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| CYMI > SEC Filings for CYMI > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-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 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 lithography 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 revenues have been earned or recorded to date for our TCZ segment; however TCZ shipped its first flat panel display system for flat panel display manufacturing in the third quarter of 2009. Additional information regarding our reporting segments is contained in Note 10, "Segment Operations," to our unaudited 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. 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. Beginning in the fourth quarter of 2008 and continuing into 2009, we took various actions to reduce our cost structure, including reducing our worldwide workforce, salaries, bonuses, and other operating and capital expenditures. The economic trend continued through the second quarter of 2009. In the third quarter of 2009, we saw some strengthening of the global economy and the semiconductor industry and, as a result, restored the salaries of our employees and executive officers during the quarter.
Business and Economic Highlights
Third quarter 2009 highlights include the following:
• In the third quarter of 2009, revenue increased approximately 48 percent over the second quarter 2009 levels to $92.3 million. The higher level of demand was driven by increased investment from foundry and memory customers, in support of their transition to the 5x nanometer ("nm") node and below.
• Chipmaker light source investment was, and we expect will continue to be, focused on argon and fluorine ("ArF") immersion. Our immersion light source products are well positioned to support our direct lithography and chipmaker customers with our XLR platform, led by the XLR600ix.
• We shipped a total of 12 light source systems of which 11 were XLR, and we installed 14 light sources at chipmaker locations of which 11 were ArF immersion.
• In the third quarter of 2009, gross pulse utilization increased from the second quarter 2009 level. We estimate that at the end of the third quarter of 2009, monthly gross pulses were at approximately 86 percent of the June 2008 gross pulse level, which was our peak for the last two years.
• We continued to actively work with chipmakers during the third quarter of 2009 to reduce their cost of operations, while increasing their light source productivity with our OnPulse product and support infrastructure. In the third quarter of 2009, we added additional light sources under OnPulse coverage, and we now have OnPulse agreements at all of our top ten chipmaker customers in all three sectors.
• During the third quarter of 2009, we worked closely with ASML to install our first laser produced plasma extreme ultraviolet ("EUV") source in their Veldhoven, Netherlands facilities. The installation is complete, first light has been demonstrated and acceptance testing is underway. We are currently in the process of assembling several pilot EUV source units in our San Diego headquarters, and we anticipate fulfilling our orders with ASML per our multi-year, multi-unit agreement.
• TCZ shipped and installed its first system for flat panel display manufacturing in the third quarter of 2009 at a Korean customer site. TCZ is working with this display maker to demonstrate the system's differentiated throughput and the superior uniformity of TCZ's laser crystallization technology. The demonstration period is expected to run though the first half of 2010 and if successful could lead to follow-on equipment orders.
We have made good progress thus far in 2009 to position the company for growth. The XLR600ix, with its flexible power and improved optical stability, has been qualified on the most advanced scanners, enabling chipmakers' most advanced ArF immersion needs. Our installed base products, led by OnPulse, are helping chipmakers increase productivity and lower their cost of operations and we are focused on continuing to add more light sources under this coverage. In addition, we have continued to focus on controlling our operating costs while keeping our structure responsive to improved business conditions. We remain committed to the success of the EUV technology and the activities of our TCZ joint venture.
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 increased the 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 DUV 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. We anticipate that our future revenues will also include sales of our EUV lithography source systems and associated installed base products and our TCZ 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, 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. Accordingly, 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. In cases where we have objective and reliable evidence of the fair value of both the delivered and undelivered items in the 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. 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 installation and system acceptance testing services, on-site support services and On-Pulse coverage, to be delivered over discrete service periods. We believe that all of the undelivered elements in these transactions, with the exception of the installation and acceptance testing services, will qualify as separate units of accounting under the authoritative guidance for revenue recognition and multiple-element arrangements, 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.
TCZ Products
The sale of our initial TCZ system includes installation services, training services and technical support services which are expected to be delivered over discrete time periods. We are currently in the process of analyzing the data that we have to evaluate whether fair value exists for the undelivered service elements. The initial TCZ sale includes an acceptance provision and this provision will be satisfied upon issuance of an acceptance certificate by the customer when the system meets all required specifications. To date, we have shipped one TCZ system, but have not yet recognized revenue under the agreement since 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 in authoritative guidance on inventory as the lower of the current replacement cost or net realizable value 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 unaudited 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 changing or adverse economic conditions, 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 light source system and replacement parts 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 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. An estimated forfeiture rate is applied 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 volatility is derived based on six-month traded options of our common stock. The expected term of our stock options represents the period of time options are expected to be outstanding and is based on observed historical exercise patterns for our company which we believe are indicative of future exercise behavior. We estimate forfeiture rates based on the historical activity for our company which we believe are indicative of future forfeiture rates.
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