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 March 31, 1996
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)
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 April 26, 1996, 16,043,167 shares of the Registrant's common stock, no par
value, were issued and outstanding.
NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1996
INDEX
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements Page
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Condensed Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995. 3
Condensed Consolidated Statements of Income
for the three months ended
March 31, 1996 and March 31, 1995. 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1996
and March 31, 1995. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
2
NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
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Assets March 31, December 31,
1996 1995 (1)
(unaudited)
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Current assets:
Cash and cash equivalents $52,080 $60,114
Short-term investments 106,242 89,685
Accounts receivable, net 116,946 112,088
Inventories 46,991 36,779
Deferred taxes 16,280 16,666
Prepaid and other current assets 4,105 2,831
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Total current assets 342,644 318,163
Property and equipment:
Machinery and equipment 45,946 41,916
Furniture and fixtures 2,936 2,587
Leasehold improvements 26,981 23,947
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75,863 68,450
Less accumulated depreciation and amortization 26,238 23,745
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49,625 44,705
Other assets 2,664 1,820
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$394,933 $364,688
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Liabilities and Shareholders' Equity
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Current liabilities:
Current obligations under lines of credit $7,062 $7,369
Accounts payable 34,358 32,866
Accrued payroll and related expenses 10,706 15,578
Accrued warranty 16,313 15,261
Other accrued liabilities 12,518 9,580
Income taxes payable 14,237 11,252
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Total current liabilities 95,194 91,906
Commitments and contingencies
Shareholders' equity:
Common stock 120,734 118,423
Cumulative translation adjustment 406 764
Retained earnings 178,599 153,595
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Total shareholders' equity 299,739 272,782
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$394,933 $364,688
See accompanying notes. ----------------------
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(1) Derived from December 31, 1995 audited financial statements
3
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
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(in thousands, except per share data) Three Months
(unaudited) Ended March 31,
1996 1995
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Net sales $115,284 $76,130
Cost of sales 48,419 32,584
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Gross profit 66,865 43,546
Operating expenses
Research and development 12,303 8,286
Selling, general and administrative 17,205 12,241
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Total operating expenses 29,508 20,527
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Operating income 37,357 23,019
Interest income, net 1,888 2,145
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Income before provision for income taxes 39,245 25,164
Provision for income taxes 13,736 8,556
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Net income $25,509 $16,608
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Net income per share $1.55 $0.98
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Shares used in per share calculations 16,508 17,015
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See accompanying notes.
4
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(in thousands) Three Months
(unaudited) Ended March 31,
1996 1995
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Cash flows provided by operating activities:
Net income $25,509 $16,608
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,493 1,717
Changes in operating assets and liabilities
Accounts receivable (5,216) (5,524)
Inventories (10,376) (4,959)
Prepaid taxes and other current assets (888) (1,638)
Accounts payable 1,492 673
Accrued payroll and related expenses (4,872) (2,994)
Accrued warranty 1,052 1,738
Other accrued liabilities 2,938 1,023
Income taxes payable 3,514 5,508
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Total adjustments (9,863) (4,456)
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Net cash provided by operating activities 15,646 12,152
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Cash flows from investing activities:
Maturities and sale (purchases) of Available-For-Sale
Debt Securities (16,557) -
Maturities (purchases)of Held-to-Maturity-Debt Securities - (1,143)
Capital expenditures (7,249) (1,915)
(Increase)in other assets (844) (256)
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Net cash(used for)investing activities (24,650) (3,314)
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Cash flows from financing activities:
Proceeds(payments) on lines of credit, net (307) (70)
Repurchase of common stock (855) (2,453)
Proceeds from sale of common stock 2,132 2,342
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Net cash provided by (used for)financing activities 970 (181)
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Net increase (decrease)in cash and cash equivalents (8,034) 8,657
Cash and cash equivalents at the beginning of the period 60,114 45,897
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Cash and cash equivalents at the end of the period $52,080 $54,644
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Supplemental Disclosures
Cash paid during the period for:
Interest $93 $64
Income taxes $9,288 $3,947
Other noncash charges:
Income tax benefits from employee stock plans $529 $708
Systems and parts transferred from property and equipment
to inventory $- $894
Systems and parts transferred from inventory to property
and equipment $164 $-
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, 1995 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 month
period ended March 31, 1996 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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March 31, 1996 Dec. 31, 1995
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Purchased parts $23,968 $17,571
Work-in-process 16,086 14,550
Finished goods 6,937 4,658
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$46,991 $36,779
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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 March 31, 1996, there
were no borrowings by the parent company, and $7,062,000 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. 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. During the first quarter of 1996, the Company completed this
program by purchasing 5,000 shares, which resulted in a total of 700,000 shares
purchased as of March 31, 1996. In January 1996, the Company announced an
additional program to repurchase up to 1,000,000 shares of its common stock to
minimize the dilutive effect of future share issuance in connection with the
Company's employee benefit and compensation plans. As of March 31, 1996, the
Company had purchased 11,800 shares under this new program.
6
6. 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 March 31, 1996, the notional amount of
foreign exchange contracts used by the Company as hedging protection against
foreign currency exposure was approximately $21,436,000. These contracts expire
on various dates through January 1997.
7. LITIGATION
On January 30, 1995, Applied Materials, Inc. (Applied) filed a patent
infringement suit against the Company, alleging the Company's TEOS products
infringe one of Applied's patents that was issued in November 1994. On September
15, 1995, the Company filed a patent infringement suit against Applied, alleging
that Applied's tungsten products infringe one of the Company's patents issued in
August 1993. Also on September 15, 1995, Applied filed a patent infringement
suit against the Company, alleging that one of the Company's tungsten processes
infringes one of Applied's patents that was issued in 1991. On October 10, 1995,
the Company filed a counterclaim alleging that Applied's TEOS products infringe
on one of the Company's patents that was issued in June 1995. On October 26,
1995, the Company filed an amended counterclaim alleging that Applied's tungsten
products infringe one of the Company's patents issued in December 1994.
Management's expectations are that the ultimate resolution of these matters will
not have a material adverse effect on the Company's financial position, cash
flows, or results of operations; however based on future developments,
management's estimate of the ultimate outcome could change in the near term.
8. NEW LEASE AGREEMENT
On April 10, 1996, the Company entered into a new lease agreement for five
buildings in the San Jose area, three of which are currently occupied and were
previously leased by the Company. The agreement is for five years at
approximately $1.9 million per year at interest rates in effect on April 19,
1996. The guaranteed residual payment on the lease agreement is approximately
$28.0 million.
7
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 1996 were $115.3 million, an increase
of 51% from the $76.1 million reported for the quarter ended March 31, 1995. The
increase is primarily due to higher unit shipments outside the United States,
specifically in Europe, Japan, and the Pacific Rim.
Gross profit was $66.9 million for the first quarter of 1996 as compared to
$43.5 million in the comparable quarter of 1995. The increase is primarily a
result of the increase in net sales. Gross profit as a percentage of net sales
increased to 58.0% in the first quarter of 1996 from 57.2% in the first quarter
of 1995. The improvement in gross profit percentage over the prior period is
primarily due to improvements in manufacturing efficiencies as the volume of the
Company's newer products is increased.
Research and development expenses for the quarter ended March 31, 1996 increased
48% to $12.3 million from $8.3 million in the same quarter of 1995. Research and
development expenses as a percentage of net sales were 10.7% for the first
quarter of 1996 which was slightly below the 10.9% recorded in the first quarter
of 1995 due to increased sales. The dollar increases were due primarily to
expenditures on new product development.
Selling, general, and administrative expenses for the first quarter of 1996
increased to $17.2 million from $12.2 million in the same period of 1995. The
dollar increases were due to higher profit sharing resulting from the increased
net income, and generally higher levels of overhead to support the Company's
expanding operations worldwide. Selling, general, and administrative expenses as
a percentage of net sales were 14.9% in the first quarter of 1996 as compared to
16.1% in the first quarter of 1995. The decrease in percentage was due to the
Company controlling spending while net sales increased in 1996.
Net interest income decreased to $1.9 million for the first quarter of 1996 from
$2.1 million for the comparable period of 1995. The decrease in net interest
income was the result of falling interest rates.
The Company's effective tax rate was 35% for the first quarter of 1996, as
compared to 34% for the first quarter of 1995. The increase results from the
fact that the research and development tax credit has not yet been extended by
the U.S. Congress to 1996.
Net income for the first quarter of 1996 was $25.5 million or $1.55 per share,
which represents a 54% increase (58% increase in per share amounts) from the
$16.6 million or $0.98 per share recorded in the first quarter of 1995. The
increase was primarily due to the higher net sales and increased gross margin
percentage.
The number of shares used in the per share calculations was 16.5 million at the
end of the first quarter of 1996 representing a decrease from the 17.0 million
at the end of the first quarter of 1995 primarily due to the activity in the
Company's common stock repurchase program. Approximately 600,000 shares of
common stock were repurchased in late 1995 and early 1996.
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 March 31, 1996 consisted of $158.3
8
million of cash, cash equivalents, and short term investments. In addition at
March 31, 1996, there was $10.0 million available under bank lines of credit
that expire at various dates through April 30, 1997. At March 31, 1996
approximately $7.1 million was outstanding under these bank lines of credit
which bear interest at the banks' prime lending rates or offshore reference
rates.
During the three months ended March 31, 1996, the Company's cash and cash
equivalents decreased $8.0 million to $52.1 million from $60.1 million at
December 31, 1995. Net cash provided by operating activities during the
first quarter of 1996 was $15.6 million due primarily to net income of $25.5
million, depreciation and amortization of $2.5 million and increases in other
accrued liabilities and income taxes payable of $2.9 million and $3.5
million, respectively. These amounts were partially offset by increases in
accounts receivable of $5.2 million, inventories of $10.4 million, and
accrued payroll and related expenses of $4.9 million. The increase in
accounts receivable was primarily due to the increased sales. Days Sales
Outstanding increased to 90 days at March 31, 1996 from 86 days at December
31, 1995, primarily due to continued 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 of the Company's new HDP Speed products, as well as the
transition from Concept One to Concept Two product lines. There was also an
increase in spares inventories in response to the new products and the
increase in the system installed base. Inventory turns for the three months
ended March 31,1996 decreased to 3.2 from 3.9 for the quarter ended December
31, 1995. Cash flows from investing activities used $24.7 million during the
first three months of 1996. During the first quarter of 1996, net purchases
of Available-For-Sale Debt Securities and capital expenditures used $16.6
million and $7.2 million, respectively. During the first quarter of 1996, net
cash provided by financing activities was $1.0 million, due to proceeds (net
of repurchases)of common stock of $1.3 million partially offset by payments
on lines of credit of $0.3 million.
The Company expects to make expenditures for the year ended December 31, 1996 of
approximately $38.0 million to acquire capital and leasehold improvements,
primarily in the United States and 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.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: With the exception of historical information, the matters discussed in
this document are forward-looking statements that involve risks and
uncertainties including, but not limited to, economic conditions, product demand
and industry capacity, competitive products and pricing, manufacturing
efficiencies, new product development, ability to enforce patents, availability
of raw materials and critical manufacturing equipment, new plant startups, the
regulatory and trade environment, and other risks indicated in filings with the
Securities and Exchange Commission.
9
PART II OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended March 31, 1996.
No exhibits are filed with this report.
10
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)
May 13, 1996
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Date