PART I
The
Company
We are the worlds leading supplier of light sources used in the photolithography process for
semiconductor, or chip manufacturing. We provide state-of-the-art light sources designed to help enable the performance of leading edge wafer steppers and wafer scanners built by lithography tool manufacturers. We currently supply deep ultraviolet
(DUV) light sources to our lithography tool manufacturer customers, ASML, Canon, Inc. (Canon) and Nikon, Corp. (Nikon), who integrate our light source into their wafer steppers and scanners which they then provide
to chipmakers. We provide installed base products in support of our chipmaker customers, who use our light sources in their advanced wafer patterning production processes. In addition, we provide comprehensive support products for our installed base
of light sources to the lithography tool manufacturers as well as directly to chipmakers, which include all of the worlds largest semiconductor manufacturers. Our light sources constitute a substantial majority of all DUV light sources
incorporated in
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lithography stepper and scanner tools at chipmakers worldwide. As a result, the majority of consumer electronics devices manufactured in the last several years contain a semiconductor
manufactured using our light sources. We are continuing to invest in the development of extreme ultraviolet sources (EUV) for chip manufacturing. Our EUV sources are still under development and not yet capable of supporting the
commercial production of integrated circuits; however, we have received customer acceptance from ASML and recorded revenue for six of our EUV 3100 pilot sources to date. We have also received multiple orders from ASML for our next generation EUV
3300 sources and are working closely with ASML on the development of these sources.
Our display products operating segment
developed, integrated, marketed and supported silicon crystallization tools used in the manufacture of different types of displays, including high-resolution low temperature poly-silicon liquid crystal displays (LTPS LCD) and
organic light emitting diode (OLED) displays. On January 28, 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. Cymer, Inc. was incorporated in California in 1986 and reincorporated in
Nevada on July 12, 1996. Our headquarters is in San Diego, California, where we design, develop and manufacture our light sources and the majority of our replacement parts. To provide better support to our customers located outside of the
United States, we maintain a replacement parts refurbishment facility and field service office in South Korea, and field service and support offices in China, Japan, the Netherlands, Singapore and Taiwan. We also maintain a field service office in
the United States to support our installed base of light sources located at our United States-based chipmaker customers.
Merger with ASML
On October 16, 2012, the Company entered into the Agreement and Plan of Merger (the Merger Agreement) by and among (i) ASML, (ii) solely for purposes of Article II, Article IV,
Article VI and Article X, ASML US Inc., a Delaware corporation and an indirect wholly owned subsidiary of ASML (Holdco), and Kona Technologies, LLC, a Nevada limited liability company and a wholly owned subsidiary of Holdco (Merger
Sub 2), (iii) Kona Acquisition Company, Inc., a Nevada corporation and a wholly owned subsidiary of Holdco (Merger Sub), and (iv) the Company. The Merger Agreement provides that, upon the terms and subject to the
conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company, and immediately thereafter, the Company will be merged with and into Merger Sub 2. References in this Annual Report on Form 10-K to the
Merger should, unless the context otherwise requires, be read to mean the merger of Merger Sub into the Company and the merger of the Company into Merger Sub 2, as part of an integrated plan.
Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of the
Companys common stock will be converted into the right to receive (i) $20.00 in cash, without interest, and (ii) 1.1502 ordinary shares, nominal value EUR 0.09 per share, of ASML (ASML ordinary shares).
On February 5, 2013, a special meeting of our stockholders (the Special Meeting) was held. At the Special Meeting, 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 Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (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 Companys 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
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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 partys 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.
Financial Information about Segments and Geographic Areas
Financial information regarding our segments and the geographic areas where we operate is contained in Note 15 Segment and
Geographic Information to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Industry Background
The highly cyclical nature of the semiconductor
industry is driven by demand for consumer electronic devices that contain semiconductor chips. The complexity of these chips has increased dramatically due to the demand for more sophisticated electronic devices that can provide more functionality,
such as smart phones with internet and video capability, tablets and notebook computers that can download and play movies, automotive products, and advanced game consoles that are capable of driving the rapid action and vivid graphics that
characterize todays increasingly realistic and interactive video games. Additionally, there is growing consumer demand for this increased functionality to be available virtually everywhere, through wireless connectivity. These advances have
been achieved without the devices increasing in size, and generally without significant increase in price, because chipmakers have been able, over the years, to make each generation of chips with smaller features and finer circuitry than the
previous generation. Moores Law, first observed by Intel Corporation co-founder and former chairman Gordon E. Moore is well-known and widely used in the semiconductor industry to describe the advancement in semiconductor device
technology. The semiconductor industry operates to this model, which requires chip makers to pack transistors more tightly with every new generation of chips, shrinking the size of transistors. Smaller transistors mean that semiconductor lithography
machines must be able to print finer features with every new generation of chips. Semiconductor equipment suppliers have partnered with their chipmaker customers to enable the features on the chip to continue to shrink. Photolithography is one
of the key technologies that enables this process to continue.
The basic building block of semiconductor technology is a
thin, flat, round disc of pure silicon called a wafer, which is polished to a mirror-like finish. After polishing, the wafer must go through a complex manufacturing process that involves several hundred stepsall of which must be executed with
extreme precision at the level of a few nanometers (nm) (one nm is a billionth of a meter). Standard processes, such as photolithography, etch and deposition, are repeated many times on the wafer, resulting in a buildup of microscopic
structures, consisting of more than a billion transistors. When the wafer processing is complete, a single wafer will contain hundreds of individual chips, which are then cut, tested, bonded onto lead-wire legs, and then packaged in a
ceramic or epoxy container.
The Lithography Process
Photolithography is a process that uses light to print, or pattern, the complex circuit patterns onto the wafer. The ability to pattern
smaller circuits depends, to a great degree, on the wavelength of the light used in the photolithography process. A shorter wavelength of light can pattern circuitry with smaller critical dimensions (CD), which in turn allows the
transistors that serve as circuit switches to be smaller, which allows more devices to be put on a chip and thus enables higher levels of functionality. Our DUV light sources provide an extremely pure beam of ultraviolet light. The short wavelength
of DUV light enables the required resolution, depth of focus and CD control required to pattern semiconductor circuits.
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A lithography tool projects light from the light source through an image of the circuitry
pattern on a photomask or reticle. A reticle is a glass plate with a layer of chrome on one side, on which the negative of the circuit pattern is etched. The image of the circuitry is transferred by the light being projected through a reduction lens
onto a small portion of the surface of the silicon wafer.
To print the projected optical pattern, the wafer is coated with a
thin film of light-sensitive material, called photoresist. The light exposes the photoresist, which is then developed (somewhat like photographic film) to create a stenciled image pattern. Next, through a process called etch, the
unnecessary underlying material is selectively removed, creating an extremely fine circuit pattern. The wafer is inspected, particularly for pattern defects, any hardened residual photoresist is removed, and then the wafer is measured to make sure
it meets predetermined specifications. Then the wafer surface is cleaned, generally by immersing it in acid, solvent, or deionized water. The process is repeated over multiple layers to build the electrical circuit structure. Depending on the type
of chip being made, a total of 30 to 50 layers are patterned precisely over the first to complete the circuit fabrication, at which time the wafer is fully processed.
The light from these DUV sources is generated by mixing two gaseseither krypton and fluorine (KrF), or argon and fluorine (ArF)inside a discharge chamber within the
light source system. When a short electrical charge is applied to the gases, the gas atoms combine briefly to form a molecule known as an excited dimer, or excimer. These gas molecules remain together for a few nano-seconds, and
when they separate, produce an intense pulse of DUV light that is then purified and directed out one end of the light source to the lithography tool. Depending on the repetition rate of the laser, this procedure is repeated between 1,000 and 6,000
times per second (1,000 pulses per second equals one kilohertz (kHz)). EUV is an advanced form of lithography that uses extremely short wavelength (13.5 nm) light, mirrors and reflective photomasks to image circuit patterns
onto the surface of semiconductor wafers. The chips produced with EUV light sources are expected to contain features 22 nm wide or smaller, and are projected to be as much as 100 times faster than, with 1,000 times the memory capacity of,
todays most powerful computer chips. EUV lithography is viewed as the front runner for next generation critical dimension imaging after existing ArF 193 nm immersion lithography for layer patterning features 22 nm wide or
smaller. NAND flash memory devices and dynamic random access memory (DRAM) devices are expected to be early adopters of EUV technology.
Products and Support
Our products include DUV and EUV
photolithography light sources, and installed base products designed to cost-effectively deliver high levels of performance, availability, and reliability to enable our customers to achieve their production goals.
Photolithography Light Sources
Our DUV light sources include the most advanced ArF immersion light sources for use on the most critical process layers. Chipmakers also use our ArF and KrF light sources to fill out or balance their
production lines or add capacity to their manufacturing facilities (also referred to as fabs) for less critical layers. The extremely short wavelengths and highly narrowed bandwidths of our light sources work in concert with our
lithography customers steppers and scanners and their sophisticated lens systems to help enable the very fine feature resolution required for patterning todays most advanced semiconductor circuitry. In addition, the pulse energy and
repetition rate of our light sources enable our chipmaker customers to achieve high throughput in wafer processing. We have designed our light sources to be reliable, easy to install and compatible with existing semiconductor manufacturing
processes. Additionally, we offer focus drilling technology for certain of our ArF immersion light sources. Focus drilling provides up to two times improvement in the depth of focus on the wafer, which can positively impact chipmakers yield.
Chipmaker demand for EUV light sources continues to be strong, as we believe EUV technology is the best path toward enabling
Moores Law and scaling of semiconductors with features 22 nm wide or smaller. We have
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accelerated our rate of EUV source development, and are continuing to increase our investment in development resources, manufacturing capacity, and field support to fulfill EUV source demand.
Our Laser-Produced Plasma (LPP) EUV light source is designed to provide scalable power that enables high volume
manufacturing. Our LPP EUV source system consists of a high power, high repetition rate pulsed carbon dioxide laser, a beam delivery system, and a plasma vacuum vessel. The plasma vacuum vessel is complete with a droplet generator and collector,
debris mitigation, and in-situ metrology to measure, monitor and control the system operation. The 13.5 nm wavelength is produced when a carbon dioxide laser pulse strikes small droplets of elemental tin in the plasma chamber. The laser heats the
droplet of tin to the point of evaporation and super-heating to critical temperature, then the atoms shed their electrons and become highly ionized (i.e. a plasma). This causes the excited tin ions (the plasma) to emit light which is collected by a
highly reflective mirror. The mirror reflects and directs the resulting 13.5 nm wavelength energy and focuses it through an aperture and into the lithography system. The plasma chamber of the EUV source is directly coupled to the scanner
systems vacuum chamber inside the scanner enclosure, requiring close coordination between the designs of our EUV source and the scanner produced by the lithography tool manufacturer. We are working closely with ASML, a lithography tool
manufacturer and current customer for our EUV sources, and our key suppliers to drive execution to our power and performance roadmap. Our EUV sources are still under development and not yet capable of supporting the commercial production of
integrated circuits; however, we have received customer acceptance from ASML and recorded revenue for six of our EUV 3100 pilot sources. We have also received multiple orders from ASML for our next generation EUV 3300 sources.
Revenues generated from sales of DUV light sources were approximately $137.2 million, $208.3 million and $191.6 million for
2012, 2011 and 2010, respectively. Revenues from sales of EUV sources were approximately $23.1 and $22.3 million for 2012 and 2011, respectively. No revenue was generated from sales of EUV sources in 2010.
Our current DUV light source product portfolio consists primarily of the following:
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Product Series
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Configuration
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Gas
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Wavelength
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Application
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Power
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Repetition
Rate
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XLR 600ix
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Dual Chamber
Recirculating Ring
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ArF
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193 nm
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Double Patterning/
Immersion
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60W/ 90W
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6 kHz
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XLA 105
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Dual Chamber
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ArF
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193 nm
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Dry
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40W
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4 kHz
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ELS-7010
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Single Chamber
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KrF
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248 nm
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Dry
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30W/ 50W
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4 kHz
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XLR Series193 nm ArF Immersion Light Sources.
As chipmakers continue to reduce the feature
sizes and shrink CDs on the wafer, they need to install the advanced tools required to enable patterning of the most critical layers. NAND flash memory and DRAM semiconductor manufacturers have been the most aggressive chipmakers in shrinking CDs,
and have been driving demand for our most advanced light sources for ArF immersion lithography applications. DRAM manufacturers are in production with CDs at 45 nm. Currently, some chipmakers are in development of chip production with CDs of less
than 32 nm. Leading edge semiconductor manufacturers in the memory, logic and foundry sectors have been developing ArF immersion extension down to CDs of 22 nm and implementing double-patterning technique, which means the increased demand for ArF
immersion light sources could last for several years. The XLR Series is based on our dual discharge chamber master oscillator power amplifier (MOPA) light source architecture, with a regenerative ring amplifier in place of the
traditional power amplifier. Built on our XL universal platform, this product series offers a step function improvement in performance and cost of operation. Our XLR light sources are designed to enable our chipmaker customers to customize
performance for specific applications through improved performance parameters and metrology options. Flexible power up to 90 watts (W), improved bandwidth stability and dose control enable higher CD control and yield, and this series
offers longer pulse duration to extend the lifetime of the illuminator and lens, even at higher power levels. Cost of operation is reduced significantly through optical design and component robustness, leading to increased module lifetime. With
active bandwidth stabilization and tuning
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capability, the XLR light sources offer improved bandwidth management for improved mask optical proximity correction matching and tool-to-tool matching, so customers can use multiple node mask
sets in the same tool or the same mask in different tools. We sell primarily the XLR 600ix model of this series.
XLA
Series193 nm ArF Dry Light Sources.
Though no longer considered leading edge technology, dry ArF lithography is still used to pattern a significant number of less-critical layers on wafers. Additionally, as CDs continue to shrink and drive
demand for even finer resolution on the most critical layers, non-critical layers may be patterned with ArF dry scanners, which drives continued demand for these tools. Our XLA Series of ArF light sources was the first product series to be based on
our dual-discharge chamber MOPA architecture. MOPA represented a paradigm shift in excimer laser architecture when it was introduced in 2003. The master oscillator creates a narrow bandwidth beam of light at low power. The beam then is directed into
the power amplifier, where the power is increased significantly while maintaining the narrow bandwidth. This combination of bandwidth and power enabled our chipmaker customers to continue reducing CDs and increasing processing speeds, capacity and
functionality of chips, while giving them the performance and cost advantages they need. Each product in the XLA Series is based on the XL universal platform, and we continue to sell the XLA 105 model of this series.
ELS 7010248 nm KrF Dry Light Sources.
We have been providing KrF light sources for volume chip production since 1996, when
chipmakers required the adoption of DUV light sources in their fabs. Over the years, we have developed and sold a variety of increasingly powerful and productive KrF light sources. The 7000 Series is the first series that was designed and built on a
common platform, enabling chipmakers to easily utilize the 193 nm wavelength produced by ArF and the 248 nm wavelength produced by KrF within the manufacturing environment. This ease of use feature was very important at the time because
chipmakers were introducing ArF production into their fabs and the common platform simplified the introduction of this new technology. With a 4 kHz repetition rate and high output power, the 7000 Series provides our chipmaker customers with high
wafer throughput and lower cost of operation by reason of advanced design and materials, and delivers a high level of tool availability to enable manufacturing efficiency and flexibility. Our bestselling light source of the series, the ELS-7010, is
still in demand as chipmakers continue to prefer the higher power and narrower bandwidth offered by this system. In 2010, we introduced the ELS-7010x which allows customers to easily adjust power from 30 watts to 50 watts based on the changing wafer
design requirements and production needs.
Legacy Light Sources.
In addition to our current DUV product portfolio of
light sources, we have numerous models of ArF and KrF light sources that have been superseded and are no longer in active production. However, these systems are still widely used by our customers and make up a substantial portion of our installed
base of light sources. We continue to provide installed base products and maintain parts inventory for these systems.
Installed Base Products
We derive a substantial portion of our revenue from the sale of installed base products, which include replacement parts, various service and support offerings and upgrades to lithography tool
manufacturers as well as directly to chipmakers.
Contracts and Service Agreements
We provide ongoing support to our customers through contracts and service agreements. Under these agreements, we provide comprehensive
support products to maintain the equipment within specifications. Certain contracts include the replacement of consumable and non-consumable parts.
Our OnPulse contracts offer a comprehensive approach to enhancing light source productivity, offering our customers predictable light source running costs that scale directly with pulse utilization. We
provide our OnPulse contract customers on-site support from certified service engineers and continuous real-time light source monitoring. Replacement parts and support are covered under the OnPulse contract, which facilitates cost savings for our
customers as well as simplified order and asset management. We believe that our OnPulse contracts offer our customers many compelling benefits, and this product has been well-received by our customers.
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In 2011, we introduced light source data offerings, OnPulse Plus and SmartPulse, as an
enhancement to our OnPulse contracts. These data offerings provide real time light source performance data in a new user interface, supporting chipmaker needs to improve process control and the quality of wafers. Additionally, for our OnPulse
customers, we offer our third generation Gas Lifetime eXtension (iGLX) control system for ArF immersion light sources. The value-added feature of iGLX is an improvement over previous generations of gas management systems, and is designed to double
gas lifetime and automate gas optimization.
Revenues generated from contracts and service agreements were approximately
$325.0 million, $280.8 million and $225.1 million for 2012, 2011 and 2010, respectively.
Replacement Parts and
Refurbishment Activities
Our light sources incorporate certain modules and subassemblies that require replacement or
refurbishment following extended operation, including, but not limited to, discharge chambers and certain optical components. We provide these and all other spare and replacement parts for our light sources to our customers. Customers not
participating in a contract or service agreement pay for the parts and labor as the parts are replaced.
We conduct parts
refurbishment and materials reclamation activities for some of our core modules. 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
module being replaced. These returned modules contain a certain amount of material, primarily metal components, that may be reused by us in future core assemblies. A portion of the modules sale price is related to the return of these consumed
parts, and we record revenue based on the estimated fair value of the returned parts when we receive the returned modules from our customers. It has been our practice to continually improve the performance and extend the expected lifetimes of our
replacement modules. The enhanced performance enables our customers to benefit from higher throughput and yield, while the extended lifetimes provide lower cost of operation. We continue to seek ways to add value for our customers and enable them to
realize higher returns on their investment in light sources purchased from us.
Revenues generated from sales of replacement
parts and refurbishment activities, including the receipt of reusable material contained within consumed assemblies returned from our customers, were approximately $46.6 million, $80.0 million and $113.5 million for 2012, 2011 and 2010,
respectively.
Customers and End-Users
We currently supply light sources to ASML, Nikon, and Canon, lithography tool manufacturers who in turn supply their wafer steppers and scanners to chipmakers. We strive to maintain and strengthen our
relationship with these lithography tool manufacturer customers by developing and providing compelling light source solutions in advance of their needs. We work closely with them to ensure that our product road map aligns with theirs, and that we
can support each of them in a timely manner with the products required by our mutual chipmaker customers. We believe these efforts enhance our relationship with our lithography tool manufacturer customers and support our leadership position in the
photolithography light source market.
We sell to customers in China, Europe, Japan, South Korea, Taiwan, the United States
and other Asian countries. Our chipmaker customers include the worlds leading semiconductor manufacturers.
Sales to
ASML, Nikon, SK Hynix, Limited and Samsung Electronics, Co. accounted for 23%, 13%, 11% and 11%, respectively, of total revenue in 2012. We expect that sales of our light source and other related products to these four customers will continue to
account for a substantial portion of our revenue in the foreseeable future. Additionally, all of our revenue and orders for EUV sources are from ASML. The loss of any significant business from or production problems for any one of these customers
would harm our business and financial condition. We believe there is limited credit risk exposure for us with these companies as they continue to demonstrate sound credit worthiness. However, our ability to generate future revenue from them is
dependent on their ongoing financial condition and liquidity.
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Backlog
We base our light source production schedule upon order backlog as well as informal customer forecasts. Our 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 twelve months. Our backlog does not include installed base products,
service or support which will be provided to our customers in the future or under 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. At December 31, 2012, we had a DUV backlog, which
includes light sources and replacement parts, of approximately $40.2 million compared with a DUV backlog of $48.2 million at December 31, 2011. We do not include the orders from ASML for EUV 3300 sources in our backlog.
Manufacturing
Our manufacturing activities, which consist of material management, assembly, integration and testing, are performed at our San Diego, California facility. This facility includes approximately 43,181
square feet of Class 10,000 cleanroom manufacturing and test space. Our San Diego facility supports our EUV research, development and commercial production efforts. To better leverage our own resources, capitalize on the expertise of our key
suppliers and respond more efficiently to our customers needs, we outsource the manufacture of many modules and subassemblies of our light sources. The modular design of our light source products enables this manufacturing outsourcing strategy
with substantially all manufacturing of nonproprietary subassemblies currently contracted to third-party suppliers. As a result, we are increasingly dependent upon these contract suppliers to meet our manufacturing schedules. We believe the highly
outsourced content and design of our products allows for reduced manufacturing cycle times and increased output per employee. To improve current production efficiencies, control costs, and manage overall manufacturing capacity, we intend to continue
training manufacturing personnel, improving our assembly and test processes to further reduce cycle time, investing in additional manufacturing tooling and further developing our supplier management and engineering capabilities.
In addition to our manufacturing facility in San Diego, we have a facility in South Korea that refurbishes discharge chambers for light
sources installed in South Korea and the Asia-Pacific region. This facility includes 3,229 square feet of Class 10,000 cleanroom manufacturing space.
We purchase a limited number of components and subassemblies included in our light sources and installed base products from a single supplier or a small group of suppliers. To reduce the risk associated
with these suppliers, we have supply agreements in place and carry strategic inventories of these components. Strategic inventories are managed as a percentage of anticipated future demand. Whenever possible, we work with secondary suppliers to
qualify additional sources of supply. In some cases, we procure components through distributors with access to multiple suppliers to minimize the risk of single-sourced components. In addition, we contract for the manufacture of various
subassemblies of our products and depend on our contract manufacturers to deliver to our required specifications, schedule and quality standards. Some of our suppliers have specialized in supplying equipment or manufacturing services to
semiconductor equipment manufacturers and, therefore, are susceptible to industry fluctuations and are subject to the same risks and uncertainties as we are regarding their ability to respond to changing market and global conditions. To date we have
been able to obtain adequate components and subassemblies for our light sources and installed base products in a timely manner from existing suppliers.
Sales and Marketing
We strive to best serve and understand our
manufacturer and chipmaker customers performance and production needs. We work to ensure their understanding of the significant value-add our products offer. We have established product development and marketing and applications engineering
teams who work closely with our customers to understand their needs. These teams support our direct sales and marketing efforts.
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Support Services
We warrant our products against defects in design, materials, and workmanship. After a customer takes delivery of one of our new light
sources, we provide product warranty support for the duration of the warranty. We also include a parts warranty on all replacements parts sold to our customers. The warranty coverage period varies by the type of part, since some part types include
time-based warranty periods and others include usage-based warranty periods. We may offer a comprehensive contract to continue providing replacement products and support. We believe our success depends on enabling our customers to realize the
highest possible return on their investment in our light sources. We provide our customers with on-site support at their facilities. Prior to shipment, our support personnel typically assist with customer site preparation and inspection. We also
provide our customers with comprehensive information regarding product operation, maintenance, service, diagnostics and safety.
Our field engineers and technical support specialists provide field maintenance and front-line technical support for our customers from
our San Diego headquarters, from our field offices located throughout the United States, and from our field offices located in China, Japan, South Korea, the Netherlands, Singapore, and Taiwan. To ensure that our customers receive replacement parts
quickly and maintain the optimal level of productivity in their fabs, we maintain spares inventory at each of our field depot facilities per our customer support program. As our installed base of light sources grows, we believe it is critical that
replacement parts, as well as our own logistics support organization, are available for quick response to the demands of our customers.
In order to provide the highly responsive and high quality support that our customers need to maximize their production efficiency, and provide it in a cost-effective manner, we maintain a highly-trained,
service support staff that can provide rapid global support solutions. We continuously develop and enhance our direct support infrastructure in both our international and domestic markets. To achieve this level of capability and strive for
continuous improvement, we recruit highly qualified field service personnel and provide additional training and certification.
Product Research and Development
Our product development strategy has been to develop in rapid succession technologically innovative new products that deliver superior performance with higher throughput and lower cost of operation to
meet the continually evolving needs of our customers. We believe we must continue to anticipate our customers future needs, and develop and introduce new and enhanced light source products in order to support our customers, as well as to
strengthen our leadership position in the industry. Execution of our strategy has enabled us to offer our customers increasingly higher value-added light sources in advance of their needs, while establishing our position as the technology and market
leader in our field. We are also developing enhancements to our products that will improve tool productivity for high volume memory manufacturing and provide new optical capabilities for process improvement in the foundry and logic sectors. We
intend to continue developing and enhancing our technology in order to provide our customers with innovative products to help ensure their success. Our EUV source efforts have been recognized as leading the industry in the development and
commercialization of critical next generation light source technology.
We have historically devoted a significant portion of
our financial resources to research and development, and intend to continue to maintain a strategic investment in our product research and development activities in connection with our development of new products. Research and development expenses
for 2012, 2011 and 2010 were $187.7 million, $130.6 million and $89.2 million, respectively.
Patent and Other
Property Rights
We seek to protect our intellectual property rights in a number of ways, one of which is to obtain
patent protection for our technology. As of December 31, 2012, we own a number of United States and foreign patents
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covering certain aspects of technology related to light sources, piezoelectric techniques and silicon crystallization tools. Patents related to our source technologies and piezoelectric
techniques will expire at various times through 2031.
We also rely on trade secret protection, employee and third-party
nondisclosure agreements and other intellectual property protection methods to protect our confidential information. These methods, however, may not be effective in protecting our confidential information, particularly our trade secrets, because
third parties may independently develop substantially the same proprietary information and techniques, gain access to our trade secrets, or disclose our technology.
We have registered a number of trademarks in the United States and in some other countries. We are also trying to register additional trademarks in the United States and in other countries. We use these
trademarks in our business and advertising materials, which are distributed throughout the world.
Competition
We currently have one DUV light source competitor, Gigaphoton. Gigaphoton is a wholly owned subsidiary of Komatsu and
is headquartered in Japan. Our lithography tool manufacturer customers have purchased products from Gigaphoton and have qualified Gigaphotons DUV light sources for use with their products. Additionally, Gigaphotons DUV light sources have
been qualified by a number of chipmakers in Europe, Japan, other regions in Asia and the United States, and Gigaphoton has an installed base of light sources at chipmakers in these regions. We also face competition from Gigaphoton and Ushio, also
headquartered in Japan, in the development of EUV source technology.
The principal elements of competition in our markets are
the technical performance characteristics of the light source products and the operating efficiency of the system, which is based on availability, reliability, performance efficiency, throughput, cost of ownership, and overall quality. We believe
that we compete favorably with respect to these factors. Our management receives and evaluates internally-generated market research for the U.S. and foreign markets, as well as periodic public and customized market research data in order to gauge
the effectiveness of our success rate in response to such factors.
Employees
As of December 31, 2012, we employed approximately 1,100 regular and 140 temporary persons worldwide. The substantial majority of our
employees are not party to a collective bargaining agreement, although we have eleven employees in France, Italy and Belgium who are subject to a collective bargaining agreement. We have not experienced work stoppages and believe that our employee
relations are good.
Environmental Matters
We are subject to federal, state and local regulations, such as regulations related to the environment, land use, public utility
utilization and the fire code, in connection with the storage, handling, discharge and disposal of substances that we use in our manufacturing process and in our facilities. We believe that our activities comply with current government regulations
that are applicable to our operations and current facilities.
Available Information
Our filings with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) are available free of charge through the Investor Relations section of
our companys website at
http://www.cymer.com
and are accessible as soon as reasonably practicable after being electronically filed with or furnished to the SEC. Additionally, we regularly
10
post copies of our press releases as well as additional information about us on our website. Interested persons can subscribe to email alerts that are sent automatically when we issue press
releases, file our reports with the SEC or post certain other information to our website. Information accessible through our website does not constitute a part of this report.
Copies of this report are also available free of charge from Cymer Corporate Investor Communications, 17075 Thornmint Court, San Diego, CA 92127. In addition, our Corporate Governance Guidelines, Code of
Conduct and written charters of the committees of the Board of Directors are accessible through the Corporate Governance tab in the Investor Relations section of our website and are available in print to any shareholder who requests a copy. You may
read and copy materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at
1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements and other information we file with the SEC. The address of the SECs website is
http://www.sec.gov
.
Executive Officers
Set forth below is certain information regarding our executive officers and their ages as of February 8, 2013.
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Name
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Age
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Position
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Robert P. Akins
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61
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Chairman of the Board and Chief Executive Officer
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Edward J. Brown
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55
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President and Chief Operating Officer
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Paul B. Bowman
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56
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Senior Vice President, Chief Financial Officer and Secretary
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Karen K. McGinnis
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46
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Vice President, Corporate Controller and Chief Accounting Officer
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Thomas J. Bondur
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45
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Vice President, Global Sales and Marketing
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Robert P. Akins
,
co-founder, has served as our chairman and chief executive officer
since our inception in 1986. He currently serves on the board of directors of KLA-Tencor Corporation and in an ex-officio role of Semiconductor Equipment and Materials International (SEMI). He is also a member of the council of advisors to the Irwin
and Joan Jacobs School of Engineering at the University of California, San Diego (UCSD), and has served on the board of the UCSD Foundation. Mr. Akins received the SEMI North America Award for contributions to the field of DUV
lithography, the outstanding alumnus award from UCSD, and the 2007 William W. Otterson Award, which is awarded to the San Diego company whose products have demonstrated the most significant positive impact on society. Mr. Akins received a
bachelors degree in physics and literature, and a doctorate in applied physics from UCSD.
Edward J. Brown,
Jr.
has served as our president and chief operating officer since his appointment in September 2005. From 1984 to 2005, Mr. Brown was employed at Applied Materials, Inc. where he held numerous high-level management positions including
group vice president and senior advisor to the president, vice president and general manager of the Intel business unit, as well as managing director heading up their largest product division, global operations. Mr. Brown received a
masters degree in business administration from National University and a bachelors degree in industrial studies from San Diego State University.
Paul B. Bowman
has served as our senior vice president, chief financial officer and secretary since his appointment in October 2009. From December 2008 until his appointment as chief
financial officer in October 2009, he served as our interim chief financial officer, treasurer and secretary. From May 2008 until December 2008, Mr. Bowman served as our vice president of investor relations. Prior to joining us, Mr. Bowman
served as chief financial officer of American Mold Guard, Inc. from April 2006 to April 2008. From 1996 to April 2006, Mr. Bowman was employed at Applied Materials, Inc., holding positions as the managing director of investor
relations, managing director of finance for worldwide manufacturing and controller of the worldwide service division. Mr. Bowman received a bachelors degree in finance from Shippensburg State University.
11
Karen K. McGinnis
has served as vice president, corporate controller, and
chief accounting officer since her appointment in November 2009. Prior to joining us, Ms. McGinnis was employed by Insight Enterprises, Inc., a Fortune 500 global provider of information technology hardware, software and services, as chief
accounting officer from September 2006 until March 2009 and as senior vice president of finance from 2001 through September 2006. Ms. McGinnis is a certified public accountant and received her bachelors degree in accounting from the
University of Oklahoma.
Thomas J. Bondur
has served as our vice president, global sales and marketing since his
appointment in March 2011. From 2001 to 2011, Mr. Bondur was employed at Lam Research Corporation where he held positions in business development, sales and marketing and Global Field Operations. He most recently managed the global business
development organization and had direct operational responsibility for the North America and European regions. From 1995 to 2001, Mr. Bondur was employed at Applied Materials, Inc. where he held positions in the etch product group and managed
sales to large global accounts. Mr. Bondur received a bachelors degree in business administration from the State University of New York at Oswego.
Executive officers serve at the discretion of the board of directors. There are no family relationships between any of the directors and our executive officers.
The
risks described below may not be the only risks we face. Additional risks that we do not currently believe are material may also impair our business operations. If any of the events or circumstances described in the following risks occur, our
business, financial condition, results of operations or cash flows could suffer, and the trading price of our common stock and our market capitalization could decline.
RISKS RELATED TO THE MERGER WITH ASML
The market price of ASML
ordinary shares may decline following the completion of the Merger or during the period of time between the date of this Annual Report on Form 10-K and the date on which our stockholders are entitled to receive ASML ordinary shares pursuant to the
Merger Agreement.
At the effective time of the Merger, each issued and outstanding share of our common stock will be
converted into the right to receive fixed consideration consisting of a fixed number of ASML ordinary shares and the cash consideration and, in lieu of fractional shares, an amount in cash equal to the product obtained by multiplying (i) the
average of the last reported sales price of ASML ordinary shares, as reported on NASDAQ, on each of the last five trading days ending on the third trading day immediately preceding the closing date by (ii) the fraction of an ASML ordinary share
to which such holder would otherwise be entitled.
The stock consideration to be delivered to our stockholders under the
Merger Agreement is fixed at 1.1502 ASML ordinary shares for each share of our common stock and will not be adjusted at any time to reflect changes in the market value of ASML ordinary shares.
The market price of ASML ordinary shares may decline at any time following the completion of the Merger if, among other reasons:
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the synergies expected by ASML and the Company are not achieved;
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the effect of the Merger on the financial results of ASML is not consistent with the expectations of financial analysts or investors;
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ASML shareholders sell a significant number of ASML ordinary shares after consummation of the Merger, or our stockholders who receive ASML ordinary
shares under the Merger Agreement sell a significant number of ASML ordinary shares in the open market; or
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ASMLs financial results fail to meet the expectations of financial analysts or investors for any reason.
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12
In addition, the market price of the ASML ordinary shares may fluctuate or decline during
the period of time between the date of this Annual Report on Form 10-K and the date on which our stockholders entitled to receive ASML ordinary shares pursuant to the Merger Agreement actually receive ASML ordinary shares. These fluctuations may be
caused by changes in the businesses, operations, results and prospects of either the Company or ASML, market expectations of the likelihood that the Merger will be completed and the timing of the completion, general market and economic conditions or
other factors. The actual market value of the ASML ordinary shares, when received by our stockholders, will depend on the market value of those ASML ordinary shares on that date. This market value may be less than the value of the ASML ordinary
shares at the time the Merger Agreement was signed or on the date of the Special Meeting.
The Company and ASML may be
unable to obtain the regulatory approvals required to complete the Merger.
Under the HSR Act, the Merger may not be
completed until notification and report forms have been filed with the U.S. Federal Trade Commission (the FTC), and the Antitrust Division of the U.S. Department of Justice (the Antitrust Division), and the applicable waiting
period has expired or been terminated. The Company and ASML filed our respective notification and report forms under the HSR Act with the FTC and the Antitrust Division on November 9, 2012. Each party subsequently received a second request from
the Antitrust Division in connection with the Merger. ASML and the Company are continuing to work with the Antitrust Division and working to comply promptly with these second requests.
At any time before or after the completion of the Merger, the Antitrust Division, the FTC, or a state attorney general could take any
action under U.S. federal or state antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the Merger in federal court or seeking the divestiture of substantial assets of ASML, the Company, or our
respective subsidiaries and affiliates. State attorneys general and private parties may also bring legal actions under U.S. federal or state antitrust laws under certain circumstances. There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or, if a challenge is made, of the result of the challenge.
Clearances and consents or the
expiration or termination of applicable waiting periods under competition laws in Germany, Israel, Japan, South Korea, and Taiwan also are conditions to the Merger. On December 17, 2012, the required clearances were received under the
competition laws in Germany. On February 13, 2013, the required clearances were received under the competition laws in Israel.
In addition, ASML and the Company have agreed that the Merger is also conditioned upon the favorable review of the Merger by the Committee on Foreign Investments in the United States (CFIUS).
This condition was satisfied on January 3, 2013, when CFIUS notified the Company and ASML that there are no unresolved national security concerns with respect to the Merger, and that CFIUS review was therefore concluded.
The Merger is subject to a number of conditions beyond our control. Failure to complete the Merger within the expected time frame
or at all could adversely affect our future business and financial results and our stock price.
Completion of the
Merger is subject to certain conditions, including, among others: (i) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (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 Companys 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 partys 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.
13
We cannot predict whether and when these conditions will be satisfied. If one or more of
these conditions is not satisfied, and as a result, we do not complete the Merger, or in the event the Merger is delayed for any other reason, our business may be harmed because:
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managements and our employees attention may be diverted from our day-to-day business because matters related to the Merger may require
substantial commitments of their time and resources;
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we may lose key employees;
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our relationships with customers, partners and suppliers may be harmed as a result of the Merger as well as uncertainties with regard to the combined
companys plans with respect to our products, employees and business;
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we have agreed to restrict certain of our activities pending the consummation of the Merger; and
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certain costs related to the Merger, such as legal and accounting fees and reimbursement of certain expenses, are payable by us whether or not the
Merger is completed.
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Our stock price may also fluctuate significantly based on announcements by ASML and
other third-parties or us regarding the Merger, or based on market perceptions of the likelihood of us obtaining regulatory approval of the Merger. Such announcements may lead to perceptions in the market that the Merger may not be completed, which
could cause our stock price to fluctuate or decline. In addition, if the Merger Agreement is terminated our stock price could decline significantly.
Any of these events could harm our results of operations and financial condition and could cause a decline in the price of our common stock, particularly if the Merger does not close.
Our executive officers and directors have interests in the Merger that may be different from, or in addition to, the interests of
our stockholders generally.
Our executive officers and directors have interests in the Merger that may be different
from, or in addition to, the interests of our stockholders generally. These interests include:
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some of our executives who are parties to change in control agreements with us may become entitled to receive severance benefits, including vesting of
their unvested equity, upon or after the closing of the Merger in the event of their qualified termination of employment;
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equity awards held by our outside directors that are unvested at the closing of the Merger will accelerate upon the closing of the Merger; and
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certain of our executive officers may enter into employment agreements with ASML or the surviving corporation that would provide for continued
employment, and payments and benefits, to these executives following the Merger.
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Our Board of Directors was
aware of these interests at the time it approved the Merger and the transactions contemplated by the Merger Agreement. These interests may cause our directors and executive officers to view the Merger differently and more favorably than our
shareholders may view it.
The Company and ASML will incur transaction and integration costs in connection with the
Merger.
ASML and the Company have incurred, and expect to continue to incur, significant costs in connection with the
Merger, including the fees of their respective professional advisors. ASML also will incur integration and restructuring costs following the completion of the Merger as our operations are integrated with ASMLs operations. The synergies
anticipated to arise from the Merger may not be achieved in the near term or at all, and if achieved, may not be sufficient to offset the costs associated with the Merger. Unanticipated costs, or the failure to achieve expected synergies, may have
an adverse impact on the results of operations of the combined company following the completion of the Merger.
14
Failure to timely complete the Merger could disrupt the Companys and ASMLs
business plans and operations.
Although we anticipate that the Merger will close in the first half of 2013, the
transaction is subject to governmental regulatory approvals and other customary closing conditions. The Companys and ASMLs inability to complete the Merger on the expected schedule likely would disrupt our respective operations and
require us to revise our respective business plans, and otherwise could have a material adverse effect on each companys business and on the trading price of ASML ordinary shares and our common stock. Moreover, if the Merger is not completed,
we will be subject to several risks, including having to pay certain costs relating to the Merger and diverting the focus of our management team from pursuing other opportunities that could be beneficial to us, without realizing any of the benefits
that might have resulted had the Merger been completed, which could have a material adverse effect on our business and on the trading price of our common stock.
ASML and the Company may not achieve the expected benefits of the transaction.
ASML and the Company entered into the Merger Agreement with the expectation that the transaction will result in various benefits, including with respect to the development of EUV technologies. Some of
those benefits may not be achieved or, if achieved, may not be achieved in the time frame in which they are expected. Whether the combined company will actually realize these anticipated benefits depends on future events and circumstances, some of
which are beyond the parties control. EUV sources are still under development, and it is not certain that the combined company will be able to introduce commercial EUV systems on time or at all. In addition, future growth in revenues, earnings
and cash flow will be partly dependent on future economic conditions and conditions in the semiconductor industry. Also, the potential synergies that ASML and the Company anticipate, including the expectation that the Merger will make EUV
development more efficient, may not be realized. In addition, other risk factors discussed below may prevent the achievement of the expected advantages of the Merger.
ASMLs inability to effectively integrate our business and operations with its own could disrupt its operations and force ASML to incur unanticipated costs.
ASMLs ability to integrate our operations with its own will be important to the future success of the combined company. Successful
integration is subject to numerous factors beyond ASMLs control, including adverse general and regional economic conditions, general industry trends and competition. ASMLs future performance will depend, in part, on ASMLs ability
to effectively integrate our operations with its own. The failure to do so could disrupt ASMLs ongoing business, force ASML to incur unanticipated costs and adversely affect the trading price of ASML ordinary shares. If ASML is unable to
realize the anticipated benefits of the Merger due to its inability to address the challenges of integrating our business or for any other reason, it could have a material adverse effect on the combined companys financial condition and results
of operations and require significant additional time on the part of its senior management dedicated to attempting to resolve integration issues.
If ASML is unable to retain key Company and/or ASML personnel after the Merger is completed, ASMLs business may suffer.
The success of the Merger will depend in part on ASMLs ability to retain key personnel currently employed by ASML and the Company.
There is no assurance that ASML will be able to retain key employees of either ASML or the Company after the Merger. Current and prospective employees of ASML and the Company may experience uncertainty about their future roles with their company
until after the Merger is completed. This may adversely affect the ability of both companies to attract and retain key personnel. If key employees terminate their employment, or if insufficient numbers of employees are retained to maintain effective
operations, managements attention might be diverted from successfully integrating our operations to hiring suitable replacements, and ASMLs business might suffer. In addition, ASML might not be able to locate suitable replacements for
any key employees that leave ASML or Cymer.
15
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Our revenue and operating results from quarter to quarter and year to year have varied in the past and our future operating results
may continue to fluctuate significantly.
Factors that contribute to fluctuations in our revenue and operating results
include:
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global demand for semiconductors in general and, in particular, for leading edge devices with smaller circuit geometries;
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utilization rates of light sources by our chipmaker customers and pulse usage which affect our installed base products revenue and costs;
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cyclicality in the market for semiconductor manufacturing equipment;
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rates at which our chipmaker customers take delivery of photolithography tools from our lithography tool manufacturer customers;
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rates at which lithography tool manufacturer customers take delivery of light source systems from us;
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timing and size of orders from our customers;
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the ability of our customers to pay for products purchased from us;
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our ability to manage customer satisfaction and product reliability, and to provide effective field support to our customers;
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variability in the amount and timing of parts replacement costs under our contracts and service agreements, including our OnPulse contracts;
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changing or adverse global economic conditions, including energy prices, inflation, deflation, recession, unemployment, consumer confidence and demand,
turmoil in the credit markets and financial services industry, political instability, and credit availability and their potential effects on our customers, suppliers, ability to sell products, and investments;
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improved or reduced market penetration by our competitors;
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demand for reduced product lead times from our customers;
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the mix of light source models, and the level of installed base products revenue in our total revenue;
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changes in the price and profitability of our products;
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our ability to develop and implement new technologies and introduce new products that meet our customers needs, in particular, EUV sources;
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research and development costs incurred to develop new technologies;
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demand for our EUV sources;
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our ability to manage our manufacturing and inventory requirements, including our inventory levels and controls at our widely dispersed operations;
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natural events such as severe weather and earthquakes in the locations in which we, our customers or our suppliers operate;
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the financial condition of our suppliers which, if negative, could affect their ability to supply us with the parts that we need to manufacture our
products;
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foreign currency exchange rate fluctuations and possible protectionist measures in the countries in which we do business;
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our investments in marketable securities;
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changes in our effective tax rate;
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16
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intellectual property protection; and
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potential impairments to our goodwill or long-lived assets.
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Revenue from installed base products has grown as a percentage of our total revenue. The revenue from the operation of our installed base of light source systems depend on the rate at which our customers
use these light source systems, the rate of growth of our installed base, and the mix of pulses from our various light source models. Our operating results for a particular period may be adversely affected if our customers reduce usage rates, or
change their buying patterns, or if we incur higher parts replacement or service costs. Because we sell a limited number of light source systems, the precise timing for recognizing revenue from an order may have a significant effect on our total
revenue for a particular period. As is the practice in our industry, our customers may cancel or reschedule orders with little or no penalty. Orders expected in one quarter could shift to another period due to changes in the anticipated timing of
our customers purchase decisions or rescheduled delivery dates requested by our customers. Our operating results for a particular quarter or year may be adversely affected if our customers cancel or reschedule orders, or if we cannot fill
orders timely due to unexpected delays in manufacturing, testing, shipping, or product acceptance or due to an unexpected material surge in demand. Our light source systems used in a production environment generate installed base product revenue
based on system usage, which may also vary period to period. Additionally, we may be required to defer revenue associated with contracts that contain multiple deliverables.
We manage our expense levels based, in large part, on expected future revenue. As a result, if our actual revenue decreases below the level we expect, or we are not successful in aligning our
manufacturing cost structure with decreasing production levels, our operating results will be adversely affected. As a result of these or other factors, we could fail to achieve our expectations as to future revenue, gross profit and gross margin,
operating income, net income, earnings per share, and cash flows. Our failure to meet the performance expectations set and published by external sources could result in a sudden and significant drop in the price of our stock, particularly on a
short-term basis, and could negatively affect the value of any investment in our stock.
Our business depends on the
semiconductor and the semiconductor capital equipment industries, which are volatile and unpredictable.
We derive the
majority of our revenue from our lithography tool manufacturer customers who, as original equipment manufacturers (OEMs), incorporate our light source systems in photolithography tools that they sell to semiconductor manufacturers, or
chipmakers, and from our chipmaker customers who purchase installed base products directly from us in support of their light source systems. Like us, our OEM customers depend on market demand for their products from the chipmakers. This market
demand can be volatile and unpredictable and can affect our ability to accurately predict future revenue and, therefore, our ability to manage our future expense levels. When cyclical fluctuations result in lower than expected revenue levels,
operating results may be adversely affected and cost reduction actions may be necessary in order for us to remain competitive and financially stable. During a down cycle or slowdown, we must adjust our cost and expense structure to prevailing market
conditions while maintaining our longer term strategies and motivating and retaining our key employees. In contrast, during periods of rapid growth, we must quickly increase manufacturing capacity and personnel to meet our customers needs. We
can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. We are not able to predict with any certainty the duration of any industry cycle or the timing or order of magnitude of any recovery from a
down cycle or slowdown.
Downturns in the semiconductor industry often result in decreases in demand for semiconductor
manufacturing equipment, including the photolithography tools that our OEM customers produce. Downturns in the semiconductor industry have generally had severe effects on the demand for semiconductor manufacturing equipment and to a lesser extent,
the associated installed base products. Fluctuating levels of investment by chipmakers and resulting pricing volatility will continue to materially affect our aggregate bookings, revenue and operating results. Even during periods of reduced revenue,
we believe we must continue to invest in research and
17
development and maintain extensive ongoing worldwide customer support capabilities to meet our customers needs and to remain competitive. Continued spending to further these objectives may
temporarily harm our financial results. Semiconductor industry downturns and slowdowns will likely continue to adversely affect our business, financial condition and operating results. While revenue from installed base products has grown as a
percentage of our total revenue, we continue to derive a significant percentage of our revenue from the sales of light source systems. Market conditions in the semiconductor industry and our OEM customers production efficiency can cause them
to expand or reduce their orders for new light source systems as they try to manage their inventories and production requirements. We continue to work closely with our OEM customers to better understand these issues. However, we cannot guarantee
that we will be successful in understanding our OEM customers inventory management or production requirements or that our OEM customers will not build up an excess inventory of light source systems. If our OEM customers retain an excess
inventory of light source systems, our revenue could be reduced in future periods as the excess inventory is utilized, which could adversely affect our operating results, financial condition and cash flows. If our OEM customers demand shorter
product lead times to improve their inventory and cash positions, our inventory management and cash position may be negatively affected, which may adversely affect our operating results, financial condition and cash flows.
Our EUV sources are still under development and not yet capable of supporting the commercial production of integrated circuits; Our
EUV sources could fail to meet customer specifications or not be delivered on time.
We are investing significant
financial and other resources to develop EUV source technology for chip manufacturing. These expenditures are reflected in our research and development expenses in our consolidated statements of operations, as well as inventory and property, plant
and equipment in our consolidated balance sheets.
As of December 31, 2012, we have shipped, received customer acceptance
and recorded revenue for six EUV 3100 pilot sources. We also received orders for our next generation EUV 3300 sources. We currently record revenue associated with EUV sources when customer acceptance is received equal to amounts that are fixed and
determinable at the date of acceptance.
Our EUV sources are still under development and not yet capable of supporting the
commercial production of integrated circuits. The technology underlying EUV is extremely complex, and we have experienced some delays that have put us behind schedule in our EUV source development. We may not be able to introduce commercial EUV
systems on time, or at all. If we are not able to meet customer specifications, or have reliability or performance problems, or if the pilot sources and eventually commercial systems do not meet customer specifications or are not introduced on time,
or if our inventory balances exceed the net realizable value under the related contracts, or if a competitors source is selected over our source, we may experience any or all of the following: the need to record impairment charges to our
inventory and/or property, plant and equipment, reduced orders, order cancellations, higher manufacturing costs, delays in acceptance of and payment for new products, product rejections, and additional service and warranty expenses. These risks
could also damage our reputation among the initial adopters of EUV source technology and limit our ability to penetrate the market. For example, we have entered into a supply agreement for EUV sources with ASML, one of our significant customers for
DUV light sources. Significant setbacks in our EUV program, or disagreement with ASML regarding its specifications for commercial systems, could impact the amount and timing of purchases of DUV light sources by ASML. Any of these risks could have a
material adverse effect on our operating results, financial condition and cash flows.
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A significant percentage of our revenue is derived from sales to a limited number of
customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, or delay or default on payments, we may experience material adverse effects on our operating results, financial condition and cash flows.
ASML and Nikon, two large companies that dominate the photolithography tool business and Hynix and Samsung, two of our
chipmaker customers that purchase our installed base products, accounted for the following percentages of our revenue during the periods indicated:
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Years Ended December 31,
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2012
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2011
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2010
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ASML
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23
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%
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35
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%
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30
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%
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Nikon
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13
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%
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11
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%
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15
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%
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Hynix
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11
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%
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8
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%
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8
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%
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Samsung
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11
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%
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10
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%
|
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10
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%
|
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Total
|
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58
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%
|
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|
64
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%
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63
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%
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We expect that sales to these customers will continue to account for a substantial portion of our revenue
in the foreseeable future. None of our customers are obligated to purchase a minimum number of our products in the aggregate or during any particular period. We can provide no assurance that any of our customers will continue to purchase our
products at past or current levels. Sales to any of these customers may be affected by many factors, some of which are beyond our control. These factors include:
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changes in global economic or market conditions affecting the semiconductor or the photolithography tool industries;
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our ability to develop and introduce new products, including EUV sources, that meet a customers needs and specifications;
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a change in a customers competitive position in its industry;
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a customer experiencing production problems or disruption for a variety of reasons, including but not limited to work stoppages, terrorism, political
turmoil, fire, earthquake, energy shortages, flooding or other natural disasters;
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a decision to purchase light sources, silicon crystallization tools or other products from other suppliers;
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a change in a customers production or utilization rate; and
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a decline in a customers financial condition.
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These companies accounted for the following percentages of our total accounts receivable at the dates indicated:
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|
|
December 31,
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|
|
2012
|
|
|
2011
|
|
ASML
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|
|
4
|
%
|
|
|
22
|
%
|
Nikon
|
|
|
15
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%
|
|
|
15
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%
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Hynix
|
|
|
18
|
%
|
|
|
13
|
%
|
Samsung
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|
|
6
|
%
|
|
|
5
|
%
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|
|
|
|
|
|
|
|
|
Total
|
|
|
43
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%
|
|
|
55
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%
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|
|
|
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|
We believe there is limited credit risk exposure for us with these companies who continue to demonstrate
sound creditworthiness. However, our ability to generate future revenue and collect accounts receivable from them is dependent on their ongoing financial condition and liquidity.
19
The loss of any significant business from, or production problems or disruption due to
natural disasters for, any one of these customers may have a material adverse effect on our operating results, financial condition and cash flows.
The majority of our revenue is derived from selling our light source systems and supporting the installed base of light source systems being used in production.
We expect sales of our light source systems, including KrF and ArF systems, and the products in support of the installed base of light
source systems to continue to account for a majority of our revenue in the near term. Continued market acceptance of our light source systems and installed base products is, therefore, critical to our future success. The rate at which chipmakers
adopt light sources may vary, for reasons including:
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performance of ArF immersion-specific resists;
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potential shortages of specialized materials used in DUV optics;
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the productivity of double-patterning ArF lithography tools;
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our ability to develop and introduce an EUV source that meets customer specifications and our customers and chipmakers adoption of our EUV
technology;
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consolidation of chipmakers; and
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the level of demand for chips with ever-smaller feature sizes.
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We cannot guarantee that these factors can or will be overcome or that the demand for our light source systems and installed base
products will not be materially reduced. The demand for our light source systems and installed base products, and therefore our operating results, financial condition and cash flows could be adversely affected by a number of factors, including:
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a decline in demand for our customers photolithography tools;
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a decline in chipmaker light source utilization rates or retirement of light sources in our installed base;
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a failure to achieve continued market acceptance of our products;
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a failure to manage customer satisfaction, product reliability, or maintain the effectiveness of direct field support;
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a failure to release enhanced versions of our products on a timely basis or to successfully develop and introduce EUV sources that meet customer
specifications;
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a failure to meet certain performance specifications on EUV sources;
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a deterioration in global economic conditions;
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the introduction of one or more improved versions of light sources by our competitors; and
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technological changes that we are unable to address with our products.
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We depend on a few key suppliers for purchasing components and subassemblies that are included in our products.
We purchase a limited number of components and subassemblies included in our light source systems and installed base products from a
single supplier or a small group of suppliers. There may also be single source suppliers that we are not aware of for components of our purchased subassemblies. To reduce the risk associated with these suppliers, we have supply agreements in place
and carry a strategic inventory of these components. Strategic inventories are managed as a percentage of future demand. In some cases, we procure components through distributors with access to multiple suppliers to minimize the risk of
single-sourced components. In
20
addition, we contract for the manufacture of various subassemblies of our products and depend on our contract manufacturers to deliver to our required specifications, schedule, and quality
standards. Further, some of our suppliers have specialized in supplying equipment or manufacturing services to semiconductor equipment manufacturers and, therefore, are susceptible to industry fluctuations and subject to the same risks and
uncertainties as we are regarding the ability to respond to changing market and global economic conditions. Because many of these suppliers reduce their workforce in an industry downturn and rehire in an upturn, they may not be able to meet our
requirements or respond quickly enough as an upturn begins and gains momentum. Due to the nature of our product development requirements, these key suppliers must rapidly advance their own technologies and production capabilities in order to support
the introduction schedule of our new products. These suppliers may not be able to provide new modules and subassemblies when they are needed to satisfy our manufacturing and delivery schedules. These suppliers may also be adversely affected by
economic conditions, which could result in a lack of available capital and limit their ability to access such capital, if needed, to fund their operations. In addition, if we cannot purchase enough of these materials, components or subassemblies, or
if these items do not meet our quality standards, there could be delays or reductions in our product shipments, which may have a material adverse effect on our business, operating results, financial condition and cash flows.
We depend on the introduction of new products for our success, and we are subject to risks associated with rapid technological
change.
The development, introduction and support of new products in a competitive business environment are complex
processes and could be expensive. New or improved products may lead to higher costs and perhaps reduced profits. Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances
which enable such processes. We believe that our future success depends in part upon our ability to develop, manufacture, and support new light source products with improved capabilities on a timely basis and to continue to enhance our existing
product and process capabilities. Due to the risks inherent in transitioning to new products, we must forecast accurate demand for new products while managing the transition from established products. After our chipmaker customers have built their
capacity to levels appropriate to meet existing demand, their demand for our light source products will depend, in part, on their sales forecasts, their estimates regarding the duration and magnitude of the current industry cycle and whether their
projected manufacturing process yields will enable ongoing investments at a suitable level of capacity. To provide our customers with more productive and lower cost of operation systems, our existing light source systems and their process
capabilities must be enhanced, and we must develop and manufacture new products, such as EUV sources, to continue to grow our business. We cannot guarantee that we will be able to grow our business. We may not be able to develop and introduce new
sources, products or enhancements to our existing products and processes in a timely or cost effective manner that satisfies customer needs or achieves market acceptance. Development of new sources, products and enhancements to existing products
represent significant investments of our resources, and there is no guarantee that we will realize a return on these investments. Further, we may not be able to effectively integrate new sources, products and applications into our current
operations. Any of these risks could have a material adverse effect on our operating results, financial condition and cash flows.
Current technologies that are still being developed and commercialized, such as EUV, and future technologies such as nano-imprint lithography and certain maskless lithography techniques may render our
existing light source systems and products obsolete. We must manage product transitions, as the introduction of new products could have a negative adverse effect on our sales of existing products.
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 determined that the carrying value of assets in the display product business required adjustments consisting of a write-down to inventory of $48.2 million to properly reflect lower of cost or
market and a $5.1 million impairment of equipment used in the manufacturing or research and development of display product tools. In addition, in the fourth quarter of 2012, we accrued expenses of $12.2 million relating to firm purchase commitments
for inventory and research and
21
development costs that will no longer be utilized. 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.
Global economic conditions
could affect our revenue and operating results.
A general weakening of, or declining corporate or consumer confidence
in, the global economy, or a reduction in corporate or consumer spending, could delay or significantly decrease purchases of our products by our customers, which are driven in part by indirect consumer demand for the electronic devices that contain
semiconductor chips. It could also decrease revenue from our installed base products by causing our chipmaker customers to reduce their usage rates. Our revenue and operating results will be affected by uncertain or changing economic and market
conditions including inflation, deflation, prolonged weak consumer demand or other changes which may affect the principal markets in which we conduct business. If economic or market conditions in the United States or other key global markets
deteriorate, we may experience material adverse effects on our business, operating results, financial condition and cash flows.
Adverse economic and market conditions could also harm our business by negatively affecting the parties with whom we do business,
including our business partners, our customers and our suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from us. As a result, allowances for doubtful accounts and write-offs of accounts
receivable from our customers may increase. In addition, our suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with the parts we need to manufacture our products.
We face competition in the DUV and EUV lithography market and could face additional competition if other competitors enter the
market.
Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. The
principal elements of competition in our markets are the technical performance characteristics of light source products and the operating efficiency of the system, which is based on availability, reliability, performance efficiency, cost of
ownership, and overall quality.
We currently have one DUV light source competitor, Gigaphoton. Gigaphoton is a wholly owned
subsidiary of Komatsu and is headquartered in Japan. Our customers have purchased products from Gigaphoton and have qualified Gigaphotons DUV light source systems for use with their products. Additionally, Gigaphotons DUV light sources
have been qualified by a number of chipmakers in Europe, Japan, other regions in Asia and the United States, and Gigaphoton has an installed base of light source systems at chipmakers in these regions. We also face competition from Gigaphoton and
Ushio, also headquartered in Japan, in the development of EUV source technology.
Future competitors may develop systems and
products that are competitive to our products. This competition may affect our ability to sell our products. Larger companies with substantially greater resources, such as other manufacturers of industrial light sources for advanced lithography, may
attempt to sell competitive products to our customers. Potential competitors may also be attracted to our growing installed base of DUV light sources which represents a significant revenue stream for us, and they may attempt to supply replacement
parts to our customer base. If any existing or future competitors gain market acceptance, we could lose market share and our growth could slow or decline, which could have a material adverse effect on our business, operating results, financial
condition and cash flows.
22
We must effectively manage changes in our business.
In order to respond to the business cycles of the semiconductor industry and overall economic conditions, we must constantly adjust our
business plan and cost structure. As the semiconductor equipment industry cycle moves between contraction and growth and the condition of the global economy changes, we need to:
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quickly adapt to changing sales and marketing channels;
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effectively manage our inventory levels;
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|
closely manage our global operations and cost structure;
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|
accurately forecast demand and meet production schedules for our products;
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|
differentiate our products from those of competitors, meet customer performance specifications, and drive efficiencies;
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|
allocate resources including key personnel between the development of new products and the enhancement of existing products, as most appropriate and
effective for future growth;
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|
improve our product reliability through quality control, order fulfillment and customer support capabilities;
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|
attract, train, retain and motivate key personnel; and
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|
|
improve our processes and other internal management systems.
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If we fail to effectively manage changes in our business, we may experience a material adverse effect on our operating results, financial
condition and cash flows.
Any failure to manage our inventory levels and our inventory controls at our widely dispersed
operations could adversely affect our business, operating results, financial condition and cash flows.
We need to
continually evaluate and monitor the adequacy of our inventory levels. We also need to closely manage the levels of obsolete and excess parts. We have inventory located at warehouses at our corporate office in the United States and at bonded
warehouses and customer locations throughout Asia, Europe and North America. The success of our business depends to a significant degree on our ability to maintain or increase the sales of our products in the markets in which we do business. If we
overestimate demand for our products or the overall condition of the global economy, we could experience excess inventory levels and use unnecessary cash. As a result of such excess inventory, we may be required to significantly write down the value
of our inventory, which would negatively affect our operating results and financial condition.
We could also sustain a loss
in the event of a catastrophe in any of the locations where we maintain our inventory if our insurance is inadequate to cover such losses. We will be required to continually analyze the sufficiency of our inventory distribution systems in order to
support our operations. We may not adequately anticipate all of the changing demands that will be imposed on these systems. An inability or failure to update our internal inventory distribution systems or procedures, as required, could have a
material adverse effect on our business, operating results and financial condition.
International operations expose us
to foreign currency exchange rate fluctuations for all foreign currencies in which we do business and we may be materially adversely affected by these fluctuations.
We have international subsidiaries that operate in foreign currencies. All of our international subsidiaries purchase inventory in U.S. Dollars from either our manufacturing facility in San Diego or from
our South Korean subsidiary and, in many cases, resell these products to their customers in their local currency. In addition, we purchase certain inventory in Euros. We hedge the foreign currency risks associated with these intercompany
transactions by entering into forward contracts. Although we enter into such forward contracts, they may not be
23
adequate to eliminate the risk of foreign currency exchange rate exposures. Specifically, there is concern regarding the overall stability of the Euro and the future of the Euro as a single
currency given the diverse economic and political circumstances in individual Eurozone countries. Potential negative developments and market perceptions related to the Euro could adversely affect the value of our Euro-denominated assets, as well as
those of customers and suppliers.
We have taken steps to mitigate our foreign currency exchange risks; however, these steps
may fail to sufficiently hedge or otherwise manage our foreign currency risks properly and could have a material adverse effect on our operating results and financial condition.
International operations also expose us to currency fluctuations as we translate the financial statements of our international
subsidiaries to U.S. Dollars, and a significant strengthening of the U.S. Dollar relative to international currencies would increase the effective prices our customers pay for our products, potentially reducing demand for them.
Failure to effectively maintain our direct service support operations could have a material adverse effect on our business.
We believe it is critical for us to provide direct, quick and responsive support to our chipmaker and direct customers
who use our light source products in their photolithography systems. It is also essential to have well trained field service engineers to provide the high level of support that our customers have come to expect. Accordingly, we have an ongoing
effort to develop our direct support system with service locations in China, Europe, Japan, Singapore, South Korea, Taiwan and the United States. This requires us to do the following:
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recruit and train qualified support service personnel; and
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|
maintain effective and highly trained resources who provide support to our customers in various countries.
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We may not be able to attract and train qualified personnel to maintain our direct support operations successfully. Further, we may incur
significant costs in providing this support. Failure to implement our direct support operation effectively could harm our operating results, financial condition and cash flows.
We are dependent on our suppliers and manufacturing facilities to assemble and test our products.
Operations at our primary manufacturing facility in San Diego and refurbishment facility in South Korea and operations at our suppliers
are subject to disruption for a variety of reasons, including, but not limited to, work stoppages, terrorism, political turmoil, fire, natural disasters, or energy shortages. Such disruptions could cause delays in shipments of our products to our
customers. Our San Diego facility, where we build our light source systems and replacement parts, poses the greatest risk. We provide no assurance that alternate production capacity would be available if a major disruption were to occur or that, if
it were available, it could be obtained on favorable terms, or at all. Such disruption could result in cancellation of orders or loss of customers, which would have a material adverse effect on our operating results, financial condition and cash
flows.
We depend on key personnel, particularly management and technical personnel, who may be difficult to attract and
retain.
We are highly dependent on the services of many key employees in various areas, including:
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|
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research and development;
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|
direct service support;
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24
In particular, there are a limited number of experts in DUV and EUV source technology, and we require highly skilled hardware and
software engineers. Competition for qualified personnel is intense and we cannot guarantee that we will be able to continue to attract and retain qualified personnel. We believe our future growth and operating results will depend on the following:
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|
|
the continued service of sufficient staff within the areas of research and development, engineering, sales and marketing, direct service support,
manufacturing, and management;
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|
our ability to attract, train and retain highly-skilled key personnel; and
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the ability of key management to continue to expand, motivate and manage our employee base.
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We grant equity awards to key employees. Stock options, performance-based restricted stock unit awards and restricted stock unit awards
may not be viewed by key employees as a sufficient financial incentive during periods when stock price volatility could cause our stock price to fall, reducing the effectiveness of such awards as a means to retain and incentivize these employees. If
we are unable to hire, train and retain key personnel as required, our operating results, financial condition and cash flows could be adversely affected.
Economic, political, regulatory and other events in geographic areas where we have significant revenue or operations could interfere with our business.
We serve a global market and a large portion of our revenue is derived from customers outside of the United States. We expect our
international sales to continue to account for the majority of our total revenue. In order to support our foreign customers, we maintain a refurbishment facility in South Korea as well as field support facilities in China, Japan, the Netherlands,
Singapore and Taiwan.
Various factors may inhibit our ability to manage our operations to address and support our global
customers effectively. Further, our investments in these types of activities may not be viably competitive in the global market, or we may not be able to meet the support or manufacturing levels required by our global customers. Additionally, we are
subject to risks inherent in doing business globally, including but not limited to:
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|
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fluctuations in exchange rates and currency controls;
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|
|
political turmoil and global economic instability;
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|
imposition of trade barriers and restrictions, such as the Foreign Corrupt Practices Act, including changes in tariff and freight rates, foreign
customs and duties;
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|
difficulty in coordinating our management and operations in various countries;
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difficulties in staffing and managing foreign subsidiary and branch operations;
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limited intellectual property protection in some countries;
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potentially adverse tax consequences in some countries;
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|
the possibility of challenging accounts receivable collections;
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|
the risk of business interruption as a result of natural disasters or supply chain disruptions;
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|
the effect of acts of terrorism and war;
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|
the burdens of complying with foreign laws, including regulatory structures and unexpected changes in regulatory environments; and
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|
distribution costs, disruptions in shipping or freight transportation.
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25
A significant portion of our customer base is located in Asia. Political turmoil, economic
problems and currency fluctuations affecting Asia could increase our risk in that region. It has not been difficult for us to comply with United States export controls; however, changes to these controls in the future could make it more difficult or
impossible for us to export our products to many countries. There are certain risks for which we purchase limited or no insurance, including earthquake risk. Any of these vulnerabilities could have a material adverse effect on our business,
operating results, financial condition and cash flows.
Currently, eleven of our international employees are members of a
labor union; however, none of our United States employees are members of a labor union. If a greater number of our employees decide to join a union, our cost of doing business could increase, and we could experience contract delays, difficulty in
adapting to a changing regulatory and economic environment, cultural conflicts between unionized and non-unionized employees, strikes and work stoppages, any of which could have a material adverse effect on our business, financial condition and
operating results.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property
rights. These types of claims could seriously harm our business or require us to incur significant costs.
We believe
our success and ability to compete depend in part upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to
protect our proprietary rights. We own and have numerous patents pending in the United States and various foreign countries covering certain aspects of technology related to our light source systems. Patents related to our source technologies and
piezoelectric techniques will expire at various times through 2031.
Our pending patent applications and any future
applications might not be approved. Our patents may not provide us with a competitive advantage and may be successfully challenged by third parties. In addition, third parties patents might have an adverse effect on our ability to do business.
Due to cost constraints, we do not seek international patent protection for all inventions that are covered by United States patents and patent applications. As a result, we do not have foreign patent protection for some of our inventions.
Additionally, laws of some foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of
the United States Therefore, the likelihood of piracy of our technology and products is greater in these countries. Further, third parties might independently develop similar products, duplicate our products, or design around patents that are
granted to us.
Other companies or persons may file or have filed patent applications that are similar or identical to ours.
As a result, we may have to participate in appropriate proceedings in the courts or the patent offices to determine the priority of inventions. These proceedings may determine that these third-party patent applications have priority over our patent
applications. Loss of priority in these interference proceedings could result in substantial cost to us and loss of rights.
We also rely on the following to protect our confidential information and our other intellectual property:
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trade secret protection;
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|
|
employee nondisclosure agreements;
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|
|
third-party nondisclosure agreements; and
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|
other intellectual property protection methods.
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26
However, we may not be successful in protecting our confidential information or intellectual
property, particularly our trade secrets, because third parties may:
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|
|
develop substantially the same proprietary information or techniques independently;
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|
|
|
gain access to our trade secrets from unrelated third parties and/or without obligation of confidentiality; or
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|
disclose our technology following expiration of their confidentiality obligation.
|
We may be subject to patent litigation to enforce patents issued to us or defend ourselves against claimed infringement by our
competitor or any other third party.
Third parties have notified us in the past, and may notify us in the future, that
we are infringing their intellectual property rights. Also, we have notified third parties in the past, and may notify them in the future, that they may be infringing our intellectual property rights. In the future, patent litigation may result due
to a claim of infringement by our competitor or any other third party or may be necessary to enforce patents issued to us. Any such litigation could result in substantial cost to us and diversion from our primary business efforts, which would have
an adverse effect on our business, financial condition and operating results. Furthermore, our customers and the end-users of our products might assert other claims for indemnification that arise from infringement claims against them. If these
assertions are successful, it may have a material adverse effect on our business, operating results, financial condition and cash flows. Instead of litigation, or as a result thereof, we may seek a license from third parties to use their
intellectual property. However, we may not be able to obtain a license. Alternatively, we may design around the third partys intellectual property rights or we may challenge these claims in legal proceedings. Any adverse determination in a
legal proceeding could result in one or more of the following:
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|
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loss of our proprietary rights;
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|
|
exposure to significant liabilities by other third parties;
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|
|
a requirement that we get a license from third parties on terms that are not favorable to us or not available at all; or
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an injunction that prohibits us from manufacturing or selling our products.
|
Any of these actions could be costly and would divert the efforts and attention of our management and technical personnel, which could
have a material adverse effect on our business, operating results, financial condition and cash flows.
If our goodwill,
amortizable intangible assets or property, plant and equipment become impaired, we may be required to record a significant charge to earnings.
We review our amortizable intangible assets, which are primarily patents, and our property, plant and equipment, for impairment when events or changes in circumstances indicate that their carrying value
may not be recoverable. Goodwill is also tested for impairment at least annually and more often if certain triggering events or circumstances occur. Factors that may be considered to be a change in circumstances that would indicate the carrying
value of our goodwill, amortizable intangible assets or property, plant and equipment may not be recoverable include reduced future cash flow estimates for our company, a decline in our stock price and market capitalization, slower growth rates in
our industry and adverse global economic conditions. If, as a result of our impairment test, it is determined that our goodwill, amortizable intangible assets or property plant and equipment is impaired, we may be required to record a significant
write down in our financial statements during the period in which such impairment is determined, which may have a material adverse effect on our operating results. For example, in the fourth quarter of 2012, lack of demand for our display products
triggered an asset impairment test
27
associated with our display products business. The impairment test resulted in a $5.1 million impairment of equipment used in the manufacturing or research and development of display product
tools. 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.
Our investments in marketable securities are subject to market, interest and credit risk that may reduce their value.
The value of our investments in marketable securities may be adversely affected by changes in interest rates,
downgrades in the creditworthiness of bonds we hold, turmoil in the credit markets and financial services industry and by other factors which may result in other than temporary declines in the value of our investments. Each of these events may cause
us to record charges to reduce the carrying value of our investment portfolio, which could have a material adverse effect on our operating results and financial position.
Changes in our effective tax rate may have a material adverse effect on our operating results, financial position and cash flows.
Our future effective tax rate may be adversely affected by a number of factors including:
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changes in available tax credits, particularly the federal research and development tax credit;
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the resolution of issues arising from tax audits with various tax authorities;
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the jurisdictions in which profits are determined to be earned and taxed;
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changes in the valuation of our deferred tax assets and liabilities;
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adjustments to estimated taxes upon finalization of various tax returns;
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increases in expenses not deductible for tax purposes;
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changes in tax laws or the interpretation of such tax laws, such as the Internal Revenue Service (IRS) Code Section 199 manufacturing
deduction which currently provides a tax benefit; and
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the repatriation of non-U.S. earnings for which we have not previously provided for United States taxes.
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An adverse change in our future effective tax rate could in turn, adversely affect our operating results, financial position and cash
flows.
Our worldwide income tax provisions and other tax accruals may be insufficient if any taxing authorities assume
taxing positions that are contrary to our positions and those contrary positions are sustained.
We are subject to
taxation in the United States and in various states and foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and for our accruals for state, federal and international income taxes together
with transaction taxes such as sales tax, value added tax, and goods and services tax. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Although we believe that our approach to
determining our worldwide income tax provisions and other tax accruals is consistent with prevailing legislative interpretation, no assurance can be given that the final tax authority review of these matters will agree with our determinations. Such
differences could have a material effect on our income tax provisions or benefits, or other tax accruals, in the period in which such determination is made, and consequently, on our results of operations for such period.
From time to time, we are audited by various state, federal and tax authorities of the countries in which we operate. Our tax years 2009
and forward are subject to examination by the IRS, our tax years 2000 and forward are subject to examination by material state jurisdictions, and our tax years 2004 and forward are subject to
28
examination by material foreign jurisdictions. Several of our subsidiaries are currently under audit or appeal. No outcome for a particular audit can be determined with certainty prior to the
conclusion of the audit and any appeals process.
As each audit progresses and is ultimately concluded, adjustments, if any,
will be recorded in our financial statements from time to time in light of prevailing facts based on our and the taxing authoritys respective positions on any disputed matters. We provide for potential tax exposures by accruing for uncertain
tax positions based on judgment and estimates including historical audit results. If the reserves are insufficient or we are not able to establish a reserve under GAAP prior to completion or during the progression of any audits, there could be an
adverse impact on our financial position and results of operations when an audit assessment is made.
It is reasonably
possible that the examination phase of our current audits or appeals 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 our results of operations. In addition, our external costs of contesting and settling any dispute with the tax authorities could be substantial and adversely impact our financial position and results of operation.
We may not have sufficient cash to fund our current operations and future growth plans.
We believe that our cash resources remain sufficient for our planned operations; however, if global economic conditions deteriorate, our
business conditions worsen, our plans change or other unanticipated events occur, we may need to raise additional cash through the establishment of financing facilities or the sale of equity or debt securities to fund our operations. Depending on
market conditions, it could be difficult for us to raise the additional cash needed without incurring significant dilution of our existing stockholders or agreeing to significant restrictions on our ability to operate as currently planned. If we
were unable to raise additional cash in such circumstances, we could be required to reduce costs through the delay, reduction or curtailment of our operating plan, including reductions in our global workforce or other cost reduction actions, any of
which could have a material adverse effect on our operating results, financial condition or cash flows.
At December 31,
2012, we have $42.1 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.
The integration and operation of a business acquisition may disrupt our business and create additional expenses, and we may not achieve the anticipated benefits of the acquisition. We may also
acquire other businesses or enter new markets that will involve numerous risks. We may not be able to address these risks successfully without substantial expense, delay or other operational and financial challenges.
The risks involved with acquisitions, mergers, and joint ventures or entering a new market include the following:
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diversion of managements attention and resources to integrate the new business opportunity;
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failure to retain key personnel;
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customer dissatisfaction or performance problems with the acquired company or new product in a new market;
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costs associated with acquisitions and joint ventures and the integration of acquired operations;
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costs associated with developing, marketing, introducing and supporting a new product in a new market;
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failure to commercialize purchased technologies;
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29
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ability of the acquired companies, joint ventures or new markets to meet their financial projections;
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assumption of unknown liabilities or other unanticipated events or circumstances; and
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compliance with the Sarbanes-Oxley Act of 2002, new SEC regulations, NASDAQ Stock Market rules and new accounting standards as they relate to the new
company or joint venture.
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The success of an acquisition assumes certain synergies and other benefits. We
cannot assure you that these risks or other unforeseen factors will not offset the intended benefits of the acquisition, in whole or in part. The magnitude, timing and nature of any future acquisitions or investments will depend on a number of
factors, including the availability of suitable candidates, the negotiation of acceptable terms, our financial capabilities and general economic and business conditions. Financing for future transactions would result in the utilization of cash,
incurrence of debt, issuance of stock or some combination of the three. Further, any business that we acquire, any joint venture that we form, or new market we may enter may not achieve anticipated revenue or operating results and the costs of such
activity may have a material adverse effect on our operating results, financial condition or cash flows.
We may
experience difficulties with our enterprise resource planning (ERP) system or other critical information systems that we use for the daily operations of our business. System failure, malfunction, security breaches due to cyber attacks by
third parties or loss of data contained in these information systems may result in disruption of our operations and result in our inability to process transactions, and this could adversely affect our financial results.
System failure, malfunction, security breaches due to cyber attacks by third parties or loss of data housed in our critical information
systems could disrupt our ability to timely and accurately process transactions and produce key financial reports, including information on our operating results, financial position and cash flows. Any disruptions or difficulties that may occur in
connection with our ERP system or other critical systems could also adversely affect our ability to complete important business processes such as the evaluation of our internal controls and attestation activities pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002. We also regularly upgrade our information systems hardware and software to better meet the information requirements needed to effectively manage our business. If we encounter unforeseen problems with regard to our ERP
system or other critical information systems, including those encountered during system upgrades, our business could be adversely affected.
Compliance with changing regulations and standards for accounting, corporate governance and public disclosure may result in additional expenses.
Changing regulatory requirements for corporate governance and public disclosure including SEC regulations, NASDAQ Stock Market rules, and
the Financial Accounting Standards Boards accounting standards requirements and the expected future requirement to transition to or converge with international financial reporting standards are creating uncertainty and additional complexities
for publicly held companies such as ours. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related
provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as say on pay and proxy access. On August 22, 2012 the SEC adopted new requirements under the Dodd-Frank Act for
companies that use certain minerals and metals known as conflict minerals in their products, whether or not these products are manufactured by third parties. These requirements will require companies to annually assess whether a conflict mineral is
necessary to the functionality or production of any of their products. If so, companies must perform due diligence, disclose in SEC filings and prepare specific reports regarding whether or not such minerals originate from the Democratic Republic of
Congo and adjoining countries. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of semiconductor devices, including our products. In addition, we will
incur additional costs to comply with the disclosure requirements, including costs related to determining the source of
30
any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our
products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict
mineral free.
Stockholder activism, the current political environment, financial reform legislation and the current high
level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact (in ways we cannot currently anticipate) the manner in which we
operate our business. To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with such compliance programs and rules and all other evolving standards. These
investments may result in increased general and administrative costs and a diversion of our managements time and attention from strategic revenue generating and cost management activities.
We are dependent on air transport to conduct our business and disruption of domestic and international air transport systems could
adversely affect our business.
We depend on regular and reliable air transportation on a worldwide basis for many of
our routine business functions. If civil aviation in the United States or abroad is disrupted by terrorist activities or security responses to the threat of terrorism, regulatory compliance issues, weather or atmospheric conditions or for any other
reason, our business could be adversely affected in the following ways:
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supplies of raw materials and components for the manufacture of our products or our customers products may be disrupted;
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we may not be able to deliver our products to our customers in a timely manner;
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we may not be able to provide timely service of or support for installed light sources for chipmakers; and
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our sales and marketing efforts may be disrupted.
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We are subject to many standards and regulations of foreign governments and, even though we intend to comply, we may not always be in compliance with these rules, or we may be unable to design or
redesign our products to comply with these rules.
Many foreign government standards and regulations apply to our
products and these standards and regulations are frequently being amended. Although we intend to meet all foreign standards and regulations, our products may not comply with all of them. Further, it might not be cost effective for us to redesign our
products to comply with these foreign government standards and regulations. If we are unable to design products to fully comply with foreign standards, a failure to comply could have a material adverse effect on our business.
Our chipmaker customers prolonged use of our products in high volume production may not produce the results they desire and,
as a result, our reputation and that of our customers who supply photolithography tools to the chipmakers could be damaged in the semiconductor industry.
Over time, our light source products may not meet our chipmaker customers production specifications or operating cost requirements after the light source has been used for a long period in high
volume production. If any chipmaker cannot successfully achieve or sustain their volume production using our light sources, our reputation could be damaged with them and with lithography tool manufacturers. This would have a negative effect on our
business.
Our operations are subject to environmental and other government regulations that may expose us to
liabilities for noncompliance.
We are subject to federal, state and local regulations, such as regulations related to
the environment, land use, public utility utilization and the fire code, in connection with the storage, handling, discharge and disposal of
31
substances that we use in our manufacturing process and in our facilities. We believe that our activities comply with current government regulations that are applicable to our operations and
current facilities. We may be required to purchase additional capital equipment or meet other requirements to comply with these government regulations in the future, if they change. Further, these government regulations may restrict us from
expanding our operations. Adopting measures to comply with changes in the government regulations, our failure to comply with environmental and land use regulations, or restrictions on our ability to discharge hazardous substances, could subject us
to future liability or cause our manufacturing operations to be reduced or stopped. This could have a material adverse effect on our business, operating results, financial condition and cash flows.
Our products are subject to potential product liability claims if personal injury or death results from their use.
We are exposed to significant risks for product liability claims if personal injury or death results from the use of
our products. We may experience material product liability losses in the future. We maintain insurance against product liability claims; however, our insurance coverage may not continue to be available on terms that are acceptable to us. This
insurance coverage also may not adequately cover liabilities that we incur. Further, if our products are defective, we may be required to recall or redesign these products. A successful claim against us that exceeds our insurance coverage level, or
any claim or product recall that results in adverse publicity against us, could have a material adverse effect on our business, operating results, financial condition and cash flows.
Disputes may arise over the ownership of intellectual property resulting from our research and development activities that have
been partially funded by other parties.
In the past, we have occasionally received funds through research and
development arrangements with third parties to pay for a portion of our research and development costs associated with the design and development of specific products. Additionally, funds from lithography tool manufacturers and chipmaker customers
have been used to fund a portion of our source systems research and development efforts. In connection with providing these research and development services, we try to make contractually clear who owns the intellectual property that results from
such activities. Disputes over the ownership or rights to use or market the resulting intellectual property could arise between the funding organizations and us. Any dispute over ownership of the intellectual property we develop or have developed
could restrict our ability to market our products and have a material adverse effect on our business.
Trademark
infringement claims against our registered and unregistered trademarks would be expensive and we may have to stop using such trademarks and pay damages.
We have registered a number of trademarks including CYMER in the United States and in some other countries. We are also trying to register additional trademarks in the United States and in
other countries. These registrations in other countries, or any new registrations we may undertake in the United States, could be unsuccessful.
We use these trademarks in the course of our business and in advertising materials, which are distributed throughout the world. While we take precautions against trademark infringement before using our
trademarks in new markets, we may be subject to claims of trademark infringement. The process of negotiating a settlement or coexistence agreement to allow us to continue using our trademarks in a particular market could be expensive or distract us
from our primary business efforts, potentially adversely affecting our financial condition or operations. Furthermore, if we must undertake negotiations, and the negotiations are ultimately unsuccessful, we would either need to discontinue using the
trademarks in the new market, risk facing litigation or potentially pay damages. Even if we ultimately prevail, litigation could be expensive or distract us from our primary business efforts.
32
The price of our common stock has fluctuated and may continue to fluctuate widely.
The price of our common stock has historically been subject to fluctuations and could continue to fluctuate in
response to a variety of factors, including the risk factors contained in this report.
Various factors may significantly
affect the market price and volatility of our common stock, including:
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the market price of ASML stock;
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regulatory approval of the Merger, which could effect the closing date of the Merger;
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consummation of the Merger;
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the cyclical nature of the semiconductor industry;
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actual or anticipated fluctuations in our operating results, including our net income, revenue and product gross margins;
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conditions and trends in lithography and other technology industries;
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announcements of innovations in technology;
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new products offered by us or our competitors;
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developments of patents or proprietary rights;
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changes in financial estimates by securities analysts;
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global political, economic, and market conditions, including a recession or economic deterioration; and
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failure to properly manage any single or combination of risk factors listed in this section.
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Stock markets in the United States can experience extraordinary volatility. Severe price fluctuations in a companys stock have
frequently been followed by securities litigation. If such litigation were initiated against us, it may result in substantial costs and a diversion of managements attention and resources and, therefore, could have a material adverse effect on
our business, operating results, financial condition and cash flows.
Some anti-takeover provisions contained in our
articles of incorporation and bylaws, as well as provisions of Nevada law and our executive employment contracts, could impair a takeover attempt.
Our articles of incorporation and bylaws contain provisions which could have the effect (separately, or in combination) of rendering more difficult or discouraging a merger, acquisition or other change of
control deemed undesirable by our Board of Directors. These include provisions:
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authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;
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limiting the liability of, and providing indemnification to, our directors and officers;
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requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for
election to our Board of Directors;
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controlling the procedures for conduct of stockholder meetings and election and removal of directors; and
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specifying that stockholders may not take action by written consent.
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These provisions, alone or together, could deter or delay hostile takeovers, proxy contests and changes in control or management.
33
As a Nevada corporation, we are subject to Nevada law. Nevada law does not grant
stockholders the authority to call a special meeting unless the corporations articles of incorporation or bylaws otherwise provide; neither our articles of incorporation nor our bylaws contain such a provision. Nevada law may also limit the
ability of certain stockholders to engage in certain business combinations with us and may limit the voting rights of stockholders who acquire 20% or more of our outstanding shares. Either limitation could discourage or increase the difficulty of an
attempted merger, acquisition or other change of control.
Additionally, we have employment agreements with certain officers
under which severance payments would become payable in the event of specified terminations without cause or terminations under certain circumstances after a change in control. If such persons were terminated without cause or under certain
circumstances after a change of control, and the severance payments under the current employment agreements were to become payable, the officers would receive certain payments and other benefits which depend on the individual officers
employment agreement but generally include continued base salary and health insurance payments for a period of time, lump sum bonus payments and accelerated vesting of equity awards.
Any provision of our articles of incorporation, bylaws, employment agreements or Nevada law that has the effect of delaying or deterring
a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock in connection with such a transaction and also could affect the price that some investors are willing to pay for our
common stock.
Sales of additional common stock and securities convertible into our common stock may dilute the voting
power of current holders.
We may issue equity securities in the future the terms and rights of which are superior to
those of our common stock. Our articles of incorporation authorize the issuance of up to 5,000,000 shares of preferred stock. These are blank check preferred shares, meaning that our Board of Directors is authorized, from time to time,
to issue the shares and designate their voting, conversion and other rights, including rights superior, or preferential, to rights of already outstanding shares, all without stockholder consent. No preferred shares are outstanding, and we currently
do not intend to issue any shares of preferred stock. Any shares of preferred stock that may be issued in the future could be given voting and conversion rights that could dilute the voting power and equity of existing holders of shares of common
stock and have preferences over shares of common stock with respect to dividends and liquidation rights.
Item 1B.
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Unresolved Staff Comments
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None.
34
We conduct
our operations in both owned and leased properties. Our corporate headquarters and primary manufacturing facilities, as well as a leased warehouse facility, are located in San Diego, California. We also own a manufacturing facility in South Korea,
where we refurbish our discharge chamber assemblies for certain models of our DUV light sources. Additionally, we lease several domestic and international field service offices. We believe that our facilities are adequate to meet the needs of our
current business operations. At December 31, 2012, our principal leased and owned properties were as follows:
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Location
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Ownership
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Square
footage
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Primary Usage/Status
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San Diego, California (1)
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Owned
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265,000
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Manufacturing and administrative offices
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San Diego, California (1)
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Owned
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135,000
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Corporate headquarters, engineering, research facilities
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San Diego, California (2)
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Leased
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78,744
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Warehouse facility
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Pyongtaek-city, Kyonggi, Korea (3)
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Owned
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26,000
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Manufacturing, sales and administrative
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Santa Clara, California (2)
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Leased
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9,389
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Field service and sales office
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Hsin-Chu, Taiwan (2)
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Leased
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7,963
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Field service and sales office
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Kyunggi-do, Korea (1)
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Owned
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6,153
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Data products engineering office
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Gate City, Japan (2)
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Leased
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6,091
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Field service and sales office
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Pudong, Shanghai, China (2)
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Leased
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4,746
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Field service and sales office
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Singapore, Singapore (2)
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Leased
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3,315
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Field service and sales office
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Veldhoven, the Netherlands (2)
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Leased
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2,605
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Field service and sales office
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(1)
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Building and land owned by us.
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(2)
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We lease our facilities under operating lease agreements and have lease terms that expire at various dates through 2017. Additional information regarding these
operating leases is incorporated herein by reference to Note 13, Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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(3)
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Building owned by us. Land leased through December 2020.
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Item 3.
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Legal Proceedings
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Merger with ASML
On October 29, 2012, a putative shareholder class action complaint was filed against Cymer, the Cymer Board, ASML, Holdco, Merger Sub and Merger Sub 2 in the District Court of Clark County, Nevada,
captioned
Jerome v. Cymer, Inc. et al.,
Case No. A-12-671009-C (Eighth Judicial Dist. Clark County, Nevada), challenging the Merger and seeking, among other things, compensatory damages, attorneys and experts fees and injunctive
relief concerning the alleged breaches of fiduciary duty and to prohibit the defendants from consummating the Merger. The plaintiff subsequently amended the complaint on November 28, 2012.
The lawsuit generally alleges, among other things, that the Merger Agreement was reached through an unfair process, that the merger
consideration is inadequate, that the Merger Agreement unfairly caps the price of our common stock, that the Merger Agreements no solicitation provision and other deal protection devices have precluded other bidders from making
successful competing offers for us, and that the preliminary proxy statement/prospectus filed in connection with the Merger contains material misstatements and/or omissions. The lawsuit alleges that ASML aided and abetted the alleged breaches of
fiduciary duties.
On December 31, 2012, the parties entered into a memorandum of understanding to settle the lawsuit.
While the defendants believe that the lawsuit is without merit, in order to eliminate the burden, expense and uncertainties inherent in further litigation, the defendants have agreed, as part of the memorandum of understanding and without admitting
to the validity of any allegations made in the lawsuit, to make certain
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additional disclosure requested by the plaintiff in the proxy statement/prospectus filed in connection with the Merger. The memorandum of understanding contemplates that the parties will enter
into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including certain confirmatory discovery and court approval following notice to our stockholders. If the settlement is finally approved by the
court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the Merger, the Merger Agreement, and any disclosure made in connection therewith (other than claims to enforce the
settlement). In addition, the memorandum of understanding contemplates that, if the Merger is consummated and if the settlement is approved, Cymer or its successor shall be responsible for any attorneys fees of the plaintiff that may be
awarded by the District Court of Clark County, Nevada. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the District Court of Clark County, Nevada will approve the settlement even if the
parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.
We do not expect the outcome of this lawsuit to have a material effect on our operating results, financial condition and cash flow.
Item 4.
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Mine Safety Disclosures
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None.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Nature of Operations
Cymer, Inc., together with its wholly-owned subsidiaries, is 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. Our display products business developed, integrated, marketed, and
supported silicon crystallization tools used in the manufacture of displays. In January 2013, we made the decision to discontinue new product development in this business. For further discussion, see Note 15 Segment and Geographic
Information and Note 18 Subsequent Events.
We manufacture our products primarily at our San Diego
headquarters, and we also conduct refurbishment manufacturing activities for replacement parts at our subsidiary located in South Korea. We sell our products to customers primarily in Europe, South Korea, Japan, Taiwan, the United States and other
Asian countries. We provide customer support from our San Diego headquarters, and from our field offices located throughout China, Japan, the Netherlands, Singapore, South Korea, Taiwan and the United States.
Merger with ASML
On October 16, 2012, the Company entered into the Agreement and Plan of Merger (the Merger Agreement) by and among (i) ASML Holdings N.V., (ii) solely for purposes of Article
II, Article IV, Article VI and Article X, ASML US Inc., a Delaware corporation and an indirect wholly owned subsidiary of ASML (Holdco), and Kona Technologies, LLC, a Nevada limited liability company and a wholly owned subsidiary of
Holdco (Merger Sub 2), (iii) Kona Acquisition Company, Inc., a Nevada corporation and a wholly owned subsidiary of Holdco (Merger Sub), and (iv) the Company. The Merger Agreement provides that, upon the terms and
subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company, and immediately thereafter, the Company will be merged with and into Merger Sub 2. References herein to the Merger should,
unless the context otherwise requires, be read to mean the merger of Merger Sub into the Company and the merger of the Company into Merger Sub 2, as part of an integrated plan.
Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of the
Companys common stock will be converted into the right to receive (i) $20.00 in cash, without interest, and (ii) 1.1502 ASML ordinary shares.
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
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (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 Companys 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 partys 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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cymer, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
F-8
consolidation. References to Cymer, the Company, we, us, our and other similar words refer to Cymer, Inc. and its consolidated
subsidiaries, unless the context suggests otherwise.
All significant intercompany balances and transactions have been
eliminated in consolidation. References to Cymer, the Company, we, us, our and other similar words refer to Cymer, Inc. and its consolidated subsidiaries, unless the context suggests
otherwise.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Applying these principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results may differ from those estimates.
Fair Value of Financial Instruments
The fair value of our cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and other
current liabilities approximate their carrying amounts due to their short-term nature.
Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash
equivalents.
Restricted Cash
At December 31, 2012, we have $6.4 million in restricted cash associated with a secured bond that we entered into as a result of a foreign tax audit. The secured bond expires in July 2013 and,
therefore, the restricted cash is included in current assets.
Investments
We determine the appropriate classification of our investments at the time of acquisition and reevaluate such determination at each
balance sheet date. Available-for-sale securities are carried at quoted fair value, with unrealized gains and losses reported in stockholders equity as a component of accumulated other comprehensive income (loss). Realized gains and losses are
determined using the specific identification method and are included in interest income.
Inventories
Inventories are recorded at the lower of cost, determined on a first-in, first-out basis, or estimated market value.
Inventory costs include material, labor and manufacturing overhead costs. Our inventories include reusable parts that we receive from our customers as part of consumed assemblies. We refurbish these returned core assemblies, which consist primarily
of metal components, and reuse them in future core assemblies. Refurbishment costs are capitalized as incurred. We review the components of our inventory on a quarterly basis for excess or obsolete inventory and make appropriate adjustments to the
value of our inventory in the period that such excess or obsolete inventory is identified. 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.
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
F-9
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 revenues if the return of the core assembly is
related to a part being replaced under our warranty provisions or under a service and support contract. 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 and evaluated for recoverability along with our other inventory.
Based on the evaluation of demand for our display products business 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.
Property, Plant and Equipment
Our property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over
20 years for buildings; one to five years for equipment; and three to five years for light sources built for internal use. Amortization of leasehold improvements and leased equipment is calculated using the straight-line method over the lease term
or the estimated useful life of the assets, whichever period is shorter. Additions and improvements are capitalized, while maintenance and repairs are expensed as incurred. When depreciable assets are retired, or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any related gains or losses are included within operating income in the consolidated statement of operations.
Valuation of Long-Lived Assets
We review the carrying amount and remaining useful life of our long-lived assets, which includes property, plant and equipment and definite-lived intangible assets, for impairment when events or
circumstances indicate that the carrying amount may not be recoverable. Other 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 assets 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 asset
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. In the fourth quarter of
2012, lack of demand for our display products triggered an asset impairment test associated with our display products business. The impairment test resulted in a $5.1 million impairment of equipment used in the manufacturing or research and
development of display product tools. For further discussion, see Note 15 Segment and Geographic Information and Note 18 Subsequent Events. There were no indicators of impairment of our long-lived assets during 2011 and 2010.
Goodwill and Intangible Assets
Goodwill is not amortized but instead is tested annually for impairment at the reporting unit level, or more frequently when events or changes in circumstances indicate that fair value of the reporting
unit has been reduced to less than its carrying value. We perform our impairment test annually during the fourth quarter. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is
less than
F-10
its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Accounting Standards Codification Topic 350. If, after
assessing qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If deemed necessary, a two-step test is
used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting
unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, there is an indication that goodwill maybe impaired and the amount of the loss, if any, is measured by performing step two. Under step two, the impairment loss, if
any, is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill.
Intangible assets that are determined to have definite lives are amortized utilizing a straight-line basis over their estimated useful
lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. Our intangible assets consist of patents and developed technology, which are amortized using the straight-line basis over their
expected useful lives.
Foreign Currency Translation
The financial statements of our foreign subsidiaries where the functional currency is the local currency are translated into U.S. Dollars
using current rates of exchange for assets and liabilities and rates of exchange that approximate the rates in effect at the transaction date for revenues, cost of revenues, expenses, gains and losses. Gains and losses resulting from foreign
currency translation are accumulated as a separate component of our consolidated statement of equity in accumulated other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the consolidated
statements of operations.
Derivative Instruments
We conduct business in several international currencies through our global operations. We maintain a foreign exchange risk management
policy with the goal of protecting product margins and minimizing the short term volatility of reported earnings due to foreign currency risk exposure. In accordance with our policy, we use financial instruments, principally forward contracts, to
manage certain of our foreign currency risk exposures. Forward contracts acquired to protect the product margins of forecasted transactions, primarily the purchases of our products for resale under firm third-party sales commitments are accounted
for in accordance with the provisions of the authoritative guidance for derivatives and hedging. We also enter into forward contracts to offset gains and losses on assets and liabilities held in non-functional currencies, primarily the intercompany
U.S. Dollar denominated liabilities of our foreign subsidiaries and do not designate these forward contracts as hedges pursuant to the authoritative guidance for derivatives and hedging. We record all forward contracts at fair value based on
the quoted exchange rates for such instruments. We do not enter into forward contracts for speculative purposes. For further discussion, see Note 7, Derivative Instruments and Hedging Activities.
Guarantees and Warranties
In the ordinary course of business, we are not subject to potential obligations under guarantees that fall within the scope of the authoritative guidance for guarantees, with the exception of standard
warranty provisions associated with product sales and indemnification provisions related to intellectual property that are contained within many of our lithography tool manufacturer agreements. See Note 13, Commitments and Contingencies
for further information regarding our guarantees and warranties.
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.
F-11
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 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. Delivery of the additional elements generally occurs within one to
three years.
Installed Base ProductsOnPulse 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 support 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 when combined with revenue generated 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.
F-12
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. Costs directly attributable to the deferred revenue are also deferred until the related revenue is recognized if the arrangement is profitable.
Shipping and Handling Costs
Costs incurred for shipping and handling are included in cost of revenues at the time the related revenue is recognized. Amounts billed to a customer, if any, for shipping and handling are reported as
revenue.
Research and Development Costs
We expense research and development costs in the period they are incurred.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses amounted to approximately $612,000, $559,000 and $572,000, for 2012, 2011, and 2010, respectively.
Stock-Based Compensation
We grant stock options and stock units from our 2011 Equity Incentive Plan, which provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, stock bonus
awards, stock purchase awards, stock unit awards, performance-based stock unit awards, and other stock awards to our employees, non-employee directors and consultants.
Under the fair value recognition provisions of the authoritative guidance for stock-based compensation awards, we measure the fair value of stock-based awards at the grant date and the fair value is
recognized as expense over the requisite service period. The fair value of stock options is determined by a Black-Scholes option pricing model. We value stock unit awards based on the fair value of our common stock on the date that the stock unit
award is granted. Stock-based compensation expense related to stock options and stock unit awards with only service conditions is recognized straight line over the requisite service period for the entire award. Stock-based compensation expense
related to stock unit awards with performance-based conditions is recognized on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards (i.e., a graded vesting
basis). Additionally, we adjust the compensation expense over the service period based upon the expected achievement of the performance conditions. An estimated forfeiture rate is applied and included in the calculation of stock-based compensation
expense at the time that the stock option or stock unit awards are granted and revised, if necessary, in subsequent periods, if actual forfeiture rates differ from those estimates. 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.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Deferred income taxes are recognized for the future tax consequences of temporary differences using enacted statutory tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Temporary differences include the difference between the financial statement carrying amounts and the tax bases of
existing assets and liabilities and operating loss and tax credit carryforwards. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We assess the likelihood that our deferred
tax assets will be recovered from future taxable income. To the extent management
F-13
believes that recovery is more likely than not, we do not establish a valuation allowance. The calculation of our tax provision is dependent upon the geographic composition of our world-wide
earnings, tax regulations governing each region and the availability of tax credits.
Our income tax returns are based on
calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than
not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes, and
adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
We are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing
jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record
additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and
uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be
materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities. We recognize interest and penalties related to uncertain tax positions in our
income tax expense.
We recognize excess tax benefits associated with the exercise of stock options directly to
stockholders equity only when realized. An excess tax benefit occurs when the actual tax benefit realized by us upon an employees disposition of a share-based award exceeds the deferred tax asset, if any, originally recorded for such
award. When assessing whether a tax benefit relating to share-based compensation has been realized, we follow the tax law ordering method, under which current year share-based compensation deductions are assumed to be utilized before net operating
loss carryforwards and other tax attributes.
We use the short-cut method for calculating the tax effects of
share-based compensation. The short-cut method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of share-based compensation, and to
determine the subsequent impact on the APIC pool.
In accordance with the authoritative guidance for stock compensation, we
have presented excess tax benefits for the exercise of stock options as a financing activity in the consolidated statement of cash flows.
(Loss) Earnings Per Share
Basic (loss) earnings per share is
calculated by dividing net (loss) income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted (loss) earnings per share is calculated on the basis of the weighted-average number of
shares of common stock including the effect of the potential dilution that could occur if securities to issue common stock were exercised or converted into common stock. Potential dilutive securities include outstanding stock options, restricted
stock units (RSUs), performance restricted stock units (PRSUs), and stock issued pursuant to our Employee Stock Purchase Plan (ESPP).
F-14
The following table sets forth the basic and diluted (loss) earnings per share for the years
ended December 31, 2012, 2011 and 2010 (in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012 (1)
|
|
|
2011
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(36,365
|
)
|
|
$
|
80,241
|
|
|
$
|
90,961
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
31,121
|
|
|
|
30,469
|
|
|
|
29,777
|
|
Effect of dilutive securities
|
|
|
0
|
|
|
|
632
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted (loss) earnings per share
|
|
|
31,121
|
|
|
|
31,101
|
|
|
|
30,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.17
|
)
|
|
$
|
2.63
|
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(1.17
|
)
|
|
$
|
2.58
|
|
|
$
|
3.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from the computation of diluted earnings per share
|
|
|
797
|
|
|
|
163
|
|
|
|
934
|
|
(1)
|
Potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported as their effect would be
antidilutive. Thus, the denominator for diluted earnings per share is the same as weighted average common shares in periods when a net loss is reported.
|
Accumulated Other Comprehensive Loss
Accumulated other
comprehensive loss includes net (loss) income, foreign currency translation adjustments, net unrealized gains and losses on available-for-sale securities, net unrealized gains and losses on effective foreign currency forward exchange contracts, and
net unrealized pension gains and losses. See the consolidated statements of comprehensive (loss) income for the effect of the components of comprehensive income (loss) to our net (loss) income.
The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustments
|
|
|
Net unrealized gains
(losses) on available-
for-sale investments
|
|
|
Net unrealized gains
(losses) on foreign
currency forward
exchange contracts
|
|
|
Unrealized pension
gains (losses)
|
|
|
Accumulated
other
comprehensive
loss
|
|
Balance, December 31, 2009
|
|
$
|
(8,182
|
)
|
|
$
|
2
|
|
|
$
|
62
|
|
|
$
|
(162
|
)
|
|
$
|
(8,280
|
)
|
Current period other comprehensive income
|
|
|
5,588
|
|
|
|
(10
|
)
|
|
|
(62
|
)
|
|
|
(117
|
)
|
|
|
5,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
(2,594
|
)
|
|
|
(8
|
)
|
|
|
0
|
|
|
|
(279
|
)
|
|
|
(2,881
|
)
|
Current period other comprehensive loss
|
|
|
(8,400
|
)
|
|
|
1
|
|
|
|
(971
|
)
|
|
|
333
|
|
|
|
(9,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
(10,994
|
)
|
|
|
(7
|
)
|
|
|
(971
|
)
|
|
|
54
|
|
|
|
(11,918
|
)
|
Current period other comprehensive income
|
|
|
(406
|
)
|
|
|
83
|
|
|
|
559
|
|
|
|
(98
|
)
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
$
|
(11,400
|
)
|
|
$
|
76
|
|
|
$
|
(412
|
)
|
|
$
|
(44
|
)
|
|
$
|
(11,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations of Risk and Related Uncertainties
Credit Risk.
Financial instruments, which potentially subject us to concentrations of credit risk, consist
principally of cash and cash equivalents, accounts receivable, investments, and foreign exchange contracts receivable.
F-15
Cash and cash equivalents.
We invest our excess cash in an effort to preserve
capital, provide liquidity, maintain diversification and generate returns relative to our corporate investment policy and prevailing market conditions. We have not experienced any material losses in our cash and cash equivalents. The cash balances
in financial institutions and cash equivalent securities that we hold are in excess of federally insured limits. We perform periodic evaluations of the relative credit standing of the financial institutions and securities and limit the risk by
selecting financial institutions and securities with a strong relative credit rating. Cash equivalents as of December 31, 2012 and 2011 were $50.1 million and $39.7 million, respectively. We have established investment credit policies
that focus on the credit quality of obligors, limit credit concentrations, encourage diversification and require periodic creditworthiness reviews.
Accounts receivable.
We maintain an allowance for doubtful accounts for estimated losses on accounts receivable based on evaluation of the aging of receivables, payment histories of our customers,
financial condition of our customers, and the overall economic environment. We write off individual accounts against the allowance when we become aware of our customers inability to meet its financial obligation to us.
Our customer base is disbursed among many geographic regions and is comprised largely of multinational companies. For geographic customer
concentrations, see Note 15 Segment and Geographic Information. In 2012, 2011 and 2010, revenue from four customers accounted for 58%, 64% and 63% of our total revenue, respectively. In 2012 and 2011, certain customers comprised 43% and
55% of total receivables at December 31, 2012 and 2011, respectively. We expect that sales to these customers will continue to account for a substantial portion of our revenue. None of our customers are obligated to purchase a minimum number of
our products in the aggregate or during any particular period. We can provide no assurance that any of our customers will continue to purchase our products at past or current levels. The loss of business from any of these customers would have a
material adverse effect on our operating results, financial condition, and cash flows.
Investments.
Investment
activity, including review of our investment policy and defining acceptable risk levels, is subject to periodic review and approval by senior management. We invest primarily in debt securities which are rated investment grade and have established
exposure limits, diversification standards and review procedures for all credit risks including borrower, issuer and counterparty. Creditworthiness of specific obligors is determined by consideration of external determinants, typically ratings
assigned by nationally recognized ratings agencies, and are supplemented by an internal credit evaluation. Obligor, asset sector and industry concentrations are subject to established limits and are monitored on a periodic basis.
Foreign exchange contracts receivable.
We enter into foreign exchange forward contracts with major financial institutions in order
to manage our risk of transacting business in several foreign currencies. Obligations under these forward contracts are unsecured, so we have established counterparty limits and we review the creditworthiness of these financial institutions on a
periodic basis. In addition, we have entered into ISDA master agreements that contain netting provisions in the event that one party defaults on its obligations to the other.
Supplier Risk.
We purchase a limited number of components and subassemblies included in our light sources, installed base products and silicon crystallization tools from a single supplier or
a small group of suppliers. Whenever possible, we work with secondary suppliers to qualify additional sources of supply. To reduce the risk associated with limited-source suppliers, we have supply agreements in place and carry strategic inventory of
these components. Strategic inventories are managed as a percentage of future demand. We also have vendor-managed inventory of critical components to further reduce the risk of a single supplier. In addition, we contract for the manufacture of
various subassemblies of our products and depend on our contract manufacturers to deliver to our required specifications, schedule and quality standards. Further, some of our suppliers have specialized in supplying equipment or manufacturing
services to semiconductor equipment manufacturers and, therefore, are susceptible to industry fluctuations and are subject to the same risks and uncertainties regarding their ability to respond to changing market and global conditions. To date we
have been able to obtain adequate components and subassemblies for our light sources, installed base products and silicon crystallization tools in a timely manner from existing suppliers.
F-16
EUV Technology Development Risk.
We are investing significant financial and
other resources to develop EUV source technology for chip manufacturing. These expenditures are reflected in our research and development expenses in our consolidated statements of operations, as well as inventory and property, plant and equipment
in our consolidated balance sheets. As of December 31, 2012, we have inventory of $93.3 million and property, plant and equipment of $71.5 million related to development of EUV source technology. Although we have customer orders for our EUV sources,
if the EUV technology development is not successful, the value of our inventory and property, plant and equipment could be impaired.
Recently Adopted Accounting Standards
In June 2011, the FASB
issued amended standards to increase the prominence of items reported in other comprehensive income. These amendments eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders
equity and require that all changes in stockholders equityexcept investments by, and distributions to, ownersbe presented either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. In addition, these amendments require that we present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the
components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued additional guidance that defers the effective date of the requirement to present separate line items on the income statement
for reclassification adjustments of items out of accumulated other comprehensive income into net income. The deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users. These new standards were
effective for interim and annual periods beginning after December 15, 2011, and are to be applied retrospectively. These amended standards affected the presentation of other comprehensive income but did not affect our financial position or
results of operations.
Recently Issued Accounting Standards
In December 2011, the FASB issued amended standards to increase the prominence of offsetting assets and liabilities reported in
financial statements. These amendments require an entity to disclose information about offsetting and the related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.
These amendments will enhance disclosures by requiring improved information about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. This information
will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys financial position, including the effect or potential effect of rights of setoff associated with
certain financial instruments and derivative instruments. These revised standards are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the
disclosures required by those amendments retrospectively for all comparative periods presented. These amended standards will require additional footnote disclosures for these enhancements but will not affect our financial position or results of
operations.
2. Fair Value Measurements
We account for our financial assets and liabilities that are being measured and reported on at fair value on a
recurring basis per the provisions of the authoritative guidance for fair value measurements. This includes certain items we report in cash equivalents and available-for-sale securities within our cash and cash equivalents, and short and long term
investments on the accompanying consolidated balance sheets. In addition, our derivatives, which consist of foreign currency forward exchange contracts, are reported at fair value and are included in the scope of the authoritative guidance for fair
value measurements and disclosures.
The authoritative guidance for fair value measurements stipulates that fair value is
defined as the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, willing parties.
F-17
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are
applied. These valuation techniques include unobservable inputs and involve some level of estimation and judgment on the part of the reporting entity, the degree of which is dependent on the price transparency for the instruments or market and the
instruments complexity.
Per the authoritative guidance for fair value instruments, assets and liabilities recorded at
fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels as defined by the fair value hierarchy in the authoritative guidance for fair
value instruments are as follows:
Level 1 Inputs are unadjusted, quoted prices in active
markets for identical assets or liabilities at the measurement date.
Level 2 Inputs other
than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly at the measurement date.
Level 3 Inputs are unobservable for the asset or liability and usually reflect the reporting entitys best estimate of what market participants would use in pricing the asset or
liability at the measurement date.
Financial Assets and Liabilities Measured on a Recurring Basis
The majority of our available-for-sale securities and our foreign currency forward exchange contracts are priced via independent
providers. In obtaining such valuation information from third parties, we have evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in our principal
markets.
Available-for-Sale Securities
The fair values of our available-for-sale securities are determined by a matrix pricing, which is a mathematical technique widely used to value securities without relying exclusively on quoted prices for
the specific securities but rather by relying on the securities relationship to other benchmark-quoted securities. Such assets are classified as Level 2 inputs in the fair value hierarchy and typically include commercial paper and
government and corporate fixed income securities which are included in our investment portfolio.
Derivative Instruments
Our foreign currency forward exchange contracts are valued using an income approach which includes observable Level 2
market inputs at the measurement date and uses a standard valuation technique to convert future foreign currency amounts to a single discounted present amount assuming participants are motivated, but not compelled, to transact. Level 2 inputs
are limited to quoted prices for similar assets or liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability. Key inputs in this discounted calculation include spot currency exchange rates at
the measurement date, interest rates, and credit default swap rates at standard quoted intervals. Credit default swaps on us are not available, so we estimated our credit risk premium based on a financing arrangement that was offered to us during
the three months ended December 31, 2012 by a third party. The principal market in which we execute our foreign currency forward exchange contracts is the retail market. Mid-market pricing is used as a practical expedient for fair value
measurements. Since significant inputs in the valuation of our foreign currency forward exchange contracts are observable in the active market, they are classified as Level 2 in the fair value hierarchy. For further discussion,
F-18
see Note 7, Derivative Instruments and Hedging Activities. Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
Assets:
|
|
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1) (1)
|
|
|
Significant Other
Observable Inputs
(Level 2) (1)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
50,144
|
|
|
$
|
29,678
|
|
|
$
|
20,466
|
|
|
$
|
0
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
80,464
|
|
|
|
0
|
|
|
|
80,464
|
|
|
|
0
|
|
U.S. government securities
|
|
|
35,159
|
|
|
|
0
|
|
|
|
35,159
|
|
|
|
0
|
|
Commercial paper
|
|
|
32,385
|
|
|
|
0
|
|
|
|
32,385
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
1,303
|
|
|
|
0
|
|
|
|
1,303
|
|
|
|
0
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
8,038
|
|
|
|
0
|
|
|
|
8,038
|
|
|
|
0
|
|
U.S. government securities
|
|
|
13,729
|
|
|
|
0
|
|
|
|
13,729
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
221,222
|
|
|
$
|
29,678
|
|
|
$
|
191,544
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (2)
|
|
$
|
3,123
|
|
|
$
|
0
|
|
|
$
|
3,123
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,123
|
|
|
$
|
0
|
|
|
$
|
3,123
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
Assets:
|
|
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1) (1)
|
|
|
Significant Other
Observable Inputs
(Level 2) (1)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Cash equivalents
|
|
|
39,710
|
|
|
|
26,190
|
|
|
|
13,520
|
|
|
|
0
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
74,170
|
|
|
|
0
|
|
|
|
74,170
|
|
|
|
0
|
|
U.S. government securities
|
|
|
27,226
|
|
|
|
0
|
|
|
|
27,226
|
|
|
|
0
|
|
Commercial paper
|
|
|
10,070
|
|
|
|
0
|
|
|
|
10,070
|
|
|
|
0
|
|
Municipal bonds
|
|
|
7,246
|
|
|
|
0
|
|
|
|
7,246
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
6,000
|
|
|
|
0
|
|
|
|
6,000
|
|
|
|
0
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
51,060
|
|
|
|
0
|
|
|
|
51,060
|
|
|
|
0
|
|
U.S. government securities
|
|
|
22,751
|
|
|
|
0
|
|
|
|
22,751
|
|
|
|
0
|
|
Foreign currency forward exchange contracts (3)
|
|
|
371
|
|
|
|
0
|
|
|
|
371
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,604
|
|
|
|
26,190
|
|
|
|
212,414
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts (4)
|
|
|
1,902
|
|
|
|
0
|
|
|
|
1,902
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,902
|
|
|
|
0
|
|
|
|
1,902
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We did not have any transfers in or out of Level 1 or Level 2.
|
(2)
|
$2.6 million is included in other current liabilities and $486,000 is included in other liabilities on the accompanying consolidated balance sheets.
|
(3)
|
Included in other current assets on the accompanying consolidated balance sheets.
|
(4)
|
Included in other current liabilities on the accompanying consolidated balance sheets.
|
F-19
Non-Financial Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We apply fair value techniques on a non-recurring basis associated with: (1) valuing potential impairment losses
related to goodwill, which are accounted for pursuant to the authoritative guidance for intangiblesgoodwill and other; and (2) valuing potential impairment losses related to long-lived assets, which are accounted for pursuant to the
authoritative guidance for property, plant and equipment.
We develop, manufacture and market our products within two
reportable operating segments, light source products and display products. Our light source products operating segment designs, manufactures and sells light sources and installed base products for use in photolithography systems used in the
manufacture of semiconductors. Our display products business, which was discontinued in January 2013, developed, integrated, marketed, and supported silicon crystallization tools used in the manufacture of displays. For further discussion, see Note
15 Segment and Geographic Information and Note 18 Subsequent Events.
We test for goodwill impairment
at the reporting unit level, which are the same as our operating segments. All of our goodwill is associated with our light source products reporting unit, and we determine the fair value of this reporting unit, when required, based on a combination
of inputs including our market capitalization, as well as Level 3 inputs such as discounted cash flows which are not observable from the market, directly or indirectly. We conduct our goodwill impairment analysis annually in the fourth quarter
of each year, or upon the occurrence of certain triggering events. No such triggering events occurred during the year ended December 31, 2012. Historically, the fair value of our light source products reporting unit has significantly
exceeded its carrying value.
We test for the impairment of our long-lived assets when triggering events occur and such
impairment, if any, is measured at fair value. The inputs for fair value of our long-lived assets would be based on Level 3 inputs as data used for such fair value calculations would be based on discounted cash flows which are not observable
from the market, directly or indirectly. In the fourth quarter of 2012, lack of demand for our display products triggered an asset impairment test associated with our display products business. The impairment test resulted in a $5.1 million
impairment of equipment used in the manufacturing or research and development of display product tools. For further discussion, see Note 15 Segment and Geographic Information and Note 18 Subsequent Events. There were no
indicators of impairment of our long-lived assets during 2011 and 2010.
3. Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments at December 31, 2012 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Cash
|
|
$
|
84,516
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
84,516
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
19,678
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,678
|
|
Certificate of deposits
|
|
|
10,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,000
|
|
Commercial paper
|
|
|
17,462
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,462
|
|
Corporate debt securities
|
|
|
3,004
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
134,660
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
134,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
80,394
|
|
|
|
72
|
|
|
|
(2
|
)
|
|
|
80,464
|
|
U.S. government securities
|
|
|
35,138
|
|
|
|
21
|
|
|
|
0
|
|
|
|
35,159
|
|
Commercial paper
|
|
|
32,384
|
|
|
|
1
|
|
|
|
0
|
|
|
|
32,385
|
|
Certificates of deposit
|
|
|
1,303
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
149,219
|
|
|
$
|
94
|
|
|
$
|
(2
|
)
|
|
$
|
149,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
8,017
|
|
|
|
21
|
|
|
|
0
|
|
|
|
8,038
|
|
U.S. government securities
|
|
|
13,718
|
|
|
|
25
|
|
|
|
(14
|
)
|
|
|
13,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
21,735
|
|
|
$
|
46
|
|
|
$
|
(14
|
)
|
|
$
|
21,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$
|
305,614
|
|
|
$
|
140
|
|
|
$
|
(16
|
)
|
|
$
|
305,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Cash, cash equivalents and investments at December 31, 2011 consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Cash
|
|
$
|
85,317
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
85,317
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
6,189
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,189
|
|
Certificate of deposits
|
|
|
20,001
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,001
|
|
Municipal bonds
|
|
|
1,020
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1,021
|
|
Corporate debt securities
|
|
|
12,499
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
125,026
|
|
|
$
|
1
|
|
|
$
|
0
|
|
|
$
|
125,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
74,189
|
|
|
|
12
|
|
|
|
(31
|
)
|
|
|
74,170
|
|
U.S. government securities
|
|
|
27,219
|
|
|
|
7
|
|
|
|
0
|
|
|
|
27,226
|
|
Commercial paper
|
|
|
10,070
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,070
|
|
Municipal bonds
|
|
|
7,248
|
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
7,246
|
|
Certificates of deposit
|
|
|
6,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
124,726
|
|
|
$
|
19
|
|
|
$
|
(33
|
)
|
|
$
|
124,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
51,064
|
|
|
|
49
|
|
|
|
(53
|
)
|
|
|
51,060
|
|
U.S. government securities
|
|
|
22,745
|
|
|
|
8
|
|
|
|
(2
|
)
|
|
|
22,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments
|
|
$
|
73,809
|
|
|
$
|
57
|
|
|
$
|
(55
|
)
|
|
$
|
73,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$
|
323,561
|
|
|
$
|
77
|
|
|
$
|
(88
|
)
|
|
$
|
323,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of our cash equivalents and investments at December 31, 2012 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
199,363
|
|
|
$
|
199,455
|
|
Due after one year to two years
|
|
|
21,735
|
|
|
|
21,767
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
221,098
|
|
|
$
|
221,222
|
|
|
|
|
|
|
|
|
|
|
We did not have any investments in individual securities that have been in a continuous unrealized loss
position deemed to be temporary for more than 12 months at December 31, 2012.
4. Accounts Receivable
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Trade
|
|
$
|
110,557
|
|
|
$
|
120,767
|
|
Other
|
|
|
3,193
|
|
|
|
3,405
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
113,750
|
|
|
|
124,172
|
|
Allowance for doubtful accounts
|
|
|
(501
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,249
|
|
|
$
|
123,970
|
|
|
|
|
|
|
|
|
|
|
F-21
5
. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
92,637
|
|
|
$
|
69,367
|
|
Work-in-progress
|
|
|
57,069
|
|
|
|
40,192
|
|
Finished goods
|
|
|
109,830
|
|
|
|
112,181
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,536
|
|
|
$
|
221,740
|
|
|
|
|
|
|
|
|
|
|
6. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Land
|
|
$
|
10,303
|
|
|
$
|
10,270
|
|
Building
|
|
|
93,209
|
|
|
|
89,498
|
|
Building improvements
|
|
|
32,603
|
|
|
|
25,203
|
|
Furniture and equipment
|
|
|
105,619
|
|
|
|
98,932
|
|
Capitalized light sources
|
|
|
81,695
|
|
|
|
65,223
|
|
Leasehold improvements
|
|
|
2,612
|
|
|
|
1,478
|
|
Construction in process
|
|
|
39,618
|
|
|
|
12,465
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
365,659
|
|
|
$
|
303,069
|
|
Accumulated depreciation
|
|
|
(196,607
|
)
|
|
|
(184,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,052
|
|
|
$
|
119,015
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense totaled $25.0 million, $17.6 million, and $18.1 million for the years
ended December 31, 2012, 2011 and 2010, respectively.
7. Derivative Instruments and Hedging Activities
We conduct business in several currencies through our global operations with certain transactions denominated in local
currencies, such as the Euro, Japanese Yen, South Korean Won and Taiwanese Dollars. We use derivative financial instruments, such as forward exchange contracts, to hedge certain forecasted foreign denominated transactions expected to occur over the
next twelve to twenty-four months. The purpose of our derivative financial instruments is to mitigate the effect of the exchange rate fluctuations on certain foreign currency denominated revenue, costs and cash flows. We do not enter into derivative
instruments for speculative purposes.
Our foreign currency risk falls into two primary categories. First, our gross profit
margins are subject to change when we sell our products in one currency and the product costs are denominated in a different currency. To mitigate this risk, we enter into derivative financial instruments, principally forward contracts, which we
designate as cash flow hedges to mitigate fluctuations in the gross profit margins of these forecasted transactions. We also occasionally enter into derivative financial instruments, principally forward contracts, which we designate as cash flow
hedges when we anticipate purchasing a capital asset in a currency other than the functional currency of the entity purchasing the asset. Designated hedging instruments qualify for cash flow hedge accounting treatment if certain criteria are met.
For example, at the inception of the hedge, we must have formal documentation of the hedging relationship and our management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged
transaction, the nature of the risk being hedged, and how the hedging instruments effectiveness will be assessed. The hedging relationship must be
F-22
highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge. Interest charges or forward points on our forward contracts are
excluded from the assessment of hedge effectiveness and are recorded in the consolidated statements of operations.
The
effective portion of the gain or loss on the cash flow hedge is reported as a component of accumulated other income or loss and is reclassified into earnings when the hedged transaction affects earnings. Once the underlying hedged transaction is
recorded, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction and record any further gains or losses to other income (expense). The cash flows resulting from forward exchange contracts are classified in the
consolidated statements of cash flows as part of cash flows from operating activities. If all or a portion of the forecasted transaction were cancelled, this would render all or a portion of the cash flow hedge ineffective, and we would reclassify
the ineffective portion of the hedge into other income (expense). We can also experience ineffectiveness if the expected date of a hedged transaction is delayed beyond the maturity date of the cash flow hedge. In such an instance, the asset or
liability value of a cash flow hedge is larger than the liability or asset value of the hedged transaction on a net present value basis, rendering the surplus amount ineffective which we record to other income (expense). We generally do not
experience ineffectiveness of our cash flow hedges as a result of cancelled transactions and the accompanying consolidated statements of operations contain immaterial gains and losses due to time value differences. We adjust the level and use of
derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.
The second category of foreign currency risk occurs when transactions are recorded in our consolidated financial statements in a currency other than the applicable subsidiarys functional currency
and the cash settlement of the transaction occurs at some point in the future. When transactions in non-functional currencies are recorded in our consolidated financial statements, changes in the recorded amounts resulting from fluctuations in the
value of that currency are recorded to other income (expense). In order to mitigate these remeasurement gains and losses, we enter into derivative financial instruments, principally forward contracts. The forward contracts that hedge these
transactions that have been recorded to our consolidated financial statements are not designated as hedges and, therefore, we record changes in their fair value to other income (expense). The U.S. dollar equivalent of all outstanding notional
amounts of forward contracts was as follows (in thousands):
|
|
|
|
|
Buy/Sell:
|
|
December 31,
2012
|
|
Japanese Yen/U.S. Dollar
|
|
$
|
5,500
|
|
U.S. Dollar/South Korean Won
|
|
$
|
47,000
|
|
U.S. Dollar/Taiwanese Dollars
|
|
$
|
21,000
|
|
Euros/U.S. Dollar
|
|
$
|
57,271
|
|
The fair value of all of our forward contracts totaled to a liability of $3.1 million and $1.5 million at
December 31, 2012 and 2011, respectively. As of December 31, 2012, the deferred loss, net of tax, for those that qualified for hedge accounting treatment was $412,000, of which $323,000 will be reclassified from accumulated other
comprehensive loss into earnings at the then- current values over the next twelve months as the underlying hedged transactions occur.
F-23
The derivative instruments that we enter into are subject to master netting arrangements and
qualify for net presentation on the balance sheet. The gross fair value of derivative instruments in our consolidated balance sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
|
|
December 31,
|
|
|
|
|
December 31,
|
|
|
|
Balance Sheet Location
|
|
2012
|
|
|
2011
|
|
|
Balance Sheet Location
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Fair Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
$
|
807
|
|
|
$
|
3
|
|
|
Other current liabilities
|
|
$
|
25
|
|
|
$
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
|
256
|
|
|
|
686
|
|
|
Other current liabilities
|
|
|
3,675
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,063
|
|
|
$
|
689
|
|
|
Other liabilities
|
|
|
486
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,186
|
|
|
$
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments on our consolidated statements of operations and other comprehensive
(loss) income (OCI) was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Derivatives designated as hedging instruments:
|
|
Location in financial statements
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Gain (loss) recognized in OCI on derivative (effective portion)
|
|
OCI
|
|
$
|
901
|
|
|
$
|
(1,566
|
)
|
|
$
|
(104
|
)
|
Gain (loss) reclassified from accumulated OCI into income (effective portion)
|
|
Cost of revenue
|
|
$
|
69
|
|
|
$
|
(54
|
)
|
|
$
|
(967
|
)
|
(Loss) gain recognized in income on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ineffective portions and amount excluded from effectiveness testing) (1)
|
|
Cost of revenue
|
|
$
|
(261
|
)
|
|
$
|
(125
|
)
|
|
$
|
25
|
|
(Loss) gain recognized in income on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ineffective portions from hedging relationship) (2)
|
|
Foreign currency exchange (loss) gain
|
|
$
|
(2
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain recognized in income on derivatives
|
|
Foreign currency exchange (loss) gain
|
|
$
|
(2,447
|
)
|
|
$
|
2,384
|
|
|
$
|
(4,965
|
)
|
(1)
|
The amount represents the (loss) gain recognized in income on the amount of the hedging relationship excluded from effectiveness testing.
|
(2)
|
The amount represents the loss recognized in income related to the ineffective portion of a hedging relationship.
|
We are exposed to credit losses in the event of nonperformance by the banks with which we transact foreign currency hedges. We manage
this credit risk by transacting foreign currency hedging with more than one institution, only executing hedges with counterparties that meet our minimum requirements, monitoring the credit ratings of our counterparties on a periodic basis and
negotiating contractual master netting provisions that allow us to record and offset liabilities to a counterparty against amounts due from that counterparty in an event of default. We do not receive collateral from our hedging counterparties. As of
December 31, 2012, we did not have any credit exposure from nonperformance of foreign exchange hedging counterparties.
F-24
8. Goodwill and Intangible Assets
Goodwill
The following table provides the changes in the carrying amount of goodwill for our light source products segment during the year ended December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
16,792
|
|
|
$
|
8,833
|
|
Goodwill recorded in connection with acquisition of eDiag
|
|
|
0
|
|
|
|
8,483
|
|
Foreign currency translation impact
|
|
|
711
|
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
17,503
|
|
|
$
|
16,792
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
Intangible assets consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Useful
life
(years)
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Impact
|
|
|
Net Book
Value
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Currency
Impact
|
|
|
Net Book
Value
|
|
Patents
|
|
|
5-16
|
|
|
$
|
10,866
|
|
|
$
|
(4,602
|
)
|
|
$
|
0
|
|
|
$
|
6,264
|
|
|
$
|
10,866
|
|
|
$
|
(3,882
|
)
|
|
$
|
0
|
|
|
$
|
6,984
|
|
Developed Technology (1)
|
|
|
5
|
|
|
|
3,464
|
|
|
|
(1,232
|
)
|
|
|
221
|
|
|
|
2,453
|
|
|
|
3,464
|
|
|
|
(546
|
)
|
|
|
26
|
|
|
|
2,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,330
|
|
|
$
|
(5,834
|
)
|
|
$
|
221
|
|
|
$
|
8,717
|
|
|
$
|
14,330
|
|
|
$
|
(4,428
|
)
|
|
$
|
26
|
|
|
$
|
9,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The developed technology was recorded in connection with the acquisition of eDiag.
|
Intangible assets that are determined to have definite lives are amortized on a straight-line basis over their estimated useful lives,
and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. The expected useful life of our patents can vary depending on the nature of the technology and their remaining useful life. Amortization
expense associated with our intangible assets was $1.4 million, $1.3 million and $682,000 for the years ended December 31, 2012, 2011, and 2010, respectively.
Amortization expense related to intangible assets at December 31, 2012 for the next five years and thereafter is expected to be as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
1,474
|
|
2014
|
|
|
1,470
|
|
2015
|
|
|
1,470
|
|
2016
|
|
|
904
|
|
2017
|
|
|
710
|
|
Thereafter
|
|
|
2,689
|
|
|
|
|
|
|
Total
|
|
$
|
8,717
|
|
|
|
|
|
|
F-25
9. Other Balance Sheet Details
Details of other assets and liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
Prepaids and other
|
|
$
|
39,068
|
|
|
$
|
28,158
|
|
Income taxes receivable
|
|
|
1,490
|
|
|
|
7,072
|
|
Foreign exchange contracts receivable
|
|
|
0
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,558
|
|
|
$
|
35,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and benefits
|
|
$
|
11,846
|
|
|
$
|
27,411
|
|
Accrued warranty
|
|
|
7,202
|
|
|
|
9,870
|
|
Income taxes payable
|
|
|
11,088
|
|
|
|
2,680
|
|
Other
|
|
|
11,283
|
|
|
|
9,658
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,419
|
|
|
$
|
49,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Accrued income taxes
|
|
$
|
8,444
|
|
|
$
|
12,369
|
|
Other
|
|
|
14,990
|
|
|
$
|
14,886
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,434
|
|
|
$
|
27,255
|
|
|
|
|
|
|
|
|
|
|
10. Equity
Stock Award Plans
We have the following equity incentive plans or incentive programs that include equity based awards:
2011 Equity Incentive Plan (the Incentive Plan)
In
May 2011, at our annual meeting of stockholders, our stockholders approved the Incentive Plan, which replaced our 2005 Equity Incentive Plan (the 2005 Plan). The Incentive Plan provides for the issuance of incentive stock options,
non-statutory stock options, stock purchase awards, stock bonus awards, stock appreciation rights, stock unit awards, performance stock awards, performance cash awards and other stock awards to our employees, non-employee directors and
consultants. Stock options granted under the Incentive Plan have an exercise price at least equal to the fair market value of our common stock on the dates of grant, expire no more than ten years from the date of grant, and generally vest ratably
over a four-year period following the date of grant. Restricted stock unit awards granted generally vest one to three years from the date of grant. We also grant performance-based restricted stock unit awards to our executive officers and certain
key management. The number of shares granted is subject to increase or decrease based on actual performance against performance measures approved by the Compensation Committee of our Board of Directors. Following the date approved by our
stockholders, any shares available for issuance under our 2005 Plan became available for issuance under the Incentive Plan, and any outstanding stock awards that terminate or expire under the 2005 Plan that would have reverted to the share reserve
of the 2005 Plan will become available for issuance under the Incentive Plan. The number of shares available for grant under the Incentive Plan was 1,524,337 at
F-26
December 31, 2012. Awards and options to purchase 857,933 shares were outstanding under this plan as of December 31, 2012.
2005 Plan
The 2005 Plan provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, stock bonus
awards, stock purchase awards, stock unit awards, performance-based stock unit awards, and other stock awards to our employees, non-employee directors and consultants. Stock options granted under the 2005 Plan had an exercise price at least equal to
the fair market value of our common stock on the dates of grant, expire no more than ten years from the date of grant, and generally vest ratably over a four-year period following the date of grant. Restricted stock unit awards granted generally
vest one to three years from the date of grant. We also granted performance-based restricted stock unit awards to our executive officers and certain key management. The 2005 Plan was terminated in May 2011 with the stockholders approval of the
Incentive Plan. Awards and options to purchase 1,061,460 shares were outstanding under this plan as of December 31, 2012.
2000 Equity Incentive Plan (the 2000 Plan)
The 2000 Plan provided for the grant of options to our employees or consultants who were neither directors nor officers. The exercise prices of the options granted under the 2000 Plan were equal to the
fair market value of our common stock on the dates of grant. Options issued under the 2000 Plan expire ten years after the options were granted and generally vest ratably over a four-year period following the date of grant. The 2000 Plan was
terminated in May 2005 with the stockholders approval of the 2005 Plan. Options to purchase 57,045 shares were outstanding under this plan as of December 31, 2012.
1996 Stock Option Plan (the 1996 Plan)
The 1996 Plan provided
for the grant of incentive stock options to our employees and nonqualified stock options to our employees, directors and consultants. The exercise prices of options granted under the 1996 Plan were at least equal to the fair market value of our
common stock on the dates of grant. Options issued under the 1996 Plan expire five to ten years after the options were granted and generally vest ratably over a four-year period following the date of grant. The 1996 Plan was terminated in May 2005
with the stockholders approval of the 2005 Plan. Options to purchase 103,730 shares were outstanding under this plan as of December 31, 2012.
Stock Options, Restricted Stock Unit Awards and Performance-Based Restricted Stock Unit Awards
A summary of the stock award activity under our equity incentive plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
Number of Shares
(in thousands)
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Aggregate
Intrinsic Value
(in millions)
|
|
Balance at January 1, 2012
|
|
|
1,177
|
|
|
$
|
36.15
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5
|
|
|
|
59.82
|
|
|
|
|
|
|
|
|
|
Exercised (1)
|
|
|
(325
|
)
|
|
|
34.61
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19
|
)
|
|
|
49.63
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(43
|
)
|
|
|
47.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
795
|
|
|
$
|
36.01
|
|
|
|
3.85
|
|
|
$
|
42.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
787
|
|
|
$
|
35.94
|
|
|
|
3.80
|
|
|
$
|
42.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2012
|
|
|
735
|
|
|
$
|
35.52
|
|
|
|
3.48
|
|
|
$
|
40.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
Number of Shares
(in thousands)
|
|
|
Weighted Average
Grant-Date Fair
Value per Share
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Nonvested at January 1, 2012
|
|
|
754
|
|
|
$
|
44.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
515
|
|
|
|
49.91
|
|
|
|
|
|
|
|
|
|
Vested (1)
|
|
|
(327
|
)
|
|
|
40.84
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(59
|
)
|
|
|
44.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2012
|
|
|
883
|
|
|
$
|
46.62
|
|
|
|
1.00
|
|
|
$
|
79.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2012
|
|
|
816
|
|
|
$
|
46.62
|
|
|
|
0.98
|
|
|
$
|
73.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRSUs
|
|
Number of Shares
(in thousands)
|
|
|
Weighted Average
Grant-Date Fair
Value per Share
|
|
|
Weighted Average
Remaining
Contractual Term
(Years)
|
|
|
Aggregate
Intrinsic Value
(in millions)
|
|
Nonvested at January 1, 2012 (2)
|
|
|
469
|
|
|
$
|
36.15
|
|
|
|
|
|
|
|
|
|
Granted (2)
|
|
|
222
|
|
|
|
51.07
|
|
|
|
|
|
|
|
|
|
Vested (1)
|
|
|
(191
|
)
|
|
|
36.15
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(98
|
)
|
|
|
37.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2012 (2)
|
|
|
402
|
|
|
$
|
40.34
|
|
|
|
1.12
|
|
|
$
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2012 (2)
|
|
|
376
|
|
|
$
|
40.34
|
|
|
|
0.82
|
|
|
$
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During the year ended December 31, 2012, a select number of vested stock options, RSUs and PRSUs were net-share settled. For employee RSUs and PRSUs, we withheld
shares with value equivalent to the employees minimum statutory obligation for the applicable income and other employment taxes and remitted the equivalent cash amount to the appropriate taxing authorities. For board member stock options, we
withheld shares to cover the value of the exercise price on the date of exercise and withheld shares equal to approximately 40% of the difference between the exercise price and the fair market value on the date of exercise. For board member RSUs, we
withheld shares equal to approximately 40% of the value of the shares covered by the RSU. We remitted the equivalent cash amount for the shares withheld from board members, except those withheld from stock options to cover the value of the exercise
price on the date of exercise, directly to the board member. The total stock options, RSU and PRSU shares withheld were 19,650, 37,904 and 42,260, respectively, and were based on the value of the stock options on their exercise date and the RSUs and
PRSUs on their respective release dates, as determined by our closing stock price on such dates. These net-share settlements had the effect of repurchases of our common stock as they reduced the number of shares that would have otherwise been issued
as a result of their release.
|
(2)
|
The number of shares subject to PRSUs granted represents the aggregate target awards for such PRSUs. The number of shares ultimately issued will be determined based on
our performance related to market share, revenue, and net income targets. The shares, if any, will be issued following the end of the applicable performance period.
|
The weighted-average grant-date fair value of options granted during the years ended December 31, 2012, 2011, and 2010 was $13.82,
$14.84, and $9.84 per share, respectively. The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2012, 2011 and 2010 was $49.91, $49.53, and $31.82 per share, respectively. The weighted-average
grant-date fair value of PRSUs granted during the years ended December 31, 2012, 2011 and 2010 was $51.07, $50.63, and $31.66 per share, respectively.
F-28
The total intrinsic value of options exercised during the years ended December 31, 2012, 2011, and 2010
was $9.6 million, $7.5 million, and $3.1 million, respectively. The total fair value of RSUs vested during the years ended December 31, 2012, 2011 and 2010 was $21.2 million, $8.3 million, and $3.9 million, respectively. The total fair value of
PRSUs vested during the years ended December 31, 2012 and 2011 was $13.4 million, and $6.7 million, respectively. No PRSUs vested in 2010.
The total cash received from employees as a result of employee stock option exercises for the years ended December 31, 2012, 2011, and 2010 was $10.3 million, $15.5 million, and
$8.8 million, respectively. In connection with these exercises, the excess tax benefit recognized by us for the years ended December 31, 2012, 2011, and 2010 was $8.1 million, $4.0 million, and $2.1 million, respectively. Payments related
to the net share settlement of equity awards for the year ended December 31, 2012 was $7.8 million, which is reflected as a financing activity within the consolidated statements of cash flows. We settle employee stock option exercises and RSU
and PRSU releases with newly issued shares of our common stock.
Stock-Based Compensation Expense
Stock-based compensation expense consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Stock options
|
|
$
|
1,892
|
|
|
$
|
1,568
|
|
|
$
|
480
|
|
RSUs
|
|
|
16,966
|
|
|
|
10,258
|
|
|
|
4,970
|
|
PRSUs
|
|
|
7,887
|
|
|
|
6,292
|
|
|
|
5,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense, before income taxes
|
|
|
26,745
|
|
|
|
18,118
|
|
|
|
10,603
|
|
Related income tax benefit
|
|
|
(9,712
|
)
|
|
|
(6,618
|
)
|
|
|
(3,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense, net of income taxes
|
|
$
|
17,033
|
|
|
$
|
11,500
|
|
|
$
|
6,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, the unamortized compensation expense related to outstanding unvested
options, RSUs and PRSUs was $704,000, $26.5 million, and $6.8 million, respectively, and is expected to be recognized over a weighted-average period of 2.22, 1.86, and 1.12 years, respectively.
We measure the fair value of stock options on the date of grant, as determined by the Black-Scholes option pricing model. We utilize a
blended volatility, a combination of historical and implied volatility, in this valuation model. Historical volatility is based on a period commensurate with the expected term of the options. Implied volatility is derived based on a six-month period
of 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 us, which we believe are indicative of
future exercise behavior. For the risk free interest rate, we use the then currently available rate on zero coupon U.S. government issues with a remaining period commensurate with the expected term for valuing options. We have never declared or paid
cash dividends on our common stock, and currently do not anticipate paying cash dividends in the future.
The following
weighted average assumptions were used for valuing our stock options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Volatility rate
|
|
|
41
|
%
|
|
|
41
|
%
|
|
|
44
|
%
|
Risk free interest rate
|
|
|
0.27
|
%
|
|
|
1.57
|
%
|
|
|
1.93
|
%
|
Expected term (in years)
|
|
|
2.0
|
|
|
|
2.95
|
|
|
|
3.05
|
|
We value stock unit awards based on the fair value of our common stock on the date that the stock unit
award is granted. Stock-based compensation expense related to stock options and stock unit awards with only
F-29
service conditions is recognized straight line over the requisite service period for the entire award. Stock-based compensation expense related to stock unit awards with performance-based
conditions is recognized on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in substance, multiple awards (i.e., a graded vesting basis). Additionally, we adjust the compensation
expense over the service period based upon the expected achievement of the performance conditions. An estimated forfeiture rate is applied and included in the calculation of stock-based compensation expense at the time that the stock option or stock
unit awards are granted and revised if necessary in subsequent periods, if actual forfeiture rates differ from those estimates.
In November 2012, the board of directors approved modifications for certain of the board of directors RSUs and certain board of
director stock options. The modification for the RSUs provided at the election of the director to sell to the company a whole number of shares of common stock equal to approximately 40% of the shares covered by the RSU. The modification to the stock
options provided at the election of director to exercise the option pursuant to a net exercise arrangement and/or sell to the company a whole number of shares of common stock to approximately 40% of the difference between the exercise price and the
fair market value on the date of exercise. On December 13, 2012, certain directors elected for the release of their RSUs and the exercise of stock options according to these modifications. As a result of these modifications, the RSU and stock
option awards classifications were changed from equity awards to liability awards and resulted in incremental compensation expense equal to the increase in the fair value of the award on the settlement date over the fair value of the award on the
grant date. The incremental stock compensation expense for the RSUs and stock options was $677,000 and $1.2 million, respectively.
Employee Stock Purchase Plan
Under the ESPP, eligible employees may
purchase shares of our common stock through payroll deductions of up to 15% of his or her compensation, at a price per share equal to 95% of the fair market value of our common stock at the end of the purchase period.
The number of shares issuable under the ESPP as of December 31, 2012 was 226,668. Because our ESPP is a non-compensatory plan as
defined by the authoritative guidance for stock compensation, no stock-based compensation expense is recorded for our ESPP. The total cash received from employees as a result of ESPP shares issued during the year ended December 31, 2012, 2011,
and 2010 was $976,000, $792,000, and $632,000, respectively.
Stock Repurchase Programs
In April 2008, our board authorized us to repurchase up to $100 million of our common stock. The program does not have a fixed
expiration date and may be discontinued at any time. During the years ended December 31, 2012 and 2011, no shares were repurchased and during the year ended December 31, 2010, we repurchased 560,000 shares for $19.3 million under this
program. As of December 31, 2012, $57.8 million remain available under this program for repurchases. The Merger Agreement prohibits us from redeeming, purchasing, or otherwise acquiring our own stock. As a result, we will not repurchase
additional shares of our common stock pursuant to our board-authorized repurchase program while the Merger remains pending.
F-30
11. Income Taxes
The components of (loss) income before income taxes and income tax (benefit) expense are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(55,020
|
)
|
|
$
|
98,020
|
|
|
$
|
110,714
|
|
Foreign
|
|
|
11,729
|
|
|
|
10,414
|
|
|
|
10,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(43,291
|
)
|
|
$
|
108,434
|
|
|
$
|
121,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current income tax expense :
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14,356
|
|
|
$
|
29,963
|
|
|
$
|
7,997
|
|
State
|
|
|
146
|
|
|
|
567
|
|
|
|
(222
|
)
|
Foreign
|
|
|
3,239
|
|
|
|
6,592
|
|
|
|
9,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,741
|
|
|
$
|
37,122
|
|
|
$
|
17,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) expense :
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(41,101
|
)
|
|
$
|
(6,059
|
)
|
|
$
|
19,761
|
|
State
|
|
|
15,558
|
|
|
|
(182
|
)
|
|
|
(667
|
)
|
Foreign
|
|
|
876
|
|
|
|
(2,688
|
)
|
|
|
(6,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(24,667
|
)
|
|
$
|
(8,929
|
)
|
|
$
|
12,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(6,926
|
)
|
|
$
|
28,193
|
|
|
$
|
30,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule reconciles the difference between the U.S. federal income tax (benefit) expense at
the statutory rate (35%) to our income tax (benefit) expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Income tax (benefit) expense at U.S. federal statutory rate
|
|
$
|
(15,152
|
)
|
|
$
|
37,952
|
|
|
$
|
42,379
|
|
Effect of foreign operations taxed at various rates
|
|
|
(315
|
)
|
|
|
308
|
|
|
|
(3,177
|
)
|
State income (benefit) taxes, net of federal benefit
|
|
|
450
|
|
|
|
187
|
|
|
|
(811
|
)
|
Federal manufacturing benefit
|
|
|
(1,157
|
)
|
|
|
(2,911
|
)
|
|
|
(2,758
|
)
|
Research and other federal tax credits
|
|
|
0
|
|
|
|
(3,808
|
)
|
|
|
(6,367
|
)
|
Reduction in unrecognized tax benefit
|
|
|
(1,200
|
)
|
|
|
(4,772
|
)
|
|
|
(2,263
|
)
|
Change in valuation allowance
|
|
|
15,126
|
|
|
|
0
|
|
|
|
2,504
|
|
Write-off of investments in foreign subsidiary
|
|
|
(8,190
|
)
|
|
|
0
|
|
|
|
0
|
|
Merger related costs
|
|
|
3,112
|
|
|
|
0
|
|
|
|
0
|
|
Other
|
|
|
400
|
|
|
|
1,237
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(6,926
|
)
|
|
$
|
28,193
|
|
|
$
|
30,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
16.0
|
%
|
|
|
26.0
|
%
|
|
|
25.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The American Taxpayer Relief Act of 2012, which retroactively reinstated the U.S. federal research and
development tax credit from January 1, 2012 through December 31, 2013, was enacted into law on January 2, 2013. Therefore, in the first quarter of the 2013, we will recognize a benefit of approximately $5.5 million relating to U.S.
research and development tax credits generated in the 2012.
F-31
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our net deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Reserves and accruals not currently deductible
|
|
$
|
37,153
|
|
|
$
|
18,869
|
|
Difference between book and tax basis of inventory
|
|
|
33,890
|
|
|
|
10,862
|
|
Tax carryforwards
|
|
|
17,090
|
|
|
|
17,050
|
|
Foreign deferred tax assets
|
|
|
15,937
|
|
|
|
20,138
|
|
Difference between book and tax basis of property and equipment
|
|
|
3,644
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
107,714
|
|
|
|
66,919
|
|
Valuation allowance for deferred tax assets
|
|
|
(18,751
|
)
|
|
|
(4,788
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
88,963
|
|
|
$
|
62,131
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Difference between book and tax basis of property and equipment
|
|
$
|
0
|
|
|
$
|
(2,211
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
88,963
|
|
|
$
|
59,920
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
72,948
|
|
|
$
|
26,963
|
|
Non-current deferred tax assets
|
|
|
16,906
|
|
|
|
34,591
|
|
Current deferred tax liabilities
|
|
|
(186
|
)
|
|
|
(171
|
)
|
Non-current deferred tax liabilities
|
|
|
(705
|
)
|
|
|
(1,463
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
88,963
|
|
|
$
|
59,920
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance is based on our assessment that it is more likely than not that certain deferred
tax assets will not be realized in the foreseeable future. The valuation allowance as of December 31, 2012 includes allowances of $15.2 million against our deferred tax asset for California research and development tax credit carryforwards. Due
to changes in Californias income apportionment rules, which were enacted in the fourth quarter of 2012 and will become effective January 1, 2013, we believe that it is more likely than not that the results of future operations will not
generate sufficient taxable income in California to realize these benefits; therefore, a valuation allowance was provided for these assets.
We also have a deferred tax asset of $1.7 million related to foreign net operating loss carryforwards in our display products business and a deferred tax asset of $1.9 million related to capital loss
carryforwards. We have full valuation allowances against these deferred tax assets as we believe it is more likely than not that we will not generate sufficient taxable income to utilize the foreign net operating loss carryforwards or sufficient
capital gains to utilize the capital loss carryforwards after consideration of our tax planning strategies.
F-32
The following is a reconciliation of the amount of gross unrecognized tax benefits (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
22,754
|
|
|
$
|
24,294
|
|
Additions based on tax positions related to the current year
|
|
|
3,944
|
|
|
|
3,426
|
|
Additions for tax positions of prior years
|
|
|
0
|
|
|
|
0
|
|
Reductions for tax positions of prior years
|
|
|
(1,619
|
)
|
|
|
(194
|
)
|
Reductions for settlements and effective settlements with taxing authorities
|
|
|
(5,677
|
)
|
|
|
0
|
|
Reductions for lapsing of the statute of limitations
|
|
|
(523
|
)
|
|
|
(4,772
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
18,879
|
|
|
$
|
22,754
|
|
|
|
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits at December 31, 2012 is $8.4 million of
net tax benefits that, if recognized, would affect our effective tax rate. We recognize interest and penalties related to uncertain tax positions in our income tax expense. As of December 31, 2012 and 2011, respectively, we had approximately
$1.5 million and $2.2 million of accrued interest and penalties related to uncertain tax positions. During the years ended December 31, 2012, 2011, and 2010, we recorded interest and penalties, of $232,000, $231,000 and $250,000,
respectively. In the first quarter of 2013, we expect to reduce the balance of unrecognized tax benefits by $4.6 million due to the expiration of a statute of limitations.
We are subject to taxation in the United States and in various states and foreign jurisdictions. Our tax years 2008 and forward are subject to examination by the IRS, our tax years 2000 and forward are
subject to examination by material state jurisdictions, and our tax years 2004 and forward are subject to examination by material foreign jurisdictions.
We have benefited from a tax holiday in Korea where we manufacture certain of our replacement parts. The tax holiday, which expired at the end of 2012, was awarded by Koreas Ministry of Finance and
Economy to promote capital investment in certain qualified high-technology businesses. The holiday provided exemption from corporate income tax of 100% of eligible income from 2003 through 2009 and of 50% of eligible income from 2010 through 2012.
Since inception, the tax holiday has provided tax benefits to us totaling $5.1 million. Tax benefits provided by the tax holiday totaled $366,000 and $51,000 for the years ended December 31, 2012 and 2011, respectively. There was no tax
benefit provided by the tax holiday in 2010.
It is our intention to reinvest undistributed earnings of our foreign
subsidiaries and thereby indefinitely postpone their remittance. Accordingly, we have not provided U.S. federal income and foreign withholding taxes on $84.0 million of undistributed earnings from non-U.S. operations as of December 31, 2012. It
is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.
12. Employee Benefit Plans
Defined Benefit Plans
We provide a defined benefit pension plan for a substantial portion of our employees at our Japan subsidiary. Benefits under the plan are based upon years of service and compensation levels. The plan is
an unfunded plan and includes no plan assets. We accrue for the unfunded portion of the benefit obligation. The assumptions used in calculating the obligation for this plan depend on the local economic environment.
Our Korean subsidiary terminated their pension plan in July 2011. Plan assets were distributed to participants on or before
August 30, 2011. Prior to its termination, our Korean subsidiary maintained a trust fund with a life insurance company, which is a guaranteed investment product and heavily regulated by the Korean government. All of the pension plan assets were
held in a Variable Rate Guaranteed Investment Fund. These
F-33
pension plan assets were recorded based on the total amount contributed plus any compounded and accrued interest. There were no other categories of pension plan assets. The vast majority of
pension plan assets, as well as a minimum rate of return, were guaranteed by the Korean government. In connection with the termination of our Korean subsidiary pension plan during the year ended December 31, 2011, we recognized a curtailment
loss of $222,000 related to the settlement of projected benefit obligations.
At December 31, 2012 and 2011, the
liability recognized related to the projected benefit obligation was $3.1 million and $2.9 million, respectively. Net period costs were $364,000, $883,000 and $622,000 for the years ended December 31, 2012, 2011 and 2010, respectively. The
weighted-average discount rate used to estimate the projected benefit obligation as of December 31, 2012 and 2011 was 1.00% and 1.25%, respectively, and the weighted-average compensation increase was 2.5% and 5.0%, respectively. Our estimated
benefit payments for each of the next ten years will be $210,000, $219,000, $231,000, $239,000 and $249,000, respectively in 2013 through 2017, and an aggregate of $1.5 million for years 2018 through 2022.
The recognition of the unfunded status on the balance sheet requires employers to recognize actuarial gains and losses as a component of
other comprehensive income (loss). We recorded the unrecognized actuarial gains and losses included in our pension plans in other comprehensive income (loss). The total amount recorded in accumulated other comprehensive income (loss) after taxes was
an unrecognized actuarial loss of $44,000 for the year ended December 31, 2012, an unrecognized actuarial gain of $54,000 for the year ended December 31, 2011, and an unrecognized actuarial loss of $279,000 for the year ended
December 31, 2010.
Defined Contribution Plans
We have a defined contribution plan in the United States that qualifies under Section 401(k) of the Internal Revenue Code, and we
offer defined contribution plans at certain of our international subsidiaries. Participating United States employees contribute a percentage of their eligible compensation, subject to certain annual IRS limits. The plan is available to all eligible
United States employees who meet the service requirement. In accordance with the provisions of the terms of the plan, we may make discretionary matching contributions of up to 4% of each participating employees eligible compensation, not to
exceed $5,000 per participant in the plan year.
We matched defined contribution participant amounts of $2.9 million,
$2.5 million, and $2.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Executive
Deferred Compensation Plan
We have an executive deferred compensation plan for key management level employees in which
the employee may elect to defer receipt of current compensation from us in order to provide retirement and other benefits on behalf of such employee backed by company owned life insurance policies. This plan is intended to be an unfunded,
nonqualified deferred compensation plan that complies with the provisions of Section 409A of the Internal Revenue Code. The cash surrender value of the company owned life insurance policies totaled $6.0 million and $4.9 million as of
December 31, 2012 and 2011, respectively, and is included in other assets in the consolidated balance sheets. Our liability for the deferred compensation plan totaled $6.3 million and $5.2 million as of December 31, 2012 and
2011, respectively, and is included in other liabilities in the consolidated balance sheets. Compensation expense under the plan totaled $430,000, $576,000 and $123,000, for the years ended December 31, 2012, 2011 and 2010, respectively.
13. Commitments and Contingencies
Leases
We lease certain facilities under non-cancelable operating leases. The lease terms on these facilities are through December 2017 and provide for certain rent abatements and minimum annual increases and
options to
F-34
extend the terms. In addition, we have a land lease in Korea with a lease term that expires in December 2020. This land lease is exempt from lease payments because the building meets certain
investment and operational criteria of the Korean government.
Building rent expense under operating leases is recognized on a
straight-line basis over the life of the related lease. Rent expense includes payments for building rent, utilities and services. For the years ended December 31, 2012, 2011, and 2010, rent expense totaled approximately $2.5 million, $2.4
million and $2.3 million, respectively.
Total future minimum lease commitments under operating leases are as follows (in
thousands):
|
|
|
|
|
2013
|
|
$
|
2,049
|
|
2014
|
|
|
1,643
|
|
2015
|
|
|
1,237
|
|
2016
|
|
|
719
|
|
2017
|
|
|
628
|
|
|
|
|
|
|
|
|
$
|
6,276
|
|
|
|
|
|
|
We had capital lease obligations of $654,000 as of December 31, 2012. Capital lease obligations
expire at various dates, with the latest maturity in 2015. The current portion of the total obligation of $354,000 is included in other current liabilities and the remaining long-term portion of $300,000 is included in other long-term liabilities on
the consolidated balance sheets. Assets held under capital leases are included in net property, plant and equipment on the consolidated balance sheets.
Total future minimum lease commitments under capital leases are as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
431
|
|
2014
|
|
|
231
|
|
2015
|
|
|
44
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
706
|
|
Less amount representing interest
|
|
|
(52
|
)
|
|
|
|
|
|
Present value of future minimum lease payments
|
|
$
|
654
|
|
|
|
|
|
|
Guarantees and Warranties
We record a provision for warranty, which is included in cost of revenues and is recorded at the time that the related revenue is
recognized. The warranty period and terms for light sources and replacement parts varies by light source 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 warranty 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 products 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 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.
F-35
The following table provides the changes in the product warranty accrual (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
9,870
|
|
|
$
|
11,050
|
|
Accruals for warranties issued during the year
|
|
|
7,651
|
|
|
|
13,199
|
|
Changes in liability related to pre-existing warranties
|
|
|
(5,005
|
)
|
|
|
(10,944
|
)
|
Warranty expenditures (1)
|
|
|
(5,314
|
)
|
|
|
(3,435
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
7,202
|
|
|
$
|
9,870
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Warranty expenditures are net of consumed parts returned of $1.4 million and $1.5 million, respectively, for the years ended December 31, 2012 and 2011.
|
Intellectual Property Indemnifications
We agree to indemnify certain of our customers in the general purchase agreements with our three lithography tool manufacturer customers,
ASML, Canon and Nikon, and under certain of our development and supply agreements. These indemnifications generally include both general and intellectual property indemnification provisions that provide we defend these parties against certain
infringement claims directed against our products. Under the indemnification provisions, we would pay costs and damages attributable to the infringement claims, including attorneys fees associated with settlements or defenses in respect of
such claims, provided that certain conditions are satisfied. As of December 31, 2012, we were not subject to any pending general or intellectual property-related litigation or claims. We have not received any requests for nor have we been
required to make any payments under these indemnification provisions.
Employment Contracts
We have employment contracts with five officers and key management under which severance payments would become payable after a change in
control in the event of specified terminations without cause or terminations under certain circumstances. In addition, vesting of stock-based compensation would accelerate upon the occurrence of the requisite triggers. If severance payments under
the current employment agreements were to become payable, the individual severance payments, as of December 31, 2012, would range from $429,000 to $2.9 million, and total severance payments for all five individuals would be $7.3 million.
Indemnifications
We have entered into separate indemnification agreements with our executive officers, certain key employees and with each of our directors. These agreements require us, among other requirements, to
indemnify such officers and directors against expenses (including attorneys fees), judgments and settlements paid by such individuals in connection with any action arising out of such individuals status or service as our executive
officers or directors (subject to exceptions such as where the individuals failed to act in good faith or in a manner the individuals reasonably believed to be in or not opposed to the best interests of Cymer) and to advance expenses when such
individuals may be entitled to indemnification by us. Other than the pending purported class action litigation discussed under Litigation below, there are no pending legal proceedings that involve the indemnification of any of our
directors or officers.
Contingencies Related to Third-Party Review and Legal Actions
From time to time, we are subject to potential claims and assessments from third parties. We are also subject to various governmental
audits and reviews. We continually assess whether or not such claims have merit and
F-36
warrant accrual. Where appropriate, we accrue estimates of anticipated liabilities in the consolidated financial statements. Such estimates are subject to change and may affect our operating
results, financial condition and cash flows.
We are from time to time party to legal actions in the normal course of
business. Management does not expect the outcome of current legal action in the normal course of business to have a material effect on our operating results, financial condition and cash flows.
Commitments and Contingencies Related to Merger with ASML.
Merger Related Fees
Pursuant to an engagement letter between us and Goldman Sachs & Co., we have agreed to pay Goldman Sachs & Co. a transaction fee based on a percentage of the aggregate consideration to
be paid pursuant to the Merger Agreement. As of January 2, 2013, such fee is estimated to be approximately $34.5 million, based on the closing price of ASML ordinary shares for the five trading days ending January 2, 2013, $6.0 million of
which was paid upon execution of the Merger Agreement and the remainder of which is payable immediately prior to closing of the Merger. Through December 31, 2012, we have recorded an additional $2.8 million in fees to other service providers
relating to the Merger, and will owe an additional $1.6 million for this time period contingent upon closing of the Merger. During the year ended December 31, 2012, we recorded total expenses related to the Merger of $8.8 million.
2012 Short Term Incentive Plan and Profit Sharing Program Payments
During 2012, we did not meet our performance targets under our bonus and profit sharing plan and, therefore, did not have any amounts
accrued at December 31, 2012. Pursuant to the Merger Agreement, we will pay 2012 annual bonuses and profit sharing on the closing date of the Merger. Each employee in good standing as of the closing date will be entitled to receive 50% of their
2012 target short term incentive plan bonus award or 50% of their target profit sharing award. The estimated total amount of such bonuses and profit sharing is approximately $12.0 million, and will be paid only if the Merger is completed.
Termination Fee
If the Merger Agreement is terminated, depending upon the reason for terminating the Merger Agreement, we may be required to pay ASML a termination fee of $75.0 million.
Accelerated Vesting Rights
Pursuant to the Merger Agreement, unvested options and RSUs held by our outside directors will be cashed-out at closing of the Merger. This will accelerate the vesting of these options and RSUs and result
in additional stock-based compensation expense of up to $772,000, depending on the closing date of the Merger.
Litigation
On October 29, 2012, a putative shareholder class action complaint was filed against Cymer, the Cymer Board, ASML, Holdco, Merger Sub and Merger Sub 2 in the District Court of Clark County, Nevada,
captioned
Jerome v. Cymer, Inc. et al.,
Case No. A-12-671009-C (Eighth Judicial Dist. Clark County, Nevada), challenging the Merger and seeking, among other things, compensatory damages, attorneys and experts fees and injunctive
relief concerning the alleged breaches of fiduciary duty and to prohibit the defendants from consummating the Merger. The plaintiff subsequently amended the complaint on November 28, 2012.
F-37
The lawsuit generally alleges, among other things, that the Merger Agreement was reached
through an unfair process, that the Merger consideration is inadequate, that the Merger Agreement unfairly caps the price of Cymer common stock, that the Merger Agreements no solicitation provision and other deal protection devices
have precluded other bidders from making successful competing offers for Cymer, and that the preliminary proxy statement/prospectus filed in connection with the Merger contains material misstatements and/or omissions. The lawsuit alleges that ASML
aided and abetted the alleged breaches of fiduciary duties.
On December 31, 2012, the parties entered into a memorandum
of understanding to settle the lawsuit. While the defendants believe that the lawsuit is without merit, in order to eliminate the burden, expense and uncertainties inherent in further litigation, the defendants have agreed, as part of the memorandum
of understanding and without admitting to the validity of any allegations made in the lawsuit, to make certain additional disclosure requested by the plaintiff in the proxy statement/prospectus filed in connection with the Merger. The memorandum of
understanding contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including certain confirmatory discovery and court approval following notice to our
stockholders. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the Merger, the Merger Agreement, and any disclosure made in
connection therewith (other than claims to enforce the settlement). In addition, the memorandum of understanding contemplates that, if the Merger is consummated and if the settlement is approved, Cymer or its successor shall be responsible for any
attorneys fees of the plaintiff that may be awarded by the District Court of Clark County, Nevada. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the District Court of Clark County,
Nevada will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.
We do not expect the outcome of this lawsuit to have a material effect on our operating results, financial condition and cash flow.
14. Related Party Transactions
We did not have any related party transactions in 2012 or 2011. During 2010, we engaged Exponent, Inc., to perform a
one-time component reliability analysis for a fee of $164,000. A member of our board of directors and member of Exponents board of directors, served as an executive officer of Exponent until he retired from his executive chairman role at
Exponent on June 3, 2010.
15. Segment and Geographic Information
Operating segments are defined as components of a public entity which engage in business activity which may earn
revenues and incur expenses and its operating results are reviewed regularly by the chief operating decision maker (CODM), or decision making group, in deciding how to allocate resources and in assessing performance. We develop,
manufacture and market our products within two reportable operating segments: light source products and display products. Our light source products operating segment primarily designs, manufactures and sells light sources and installed base products
for use in photolithography systems used in the manufacture of semiconductors. Our display products operating segment developed, integrated, marketed and supported silicon crystallization tools used in the manufacture of high-resolution LTPS
LCD and OLED displays. Our CODM is our chief operating officer who reviews the operations and full financial statements of our light source products and display products operating segments on a quarterly basis. Our CODM uses this information in
order to make decisions on resources needed for our light sources and display products businesses and to assess the overall performance of these businesses. The accounting policies to derive our consolidated financial results are the same as those
used for our segment reporting.
In the fourth quarter of 2012, we evaluated the demand for our display products business.
Based on this evaluation, we determined that the carrying value of the assets in the display products business required
F-38
adjustments, as discussed below. In January 2013, we decided to discontinue new product development in the display products business. For further discussion, see Note 18 Subsequent
Events.
Information related to our operating segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Light source products
|
|
$
|
531,967
|
|
|
$
|
591,437
|
|
|
$
|
529,609
|
|
Display products (1)
|
|
|
6,658
|
|
|
|
2,775
|
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
538,625
|
|
|
$
|
594,212
|
|
|
$
|
534,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Light source products
|
|
$
|
44,295
|
|
|
$
|
124,379
|
|
|
$
|
132,875
|
|
Display products (1)
|
|
|
(86,850
|
)
|
|
|
(16,800
|
)
|
|
|
(11,759
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(42,555
|
)
|
|
$
|
107,579
|
|
|
$
|
121,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Light source products
|
|
$
|
1,007,749
|
|
|
$
|
885,426
|
|
|
$
|
775,391
|
|
Display products (2)
|
|
|
15,481
|
|
|
|
42,318
|
|
|
|
11,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,023,230
|
|
|
$
|
927,744
|
|
|
$
|
787,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects a $48.2 million write-down of inventory, a $5.1 million impairment of equipment used in the manufacturing or research and development of display product tools
and an accrual of $12.2 million for firm purchase commitments for inventory and equipment associated with the discontinuance of new product development in the display products business.
|
(2)
|
Reflects a $48.2 million write-down of inventory and a $5.1 million impairment of equipment used in the manufacturing or research and development of display product
tools associated with the discontinuance of new product development in the display products business.
|
Revenue
by product in each of our operating segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Light source products:
|
|
|
|
|
|
|
|
|
|
|
|
|
DUV
|
|
$
|
137,185
|
|
|
$
|
208,333
|
|
|
$
|
191,625
|
|
EUV
|
|
|
23,125
|
|
|
|
22,250
|
|
|
|
0
|
|
Installed base products
|
|
|
371,657
|
|
|
|
360,854
|
|
|
|
337,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
531,967
|
|
|
$
|
591,437
|
|
|
$
|
529,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Display products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon crystallization tools
|
|
$
|
6,658
|
|
|
$
|
2,775
|
|
|
$
|
3,999
|
|
Installed base products
|
|
|
0
|
|
|
|
0
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,658
|
|
|
$
|
2,775
|
|
|
$
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
538,625
|
|
|
$
|
594,212
|
|
|
$
|
534,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
Geographic Information
Sales to external customers and long-lived assets, classified by geographic location, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Sales to
External
Customers (1)
|
|
|
Long-lived
Assets (2)
|
|
2012
|
|
|
|
|
|
|
|
|
U.S (3)
|
|
$
|
180,117
|
|
|
$
|
161,927
|
|
Japan
|
|
|
107,815
|
|
|
|
934
|
|
Korea
|
|
|
103,942
|
|
|
|
4,314
|
|
Taiwan
|
|
|
63,229
|
|
|
|
834
|
|
Other Asia (China and Singapore)
|
|
|
55,543
|
|
|
|
498
|
|
Europe
|
|
|
27,979
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
538,625
|
|
|
$
|
169,052
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
U.S (3)
|
|
$
|
264,881
|
|
|
$
|
113,768
|
|
Japan
|
|
|
100,931
|
|
|
|
931
|
|
Korea
|
|
|
97,105
|
|
|
|
3,573
|
|
Taiwan
|
|
|
59,498
|
|
|
|
282
|
|
Other Asia (China and Singapore)
|
|
|
38,966
|
|
|
|
238
|
|
Europe
|
|
|
32,831
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594,212
|
|
|
$
|
119,015
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
U.S (3)
|
|
$
|
210,837
|
|
|
$
|
97,531
|
|
Japan
|
|
|
107,006
|
|
|
|
311
|
|
Korea
|
|
|
86,944
|
|
|
|
2,383
|
|
Taiwan
|
|
|
57,627
|
|
|
|
150
|
|
Other Asia (China and Singapore)
|
|
|
37,729
|
|
|
|
4,109
|
|
Europe
|
|
|
34,066
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
534,209
|
|
|
$
|
104,705
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Sales to external customers consist of sales generated from each of the geographic locations. All significant intercompany balances are eliminated in consolidation.
|
(2)
|
Long-lived assets include property, plant and equipment attributed to the geographic location in which they are located.
|
(3)
|
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 expect that sales in these geographic areas will continue to account for a substantial portion of our
revenue. The loss of business from any of these regions would have a material adverse effect on our operating results, financial condition, and cash flows.
F-40
Customers concentrations with revenues attributable to our light source products
operating segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
ASML Holding N.V.
|
|
|
23
|
%
|
|
|
35
|
%
|
|
|
30
|
%
|
Nikon Corporation
|
|
|
13
|
%
|
|
|
11
|
%
|
|
|
15
|
%
|
SK Hynix, Limited
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
Samsung Electronics Co.
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
16. Acquisition
On April 1, 2011, we acquired all of the outstanding equity of eDiag, a privately held company based in Seoul,
Korea. We acquired eDiag for consideration totaling $15.0 million payable in cash, with $6.0 million paid on April 1, 2011, $3.0 million paid on April 1, 2012 and $3.0 million payable on each of April 1,2013 and 2014. Additionally, we
entered into a services agreement with the president and previous majority stockholder of eDiag that pays him $2.5 million on April 1, 2015 and $2.5 million on April 1, 2016, if he continues his employment with us through those dates. The
payments under the services agreement are being recorded as bonus expense over the respective service periods.
The excess
purchase price over fair value of net assets acquired was recorded as goodwill and identifiable assets consisting of developed technology were recorded at fair value. For further discussion, see Note 8, Goodwill and Intangible Assets.
17. Quarterly Financial Data (Unaudited)
The table below includes quarterly data (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Total
|
|
Revenues
|
|
$
|
150,498
|
|
|
$
|
149,312
|
|
|
$
|
131,478
|
|
|
$
|
107,337
|
|
|
$
|
538,625
|
|
Gross profit
|
|
$
|
75,501
|
|
|
$
|
78,793
|
|
|
$
|
71,788
|
|
|
$
|
(3,653
|
)
|
|
$
|
222,429
|
|
Operating (loss) income
|
|
$
|
16,674
|
|
|
$
|
11,220
|
|
|
$
|
9,046
|
|
|
$
|
(79,495
|
)
|
|
$
|
(42,555
|
)
|
Net (loss) income
|
|
$
|
21,531
|
|
|
$
|
9,603
|
|
|
$
|
9,826
|
|
|
$
|
(77,325
|
)
|
|
$
|
(36,365
|
)
|
Basic (loss) earnings per share (1)
|
|
$
|
0.70
|
|
|
$
|
0.31
|
|
|
$
|
0.31
|
|
|
$
|
(2.47
|
)
|
|
$
|
(1.17
|
)
|
Diluted (loss) earnings per share (1)
|
|
$
|
0.68
|
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
(2.47
|
)
|
|
$
|
(1.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
|
Total
|
|
Revenues
|
|
$
|
154,399
|
|
|
$
|
158,235
|
|
|
$
|
128,698
|
|
|
$
|
152,880
|
|
|
$
|
594,212
|
|
Gross profit
|
|
$
|
79,513
|
|
|
$
|
84,184
|
|
|
$
|
65,063
|
|
|
$
|
76,376
|
|
|
$
|
305,136
|
|
Operating income
|
|
$
|
35,657
|
|
|
$
|
36,912
|
|
|
$
|
13,406
|
|
|
$
|
21,604
|
|
|
$
|
107,579
|
|
Net income
|
|
$
|
28,799
|
|
|
$
|
27,721
|
|
|
$
|
11,250
|
|
|
$
|
12,471
|
|
|
$
|
80,241
|
|
Basic earnings per share (1)
|
|
$
|
0.95
|
|
|
$
|
0.91
|
|
|
$
|
0.37
|
|
|
$
|
0.41
|
|
|
$
|
2.63
|
|
Diluted earnings per share (1)
|
|
$
|
0.94
|
|
|
$
|
0.89
|
|
|
$
|
0.36
|
|
|
$
|
0.40
|
|
|
$
|
2.58
|
|
(1)
|
Earnings per share are computed separately for each quarter and the full year using the respective weighted average shares. Therefore, the sum of the quarterly earnings
per share amounts may not equal the annual amounts reported.
|
F-41
18. Subsequent Events
Discontinuance of New Product Development in Display Product Business
On January 28, 2013, we decided to discontinue new product development in our display products business, as authorized by our board
of directors. This decision was made in light of our plan to focus on our core light source business, the losses the display products business has generated since its inception, and the continued material investment in research and development that
we believe would be necessary to increase our competitive position in the market. We will continue to support the display product tools that have been previously sold and have remaining warranty or service contracts associated with them.
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 determined that the carrying value of the assets in the display products business required adjustments consisting of a write-down to inventory of $48.2 million to properly reflect lower of cost or
market and a $5.1 million impairment of equipment used in the manufacturing or research and development of display product tools. In addition, in the fourth quarter of 2012, we accrued expenses of $12.2 million relating to firm purchase commitments
for inventory and research and development costs that will no longer be utilized. As a result of the above, we recorded pre-tax charges in the fourth quarter of 2012 of $65.5 million, of which $63.6 million is included in cost of revenues and $1.9
million is included in operating expenses.
The steps needed to complete the discontinuance of new product development in the
display products business are expected to be completed by the end of the first quarter of 2013. We expect additional charges in the first quarter of 2013, primarily for employee-related and other costs, to be approximately $1.0 million. These $1.0
million charges are expected to be the only cash expenditures associated with discontinuing the display products business, except potential refunds of up to $13.2 million in customer deposits on tools that have been delivered but not yet accepted by
the customer. These customer deposits are included in deferred revenue in the current liabilities section of the consolidated balance sheet at December 31, 2012.
F-42