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| CYMI > SEC Filings for CYMI > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in "Item 1. Financial Statements" of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and the section titled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities Exchange Commission on February 27, 2009.
Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical in nature are "forward-looking statements", within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include, but are
not limited to, references to the outlook for the semiconductor industry and us;
expected domestic and international product sales and development; our planned
research and development activities and expenditures; adequacy of our capital
resources and investments; effects of business cycles in the semiconductor
business; our competitive position; and our relationships with customers and
third-party manufacturers of our products, and may contain words such as
"believes," "anticipates," "expects," "plans," "intends" and words of similar
meaning. These statements are predictions based on current information and our
expectations and involve a number of risks and uncertainties. The underlying
information and our expectations are likely to change over time. Actual events
or results may differ materially from those projected in the forward-looking
statements due to various factors, including, but not limited to, those
contained under the caption "Risk Factors" and elsewhere in this Quarterly
Report on Form 10-Q. Forward-looking statements herein speak only as of the date
of this Quarterly Report on Form 10-Q. Unless required by law, we undertake no
obligation to update or revise any forward- looking statements to reflect new
information or future events or developments. Thus, you should not assume that
our silence over time means that actual events are bearing out as expressed or
implied in such forward-looking statements.
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 deep ultraviolet ("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 low-temperature poly-silicon ("LTPS") processing used in the manufacture of organic light emitting diode ("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 12, "Segment Operations" to our condensed consolidated financial statements and this Item 2 under Results of Operations.
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. In 2008, particularly in the second half of 2008, global economic conditions deteriorated which negatively affected consumer spending on electronics and, as a result, the downturn in the semiconductor industry worsened significantly. We continued to see this trend throughout the first quarter of 2009.
In the first quarter of 2009 we took various actions to lower our cost structure as demand for new light sources declined sharply and demand for installed base products slowed. During the quarter, we initiated reductions in our global workforce that resulted in charges of approximately $8.4 million. With the implementation of these cost reduction actions, which included these reductions in workforce, we now estimate that the company's quarterly revenue operating break-even level is approximately $60 million and our quarterly revenue cash break-even is approximately $55 million. As business conditions strengthen, we believe that the company will be in a stronger position to serve our customers and increase shareholder returns.
During the first quarter of 2009, we announced the latest addition to our industry leading argon fluorine ("ArF") immersion light source series with the introduction of the XLR600ix. The "x" stands for extendable as the XLR600ix is a 90 watt ("W") capable light source that can operate at any output power from 60W to 90W selected by the scanner or tool operator. Until now, two chamber excimer laser technology has been incapable of offering such a large dynamic range of power flexibility while maintaining all optical specifications. By utilizing the inherent stability of the XLR architecture combined with new hardware and control algorithms, the XLR600ix is the first to break this paradigm. The flexible operation of the XLR600ix provides for unmatched performance improvements and versatility for double patterning applications at 32 nm and below. Since its introduction, the XLR600ix has been positively received by our customers with the first shipment taking place in early April 2009. We expect the flexibility, stability, and high power of the XLR600ix to position us to support chipmaker's needs for manufacturing flexibility and double-patterning at the lowest cost of operation.
We believe that our light sources accounted for a significant majority of the industry's ArF immersion shipments and installations during the first quarter of 2009. We shipped a total of nine light sources in the first quarter of 2009 of which seven were immersion XLR. We installed 20 light sources at chipmaker locations of which nine were immersion XLR. In the current business environment, chipmaker light source investment is primarily focused on ArF immersion. We believe ArF immersion technology will continue to command the majority of chipmaker investment as industry conditions improve, and we believe that our XLR platform, led by the XLR600ix, is well positioned to support chipmaker manufacturing at 45nm and below.
Our installed base products and the associated revenue have scaled with light source utilization and our installed base growth. As we exited 2008, chipmaker utilization was rapidly declining and ended the year at historically low levels. By January 2009, average pulse utilization had declined approximately 50% from the June 2008 peak. At of the end of the first quarter of 2009, average pulse utilization increased 32% from the January 2009 trough. Based on current chipmaker utilization forecasts, we anticipate that pulse utilization will continue to rise in the second quarter of 2009. As chipmaker utilization increases, we are supporting their need for increased productivity and lower cost of operations with our OnPulse program. OnPulse agreements now cover light source systems installed at leading chipmakers in Asia, North America and Europe, all of which have entered into agreements with us for this product to improve wafer production, reduce total operating costs, enhance light source system cost predictability, and simplify administration associated with the maintenance of their installed base of light sources.
Chipmaker interest in extreme ultraviolet ("EUV") technology continues to remain high as it is the lithography technology of choice that is capable of meeting next generation resolution and throughput requirements. In the first quarter of 2009, we continued to make significant progress in our laser produced plasma EUV source development and commercialization for next generation lithographic patterning. Our prototype source is the first to incorporate a full-size 650mm diameter collecting mirror together with a full array of debris mitigation techniques for collector protection. As part of our EUV agreement with ASML, we anticipate shipping multiple EUV sources in 2009.
TCZ, our joint venture with Zeiss, which is developing a production tool for the flat panel display industry, continues to achieve new technical milestones and we believe it provides us with growth opportunities.
We believe we are well positioned to capture a greater share of the overall ArF immersion light source market in 2009. We expect that light source shipments will be lower in the second quarter of 2009 as direct customers continue to absorb our work-in-progress light source inventory and chipmakers modify the timing of their lithography investments. However, we anticipate that growth in our installed base products revenue will offset the decline in light source revenue. We believe that the second quarter of 2009 will mark the low point for our light source shipments and we anticipate shipments to increase in the second half of 2009 beginning in the third quarter.
The current business environment remains challenging. However, we believe that we have differentiated ourself during this period through swift and decisive actions that have significantly reduced our cost structure and improved our market position. Over the last four months we have proactively reduced company spending by over 40% which has kept intact our ability to maintain solid margins and enable future growth investment. Our installed base products, led by OnPulse, are supporting chipmaker productivity and helping to reduce their cost of operations. We believe this portion of our business is positioned for near-term growth. In the near- and medium-term, we are pleased with customer adoption of the XLR series across the memory, foundary and logic chipmaking sectors and our advancement in ArF immersion technology which is strengthened by the introduction of the XLR600ix light source. We continued to make significant progress in our laser produced plasma EUV source development and commercialization for next generation lithographic patterning. Our balance sheet remains strong and we have made progress reducing manufacturing and field inventory. In addition, we repaid our $140.7 million convertible notes in the first quarter of 2009 and now have no major debts outstanding. Our business operations are leaner, more efficient, and the company is positioned to deliver improved financial performance as business conditions strengthen.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed 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 unaudited condensed 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 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 do not have expected usage based on our forecasted demand 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 have existed to date in 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 of our light source system products, the newer model light sources and the modules contained within them have higher inherent warranty risks with their initial shipments and require higher warranty provisions until the technology becomes more mature.
We actively engage in product improvement programs and processes to limit our warranty costs, but our warranty obligation is affected by the complexity of our product, product failure rates and costs incurred to correct those product failures at customer sites. The industry in which we operate is subject to rapid technological change, and as a result, we periodically introduce newer, more complex light sources. Although we classify these newly released light source models as having a higher risk in our warranty model resulting in higher warranty provisions, we are more likely to have differences between the estimated and actual warranty costs for these new products. This is due to us having limited or no historical product performance data on which to base our future warranty costs. Warranty provisions for our older and more established light source models are more predictable as we have more historical information available on these products. If actual product failure rates or estimated costs to repair those product failures were to differ from our estimates, revisions to our estimated warranty provision would be required, which could have a material . . .
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