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| CYMI > SEC Filings for CYMI > Form 10-K on 15-Feb-2013 | All Recent SEC Filings |
15-Feb-2013
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 Part II, Item 8 of this Annual Report on Form 10-K.
Merger with ASML
On October 16, 2012, the Company entered into the Merger Agreement by and among
(i) ASML, (ii) solely for purposes of Article II, Article IV, Article VI and
Article X, Holdco and Merger Sub 2, (iii) Merger Sub, and (iv) the Company.
Subject to the terms and conditions of the Merger Agreement, upon consummation
of the Merger, each outstanding share of the Company's common stock will be
converted into the right to receive (i) $20.00 in cash, without interest, and
(ii) 1.1502 ASML ordinary shares.
At the Special Meeting held on February 5, 2013, our stockholders approved the proposal to approve the Merger Agreement.
Completion of the Merger is subject to the satisfaction or waiver of certain conditions, including, among others: (i) the expiration or termination of the applicable waiting period under the HSR Act, (ii) receipt of certain consents and approvals from competition regulators in other jurisdictions, (iii) the absence of any governmental order, law, or legal restraint prohibiting the consummation of the Merger, and (iv) the listing of the ASML ordinary shares to be issued to the Company's stockholders in the Merger on NASDAQ having been authorized. Additionally, ASML is not required to complete the Merger if there is any pending action or proceeding by any governmental entity of competent jurisdiction challenging or seeking to make illegal, to delay materially or otherwise directly or indirectly to prohibit the consummation of the Merger. The obligation of each party to consummate the Merger is also conditioned upon the accuracy of the other party's representations and warranties, the absence of a material adverse effect, and the other party having performed in all material respects its obligations under the Merger Agreement.
We anticipate that the Merger will close in the first half of 2013.
Overview
We are engaged in the development, manufacturing and marketing of light sources for sale to customers who manufacture photolithography tools in the semiconductor equipment industry. We sell replacement parts and support services directly to our chipmaker customer as well as to our lithography tool manufacturer customers. In January 2013, we decided to discontinue new product development in our display products reporting segment, which developed, integrated, marketed, and supported silicon crystallization tools used in the manufacture of displays.
Because 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. During the downturn in the global economy and semiconductor industry in early 2009, we focused on cost structure improvements and operational efficiencies, while continuing to focus on providing comprehensive support products for the installed base and investments in the development and commercialization of our EUV source technology. As a result, we were well positioned for the upturn beginning in late 2009 that continued through the first half of 2011. DUV light source demand started softening in the second half of 2011 and continued throughout 2012, as chipmakers assess their capital investment needs.
The majority of our DUV light source shipments in 2012 continued to be ArF immersion sources in support of 45 nm and below chipmaking, although we continued to deliver several KrF sources. For the full year 2012,
we shipped 97 DUV light sources, of which 60 were ArF immersion, 35 were KrF, and 2 were ArF dry. Revenue generated by our installed based products remained strong, representing 69% of our 2012 revenue. Throughout 2012, we added over 260 light sources to OnPulse, which now provides coverage for over 77% of all active production light sources. In 2012, we recognized revenue on three 3100 EUV sources, and we delivered two EUV 3300 vessels to ASML. We also increased our EUV source development performance by demonstrating sustained 40 watts EUV exposure power with good dose stability, utilizing pre-pulse technology.
In the fourth quarter of 2012, in connection with the preparation of the year-end financial statements, we evaluated the demand for our display products. Based on this evaluation we recorded charges totaling $65.5 million related to impairment of inventory and equipment and accruals for firm purchase commitments for additional inventory and equipment that will no longer be utilized. In January 2013, we made the decision to discontinue new product development in this business. We will continue to support the display product tools that have been previously sold and have remaining warranty or service contracts associated with them. As a result, we expect charges in the first quarter 2013, primarily for severance and other costs to be approximately $1.0 million, and future annual savings in operating expenses, based on 2012 spending levels, to be approximately $20.0 million. For further discussion, see Note 15 "Segment and Geographic Information" and Note 18 "Subsequent Events" to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Overall, revenue was $538.6 million in 2012, a 9% decrease compared to 2011.
Gross margin was 41.3% in 2012, a decrease over gross margin of 51.4% in 2011. The decrease in gross margin over prior year was primarily due to the impairment of inventory and equipment and loss on purchase commitments discussed above as well as low margin on the sale of a display product tool. Partially offsetting these decreases was an increase in gross margin due to lower costs associated with our installed base products.
Operating expenses of $265.0 million in 2012 represent a $67.4 million, or 34%, increase over 2011. This increase was due primarily to an increase in research and development expenses of $57.1 million related to development and commercialization of our EUV source technology, $8.8 million of costs associated with the Merger, discussed above, and a $1.9 million impairment charge related to our display products business.
Our effective tax rate was 16% in 2012 compared to 26% in 2011.
As a result of the above, we generated a net loss in 2012 of $36.4 million, compared to net income of $80.2 million in 2011.
In 2012, we generated cash flows from operations of $49.1 million, and our cash and investments balance was $305.7 million at December 31, 2012.
Critical Accounting Policies and Estimates
General
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 liabilities. As a part of our ongoing internal processes, we regularly evaluate our estimates and judgments associated with revenue recognition, inventory valuation, 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, projected information, and other facts and assumptions that we believe to
be valid and 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, 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.
Revenue Recognition
Our revenues include light sources, silicon crystallization tools and installed base products, which consist of OnPulse contracts, service support and replacement parts, and to a lesser extent, service, upgrades, and refurbishments of our light sources.
We recognize revenue when title and risk of loss have passed, evidence of an arrangement has been obtained, pricing is fixed or determinable at the date of sale, and collectability is reasonably assured. Our sales arrangements do not include general rights of return or cancellation privileges.
Light Sources and Silicon Crystallization Tools
We recognize revenue for light sources and silicon crystallization tools at one of the following three points, depending on the terms of our arrangement with our customer: 1) shipment of the system, 2) delivery of the system, or 3) receipt of an acceptance certificate from the customer. For the majority of our DUV light source sales, the shipping terms are F.O.B. shipping point, and revenue is recognized upon shipment. Our current sales arrangements for EUV sources and silicon crystallization tools contain acceptance criteria, and revenue is recognized upon system acceptance by the customer.
Certain of our revenue arrangements include additional elements, such as future product upgrades or services. In accordance with the authoritative guidance for revenue recognition arrangements with multiple deliverables, we allocate the total consideration in the arrangement to the multiple elements using the relative selling price of the delivered and undelivered items, based on vendor specific objective evidence or estimated selling price.
If vendor specific objective evidence is not available, as third party evidence is generally not available to us due to the proprietary nature of our products, the estimated selling price is determined considering market conditions and estimated gross margins, as well as factors that are specific to us.
Installed Base Products-OnPulse Contracts, Support Services, and Replacement Parts
Revenue associated with our OnPulse contracts, which include primarily replacement parts and to a much lesser extent services, is recognized monthly based on the number of pulses utilized by our customers on their light sources that are covered under their OnPulse arrangement. Revenue from services, including our data services, is recognized as the services are rendered. To date, the revenue associated with the service element of our OnPulse contracts combined with revenue from our support services has been less than 10% of our total revenue.
For our replacement part sales, the shipping terms are F.O.B. shipping point, and revenue is recognized upon shipment. For a significant portion of our replacement parts revenue, 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 fair value of the reusable parts received from our customers as consideration for these 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 based on historical experience. 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, we will recognize the estimated fair value of the reusable component as a reduction to cost of revenue.
On a limited basis, we sell upgrades for our light sources or refurbish light sources owned by our customers to their original or new condition. Revenue from upgrades is recognized when the upgrade has been successfully installed by us and accepted by the customer. Revenue from refurbished light sources is recognized when the refurbishment process has been completed and, depending upon the customer, the proper delivery or acceptance terms have been met.
We report revenue net of any sales-based taxes assessed by governmental authorities that are imposed on or concurrent with sales transactions.
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. Our inventories include raw materials, work-in-process, finished goods, and replacement and reusable parts, which we use in our contract arrangements, refurbishment activities and warranty obligations.
As part of our regular business activities, we conduct parts refurbishment and material reclamation activities related to some of our core assemblies, particularly our chamber assemblies. We receive consumed core assemblies back from our customers as partial consideration for the purchase of new parts or when core assemblies are replaced under OnPulse contracts or warranty claims. The fair value of the reusable parts contained within the consumed assembly is recorded in inventory based upon historical data on the value of the reusable parts that we typically yield from a consumed core assembly.
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. 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. We also record a liability for firm purchase commitments for quantities in excess of future demand forecasts consistent with the valuation of excess and obsolete inventory. There are many factors that could potentially affect the future demand or usage of our products, including the following:
• condition of the semiconductor and display industries, which are cyclical in nature;
• rate at which our customers take delivery of our 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 system models or replacement parts and any changes to that mix required by our customers;
• utilization rates of our light sources at chipmakers;
• customer acceptance of new products or discontinued use of our products; and
• engineering change orders, including those changes inherent in the development of emerging technologies such as EUV.
Additionally, service level requirements of our customers require us to keep certain levels of replacement parts at or near customer locations. 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. During changing or adverse economic conditions or when introducing new products and product lines, 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. If actual demand or the usage periods of our inventory are substantially different from our estimates, such differences may have a material adverse effect on our operating results and financial condition.
When we reduce our inventory to the lower of cost or market, we are required to consider the net realizable value of our inventory. Net realizable value represents the estimated selling price of the inventory reduced by the costs of completion and disposal. We include all direct costs in our estimated costs of completion, including estimated warranty and installation costs. If actual selling prices or costs of completion are substantially different from our estimates, such differences may have a material adverse effect on our operating results and financial condition.
Based on the evaluation of demand for our display products during the fourth quarter of 2012, we recorded a write-down to inventory of $48.2 million to properly reflect lower of cost or market and accrued $11.6 million for firm purchase commitments of inventory that will no longer be utilized. In January 2013, we decided to discontinue new product development in our display products business. For further discussion, see Note 15 "Segment and Geographic Information" and Note 18 "Subsequent Events" to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Warranty Obligations
We maintain an accrual for the estimated cost of product warranties associated with sales of our products. Warranty costs include replacement parts and labor costs to repair our products during the warranty period. We record a provision for warranty, which is included in cost of revenues, at the time that the related revenue is recognized. The warranty period and terms for systems and replacement parts varies by system model. We review our warranty provision using a statistical financial model which calculates actual historical expenses, product failure rates, and potential risks associated with our different product models. We then use this financial model to calculate the future probable expenses related to warranties and the required level of the warranty provision. Throughout the year, we review the risk levels, historical cost information and failure rates used within this model and update them as information changes over the product's life cycle. For new product offerings, such as EUV sources and silicon crystallization tools, for which we have limited or no historical failure rates, we estimate our future probable expenses related to the warranties based on an evaluation of parts covered under warranty and their expected failure rates determined through internal testing and analysis. If actual warranty expenditures differ substantially from our estimates, revisions to the warranty provision would be required. Actual warranty expenditures are recorded against the warranty provision as they are incurred. Consumed parts under warranty, when returned, are recorded as reductions to warranty expenditures during the return period at their estimated fair value. We do not include the return of consumed parts in our statistical financial model used to estimate our provision for warranty because the specific parts and their estimated future fair value when returned, if any, cannot be reasonably estimated at the time revenue is recorded.
We actively engage in product improvement programs and processes to limit our warranty costs; however, our warranty obligation is affected by the complexity of our product, product failure rates and costs incurred to
correct those product failures at customers' sites. The industry in which we operate is subject to rapid technological change, and as a result, we periodically introduce newer, more complex products. Although we classify these newly released products 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. Warranty provisions for our older and more established products are more predictable as more historical data is available. 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 effect on our operating results and financial condition.
Stock-Based Compensation
The fair value of stock-based compensation awards is measured on the grant date and is recognized as expense over the employee's requisite service period. The fair value of the stock award is determined using the Black-Scholes option pricing model for stock options and the quoted price of our common stock on the grant date for restricted stock units. The Black-Scholes option pricing model requires the use of 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. If we change any of the key assumptions that we use in the Black-Scholes option pricing model as described above, or if we decide to use a different valuation model in the future or change our forfeiture rate, the compensation expense that we record may differ significantly in the future from what we have recorded in prior periods and could materially affect our operating results. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
We also grant performance restricted stock units ("PRSUs") to our executive officers and certain key employees. PRSUs are a form of share-based award in which the number of shares ultimately received will be determined based on achievement against defined performance metrics. Grants of PRSUs during the past three years have contained at least one of the following performance metrics over a defined performance period: revenue and net income performance compared to our annual operating plan ("AOP"), revenue and net income relative performance compared to a specified group of peer companies, DUV and EUV install value market share and eligible individual's management by objectives ("MBO") achievement. We record compensation expense each period based on our estimate of the most probable number of PRSUs that will be issued. This estimate requires significant estimates and projections about our financial performance relative to our AOP or to the financial performance of the specified group of peer companies, our DUV and EUV install value market share and the performance of individuals against their specific MBOs. If our estimates change or actual results are different than the estimates used in prior periods, we would be required to increase or decrease compensation expense, which could materially affect our operating results.
Allowance for Doubtful Accounts
The majority of our trade receivables are derived from sales to lithography tool manufacturers or semiconductor manufacturer customers located throughout the world. In order to monitor potential credit losses, we perform periodic credit evaluations of our customers' financial condition. We maintain an allowance for doubtful accounts for probable credit losses based upon our assessment of the expected collectability of our accounts receivable. We take into consideration the following when making this assessment;
• our customer's payment history and how current they are on paying their outstanding receivables balance;
• our history of successfully collecting on past due or aged receivables from our customers;
• our judgments as to prevailing economic conditions in the industry and global economy and their effect on our customers.
If circumstances change, and the financial conditions of our customers are adversely affected and they are unable to meet their financial obligations to us, or the judgments used by us to determine a customer's allowance prove to be incorrect, we may need to record additional allowances. In addition, due to our concentrated customer base, the trade receivable balance owed by any one customer can be significant. As a result, if our assessment of the financial condition of our customers, even a single customer, proves to be incorrect, we would have to record additional and potentially significant allowances and bad debt expense, which would have a material adverse effect on our business, operating results, financial condition and cash flows.
Long-Lived Assets Valuation
Included in our long-lived assets are property, plant and equipment and definite-lived intangible assets. Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Factors that would indicate potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset, a significant change in the long-lived asset's physical condition, and operating or cash flow losses associated with the use of the long-lived asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. An impairment loss would be recognized when the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group.
Significant judgments and estimates by management are required to project cash flows and, if required, estimate the fair value of the long-lived assets. The estimated future cash flows are based upon, among other things, our strategic plans with regard to our business and operations, assumptions about expected future operating performance, and the interpretation of current and future economic indicators. To the extent that the judgments used by us to calculate our future cash flows prove to be inaccurate or there are significant changes in market conditions, the overall condition of the global economy or our strategic plans change, it is possible that our conclusions regarding long-lived asset impairment could change. This could result in significant impairment charges, which would have a material adverse effect on our business, operating results and financial position.
In the fourth quarter of 2012, the lack of demand for our display products triggered an asset impairment test associated with our display products . . .
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