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| CYMI > SEC Filings for CYMI > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.
Overview
We provide state-of-the-art lithographic light sources designed to help enable the performance of leading edge wafer steppers and scanners built by the three lithography tool manufacturers, and we provide installed base products to support chipmakers that use these light sources in the production of advanced wafer patterning applications. We currently supply DUV light sources to each of the lithography tool manufacturers, ASML, Canon, and Nikon, who in turn supply their wafer steppers and scanners to chipmakers. In addition, we sell installed base products, which include replacement parts, various service and support offerings and upgrades to lithography tool manufacturers as well as directly to chipmakers. We provide worldwide service and support through certified field service engineers, and we have replacement parts depots located close to many of our customers throughout the world. Our light source systems currently constitute many of the excimer light sources incorporated in lithography wafer stepper and scanner tools at chipmakers worldwide. As the leading supplier of lithography light sources, many of the consumer electronic devices manufactured in the last several years contain a semiconductor manufactured using our light sources.
We currently operate within two reportable segments, Cymer and TCZ. The Cymer segment of our business consists of products including photolithography light sources and installed base products. The TCZ segment is targeting the growing market for LTPS processing used in the manufacture of OLED flat panel displays. No sales or revenues have been earned or recorded to date for our TCZ segment. Additional information regarding our reporting segment is contained in Note 16, Segment and Geographic Information to our consolidated financial statements and in this Item 7. under Results of Operations for the Years Ended December 31, 2008, 2007 and 2006.
Since we derive a substantial portion of our revenues from lithography tool manufacturers and chipmakers, we are subject to the volatile and unpredictable cyclical nature of the semiconductor equipment industry. The semiconductor equipment industry historically has experienced periodic ups and downs, some of them more pronounced than others.
The most recent growth year for the semiconductor equipment industry was 2006, during which we achieved record revenue and net income levels. Although we and many of the companies in our industry initially expected 2007 to be another growth year, activity levels decreased as the year progressed and the semiconductor industry entered a slowdown. In 2008, particularly in the second half of 2008, global economic conditions deteriorated which negatively effected consumer spending on electronics and the downturn in the semiconductor industry worsened significantly. As a result, chipmakers dramatically reduced their capital spending and delayed or cancelled deliveries of equipment originally scheduled to occur in 2008 or 2009.
Our light source system shipments have historically tracked with the semiconductor-equipment cycle while our installed base products and the associated revenue have scaled with utilization of our light sources in the field and the growth of our installed base of light source systems. As a result, our light source systems' unit shipments declined by 49% and the associated revenue by 36% in 2008 as compared to 2007. Although chipmakers began to reduce their manufacturing utilization levels in the second half of 2008 in an effort to align their chip inventories with rapidly declining electronics demand, our installed base products revenue still grew by approximately 9% in 2008 as compared to the prior year. The growth of installed base products in 2008 was driven by increasing pulse utilization in the first half of the year and the overall increase in our installed base of light sources in 2008 as compared to 2007. Installed base product revenue totaled $300.1 million in 2008. Overall, our total revenue declined by approximately 12% in 2008 as compared to 2007.
In 2008 we shipped 100 light source systems with ArF accounting for 79% of the total shipments. Our XLR series accounted for 48 of the 79 ArF light source systems we shipped, with the XLR 500i being selected by chipmakers in the memory, foundry and logic sectors. In 2008, we introduced, and received multiple orders for, the newest light source in the XLR Series, the XLR 500d, designed for dry ArF applications with a CD of 32nm. We believe that we are also well-positioned to support double patterning at 32nm with the XLR 600i, the industry's first 90W ArF light source designed for use in immersion double patterning applications. We received additional orders for multiple XLR 600i systems in the second half of 2008, and multiple units of the XLR500d and XLR600i shipped in 2008. With product demand heavily weighted toward these high productivity ArF light sources, our currency adjusted average selling price ("ASP") continued to rise, reaching $1.6 million during 2008. As a result of this higher ASP in 2008, our light source system revenue did not decline at as high a rate as did the light source system unit shipments from 2007 to 2008.
During 2008 we made significant strides helping customers increase uptime and wafer output, while reducing their cost of operations with longer life modules and enhancements like Gas Lifetime eXtension ("GLX"). We also continued to demonstrate the value of our OnPulse product. OnPulse agreements now cover installations at leading chipmakers in Asia, North America and Europe, all of which have implemented the product to improve wafer production, reduce total operating costs, enhance laser cost predictability, and simplify administration.
In 2008, we continued to make progress on our laser produced plasma EUV source development. During the year we achieved new milestones in energy levels and duration and we demonstrated further improvement in our debris mitigation technology. As part of our multi-year, multi-unit agreement with ASML, we expect to ship several commercial systems in 2009.
Additionally, we are making progress in TCZ, our joint venture with Zeiss that is developing a production tool for the flat panel display industry. TCZ is currently building multiple production tools, and anticipates delivering its first prototype tool in 2009 provided that it receives a purchase order for the tool from its prospective customer.
The global semiconductor industry and the economy as a whole have entered one of the most difficult periods in recent history. Lower consumer spending, tighter credit markets, and rising unemployment are reducing consumer demand for electronics, resulting in an overall slowdown in semiconductor capital spending, including lithography. Visibility into customers' investment plans has been reduced and the timing for capacity orders is uncertain. Demand for new light source systems has declined sharply and demand for installed base products is slowing due to lower utilization of our light source systems by our customers. We expect that the total available light source market will be considerably lower in 2009, and that demand will be dominated by the logic sector. Our expectation for the year is for advanced ArF immersion orders to represent the majority of scanner and light source demand.
We are focused on winning each light source selection by providing customers with increased performance, productivity and lower cost of operations. We will continue to strengthen our leadership position by investing responsibly in research and development, delivering new XLR features and capabilities and successfully commercializing our EUV source product. We are also focused on increasing efficiencies within manufacturing and the field, driving continuous improvement in quality and reliability, and we will continue to maintain tight cost control.
2008 was a very volatile economic year. The rate of deterioration in the semiconductor capital equipment industry was unprecedented. In January 2009, Gartner Dataquest forecasted that 2008 worldwide semiconductor capital equipment spending would decrease 30.6% from 2007 levels and that 2009 worldwide semiconductor capital equipment spending is on pace to decline 34.1% from 2008 levels. In response to these rapidly changing business conditions, we took several actions to reduce our
cost structure, including executing a reduction in our workforce and reducing operating expenses. During a year of declining demand, we were able to considerably strengthen our DUV product portfolio and overall product reliability, and quality continued to increase. Our installed base products business grew and we believe we are in a leadership position with advanced ArF immersion, next generation laser produced plasma EUV light source technology and TCZ flat panel display technologies.
As a result of the downturn in the global economy and the semiconductor industry and the crisis in the financial markets in 2008, there were negative impacts to our financial results in 2008 beyond those described above related to our revenues. They include the following which we recorded in our consolidated financial statements during the year ended December 31, 2008:
º •
º A $5.3 million impairment of an auction rate security with a face
value of $5.6 million in our investment portfolio that we purchased in
October 2007. Based on the type and magnitude of this impairment, we
were required to record this as an other-than-temporary loss in our
consolidated statement of income in 2008.
º •
º Foreign currency losses which totaled $6.6 million and were associated
with the significant fluctuations of the foreign exchange rates in the
countries in which our subsidiaries are located and do business,
particularly the Korean Won, the Japanese Yen and the Euro. This
foreign currency exposure is caused by the fact that our foreign
subsidiaries purchase inventory from our corporate office in US
dollars, but they operate in functional currencies other than U.S.
dollars.
º •
º Bad debt expense of $1.9 million as a result of certain of our
customers experiencing financial difficulties associated with the
downturn in the semiconductor industry and global economy.
º •
º Write downs of the value of our inventory of $5.9 million in response
to the decreasing demand for our products and increased risk of parts
on hand in excess of our demand plan.
As a result of the above items and the overall decline in our financial performance and net income in 2008, we took the following actions in late 2008;
º •
º In November 2008, we conducted an approximate 8% reduction in our
global workforce which resulted in charges of approximately
$3.0 million which we recorded in our consolidated financial
statements during the three months ended December 31, 2008. This
reduction in workforce affected all areas of the company and we
anticipate that this action will result in an annual savings of
approximately $8.4 million.
º •
º We opened several bonded warehouses abroad in the third and fourth
quarters of 2008 in an effort to mitigate the foreign currency
exchange rate exposure associated with the inventory sales between our
U.S. corporate office and our foreign subsidiaries. With this change,
some of the inventory previously purchased from our foreign
subsidiaries is now located in bonded warehouses and are owned by our
U.S. parent company and, accordingly, valued in U.S. dollars.
We anticipate that 2009 will be a very challenging business environment. We expect lithography light source demand and chipmaker factory utilization to be at extremely low levels. Our top priorities are to continue to increase XL platform productivity and reliability, further develop our installed base products business, build upon our EUV program success, and continue to improve the planning and process execution of the company. We will also continue to size the company and its cost structure to address changes in the global business conditions.
In January 2009, we announced that we were taking actions to further lower our global cost structure from those already taken by us in November 2008. These actions included an additional 10% reduction in our global workforce that resulted in charges of approximately $4.5 million which we will record in the first quarter of 2009. In connection with this reduction in workforce, we reduced the
annual salaries of certain of our executive officers 10-15% effective in January 2009, reduced all other employees' salaries by 10% and took other actions to significantly reduce other operating expenses, As a result of these actions, we expect to lower our global cost structure by approximately $50 to $55 million annually starting in 2009.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and use judgment that may impact the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. As a part of our ongoing internal processes, we regularly evaluate our estimates and judgments associated with revenue recognition, inventory valuation, refurbished inventories, warranty obligations, stock-based compensation, income taxes, allowances for doubtful accounts, long-lived assets valuation, goodwill valuation, financial assets and liabilities valuation and contingencies and litigation. We base these estimates and judgments upon historical information and other facts and assumptions that we believe to be valid and/or reasonable under the circumstances. These assumptions and facts form the basis for making judgments and estimates and for determining the carrying values of our assets and liabilities that are not apparent from other sources. Adverse global economic conditions, illiquid credit markets, volatile equity, foreign currency and energy markets and declines in consumer spending have combined to increase uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, particularly those related to the condition of the economy, actual results could differ significantly from these estimates.
We believe that revenue recognition, inventory valuation, refurbished inventories, warranty obligations, stock-based compensation, allowance for doubtful accounts, long-lived assets valuation, and income taxes require more significant judgments and estimates in the preparation of our consolidated financial statements than do other of our accounting estimates and judgments.
Our revenues consist of product sales, which primarily include sales of light source systems and installed base products which consist of replacement parts and, to a lesser extent, training, service, upgrades, and refurbishments of our light source systems.
The sales of our light source systems generally include training and
installation services. We determined that these elements qualify as one unit of
accounting under Emerging Issues Task Force Bulletin No. 00-21, "Revenue
Arrangements with Multiple Deliverables," ("EITF 00-21"), as we do not have
evidence of fair value for the undelivered training and installation elements.
Furthermore, we determined that the undelivered training and installation
elements are perfunctory performance obligations and are not essential to the
functionality of our light source systems. For the installation element, we
determined it to be a perfunctory performance obligation due to the following:
1) installation of our light source systems is provided primarily as a courtesy
to our customers and not as a requirement of the light source system sale,
2) our customers have the capability to perform the installation of the light
source systems themselves, 3) we have adequate history performing such light
source system installations that we can accurately estimate the installation
costs and 4) our cost to perform a light source system installation is less than
1% of the sales price of the light source system and the installation takes a
minimal number of hours to perform. In addition, the training services are
considered to be perfunctory as they are only provided as a courtesy to our
customers and are not a requirement of the light source system sales. Therefore,
in accordance with the provisions of Staff Accounting Bulletin No. 104, we
recognize revenue when the revenue recognition criteria are met for
the light source system, and accrue the costs of providing the training and installation services. We recognize light source system revenue at one of following three points, depending on the terms of our arrangement with our customer: 1) shipment of the light source system, 2) delivery of the light source system or 3) receipt of an acceptance certificate. For the majority of our light source system sales, the shipping terms are F.O.B. shipping point and revenue is recognized upon shipment. For our arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery of the light source system to our customer. Lastly, one of our light source system arrangements includes an acceptance provision, which is satisfied by the issuance of an acceptance certificate by the customer. For these transactions, we recognize revenue upon receipt of the acceptance certificate. In addition, we test our light source systems in environments similar to those used by our customers prior to shipment to ensure that they meet published specifications.
On a very limited basis, certain of our product sales include additional elements, such as future product upgrades. For these transactions, we allocate consideration to the multiple elements based on the relative fair values of each separate element which we determine based on prices charged for such items when sold on a stand alone basis. In cases where there is objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), we use the residual method to allocate the arrangement's consideration. If there is no objective and reliable evidence of the fair value of the undelivered item, we account for the transaction as a single unit of accounting per the requirements of EITF 00-21. Our sales arrangements do not include general rights of return.
Revenue from replacement parts is recognized at the point that legal title passes to the customer, which is generally upon shipment from our facility. For a significant portion of our replacement parts sales, our customers return the consumed assembly to us as part of the sale of the new part. We reuse some of the material within these core assemblies, mainly metal components, for the future build of core assemblies. As a result, our revenue consists of both cash and the value of the reusable parts received from our customers as consideration for these spare replacement part sales. Revenue associated with our customers' return of core assemblies is recognized upon receipt of the returned core assembly. The amount of the revenue is determined based upon the fair value of the reusable parts that we expect to yield from the returned core assembly which is based on historical experience.
Service and training revenue is recognized as the services are rendered. Revenue associated with our OnPulse contracts, which include primarily replacement parts and to a much lesser extent services, is recognized based on the pulse usage of the light source systems covered under the contract. Revenue is determined based on a per pulse fee and the number of pulses utilized during each month, with no minimums or maximums. From a revenue classification and reporting standpoint, we are able to determine the relative fair values of the replacement part and service components of the revenues recognized under such contracts. To date, the revenue associated with the service element of our OnPulse contracts when combined with our training, service and service contract revenue has been less than 10% of our total revenue.
On a very limited basis, we sell upgrades for our light source systems or refurbish light source systems owned by our customers to their original or new condition. Revenue from the sale of upgrades is recognized when the upgrade has been successfully installed by us and accepted by the customer. Revenue from refurbished light source systems is recognized when the refurbishment process has been completed and, depending upon the customer, the proper delivery or acceptance terms have been met.
Deferred revenue represents payments received from our customers in advance of the delivery of products and/or services, or before the satisfaction of all revenue recognition requirements as described above.
Our inventories are recorded at the lower of cost, determined on a first-in, first-out basis, or estimated market value, which is defined as the lower of the current replacement cost or net realizable value as defined by Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins, if the market value is less than cost. We evaluate the need to record adjustments for impairment of our inventory on a quarterly basis and our policy is to assess the valuation of all inventories, including raw materials, work-in-process, finished goods, replacement parts and reusable parts that we use for our refurbishment activities. Obsolete inventory or inventory for which we either do not have expected usage based on our forecasted demand for the next 12-24 months or do not expect to have a high likelihood of use beyond 24 months is written down to its estimated market value, if less than its cost. When we perform our quarterly analysis of obsolete and excess inventory, we take into consideration certain assumptions related to market conditions and future demands for our products, including changes to product mix, new product introductions, and/or product discontinuances, which may result in excess or obsolete inventory. As part of this analysis, we also determine whether there are potential amounts owed to vendors as a result of cancelled or modified raw material orders. We estimate and record a separate liability, which is included in accrued and other liabilities in the accompanying balance sheets for such amounts owed.
The methodologies used to analyze excess and obsolete inventory and determine the value of our inventory are significantly affected by future demand and usage of our products. There are many factors that could potentially affect the future demand or usage of our products, including the following:
º •
º Condition of the semiconductor industry, which is cyclical in nature;
º •
º Overall condition of the world economy which can positively or
negatively impact the demand for our products;
º •
º Rate at which our lithography tool manufacturers and chipmaker
customers take delivery of our light source systems and our
replacement parts;
º •
º Loss of any of our major customers or a significant change in demand
from any of these customers;
º •
º Overall mix of light source system models or replacement parts and any
changes to that mix required by our customers;
º •
º Utilization rates of our light sources at chipmakers; and
º •
º Engineering change orders.
Based upon our experience, we believe that the estimates we use to calculate the value of our inventories are reasonable and properly reflect the risk of excess and obsolete inventory. If actual demand or the usage periods for our inventory are substantially different from our estimates, such differences may have a material adverse effect on our financial condition and results of operations. During adverse economic conditions, such as those that existed in the second half of 2008 and are expected to continue into 2009, it is difficult to estimate the future demand for our products. As a result, the likelihood that the usage period for our inventory will substantially differ from our estimates is increased. In order to minimize this risk, we used the most current demand plan information available to us so that the calculations for our excess inventory reflect the current state of the economy and our business, which have both deteriorated from prior periods.
As part of our regular business activities, we conduct significant parts refurbishment and material reclaim activities related to some of our core assemblies, particularly our chamber assemblies. These
activities involve arrangements with our customers where we sell a new part to the customer at a reduced sales price if the customer returns the consumed core assembly that the new part replaces. These returned core assemblies contain a certain amount of material, primarily metal components, that may be reused by us in the manufacture of future core assemblies. Upon receipt of these consumed core assemblies from our customers, we record an entry to recognize the estimated fair value of the reusable components either 1) as revenue if the return of the core assembly relates to a spare part replacement sale or 2) as a reduction in cost of revenue if the return of the core assembly is related to a part being replaced under our warranty provisions or under a service or support contract with our customer. The value of the reusable parts contained within the consumed assembly is determined based upon historical data on the value of the reusable parts that we typically yield from a consumed core assembly. As part of our normal excess and obsolete inventory analysis, these consumed core assemblies are also reviewed on a monthly basis and an adjustment to inventory is recorded as appropriate for these parts.
We maintain an accrual for the estimated cost of product warranties associated with our product sales. Warranty costs include replacement parts and labor costs to repair our products during the warranty periods. At the time revenue is recognized, we record a warranty provision, which is included in cost of revenues in our consolidated statements of income. The warranty coverage period and terms for light source systems and replacement parts varies by light source system model. The warranty provision for our products is reviewed monthly and determined by using a statistical financial model, which takes into consideration actual historical expenses, product failure rates, and potential risks associated with our different products. This model is then used to estimate future expenses related to warranty and the required warranty provision. The risk levels and historical cost information and failure rates used within this model are reviewed throughout the year and updated as these inputs change over the product's life cycle. Due to the highly technical nature . . .
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