Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2017

Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying consolidated financial statements include the consolidated accounts of the Company and its wholly‑owned, controlled subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years' financial statements to conform to the current year’s presentation.

Events occurring subsequent to December 31, 2017 have been evaluated for potential recognition or disclosure in the consolidated financial statements.

Use of Estimates

(b) Use of Estimates

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates and judgments, including those related to revenue recognition, the realizable value of inventories, valuing stock-based compensation instruments and reserves relating to tax assets and liabilities. Actual amounts could differ from these estimates. Changes in estimates are recorded in the period in which they become known.

Foreign Currency

The functional currency for substantially all operations outside the United States is the local currency. Financial statements for these operations are translated into United States dollars at year‑end rates as to assets and liabilities and average exchange rates during the year as to revenue and expenses. The resulting translation adjustments are recorded in stockholders’ equity as an element of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in other income (expense) in the Consolidated Statements of Operations.

For the year ended December 31, 2017 the Company had $1.1 million in foreign exchange gains. For the year ended December 31, 2016 the Company had $0.6 million in foreign exchange losses. For the year ended December 31, 2015 the Company did not have any material foreign exchange gains or losses.

Cash and Cash Equivalents

(d) Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and highly liquid investments with original maturities of ninety days or less. Cash equivalents consist primarily of money market funds, U.S Government and Agency Securities and deposit accounts. Cash equivalents are carried on the balance sheet at fair market value.

Inventories

(e) Inventories

Inventories are carried at lower of cost or net realizable value, determined using the first‑in, first‑out (“FIFO”) method, or market. The Company periodically reviews its inventories and makes provisions as necessary for estimated obsolescence or damaged goods to ensure values approximate lower of cost or net realizable value. The amount of such markdowns is equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices, and market conditions.

The Company records an allowance for estimated excess inventory. The allowance is determined using management’s assumptions of materials usage, based on estimates of demand and market conditions. If actual market conditions become less favorable than those projected by management, additional inventory write‑downs may be required.

Property, Plant and Equipment

(f) Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization.

Depreciation and amortization are recorded using the straight‑line method over the estimated useful lives of the related assets as follows:


Asset Classification	Estimated Useful Life
Land and buildings (under lease)		Lesser of the lease term or estimated useful life of the asset
Machinery and equipment		7 to 10 years

On January 30, 2015, the Company sold its corporate headquarters facility. As part of this sale, the Company also entered into a 22-year lease agreement. The Company accounted for the sale leaseback transaction as a financing arrangement for financial reporting purposes. The Company retained the historical costs of the property and the related accumulated depreciation on its financial books within property, plant and equipment and will continue to depreciate the property for financial reporting purposes over the lesser of its remaining useful life or its initial lease term of 22 years.

Repairs and maintenance costs are expensed as incurred. Expenditures for renewals and betterments are capitalized.

Impairment of Long-Lived Assets

(g) Impairment of Long‑Lived Assets

The Company records impairment losses on long-lived assets when events and circumstances indicate that these assets might not be recoverable. Recoverability is measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment is measured based on the amount by which the carrying value exceeds its fair value.

The Company did not have any indicators of impairment during the period ending December 31, 2017. The Company did not record an impairment charge in the years ended December 31, 2017, 2016, or 2015.

Actual performance could be materially different from our current forecasts, which could impact estimates of undiscounted cash flows and may result in the impairment of the carrying amount of the long-lived assets in the future. This could be caused by strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, or a material adverse change in the Company’s relationships with significant customers.

Concentration of Risk and Off-Balance Sheet Risk

(h) Concentration of Risk and Off‑Balance Sheet Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash equivalents and accounts receivable. The Company’s cash equivalents are principally maintained in investment grade money‑market funds, U.S. Government and Agency Securities and deposit accounts.

The Company has no significant off‑balance‑sheet risk such as currency exchange contracts, option contracts or other hedging arrangements.

The Company’s exposure to market risk for changes in interest rates relates primarily to cash equivalents. The primary objective of the Company’s investment activities is to preserve principal without significantly increasing risk. This is accomplished by investing in marketable high investment grade securities. The Company does not use derivative financial instruments to manage its investment portfolio and does not expect operating results or cash flows to be affected to any significant degree by any change in market interest rates.

The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. For selected overseas sales, the Company requires customers to obtain letters of credit before product is shipped. The Company maintains an allowance for doubtful accounts based on its assessment of the collectability of accounts receivable. The Company reviews the allowance for doubtful accounts quarterly. The Company does not have any off‑balance sheet credit exposure related to its customers.

The Company’s customers consist of semiconductor chip manufacturers located throughout the world and net sales to its ten largest customers accounted for 73.3%, 70.2% and 76.8% of revenue in 2017, 2016 and 2015, respectively.

For the year ended December 31, 2017 the Company had two customers representing 24.9% and 13.1% of total revenue, respectively. For the year ended December 31, 2016, the Company had one customer representing 17.0% of total revenue. For the year ended December 31, 2015, the Company had two customers representing 29.3% and 10.5% of total revenue, respectively.

As of December 31, 2017, the Company had three customers account for 19.8%, 11.8% and 10.6% of consolidated accounts receivable, respectively. As of December 31, 2016, the Company had four customers account for 22.0%, 12.3%, 12.0% and 10.6% of consolidated accounts receivable, respectively.

Some of the components and sub‑assemblies included in the Company’s products are obtained either from a sole source or a limited group of suppliers. Disruption to the Company’s supply source, resulting either from economic conditions or other factors, could affect its ability to deliver products to its customers.

Revenue Recognition

(i) Revenue Recognition

The Company’s revenue recognition policy involves significant judgment by management. 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, payment history, customer creditworthiness and the installation process.

The Company’s system sales transactions are made up of multiple elements, including the system itself and elements that are not delivered simultaneously with the system. These undelivered elements might include a combination of installation services, extended warranty and support and spare parts, all of which are covered generally by a single sales price.

The Company’s system revenue arrangements with multiple elements are divided into separate units of accounting if specified criteria are met, including whether the delivered element has stand‑alone value to the customer. If the criteria are met, then the consideration received is allocated among the separate units based on their relative selling price, and the revenue is recognized separately for each of the separate units.

The Company determines selling price for each unit of accounting (element) using vendor specific objective evidence (VSOE) or third‑party evidence (TPE), if they exist, otherwise, the Company uses best estimated selling price (BESP). The Company generally expects that it will not be able to establish TPE due to the nature of its products, and, as such, the Company typically will determine selling price using VSOE or BESP.

Where required, the Company determines BESP for an individual element based on consideration of both market and Company‑specific factors, including the selling price and profit margin for similar products, the cost to produce the deliverable and the anticipated margin on that deliverable and the characteristics of the markets in which the deliverable is sold.

Systems are not sold separately and VSOE or TPE is not available for the systems element. Therefore the selling price associated with systems is based on BESP. The allocated value for installation in the arrangement includes either (i) the relative selling price of the installation or (ii) the portion of the sales price that will not be received until the installation is completed (the “retention”). The selling price of elements such as extended warranty for support, spare parts and support labor is also based on BESP. For the majority of regions, the selling price of installation is based upon the fair value of the service performed, including labor, which is based upon the estimated time to complete the installation at hourly rates, and material components, both of which are sold separately, or VSOE. In regions where VSOE does not exist the Company uses BESP.

Product revenue for products which have demonstrated market acceptance, is generally recognized upon shipment provided title and risk of loss has passed to the customer, evidence of an arrangement exists, prices are contractually fixed or determinable, collectability is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance. Revenue from installation services is recognized at the time acceptance has occurred, as defined in the sales documentation or, for certain customers, when both acceptance has occurred and retention payment has been received. Revenue for other elements is recognized at the time products are shipped or the related services are performed.

The Company generally recognizes revenue for systems which have demonstrated market acceptance at the time of shipment because the customer’s post‑delivery acceptance provisions and installation process have been established to be routine, commercially inconsequential and perfunctory. The Company believes the risk of failure to complete a system installation is remote.

For initial shipments of systems with new technologies or in the small number of instances where the Company is unsure of meeting the customer’s specifications or obtaining customer acceptance upon shipment of the system, it will defer the recognition of systems revenue and related costs until written customer acceptance of the system is obtained. This deferral period is generally within twelve months of shipment.

Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts, or based on parts usage, where appropriate. Revenue related to service hours is recognized when the services are performed.

Product revenue includes revenue from system sales, sales of spare parts, the spare parts component of maintenance and service contracts and product upgrades. Services revenue includes the labor component of maintenance and service contract amounts charged for on‑site service personnel.

Axcelis reports revenue net of any taxes collected from customers and remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

Shipping and Handling Costs

(j) Shipping and Handling Costs

Shipping and handling costs are included in cost of revenue.

Stock-Based Compensation

(k) Stock‑Based Compensation

The Company generally recognizes compensation expense for all stock-based payments to employees and directors, including grants of stock options and restricted stock units, based on the grant‑date fair value of those stock‑based payments using the Black‑Scholes option pricing model, adjusted for expected forfeitures. Other valuation models may be utilized in the limited circumstances where awards with market-based vesting considerations, such as the price of the Company’s common stock, or performance based awards, are granted. Stock‑based compensation expense is recognized ratably over the requisite service period. For each stock option or restricted stock unit grant with vesting based on a combination of time, market or performance conditions, where vesting will occur if either condition is met, the related compensation costs are recognized over the shorter of the explicit service period or the derived service period.

See Note 11 for additional information relating to stock‑based compensation.

Income Taxes

(l) Income Taxes

The Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and operating loss and tax credit carryforwards.

The Company’s consolidated financial statements contain certain deferred tax assets which have arisen primarily as a result of operating losses, as well as other temporary differences between financial and tax accounting. The Company establishes a valuation allowance if the likelihood of realization of the deferred tax assets is reduced based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets. The Company evaluates the weight of all available evidence to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized.

Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest related to unrecognized tax benefits as interest expense and penalties as operating expense in the consolidated statements of operations.

Computation of Net Income per Share

(m) Computation of Net Income per Share

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

The components of net income per share are as follows:


	Year ended December 31,
	2017		2016		2015
	(in thousands, except per share data)
Net income available to common stockholders	$	126,959	$	11,001	$	14,678
Weighted average common shares outstanding used in computing basic income per share		30,866		29,195		28,595
Incremental options and RSUs		2,570		1,752		1,634
Weighted average common shares used in computing diluted net income per share		33,436		30,947		30,229
Net income per share
Basic	$	4.11	$	0.38	$	0.51
Diluted	$	3.80	$	0.36	$	0.49

Diluted weighted average common shares outstanding does not include options and restricted stock units

outstanding to purchase 0.9 million and 0.9 million common equivalent shares for the periods ended December 31, 2016 and 2015, respectively, as their effect would have been anti-dilutive.

Accumulated Other Comprehensive Income

(n) Accumulated Other Comprehensive Income

The following table presents the changes in accumulated other comprehensive income, net of tax, by component for the year ended December 31, 2017:


	Foreign		Defined benefit
	currency		pension plan		Total
	(in thousands)
Balance at December 31, 2016	$	(1,591)	$	(688)	$	(2,279)
Other comprehensive income and pension reclassification		4,347		108		4,455
Balance at December 31, 2017	$	2,756	$	(580)	$	2,176

Recent Accounting Guidance

(o) Recent Accounting Guidance

Accounting Standards or Updates Recently Adopted

In July 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-11, “Simplifying the Measurement of Inventory,” which changes the inventory measurement principles for entities using the first-in, first-out (FIFO) or average cost methods. For entities utilizing one of these methods, the inventory measurement principle changes from lower of cost or market to the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the reasonably predictable costs of completion, disposal and transportation. The Company adopted this ASU prospectively in the first quarter of 2017, which did not have a material impact on our financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09 “Compensation — Stock Compensation,” which changes the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amended guidance eliminates the requirement to record excess tax benefits as a reduction in current taxes payable and an increase to additional paid-in capital. The Company adopted this ASU in the first quarter of 2017, in part prospectively and in part retrospectively, as permitted by the ASU.

The Company prospectively adopted the provisions of ASU No. 2016-09 relating to the accounting for excess tax benefits. Axcelis had tax deductions in excess of recognized compensation cost of $29.5 million for the year ended December 31, 2017 which resulted in a tax benefit of $10.3 million.

The Company retrospectively adopted the provisions of ASU 2016-09 related to the presentation of employee taxes. These provide that when an employer withholds shares for taxes on vesting of equity compensation, the value withheld is presented as a financing activity on the statement of cash flows. This resulted in a $1.2 million, eleven thousand and an eight thousand dollar reduction in net cash provided by financing activities for the years ended December 31, 2017, 2016 and 2015, respectively. Prior to adoption, these amounts were reflected within cash flows from operating activities.

The Company has also elected to continue to estimate a forfeiture rate associated with our stock-based awards and related expense.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 203): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This ASU requires the statement of cash flows to explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statement of cash flows. On January 1, 2017, the Company early adopted this ASU retrospectively, resulting in $6.9 million of restricted cash being included in the beginning balances of cash, cash equivalents and restricted cash balances on the statement of cash flows for the periods presented. Please see Note 3 for additional information.

Accounting Standards or Updates Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers” (Topic 606): Identifying Performance Obligations and Licensing, which further clarifies performance obligations in a contract with a customer. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers” (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides a more narrow interpretation of ASU No. 2014-09. In July, 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies the transition periods related to public and private business entities. These ASUs (collectively referred to as “Topic 606”) are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods.

The Company has substantially completed the implementation of Topic 606 and has identified the necessary changes to its policies, processes, systems, and controls.

The Company will adopt Topic 606, effective January 1, 2018, using the modified retrospective approach. The cumulative effect of adopting Topic 606 will be a $1.6 million increase to retained earnings on January 1, 2018. We have completed our assessment of the effect of adoption. Based on our assessment, under ASC 606 we will no longer value any installation performance obligation as the greater of the standalone selling price or retention, but rather only value installation at the standalone selling price.

In February 2016, the FASB issued ASU No. 2016-02 “Leases.” In July, 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which clarifies the transition periods related to public and private business entities. The ASU requires lessees to recognize the rights and obligations created by most leases as assets and liabilities on their balance sheet and continue to recognize expenses on their income statement over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted for all entities. We are currently evaluating the impact of ASU 2016-02 on the consolidated financial statements and disclosures.

In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments.” The ASU is intended to add or clarify guidance on the classification of certain receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact of ASU 2016-15 on the consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU No. 2017-07 “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The ASU is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment applies to all entities offering a defined benefit pension plan, other postretirement benefit plans, or other types of benefits accounted for under Topic 715. The amendments in the ASU require an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within the annual period. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We are currently evaluating the impact of ASU 2017-07 on the consolidated financial statements and disclosures.