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 SEPTEMBER 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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Commission File Number
0-17157
NOVELLUS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0024666
(State or other jurisdiction (I.R.S. Employer
of incorporation of Identification
organization) Number)
3970 NORTH FIRST STREET
SAN JOSE, CALIFORNIA
(ADDRESS OF PRINCIPAL 95134
EXECUTIVE OFFICES) (Zip Code)
Registrant's telephone number, including area code:
(408) 943-9700
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
----- -----
As of October 24, 1995, 16,484,771 shares of the Registrant's common stock, no
par value, were issued and outstanding.
NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1995
INDEX
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements Page
Consolidated Balance Sheets at
September 30, 1995 and December 31, 1994. 3
Consolidated Statements of Income
for the three months and nine months ended
September 30, 1995 and September 30, 1994. 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1995
and September 30, 1994. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II: Other Information
Item 1: Legal Proceedings 11
Item 6: Exhibits and Reports on Form 8-K 11
Signatures 12
2
NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
- --------------------------------------------------------------------------------
Assets Sept 30, December 31,
1995 1994
(unaudited)
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $90,978 $45,987
Short-term investments 71,796 90,552
Accounts receivable, net 87,390 60,590
Inventories 35,401 27,279
Prepaid taxes and other current assets 13,485 9,959
---------------------
Total current assets 299,050 234,367
Property and equipment:
Machinery and equipment 39,454 31,261
Furniture and fixtures 2,019 1,801
Leasehold improvements 21,166 11,875
---------------------
62,639 44,937
Less accumulated depreciation and amortization 21,686 15,528
---------------------
40,953 29,409
Other assets 1,603 1,224
---------------------
$341,606 $265,000
---------------------
---------------------
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------
Current liabilities:
Current obligations under lines of credit $6,934 $4,518
Accounts payable 22,516 14,845
Accrued payroll and related expenses 11,859 10,119
Accrued warranty 13,255 8,260
Other accrued liabilities 4,394 6,979
Income taxes payable 3,615 6,065
---------------------
Total current liabilities 62,573 50,786
Commitments and contingencies
Shareholders' equity:
Common stock 122,224 112,532
Cumulative translation adjustment 565 -
Retained earnings 156,244 101,682
---------------------
Total shareholders' equity 279,033 214,214
---------------------
$341,606 $265,000
---------------------
---------------------
See accompanying notes.
3
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------- -----------------
(in thousands, except per share data) Three Months Nine Months
(unaudited) Ended Sept 30, Ended Sept 30,
1995 1994 1995 1994
- -------------------------------------------------------------- -----------------
Net sales $100,407 $59,533 $263,935 $153,000
Cost of sales 42,171 25,481 111,469 65,545
-------------------- -----------------
Gross profit 58,236 34,052 152,466 87,455
Operating expenses
Research and development 11,427 6,862 29,354 18,298
Selling, general and administrative 15,939 9,477 42,466 27,049
-------------------- -----------------
Total operating expenses 27,366 16,339 71,820 45,347
-------------------- -----------------
Operating income 30,870 17,713 80,646 42,108
Interest income, net 2,338 1,308 6,783 2,825
-------------------- -----------------
Income before provision for income taxes 33,208 19,021 87,429 44,933
Provision for income taxes 11,291 6,467 29,726 15,277
-------------------- -----------------
Net income $21,917 $12,554 $57,703 $29,656
-------------------- -----------------
-------------------- -----------------
Net income per share $1.27 $0.75 $3.37 $1.82
-------------------- -----------------
-------------------- -----------------
Shares used in per share calculations 17,274 16,766 17,137 16,251
-------------------- -----------------
-------------------- -----------------
See accompanying notes.
4
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands) Nine Months
(unaudited) Ended Sept 30,
1995 1994
- --------------------------------------------------------------------------------
Cash flows provided by operating activities:
Net income $57,703 $29,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,158 3,967
Changes in operating assets and liabilities
Accounts receivable (26,235) (7,952)
Inventories (10,271) (9,039)
Prepaid taxes and other current assets (3,526) (3,065)
Accounts payable 7,671 6,812
Accrued payroll and related expenses 1,740 3,659
Accrued warranty 4,995 2,525
Other accrued liabilities (2,585) 2,316
Income taxes payable 1,679 47
---------------------
Total adjustments (20,374) (730)
---------------------
Net cash provided by operating activities 37,329 28,926
---------------------
Cash flows from investing activities:
Maturities (Purchases) of Held-to-Maturity-Debt
Securities, net 18,756 (38,711)
Capital expenditures (15,553) (7,070)
(Increase) decrease in other assets (379) 210
---------------------
Net cash provided by (used for)
investing activities 2,824 (45,571)
---------------------
Cash flows from financing activities:
Proceeds (payments) on lines of credit, net 2,416 (3,047)
Repurchase of common stock (3,638) -
Proceeds from sale of common stock 6,060 57,935
---------------------
Net cash provided by financing activities 4,838 54,888
---------------------
Net increase in cash and cash equivalents 44,991 38,243
Cash and cash equivalents at the beginning of the period 45,987 24,058
---------------------
Cash and cash equivalents at the end of the period $90,978 $62,301
---------------------
---------------------
Supplemental Disclosures
Cash paid during the period for:
Interest $176 $202
Income taxes $29,773 $17,165
Other noncash charges:
Income tax benefits from employee stock plans $4,129 $2,469
Systems transferred from property and equipment to
inventory $1,583 $3,014
Systems transferred from inventory to property and
equipment $3,732 $6,260
See accompanying notes.
5
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED 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 nine
month periods ended September 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):
- ----------------------------------------------------------------
Sept 30, 1995 Dec. 31, 1994
- ----------------------------------------------------------------
Purchased parts $21,550 $14,238
Work-in-process 10,590 10,971
Finished goods 3,261 2,070
--------- -----------
$35,401 $27,279
========= ===========
3. LINES OF CREDIT
The Company has lines of credit with four banks under which the Company can
borrow up to $10,000,000 at the banks' prime rate which expire at various dates
through April 1997. A portion of this facility ($8,000,000) 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 September 30, 1995,
there were no borrowings by the parent company, and $6,934,000 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 September 30, 1995, the Company had repurchased 71,000
shares in the first nine months of 1995 and 125,000 shares under the program to
date.
6
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 certain of the Company's foreign net monetary asset positions. The gains
and losses on these contracts are included in income in the year in which the
related transaction takes place. At September 30, 1995, the notional amount of
foreign exchange contracts used by the Company as hedging protection against
foreign currency exposure was approximately $37,178,000. These contracts expire
on various dates through April 1996.
8. DEBT SECURITIES
At September 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 (in thousands):
Cash and money market funds $21,072
U.S. Treasury securities and obligations
of U.S. Government Agencies 24,313
Other U.S. securities 90,646
Foreign securities 26,743
---------
Total cash, cash equivalents and short-term investments $162,774
---------
---------
Cash and cash equivalents $90,978
Short-term investments 71,796
---------
Total cash, cash equivalents and short-term investments $162,774
---------
---------
9. LITIGATION
On September 15, 1995, the Company filed suit in the United States District
Court, Northern District of California against Applied Materials, Inc. (Applied)
alleging that Applied's Tungsten products infringe U.S. Patent No. 5,238,499
issued August 24, 1993 and assigned to the Company. The Company is requesting
injunctive relief to enjoin Applied from infringing the '499 patent, and is
seeking unspecified damages for past infringement, treble damages for willful
infringement, and attorney's costs and fees related to the suit.
Also on September 15, 1995 Applied filed suit against the Company in United
States District Court, Northern District of California, alleging that the
Company's Tungsten products infringe on U.S. Patent No. 5,028,565 issued July 2,
1991 and assigned to Applied. Applied is requesting injunctive relief to enjoin
the Company from infringing the '565 patent, and is seeking unspecified damages
for past infringement, treble damages for willful infringement, and attorney's
costs and fees related to the suit. Applied is also requesting a finding that
Applied has not infringed on any valid claims of the Company's '499 patent, and
that the '499 patent is invalid and void.
On October 10, 1995, the Company filed a counterclaim in United States District
Court, Northern District of California in response to Applied's suit for
infringement of the '565 patent alleging that Applied's TEOS products infringe
on U.S. Patent No. 5,425,803 issued June 20, 1995 and assigned to the Company.
The Company is requesting injunctive relief to enjoin Applied from infringing
the subject patent, and is seeking unspecified damages for past infringement,
treble damages for willful infringement, and attorney's costs and fees related
to the suit.
7
On October 26, 1995, the Company filed an amended counterclaim in United States
District Court, Northern District of California in response to Applied's suit
for infringement of the '565 patent, alleging that Applied's tungsten products
infringe U.S. Patent No. 5,374,594, issued December 20, 1994 and assigned to the
Company. The Company is requesting injunctive relief to enjoin Applied from
infringing the subject patent, and is seeking unspecified damages for past
infringement, treble damages for willful infringement, and attorneys' costs and
fees related to the suit.
Based on the Company's preliminary analysis the Company believes that the
ultimate resolution of Applied's action will not have a material adverse effect
on the Company's financial position or results of operations.
(See further comments in Part II, Item 1 of this document.)
8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the third quarter and nine months ended September 30, 1995 were
$100.4 million and $263.9 million, increases of 69% and 73%, respectively from
the $59.5 million and $153.0 million reported for the comparable periods of
1994. The increases are primarily due to higher unit shipments across all
product lines, particularly the Company's tungsten systems (Concept One and
Concept Two Altus)and Concept Two Sequel dielectric systems.
Gross profit increased to $58.2 million and $152.5 million for the third quarter
and first nine months of 1995, respectively, from $34.1 million and $87.5
million in the comparable periods of 1994. The increases are primarily a result
of the increase in net sales. Gross profit as a percentage of net sales
increased to 58.0% in the third quarter and 57.8% in the first nine months of
1995 from 57.2% in each of the comparable periods of 1994. The improvements in
gross profit percentage over the prior periods is primarily due to manufacturing
efficiencies and lower fixed costs per system due to the higher volume of
systems manufactured and shipped in 1995.
Research and development expenses for the third quarter and nine months ended
September 30, 1995 increased 67% and 60% to $11.4 million and $29.4 million,
respectively, from $6.9 million and $18.3 million for the same periods of 1994.
Research and development expenses as a percentage of net sales were 11.4% for
the third quarter of 1995 which was slightly below the 11.5% recorded in the
third quarter of 1994 due to increased sales. For the nine months ended
September 30, 1995, research and development expenses as a percentage of net
sales were 11.1%, down from 12.0% in the first nine months of 1994, also because
of the higher revenues in 1995. The dollar increases were due to expenditures on
new product development particularly in the high density gap fill (SPEED)and the
metalorganic CVD (barrier/adhesion films prior to tungsten deposition) areas.
The Company anticipates such expenditures to continue in future quarters.
Selling, general, and administrative expenses for the third quarter and first
nine months of 1995 increased to $15.9 million and $42.5 million, respectively,
from $9.5 million and $27.0 million 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 expanding
installed system base worldwide. Selling, general, and administrative expenses
as a percentage of net sales were 15.9% in the third quarter and 16.1% in the
first nine months of 1995 as compared to 15.9% and 17.7% in the third quarter
and first nine months of 1994, respectively. The decrease in percentage in the
nine month periods was due to higher 1995 revenues.
Net interest income increased to $2.3 million and $6.8 million for the third
quarter and first nine months of 1995 from $1.3 million and $2.8 million for the
comparable periods of 1994. The increases in interest income were the result of
higher interest rates applied to higher cash balances. Higher cash balances for
the third quarter and first nine months of 1995 as compared to the prior periods
of 1994 resulted primarily from cash generated from operations and proceeds from
the exercise of stock options. The increase for the nine month period is also
attributable to proceeds of approximately $53.9 million from the March 1994
common stock offering.
9
The Company's effective tax rate was 34% for the third quarters and first nine
months of 1995 and 1994.
Net income for the third quarter and first nine months of 1995 increased 75% and
95% to $21.9 million or $1.27 per share and $57.7 million or $3.37 per share,
respectively, from $12.6 million or $0.75 per share and $29.7 million or $1.82
per share for the third quarter and first nine months of 1994. The increase was
primarily due to the higher revenues, increased gross margin, 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 September 30, 1995 consisted of $162.8 million of
cash, cash equivalents, and short term investments. In addition at September
30, 1995, there was $10.0 million available under bank lines of credit that
expire at various dates through April 30, 1997. At September 30, 1995
approximately $6.9 million was outstanding under these bank lines of credit
which bear interest at the banks' prime lending rates.
During the nine months ended September 30, 1995, the Company's cash and cash
equivalents increased $45.0 million to $91.0 million from $46.0 million at
December 31, 1994. Net cash provided by operating activities was $37.3 million
due primarily to net income of $57.7 million, depreciation and amortization of
$6.2 million and increases in accounts payable and accrued warranty of $7.6
million and $5.0 million, respectively, partially offset by increases in
accounts receivable of $26.2 million and inventories of $10.3 million. The
increase in accounts receivable was primarily due to the increased sales. Days
Sales Outstanding increased to 73 at September 30, 1995 from 58 at December 31,
1994, primarily due to the increase in Japanese business where receivables
typically have a longer collection cycle. 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. Inventory turns for the nine months ended September 30,1995
improved to 3.5 from 3.0 for the year ended December 31, 1994. Cash flows from
investing activities provided $2.8 million during the first nine months of 1995.
Maturities of Held-To-Maturity Debt Securities provided $18.8 million. Partially
offsetting these maturities were capital expenditures of approximately $15.6
million which were primarily related to increasing manufacturing capacity in the
United States and providing additional facilities to support the overall
business growth. Net cash provided by financing activities was $4.8 million, due
to proceeds (net of repurchases) of common stock of $2.4 million and proceeds on
lines of credit of $2.4 million. The Company expects to make expenditures for
the year ended December 31, 1995 of approximately $22.5 million to acquire
capital and leasehold improvements, primarily in the United States and in Japan.
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.
10
PART II OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
On September 15, 1995, the Company filed suit in the United States District
Court, Northern District of California against Applied Materials, Inc. (Applied)
alleging that Applied's Tungsten products infringe U.S. Patent No. 5,238,499
issued August 24, 1993 and assigned to the Company. The Company is requesting
injunctive relief to enjoin Applied from infringing the '499 patent, and is
seeking unspecified damages for past infringement, treble damages for willful
infringement, and attorney's costs and fees related to the suit.
Also on September 15, 1995, Applied filed suit against the Company in United
States District Court, Northern District of California, alleging that the
Company's Tungsten products infringe on U.S. Patent No. 5,028,565 issued
July 2, 1991 and assigned to Applied. Applied is requesting injunctive relief to
enjoin the Company from infringing the '565 patent, and is seeking unspecified
damages for past infringement, treble damages for willful infringement, and
attorney's costs and fees related to the suit. Applied is also requesting a
finding that Applied has not infringed on any valid claims of the Company's '499
patent, and that the '499 patent is invalid and void.
On October 10, 1995, the Company filed a counterclaim in United States District
Court, Northern District of California in response to Applied's suit for
infringement of the '565 patent alleging that Applied's TEOS products infringe
on U.S. Patent No. 5,425,803, issued June 20, 1995 and assigned to the Company.
The Company is requesting injunctive relief to enjoin Applied from infringing
the subject patent, and is seeking unspecified damages for past infringement,
treble damages for willful infringement, and attorney's costs and fees related
to the suit.
On October 26, 1995, the Company filed an amended counterclaim in United States
District Court, Northern District of California in response to Applied's suit
for infringement of the '565 patent, alleging that Applied's tungsten products
infringe U.S. Patent No. 5,374,594, issued December 20, 1994 and assigned to the
Company. The Company is requesting injunctive relief to enjoin Applied from
infringing the subject patent, and is seeking unspecified damages for past
infringement, treble damages for willful infringement, and attorneys' costs and
fees related to the suit.
There can be no assurance that the Company's financial position or results of
operations would not be materially adversely affected if Applied prevailed in
its action described above. However, based on the Company's preliminary analysis
the Company believes that the ultimate resolution of the matter will not have a
material adverse effect on the Company's financial position or results of
operations. The Company intends to vigorously pursue its claims and
counterclaims and defend Applied's claim.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended September 30,
1995. No exhibits are filed with this report.
11
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.
-------------------------
REGISTRANT
/s/ William J. Wall
------------------------------
William J. Wall
Vice President
Finance and Administration
(Principal Financial and Accounting Officer)
November 9, 1995
----------------
Date
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