CYBEROPTICS CORP - Annual Report: 2018 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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x ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange

Act of 1934 for the Year Ended December 31, 2018.

 

o TRANSITION PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange

Act of 1934 for the transition period from ______ to ______.

 

COMMISSION FILE NO. (0-16577)

 

CYBEROPTICS CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota	41-1472057
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5900 Golden Hills Drive MINNEAPOLIS, MINNESOTA	55416
(Address of principal executive offices)	(Zip Code)
(763) 542-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: Title of each class: Common Stock, no par value

Name of Exchange: NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $119,485,783

 

As of February 28, 2019, there were 7,102,075 shares of the registrant’s Common Stock, no par value, issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

The responses to Part III items 10, 11, 12, 13 and 14 herein are incorporated by reference to certain information in the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held May 16, 2019.

 

 

 

GENERAL

Background 

 

CyberOptics Corporation was founded in 1984 and is a leading global developer and manufacturer of high precision sensing technology solutions. Our headquarters are located at 5900 Golden Hills Drive in Golden Valley, Minnesota. Our website address is www.cyberoptics.com. You can access, free of charge, our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and any other amendments to those reports, at our website, or at the Commission’s website at www.sec.gov. Proxy materials for our upcoming 2019 annual shareholders meeting to be held on May 16, 2019 will be available electronically via the internet at the following address: http://www.idelivercommunications.com/proxy/cybe/.

 

As a leading global developer and manufacturer of high precision 3D sensors, our strategy is to leverage our 3D sensor technologies in our three key vertical markets: surface mount technology (SMT); semiconductor; and metrology. A key element of our strategy is to deliver profitable growth through the continued sale and development of high precision 3D sensors and system products based on our proprietary Multi-Reflection Suppression (MRS) technology. We believe that our MRS technology is a breakthrough 3D optical technology for high-end inspection and metrology with the potential to significantly expand our markets. Unlike competing technologies, our MRS technology has the ability to inhibit reflections and provide microscopic quality images at production line speeds.

 

Our products are used in the SMT, semiconductor and metrology markets to significantly improve our customers' manufacturing yields and productivity, and to assist our customers in meeting their rigorous demands for manufacturing quality. Our products use a variety of proprietary technologies such as lasers, optics and machine vision, combined with software, electronics and mechanical design. Our products help manufacturers solve their most complex manufacturing challenges by providing them with key information relating to their manufacturing processes, which allows them to improve production volumes, yields and product quality.

Manufacturing yield challenges, as electronics and semiconductors become more complex, are driving the need for more precise inspection and metrology. As a result, we believe 3D inspection and metrology represent high-growth segments in both the SMT and semiconductor capital equipment markets. We expect a growing number of opportunities in the markets for SMT and semiconductor inspection and metrology, because our 3D MRS technology platform is well suited for many of these applications, particularly with respect to complex circuit boards and semiconductor back-end, mid-end and advanced packaging inspection and metrology applications.

 

We manufacture 3D and 2D optical sensors for use in our own proprietary inspection system products and for sale to original equipment manufacturers (OEMs), system integrators and end customers in the SMT, semiconductor and metrology markets. Our inspection system products are sold to manufacturers of SMT electronic circuit boards to control quality as in-line systems, particularly with respect to complex circuit boards used in smart phones and other high-end electronic products. These products are used by manufacturers to measure screen-printed solder paste, to inspect circuit boards and components after component placement, to confirm proper placement after full assembly of circuit boards and to inspect solder joints on printed circuit boards. We also sell our inspection system products to leading semiconductor manufacturers and outsourced semiconductor assembly and test (OSAT) companies. Manufacturers of DRAM and Flash Memory use our inspection system products to inspect assembly of their memory modules. Increasingly, our inspection system products are being used for various semiconductor related inspection and metrology applications, including advanced packaging.

 

Our WaferSense® family of products assist with yield improvement and tool uptime in semiconductor wafer fabrication and flat panel display manufacturing by providing highly accurate measurements of critical process factors. These measurements are impossible or very difficult to obtain without powering down the equipment used for wafer fabrication and flat panel display manufacturing. Customers who use our products have better yields, through-put and tool up-time. Our products are more accurate when compared to the various manual techniques historically used by semiconductor manufacturers to obtain critical wafer fabrication process measurements. We have continued to invest in our WaferSense® product family and anticipate strong future sales growth for these products.

Our ability to implement our strategy effectively is subject to numerous uncertainties and risks, including the risks identified in Item 1A of this Annual Report on Form 10-K. There can be no assurance that our strategy will be successful.

 

Multi-Reflection Suppression Technology

We are developing new high precision 3D sensors and system products based on our proprietary MRS technology. We believe 3D inspection and metrology represent a high growth segment for both the SMT and semiconductor capital equipment markets. Our recent and planned product introductions are designed to strengthen our competitive position in our current markets and expand into adjacent markets.

We have entered into an agreement to supply KLA with high-precision 3D sensor subsystems for its back-end semiconductor packaging inspection systems. We also have entered into an agreement to supply Nordson-YESTECH (a subsidiary of Nordson Corporation) with high precision 3D sensor subsystems for its SMT and wire bond inspection systems. The sensor subsystems are based on the MRS technology that we have been developing for the past several years. We intend to expand sales of products based on our MRS technology in the SMT, semiconductor and metrology markets, including inspection and metrology for semiconductor mid-end, back-end and advanced packaging applications, through new OEM partners, system integrators and direct sales to end-user customers. 

 

Our 3D MRS technology has been deployed in our 3D automated optical inspection (AOI) systems, the SQ3000 and SQ3000™ 3D CMM, which are designed to expand our presence in markets requiring high precision inspection and metrology. In these markets, identifying defects has become highly challenging and critical due to smaller semiconductor and electronics packaging and increasing component density on circuit boards. We believe the combination of our proprietary MRS technology, sophisticated 3D fusing algorithms and precision optics allows us to offer microscopic image quality at production speeds. We recognized our initial revenues from sales of the SQ3000 in the second quarter of 2015. The SQ3000™ 3D CMM, which was launched in the second half of 2017, combines automated optical inspection and metrology functionality in a single product.  Manufacturers in a variety of industries, including the SMT and semiconductor markets, can use the SQ3000™ 3D CMM as an in-line or off-line metrology tool to help solve complex manufacturing and product quality challenges. 

Challenges with shrinking transistor dimensions has resulted in increased 3D stacking of chips. Accordingly, advanced semiconductor packaging is expected to grow rapidly in the next 5 to 10 years. Micro electromechanical systems devices (MEMS) are now being used for many advanced applications. Yield challenges with these products are driving the need for inspection and metrology, and we believe our 3D MRS technology platform is well suited to conduct the inspection and metrology for many of these applications.  We are introducing new products based on our MRS technology that we believe will allow us to capitalize on these opportunities and significantly increase our revenues in the future.  

We have significantly advanced our MRS-enabled 3D sensor technology as part of a research initiative aimed at further applying our 3D MRS technology to semiconductor mid-end and advanced packaging inspection and metrology. Our next generation ultra-high resolution 3-micron pixel 3D MRS sensor is capable of measuring feature sizes down to 30 microns accurately and at high speeds, which makes this sensor valuable for many semiconductor mid-end and advanced packaging inspection and metrology applications. We are targeting one micron, three-sigma accuracy, at speeds that would inspect more than 20 300-millimeter wafers per hour. We are currently demonstrating our ultra-high resolution 3-micron pixel 3D MRS sensor to OEMs, system integrators and directly to semiconductor manufacturers and we have already received our first purchase orders for this sensor and subsystems based on this technology. We believe sales of MRS-enabled 3D sensors and systems for semiconductor mid-end and advanced packaging inspection applications represent significant long-term growth opportunities, and we expect sales of these sensors and related systems to ramp up in the second half of 2019 and beyond.

 

OPERATIONS AND PRODUCTS

 

We develop, manufacture and sell intelligent, non-contact sensors and systems for process control, inspection and metrology. Our product offerings are sold to OEMs, system integrators and end-user customers in the SMT circuit board assembly, semiconductor and general industrial metrology markets. Our OEMs and system integrators incorporate our sensor products into capital equipment serving these markets. We also sell sensors and stand-alone inspection and metrology systems directly to end-users. We provide services for 3D scanning and metrology for those customers who cannot justify the purchase of their own 3D scanning and metrology equipment, or need services for special projects.

 

Our principal products are used by manufacturers to increase operating efficiencies and yields, and to assist them in meeting rigorous demands for product quality. In addition to proprietary hardware designs that combine precision optics, various light sources and multiple detectors, our products incorporate software that controls the hardware, and filters and converts raw data into application specific information. Our 3D scanning and metrology services help manufacturers quickly solve their most complex 3D inspection, analysis and product engineering challenges, allowing them to improve product yields and quality.

 

 

High Precision 3D and 2D Sensors

 

We manufacture high precision sensors for use in the SMT, semiconductor and metrology markets. We sell our sensors directly to OEMs, system integrators and end-user customers. Historically, most of our revenue from sensor sales has come from our alignment sensors. Within the past five years, we began selling 3D MRS sensor subsystems to OEMs for integration into their proprietary inspection system and metrology products serving the SMT and semiconductor markets. We also have integrated our 3D MRS sensor technology into our own proprietary systems for 3D inspection and metrology applications.

We have entered into an agreement to supply KLA with high-precision 3D MRS sensor subsystems for its back-end semiconductor packaging inspection systems. We have an agreement to supply Nordson-YESTECH with high-precision 3D MRS sensor subsystems for its SMT and wire bond inspection systems. We intend to negotiate agreements for sale of these sensors to other OEMs, system integrators and end-users, and to deploy them in our next generation inspection system and metrology products. We also have developed a strobe inspection module (SIM) that features extremely fast image acquisition and low false call rates in 2D applications. We use the SIM in our 2D AOI products, including our QX family of products and the MX600 product that is used for post-singulation inspection of memory modules.

We believe that a strategy of developing and selling complete inspection systems and metrology products to end-users provides us with valuable customer input in the markets we currently serve, and allows us to refine the sensors and sensor subsystems for these markets and adjacent markets. At the same time, sales to OEMs allow us to capitalize on our strengths in optical physics, sensor design and software algorithm development. We believe that the resulting sensor products and subsystems are unique and add significant value to the products of our OEM customers.

 

3D MRS Sensors

 

Our 3D MRS sensors are used in our proprietary inspection system and metrology products serving the SMT, semiconductor and metrology markets. We also sell our 3D MRS sensors to OEM customers and system integrators serving the SMT and semiconductor markets. Our 3D MRS sensors are particularly well suited for applications in the semiconductor back-end, mid-end and advanced packaging inspection and metrology markets.

 

Our high precision 3D sensors are based on commercially available cameras, digital light projectors and other hardware components, which are combined with our proprietary MRS technology, 3D fusing algorithms and precision optics. The combination of these elements allows our sensors to capture microscopic quality images at production speeds. Sales of high precision 3D MRS sensor subsystems to OEMs accounted for 12% of our revenues in 2018 and 8% of our revenues in 2017.

 

Strobe Inspection Modules (SIM)

 

We also design and manufacture 2D sensors based on our SIM technology and proprietary Autonomous Image Interpretation (Ai2) software for automated optical inspection. These sensors are based on a proprietary hardware design utilizing a strobe-based lighting concept for extremely fast image acquisition. We deploy these sensors in our family of 2D AOI inspection systems, which we believe offer an industry leading level of low false call performance at fast in-line production speeds. We also utilize this technology in our MX600 system for post-singulation inspection of memory modules. To date, use of the SIM technology has been limited to our own 2D AOI products for the SMT and semiconductor inspection markets. However, our SIM technology could be used for a variety of inspection tasks outside of traditional SMT and semiconductor inspection applications, including inspecting for completeness and accuracy at the end of line final assembly.

 

SMT Electronic Assembly Alignment Sensors

 

Our SMT electronic assembly alignment sensor products are a family of sensors that are customized and incorporated into the equipment manufactured by our customers for use in SMT circuit board assembly. We work closely with our OEM customers to integrate these sensors into their equipment.

LaserAlign®. Our LaserAlign sensor family of products has accounted for the majority of our sales in the SMT electronic assembly alignment sensor product line. These sensors are primarily sold for incorporation into pick-and-place machines manufactured and sold by OEM customers for use in SMT production lines.

 

The LaserAlign family of products aligns both large and extremely small surface mount and through-hole components, known as chip capacitors and resistors, during transport on a pick-and-place machine prior to placement. LaserAlign sensors are incorporated into the placement heads of pick-and-place machines to ensure accurate component placement at high production speeds. LaserAlign integrates an intelligent sensor, composed of a laser, optics and detectors with a microprocessor and software for making specific measurements. LaserAlign enables quick and accurate alignment of each component as it is being transported by the pick-and-place arm for surface mount or through-hole assembly. Using non-contact technology, LaserAlign facilitates orientation and placement of components at higher speeds than can be achieved using conventional mechanical or machine vision component centering systems.

 

The LaserAlign sensor is offered in several different configurations to satisfy the requirements of the machines on which it is used. Revenue from product shipments of LaserAlign sensors accounted for 13% of our revenues in 2018 and 15% of our revenues in 2017.

 

InPrinter Inspection Camera. The InPrinter Inspection Camera, which is mounted directly in DEK brand screen printers manufactured by ASM Pacific Technology Ltd., is used to identify fiducial markings on a circuit board to ensure accurate board registration prior to placement of solder paste, as well as to provide an upgraded capability for 2D solder paste and stencil inspection. Revenue from shipments of the InPrinter Inspection Camera accounted for 4% of our revenues in 2018 and 2017.

 

3D Solder Paste Inspection (SPI) Sensors

 

We manufacture custom designed 3D SPI sensors for use in our own family of SPI systems. We also sell our 3D SPI sensors to Viscom AG for use in their SPI platforms. Sales of 3D SPI sensors to Viscom AG accounted for minimal revenues in each of 2018 and 2017. 

 

Inspection and Metrology Systems

 

Our inspection system products are primarily used in the semiconductor and SMT electronic assembly industries for process control, inspection and metrology. These systems are sold to end-user manufacturing customers that use them in a production line or alongside a production line to maintain process and quality control. Our products incorporate our proprietary 3D and 2D optical sensors, off the shelf, translation or robotics hardware and conveyors and complete computer systems or processors with internally developed software.

 

Automated Optical Inspection (AOI) Products

 

We have been selling AOI products for well over a decade and have continued to develop and improve our AOI offerings since inception. These products are typically used to inspect circuit boards after component placement to determine whether all components have been placed correctly, and to measure the quality of solder joints after reflow. These products can also be used for various semiconductor related inspection and metrology applications, including advanced packaging, and for certain general purpose industrial metrology applications. Revenue from shipments of our AOI products accounted for 27% of our revenues in 2018 and 23% of our revenues in 2017.

 

SQ3000 and SQ3000™ 3D CMM. Our first 3D AOI system, the SQ3000, is designed to expand our presence in markets requiring high precision inspection. Identifying defects on circuit boards has become highly challenging and critical due to smaller electronics packaging and increasing component density, combined with smaller and more complex solder joints. The SQ3000 is also available in versions that can accommodate dual production lanes and larger circuit board sizes. The SQ3000™ 3D CMM, which was launched in the second half of 2017, combines automated optical inspection and metrology functionality in a single product. Manufacturers in a variety of industries, including the SMT and semiconductor markets, can use the SQ3000™ 3D CMM as an in-line or off-line metrology tool to help solve complex manufacturing and product quality challenges. We believe there are a growing number of sales opportunities for the SQ3000 and SQ3000™ 3D CMM in the markets for semiconductor inspection and metrology, particularly for advanced packaging applications. We believe our 3D MRS sensor technology is uniquely suited for many of these applications because of its ability to offer microscopic image quality and superior measurement performance at production line speeds. 

 

Sales of the SQ3000 and SQ3000™ 3D CMM accounted for 20% of our revenues in 2018 and 18% of our revenues in 2017. 

 

QX600 and QX150i. Our 2D QX600 and QX150i AOI systems feature our SIM sensor technology and advanced Ai2 software which, we believe, offer an industry leading level of low false call performance. We have invested in significant software enhancements for all of our AOI products that improve set-up and programming time and ease of use for the customer. The QX600 is available in versions that can accommodate dual production lanes and larger circuit board sizes.

 

QX100i. We market our 2D QX100i AOI system for production lines requiring extremely fast inspection speeds. These products also feature our SIM sensor technology and advanced Ai2 software. The QX100i does not offer the resolution capability of the QX600 or QX150i, but instead was designed to provide the fastest AOI inspection times currently available in the market and also an industry-leading level of low false call performance.

 

QX250i. Our new 2D QX250i AOI system features our SIM sensor technology and advanced Ai2 software. The QX250i features two sensors that allows for both top and bottom side inspection of a circuit board.

MX600. Our MX600 system utilizes our SIM sensor technology and Ai2 software, and is used for post-singulation inspection of memory modules. In 2018 we recognized $1.1 million of revenue from sales of the MX600 to one of the world’s top three memory manufacturers, and our backlog at December 31, 2018 includes approximately $3.3 million of orders for the MX600. We recognized no revenue from sales of this product in 2017. We believe additional MX600 orders could be received in future periods.

 

Solder Paste Inspection (SPI) Products

 

We have been selling in-line 3D solder paste measurement machines for over a decade and have continued to develop and improve our SPI family of products since their introduction. Revenue from shipments of our SPI products accounted for 5% of our revenues in 2018 and 11% of our revenues in 2017.

 

SE3000™. The SE3000™ is an in-line system solder paste inspection system based on our 3D MRS sensor technology. The SE3000™ measures in 3D the amount of solder paste applied to a circuit board after the first step of the SMT circuit board assembly process. Because of the small size of the components that must be placed on each pad of solder paste and the density of components placed on the circuit board, a significant amount of SMT assembly problems are related to the quality of solder paste deposition. Misplaced solder paste or excess or inadequate amounts of paste can lead to improper connections or bridges between leads causing an entire circuit board to malfunction. The SE3000™ inspects the height, area and volume of solder paste placed on an entire circuit board at production line speeds and with resolution that allows the SE3000™ to measure the smallest chip scale packages and micro ball array component sites. The SE3000™ can be integrated into most SMT production lines, providing real time quality control immediately after a printed circuit board leaves the screen printer and before component placement commences.

SE600. The SE600 is an in-line solder paste inspection system incorporating a dual-illumination sensor that measures in 3D the height, area and volume of solder paste placed on an entire circuit board at production line speeds. The SE600 can be integrated into most SMT production lines.

 

SE500ULTRA. The SE500ULTRA is an in-line solder paste inspection system incorporating the same proprietary 3D inspection technology as the SE600, but with a single illumination sensor. The SE500ULTRA inspects at faster speeds than the SE3000 or SE600 and is intended for use in high-volume production environments. Because the SE500ULTRA performs inspections at very high speed, it does not provide the same level of resolution and measurement performance as the SE3000 or SE600.

General Industrial Metrology Products and Services

 

CyberGage®360. Manufacturers in a variety of industries use CyberGage®360 as a near-line or off-line metrology tool to capture surface data to help solve complex manufacturing and product quality challenges. Our sales of CyberGage®360 to date have not been significant. There can be no assurance that CyberGage®360 will ever achieve widespread market acceptance. 

Other Metrology Products and Services. We also sell 3D scanning and metrology equipment manufactured by other suppliers and provide 3D scanning and metrology services for objects of all sizes and complexity for customers who do not have their own 3D scanning and metrology equipment. Revenue from sales of other metrology products and services accounted for 11% of our revenues in 2018 and 11% of our revenues in 2017.

Semiconductor Sensors

 

Our principal semiconductor products, the WaferSense® family of products, are a series of wireless sensors that provide measurements of critical factors in the semiconductor fabrication process. We designed our WaferSense® family of sensors to be used where wafers or reticles are located in semiconductor fabrication to provide measurements of critical factors that are currently impossible or extremely difficult to obtain without powering down the fabrication process equipment. Because the user is not required to break down semiconductor fabrication equipment when using our WaferSense® products, significant time is saved and accuracy is increased, compared to the manual techniques currently used by many customers when checking the process parameters measured by our WaferSense® products. As a result of WaferSense® technology, our customers are able to improve the up-time, through-put and process yield for their semiconductor fabrication equipment. We intend to continue to enhance and expand the WaferSense® family of products in the future. We sell our semiconductor products to both OEM and end-user customers through a network of independent sales representatives. Sales of our semiconductor products accounted for 21% of our revenues in both 2018 and 2017.

Automatic Leveling Sensor (ALS). The ALS is a wireless, vacuum-compatible sensor that can be placed in cassettes, FOUPS, on-end effectors, aligners, in-load locks and process chambers used in semiconductor fabrication to ensure that all stations are level and coplanar.

 

Automatic Gapping Sensor (AGS). The AGS is a gapping tool that measures the gap in three places between the showerhead and pedestal in semiconductor process equipment. The amount of gap between the showerhead and pedestal can affect uniformity when material is deposited on semiconductor wafers.

 

Automatic Teaching Sensor (ATS). The ATS measures X-Y-Z offset from robotic transfers of wafers to the pedestal in semiconductor process equipment. The amount of gap and offset after robotic transfer of wafers to the shower pedestal can affect film thickness and uniformity when material is deposited or etched on semiconductor wafers, impacting quality and product yields.

 

 

Automatic Vibration Sensor (AVS). The AVS measures X-Y-Z acceleration for shock and vibration, which can generate wafer particles, scratches or wafer breakage that reduce yield.

 

WaferSense® Airborne Particle Sensor™. The WaferSense® Airborne Particle Sensor™ (APS) allows engineers to efficiently detect and classify particles and their exact sources in a process as wafers are transferred, slit valves are actuated and chambers are cycled, pumped down and purged. The APS is designed to be compatible with front-ends, coater/developer tracks, and deposition and etch equipment. ReticleSense® Airborne Particle Sensor allows users to quickly identify geographic particle sources in reticle environments. The ReticleSense Airborne Particle Sensor is compatible with ASML, Nikon and Canon scanners and can travel the entire reticle path to detect in real-time when and where particles occur. The ReticleSense Airborne Particle Sensor helps our customers exceed manufacturing quality and productivity standards in the Photo Lithography scanner environment. 

PanelSense™ Airborne Particle Sensor™. The PanelSense™ Airborne Particle Sensor™ (APS-FPD) enables troubleshooting of airborne particles within flat panel display manufacturing equipment by allowing engineers to quickly monitor and identify when and where particles originate in the flat panel display manufacturing process. 

WaferSense® Auto Multi Sensor™.  The WaferSense® Auto Multi Sensor™ is an all-in-one wireless real-time device that allows engineers to quickly take leveling, vibration and humidity measurements. Humidity measurements are becoming more important as the use of Fin Field Effect Transistor technology increases among semiconductor manufacturers. The ReticleSense® Auto Multi Sensor™ allows users to quickly take leveling, vibration and humidity measurements in reticle environments.

 

Markets and Customers 

 

We sell the majority of our products into the SMT circuit board assembly market and the markets for SMT and semiconductor inspection and metrology. The value of automation is high in these markets because the products produced have high unit costs and are manufactured at speeds too great for effective human involvement. Moreover, the trend toward smaller electronic devices with higher circuit densities, smaller circuit paths and extremely small components requires manufacturing and testing equipment capable of extremely accurate alignment and multidimensional measurement. Challenges with shrinking transistor dimensions have resulted in 3D stacking of chips. MEMS devices are now being used for many advanced applications. Yield challenges with these products are driving the need for inspection and metrology. We expect a growing number of opportunities in the markets for SMT and semiconductor inspection, because our 3D MRS technology platform is well suited for many of these applications. Trends in these markets include further efforts to reduce the cost of the manufacturing process, and to limit human involvement through automation.

We sell 3D MRS-enabled sensor subsystems to KLA for use in its semiconductor back-end packaging inspection systems. We are currently demonstrating our ultra-high resolution 3-micron pixel 3D MRS sensor to OEMs, system integrators and directly to semiconductor manufacturers, and we have received our first purchase orders for sales of sensors and subsystems based on this technology. We believe sales of 3D MRS-enabled sensors and systems for semiconductor mid-end and advanced packaging inspection applications represent significant long-term growth opportunities for us, and we expect sales of these sensors and systems to ramp up in the second half of 2019 and beyond. We estimate that the total available market for sales of our 3D MRS sensors to manufacturers of semiconductor inspection and metrology equipment will be approximately $25 million in 2019. 

 

The vast majority of our SMT electronic assembly alignment sensors are sold on an OEM basis to Juki Corporation, Kulicke & Soffa Industries, Inc. and ASM Pacific Technology Ltd. for integration into DEK brand equipment serving the SMT circuit board assembly market. Viscom AG purchases our SPI sensors on an OEM basis for integration into their SPI inspection equipment. We believe our arrangement with Viscom AG will allow us to sell more SPI sensors by better penetrating the European market for SMT inspection equipment. We also have an agreement to supply Nordson-YESTECH with 3D MRS sensor subsystems for its SMT and wire bond inspection equipment. We believe our arrangement with Nordson-YESTECH will allow us to better penetrate the markets for SMT and wire bond inspection equipment with our 3D MRS sensor offerings.

 

We use our 3D and 2D optical sensors in SPI and AOI inspection equipment that we manufacture and sell on a worldwide basis to many of the leading SMT electronic assembly circuit board manufacturers, end-user customers manufacturing their own circuit boards, semiconductor manufacturers and outsourced semiconductor assembly and test (OSAT) companies. Manufacturers of DRAM and Flash Memory use our inspection system products to inspect assembly of their memory modules. We estimate that our total available market for sales of 3D AOI equipment to the SMT and semiconductor inspection and metrology markets will be approximately $350 million in 2019. 

 

Our semiconductor products, primarily our WaferSense family of products, are used by process and equipment engineers as non-contact precision measurement tools to optimize the process for production of semiconductor wafers and manufacturing of flat panel displays. Most of the world’s largest manufacturers of semiconductors and semiconductor equipment purchase our WaferSense products. We believe the available market for our WaferSense products is potentially significant, and will continue to increase in the future as new product applications are added.

 

 

The total available market for general industrial metrology equipment is very large, diverse and growing. Our 3D scanning and metrology services scan, model and inspect objects of all sizes and complexity for customers who do not have their own scanning and metrology equipment.

 

Export sales totaled $46.4 million or 72% of our total sales in 2018, compared to $38.0 million or 71% of our total sales in 2017. Export sales represent a large percentage of our total sales because a large portion of the global capacity for electronics assembly and semiconductor production occurs outside the United States. In addition, a significant portion of our export sales include SMT electronic assembly alignment sensors and 3D MRS sensors sold to OEM customers located in Europe and Asia. See Note 12 to our consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for information regarding the percentage of total sales revenue represented by total export sales (sales of products into countries other than the United States, including sales delivered through distributors) by location during the past two years. Most of our international export sales are negotiated, invoiced and paid in U.S. dollars. We manufacture our inspection system products in Singapore and a portion of our raw material purchases are denominated in Singapore dollars. We also have R&D and sales personnel located in Singapore and sales offices located in other parts of the world. Although currency fluctuations do not significantly affect our revenue, they can impact our costs and influence the price competitiveness of our products and the willingness of existing and potential customers to purchase our products.

 

Our sales to Juki Corporation and KLA each accounted for 10% of our total revenue in 2018.

Sales and Marketing

 

Our high precision 3D and 2D sensors are sold in all global geographies to OEMs, system integrators and manufacturers by direct sales personnel located in Minnesota and Asia. Some of the global channel partners for our semiconductor products also market our high precision 3D MRS sensors to semiconductor manufacturers and system integrators. 

 

Our AOI and SPI inspection and metrology system products are sold in all global geographies. Sales of these products are more heavily concentrated in Asia where a significant portion of the worldwide production capacity for circuit board assembly and semiconductor manufacturing occurs. Our sales of AOI and SPI systems are sold by direct sales personnel located in Singapore, as well as in the United Kingdom, the United States and China and through independent sales representatives and distributors. Our sales and service office in the United Kingdom serves the European market and we have sales and service team members based in the United States to serve the Americas market. We have sales and service offices in China and Singapore to serve the markets for SMT and semiconductor inspection and metrology equipment in Asia. We have agreements with 40 independent sales representatives and distributors, which focus on sales and service of our AOI and SPI inspection and metrology system products to end-user customers. These agreements cover North and South America (13), Europe (13) and China and the rest of Asia (14).

 

We sell our semiconductor products, primarily our WaferSense family of products, to semiconductor fabrication facilities through a separate worldwide sales channel of independent sales representatives and distributors. We also sell our WaferSense products directly to large OEM customers, which are mainly semiconductor capital equipment manufacturers. We currently have agreements in place or in process with 14 independent sales representatives and distributors, which focus on sales and service for our WaferSense products. These agreements cover the United States (4), Europe (3) and the Asia-Pacific (7). Our sales to OEM customers and our worldwide network of independent sales representative and distributors are managed by direct sales personnel located in the United States and Asia.  

 

We sell our general industrial metrology products through a separate worldwide sales channel of independent sales representative and distributors. We have agreements in place with 27 independent sales representatives and distributors, which focus on sales and service for our general industrial metrology products. These agreements cover the Americas (15), Europe (6) and the Asia-Pacific (6). We also sell our 3D scanning and metrology products and services to end-user customers through a direct sales staff located in Minnesota. 

 

We market our products through appearances at industry trade shows, advertising in industry journals, articles published in industry and technical journals and on the Internet. In addition, we have marketing arrangements with certain key customers that serve as highly visible references. We support our sales efforts by utilizing internet-based search engine marketing programs to generate leads from prospects who have expressed interest in obtaining the types of products and services that we offer.

 

Backlog

 

Product backlog was $13.6 million at December 31, 2018, $11.4 million at December 31, 2017 and $10.2 million at December 31, 2016. Product backlog at September 30, 2018 was $19.7 million. Our products are typically shipped two weeks to two months after the receipt of an order. Sales of some inspection system products may require customer acceptance due to performance or other acceptance criteria included in the terms of sale. For these product sales, revenue is recognized at the time of customer acceptance. Although our business is generally not of a highly seasonal nature, sales may vary based on the capital procurement practices in the SMT electronics assembly and semiconductor fabrication industries. However, we are not able to quantify with any level of precision the impact of these practices on our sales in any given quarterly period, and any seasonal cyclicality is often masked by more dramatic changes in demand caused by the normal volatility in electronics and semiconductor markets that are associated with changes in the economy. Our scheduled backlog at any time may vary significantly based on the timing of orders from OEM customers. Accordingly, backlog may not be an accurate indicator of performance in the future.

 

Research and Development

 

We differentiate our products primarily on the basis of innovative and proprietary technology and on our ability to combine several different technological disciplines to address industry and customer needs. In addition, we actively seek ongoing strategic customer relationships with leading product innovators in existing and new markets. We actively investigate the needs of, and seek input from, these customers to facilitate the adoption of current innovative technologies and to identify opportunities to improve manufacturing processes.

We commit substantial resources to the development of important next-generation technologies that, we believe, will position us to be a global technology leader in high precision 3D sensors and capture additional market share in our key vertical markets of SMT, semiconductor and metrology. We maintain our commitment to research and development and product development even during periods when strong demand in the markets for our products does not exist. During the past two years, research and development efforts have been focused on a number of activities that are critical to our future growth and success, including the following:

 

Research and development expenses were $8.8 million or 14% of revenue in 2018 and $8.0 million or 15% of revenue in 2017. Research and development expenses consist primarily of salaries, project materials, contract labor and other costs associated with ongoing product development and enhancement efforts. Research and development resource utilization is centrally managed based on market opportunities and the status of individual projects.

 

Manufacturing

 

All of our 3D and 2D optical sensors, SMT alignment sensors and WaferSense semiconductor sensor products are assembled at our Minneapolis, Minnesota headquarters facility. Our inspection systems, including the SQ3000™ 3D CMM product, are assembled in Singapore. Much of our product manufacturing, which is primarily circuit board manufacturing, lens manufacturing and metal parts production, is performed by outside contractors. Our production personnel inspect incoming parts, perform final assembly, calibrate and perform final quality control testing of finished products. We have elected not to make the capital investments necessary for complete internal manufacturing of our products.

 

A variety of components used in our products are available only from single sources and involve relatively long order cycles, in some cases up to six months. We believe we have identified alternative assembly contractors for most of our sub-assemblies. Use of those alternative contractors could require substantial rework of the product designs, resulting in periods during which we could not satisfy customer orders. An actual change in such contractors would likely require a period of training and testing.

 

Accordingly, an interruption in a supply relationship or reduced production capacity experienced by one or more of such contractors could result in the inability to deliver one or more of our products for a period of several months. To help prevent delays in the shipment of our products, we maintain in inventory, or on scheduled delivery from suppliers, components that we believe will be sufficient to meet forecasted demand, often times for a minimum of six months.

Competition

 

We face competition from a number of companies in the machine vision, image processing and inspection systems markets, many of which are larger and have greater financial resources than we do. However, we believe our current and planned products offer advantages from competing products in terms of price and suitability for specific applications. 

Our 3D and 2D optical sensors and SMT electronic assembly alignment sensors primarily compete with the sensors and vision systems developed by OEMs using their own design employees for incorporation into their products. We believe our high precision 3D sensors based on our MRS technology are unique in the marketplace based on the ability to offer microscopic quality images at fast production line speeds. Our 2D SIM sensors and SMT electronic assembly alignment sensor products also compete with vision (camera and software based) systems and component libraries available from Cognex Corporation and others. Although advances in vision systems have reduced some of the advantages of our SMT electronic assembly alignment sensor products in some configurations, we continue to believe that our sensors compete favorably based on our ability to custom design products with stringent physical form requirements, speed, flexibility, low cost and ease of use.

The primary competition for sales of our AOI and SPI inspection system products has been from Korean based companies, including Koh Young Technology, MirTec Ltd., and PARMI Co. Ltd. We also compete with Taiwanese based Test Research, Inc. and German based Viscom AG, among others. Sales of AOI systems account for roughly two-thirds of the approximately $800 million total SPI and AOI SMT inspection systems market, with 3D AOI representing the fastest growing segment of this market. The markets for semiconductor mid-end and advanced packaging inspection equipment are fragmented. Our competitors in the market for semiconductor mid-end inspection equipment include Camtek, Inc., STMicroelectronics, Inc. and Rudolph Technologies, Inc., among others. We believe our 3D MRS sensor technology and the Ai2 software used in our SQ family of products differentiates our products from competing products and that our products compete effectively in the AOI market based on cost, ease of use at rapid production line speeds and the low rate of false calls. We believe that our SQ3000 3D AOI and SQ3000™ 3D CMM products, enabled by our proprietary MRS technology, 3D fusing algorithms and precision optics, offers advantages over competing products and will allow us to gain market share based on our ability to offer microscopic quality images at fast production line speeds.

 

We believe our WaferSense products are unique to the marketplace and primarily face competition from the manual techniques currently used by most customers to monitor their semiconductor fabrication or flat panel display manufacturing equipment. We believe that our WaferSense products provide more reliable and accurate measurements than these manual techniques. In a semiconductor fabrication environment, we believe that our WaferSense products save significant time because the user is not required to break down process equipment, or pressurize a vacuum chamber, which improves tool up-time, through-put and process yield. 

The multi-billion dollar market for 3D scanning and metrology products is highly fragmented. The primary competition for the various metrology products and solutions we sell include coordinate-measuring machines sold by Hexagon, Zeiss and others, and assorted other 3D measurement technology products offering varying combinations of speed and accuracy. The market for 3D scanning and metrology services is dominated by small regional market participants. Our sales of CyberGage®360 to date have not been significant, and there can be no assurance that CyberGage®360 will ever achieve widespread market acceptance.

Employees

 

As of December 31, 2018, we had 178 full-time employees worldwide, including 43 in sales, marketing and customer support, 61 in manufacturing, purchasing and production operations, 58 in engineering, research and development, and 16 in finance, administration and information services. Of these employees, 115 are located at our corporate headquarters in Minneapolis, Minnesota and 63 are located in other offices (5 in the United Kingdom, 7 in other states throughout the U.S., 39 in Singapore, 7 in China, 3 in Taiwan, 1 in Japan and 1 in Korea). Although we have been successful in attracting and retaining qualified technical personnel, there is an ongoing need for more employees with advanced degrees and training in mathematics, optical physics and other key disciplines. There can be no assurance that we will be able to successfully retain or recruit qualified technical personnel in the future. None of our employees is covered by collective bargaining agreements or are members of a union.

 

Proprietary Protection

 

We rely on the technical expertise and know-how of our personnel and trade secret protection, as well as on patents, to maintain our competitive position. We attempt to protect intellectual property by restricting access to proprietary methods by a combination of technical and internal security measures. In addition, we make use of non-disclosure agreements with customers, consultants, suppliers and employees. Nevertheless, there can be no assurance that any of the above measures will be adequate to protect our proprietary technology and it is possible that any of our products could be duplicated by other companies in the same markets in which we participate.

We hold 46 patents (26 U.S. and 20 foreign) on a number of technologies, including the technologies used in our 3D optical sensors, MRS technology, LaserAlign products, SIM sensor technology, inspection systems, WaferSense products, CyberGage®360, SQ3000 and SQ3000™ 3D CMM products, and other products. In addition, we have 21 pending patents (10 U.S. and 11 foreign). We protect the proprietary nature of our software primarily through copyright and license agreements, but also through close integration with our hardware offerings. We utilize 33 registered trademarks (14 U.S. and 19 foreign) and have 1 U.S. trademark registration pending. We also have 13 domain names and several common law trademarks. It is our policy to protect the proprietary nature of our new product developments whenever they are likely to become significant sources of revenue. No guarantee can be given that we will be able to obtain patent or other protection for other products. 

 

As the number of our products increases and the functionality of those products expands, we may become increasingly subject to attempts to duplicate our proprietary technology. We periodically receive communications from third parties asserting that our products infringe, or may infringe, the proprietary rights of these third parties or others. These claims of infringement may lead to protracted and costly litigation, which could require us to pay substantial damages or have the sale of our products stopped by an injunction. Infringement lawsuits or claims could also cause product delays, require us to redesign our products, hinder our ability to sell our products, or make the sale of these products more expensive. In addition, although we do not believe that any of our products infringe the rights of others, there can be no assurance that third parties will not assert infringement claims in the future or that any such assertion will not require us to enter into a royalty arrangement or result in litigation.

 

Government Regulation

 

Our business is subject to many foreign, federal, state and local legal and regulatory requirements, including those related to securities, employment, international trade, anticorruption, health, safety and the environment, among other matters. Significant costs may arise from these requirements, or from new, modified or more stringent requirements, which could affect our operations and competitive position. 

 

 

 

 

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CYBEROPTICS CORPORATION

 

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CYBEROPTICS CORPORATION

 

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CYBEROPTICS CORPORATION 

 

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CYBEROPTICS CORPORATION

 

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.