |
|
18.5 |
|
11.0 |
|
18.9 |
|
|
Selling |
|
8.5 |
|
13.4 |
|
8.6 |
|
13.9 |
|
|
General & administrative |
|
7.7 |
|
10.6 |
|
7.9 |
|
11.5 |
|
|
Amortization of intangible assets |
|
0.4 |
|
0.4 |
|
0.4 |
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
18.1 |
|
(10.0 |
) |
13.6 |
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
Equity income of Sumitomo Eaton Nova Corporation |
|
5.0 |
|
1.5 |
|
4.6 |
|
2.6 |
|
|
Interest income |
|
0.2 |
|
0.6 |
|
0.2 |
|
0.6 |
|
|
Interest expense |
|
(1.1 |
) |
(1.8 |
) |
(1.2 |
) |
(1.8 |
) |
|
Other-net |
|
— |
|
(0.6 |
) |
(0.2 |
) |
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
22.2 |
|
(10.4 |
) |
17.0 |
|
(9.7 |
) |
|
Income taxes (credit) |
|
(0.6 |
) |
81.4 |
|
0.2 |
|
40.4 |
|
|
Net income (loss) |
|
22.8 |
% |
(91.8 |
)% |
16.8 |
% |
(50.1 |
)% |
Revenue
Revenue from systems was $106.8 million, or 70.6% of revenue for the second quarter of 2004 versus revenue from systems of $53.9 million, or 62.7% of revenue for the second quarter of 2003. Revenue from systems was $198.6 million, or 69.5% of revenue for the six months ended June 30, 2004 versus revenue from systems $106.5 million, or 62.6% of revenue for the six months ended June 30, 2003. The increase in sales of systems was primarily attributable to strong market demand resulting from high levels of chip production by our semiconductor manufacturing customers.
On a product basis, approximately 72% of revenue from systems for the second quarter of 2004 was from the sale of 200mm (8 inches) products and 28% was from the sale of 300mm (12 inches) products compared with 75% and 25%, respectively, for the second quarter of 2003. For the six months ended June 30, 2004 approximately 63% of systems revenue was from 200mm products and 37% was from 300mm products compared with 69% and 31%, respectively, for the six months ended June 30, 2003. Sales of 200mm products continue to be strong due to the expansion of existing 200 mm production capacity which has outpaced the investment in new 300 mm fabrication facilities.
Service revenue, which includes spare parts, equipment upgrades and maintenance services, was $41.2 million, or 27.2% of revenue for the second quarter of 2004, compared with $30.8 million, or 35.8% of revenue, for the second quarter of 2003. Service revenue was $80.3 million, or 28.1% of revenue for the six months ended June 30, 2004, compared with $60.6 million, or 35.6% of revenue for the six months ended June 30, 2003. The demand for our services increased primarily as a result of improved capacity utilization by our customers.
Royalties for the second quarter were $3.3 million, or 2.2% of revenue, in the second quarter of 2004, compared with $1.3 million, or 1.5% of revenue, in the second quarter of 2003. Royalties for the six months ended June 30, 2004 were $6.7 million, or 2.4% of revenue, compared with $3.0 million, or 1.8% of revenue, in the six months ended June 30, 2003.
15
Royalties increased by $2.0 million in the second quarter of 2004 compared with the second quarter of 2003 and by $3.7 million in the first half of 2004 due to higher SEN sales volume reflecting growth in demand for equipment by Japanese semiconductor manufacturers.
Revenue from sales of ion implantation products and services for the second quarter accounted for $120.9 million, or 79.9%, of total revenue in the second quarter of 2004, compared with $59.5 million, or 69.3%, of total revenue in the second quarter of 2003. Revenue from sales of ion implantation products and services for the six months ended June 30, 2004 accounted for $236.2 million, or 82.7%, of total revenue, compared with $126.7 million, or 74.5%, of total revenue for the six months ended June 30, 2003. The higher proportion of total revenue from the sale of ion implantation products and services in 2004 is a result of capacity expansion and investment in new technology by semiconductor manufacturers whereby capital spending for ion implantation products has outpaced increases in total wafer fab equipment spending.
Revenue from sales of other products and services, including dry strip products, photostabilization products and rapid thermal processing systems, accounted for $30.4 million, or 20.1%, of total revenue in the second quarter of 2004, compared with $26.4 million, or 30.7%, of total revenue in the second quarter of 2003. Revenue from sales of other products and services for the six months ended June 30, 2004 accounted for $49.4 million, or 17.3%, of total revenue, compared with $43.4 million, or 25.5%, of total revenue for the six months ended June 30, 2003. As discussed above, the lower proportion of revenue from sales of other products and services is the result of capital spending for ion implantation products outpacing total water fabrication equipment spending.
Gross Profit
Gross profit was 45.2% of revenue in the second quarter of 2004 compared with gross profit of 32.9% of revenue in the second quarter of 2003. Gross profit was 41.5% of revenue for the six months ended June 30, 2004 compared with gross profit of 33.9% of revenue for the six months ended June 30, 2003. Increased sales volume and the related increased absorption of fixed manufacturing costs were the primary drivers of the increase in gross profit in both the second quarter and six months ended June 30, 2004, as well as improved pricing due to favorable market conditions which have provided increased demand and an expanded customer base. Improved pricing accounted for approximately 3.1 of the 7.6 point increase in gross profit for the six months ended June 30, 2004.
Research and Development
Research and development expense was $15.9 million in the second quarter of 2004. While the components of research and development expense varied from year to year, the total amount of research and development expense did not change compared with the second quarter of 2003. Research and development expense was $31.4 million for the six months ended June 30, 2004, a decrease of $0.7 million, or 2.3%, compared with $32.1 million for the six months ended June 30, 2003 due primarily to lower R&D utilized demo tool amortization. Quarterly fluctuations are attributable principally to the timing of projects.
Selling
Selling expense was $12.8 million in the second quarter of 2004, an increase of $1.3 million, or 11.5%, compared with $11.5 million in the second quarter of 2003 primarily due to increased customer support and evaluation tool support costs, as well as increased variable compensation, offset in part by a lower salary expense due to an approximate 10% reduction in headcount. Selling expense was $24.4 million for the six months ended June 30, 2004, an increase of $0.8 million, or 3.5%, compared with $23.6 million for the six months ended June 30, 2003 primarily due to increased customer and evaluation tool support costs, as well as increased variable compensation, offset in part by a lower salary expense due to an approximate 10% reduction in headcount.
General and Administrative
General and administrative expense was $11.6 million in the second quarter of 2004, an increase of $2.5 million, or 27.6%, compared with $9.1 million in the second quarter of 2003. General and administrative expense was $22.7 million for the six months ended June 30, 2004, an increase of $3.2 million, or 16.4%, compared with $19.5 million for the six months ended June 30, 2003. General and administrative expense increased in the second quarter and six months ended June 30, 2004 due primarily to increased variable compensation as well as a $1.7 million adjustment recorded in the second quarter of 2003 related to a change in the estimated unfunded pension expense and other benefit claims recorded in prior periods.
16
Amortization of Intangible Assets
Amortization of intangible assets was $0.6 million in the second quarter of 2004, an increase of $0.2 million, or 67.7%, compared with $0.4 million in the second quarter of 2003. Amortization of intangible assets was $1.2 million for the six months ended June 30, 2004, an increase of $0.5 million, or 67.7%, from $0.7 million for the six months ended June 30, 2003. The increase in amortization is due primarily to the incremental amortization of intangible assets arising from the July 2003 acquisition of Matrix Integrated Systems, Inc.
Other Income (Expense)
Total other income was $6.2 million in the second quarter of 2004, an increase of $6.5 million compared with ($0.3) million in the second quarter of 2003. Total other income was $9.8 million for the six months ended June 30, 2004, an increase of $8.0 million compared with $1.8 million for the six months ended June 30, 2003. Other income consists primarily of equity income from SEN, which increased by $6.3 million and $8.6 million, respectively, for the three and six months ended June 30, 2004, compared with the same periods in 2003, due to higher SEN sales volume and profitability.
Income Taxes (Credit)
Income tax expense for the three and six month periods ended June 30, 2004 has been reduced by $4.0 million from reversal of income tax accruals recorded in prior years related to the underlying tax matters that were resolved in the second quarter of 2004. In 2004 the income tax provision is set at an estimated annual effective rate of 9%. Income tax expense relates principally to operating results of foreign entities in jurisdictions where the Company is taxable. Income tax expense attributable to U.S. operations is minimal because taxable income derived from the current year operating results is substantially offset by available net operating loss carryforwards.
The Company recorded income tax expense of $69.9 million and $68.7 million for the three and six months ending June 30, 2003. Income taxes in 2003 consisted primarily of a valuation allowance of $69.7 million recorded at June 30, 2003 to reduce the carrying value of deferred tax assets to zero.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at June 30, 2004 were $157.7 million compared with $108.2 million at December 31, 2003. The $49.5 million increase in cash, cash equivalents and short-term investments is mainly attributable to $41.1 million in cash generated by operations, $6 million in net proceeds from the sale of a building located in Beverly, Massachusetts in January 2004, and $3.7 million in proceeds from the exercise of stock options and the stock purchases under the Employee Stock Purchase Plan.
Net working capital was $279.9 million at June 30, 2004 compared with $228.0 million at December 31, 2003. The $51.9 increase in net working capital is attributable principally to the Company’s results of operations.
Capital expenditures were $2.0 million and $2.2 million for the six months ended June 30, 2004 and June 30, 2003, respectively. The Company has no significant capital projects planned for 2004 and total capital expenditures are projected to be at or below depreciation expense. Future capital expenditures beyond 2004 will depend on a number of factors, including the timing and rate of the expansion of our business.
Expenditures for demo tools, used in-house for research and development and training, and evaluation tools, which are located at customer's sites and are being evaluated for potential purchase, were approximately $5.6 million and $1.1 million for the first six months of 2003 as a result of a reduction in spending in response to existing market conditions in 2003. As market conditions began to improve in the latter half of 2003, spending on demo tools increased, resulting in full year spending of approximately $6.1 million. The Company expects to spend at least this amount for the full year of 2004. Demo and evaluation tools are reflected in other assets on the balance sheet.
The Company has no off-balance sheet arrangements.
In October 2003 the Company renegotiated its $50 million revolving credit facility to extend the maturity to October
17
2006. The purpose of the facility is to provide funds for working capital and general corporate purposes as required. To the extent that the Company has borrowings under the agreement, those borrowings would bear interest at the bank’s base rate, as defined in the agreement, or LIBOR plus an applicable percentage. The Company currently has no plans to borrow against the facility but may use the facility to support letters of credit in the future. The credit facility is secured by substantially all of the Company’s assets and contains certain financial and other restrictive covenants including minimum levels of tangible net worth, liquidity, profitability and indebtedness as well as maximum levels of capital spending. At June 30, 2004, the Company was in compliance with all covenants.
Axcelis’ liquidity is affected by many factors. Some of these factors are based on normal operations of the business and others relate to the uncertainties of global economies and the semiconductor equipment industry. See “Outlook” below. Although our cash requirements fluctuate based on the timing and extent of these factors, we believe that our existing cash and cash equivalents will be sufficient to satisfy our anticipated cash requirements for at least the next twelve months.
The Company has standby letters of credit of approximately $3.4 million to support certain operating lease obligations, workers’ compensation insurance, and certain value added tax claims in Europe. In addition, the Company has guarantees and surety bonds of approximately $9.1 million related to value added tax refunds in Europe. Of these standby letters of credit, guarantees and surety bonds, $6.0 million is cash collateralized at June 30, 2004. This is reflected as restricted cash on the balance sheet.
The Company’s performance for the quarter ended June 30, 2004 was directly related to semiconductor manufacturers’ increasing levels of capital expenditures to open new fabrication facilities and expand existing ones, as well as operational improvements implemented by the Company in recent quarters. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for semiconductors and the products utilizing them, the available manufacturing capacity in manufacturers’ fabrication facilities, and the ability of manufacturers to increase productivity in existing facilities without incurring additional capital expenditures. Currently, management believes that semiconductor manufacturers will continue to invest in capacity expansions and new technology through at least 2004. Based on bookings received in the first half of 2004, the Company believes it will realize benefits in terms of continuing high levels of revenues and profitability from this anticipated continuance of capital spending.
Recognize however that it is difficult for us to predict our customers’ capital spending plans, which can change very quickly. In addition, at our current sales level, each sale, or failure to make a sale, could have a material effect on us in a particular quarter.
On July 28, 2004, the Company announced its expectation that its revenues for the third quarter of 2004 will be in the range of $155 million to $165 million. Gross margins will be approximately 45%. Net income is expected to be $31 million to $35 million, the equivalent of $0.30 to $0.34 per diluted share. The Company also expects to generate $10 million to $15 million of cash during the third quarter.
Some of the matters discussed in this filing contain forward-looking statements regarding future events that are subject to risks and uncertainties. The following important factors, among others, could cause actual results to differ materially from those described by such statements. These factors include, but are not limited to: the cyclical nature of the semiconductor industry, our ability to keep pace with rapid technological changes in semiconductor manufacturing processes, the highly competitive nature of the semiconductor equipment industry, quarterly fluctuations in operating results attributable to the timing and amount of orders for our products and services, dependence on SEN (our Japanese joint venture) for access to the Japanese semiconductor equipment market, and those risk factors contained in the section titled “Outlook” and Exhibit 99.1 of this Form 10-Q, which is incorporated herein by reference. If any of those risk factors actually occurs, our business, financial condition and results of operations could be seriously harmed and the trading price of our common stock could decline.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A discussion of market risk exposures is included Exhibit 99.1 filed herewith. There has been no material change in the information provided as of the end of 2003.
18
Item 4. Controls and Procedures
(a) 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 the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods.
(b) Changes in Internal Controls. Except as set forth below, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during our second quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In response to the reportable conditions related to certain inventory and revenue recognition transactions disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, the Company has implemented enhancements to internal controls and procedures over revenue recognition and certain inventory accounting processes, which the Company believes adequately address the reportable conditions.
19
The Company is not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Axcelis Technologies, Inc. was held at the offices of Palmer & Dodge, LLP, 111 Huntington Avenue, Boston, Massachusetts on April 29, 2004. Out of 99,535,944 shares of Common Stock (as of the record date of March 8, 2004) entitled to vote at the meeting, 90,864,523 shares, or 91.3%, were present in person or by proxy.
(a) Election of Directors. Each of the three directors nominated for election at the Annual Meeting was elected by a plurality of votes cast, to serve for a three year term ending in 2006 and, until their successors are elected. The vote was as follows:
|
Nominee |
|
Number of Votes For |
|
Number of Votes Withheld |
|
|
Gary L. Tooker |
|
83,684,265 |
|
7,180,258 |
|
|
Patrick H. Nettles |
|
86,930,372 |
|
3,934,151 |
|
|
Alexander M. Cutler |
|
65,899,381 |
|
24,965,142 |
|
(b) Ratification of Appointment of Auditors. A majority of the securities present, or represented, and entitled to vote at the meeting voted in favor of the proposal to ratify the appointment by the Board of Directors of Ernst & Young LLP as independent auditors of the Company’s financial statements for the year ending December 31, 2004. The following sets forth the tally of the votes cast on the proposal:
|
Number of Votes For |
|
Number of Votes Against |
|
Number of Votes Abstaining |
|
Percentage For |
|
|
87,473,536 |
|
3,312,269 |
|
78,718 |
|
99.3 |
% |
None
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
|
Exhibit |
|
Description |
|
|
|
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation of the Company. Incorporated by reference from Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (Registration No. 333-36330). |
|
|
|
|
|
3.2 |
|
Bylaws of the Company, as amended as of January 23, 2002. Incorporated by reference from Exhibit 3.2 of the Company’s Form 10-K for the year ended December 31, 2001, filed with the Commission on March 12, 2002. |
|
|
|
|
|
3.3 |
|
Certificate of Designation of Series A Participating Preferred Stock, filed with the Secretary of State of Delaware on July 5, 2000. Incorporated by reference from Exhibit 3.3 of the Company’s Form 10-K for the year ended December 31, 2000, filed with the Commission on March 30, 2001. |
|
|
|
|
|
4.1 |
|
Indenture between the Company and State Street Bank and Trust Company, as Trustee, including the form of note, dated as of January 15, 2002. Incorporated by reference from Exhibit 4.1 to the Company’s Report on Form 8-K filed with the Commission on January 15, 2002. |
|
|
|
|
|
4.5 |
|
Revolving Credit Agreement dated as of October 3, 2003 among the Company, ABN Amro Bank N.V. and the other lenders named therein, as amended by the First Amendment to Revolving Credit Agreement, dated as of May 3, 2004. Pursuant to Regulation S-K, Item 601(b)(4)(iii), this exhibit has not been filed, since the total amount of the facility does not exceed 10% of the Company’s total assets at this time. The Company will furnish a copy of the Credit Agreement to the Commission on request. |
|
|
|
|
|
31.1 |
|
Certification of the Chief Executive Officer under Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302 of the Sarbanes-Oxley Act), dated August 6, 2004. Filed herewith. |
|
|
|
|
|
31.2 |
|
Certification of the Chief Financial Officer under Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302 of the Sarbanes-Oxley Act), dated August 6, 2004. Filed herewith. |
|
|
|
|
|
32.1 |
|
Certification of the Chief 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 6, 2004. Filed herewith. |
|
|
|
|
|
32.2 |
|
Certification of the Chief 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 6, 2004. Filed herewith. |
|
|
|
|
|
99.1 |
|
Factors Affecting Future Operating Results as of June 30, 2004. Filed herewith. |
|
|
|
|
|
99.2 |
|
Charter of the Audit Committee of the Board of Directors of Axcelis, as adopted on April 29, 2004.Filed herewith. |
b) Reports on Form 8-K
(i) A Current Report on Form 8-K was furnished to the Securities and Exchange Commission on April 27, 2004 relating to the Company’s announcement of earnings for its first quarter ended March 31, 2004.
(ii) A Current Report on Form 8-K was filed with the Securities and Exchange Commission on June 14, 2004 relating to the establishment by each Mary G. Puma, President and Chief Executive Officer, and Michael J. Luttati, Executive Vice President and Chief Operating Officer, of a Rule 10b5-1 Sales Plan to sell a portion of their equity positions in the Company on a predetermined schedule of minimum prices in an effort to gradually diversify their portfolios.
21
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
AXCELIS TECHNOLOGIES, INC. |
||
|
|
|
|
||
|
|
|
|
||
|
|
|
/s/ Stephen G. Bassett |
|
|
|
DATED: August 6, 2004 |
|
By: |
Stephen G. Bassett,
Chief Financial Officer |
|
22