Basis of Presentation

Nature of Operations and Basis of Presentation – Amtech Systems, Inc. (the “Company”) designs, assembles, sells and installs capital equipment and related consumables used in the manufacture of solar cells, semiconductors and wafers of various materials, primarily for the solar and semiconductor industries. We are developing an ion implanter to provide our customers with a more complete solution for their next-generation high-efficiency solar cell production. The Company sells these products worldwide, primarily in Asia, the United States and Europe. The Company serves markets in industries that are experiencing rapid technological advances, and which historically have been cyclical. Therefore, future profitability and growth depend on the Company’s ability to develop or acquire and market profitable new products, and on its ability to adapt to cyclical trends.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and consequently do not include all disclosures normally required by U.S. generally accepted accounting principles. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments necessary, all of which are of a normal and recurring nature, to present fairly our financial position, results of operations and cash flows. Certain information and note disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

The consolidated results of operations for the three months ended December 31, 2012, are not necessarily indicative of the results to be expected for the full fiscal year.

Principles of Consolidation – The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and subsidiaries in which it has a controlling interest. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company's equity. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition – Revenue is recognized upon shipment of the Company’s proven technology equal to the sales price less the greater of (i) the fair value of undelivered services or (ii) the contingent portion of the sales price, which is generally 10-20% of the total contract price. The entire cost of the equipment relating to proven technology is recorded upon shipment. The remaining contractual revenue, deferred costs and installation costs are recorded upon the completion of installation at the customers’ premises and acceptance of the product by the customer.

For purposes of revenue recognition, proven technology means the Company has a history of at least two successful installations. New technology systems are those systems with respect to which the Company cannot demonstrate that it can meet the provisions of customer acceptance at the time of shipment. The full amount of revenue and costs of new technology shipments is recognized upon the completion of installation at the customers’ premises and acceptance of the product by the customer.

Revenue from services is recognized as the services are performed. Revenue from prepaid service contracts is recognized ratably over the life of the contract. Revenue from spare parts is recorded upon shipment.

Deferred Profit – Revenue deferred pursuant to the Company’s revenue recognition policy, net of the related deferred costs, if any, is recorded as deferred profit in current liabilities. The components of deferred profit are as follows:



	December 31, 2012		September 30, 2012
	(dollars in thousands)
Deferred revenues	$	8,883	$	11,200
Deferred costs	860		964
Deferred profit	$	8,023	$	10,236

Concentrations of Credit Risk – Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable and cash. The Company’s customers, located throughout the world, consist of manufacturers of solar cells, semiconductors, semiconductor wafers, LEDs and MEMS. Credit risk is managed by performing ongoing credit evaluations of the customers’ financial condition, by requiring significant deposits where appropriate, and by actively monitoring collections. Letters of credit are required of certain customers depending on the size of the order, type of customer or its creditworthiness, and its country of domicile. Reserves for potentially uncollectible receivables are maintained based on an assessment of collectability.

The Company maintains its cash, cash equivalents and restricted cash in multiple financial institutions. Balances in the United States (approximately 50% of total cash balances) are primarily invested in US Treasuries or are in financial institutions insured by the Federal Deposit Insurance Corporation (FDIC). The remainder of the Company’s cash is maintained in banks in The Netherlands, France and China that are uninsured.

As of December 31, 2012, three customers, individually, accounted for 14%, 12% and 11% of accounts receivable.

Restricted Cash – Restricted cash is $9.7 million and $4.6 million as of December 31, 2012 and September 30, 2012, respectively. The balance includes collateral for bank guarantees required by certain customers from whom deposits have been received in advance of shipment of $3.3 million and $3.8 million as of December 31, 2012 and September 30, 2012, respectively. Additionally, restricted cash includes cash received from research and development grants related to our ion implant technology to be used for research and development projects of $2.4 million and $0.8 million as of December 31, 2012 and September 30, 2012, respectively. Restricted cash also includes cash of $4.0 million as of December 31, 2012 received from research and development grants to be passed through to our research and development partners.

Accounts Receivable - Unbilled and Other – Unbilled and other accounts receivable consist mainly of the contingent portion of the sales price that is not collectible until successful installation of the product. These amounts are generally billed upon final customer acceptance. For the majority of these amounts, a liability has been accrued in deferred profit.

Inventories – Inventories are stated at the lower of cost or net realizable value. Approximately 90% of inventory is valued on an average cost basis with the remainder determined on a first-in, first-out (FIFO) basis. The components of inventories are as follows:



	December 31, 2012		September 30, 2012
	(dollars in thousands)
Purchased parts and raw materials	$	19,201	$	19,644
Work-in-process	2,978		2,328
Finished goods	2,551		3,698
	$	24,730	$	25,670

Property, Plant and Equipment – Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. The cost of property retired or sold and the related accumulated depreciation are removed from the applicable accounts when disposition occurs and any gain or loss is recognized. Depreciation is computed using the straight-line method. Useful lives for equipment, machinery and leasehold improvements range from three to seven years; for furniture and fixtures from five to ten years; and for buildings twenty years.

The following is a summary of property, plant and equipment:



	December 31, 2012			September 30, 2012
	(dollars in thousands)
Land, building and leasehold improvements	$	10,730		$	10,476
Equipment and machinery	7,495			7,272
Furniture and fixtures	5,577			5,458
	23,802			23,206
Accumulated depreciation and amortization	(11,537		)	(10,819		)
	$	12,265		$	12,387

Goodwill - Goodwill is not subject to amortization and is reviewed for impairment on an annual basis, typically at the end of the fiscal year, or more frequently if circumstances dictate.

The following is a summary of activity in goodwill:



	Three Months Ended December 31,
	2012		2011
	(dollars in thousands)
Beginning balance	$	8,355	$	13,313
Change in foreign exchange rates	68		(196		)
Ending balance	$	8,423	$	13,117

Intangibles – Intangible assets are capitalized and amortized over their useful life if the life is determinable. If the life is not determinable, amortization is not recorded.

The following is a summary of intangibles:



	Useful Life	December 31, 2012			September 30, 2012
		(dollars in thousands)
Non-compete agreements	4-8 years	$	1,061		$	1,057
Customer lists	10 years	851			828
Technology	5-10 years	2,387			2,341
In-process research and development	(1)	1,600			1,600
Other	2-10 years	334			325
		6,233			6,151
Accumulated amortization		(2,251		)	(2,055		)
		$	3,982		$	4,096


(1)	The in-process research and development will be amortized over its useful life when it has reached technological feasibility.

Long-lived assets - Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Warranty – A limited warranty is provided free of charge, generally for periods of 12 to 24 months, for all purchases of the Company’s new products and systems. Accruals are recorded for estimated warranty costs at the time the system is accepted by the customer.

The following is a summary of activity in accrued warranty expense:



	Three Months Ended December 31,
	2012			2011
	(dollars in thousands)
Beginning balance	$	2,687		$	2,265
Warranty expenditures	(362		)	(330		)
Warranty expense	103			378
Ending balance	$	2,428		$	2,313

Stock-Based Compensation - The Company measures compensation costs relating to share-based payment transactions based upon the grant-date fair value of the award. Those costs are recognized as expense over the requisite service period, which is generally the vesting period. The benefits of tax deductions in excess of recognized compensation cost are credited to additional paid-in capital and reported as cash flow from financing activities rather than as cash flow from operating activities.

Share-based compensation expense reduced the Company’s results of operations by the following amounts:



	Three Months Ended December 31,
	2012			2011
	(dollars in thousands)
Effect on income before income taxes (1)	$	(433	)	$	(465	)
Effect on income taxes	62			117
Effect on net income	$	(371	)	$	(348	)


(1)	Stock-based compensation expense is included in selling, general and administrative expenses.

Stock options issued under the terms of the plans have, or will have, an exercise price equal to or greater than the fair market value of the common stock at the date of the option grant and expire no later than 10 years from the date of grant, with the most recent grant expiring in 2022. Options issued by the Company vest over 2 to 4 years.

Stock option transactions and the options outstanding are summarized as follows:



	Three Months Ended December 31,
	2012					2011
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of period	891,293			$	9.37	611,384			$	10.02
Granted	312,850			2.95		288,400			7.98
Exercised	—			—		(50		)	6.15
Forfeited	(1,085		)	7.64		—			—
Outstanding at end of period	1,203,058			$	7.71	899,734			$	9.37

Exercisable at end of period	597,545			$	9.19	366,216			$	9.18
Weighted average fair value of options granted during the period	$	1.82				$	4.95

The fair value of options was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions:



	Three Months Ended December 31,
	2012	2011
Risk free interest rate	1%	1%
Expected life	6 years	6 years
Dividend rate	0%	0%
Volatility	70%	70%

To estimate expected lives for this valuation, it was assumed that options will be exercised at varying schedules after becoming fully vested. Forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of the options granted. The Company uses historical stock prices to determine the volatility factor.

The Company awards restricted shares under the existing share-based compensation plans. Our restricted share awards vest in equal annual installments over a two to four-year period. The total value of these awards is expensed on a ratable basis over the service period of the employees receiving the grants. The “service period” is the time during which the employees receiving grants must remain employees for the shares granted to fully vest.

Restricted stock transactions and awards outstanding are summarized as follows:



	Three Months Ended December 31,
	2012				2011
	Awards		Weighted Average Grant Date Fair Value		Awards		Weighted Average Grant Date Fair Value
Beginning Outstanding	127,975		$	9.06	120,970		$	9.42
Awarded	—		—		60,600		7.98
Released	(55,646	)	7.65		(47,014	)	8.53
Forfeited	(50	)	7.98		—		—
Ending Outstanding	72,279		$	10.15	134,556		$	9.09

Fair Value of Financial Instruments – Cash, Cash Equivalents and Restricted Cash - The carrying amount of these assets on the Company’s Consolidated Balance Sheets approximates their fair value because of the short maturities of these instruments.

Receivables, Payables and Accruals—The recorded amounts of financial instruments, including accounts receivable, accounts payable, and accrued liabilities, approximate their fair value because of the short maturities of these instruments.

Pensions—The Company has retirement plans covering substantially all employees. The principal plans are the multiemployer defined benefit pension plans of the Company’s operations in The Netherlands and France and the plan for hourly union employees in Pennsylvania. The multiemployer plans in the United States and France are insignificant. The Company's defined contribution plans cover substantially of the employees in the United States. The Company matches employee funds on a discretionary basis.

Shipping expense – Shipping expenses of $0.2 million and $0.6 million for the three months ended December 31, 2012 and 2011, respectively, are included in selling, general and administrative expenses.

Research and development expense – Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes; materials and supplies used in those activities; and product prototyping. The Company receives reimbursements through governmental research and development grants which are netted against these expenses. The table below shows gross research and development expenses and grants earned:



	Three Months Ended
	December 31, 2012			December 31, 2011
	(dollars in thousands)
Research and development	$	2,458		$	2,838
Grants earned	(1,297		)	(85		)
Net research and development	$	1,161		$	2,753