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| CYMI > SEC Filings for CYMI > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-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, Nikon, and to a lesser extent, Canon 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 10, "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 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, with some improvement in the second quarter of 2009.
Business and Economic Highlights
In late 2008 and during the first quarter of 2009 we took actions to lower our cost structure as demand for new light sources declined sharply and demand for installed base products slowed. These actions enabled Cymer to approach break-even operating performance and deliver positive cash from operations in the second quarter of 2009.
In the second quarter of 2009 we achieved several significant milestones that we believe better position Cymer for market leadership and future growth as follows:
• In April 2009, we shipped the industry's first field-selectable 60W to 90W immersion light source. This XLR600ix was recently installed at a large Asian chipmaker. We believe that all of the immersion double patterning light source selections for the first half of 2009 have been awarded to us. We believe that our XLR platform and the XLR600ix position us to maintain our leading ArF immersion market share throughout 2009.
• We installed ten light sources, seven of which were ArF immersion, at chipmaker locations during the second quarter of 2009. We estimate that our immersion unit installed market share for the first half of 2009 was approximately 80% and our immersion unit shipped market share was approximately 90%. We believe that for the foreseeable future ArF immersion technology will continue to command the majority of lithography investment, and that our XLR platform, led by the XLR600ix, is well positioned to support chipmaker investment in 45nm and below technology.
• In the second quarter of 2009, gross pulse utilization increased over the first quarter 2009 level. The month over month increase in April, May and June 2009 were 14%, 8%, and 3%, respectively. In the second quarter 2009, the aggregate gross pulse utilization increased approximately 35% over the aggregate gross pulse utilization for the first quarter 2009, reflecting positive gains in all three sectors, led by the foundry, followed by logic, and then memory. We estimate that the gross pulses for June 2009 were about 78% of our June 2008 gross pulse value, which was our peak for the last two years. In addition, ArF immersion pulses, which have higher value, continued to increase as a percentage of the total. Although the monthly rate of increase in gross pulses slowed in June, we anticipate that pulse utilization will continue to increase at a modest rate in the third quarter of 2009.
• In the second quarter of 2009, we supported chipmakers' increased utilization with our installed base products, and we continued to make significant inroads with OnPulse. Second quarter 2009 installed base products revenue increased significantly from the first quarter of 2009. The increase in revenue was driven by higher pulse utilization and a catch up in deferred maintenance of idled tools that came back on-line.
• We continued to make significant progress on our extreme ultraviolet ("EUV") source development and commercialization. In the second quarter of 2009 we shipped the world's first laser produced plasma EUV lithography source to ASML and we announced a new milestone in EUV source performance. This source is currently being installed at ASML's headquarters where it will support integration and testing of next generation EUV lithography scanners. We anticipate that our future revenues will include sales of our EUV lithography source systems and associated installed base products. Additionally, we had announced that we achieved an EUV source performance milestone of 75 watts ("W") of EUV lithography exposure power. The next critical milestone will be to demonstrate 100W of exposure power.
• In July 2009, TCZ announced that it had received its first order from a large Korean flat panel display manufacturer for the TCZ-900A, a production tool for flat panel display fabrication. TCZ has been working on the development and commercialization of a thin film crystallization tool for the OLED display industry. This tool is slated to be placed directly into a panel manufacturing production line. TCZ is in the process of shipping and installing the tool. TCZ will be working closely with the manufacturer to confirm what TCZ believes will be a high level of panel processing performance. Current industry forecasts project the OLED market to become material in late 2011 or 2012 as consumer products adopt this exciting new display technology.
As we look to the second half of 2009, we believe the company is well positioned to continue to serve our customers, while delivering increased operating profitability which will enable us to continue to invest in the future growth of the company.
Critical Accounting Policies and Estimates
General
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, 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 fluctuations 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.
Revenue Recognition
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. Our future revenues will also include sales of our EUV lithography source systems and associated installed base products.
DUV Light Source Products
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, for certain light source system arrangements that include an acceptance
provision, we recognize revenue upon receipt of the acceptance certificate
issued by our customers. 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.
EUV Light Source Products
The sale of our initial EUV lithography source systems include on-site support services and On-Pulse coverage, to be delivered over discrete service periods. We believe that these elements will qualify as separate units of accounting under EITF 00-21, but we are currently in the process of analyzing the data that we have to support the fair value for the undelivered service elements. Our current EUV lithography source systems arrangements include acceptance provisions and such provisions will be satisfied by the issuance of an acceptance certificate by the customer. To date, we have shipped one EUV prototype system but have not yet recognized revenue as the acceptance certificate has not been received from the customer.
Deferred Revenue
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.
Inventory Valuation
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 condensed consolidated 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:
• Condition of the semiconductor industry, which is cyclical in nature;
• Overall condition of the world economy which can positively or negatively impact the demand for our products;
• Rate at which our lithography tool manufacturers and chipmaker customers take delivery of our light source systems and our replacement parts;
• Loss of any of our major customers or a significant change in demand from any of these customers;
• Overall mix of light source system models or replacement parts and any changes to that mix required by our customers;
• Utilization rates of our light sources at chipmakers; and
• 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 use 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.
Refurbished Inventories
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.
Warranty Obligations
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 operations. 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 adverse effect on our financial condition and results of operations.
Stock-Based Compensation
We apply the provisions of SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R") which requires companies to estimate the fair value of stock-based compensation awards on the date of grant using an option-pricing model and amortize the resulting expense over the requisite service period of the award, which is generally the vesting period. We use the Black-Scholes option pricing model to estimate the fair value of stock options that we grant under our equity incentive plans. In order to determine the fair value of stock option grants under the Black-Scholes option pricing model, we must use subjective assumptions including the expected term of the stock options and our expected stock price volatility over the expected term of the stock options. SFAS No. 123R also requires that a forfeiture rate be estimated and included in the calculation of stock-based compensation expense at the time that the stock option or other stock awards such as our restricted stock unit awards are granted and revised if necessary in subsequent periods if actual forfeiture rates differ from those estimates.
We use a combination of historical and implied volatility ("blended volatility") to determine the expected stock volatility that we include in the Black-Scholes option pricing model to value our stock options. Historical volatility is based on a period commensurate with the expected term of the options. Implied . . .
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