DJ TALES OF THE TAPE: Acctg Rule Has Chip-Gear Cos. Furious
05/16/2000
Dow Jones News Services
(Copyright ¸ 2000 Dow Jones & Company, Inc.)
By Scott Eden
NEW YORK (Dow Jones)--An obscure accounting rule could end up hurting semiconductor-equipment companies, but the pain might be felt less on
the balance sheet than at the bargaining table.
At issue is Staff Accounting Bulletin 101, which sounds more like a freshman finance class than a guideline issued by the Securities and Exchange
Commission. Released by the SEC last December, SAB 101 calls for companies to book revenue only after equipment is officially accepted by a
customer, not when it's shipped, as is currently the practice.
The rule specifically targets any company that experiences a long lag time between shipment and when a customer officially "signs off" on a product as
working properly.
In the chip-equipment industry, which designs and builds the tools used to manufacture semiconductors, machines are so complicated that lag times can
last from a month to as long as a year. Under the current system, customers pay between 70% and 90% of a product's price when it's shipped,
depending on the complexity of the machine sold. The remainder of its price is held until acceptance.
From the SEC's perspective, the guideline is designed to prevent the unscrupulous booking of revenue for a product that is returned if not functioning
properly. If SAB 101 is enforced, companies would need to report revenue from certain sales a quarter or two later than usual, resulting in lowered
expectations for those quarters. Some analysts say the rule is dangerous for investors because if revenue arrives later than the actual shipment of a
product, it could mask a slowdown in a company's business.
But the real problem, some executives and company watchers say, isn't the superficial hit companies' quarterly financial results will take - which
amounts to robbing Peter to pay Paul - or a less visible business environment. Instead, some companies fear that the accounting guideline could give
their chip-making customers yet another leg up in negotiating contracts.
"There are certain chip companies that would try to take advantage of it," says Ed White, an analyst with Lehman Brothers Inc. "Does this begin to shift
the balance of power further into the hands of the chip companies?"
For now at least the question is somewhat moot. That's because the industry as a whole is in the middle of one of its most vigorous booms ever.
Notoriously cyclical, semiconductor-making hit a hard bottom in 1998 caused by recession in Asia and severe oversupply in the market for memory
chips. Business picked up for many suppliers a year and a half ago, after production cutbacks finally buoyed prices and the Internet sparked intense
demand for silicon of all stripes.
But the worry is that during periods of cyclical hard times, chip makers, in efforts to cut costs, will threaten to stall on the acceptance of equipment. By
holding the specter of delayed revenue over suppliers' heads, chip makers could then persuade their suppliers to offer discounts.
"They'll find any way they can in a downturn to minimize their costs," says Stan Meyers, president of Semiconductor Equipment and Materials
International, or SEMI, the industry's trade group. "They hold acceptance over your head to drive for constant lower cost and higher value," says J.
Michael Dodson, chief financial officer of SpeedFam-IPEC Inc. (SFAM), a Chandler, Ariz., maker of silicon polishing machines.
The problem is compounded by the sheer complexity of the machines, which perform such arcane tasks as "thermal sonic bonding," in which gold wires
are stitched into advanced types of microchips, or "plasma etch," in which microscopic transistor patterns are carved onto silicon wafers. Because of
their intricacy and sophistication, the machines, which can cost $5 million each, demand constant tinkering and adjustment when first installed in order to
get them up to speed.
Therefore, more than reduced prices, some executives believe that chip makers will demand a batch of additional service and maintenance work from
their suppliers before signing off, with the aim of refining the machines to the desired level of performance.
"There's always one or two things that a customer isn't happy with," notes John Detweiler, corporate controller at Credence Systems Corp. (CMOS),
a Fremont, Calif., maker of semiconductor testing equipment.
Detweiler added that with some elements of a chip-making system, it's impossible to achieve perfection. For instance, "you can spend the rest of your
life trying to get the software" perfected, he said.
Some analysts and executives, however, call farfetched any possibility of chip makers using SAB 101 as a negotiating ploy. According to Gunner
Miller, an analyst with Goldman Sachs & Co. in New York, to believe that chip makers will stall on acceptances in order to extort discounts is almost
cinematically overdramatic.
Chip makers don't want to anger their suppliers because during business upturns, when manufacturers are clamoring for extra chip-making tools, they
could lose favor with suppliers. "If you're staring down the barrel of all this stuff, the last thing you'll be thinking is 'why don't I be tougher on the list
price,"' Miller says. "Equipment companies generally have better leverage."
One high-level executive at a chip-equipment company says he believes SAB 101 will hurt the negotiating leverage of smaller firms in the industry, but
should leave larger players, which have more market-share weight to throw around, pretty much untouched.
George Scalise, president of the Semiconductor Industry Association, a trade group representing chip makers, says that both customer and supplier
must maintain a close working relationship under which the evaluation and fine tuning of machines can take place. Such intimacy, Scalise argues, would
obviate the possibility of adversarial negotiating battles between the two sides.
Chip makers themselves have provided only "moral support" for the equipment companies' cause, says one company executive. Scalise says the SIA
wrote a "letter of support" to the SEC in March.
For its part, the equipment industry is working hard to defeat the guideline. Spearheaded by SEMI, companies won from the SEC on March 16 a
delay of SAB 101's implementation until the June quarter. Originally, equipment suppliers were to report financial results using 101 beginning in the first
quarter of their fiscal years. Companies lucky enough to have odd fiscal calendars enjoyed a reprieve from the rule.
But simply delaying the guideline's eventual imposition isn't enough for the industry. "We're trying to understand whether it means we'll have to change
our accounting practices," says Vicki Hatfield, a representative of SEMI in Washington. The group has urged the SEC to let equipment companies
continue with the present system, arguing that it is much more effective.
A group of financial officers from chip-equipment companies, including Applied Materials Inc. (AMAT), Novellus Systems Inc. (NVLS), KLA-Tencor
Corp. (KLAC) and Silicon Valley Group Inc. (SVGI), met with SEC staffers in Washington Monday of last week; SEMI pleaded its case to the
commission on Wednesday.
The group, which has also met with the Senate Banking Committee in order to drum up political support for its cause, expects a response from the
SEC as early as this week.
SEC spokesman John Heine wouldn't comment on the matter, but said he "hadn't heard anything about any modification to 101." |
