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, 1996
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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)
3970 North First Street
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 October 31, 1996, 16,157,555 shares of the Registrant's common stock, no
par value, were issued and outstanding.
NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995. 3
Condensed Consolidated Statements of Income
for the three months and nine months ended
September 30, 1996 and September 30, 1995. 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996
and September 30, 1995. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
2
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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Assets Sept 30, December 31,
1996 1995 (1)
(unaudited)
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Current assets:
Cash and cash equivalents $50,074 $60,114
Short-term investments 121,970 89,685
Accounts receivable, net 115,555 112,088
Inventories 51,631 36,779
Deferred taxes 16,640 16,666
Prepaid and other current assets 7,100 2,831
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Total current assets 362,970 318,163
Property and equipment:
Machinery and equipment 58,721 41,916
Furniture and fixtures 4,402 2,587
Leasehold improvements 35,584 23,947
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98,707 68,450
Less accumulated depreciation and amortization 31,695 23,745
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67,012 44,705
Other assets 9,641 1,820
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$439,623 $364,688
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Liabilities and Shareholders' Equity
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Current liabilities:
Current obligations under lines of credit $13,649 $7,369
Accounts payable 22,524 32,866
Accrued payroll and related expenses 14,780 15,578
Accrued warranty 17,748 15,261
Other accrued liabilities 12,632 9,580
Income taxes payable 5,637 11,252
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Total current liabilities 86,970 91,906
Commitments and contingencies
Shareholders' equity:
Common stock 124,164 118,423
Cumulative translation adjustment 129 764
Retained earnings 228,360 153,595
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Total shareholders' equity 352,653 272,782
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$439,623 $364,688
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See accompanying notes.
(1) Derived from December 31, 1995 audited financial statements
3
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(in thousands, except per share data) Three Months Nine Months
(unaudited) Ended Sept 30, Ended Sept 30,
1996 1995 1996 1995
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Net sales $121,597 $100,407 $357,129 $263,935
Cost of sales 52,281 42,171 151,130 111,469
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Gross profit 69,316 58,236 205,999 152,466
Operating expenses
Research and development 13,591 11,427 38,337 29,354
Selling, general and administrative 19,540 15,939 55,029 42,466
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Total operating expenses 33,131 27,366 93,366 71,820
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Operating income 36,185 30,870 112,633 80,646
Interest income, net 2,489 2,338 6,062 6,783
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Income before provision for income taxes 38,674 33,208 118,695 87,429
Provision for income taxes 13,536 11,291 41,544 29,726
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Net income $25,138 $21,917 $77,151 $57,703
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Net income per share $1.53 $1.27 $4.68 $3.37
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Shares used in per share calculations 16,417 17,274 16,485 17,137
==================== ================
See accompanying notes.
4
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(in thousands) Nine Months
(unaudited) Ended Sept 30,
1996 1995
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Cash flows provided by operating activities:
Net income $77,151 $57,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,950 6,158
Changes in operating assets and liabilities
Accounts receivable (4,102) (26,235)
Inventories (27,554) (10,271)
Prepaid taxes and other current assets (4,269) (3,526)
Accounts payable (10,342) 7,671
Accrued payroll and related expenses (798) 1,740
Accrued warranty 2,487 4,995
Other accrued liabilities 3,052 (2,585)
Income taxes payable (4,173) 1,679
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Total adjustments (37,749) (20,374)
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Net cash provided by(used for)operating activities 39,402 37,329
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Cash flows from investing activities:
Maturities and sale (purchases) of Available-For-Sale
Debt Securities, net (32,285) -
Maturities (purchases)of Held-to-Maturity-Debt Securities - 18,756
Capital expenditures (17,555) (15,553)
(Increase)decrease in other assets (7,821) (379)
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Net cash provided by(used for)investing activities (57,661) 2,824
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Cash flows from financing activities:
Proceeds(payments) on lines of credit, net 6,280 2,416
Repurchase of common stock (2,971) (3,638)
Proceeds from sale of common stock 4,910 6,060
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Net cash provided(used for)by financing activities 8,219 4,838
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Net increase (decrease)in cash and cash equivalents (10,040) 44,991
Cash and cash equivalents at the beginning of the period 60,114 45,987
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Cash and cash equivalents at the end of the period $50,074 $90,978
======================
Supplemental Disclosures
Cash paid during the period for:
Interest $254 $176
Income taxes $45,411 $29,773
Other noncash charges:
Income tax benefits from employee stock plans $1,442 $4,129
Systems and parts transferred from property and equipment
to inventory $1,000 $1,583
Systems and parts transferred from inventory to property
and equipment $13,702 $3,732
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 and nine
month periods ended September 30,1996 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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Sept 30, 1996 Dec 31, 1995
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Purchased parts $39,073 $17,571
Work-in-process 12,254 14,550
Finished goods 304 4,658
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$51,631 $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 $17,000,000 at the banks' prime rate which expire at various dates
through April 1997. A portion of this facility ($15,000,000) 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, 1996,
there were no borrowings by the parent company, and $13,648,772 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 September 30, 1996, the
Company had purchased 76,800 shares under this new plan.
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 September 30, 1996, the notional
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amount of foreign exchange contracts used by the Company as hedging protection
against foreign currency exposure was approximately $19,101,768. These
contracts expire on various dates through March 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, U.S. patent 5,362,526 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, U.S. patent 5,238,499 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, U.S. patent 5,028,565 issued in 1991. On October 10, 1995,
the Company filed a counterclaim alleging that Applied's TEOS products infringe
a second patent of the Company, U.S. patent 5,425,803 issued in June 1995. On
October 26, 1995, the Company filed an amended counterclaim alleging that
Applied's tungsten products infringe a third patent of the Company, U.S. patent
5,374,594 issued in December 1994. On August 7, 1996 the Company filed an
amended complaint and an amended counterclaim alleging that Applied's tungsten
products infringe a fourth patent of the Company, U.S. patent 5,230,741 issued
in July 1993. 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 AGREEMENTS
On April 10, 1996, the Company entered into a 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 interest rates that
approximate LIBOR. At current interest rates the annual lease payments represent
approximately $1.9 million. The guaranteed residual payment on the lease
agreement is approximately $28.0 million. In connection with the collateral
requirements of this agreement, the Company has pledged securities of
approximately $29.7 million.
On October 24, 1996, the Company entered into an additional lease agreement for
approximately 4.4 acres of undeveloped land adjacent to the five buildings
previously leased. The agreement is for ten years at interest rates that
approximate LIBOR. At current interest rates the annual lease payments represent
approximately $0.3 million. The guaranteed residual payment on the lease
agreement is approximately $5.2 million. In connection with the collateral
requirements of this agreement, the Company has pledged securities of
approximately $5.5 million.
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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 quarter and nine months ended September 30,1996 were $121.6
million and $357.1 million, increases of 21.1% and 35.3% from the $100.4 million
and the $263.9 million reported for the third quarter and nine months ended
September 30, 1995, respectively. The increases are primarily due to higher unit
shipments of the Company's Concept Two product line in the Pacific Rim
countries. However, net bookings were slow during the quarter, resulting in less
than a 1:1 book to bill ratio.
Gross profit increased to $69.3 million and $206.0 million for the third quarter
and first nine months of 1996, respectively, from $58.2 million and $152.5
million in the comparable periods of 1995. The increases are primarily due to
the increase in net sales. Gross profit as a percentage of net sales at 57.0% in
the third quarter of 1996 was slightly down from the 58.0% recorded in the third
quarter of 1995. For the nine months ended September 30, 1996 gross profit was
57.7% as compared to 57.8% for the nine months ended September 30, 1995. The
decrease in gross profit percentage for the three months ended September 30,
1996 over the prior period is primarily due to fluctuations in product mix.
Research and development expenses for the quarter and nine months ended
September 30, 1996 increased 18.9% and 30.6% to $13.6 million and $38.3 million
from $11.4 million and $29.4 million in the same periods of 1995, respectively.
Research and development expenses as a percentage of net sales were 11.2% and
10.7% for the third quarter and first nine months of 1996. The Company plans to
maintain the levels of research and development needed to be a leader in the
industry.
Selling, general, and administrative expenses for the third quarter and first
nine months of 1996 increased to $19.5 million and $55.0 million from $15.9
million and $42.5 million in the same periods of 1995, respectively. The dollar
increases were due to higher profit sharing resulting from increased net income,
and generally higher levels of overhead to support the Company's operations
worldwide. Selling, general, and administrative expenses as a percentage of net
sales increased to 16.1% in the third quarter and decreased to 15.4% in the
first nine months of 1996 as compared to 15.9% and 16.1% in the same periods of
1995, respectively. The Company intends to prudently slow the growth of these
expenses in dollars.
Net interest income was $2.5 million and $6.1 million for the third quarter and
first nine months of 1996 as compared to $2.3 million and $6.8 million for the
same periods of 1995. The increase in net interest income from third quarter of
1995 to the third quarter of 1996 was due to higher cash balances. The decrease
from the nine month of 1995 to the nine months of 1996 was due to lower interest
rates.
The Company's effective tax rate was 35.0% for the third quarter and first nine
months of 1996, as compared to 34.0% for the third quarter and first nine of
1995. The increase results from the fact that the research and development tax
credit was only extended by the U.S. Congress to the second half of 1996.
Net income for the third quarter and first nine months of 1996 was $25.1 million
or $1.53 per share and $77.2 million or $4.68 per share, which
8
represents a 14.7% and 33.7% increase (20.5% and 38.9% increases in per share
amounts) from the $21.9 million or $1.27 per share and $57.7 million or $3.37
per share recorded in the third quarter and first nine months of 1995,
respectively. The increases were primarily due to the higher net sales.
The number of shares used in the per share calculations was 16.4 million at the
end of the third quarter and first nine months of 1996, representing a 5.0%
decrease from the 17.3 million at the end of the third quarter and first nine
months of 1995 primarily due to the activity in the Company's common stock
repurchase program. Approximately 665,000 shares of common stock were
repurchased in late 1995 and the first nine months of 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 September 30, 1996 consisted of $172.0 million of
cash, cash equivalents, and short term investments. This amount represents an
increase of $22.2 million or 14.8% from the $149.8 million at December 31, 1995.
In addition at September 30, 1996, there was $17.0 million available under bank
lines of credit that expire at various dates through April 30, 1997. At
September 30, 1996 approximately $13.6 million was outstanding under these bank
lines of credit which bear interest at the banks' prime lending rates or
offshore reference rates. At September 30, 1996, the Company has pledged
securities of approximately $29.7 million in connection with the new lease
agreement for five buildings in San Jose, California. On October 24, 1996, the
Company pledged an additional $5.5 million of securities in connection with the
lease of 4.4 acres of undeveloped land adjacent to the five buildings previously
leased.
During the nine months ended September 30, 1996, the Company's cash and cash
equivalents decreased $10.0 million to $50.1 million from $60.1 million at
December 31, 1995. Net cash provided by operating activities during the first
nine months of 1996 was $39.4 million due primarily to net income of $77.2
million, depreciation and amortization of $8.0 million, increases in accrued
warranty of $2.5 million and other accrued liabilities of $3.0 million. These
amounts were partially offset by increases in accounts receivable of $4.1
million, prepaid taxes and other assets of $4.3 million, inventories of $27.6
million, accounts payable of $10.3 million and income taxes payable of $4.2
million. The increase in accounts receivable was primarily due to the increased
sales. Days Sales Outstanding decreased to 80 days at September 30, 1996 from 86
days at December 31, 1995. The increase in inventories resulted from higher
manufacturing inventories to support increased production of our 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. In addition, inventories
were purchased to build in house systems for research and development, customer
demonstration and training.
Cash flows from investing activities used $57.7 million during the first nine
months of 1996. During this period, net purchases of Available-For-Sale Debt
Securities and capital expenditures used $32.3 million and $17.6 million,
respectively. During the first nine months of 1996, net cash provided by
financing activities was $8.2 million, due to increase in proceeds on lines of
credit to finance the Company's growth in Japan of $6.3 million and proceeds
(net of repurchases)of common stock of $1.9 million.The Company expects to make
expenditures for the year ended December 31, 1996 of approximately $40.0 million
(including systems built at Novellus)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.
9
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements regarding the Company prudently slowing the growth of
general and administrative expenses, the Company maintaining the levels of
investment in research and development needed to be a leader in the industry,
and other matters discussed in this report, except for any historical data, are
forward-looking statements. The forward-looking statements 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 (SEC). Actual results may differ materially.
Novellus assumes no obligation to update this information. For more details,
please refer to other SEC filings, including its most recent Annual Report on
Form 10K and prior quarterly report on Form 10Q.
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 September 30,
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/ ROBERT H. SMITH
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Robert H. Smith
Executive Vice President
Finance and Administration
(Principal Financial and Accounting Officer)
November 13, 1996
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Date
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