AXCELIS TECHNOLOGIES INC - Quarter Report: 2015 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

Or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to            

 

Commission file number 000-30941

 

AXCELIS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

108 Cherry Hill Drive

Beverly, Massachusetts 01915

(Address of principal executive offices, including zip code)

 

(978) 787-4000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

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

 

As of October 30, 2015 there were 115,712,016 shares of the registrant’s common stock outstanding.

 

 

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Table of Contents

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014		3
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2015 and 2014		4
	Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014		5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014		6
	Notes to Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Overview		14
	Critical Accounting Estimates		14
	Results of Operations		15
	Liquidity and Capital Resources		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II - OTHER INFORMATION			23
Item 1.	Legal Proceedings		23
Item 1A.	Risk Factors		23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3.	Defaults Upon Senior Securities		23
Item 4.	Mine Safety Disclosures		23
Item 5.	Other Information		23
Item 6.	Exhibits		24

 

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PART 1—FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

Axcelis Technologies, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2015			2014			2015			2014
Revenue
Product		$	73,795		$	32,360		$	214,073		$	122,170
Services		5,522			6,171			16,964			18,351
Total revenue		79,317			38,531			231,037			140,521
Cost of revenue
Product		45,698			18,823			137,443			73,646
Services		4,440			4,564			13,861			15,507
Total cost of revenue		50,138			23,387			151,304			89,153
Gross profit		29,179			15,144			79,733			51,368
Operating expenses
Research and development		8,581			7,950			24,679			26,052
Sales and marketing		6,322			4,891			17,808			15,404
General and administrative		6,584			5,380			18,916			18,356
Restructuring charges		—			2,288			18			2,648
Total operating expenses		21,487			20,509			61,421			62,460
Income (loss) from operations		7,692			(5,365		)	18,312			(11,092		)
Other (expense) income
Interest income		7			2			16			6
Interest expense		(1,274		)	(304		)	(3,627		)	(812		)
Other, net		(167		)	1,352			(551		)	1,282
Total other (expense) income		(1,434		)	1,050			(4,162		)	476
Income (loss) before income taxes		6,258			(4,315		)	14,150			(10,616		)
Income taxes		157			389			298			814
Net income (loss)		$	6,101		$	(4,704	)	$	13,852		$	(11,430	)
Net income (loss) per share
Basic		$	0.05		$	(0.04	)	$	0.12		$	(0.10	)
Diluted		$	0.05		$	(0.04	)	$	0.11		$	(0.10	)
Shares used in computing net income (loss) per share
Basic weighted average common shares		114,799			111,701			113,918			111,191
Diluted weighted average common shares		121,862			111,701			120,620			111,191

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

		Three months ended						Nine months ended
		September 30,						September 30,
		2015			2014			2015			2014
Net income (loss)		$	6,101		$	(4,704	)	$	13,852		$	(11,430	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(1,672		)	(2,950		)	(2,353		)	(2,868		)
Amortization of actuarial losses from pension plan		18			6			56			18
Total other comprehensive (loss)		(1,654		)	(2,944		)	(2,297		)	(2,850		)
Comprehensive income (loss)		$	4,447		$	(7,648	)	$	11,555		$	(14,280	)

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Consolidated Balance Sheets

(In thousands, except per share amounts)

(Unaudited)

 

		September 30,			December 31,
		2015			2014
ASSETS
Current assets
Cash and cash equivalents		$	79,871		$	30,753
Restricted cash		—			825
Accounts receivable, net		38,674			42,794
Inventories, net		120,067			104,063
Prepaid expenses and other current assets		10,030			6,700
Total current assets		248,642			185,135
Property, plant and equipment, net		29,985			30,464
Long-term restricted cash		61			—
Other assets		14,111			12,055
Total assets		$	292,799		$	227,654
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	24,350		$	21,605
Accrued compensation		8,262			4,232
Warranty		3,532			1,352
Income taxes		262			196
Deferred revenue		9,400			6,782
Current portion of long-term debt		—			14,530
Other current liabilities		4,014			3,401
Total current liabilities		49,820			52,098
Sale leaseback obligation		47,586			—
Long-term deferred revenue		736			449
Other long-term liabilities		6,541			6,755
Total liabilities		104,683			59,302
Commitments and contingencies (Note 13)
Stockholders’ equity
Preferred stock, $0.001 par value, 30,000 shares authorized; none issued or outstanding		—			—
Common stock, $0.001 par value, 300,000 shares authorized; 115,721 shares issued and 115,601 shares outstanding at September 30, 2015; 112,849 shares issued and 112,729 shares outstanding at December 31, 2014		116			113
Additional paid-in capital		527,274			519,068
Treasury stock, at cost, 120 shares at September 30, 2015 and December 31, 2014		(1,218		)	(1,218		)
Accumulated deficit		(337,035		)	(350,887		)
Accumulated other comprehensive (loss) income		(1,021		)	1,276
Total stockholders’ equity		188,116			168,352
Total liabilities and stockholders’ equity		$	292,799		$	227,654

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

		Nine months ended
		September 30,
		2015			2014
Cash flows from operating activities
Net income (loss)		$	13,852		$	(11,430	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		3,608			3,441
Deferred taxes		84			434
Stock-based compensation expense		4,467			3,779
Provision for excess and obsolete inventory		835			590
Changes in operating assets & liabilities
Accounts receivable		3,541			6,164
Inventories		(19,096		)	(13,732		)
Prepaid expenses and other current assets		(3,637		)	351
Accounts payable and other current liabilities		9,849			(4,849		)
Deferred revenue		2,967			372
Income taxes		73			151
Other assets and liabilities		(4,120		)	976
Net cash provided by (used for) operating activities		12,423			(13,753		)
Cash flows from investing activities
Expenditures for property, plant and equipment		(1,329		)	(710		)
Net cash used for investing activities		(1,329		)	(710		)
Cash flows from financing activities
Decrease in restricted cash		764			—
Financing fees and other expenses		(847		)	—
Proceeds from exercise of stock options		3,537			2,058
Principal payments on term loan		(14,530		)	(185		)
Principal payments on sale leaseback obligation		(392		)	—
Proceeds from sale leaseback obligation		48,940			—
Proceeds from Employee Stock Purchase Plan		213			227
Net cash provided by financing activities		37,685			2,100
Effect of exchange rate changes on cash and cash equivalents		339			(1,391		)
Net increase (decrease) in cash and cash equivalents		49,118			(13,754		)
Cash and cash equivalents at beginning of period		30,753			46,290
Cash and cash equivalents at end of period		$	79,871		$	32,536

 

See accompanying Notes to these Consolidated Financial Statements

 

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Axcelis Technologies, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1.         Nature of Business

 

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

 

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

 

The balance sheet at December 31, 2014 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, 2014.

 

Note 2.  Stock-Based Compensation

 

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

 

The 2012 Equity Plan and the ESPP are more fully described in Note 13 to the consolidated financial statements in the Company’s 2014 Annual Report on Form 10-K.

 

The Company recognized stock-based compensation expense of $1.4 million and $1.6 million for the three month periods ended September 30, 2015 and 2014, respectively.  The Company recognized stock-based compensation expense of $4.5 million and $3.8 million for the nine month periods ended September 30, 2015 and 2014, respectively.  These amounts include compensation expense related to restricted stock units, non-qualified stock options and stock to be issued to participants under the ESPP.

 

Note 3.         Sale of Corporate Headquarters and Related Leaseback

 

On January 30, 2015, the Company sold its corporate headquarters facility to Beverly Property Owner LLC (“Beverly Properties”), an affiliate of Middleton Partners, based in Northbrook, Illinois, for the purchase price of $48.9 million. As part of this sale, the Company also entered into a 22-year lease agreement with Beverly Properties, with the right to extend the term of the lease for five successive periods of five years each. The Company will pay rent of $4.7 million for the first year of the lease, with increased annual rent payments thereafter that will increase to $7.3 million in year twenty-two.  At the time of this sale, the Company discharged an outstanding term loan of $14.4 million, with related accrued interest, and paid a pre-payment penalty to Northern Bank and Trust Company for a total payment of $14.8 million. The Company accounted for the sale leaseback transaction as a financing arrangement for financial reporting purposes, as required by applicable accounting standards in light of the Company’s continuing involvement with the property, given the $5.9 million collateralized letter of credit requirement. See Note 10 for further discussion. As such, at the time of sale, the Company recorded a financing obligation in the amount of $48.9 million, less a pre-paid rent amount of $0.4 million, for a net liability of $48.5 million. Upon the adoption of Accounting Standards Update 2015-03, the Company reduced the carrying value of the financing obligation for debt issuance costs related to this transaction by $0.9 million, for a net liability of $47.6 million. See Note 14 for discussion regarding the adoption of this update. The Company classified the liability as long-term due to initial rent payments relating only to interest with future principal payments occurring outside of one year. 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 remaining useful life as originally determined. The associated lease payments, less the portion considered to decrease the financing liability, will be recorded as interest expense using the

 

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effective interest method. The implicit interest rate on the associated cash flows during the initial 22 year lease term is 10.65%. See Note 13 for the schedule of contractual lease payments relating to the lease obligation.

 

The Company does not anticipate any federal or state tax liability associated with the taxable gain on the sale of the building due to its current level of net operating loss carry forwards and has not provided for any federal or state tax expense.

 

Note 4.  Computation of Net Income (Loss) per Share

 

Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted income (loss) per share is similar to basic income 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 from stock options and restricted stock units (RSUs) had been issued, calculated using the treasury stock method.

 

The components of net income (loss) per share are as follows:

 

		Three months ended September 30,						Nine months ended September 30,
		2015			2014			2015			2014
		(in thousands, except per share data)
Net income (loss) available to common stockholders		$	6,101		$	(4,704	)	$	13,852		$	(11,430	)
Weighted average common shares outstanding used in computing basic income (loss) per share		114,799			111,701			113,918			111,191
Incremental options and RSUs		7,063			—			6,702			—
Weighted average common shares outstanding used in computing diluted net income (loss) per share		121,862			111,701			120,620			111,191
Net income (loss) per share
Basic		$	0.05		$	(0.04	)	$	0.12		$	(0.10	)
Diluted		$	0.05		$	(0.04	)	$	0.11		$	(0.10	)

 

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

 

		Three months ended September 30,				Nine months ended September 30,
		2015		2014		2015		2014
		(in thousands)
Incremental shares excluded from the calculation of net loss per share		—		4,296		—		4,550

 

Note 5.  Accumulated Other Comprehensive Income (Loss)

 

The following table presents the changes in accumulated other comprehensive income (loss), net of tax, by component for the nine months ended September 30, 2015:

 

		Foreign currency			Defined benefit pension plan			Total
		(in thousands)
Balance at December 31, 2014		$	1,920		$	(644	)	$	1,276
Other comprehensive (loss) and pension reclassifications (1)		(2,353		)	56			(2,297		)
Balance at September 30, 2015		$	(433	)	$	(588	)	$	(1,021	)

 

(1)         Pension amount presented before taxes as the tax effect was not material to the consolidated financial statements.

 

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Note 6.         Inventories, net

 

The components of inventories are as follows:

 

		September 30,			December 31,
		2015			2014
		(in thousands)
Raw materials		$	71,940		$	65,723
Work in process		30,792			22,358
Finished goods (completed systems)		17,335			15,982
		$	120,067		$	104,063

 

When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company establishes inventory reserves when conditions exist that indicate inventory may be in excess of anticipated demand or is obsolete based upon assumptions about future demand for the Company’s products or market conditions. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales or usage, estimated product end of life dates, estimated current and future market value and new product introductions. Purchasing and usage alternatives are also explored to mitigate inventory exposure. As of September 30, 2015 and December 31, 2014, inventories are stated net of inventory reserves of $17.3 million and $23.6 million, respectively.

 

During the three months and nine months ended September 30, 2014, the Company recorded a charge to cost of sales of $0.6 million and $1.0 million, respectively, due to production levels below normal capacity.

 

Note 7.         Restructuring Charges

 

In 2014, the Company had severance and other costs related to reductions in force. As of September 30, 2015, the Company satisfied its restructuring liability which consisted primarily of severance and related costs and were included in other current liabilities. The related activity is as follows:

 

		(in thousands)
Balance at December 31, 2014		$	481
Severance and related costs		18
Other adjustments		(20		)
Cash payments		(479		)
Balance at September 30, 2015		$	—

 

Note 8.         Product Warranty

 

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

 

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

 

		Nine months ended September 30,
		2015			2014
		(in thousands)
Balance at January 1 (beginning of year)		$	1,526		$	1,428
Warranties issued during the period		3,543			1,028
Settlements made during the period		(1,611		)	(1,511		)
Changes in estimate of liability for pre-existing warranties during the period		345			264
Balance at September 30 (end of period)		$	3,803		$	1,209
Amount classified as current		$	3,532		$	1,160
Amount classified as long-term		271			49
Total warranty liability		$	3,803		$	1,209

 

Note 9.  Fair Value Measurements

 

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

 

(a)         Fair Value Hierarchy

 

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

 

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

 

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

 

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

 

(b)         Assets Measured at Fair Value

 

The Company’s money market funds are included in cash and cash equivalents in the consolidated balance sheets, and are considered a level 1 investment as they are valued at quoted market prices in active markets. The Company’s sale leaseback obligation relating to the sale of our corporate headquarters is carried at amortized cost, which approximates fair value based on an implied borrowing rate of 10.65%. The underlying cash flow associated with our lease payments is being applied to both an interest and principal component using the effective interest method over the associated lease term. The liability is categorized as level 3 within the fair value hierarchy. The Company’s term loan as of December 31, 2014 was carried at amortized cost, which approximated fair value, based on market pricing of similar debt instruments and was categorized as level 2 within the fair value hierarchy.

 

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

 

		September 30, 2015 Fair Value Measurements
		Level 1			Level 2			Level 3			Total
		(in thousands)
Assets
Cash equivalents:
Money market funds		$	63,614		$	—		$	—		$	63,614
Liabilities
Sale leaseback obligation		$	—		$	—		$	47,586		$	47,586

 

		December 31, 2014 Fair Value Measurements
		Level 1			Level 2			Level 3			Total
		(in thousands)
Assets
Cash equivalents:
Money market funds		$	7,004		$	—		$	—		$	7,004
Liabilities
Term loan		$	—		$	14,530		$	—		$	14,530

 

(c)          Other Financial Instruments

 

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

 

Note 10. Financing Arrangements

 

Term Loan

 

On February 2, 2015, in connection with the sale of our headquarters facility, the Company repaid the outstanding balance on a term loan from Northern Bank and Trust Company of $14.4 million and related accrued interest of $0.1 million as well as a 2.0% prepayment penalty of $0.3 million for a total payment of $14.8 million. See Note 3 above for further discussion.

 

Sale Leaseback Obligation

 

On January 30, 2015, the Company sold its corporate headquarters facility to Beverly Property Owner LLC, an affiliate of Middleton Partners, based in Northbrook, Illinois, for the purchase price of $48.9 million. As part of the sale, the Company also entered into a 22-year lease agreement with Beverly Properties. The sale leaseback is accounted for as a financing arrangement for financial reporting and, as such, the Company has recorded a financing obligation of $47.6 million as of September 30, 2015. The associated lease payments include both an interest component and payment of principal, with the underlying liability being extinguished at the end of the original lease term. The Company posted a collateralized security deposit of $5.9 million in the form of an irrevocable letter of credit at the time of the closing. See Note 3 above for further discussion.

 

Credit Facility

 

The Company had a revolving credit facility with Silicon Valley Bank, dated October 31, 2013, which the Company terminated in October 2015. Under this revolving credit facility, the Company had the ability to borrow up to $10.0 million on a revolving basis during its two year term.  The Company’s ability to borrow under this line of credit was limited to 80% of the then current amount of qualified accounts receivable. As of September 30, 2015, the Company had not drawn down on the line of credit, although a portion of the availability was being used to support outstanding letters of credit in the amount of $6.9 million, which included the $5.9 million associated to the security deposit for the sale leaseback transaction. Concurrent to the credit facility expiration, these letters of credit were cash collateralized and will be classified as restricted cash.

 

At September 30, 2015, the Company’s available borrowing capacity under the revolving credit facility was $3.1 million.

 

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Note 11.  Income Taxes

 

Income tax expense relates principally to operating results of foreign subsidiaries in Europe and Asia, where the Company earns taxable income and does not have offsetting net operating loss carryforwards. The Company has significant net operating loss carryforwards available to offset income taxes in the U.S and certain foreign tax jurisdictions and, as a result, has not provided for significant income taxes in those jurisdictions.

 

As of December 31, 2014, the Company had deferred tax assets related to the U.S. of approximately $140.0 million.  The Company maintains a 100% valuation allowance to reduce the carrying value of these deferred tax assets to zero because the Company is in a three year cumulative loss position in the United States.  The Company will continue to maintain a full valuation allowance for these tax assets until sustainable future levels of profitability are evident. See Note 3 above relating to the potential effect associated with the taxable gain on the sale of the Company’s corporate headquarters.

 

Note 12. Concentration of Risk

 

For the three months ended September 30, 2015, two customers accounted for approximately 32.8% and 16.1% of consolidated revenue. For the nine months ended September 30, 2015, one customer accounted for approximately 33.0% of consolidated revenue.

 

For the three months ended September 30, 2014, two customers accounted for approximately 11.0% and 10.5% of consolidated revenue. For the nine months ended September 30, 2014, two customers accounted for approximately 18.8% and 10.8% of consolidated revenue.

 

At September 30, 2015, four customers accounted for 20.5%, 12.3%, 11.8%  and 10.0% of consolidated gross accounts receivable.  At December 31, 2014, two customers accounted for 21.7% and 20.4% of consolidated accounts receivable.

 

Note 13.  Contingencies

 

(a)         Litigation

 

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

 

(b)         Indemnifications

 

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

 

(c) Lease Commitments

 

In addition to the lease commitments as described within Note 16 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for our year ending December 31, 2014, in January 2015, the Company entered into a 22-year lease agreement relating to our corporate headquarters in Beverly, Massachusetts. The following table relates to the cash payment schedule associated with our lease obligation as of September 30, 2015:

 

		Lease Obligation
		(in thousands)
2015		$	1,175
2016		4,815
2017		5,315
2018		5,470
2019		5,594
Thereafter		109,567
Total lease payments		$	131,936
Less interest portion		(84,350		)
Sale leaseback obligation		$	47,586

 

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Note 14. Recent Accounting Guidance

 

Accounting Standards or Updates Recently Adopted

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public business entities, the amendments in this Update are effective for the financial statements issued for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued and shall be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company adopted ASU No. 2015-03, effective on January 1, 2015. Our balance sheet at December 31, 2014 was not retrospectively adjusted, due to the immateriality of the effect of the adoption of this ASU. The Company’s balance sheet presentation as of September 30, 2015 netted all capitalized costs associated with our lease obligation. See Note 3 above regarding the amounts recognized relating to the lease obligation.

 

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. On July 9, 2015, the FASB voted to defer for one year the effective date, which is now for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period with early adoption permitted as of January 1, 2017. We are currently assessing the potential impact the adoption of this standard will have on our financial statements.

 

In July 2015, the FASB issued 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 will change 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 amendments are effective for annual and interim periods beginning after December 15, 2016. We are currently assessing the potential impact the adoption of this standard will have on our financial statements.

 

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

 

Overview

 

Axcelis is a worldwide producer of ion implantation and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe and Asia.  In addition, the Company provides extensive aftermarket service and support, including spare parts, equipment upgrades and maintenance services to the semiconductor industry worldwide.  Consolidation and partnering within the semiconductor manufacturing industry has resulted in a small number of customers representing a substantial portion of our business.  Our net revenue from our ten largest customers accounted for 77.9% of total revenue for the nine months ended September 30, 2015.

 

Our product development and manufacturing activities occur primarily in the United States.  Axcelis’ equipment and service products are highly technical and are sold primarily through a direct sales force in the United States, Europe and Asia.

 

Demand for semiconductor manufacturing equipment and services has historically been subject to cyclical industry conditions reflecting our customers’ responses to changes in the nature and timing of technological advances in fabrication processes, supply and demand for chips, and global economic and market conditions.

 

Separately from overall market demand, Axcelis’ results are also impacted by our customers’ decisions to purchase our products rather than our competitors’ systems.  Our recent financial results reflect increasing sales of our innovative Purion ion implantation systems, and our continued investment in research and development programs related to our Purion ion implantation products. We expect to continue to grow Purion system sales and maintain tight control of our cost structure.

 

In light of these conditions, Axcelis’ results can vary significantly year-over-year, as well as quarter-over-quarter.   A discussion of factors that could affect Axcelis’ operations is set forth under “Risk Factors” in Part II, Item 1A to our annual report on Form 10-K for the year ended December 31, 2014, which discussion is incorporated herein by reference.

 

Critical Accounting Estimates

 

Management’s discussion and analysis of our financial condition and results of operations included herein and in our Annual Report on Form 10-K for the year ended December 31, 2014 are based upon Axcelis’ consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and assumptions. Management’s estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Management has not identified any need to make any material change in, and has not changed, any of our critical accounting estimates and judgments as described in Management’s Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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Results of Operations

 

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

 

		Three months ended September 30,				Nine months ended September 30,
		2015		2014		2015		2014
Revenue:
Product		93.0	%	84.0	%	92.7	%	86.9	%
Services		7.0		16.0		7.3		13.1
Total revenue		100.0		100.0		100.0		100.0
Cost of revenue:
Product		57.6		48.9		59.5		52.4
Services		5.6		11.8		6.0		11.0
Total cost of revenue		63.2		60.7		65.5		63.4
Gross profit		36.8		39.3		34.5		36.6
Operating expenses:
Research and development		10.8		20.6		10.7		18.4
Sales and marketing		8.0		12.7		7.7		11.0
General and administrative		8.3		14.0		8.2		13.1
Restructuring charges		—		5.9		—		1.9
Total operating expenses		27.1		53.2		26.6		44.4
Income (loss) from operations		9.7		(13.9	)	7.9		(7.8	)
Other (expense) income:
Interest income		—		—		—		—
Interest expense		(1.6	)	(0.8	)	(1.6	)	(0.6	)
Other, net		(0.2	)	3.5		(0.2	)	0.9
Total other (expense) income		(1.8	)	2.7		(1.8	)	0.3
Income (loss) before income taxes		7.9		(11.2	)	6.1		(7.5	)
Income taxes		0.2		1.0		0.1		0.6
Net income (loss)		7.7	%	(12.2	)%	6.0	%	(8.1	)%

 

Revenue

 

The following table sets forth our revenues.

 

		Three months ended September 30,						Period-to-Period Change					Nine months ended September 30,						Period-to-Period Change
		2015			2014			$			%		2015			2014			$			%
		(dollars in thousands)
Revenues:
Product		$	73,795		$	32,360		$	41,435		128.0	%	$	214,073		$	122,170		$	91,903		75.2	%
Percentage of revenues		93.0		%	84.0		%						92.7		%	86.9		%
Services		5,522			6,171			(649		)	(10.5	)%	16,964			18,351			(1,387		)	(7.6	)%
Percentage of revenues		7.0		%	16.0		%						7.3		%	13.1		%
Total revenues		$	79,317		$	38,531		$	40,786		105.9	%	$	231,037		$	140,521		$	90,516		64.4	%

 

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014

 

Product

 

Product revenue, which includes system sales, sales of spare parts, product upgrades, and used systems was $73.8 million, or 93.0% of revenue during the three months ended September 30, 2015, compared with $32.4 million, or 84.0% of revenue for the three months ended September 30, 2014. The $41.4 million increase in product revenue for the three month period ending September 2015 was primarily driven by an increase in the number of Purion systems sold.

 

A portion of our revenue from system sales is deferred until installation and other services related to future deliverables are performed. The total amount of deferred revenue at September 30, 2015 and December 31, 2014 was $10.1 million and $7.2 million,

 

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respectively. The increase in deferred revenue is primarily due to additional volume of system sales and to a lesser extent, the timing of the acceptance of system sales.

 

Services

 

Services revenue, which includes the labor component of maintenance and service contracts and fees for service hours provided by on-site service personnel, was $5.5 million, or 7.0 % of revenue for the three months ended September 30, 2015, compared with $6.2 million, or 16.0% of revenue for the three months ended September 30, 2014. Services revenue fluctuates from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.

 

Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014

 

Product

 

Product revenue was $214.1 million, or 92.7% of revenue for the nine months ended September 30, 2015, compared with $122.2 million, or 86.9% of revenue for the nine months ended September 30, 2014. The $91.9 million increase in product revenue for the nine month period ending September 2015 was primarily driven by an increase in the number of Purion systems sold.

 

Services

 

Services revenue was $17.0 million, or 7.3% of revenue for the nine months ended September 30, 2015, compared with $18.4 million, or 13.1% of revenue for the nine months ended September 30, 2014. Although services revenue should increase with the expansion of the installed base of systems, it can fluctuate from period to period based on capacity utilization at customers’ manufacturing facilities, which affects the need for equipment service.

 

Revenue Categories used by Management

 

As an alternative to the line item revenue categories discussed above, management also uses revenue categorizations which look at revenue by systems and aftermarket, as described below.

 

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014

 

Systems

 

Included in total revenue of $79.3 million during the three months ended September 30, 2015 is revenue from sales of systems of $47.0 million, or 59.3% of total revenue, compared with $8.4 million, or 21.9%, of total revenue for the three months ended September 30, 2014. The increase was due to higher sales of our Purion systems, reflecting market share gains and an improved semiconductor equipment market.

 

Aftermarket

 

We refer to the business of selling spare parts, product upgrades and used systems, combined with the sale of maintenance labor and service contracts and service hours, as the “aftermarket” business. Included in total revenue of $79.3 million during the three months ended September 30, 2015 is revenue from our aftermarket business of $32.3 million, which increased by $2.2 million compared to $30.1 million for the three months ended September 30, 2014. Aftermarket revenue fluctuates from period to period based on capacity utilization at customers’ manufacturing facilities which affects the sale of spare parts and demand for equipment service.  Aftermarket revenue can also fluctuate from period to period based on the demand for system upgrades or used tools.

 

Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014

 

Systems

 

Included in total revenue of $231.0 million during the nine months ended September 30, 2015 is revenue from sale of systems of $131.1 million, or 56.7% of total revenue, compared with $51.8 million, or 36.8% of total revenue for the nine months ended September 30, 2014. The increase was due to higher sales of our Purion systems, reflecting market share gains and an improved semiconductor equipment market during the first nine months of 2015.

 

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Aftermarket

 

Included in total revenue of $231.0 million during the nine months ended September 30, 2015 is revenue from our aftermarket business of $99.9 million, which increased $11.1 million, or 43.3% of total revenue, compared to $88.8 million, or 63.2% of total revenue for the nine months ended September 30, 2014.

 

Gross Profit / Gross Margin

 

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

 

		Three months ended September 30,						Period-to-Period Change					Nine months ended September 30,						Period-to-Period Change
		2015			2014			$			%		2015			2014			$			%
		(dollars in thousands)
Gross Profit:
Product		$	28,097		$	13,537		$	14,560		107.6	%	$	76,630		$	48,524		$	28,106		57.9	%
Product gross margin		38.1		%	41.8		%						35.8		%	39.7		%
Services		1,082			1,607			(525		)	(32.7	)%	3,103			2,844			259			9.1	%
Services gross margin		19.6		%	26.0		%						18.3		%	15.5		%
Total gross profit		$	29,179		$	15,144		$	14,035		92.7	%	$	79,733		$	51,368		$	28,365		55.2	%
Gross margin		36.8		%	39.3		%						34.5		%	36.6		%

 

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014

 

Product

 

Gross margin from product revenue was 38.1% for the three months ended September 30, 2015, compared to 41.8% for the three months ended September 30, 2014. The decrease in gross margin of 3.7 percentage points resulted from significantly higher system sales volume of new Purion systems at lower initial margins.

 

Services

 

Gross margin from services revenue was 19.6% for the three months ended September 30, 2015, compared to 26.0% for the three months ended September 30, 2014. The decrease in gross margin was attributable to changes in the mix of service contracts.

 

Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014

 

Product

 

Gross margin from product revenue was 35.8% for the nine months ended September 30, 2015, compared to 39.7% for the nine months ended September 30, 2014. The decrease in gross margin of 3.9 percentage points resulted from the net effect of significantly higher system sales volume of new Purion systems at lower initial margins and decrease in the mix of higher margin parts and upgrade revenue.

 

Services

 

Gross margin from services revenue was 18.3% for the nine months ended September 30, 2015, compared to 15.5% for the nine months ended September 30, 2014. The increase in gross margin was attributable to changes in the mix of service contracts and lower overall service costs.

 

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