SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______ to
Commission File Number
0-17157
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Novellus Systems, Inc.
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(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0024666
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(State or other jurisdiction (I.R.S. Employer
of incorporation of Identification
organization) Number)
81 VISTA MONTANA
SAN JOSE, CALIFORNIA 95134
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(408) 943-9700
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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 for 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 X NO
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As of July 28, 1995, 16,435,321 shares of the Registrant's common stock, no par
value, were issued and outstanding.
NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1995
INDEX
Part I: Financial Information
Item 1: Consolidated Financial Statements
Page
Consolidated Balance Sheets at
June 30, 1995 and December 31, 1994. 3
Consolidated Statements of Income
for the three months and six months ended
June 30, 1995 and June 30, 1994. 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1995
and June 30, 1994. 5
Notes to Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 4: Submission of Matters to a Vote of Securities
Holders 10
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
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(in thousands)
Assets June 30, December 31,
1995 1994
(unaudited)
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Current assets:
Cash and cash equivalents $ 60,124 $ 45,987
Short-term investments 96,231 90,552
Accounts receivable, net 70,611 60,590
Inventories 35,548 27,279
Prepaid taxes and other current assets 12,445 9,959
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Total current assets 274,959 234,367
Property and equipment:
Machinery and equipment 37,522 31,261
Furniture and fixtures 1,949 1,801
Leasehold improvements 15,944 11,875
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55,415 44,937
Less accumulated depreciation and amortization 20,449 15,528
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34,966 29,409
Other assets 1,694 1,224
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$311,619 $265,000
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Liabilities and Shareholders' Equity
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Current liabilities:
Current obligations under lines of credit $ 4,158 $ 4,518
Accounts payable 18,619 14,845
Accrued payroll and related expenses 9,630 10,119
Accrued warranty 10,580 8,260
Other accrued liabilities 9,820 6,979
Income taxes payable 4,351 6,065
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Total current liabilities 57,158 50,786
Commitments and contingencies
Shareholders' equity:
Common stock 118,108 112,532
Cumulative translation adjustment 2,026 -
Retained earnings 134,327 101,682
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Total shareholders' equity 254,461 214,214
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$311,619 $265,000
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See accompanying notes.
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
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(in thousands, except per share data) Three Months Six Months
(unaudited) Ended June 30, Ended June 30,
1995 1994 1995 1994
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Net sales $87,398 $51,030 $163,528 $93,467
Cost of sales 36,714 21,867 69,298 40,064
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Gross profit 50,684 29,163 94,230 53,403
Operating expenses
Research and development 9,641 5,850 17,927 11,436
Selling, general and administrative 14,286 9,417 26,527 17,572
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Total operating expenses 23,927 15,267 44,454 29,008
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Operating income 26,757 13,896 49,776 24,395
Interest income, net 2,300 1,045 4,445 1,517
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Income before provision for income taxes 29,057 14,941 54,221 25,912
Provision for income taxes 9,879 5,080 18,435 8,810
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Net income $19,178 $9,861 $35,786 $17,102
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Net income per share $ 1.12 $ 0.60 $ 2.10 $ 1.07
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Shares used in per share calculations 17,123 16,542 17,069 15,911
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See accompanying notes.
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(in thousands) Six Months
(unaudited) Ended June 30,
1995 1994
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Cash flows provided by operating activities:
Net income $ 35,786 $ 17,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,921 1,695
Changes in operating assets and liabilities
Accounts receivable (10,139) 957
Inventories (9,458) (2,726)
Prepaid taxes and other current assets (2,486) (50)
Accounts payable 3,774 1,356
Accrued payroll and related expenses (489) 1,658
Accrued warranty 2,320 858
Other accrued liabilities 2,841 971
Income taxes payable 683 (219)
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Total adjustments (8,033) 4,500
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Net cash provided by operating activities 27,753 21,602
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Cash flows from investing activities:
Purchases of Held-to-Maturity-Debt Securities (5,679) (47,316)
Capital expenditures (7,145) (3,225)
(Increase) decrease in other assets (470) 289
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Net cash used for investing activities (13,294) (50,252)
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Cash flows from financing activities:
Payments on lines of credit (360) (1,714)
Repurchase of common stock (3,638) -
Proceeds from sale of common stock 3,676 55,222
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Net cash provided by (used in) financing activities (322) 53,508
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Net increase in cash and cash equivalents 14,137 24,858
Cash and cash equivalents at the beginning of the period 45,987 24,058
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Cash and cash equivalents at the end of the period $ 60,124 $ 48,916
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Supplemental Disclosures
Cash paid during the period for:
Interest $ 122 $ 131
Income taxes $ 19,072 $ 8,995
Other noncash charges:
Income tax benefits from employee stock plans $ 2,397 $ 611
Systems transferred from property and equipment to inventory $ 1,531 $ 2,652
Systems transferred from inventory to property and equipment $ 2,720 $ 2,672
See accompanying notes.
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles consistent with
those applied in, and should be read in conjunction with, the audited
consolidated financial statements for the year ended December 31, 1994 included
in the Annual Report on Form 10-K. The interim financial information is
unaudited, but includes all adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary to a fair statement
of results for the interim periods presented. The results for the three and six
month periods ended June 30, 1995 are not necessarily indicative of results
expected for the full year.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first out) or market.
Inventories consisted of the following (in thousands):
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June 30, 1995 Dec. 31, 1994
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Purchased parts $20,025 $14,238
Work-in-process 14,359 10,971
Finished goods 1,164 2,070
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$35,548 $27,279
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3. LINES OF CREDIT
The Company has lines of credit with three banks under which the Company can
borrow up to $7,000,000 at the banks' prime rate which expire at various dates
through April, 1997. A portion of this facility ($5,000,000) is available to
the Company's Japanese subsidiary, Nippon Novellus Systems K.K. Borrowings by
the subsidiary are at the banks' offshore reference rate. At June 30, 1995,
there were no borrowings by the parent company, and $4,158,000 by the
subsidiary.
4. NET INCOME PER SHARE
Net income per share is based on weighted average common and dilutive common
equivalent shares outstanding during the period. Stock options are considered
common stock equivalents and are included in the weighted average computation
using the treasury stock method.
5. FOREIGN CURRENCY ACCOUNTING
To reflect the changing nature of the Company's Japanese subsidiary, the Company
changed the functional currency of the subsidiary from the U.S. Dollar to the
Japanese Yen effective January 1, 1995. This change did not have a material
effect on the Company's financial statements. The U.S. Dollar remains the
functional currency for all other foreign operations. Translation adjustments,
which result from the process of translating foreign currency financial
statements into U.S. dollars, are included in net earnings for those operations
whose functional currency is the U.S. dollar and as a separate component of
shareholders' equity for those operations whose functional currency is local
currency.
6. COMMON STOCK REPURCHASE PROGRAM
In October 1992, the Company announced a program to repurchase up to 700,000
shares of its Common Stock for issuance in future employee benefit and
compensation plans. At June 30, 1995, the Company had repurchased 20,000 shares
in the current quarter and 125,000 shares under the program to date.
7. FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts to hedge against the
short-term impact of foreign currency orders denominated in yen, as well as to
hedge the Company's foreign net monetary asset position. The gains and losses on
these contracts are included in income in the year in which the related
transaction takes place. At June 30, 1995, the notional amount of foreign
exchange contracts used by the Company as hedging protection against foreign
currency exposure was approximately $30,832,000. These contracts expire on
various dates through February 1996.
8. DEBT SECURITIES
At June 30, 1995, all of the Company's debt securities were classified as held-
to-maturity and stated at amortized cost. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
securities to maturity. The following is a summary of cash and held-to-maturity
debt securities:
Cash and money market funds $ 23,318
U.S. Treasury securities and obligations
of U.S. Government Agencies 24,375
Other U.S. securities 93,207
Foreign securities 15,455
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Total cash, cash equivalents and short-term investments $156,355
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Cash and cash equivalents $ 60,124
Short-term investments 96,231
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Total cash, cash equivalents and short-term investments $156,355
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the second quarter and six months ended June 30, 1995 were
$87.4 million and $163.5 million, increases of 71% and 75%, respectively from
the $51.0 million and $93.5 million reported for the same periods of 1994. The
increase is primarily due to higher unit shipments across all product lines,
particularly the Company's Concept Two Altus tungsten systems and Concept Two
Sequel dielectric systems.
Gross profit increased to $50.7 million and $94.2 million for the second quarter
and first half of 1995, respectively, from $29.2 million and $53.4 million in
the second quarter and first half of 1994. The increase is primarily a result
of the increase in net sales. Gross profit as a percentage of net sales
increased to 58% in the second quarter and first half of 1995 from 57% in the
comparable periods of 1994. The improvement over the prior period is primarily
due to manufacturing efficiencies which resulted in improved margins on the
Concept Two products shipped during 1995.
Research and development expenses for the second quarter and six months ended
June 30, 1995 increased 65% and 57% to $9.6 million and $17.9 million,
respectively, from $5.9 million and $11.4 million for the same periods of 1994.
Research and development expenses at 11% were constant as a percentage of net
sales in the second quarters of 1995 and 1994. For the six months ended June 30,
1995, they were 11%, down from 12% in the first half of 1994 because of the
higher revenues in 1995. The dollar increases were due to expenditures on new
product development; the Company anticipates such dollar increases to continue
in future quarters.
Selling, general, and administrative expenses for the second quarter and first
six months of 1995 increased to $14.3 million and $26.5 million from $9.4
million and $17.6 million, respectively, in the same periods of 1994. The
dollar increases were due to higher profit sharing resulting from the increased
income, and generally higher levels of overhead to support the Company's
presence worldwide, particularly in Asia. Selling, general, and administrative
expenses decreased as a percentage of net sales to 16% in the second quarter and
first half of 1995 from 18% and 19% in the second quarter and first half of
1994, respectively, due to the higher 1995 revenues.
Net interest income increased to $2.3 million and $4.4 million for the second
quarter and first half of 1995 from $1.0 million and $1.5 million for the
comparable periods of 1994. The increases were due to higher cash balances
resulting from operations, proceeds from the exercise of stock options, higher
interest rates, and for the first half of 1995, a common stock offering of
1,500,000 shares in March 1994 (netting approximately $53.9 million).
The Company's effective tax rate was 34% for the second quarter and first half
of 1995 and 1994.
Net income for the second quarter and first half of 1995 increased 94% and 109%
to $19.2 million ($1.12 per share) and $35.8 million ($2.10 per share)
respectively from $9.9 million ($0.60 per share) and $17.1 million ($1.07 per
share) for the second quarter and first half of 1994. The increase was
primarily due to the higher revenues, increased gross profit margin
percentages, and higher net interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital resources through cash flow
from operations, sales of equity securities, and borrowings. The Company's
primary sources of funds at June 30, 1995 consisted of $156.4 million of cash,
cash equivalents, and short term investments. In addition at June 30, 1995,
there was $7.0 million available under bank lines of credit that expire at
various dates through April 30, 1997. At June 30, 1995 approximately $4.2
million was outstanding under these bank lines of credit which bear interest at
the banks' prime lending rates.
During the six months ended June 30, 1995, the Company's cash and cash
equivalents increased $14.1 million to $60.1 million from $46.0 million at
December 31, 1994. Net cash provided by operating activities was $27.8 million
due primarily to net income of $35.8 million, and increases in
accounts payable of $3.8 million, partially offset by increases in accounts
receivable of $10.1 million and inventories of $9.5 million. The increase in
accounts receivable was primarily due to the increased sales. The increase in
inventories resulted from higher manufacturing inventories to support increased
production schedules and higher service inventories to provide rapid response
time to our installed system base. Cash flows from investing activities used
$13.3 million during the first half of 1995. Capital expenditures during the
first six months of 1995 were approximately $7.1 million and were primarily
related to increasing manufacturing capacity in the United States. The
additional usage resulted primarily from purchases of Held-to-Maturity-Debt-
Securities of $5.7 million. The Company expects to make expenditures for the
year ended December 31, 1995 of approximately $25.0 million to acquire capital
and leasehold improvements, primarily in the United States and in Japan. Of the
$25.0 million, approximately $7.1 million was expended through June 30, 1995.
The Company believes that its current cash position and cash generated through
operations, if any, will be sufficient to meet the Company's needs through at
least the next twelve months.
PART II OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Annual Meeting of Shareholders, held on May 26, 1995, the
following proposals were adopted by the margins indicated:
1. Election of Directors
Nominee In Favor Withheld
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Richard S. Hill 14,346,066 32,624
Robert F. Graham 14,342,757 35,933
D. James Guzy 14,347,948 30,742
Glen Possley 14,349,321 29,369
Joseph Van Poppelen 14,348,656 30,034
Robert H. Smith 14,346,428 32,262
Tom Long 14,345,191 33,499
2. Approval of an Amendment to the Company's 1992 Stock Option Plan to Increase
the Shares Reserved by 700,000 Shares
In Favor Opposed Abstained Broker Non-Votes
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7,804,476 5,852,006 20,816 701,392
3. Approval of an Amendment to the Company's 1992 Stock Option Plan to Authorize
the Stock Option Committee to Make Restricted Stock Grants and
Award Stock Bonuses
In Favor Opposed Abstained Broker Non-Votes
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8,659,953 5,040,339 27,928 650,470
4. Approval Of an Amendment to the Company's 1992 Employee Stock Purchase Plan
to Increase the Shares Reserved for Issuance by 100,000 Shares
In Favor Opposed Abstained Broker Non-Votes
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13,532,355 126,274 18,669 701,392
5. Ratification of Appointment of Ernst & Young LLP as Certified Public
Accountants of the Company for the Next Fiscal Year Ended December 31, 1995
In Favor Opposed Withheld
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14,316,657 53,622 8,411
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended June 30, 1995.
No exhibits are filed with this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVELLUS SYSTEMS, INC.
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REGISTRANT
/s/ WILLIAM J. WALL
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William J. Wall
Vice President
Finance and Administration
(Principal Financial and Accounting Officer)
August 9, 1995
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Date