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** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** **                                                                                                         |
| **For  the quarterly period ended September 30, 2009** |
| ** **                                                  | ** **                                                                                                         |
| **or**                                                      |
| ** **                                                  | ** **                                                                                                         |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom               to               **

 

**Commissionfile number****000-30941**

 

**AXCELISTECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **34-1818596**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) | ** ** | (IRS Employer  Identification No.) |

 

**108Cherry Hill DriveBeverly, Massachusetts 01915**(Address of principal executive offices, including zip code)

 

**(978) 787-4000**(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.    Yes x No o.

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, of any, every Interactive Data File required to be submitted andposted 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 postsuch files). Yes o No o.

 

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

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)    Yes oNo x

 

As of November 6,2009 there were 103,907,814 shares of the registrant’s common stockoutstanding.

 

 

 

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| **PART I -  FINANCIAL INFORMATION** | ** **                                                                                                  |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------|
| **Item 1.**                              | **Financial Statements**                                                                                    | 3 |
| ** **                               | Consolidated  Statement of Operations for the three and nine months ended  September 30, 2009 and 2008 | 3 |
| ** **                               | Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                       | 4 |
| ** **                               | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2009  and 2008          | 5 |
| ** **                               | Notes to Consolidated Financial Statements                                                                  | 6 |
| **Item 2.**                              | **Managements Discussion and Analysis of Financial  Condition and Results of Operations**                   | 13 |
| ** **                               | Overview                                                                                                    | 13 |
| ** **                               | Critical Accounting Estimates                                                                               | 13 |
| ** **                               | Results  of Operations                                                                                      | 14 |
| ** **                               | Liquidity and Capital Resources                                                                             | 18 |
| **Item 3.**                              | **Quantitative  and Qualitative Disclosures About Market Risk**                                             | 19 |
| **Item 4.**                              | **Controls and  Procedures**                                                                                | 19 |
| **PART II  - OTHER INFORMATION**    | ** **                                                                                                  |
| **Item 1.**                              | **Legal Proceedings**                                                                                       | 20 |
| **Item 1A.**                             | **Risk Factors**                                                                                            | 20 |
| **Item 2.**                              | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                            | 20 |
| **Item 3.**                              | **Defaults  Upon Senior Securities**                                                                        | 20 |
| **Item 4.**                              | **Submission  of Matters to a Vote of Security Holders**                                                    | 20 |
| **Item 5.**                              | **Other Information**                                                                                       | 20 |
| **Item 6.**                              | **Exhibits**                                                                                                | 20 |

 

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**PART 1—FINANCIALINFORMATION**

 

**Item1.    Financial Statements.**

 

**AxcelisTechnologies, Inc.**

**Consolidated Statements of Operations**

**(Inthousands, except per share amounts)**

**(Unaudited)**

 
| ** **                                                     | ** ** | **Three months ended** | ** **    | **Nine months ended**  | ** ** |
|----------------------------------------------------------------|------------|------------------------|---------------|------------------------|------------|
| ** **                                                     | ** ** | **September 30,** | ** **    | **September 30,** | ** ** |
| ** **                                                     | ** ** | **2009**               | ** **    | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                                                        |       |                   |          |                   |       |   |   |   |   |
| Product                                                        |       | $                      |  25,871  |                   | $          |  32,490 |   | $ |  69,369 |   | $ |  163,543 |   |
| Service                                                        |       | 9,132                  |          | 13,163                 |       | 24,527 |   | 41,360 |   |
| Royalties,  primarily from SEN                                 |       | 4                      |          | 801                    |       | 389 |   | 3,334 |   |
|                                                           |       | 35,007                 |          | 46,454                 |       | 94,285 |   | 208,237 |   |
| Cost  of revenue                                               |       |                   |          |                   |       |   |   |   |   |
| Product                                                        |       | 21,681                 |          | 22,759                 |       | 62,571 |   | 112,906 |   |
| Service                                                        |       | 5,506                  |          | 6,536                  |       | 15,001 |   | 21,866 |   |
|                                                           |       | 27,187                 |          | 29,295                 |       | 77,572 |   | 134,772 |   |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Gross  profit                                                  |       | 7,820                  |          | 17,159                 |       | 16,713 |   | 73,465 |   |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Operating  expenses                                            |       |                   |          |                   |       |   |   |   |   |
| Research  and development                                      |       | 7,648                  |          | 15,873                 |       | 24,935 |   | 49,680 |   |
| Sales  and marketing                                           |       | 5,700                  |          | 12,381                 |       | 18,864 |   | 36,760 |   |
| General  and administrative                                    |       | 7,874                  |          | 10,562                 |       | 27,075 |   | 31,254 |   |
| Amortization  of intangible assets                             |       | —                 |          | 656                    |       | — |   | 1,968 |   |
| Restructuring  charges                                         |       | 430                    |          | 444                    |       | 5,528 |   | 3,512 |   |
|                                                           |       | 21,652                 |          | 39,916                 |       | 76,402 |   | 123,174 |   |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Loss  from operations                                          |       | (13,832                | )             | (22,757                | )          | (59,689 | ) | (49,709 | ) |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Other  income (expense)                                        |       |                   |          |                   |       |   |   |   |   |
| Gain  on sale of SEN                                           |       | —                 |          | —                 |       | 1,080 |   | — |   |
| Equity  loss of SEN                                            |       | —                 |          | (968                   | )          | (3,238 | ) | (1,100 | ) |
| Interest  income                                               |       | 59                     |          | 319                    |       | 152 |   | 1,400 |   |
| Interest  expense                                              |       | —                 |          | (1,724                 | )          | (1,676 | ) | (5,005 | ) |
| Other,  net                                                    |       | (1,681                 | )             | 763                    |       | (3,197 | ) | 314 |   |
|                                                           |       | (1,622                 | )             | (1,610                 | )          | (6,879 | ) | (4,391 | ) |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Loss  before income taxes                                      |       | (15,454                | )             | (24,367                | )          | (66,568 | ) | (54,100 | ) |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Income  taxes                                                  |       | 444                    |          | 374                    |       | 864 |   | 1,118 |   |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Net  loss                                                      |       | $                      |  (15,898 | )                      | $          |  (24,741 | ) | $ |  (67,432 | ) | $ |  (55,218 | ) |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Net  loss per share                                            |       |                   |          |                   |       |   |   |   |   |
| Basic  and diluted net loss per share                          |       | $                      |  (0.15   | )                      | $          |  (0.24 | ) | $ |  (0.65 | ) | $ |  (0.54 | ) |
|                                                           |       |                   |          |                   |       |   |   |   |   |
| Shares  used in computing basic and diluted net loss per share |       |                   |          |                   |       |   |   |   |   |
| Weighted  average common shares outstanding                    |       | 103,850                |          | 103,002                |       | 103,475 |   | 102,635 |   |

 

See accompanying Notes to these Consolidated Financial Statements

 

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**AxcelisTechnologies, Inc.**

**Consolidated Balance Sheets**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                        | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                        | ** ** | **2009**               | ** **    | **2008**              | ** ** |
| **ASSETS**                                        | ** ** | ** **             | ** **    | ** **            | ** ** |
| Current  assets                                   |       |                   |          |                  |       |
| Cash  and cash equivalents                        |       | $                      |  41,244  |                  | $          |  37,694 |   |
| Restricted  cash                                  |       | 7,239                  |          | 8,654                 |       |
| Accounts  receivable, net                         |       | 26,632                 |          | 27,486                |       |
| Inventories,  net                                 |       | 123,630                |          | 150,113               |       |
| Prepaid  expenses and other current assets        |       | 10,931                 |          | 17,231                |       |
| Total  current assets                             |       | 209,676                |          | 241,178               |       |
|                                              |       |                   |          |                  |       |
| Property,  plant and equipment, net               |       | 41,940                 |          | 44,432                |       |
| Investment  in SEN                                |       | —                 |          | 156,677               |       |
| Other  assets                                     |       | 10,875                 |          | 12,894                |       |
|                                              |       | $                      |  262,491 |                  | $          |  455,181 |   |
|                                              |       |                   |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**    |       |                   |          |                  |       |
| Current  liabilities                              |       |                   |          |                  |       |
| Accounts  payable                                 |       | $                      |  6,432   |                  | $          |  8,066 |   |
| Accrued  compensation                             |       | 10,938                 |          | 15,841                |       |
| Warranty                                          |       | 1,029                  |          | 3,137                 |       |
| Income  taxes                                     |       | 856                    |          | 337                   |       |
| Deferred  revenue                                 |       | 10,093                 |          | 12,508                |       |
| Other  current liabilities                        |       | 2,868                  |          | 6,897                 |       |
| Current  portion of convertible subordinated debt |       | —                 |          | 83,210                |       |
| Total  current liabilities                        |       | 32,216                 |          | 129,996               |       |
|                                              |       |                   |          |                  |       |
| Long-term  deferred revenue                       |       | 659                    |          | 1,872                 |       |
| Other  long-term liabilities                      |       | 3,982                  |          | 3,936                 |       |
|                                              |       |                   |          |                  |       |
| Commitments  and contingencies (Note 13)          |       |                   |          |                  |       |
| Stockholders’  equity                        |       |                   |          |                  |       |
| Preferred  stock                                  |       | —                 |          | —                |       |
| Common  stock                                     |       | 104                    |          | 103                   |       |
| Additional  paid-in capital                       |       | 487,047                |          | 483,546               |       |
| Treasury  stock                                   |       | (1,218                 | )             | (1,218                | )          |
| Accumulated  deficit                              |       | (265,911               | )             | (198,479              | )          |
| Accumulated  other comprehensive income           |       | 5,612                  |          | 35,425                |       |
|                                              |       | 225,634                |          | 319,377               |       |
|                                              |       | $                      |  262,491 |                  | $          |  455,181 |   |

 

See accompanyingNotes to these Consolidated Financial Statements

 

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**AxcelisTechnologies, Inc.**

**Consolidated Statements of Cash Flow**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine months ended**  | ** **    |
|------------------------------------------------------------------------------|------------|------------------------|---------------|
| ** **                                                                   | ** ** | **September 30,** | ** **    |
| ** **                                                                   | ** ** | **2009**               | ** **    | **2008** | ** ** |
| **Cash flows from operating activities**                                     |       |                   |          |   |   |
| Net  loss                                                                    |       | $                      |  (67,432 | ) | $ |  (55,218 | ) |
| Adjustments  to reconcile net loss to net cash used for operating activities |       |                   |          |   |   |
| Undistributed  loss of SEN                                                   |       | 3,238                  |          | 1,100 |   |
| Depreciation  and amortization                                               |       | 5,593                  |          | 15,307 |   |
| Gain  on sale of SEN                                                         |       | (1,080                 | )             | — |   |
| Amortization  of intangible assets                                           |       | —                 |          | 1,968 |   |
| Accretion  of premium on convertible debt                                    |       | 133                    |          | 2,441 |   |
| Stock-based  compensation expense                                            |       | 3,594                  |          | 4,099 |   |
| Provision  for excess inventory                                              |       | 9,268                  |          | 1,180 |   |
| Changes  in operating assets & liabilities                          |       |                   |          |   |   |
| Accounts  receivable                                                         |       | 1,097                  |          | 39,233 |   |
| Inventories                                                                  |       | 18,091                 |          | (10,174 | ) |
| Prepaid  expenses and other current assets                                   |       | 6,468                  |          | 12,838 |   |
| Accounts  payable & other current liabilities                       |       | (12,908                | )             | (21,439 | ) |
| Deferred  revenue                                                            |       | (3,650                 | )             | (22,116 | ) |
| Income  taxes                                                                |       | 480                    |          | 254 |   |
| Cash  dividends from SEN                                                     |       | —                 |          | 2,016 |   |
| Other  assets and liabilities                                                |       | (710                   | )             | (5,614 | ) |
| Net  cash used for operating activities                                      |       | (37,818                | )             | (34,125 | ) |
| **Cash flows from investing activities**                                     |       |                   |          |   |   |
| Expenditures  for property, plant, and equipment                             |       | (381                   | )             | (3,027 | ) |
| Decrease  in restricted cash                                                 |       | 1,666                  |          | 3,354 |   |
| Proceeds  from sale of SEN                                                   |       | 132,847                |          | — |   |
| Payments  related to sale of SEN                                             |       | (10,590                | )             | — |   |
| Net  cash provided by investing activities                                   |       | 123,542                |          | 327 |   |
| **Cash flows from financing activities**                                     |       |                   |          |   |   |
| Repayment  of convertible debt                                               |       | (83,344                | )             | — |   |
| Proceeds  from exercise of stock options                                     |       | —                 |          | 110 |   |
| Proceeds  from Employee Stock Purchase Plan                                  |       | 65                     |          | 771 |   |
| Net  cash provided by (used for) financing activities                        |       | (83,279                | )             | 881 |   |
| Effect  of exchange rate changes on cash                                     |       | 1,105                  |          | (1,233 | ) |
| Net  increase (decrease) in cash and cash equivalents                        |       | 3,550                  |          | (34,150 | ) |
| Cash  and cash equivalents at beginning of period                            |       | 37,694                 |          | 83,877 |   |
| Cash  and cash equivalents at end of period                                  |       | $                      |  41,244  |   | $ |  49,727 |   |

 

See accompanyingNotes to these Consolidated Financial Statements

 

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**AxcelisTechnologies, Inc.**

 

**Notes To Consolidated Financial Statements(Unaudited)**

 

**Note 1.  Nature of Business and Basis of Presentation**

 

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

 

During the nine monthsended September 30, 2009, the Company experienced negative cash flows fromoperations.  This was predominatelydriven by the net loss from operations attributable to the depressedsemiconductor equipment market and the resultant decline in revenues.  Cash and cash equivalents at September 30,2009 were $41.2 million, compared to $49.8 million at June 30,2009. The $8.5 million decrease in cash and cash equivalents is mainlyattributable to the cash used in operations including $2.4 million forrestructuring costs.  The Companyanticipates net cash outflows from operations to decline significantly in thefourth quarter of 2009.

 

Axcelis’liquidity is affected by many factors. Some of these factors are based onnormal operations of the business, including acceptance of the Optima productline, and others relate to the uncertainties of global economies, including theavailability of credit, and the state of the semiconductor equipmentindustry.  We have seen initial signs of a recovery in the semiconductorcapital equipment industry, and our forecasts for the remainder of 2009 andthrough 2010 assume a continuing modest recovery in fab utilization and capitalspending by our customers.  We believe that, based on our current market,revenue and expense forecasts, our existing cash and cash equivalents will besufficient to satisfy our anticipated requirements for 2010 and beyond. Wecontinue to explore new financing sources; however, we do not currently haveaccess to any source of credit.  The company’s forecast performancethroughout 2010 shows a substantial improvement over its performance during thelast year; if this forecast performance is not achieved, there could be asignificant adverse effect on our liquidity.

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. In the opinion of management all adjustments, which are of a normalrecurring nature, considered necessary for a fair presentation have beenincluded. Operating results for the interim periods presented are notnecessarily indicative of the results that may be expected for other interimperiods or for the year as a whole.

 

The balance sheet at December 31,2008 has been derived from the audited financial statements at that date butdoes not include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in Axcelis Technologies, Inc.’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Note 2.  Sale of Investment in SEN**

 

Until March 30,2009, the Company owned 50% of the equity of a joint venture with SumitomoHeavy Industries, Ltd. (“SHI”) in Japan. This joint venture, which was known as SEN Corporation, an SHI andAxcelis Company (“SEN”), licensed technology from the Company relating to themanufacture of specified ion implantation products and had exclusive rights tomanufacture and sell these products in the territory of Japan.  On March 30, 2009, pursuant to a SharePurchase Agreement dated February 26, 2009, the Company sold to SHI all ofthe Company’s common shares in SEN in exchange for a cash payment of 13 billionYen, which resulted in proceeds of approximately $132.8 million before advisorfees and other expenses of $10.6 million, of which $7.1 million was paid duringthe quarter ended June 30, 2009. The sales price was determined through an arm’s length negotiation.

 

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This transactionterminated all prior agreements among the three parties relating to the SENjoint venture.  In addition, thearbitration with SEN initiated by Axcelis in Tokyo was dismissed.

 

In connection with thesale of its investment in SEN, on March 30, 2009, the Company and SENentered into a License Agreement pursuant to which the parties have crosslicensed each other to use certain patents and technical information on anon-exclusive, perpetual, royalty-free, worldwide basis, provided that theCompany and SEN received sole exclusive licenses for 4 years in the U.S. andJapan, respectively.  The licenses totechnical information cover only technical information shared by the partiesprior to the date of the license, so the license to SEN does not covertechnical information relating to the Optima HD and Optima XE.  The license also excludes patents relating toAxcelis’ work in molecular implant and certain patents developed for the OptimaHD and Optima XE.  The parties providedeach other with limited warranties regarding their right to grant theselicenses, and indemnity with respect thereto, but disclaim any warrantyregarding the validity or freedom from infringement of the licensedintellectual property.  Neither partywill provide any support for the other party’s use of the licensed intellectualproperty.

 

The sale of the Company’sinvestment in SEN on March 30, 2009, resulted in a gain of approximately$1.1 million.  This gain includes netproceeds of $122.2 million (after payment of advisor fees and other costs of$10.6 million) and cumulative foreign translation gain of $23.5 million,previously recorded in other comprehensive income, reduced by the carryingvalue of the investment on the date of sale of $144.6 million.  The gain from the sale of the Company’sinvestment in SEN is recorded in other income.

 

A portion of the proceedsof the sale were used to pay off, in full, the amounts due to the holder of theCompany’s 4.25% Convertible Senior Subordinated Notes.

 

**Note 3.  Long-lived Assets**

 

The Company recordsimpairment losses on intangibles and long-lived assets when events andcircumstances indicate that long-lived assets might not be recoverable.  Recoverability is measured by a comparison ofthe assets’ carrying amount to their expected future undiscounted net cashflows.  If such assets are considered tobe impaired, the impairment is measured based on the amount by which thecarrying value exceeds its fair value.

 

During the fourth quarterof 2008, the Company experienced a sustained market capitalization below bookvalue, as well as a significant decline in its business that led it to reviseits short-term and long-term financial forecasts.  As a result, the Company recorded a totalintangible and long-lived asset impairment charge at December 31, 2008 of$46.9 million.

 

During the three and ninemonths ended September 30, 2009, the Company continued to experienceevents and circumstances which indicated that a further impairment oflong-lived assets may have occurred.  Thesignificant decline in the Company’s stock price experienced in 2008 continuedthrough September 30, 2009.  As of September 30,2009 the Company continued to maintain a market capitalization significantlybelow book value.  In addition, theestimated future total available market for the Company’s products, which wassignificantly revised downward in the fourth quarter of 2008, showed nosignificant signs of recovery as of September 30, 2009.

 

Accordingly, as of September 30,2009, the Company performed an analysis comparing the undiscounted cash flowsestimated to be generated by the long-lived assets to the carrying amounts ofthose assets.  The estimates of futureoperating results and cash flows are derived from the Company’s updatedlong-term financial forecast.  Thisupdated long-term forecast represents the best estimate that the Company has atthis time and the Company believes that its underlying assumptions arereasonable, based primarily on current product performance and customeracceptance.  This forecast reliesprimarily on market assumptions and market share Axcelis expects toachieve.  As of September 30, 2009,the Company’s analysis indicated that the carrying amounts for long-livedassets are expected to be recovered.  Assuch so the Company did not record an impairment charge in the three monthsended September 30, 2009.  However,actual performance could be materially different from the Company’s currentforecasts, which could impact future estimates of undiscounted cash flows andmay result in the impairment of the carrying amount of long-lived assets in thefuture.  This could be caused bystrategic decisions made in

 

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response to economic andcompetitive conditions, the impact of the economic environment on the Company’scustomer base, or a material adverse change in the Company’s relationships withsignificant customers.  Accordingly, theCompany will continue to perform this analysis no less than quarterly for theforeseeable future.

 

**Note 4.  Stock-Based Compensation**

 

The Company maintains theAxcelis Technologies, Inc. 2000 Stock Plan (the “2000 Plan”), a stock awardand incentive plan which permits the issuance of options, restricted stock,restricted stock units and performance awards to selected employees, directorsand consultants of the Company. The Company also maintains the AxcelisTechnologies, Inc. Employee Stock Purchase Plan (the “ESPP”), an InternalRevenue Code Section 423 plan. The 2000 Plan and the ESPP are more fullydescribed in Note 14 to the consolidated financial statements in the Company’s2008 Annual Report on Form 10-K.

 

The Company recognized stock-basedcompensation expense of $2.3 million and $3.6 million for the three and ninemonths ended September 30, 2009, respectively.  For the three and nine months ended September 30,2008, the Company recognized stock-based compensation expense of $1.9 millionand $4.1 million respectively.  Theseamounts include the impact of recognizing compensation expense related torestricted stock units, restricted stock, non-qualified stock options and stockissued under the ESPP.

 

**Note 5.  Net Income Per Share**

 

Basic earnings per shareis 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 tobasic earnings per share, except that the denominator is increased to includeadditional common shares that would have been outstanding if the potentiallydilutive common shares had been issued. Because the Company has net losses for the three and nine month periods ended September 30, 2009, anypotentially diluted common shares related to outstanding stock options,restricted stock units or convertible debentures have been excluded from thecalculation of net loss per share because the effect would be anti-dilutive.

 

**Note 6.  Comprehensive Income**

 

The components ofcomprehensive income follow:

 
| ** **                                | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(in thousands)**     | ** ** | **(in thousands)**     | ** ** |
|                                      |       |                   |       |                   |       |   |   |   |   |
| Net  loss                                 |       | $                      | (15,898    | )                      | $          | (24,741 | ) | $ | (67,432 | ) | $ | (55,218 | ) |
| Other  comprehensive income               |       |                   |       |                   |       |   |   |   |   |
| Foreign  currency translation adjustments |       | 2,620                  |       | (5,961                 | )          | (6,346 | ) | 3,227 |   |
| Unfunded  pension liability of SEN        |       | —                 |       | (638                   | )          | — |   | (638 | ) |
|                                      |       | $                      | (13,278    | )                      | $          | (31,340 | ) | $ | (73,778 | ) | $ | (52,629 | ) |

 

**Note 7.  Inventories**

 

The components ofinventories follow:

 

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| ** **                          | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|-------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                          | ** ** | **2009**               | ** **    | **2008**              | ** ** |
| ** **                          | ** ** | **(in thousands)**     | ** **    |
| Raw  materials                      |       | $                      | 79,521        |                  | $          | 93,996 |   |
| Work  in process                    |       | 27,928                 |          | 35,977                |       |
| Finished  goods (completed systems) |       | 16,181                 |          | 20,140                |       |
|                                |       | $                      |  123,630 |                  | $          | 150,113 |   |

 

Whenrecorded, reserves reduce the carrying value of inventory to its net realizablevalue.  The Company establishes inventoryreserves when conditions exist that indicate inventory may be in excess ofanticipated demand or is obsolete based upon assumptions about future demandfor the Company’s products or market conditions.  The Company regularly evaluates the abilityto realize the value of inventory based on a combination of factors including:forecasted sales or usage, estimated product end of life dates, estimatedcurrent and future market value and new product introductions.  Purchasing and usage alternatives are alsoexplored to mitigate inventory exposure.

 

Approximately$54.2 million and $61.9 million of net inventory at September 30, 2009 andDecember 31, 2008, respectively, relates to the Optima product family.

 

**Note 8.  Restructuring Charges**

 

In the three and ninemonths ended September 30, 2009, the Company implemented a reduction inforce related to planned actions taken by management to control costs andimprove the focus of its operations in order to sustain future profitabilityand conserve cash. This reduction in force resulted in a total charge torestructuring expense of approximately $6.1 million related to severance andrelated costs for the nine months ended September 30, 2009, offset by areversal of $0.6 million of accrued compensation expenses related to terminatedemployees.  A charge to expense of $0.4million was recorded in the three months ended September 30, 2009.  During the nine months ended September 30,2009, a total of $6.2 million was paid, which included $2.4 million paid in thethree months ended September 30, 2009.

 

Changes in the Company’srestructuring liability, which consists primarily of severance and relatedcosts, included in amounts reported as other current liabilities, were asfollows:

 
| ** **                          | ** ** | **(in thousands)** | ** ** |
|-------------------------------------|------------|--------------------|------------|
| Balance  at December 31, 2008  |       | $                  | 746        |   |
| Severance  and related costs        |       | 6,071              |       |
| Cash  payments                      |       | (6,226             | )          |
| Balance  at September 30, 2009 |       | $                  | 591        |   |

 

**Note 9.  Product Warranty**

 

The Company offers a oneto three year warranty for all of its products, the terms and conditions ofwhich vary depending upon the product sold. For all systems sold, the Companyaccrues a liability for the estimated cost of standard warranty at the time ofsystem shipment and defers the portion of systems revenue attributable to thefair value of non-standard warranty. Revenue for non-standard warranty isrecognized ratably over the applicable warranty period. Costs for non-standardwarranty are expensed as incurred. Factors that affect the Company’s warrantyliability include the number of installed units, historical and anticipatedproduct failure rates, material usage and service labor costs. The Companyperiodically assesses the adequacy of its recorded liability and adjusts theamount as necessary.

 

Changes in the Company’sproduct warranty liability are as follows:

 

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| ** **                                                                      | ** ** | **Nine months ended**  | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                      | ** ** | **September 30,** | ** ** |
| ** **                                                                      | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)**     | ** ** |
| Balance  at December 31                                                    |       | $                      | 3,530      |   | $ | 6,245 |   |
| Warranties  issued during the period                                            |       | 736                    |       | 2,124 |   |
| Settlements  made during the period                                             |       | (1,945                 | )          | (4,418 | ) |
| Changes  in estimate of liability for pre-existing warranties during the period |       | (1,200                 | )          | (163 | ) |
| Balance  at September 30                                                   |       | $                      | 1,121      |   | $ | 3,788 |   |
| Amount  classified as current                                                   |       | $                      | 1,029      |   | $ | 3,166 |   |
| Amount  classified as long-term                                                 |       | 92                     |       | 622 |   |
| Total  Warranty Liability                                                       |       | $                      | 1,121      |   | $ | 3,788 |   |

 

**Note 10.  FinancialArrangements**

 

On January 15, 2009, Axcelis failed to make therequired payment of approximately $85 million under an Indenture dated as of May 2,2006 between Axcelis and U.S. Bank National Association, as Trustee, relatingto the Company’s 4.25% Convertible Senior Subordinated Notes.  Such failure constituted an event of defaultunder the Indenture.  Pursuant to the Indenture and as a result of thefailure by Axcelis to make the required payment, Axcelis was required to pay,upon demand of the Trustee, the entire overdue amount, plus interest at a rateof 8.0% per annum, plus certain additional costs and expenses associated withthe collection of such amounts.  On March 30, 2009, the Companycompleted the sale of SEN and a portion of the net proceeds was used to repayall amounts due under the Indenture, resulting in an extinguishment of the debtin full.

 

On April 23, 2008, the Company entered into arevolving credit facility with a bank that provides for borrowings up to thelesser of $50.0 million or specified percentages of the amounts of qualifyingaccounts receivable and inventory.  TheCompany is currently unable to borrow against the facility because it is notcurrently in compliance with the financial covenants contained in theunderlying credit agreement. This facility expires in April 2010.  If the Company terminates this revolvingcredit facility prior to its expiration, the Company will have to pay an earlytermination fee of approximately $0.5 million.

 

**Note 11.  IncomeTaxes**

 

Income tax expenserelates principally to operating results of foreign entities in jurisdictions,primarily in Asia, where the Company earns taxable income. The Company hassignificant net operating losses in the United States and certain foreign taxjurisdictions and, as a result, does not pay significant income taxes in thosejurisdictions. Accordingly, the effective income tax rate is not meaningful.

 

**Note 12.  SignificantCustomers**

 

For the three monthsended September 30, 2009, two customers accounted for approximately 14.8%,10.0%, of revenue respectively. For the nine months ended September 30,2009, no single customer accounted for more than 10.0% of revenue. For thethree months ended September 30, 2008, no single customer accounted formore than 10.0% of revenue.  For the ninemonths ended September 30, 2008, one customer accounted for approximately13.0% of revenue.

 

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**Note 13.  Contingencies**

 

**Litigation**

 

The Company is notpresently a party to any litigation that it believes might have a materialadverse effect on its business operations. The Company is, from time to time, a party to litigation that arises inthe normal course of its business operations.

 

**Indemnifications**

 

The Company’s systemsales agreements typically include provisions under which the Company agrees totake certain actions, provide certain remedies and defend its customers againstthird-party claims of intellectual property infringement under specifiedconditions and to indemnify customers against any damage and costs awarded inconnection with such claims. The Company has not incurred any material costs asa result of such indemnifications and has not accrued any liabilities relatedto such obligations in the accompanying consolidated financial statements.

 

**Note 14.  RecentAccounting Pronouncements**

 

In September 2006,the Financial Accounting Standards Board (FASB) issued guidance which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and establishes a hierarchy that categorizes andprioritizes the sources to be used to estimate fair value. This guidance alsoexpands financial statement disclosures about fair value measurements. On February 6,2008, the FASB issued a statement which delays the effective date for one yearfor all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). This is effective for financial statementsissued for fiscal years beginning after November 15, 2007. The Company haselected a partial deferral of this guidance related to the measurement of fairvalue used when evaluating goodwill, other intangible assets and otherlong-lived assets for impairment and valuing asset retirement obligations andliabilities for exit or disposal activities. The impact of partially adoptingthis guidance effective January 1, 2008 was not material to the Company’sfinancial position or results of operations.

 

In December 2007,the FASB issued guidance on business combinations.  This guidance applies to all transactions orother events in which an entity (the acquirer) obtains control of one or morebusinesses (the acquiree), including those sometimes referred to as “truemergers” or “mergers of equals” and combinations achieved without the transferof consideration, for example, by contract alone or through the lapse ofminority veto rights. This guidance applies to all business entities, includingmutual entities that previously used the pooling-of-interests method ofaccounting for some business combinations. It does not apply to: 1) theformation of a joint venture; 2) the acquisition of an asset or a group ofassets that does not constitute a business; 3) a combination betweenentities or businesses under common control; or 4) a combination betweennot-for-profit organizations or the acquisition of a for-profit business by anot-for-profit organization. This guidance applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. Anentity may not apply it before that date. The adoption of this guidance did nothave a material impact on the Company’s financial position, results ofoperations or liquidity.

 

In December 2007,the FASB issued guidance which applies to all entities that prepareconsolidated financial statements, except not-for-profit organizations, butwill affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. Thisguidance is effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2008 (that is, January 1,2009, for entities with calendar year-ends). Earlier adoption isprohibited.  The adoption of thisguidance did not have a material impact on the Company’s financial position,results of operations or liquidity.

 

In May 2009, theFASB issued guidance on how companies should assess subsequent events. This guidance is effective for interim and annual financial periodsending after June 15, 2009.  No significant events have occurredafter September 30, 2009 that are expected to have a significant impact onthe Company.  The Company has evaluated events occurring through November 6,2009 (the date of issuance).

 

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In June 2009, theFASB issued the FASB Accounting Standard Codification (the Codification).  This statement establishes the Codificationas the source of authoritative accounting principles recognized by the FASB tobe applied by nongovernmental entities in the preparation of financialstatements in conformity with Generally Accepted Accounting Principles in theUnited States.  This statement iseffective for periods ending after September 15, 2009.  The adoption of the Codification will have noimpact on the Company’s financial position, results of operations, orliquidity.

 

InSeptember 2009, the FASB issued a new accounting standard to provide guidanceon revenue recognition criteria for multiple-element arrangements. The newaccounting standard modifies the criteria used to separate elements in amultiple-element arrangement by introducing the concept of best estimate ofselling price, establishing a hierarchy of evidence for determining sellingprice (fair value), requiring the use of the relative selling price method andprohibiting the use of the residual method to allocate arrangementconsideration among units of accounting. The new accounting standard alsoexpands the disclosure requirements for all multiple-element arrangements andis effective prospectively for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010 (January 1, 2011for a calendar year-end entity). The Company is currently evaluating the impactof adopting this pronouncement.

 

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

 

Certainstatements in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” are forward-looking statements that involve risks anduncertainties. Words such as may, will, should, would, anticipates, expects,intends, plans, believes, seeks, estimates and similar expressions identifysuch forward-looking statements. The forward-looking statements containedherein are based on current expectations and entail various risks anduncertainties that could cause actual results to differ materially from thoseexpressed in such forward-looking statements. Factors that might cause such adifference include, among other things, those set forth under “Liquidity andCapital Resources,” those referred to in “Risk Factors” and others discussedelsewhere in this Form 10-Q. Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We assume no obligation to update theseforward-looking statements to reflect actual results or changes in factors orassumptions affecting forward-looking statements, except as may be required bylaw.

 

**Overview**

 

AxcelisTechnologies, Inc. (“Axcelis,” “the Company,” “we,” “us,” or “our”), is aworldwide producer of equipment used in the fabrication of semiconductors. Inaddition, the Company provides extensive aftermarket service and support,including spare parts, equipment upgrades, and maintenance services to thesemiconductor industry.

 

Thesemiconductor capital equipment industry is subject to significant cyclicalswings in capital spending by semiconductor manufacturers. Capital spending isinfluenced by demand for semiconductors and the products using them, theutilization rate and capacity of existing semiconductor manufacturingfacilities and changes in semiconductor technology, all of which are outside ofour control. As a result, our revenues and gross margins, to the extentaffected by increases or decreases in volume, fluctuate from year to year andperiod to period. The industry experienced a downturn beginning in the secondhalf of 2007 which is expected to continue at least through 2009. Our grossmargins are also affected by the introduction of new products. We typicallybecome more efficient in manufacturing products as they mature. Our expensebase is largely fixed and does not vary significantly with changes in volume.Therefore, we experience fluctuations in operating results and cash flowsdepending on our revenues as driven by the level of capital expenditures bysemiconductor manufacturers.

 

Duringthe three and nine months ended September 30, 2009 we incurred netlosses.  Beginning in 2004, mostcustomers shifted from multi wafer tools to single wafer tools for high currention implant applications. Because we did not have a single wafer high current product,we experienced a significant loss of market share which we have yet to regain.We introduced our single wafer Optima HD (for high current applications)product in 2006 and have gained traction with this tool at a number ofcustomers.  We introduced our singlewafer Optima XE (for high energy applications) product in 2008 and during 2009have shipped the Optima XE to multiple customers.

 

During the three and nine months ended September 30, 2009, our stockprice continued to trade below book value. Continuing losses from operations and negative cash flows have adverselyimpacted our stock price. In concert with the market uncertainty resulting fromthe current credit crisis, we believe that declining business and consumerconfidence and increased unemployment have precipitated an economic slowdownand fears of a prolonged recession.  Aneconomic downturn characterized by higher unemployment, lower family income,lower corporate earnings, lower business investment and lower consumer spendinghas severely impacted many technology manufacturers and has significantlylowered the demand for our products.  Webelieve that we have competitive products in the high current, medium currentand high energy ion implant market segments, as well as dry strip.  However, challenging market conditions haveseverely limited our ability to increase sales and market share.  We believe that a combination of thesefactors accounts for the difference between our stock trading price and ourbook value.

 

Operatingresults for the periods presented are not necessarily indicative of the resultsthat may be expected for future interim periods or years as a whole.

 

**Critical Accounting Estimates**

 

Management’sdiscussion and analysis of our financial condition and results of operationsare based upon Axcelis’ consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those related to revenue recognition, income taxes,accounts receivable, inventory and warranty obligations. Management’s estimatesare based on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying

 

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valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

Therehas been no material change in the nature of our critical accounting estimatesand judgments as described in Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**Results of Operations**

 

Thefollowing table sets forth our results of operations as a percentage of revenuefor the periods indicated:

 

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**Axcelis Technologies, Inc.**

**Consolidated Statements of Operations**

**Percentage of Revenue**

**(Unaudited)**

 
| ** **                         | ** ** | **Three  months ended  September 30,** | ** ** | **Nine  months ended  September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                            |       |                                        |       |                                       |       |   |   |   |   |
| Product                            |       | 73.9                                        | %          | 69.9                                       | %          | 73.6 | % | 78.5 | % |
| Service                            |       | 26.1                                        |       | 28.4                                       |       | 26.0 |   | 19.9 |   |
| Royalties,  primarily from SEN     |       | 0.0                                         |       | 1.7                                        |       | 0.4 |   | 1.6 |   |
| Total  revenue                     |       | 100.0                                       |       | 100.0                                      |       | 100.0 |   | 100.0 |   |
| Cost  of revenue                   |       |                                        |       |                                       |       |   |   |   |   |
| Product                            |       | 61.9                                        |       | 49.0                                       |       | 66.4 |   | 54.2 |   |
| Services                           |       | 15.7                                        |       | 14.1                                       |       | 15.9 |   | 10.5 |   |
| Total  cost of revenue             |       | 77.6                                        |       | 63.1                                       |       | 82.3 |   | 64.7 |   |
|                               |       |                                        |       |                                       |       |   |   |   |   |
| Gross  profit                      |       | 22.4                                        |       | 36.9                                       |       | 17.7 |   | 35.3 |   |
|                               |       |                                        |       |                                       |       |   |   |   |   |
| Operating  expenses                |       |                                        |       |                                       |       |   |   |   |   |
| Research  and development          |       | 21.8                                        |       | 34.2                                       |       | 26.4 |   | 23.9 |   |
| Sales  and marketing               |       | 16.3                                        |       | 26.6                                       |       | 20.0 |   | 17.7 |   |
| General  and administrative        |       | 22.5                                        |       | 22.7                                       |       | 28.7 |   | 15.0 |   |
| Amortization  of intangible assets |       | 0.0                                         |       | 1.4                                        |       | 0.0 |   | 0.9 |   |
| Restructuring  charges             |       | 1.2                                         |       | 1.0                                        |       | 5.9 |   | 1.7 |   |
| Total  operating expenses          |       | 61.8                                        |       | 85.9                                       |       | 81.0 |   | 59.2 |   |
|                               |       |                                        |       |                                       |       |   |   |   |   |
| Loss  from operations              |       | (39.4                                       | )          | (49.0                                      | )          | (63.3 | ) | (23.9 | ) |
|                               |       |                                        |       |                                       |       |   |   |   |   |
| Other  income (expense)            |       |                                        |       |                                       |       |   |   |   |   |
| Gain  on sale of SEN               |       | 0.0                                         |       | 0.0                                        |       | 1.1 |   | 0.0 |   |
| Equity  income (loss) of SEN       |       | 0.0                                         |       | (2.1                                       | )          | (3.4 | ) | (0.5 | ) |
| Interest  income                   |       | 0.2                                         |       | 0.7                                        |       | 0.2 |   | 0.7 |   |
| Interest  expense                  |       | 0.0                                         |       | (3.7                                       | )          | (1.8 | ) | (2.4 | ) |
| Other,  net                        |       | (4.8                                        | )          | 1.6                                        |       | (3.4 | ) | 0.1 |   |
| Total  other income (expense)      |       | (4.6                                        | )          | (3.5                                       | )          | (7.3 | ) | (2.1 | ) |
|                               |       |                                        |       |                                       |       |   |   |   |   |
| Loss  before income taxes          |       | (44.0                                       | )          | (52.5                                      | )          | (70.6 | ) | (26.0 | ) |
| Income  taxes (credits)            |       | 1.3                                         |       | 0.8                                        |       | 0.9 |   | 0.5 |   |
| Net  loss                          |       | (45.3                                       | )%         | (53.3                                      | )%         | (71.5 | )% | (26.5 | )% |

 

**Threeand nine months ended September 30, 2009 in comparison to the three andnine months ended September 30, 2008**

 

**Revenue**

 

*Product*

 

Productrevenue, which includes systems sales, sales of spare parts and productupgrades, was $25.9 million, or 73.9% of revenue, for the three months ended September 30,2009, compared with $32.5 million, or 69.9% of revenue for the threemonths ended September 30, 2008. Product revenue was $69.4 million, or73.6% of revenue for the nine months ended September 30, 2009, comparedwith $163.5 million, or 78.5% of revenue for the nine months ended September 30,2008.  System sales were $10.1 million,or 28.8% of revenue, for the three months ended September 30, 2009, comparedwith $8.9 million, or 19.1% of revenue, for the three months ended September 30,2008.  System sales were $26.7 million,or 28.3% of revenue, for the nine months ended September 30, 2009,compared with $89.2 million, or 42.8% of revenue, for the nine months ended September 30,2008.  The decline in product revenue inthe three and nine month period ended September 30, 2009 is attributableto a weak semiconductor market and a related decrease in capital spending bysemiconductor manufacturers.

 

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Aportion of our revenue from system sales is deferred until installation andother services related to future deliverables are performed. The total amountof deferred revenue at September 30, 2009 and 2008 was $10.8 millionand $18.4 million, respectively. The decline was mainly due to the decrease in systems sales during thethree and nine months ended September 30, 2009.

 

*Service*

 

Servicerevenue, which includes the labor component of maintenance and servicecontracts and fees for service hours provided by on-site service personnel, was$9.1 million, or 26.1% of revenue, for the three months ended September 30,2009, compared with $13.2 million, or 28.4% of revenue, for the threemonths ended September 30, 2008. Service revenue was $24.5 million, or 26.0% of revenue for the ninemonths ended September 30, 2009, compared with $41.4 million, or 19.9% ofrevenue for the nine months ended September 30, 2008.  Although service revenue should increase withthe expansion of the installed base of systems, it can fluctuate from period toperiod based on capacity utilization at customers’ manufacturing facilities,which affects the need for equipment service. The decline during the three and nine months ended September 30,2009 was primarily due to the continuing depressed fabrication utilization inthe semiconductor industry.

 

*Royalties*

 

Royaltyrevenue was $0.0 million, or 0.0% of revenue, for the three months ended September 30,2009, compared with $0.8 million, or 1.7% of revenue, for the three monthsended September 30, 2008.  Royaltyrevenue for the nine months ended September 30, 2009 was $0.4 million, or0.4% of revenue, compared to $3.3 million, or 1.6%, of revenue for the ninemonths ended September 30, 2008. Royalties were earned primarily under ourprior license agreement with SEN Corporation, an SHI and Axcelis Company (“SEN”).  Until March 30, 2009, we owned 50% ofthe equity of a joint venture with Sumitomo Heavy Industries, Ltd. (“SHI”) inJapan.  This joint venture, known as SEN,licensed technology from us relating to the manufacture of specified ionimplantation products and had exclusive rights to manufacture and sell theseproducts in the territory of Japan.  Changes in royalty revenue were mainly attributable to fluctuations inSEN sales volume based on demand for equipment by Japanese semiconductormanufacturers and the timing of shipments in Japan.  As a result of the sale of the Company’sinvestment in SEN, since March 30, 2009, SEN had no further obligation topay royalties to the Company.

 

*Ion Implant*

 

Revenuefrom sales of ion implantation products and service accounted for$28.1 million, or 80.2% of total revenue, in the three months ended September 30,2009, compared with $36.8 million, or 79.1% of total revenue, for thethree months ended September 30, 2008. Revenue from sales of ion implantation products and service accountedfor $77.7 million, or 82.2% of revenue, for the nine months ended September 30,2009, compared to $170.6 million, or 81.9% of revenue, in the nine months endedSeptember 30, 2008.  The decline wasdue to the factors discussed above for product revenues.

 

*Aftermarket*

 

TheCompany’s product revenues include sales of spare parts and product upgrades aswell as complete systems.  We refer tothe business of selling spare parts and product upgrades, combined with thesale of maintenance labor and service contracts and service hours, as the “aftermarket”business.  The revenue from ouraftermarket business was $24.9 million for the three months ended September 30,2009, compared to $36.8 million for the three months ended September 30,2008.  The revenue from our aftermarketbusiness was $67.2 million for the nine months ended September 30, 2009,compared to $115.7 million for the nine months ended September 30,2008.  Aftermarket revenue generallyincreases with expansion of the installed base of systems but can fluctuateperiod to period based on capacity utilization at customers’ manufacturingfacilities which affects the sale of spare parts and demand for equipmentservice.  The decline during the threeand nine months ended September 30, 2009 was primarily due to thecontinuing depressed fabrication utilization in the semiconductor industry.

 

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**Gross Profit**

* *

*Product*

 

Grossprofit from product revenue was 16.2% for the three months ended September 30,2009, compared to gross profit of 30.0% for the three months ended September 30,2008.  Approximately 6.0% of the 13.8%decrease resulted from an additional provision for excess inventory.  The remaining 7.8% decrease is attributableto higher systems sales volume during the three months ended September 30,2009 and the related favorable absorption of manufacturing overhead, whichincreased gross margins by 1.1%, offset by a 8.9% decrease in gross marginattributable to reduced revenue from the sale of spare parts and systemupgrades reflecting the ongoing downturn in the semicap equipment market.  Gross profit from product revenue was 9.8%for the nine months ended September 30, 2009, compared with 31.0% for thenine months ended September 30, 2008. Approximately 11.6% of the 21.2% decrease resulted from an additionalprovision for excess inventory.  Theremaining 9.6% decrease is attributable to significantly lower systems salesvolume during the nine months ended September 30, 2009 and the relatedunder absorption of manufacturing overhead, which reduced gross margins by19.5%, offset by a 9.9% increase in gross margin resulting from the favorableimpact of an increased mix of parts and upgrade revenue at higher margins.

 

*Service*

 

Grossprofit from service revenue was 39.7% for the three months ended September 30,2009, compared to 50.3% for the three months ended September 30,2008.  Gross profit from service revenuewas 38.8% for the nine months ended September 30, 2009, compared to 47.1%for the nine months ended September 30, 2008.  The decrease in gross profit is attributableto significantly lower volumes.

 

**Research and Development**

 

Researchand development expense was $7.6 million in the three months ended September 30,2009, a decrease of $8.3 million, or 52.2%, compared with $15.9 million inthe three months ended September 30, 2008. The decrease was due todecreased payroll costs ($3.4 million), decreased consulting costs ($1.3million), decreased project material costs ($0.7 million), decreaseddevelopment asset amortization and depreciation costs ($2.3 million) anddecreased other miscellaneous expenses ($0.6 million). Research and developmentexpense was $24.9 million for the nine months ended September 30, 2009, adecrease of $24.8 million or 49.8%, compared with $49.7 million for the ninemonths ended September 30, 2008. The decrease was due to decreased payroll costs ($10.4 million),decreased consulting costs ($2.8 million), decreased project material costs($3.2 million), decreased development asset amortization and depreciation costs($6.6 million) and decreased other miscellaneous expenses ($1.8 million).

 

Researchand development expense was attributable to the following activities for thenine months ended September 30, 2009: 50% for new product development, 34%for improvement of existing products, and 16% for product testing.

 

**Sales and Marketing**

 

Salesand marketing expense was $5.7 million in the three months ended September 30,2009, a decrease of $6.7 million, or 54.0%, compared with$12.4 million for the three months ended September 30, 2008. Thedecrease was due to decreased payroll costs ($2.4 million), decreasedprofessional fee expenses ($2.2 million), decreased supplies and marketingservice expenses ($0.6 million), decreased travel costs ($0.8 million),decreased freight costs ($0.3 million), and decreased other miscellaneousexpenses ($0.4 million). Sales and marketing expense was $18.9 million for thenine months ended September 30, 2009, a decrease of $17.9 million, or48.6%, compared with $36.8 million for the nine months ended September 30,2008.  The decrease was driven primarilyby decreased payroll costs ($8.1 million), decreased professional fee expenses($3.7 million), decreased supplies and marketing service expenses ($2.4million), decreased travel cost ($2.1 million), decreased freight costs ($0.9million), and decreased other miscellaneous expense ($0.7 million).

 

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**General and Administrative**

 

Generaland administrative expense was $7.9 million for the three months ended September 30,2009, a decrease of $2.7 million or 25.4%, compared with$10.6 million in the three months ended September 30, 2008. Thedecrease was due to decreased payroll costs ($1.4 million), decreasedprofessional fee expenses ($0.9 million), decreased amortization expense($0.2 million) and decreased other miscellaneous expenses ($0.2 million).  General and administrative expense was $27.1million for the nine months ended September 30, 2009, a decrease of $4.2million, or 13.4%, compared with $31.3 million in the nine months ended September 30,2008.  The decrease was due to decreasedpayroll costs ($4.0 million), decreased amortization costs ($0.6 million),decreased other miscellaneous expenses ($0.6 million), offset by increasedprofessional fees ($1.0 million).

 

**Restructuring**

 

Forthe three and nine months ended September 30, 2009, we implemented areduction in force to further reduce costs to mitigate deteriorating industryfundamentals. This reduction in force resulted in a total charge to expense ofapproximately $6.1 million related to separation and outplacement costs for thenine months ended September 30, 2009, offset by a reversal of $0.6 millionof accrued compensation expense related to terminated employees. A charge toexpense of $0.4 million was recorded in the three months ended September 30,2009.

 

**Other Income (Expense)**

 

Thesale of the Company’s investment in SEN resulted in a gain of approximately$1.1 million for the nine months ended September 30, 2009.  This gain includes net proceeds of $122.2million and cumulative foreign translation gain of $23.5 million, previouslyrecorded in other comprehensive income, reduced by the carrying value of theinvestment on the date of sale of $144.6 million.

 

Noequity loss or income was attributable to SEN for the three months ended September 30,2009.  Equity loss attributable to SENwas $3.2 million for the nine months ended September 30, 2009.  Equity loss attributable to SEN was $1.0million and $1.1 million for the three and nine months ended September 30,2008. As a result of the sale of the Company’s investment in SEN, subsequent toMarch 30, 2009, the Company no longer records equity income or loss fromSEN.

 

Interestincome decreased by $0.3 million and $1.2 million for the three and nine monthsended September 30, 2009, compared to the three and nine months ended September 30,2008, due primarily to lower average cash balances.

 

Interestexpense decreased by $1.7 million and $3.3 million for the three and ninemonths ended September 30, 2009, compared to the three and nine monthsended September 30, 2008.  Thedecrease for the three and nine months ended September 30, 2009 is due tothe payment in full of the convertible senior subordinated notes on March 30,2009.

 

**Income Taxes (Credits)**

 

Weincur income tax expense relating principally to operating results of foreignentities in jurisdictions, principally in Asia, where we earn taxable income.We have significant net operating loss carryforwards in the United States andcertain foreign jurisdictions, principally Europe, and, as a result, we do notcurrently pay significant income taxes in those jurisdictions and we do notrecognize the tax benefit for such losses as discussed in Note 11 to theconsolidated financial statements. Accordingly, our effective income tax rateis not meaningful.

 

**Liquidity and Capital Resources**

 

Ourliquidity is affected by many factors. Some of these relate specifically to the operations of our business, forexample, the rate of sale of the Optima product in inventory, and others relateto the uncertainties of global economies, including the availability of credit,and the condition of the overall semiconductor equipment industry.

 

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OnMarch 30, 2009, pursuant to the Share Purchase Agreement with SHI and SEN,we sold all of our common shares in SEN to SHI for proceeds of $132.8 millionbefore advisor fees and other expenses of $10.6 million, of which $7.1 millionwas paid during the quarter ended June 30, 2009.  We used $86.4 million ($83.3 millionprincipal and $3.1 million accrued interest and bank fee), of that amount topay in full our outstanding obligations on our 4.25% Convertible SeniorSubordinated Notes.

 

Duringthe three and nine months ended September 30, 2009, we experiencednegative cash flows from operations. This was predominately driven by the net loss from operationsattributable to the depressed semiconductor equipment market and the resultantdecline in revenues.  Unrestricted cashand cash equivalents at September 30, 2009 were $41.2 million,compared to $37.7 million at December 31, 2008. The Major components ofthe change in unrestricted cash and cash equivalents during the nine monthsended September 30, 2009 are net proceeds of $122.2 million from the saleof our investment in SEN, repayment of outstanding convertible debentures of$86.4 million (including accrued interest), and cash used for operations of$37.8 million.

 

Wehave outstanding standby letters of credit, bank guarantees and surety bonds inthe amount of $13.5 million to support certain operating lease obligations,workers’ compensation insurance, and certain value added tax claims in Europe,of which $7.2 million at September 30, 2009 was supported by cash pledgedas collateral.  The pledged cash isreflected as restricted cash on the consolidated balance sheet.

 

On April 23, 2008, weentered into a revolving credit facility with a bank that provides forborrowings up to the lesser of $50 million or specified percentages of theamounts of qualifying accounts receivable and inventory.  We are currently unable to borrow against thefacility because we are not currently in compliance with the financial covenantscontained in the underlying credit agreement. This facility expires in April 2010.  If we terminate this revolving creditfacility prior to its expiration, we will have to pay an early termination feeof approximately $0.5 million as of the date of termination.

 

We believe that, based onour current market, revenue and expense forecasts, our existingcash and cash equivalents will be sufficient to satisfy our anticipatedrequirements.  We have seeninitial signs of a recovery in the semiconductor capital equipment industry,and our forecasts for the remainder of 2009 and through 2010 assume acontinuing modest recovery in fab utilization and capital spending by ourcustomers.  We believe that, based on our current market, revenue andexpense forecasts, our existing cash and cash equivalents will be sufficient tosatisfy our anticipated requirements for 2010 and beyond.  We continue to explore new financing sources;however, we do not currently have access to any source of credit.  Thecompany’s forecast performance throughout 2010 shows a substantial improvementover its performance during the last year; if this forecast performance is notachieved, there could be a significant adverse effect on our liquidity.

 

**Item 3.    Quantitative andQualitative Disclosures about Market Risk.**

 

As of September 30, 2009, there have been nomaterial changes to the quantitative information about market risk disclosed inItem 7A to our annual report on Form 10-K for the year ended December 31,2008.

 

**Item 4. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

Ourmanagement, with the participation of our principal executive officer andprincipal financial officer, has evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) as of the endof the period covered by this report (the “Evaluation Date”). Based on thisevaluation, our principal executive officer and principal financial officerconcluded that, as of the Evaluation Date, these disclosure controls andprocedures are effective.

 

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**Changesin Internal Control over Financial Reporting**

 

Therewas no change in our internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) identified in connection with the evaluation of our internalcontrol that occurred during the third quarter of 2009 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

The Company is not presentlya party to any litigation that it believes might have a material adverse effecton its business operations.  The Companyis, from time to time, a party to litigation that arises in the normal courseof its business operations.

 

**Item 1A.  Risk Factors.**

 

Asof September 30, 2009, there have been no material changes to the riskfactors described in Item 1A to our annual report on Form 10-K for theyear ended December 31, 2008.

 

**Item 2.   Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

None.

 

**Item 3.  Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4.   Submission of Mattersto a Vote of Security Holders.**

 

Notapplicable.

 

**Item 5.  Other Information.**

 

None.

 

**Item 6.    Exhibits.**

 

Thefollowing exhibits are filed herewith:

 
| **Exhibit   No** | ** ** | **Description**                                                                                                                                                                                                          |
|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                   |       | Amended  and Restated Certificate of Incorporation of the Company. Incorporated by  reference to Exhibit 3.1 of the Company’s Current Report on  Form 8-K filed with the Commission on May 11, 2009. |

 

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| 3.2    |   | Bylaws  of the Company, as amended as of August 8, 2007. Incorporated by  reference to Exhibit 3.2 of the Company’s Form 10-Q for the quarter  ended June 30, 2007, filed with the Commission on August 9, 2007. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
| 31.1   |   | Certification  of the Principal Executive Officer under Exchange Act  Rule 13a-14(a)/15d-14(a) (Section 302 of the Sarbanes-Oxley  Act), dated November 6, 2009. Filed herewith.                                           |
|   |   |                                                                                                                                                                                                                                           |
| 31.2   |   | Certification  of the Principal Financial Officer under Exchange Act Rule 13a-14(a)/15d-14(a) (Section 302  of the Sarbanes-Oxley Act), dated November 6, 2009. Filed herewith.                                            |
|   |   |                                                                                                                                                                                                                                           |
| 32.1   |   | Certification  of the Principal Executive Officer pursuant to Section 1350 of  Chapter 63 of title 18 of the United States Code (Section 906 of  the Sarbanes-Oxley Act), dated November 6, 2009. Filed herewith.          |
|   |   |                                                                                                                                                                                                                                           |
| 32.2   |   | Certification  of the Principal Financial Officer pursuant to Section 1350 of  Chapter 63 of title 18 of the United States Code (Section 906 of  the Sarbanes-Oxley Act), dated November 6, 2009. Filed herewith.          |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                          | AXCELIS  TECHNOLOGIES, INC.        |
|-------------------------------|------------------------------------|
|                          |                               |   |
|                          | /S/  STEPHEN  G. BASSETT |
|                          |                               |   |
| DATED:  November 6, 2009 | By:                                | Stephen  G. Bassett |
|                          |                               | Executive  Vice President and Chief Financial Officer |
|                          |                               | Duly  Authorized Officer and Principal Financial Officer |
|                          |                               |   |

 

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