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CYMI > SEC Filings for CYMI > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for CYMER INC


26-Apr-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited 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 year ended December 31, 2012, filed with the Securities Exchange Commission on February 15, 2013.


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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 proposed merger between Cymer and ASML; the outlook for the semiconductor industry and us; expected timelines for the adoption of new photolithography, extreme ultraviolet technologies by customers; expected domestic and international product sales and development; our research and development activities and expenditures; the development and intended commercialization of our extreme ultraviolet sources; 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. These statements may contain words such as "believes," "anticipates," "expects," "plans," "intends" and words of similar meaning. In addition, statements regarding backlog and book-to-bill ratios should not be read as predictions or projections of future performance. Forward-looking 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, the possibility that (1) Cymer and ASML may be unable to obtain regulatory approvals required for the merger or may be required to accept conditions that could reduce the anticipated benefits of the merger as a condition to obtaining regulatory approvals; (2) the length of time necessary to consummate the proposed merger may be longer than anticipated; (3) problems may arise in successfully integrating the businesses of Cymer and ASML; (4) the proposed merger may involve unexpected costs; (5) the businesses may suffer as a result of uncertainty surrounding the proposed merger; (6) the industry may be subject to future risks that are described in SEC reports filed by Cymer and ASML; and
(7) 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.

Cymer, XLR, XLA, XL, OnPulse, SmartPulse, and all other Cymer product or service names used herein are either registered trademarks or trademarks of Cymer, Inc. Other marks mentioned herein, if any, are the property of their respective holders.

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 remaining conditions, including, among others: (i) receipt of certain consents and approvals from competition regulators in Japan and South Korea, (ii) the absence of any governmental order, law, or legal restraint prohibiting the consummation of the Merger, and (iii) 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 second quarter of 2013.

OVERVIEW

Revenue of $99.6 million in the first quarter of 2013 represented a 34% decrease over the first quarter of 2012. The decrease over prior year is primarily due to reduced demand for DUV light sources and a decrease in EUV source revenue of $22.7 million as we had no EUV source system customer acceptances in the first quarter of 2013. Revenue generated by our installed based products remained strong and provided a 3% increase over prior year. For the first quarter of 2013, we shipped 8 DUV light sources, of which 6 were krypton and fluorine ("KrF") and 2 were argon and fluorine ("ArF") immersion.

Gross margin was 51.5% in the first quarter of 2013, an increase from gross margin of 50.2% in the first quarter of 2012. The increase in gross margin from the first quarter of 2012 was due primarily to the sale of three EUV 3100 sources in the first quarter of 2012 at a low gross margin, offset partially by a write down of inventory during the current quarter.


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Operating expenses of $63.5 million in the first quarter of 2013 represent an 8% increase over the first quarter of 2012 primarily due to our increased investment in EUV source development and merger related fees. Operating expenses as a percentage of revenue increased to 63.7% in the first quarter of 2013, compared to 39.1% in the first quarter of 2012.

As a result of the above, we reported first quarter 2013 net income of $2.3 million, compared to $21.5 million net income in the first quarter of 2012. Additionally, our cash and investments were $284.4 million at March 31, 2013. Net cash used in operations for the three months ended March 31, 2013 was $622,000.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. For a summary of significant accounting policies, see Note 1 to the Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012. The preparation of these financial statements requires us to make estimates and use judgment that may impact the reported amounts of assets, liabilities, revenue, 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 unaudited consolidated financial statements than do other of our accounting estimates and judgments.

There have been no changes to the items disclosed as critical accounting policies and estimates in "Management Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

RESULTS OF OPERATIONS

The following table sets forth certain items in our unaudited consolidated
statements of operations as a percentage of total revenue:



                                                      Three Months
                                                    Ended March 31,
                                                   2013         2012
              Revenue                               100.0 %      100.0 %
              Cost of revenue                        48.5         49.8

              Gross profit                           51.5         50.2

              Operating expenses:
              Research and development               45.7         28.1
              Sales and marketing                     5.6          4.3
              General and administrative             12.4          6.7

              Total operating expenses               63.7         39.1

              Operating (loss) income               (12.2 )       11.1
              Other income                            0.8           -

              (Loss) income before income taxes     (11.4 )       11.1
              Income tax benefit                     13.7          3.2

              Net income                              2.3 %       14.3 %


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Three Months Ended March 31, 2013 and 2012

Revenue. The following table summarizes the components of our revenue (in
thousands, except units sold):



                                                Three Months Ended
                                                    March 31,                   Growth/Decline
                                               2013           2012          $/Units         Percent
DUV:
Light sources revenue                        $   5,904      $  36,693      $ (30,789 )           (84 %)

Light source units sold                              8             26            (18 )           (69 %)

Light sources average selling price (1)      $     980      $   1,478      $    (498 )           (34 %)

EUV:
Light sources revenue                        $      -       $  22,700      $ (22,700 )

Light source units sold                             -               3             (3 )

Light sources average selling price (1)      $      -       $   7,567      $  (7,567 )

Display Products:
Silicon crystallization tools revenue        $      -       $      -       $      -

Silicon crystallization tool units sold             -              -              -

Silicon crystallization tools average
selling price (1)                            $      -       $      -       $      -

Installed base product revenue               $  93,651      $  91,105      $   2,546               3 %

Total revenue                                $  99,555      $ 150,498      $ (50,943 )           (34 %)

(1) For purposes of calculating the average selling price of our light sources, we exclude the effect of deferred revenue between periods in order to present the actual average selling price per unit sold.

Total revenue, compared to the same period in the prior year, decreased primarily due to no EUV source system customer acceptances during the current quarter and reduced demand for DUV light sources . These decreases were offset partially by increased demand for our installed base products. The average selling price of our DUV light sources decreased due to a change in the DUV product mix of light sources sold when compared to the same period in the prior year, as KrF light sources have a lower average selling price than ArF light sources.

Sales to ASML, Nikon, Hynix and Samsung amounted to 5%, 9%, 16% and 17%, respectively, of total revenue for the quarter ended March 31, 2013, and 34%, 10%, 9% and 10%, respectively, of total revenue for the quarter ended March 31, 2012.

Our sales to external customers consist of sales generated from each of the following geographic locations in which we do business (in thousands):

                                       Three Months Ended
                                            March 31,                 Growth/Decline
                                       2013          2012         Dollars        Percent
  United States                      $  19,360     $  66,819     $ (47,459 )          (71 %)
  Korea                                 28,960        24,770         4,190             17 %
  Japan                                 15,794        25,326        (9,532 )          (38 %)
  Taiwan                                15,729        14,150         1,579             11 %
  Other Asia (China and Singapore)      11,893        11,674           219              2 %
  Europe                                 7,819         7,759            60              1 %

  Total revenue                      $  99,555     $ 150,498     $ (50,943 )          (34 %)

Sales generated from the United States include sales of light sources to ASML, located in the Netherlands, as transfer of title occurs in the United States. We anticipate that international sales will continue to account for a significant portion of our sales.

Backlog. Our DUV backlog includes only those orders for light sources and replacement parts for which we have accepted a purchase order from a customer, and that will be delivered to the customer within the following 12 months. In addition, our DUV backlog does not include service or support which will be provided to our customers in the future or under service contracts. Timing of delivery can be affected by many factors, including factors that cannot be easily predicted or controlled. Because it is the practice in our industry that customers may cancel or delay orders with little or no penalty, our backlog as of any particular date may not be a reliable indicator of actual sales for any succeeding period.


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Our backlog for DUV light sources and replacement parts at March 31, 2013 was $37.7 million compared to $56.2 million at March 31, 2012. DUV bookings for the quarter ended March 31, 2013 and 2012 were $96.3 million and $135.8 million, respectively. The DUV book-to-bill ratio for the quarter ended March 31, 2013 was 0.97 compared to 1.06 for the quarter ended March 31, 2012. The decrease in backlog and bookings year over year primarily reflects continued softened demand as chipmakers assess their capital equipment needs.

Cost of revenue. Cost of revenue includes direct material and labor, warranty expenses, license fees, manufacturing and service overhead. Cost of revenue also includes foreign exchange gains and losses on foreign currency forward exchange contracts ("forward contracts") associated with purchases of our products for resale under firm third-party sales commitments. Costs incurred for shipping and handling are included in cost of revenue at the time the related revenue is recognized. Amounts billed to a customer, if any, for shipping and handling are reported as revenue.

The cost of revenue decreased to $48.3 million for the quarter ended March 31, 2013 from $75.0 million for the same period in the prior year. Gross profit decreased to $51.3 million with a 51.5% gross margin for the quarter ended March 31, 2013 from $75.5 million with a 50.2% gross margin for the same period in the prior year. The increase in gross margin from the first quarter of 2012 was due primarily to the sale of three EUV 3100 sources in the first quarter of 2012 at a low gross margin, offset partially by a $5.9 million write down of inventory during the current quarter. The write down of inventory during the current quarter resulted from design changes in our EUV 3300 sources that increased the costs of the sources such that the related inventory exceeded its estimated net realizable value based on the current contract pricing with ASML for the first twelve EUV 3300 sources.

Research and development. Research and development expenses include costs of continuing product development projects, which consist primarily of employee and material costs, depreciation of equipment and other engineering related costs. Research and development expenses increased 7.6% to $45.5 million for the quarter ended March 31, 2013 from $42.3 million for the same period in the prior year primarily due to our increased investment in EUV source commercialization and development when compared to the same period in the prior year. In addition, research and development expenses included $1.4 million and $3.5 million for 2013 and 2012, respectively, for our display products segment. As a percentage of total revenue, research and development expenses increased to 45.7% for the quarter ended March 31, 2013 from 28.1% for the same period in the prior year.

Sales and marketing. Sales and marketing expenses include sales, marketing, customer support staff and other marketing expenses. Sales and marketing expenses decreased 14.5% to $5.5 million for the quarter ended March 31, 2013 from $6.5 million for the same period in the prior year. The decrease in sales and marketing expenses primarily reflects decreased employee related costs and decreased travel costs when compared to the same period in the prior year. Included in sales and marketing expenses were $664,000 and $453,000 for the quarters ended March 31, 2013 and 2012, respectively, for our display products segment. As a percentage of total revenue, sales and marketing increased to 5.6% for the quarter ended March 31, 2013 compared to 4.3% for same period in the prior year.

General and administrative. General and administrative expenses consist primarily of management and administrative personnel costs, professional services including external audit and consultant fees, and administrative operating costs. General and administrative expenses increased 23.5% to $12.4 million for the quarter ended March 31, 2013 from $10.0 million for the same period in the prior year. The increase in general and administrative expenses primarily reflects legal fees associated with the pending Merger with ASML. Included in general and administrative expenses were $225,000 and $211,000 for the quarters ended March 31, 2013 and 2012, respectively, for our display products segment. As a percentage of total revenue, general and administrative expenses increased to 12.4% for the quarter ended March 31, 2013 compared to 6.7% for the same period in the prior year.

Other income (expense). Other income (expense) consists primarily of interest income earned on our investment portfolio, foreign currency exchange gains or losses associated with fluctuations in the value of the functional currencies of our foreign subsidiaries against the U.S. Dollar and other items that may be specific to a reporting period. Other income was $842,000 for the quarter ended March 31, 2013 compared to $17,000 for the same period in the prior year. The increase is primarily due to foreign currency exchange gains of $683,000 for the quarter ended March 31, 2013 compared to foreign currency exchange losses of $263,000 for the same period in the prior year.

Income tax benefit. Income tax benefit of $13.6 million and $4.8 million reflect effective tax rates of 120% and 29% for the three months ended March 31, 2013 and 2012, respectively. The change in the effective tax rate for the three months ended March 31, 2013 was due primarily to an increase in the benefits recognized for the U.S. research and development tax credit offset partially by non-deductible expenses related to the Merger. Additionally, we recorded the following discrete items during the three months ended March 31, 2013: a $5.5 million tax benefit for the retroactive effect of the reinstatement of the U.S. federal research and development tax credit; and a tax benefit of $4.0 million for a reduction in our net unrecognized tax benefits due to the expiration of a statute of limitations. Our effective tax rate for the three months ended March 31, 2012 does not include any benefit for the U.S. research and development tax credit as this credit expired on December 31, 2011 and was not reinstated (retroactive from January 1, 2012 through December 31, 2013) until January 2, 2013. Research and development tax credits generated during 2012 are reflected as the $5.5 million discrete item recorded during the three months ended March 31, 2013 noted above. Additionally, during the three months ended March 31, 2012, we recorded $9.1 million of tax benefits related to write-offs of investments in a foreign subsidiary.


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Our future effective tax rate depends on various factors, such as tax legislation and credits and the geographic compositions of our pre-tax income. Additionally, we are currently under audit in the states of California and New York and in our Korean subsidiary. It is reasonably possible that the examination phase of these audits may conclude in the next 12 months, and that the related tax reserves or unrecognized tax benefits for uncertain tax positions may change, potentially having a material effect on our effective tax rate and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

A summary of cash (used in) provided by operating, investing and financing
activities were as follows during the three months ended March 31, 2013 (in
thousands):



                                                                 Three Months Ended
                                                                   March 31, 2013
Net cash used in operating activities                           $               (622 )
Net cash privided by investing activities                                     54,202
Net cash provided by financing activities                                      2,726
Effect of exchange rate changes on cash and cash
equivalents                                                                     (805 )

Net increase in cash and cash equivalents                       $             55,501

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2013 primarily reflects net earnings for the period before depreciation, amortization, stock-based compensation and provision for deferred income taxes and an increase in accounts payable of $21.6 million, an increase in deferred revenue of $20.8 million related primarily to advance payments received from ASML for purchase orders under a multi-year supply agreement for EUV 3300 sources, and a decrease in accounts receivable of $16.8 million due to a decrease in system sales. These increases in cash were offset partially by an increase in inventories of $48.6 million related primarily to the build of our EUV 3300 sources in support of the multi-year agreement with ASML, an increase in other assets of $15.1 million and a decrease in other liabilities of $15.5 million. The increase in other assets and decrease in other liabilities was primarily due to the income tax benefit recorded during the period which increased our income taxes receivable and decreased our income taxes payable balances.

Investing Activities

The primary source of cash in investing activities during the three months ended March 31, 2013 reflects proceeds from sales of investments, net of purchases of $76.2 million offset by capital expenditures of $22.0 million primarily related to our investment in EUV.

Financing Activities

The primary sources of cash provided by financing activities during the three months ended March 31, 2013 are $1.5 million of proceeds and $4.4 million of excess tax benefits from the exercise of employee stock options. The sources of cash were offset partially by $3.0 million of install payments related to our prior acquisition of eDiag.

Prospective Capital Needs

We require substantial resources to fund the operations of our business, and in particular to fund our investment in new technologies, including inventory and capital in support of these technologies. We expect purchases of property, plant and equipment in 2013 to be approximately $80.0 million to $120.0 million, a significant portion of which will relate to purchases of equipment and facility improvements associated with development and manufacturing of our EUV sources. In addition, we require resources to fund our normal operations.

While we have agreed to merge with and into a wholly owned subsidiary of ASML, subject to regulatory approval and the satisfaction of other customary closing conditions, we believe that our operating cash flows, together with our current cash, cash equivalents and marketable securities will be sufficient to cover our working capital needs for our normal operations, and our investments in our new technologies, particularly EUV, for at least the next 12 months. There can be no assurance that the pending Merger will be completed. It is possible that we may need to raise additional funds to finance our activities or to acquire assets, products or new technologies beyond the next 12 months. We may also decide that it is prudent in the current business and economic environment to secure commitments to access additional capital, including equity or debt securities, to protect our long term liquidity position. However, we cannot provide assurance that these funding sources will be available on favorable terms, if at all. As of March 31, 2013, we have approximately $40.7 million of cash and cash equivalents in foreign subsidiaries. In the event these cash amounts are needed to fund operations in the U.S., we believe we would not be liable for U.S. taxes in connection with repatriating these funds given that these funds would be used to repay existing intercompany payables and/or loans due to the U.S. parent company.


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There are certain restrictive covenants in the Merger Agreement with ASML that . . .

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