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UNITED STATES
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 December 31, 1997.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the period from ________ to ________.
Commission File Number 0-11348
SILICON VALLEY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2264681
(State of incorporation) (IRS Employer Identification No.)
101 METRO DRIVE, SUITE #400, SAN JOSE, CALIFORNIA 95110
(Address of principal executive offices) (Zip Code)
(408) 441-6700
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
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
--- ----
The number of shares outstanding of the Registrant's Common Stock as of
January 30, 1998 was 32,345,215.
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SILICON VALLEY GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NO.
--------
<S> <C>
Consolidated Condensed Balance Sheets as of
December 31, 1997 and September 30, 1997 3
Consolidated Condensed Income Statements
for the Quarters Ended December 31, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows
for the Quarters Ended December 31, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 18
SIGNATURES 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
------------ ------------
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 122,093 $ 129,689
Temporary investments 67,791 76,972
Accounts receivable (net of allowance for doubtful
accounts of $7,178 and $6,794, respectively) 158,111 145,794
Inventories 229,055 228,453
Prepaid expenses and other assets 7,522 7,507
Deferred taxes 6,363 5,863
------------ ------------
Total current assets 590,935 594,278
PROPERTY AND EQUIPMENT - NET 163,696 150,985
DEPOSITS AND OTHER ASSETS 5,594 6,170
INTANGIBLE ASSETS - NET 4,385 4,584
------------ ------------
TOTAL $ 764,610 $ 756,017
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 41,297 $ 43,707
Accrued liabilities 124,074 127,449
Current portion of long-term debt and capital leases 2,031 1,848
Income taxes payable 3,639 515
------------ ------------
Total current liabilities 171,041 173,519
LONG-TERM DEBT AND CAPITAL LEASES 6,347 6,515
DEFERRED AND OTHER LIABILITIES 4,117 2,873
STOCKHOLDERS' EQUITY:
Common Stock - shares outstanding:
December 31, 1997: 32,282,254
September 30, 1997: 32,272,342 400,332 399,663
Retained earnings 186,106 173,961
Minimum pension liability (274) (274)
Cumulative translation adjustment (3,059) (240)
------------ ------------
Stockholders' equity 583,105 573,110
------------ ------------
TOTAL $ 764,610 $ 756,017
============ ============
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
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SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
---------------------------
December 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
NET SALES $ 188,707 $ 128,022
COST OF SALES 114,319 79,268
--------- ---------
GROSS PROFIT 74,388 48,754
OPERATING EXPENSES:
Research, development and
related engineering 21,069 17,674
Marketing, general and
administrative 36,687 28,003
--------- ---------
OPERATING INCOME 16,632 3,077
INTEREST AND OTHER INCOME - NET 1,482 2,813
INTEREST EXPENSE (254) (229)
--------- ---------
INCOME BEFORE INCOME
TAXES AND MINORITY INTEREST 17,860 5,661
PROVISION FOR INCOME TAXES 5,715 1,883
MINORITY INTEREST -- 194
--------- ---------
NET INCOME $ 12,145 $ 3,584
========= =========
NET INCOME PER SHARE - BASIC $ 0.38 $ 0.11
========= =========
SHARES USED IN BASIC PER SHARE
COMPUTATIONS 32,277 31,201
========= =========
NET INCOME PER SHARE - DILUTED $ 0.37 $ 0.11
========= =========
SHARES USED IN DILUTED PER SHARE
COMPUTATIONS 33,124 31,747
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
<PAGE> 5
SILICON VALLEY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended
December 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,145 $ 3,584
Reconciliation to net cash provided by
operating activities:
Depreciation and amortization 8,436 4,915
Amortization of intangibles 199 69
Deferred income taxes (500) (250)
Minority interest -- 194
Changes in assets and liabilities:
Accounts receivable (12,317) 17,993
Inventories (602) (8,458)
Prepaid expenses (15) 573
Deposits and other assets 576 191
Accounts payable (2,410) (1,124)
Accrued and deferred liabilities (1,949) 3,918
Income taxes 3,124 1,073
--------- ---------
Net cash provided by operating activities 6,687 22,678
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of temporary investments (5,186) (18,110)
Maturities of temporary investments 14,367 6,080
Purchases of property and equipment (21,147) (13,661)
--------- ---------
Net cash used for investing activities (11,966) (25,691)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (235) (688)
Proceeds from borrowings 250 --
Sale of Common Stock 669 28
--------- ---------
Net cash provided by (used for) financing activities 684 (660)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,001) (56)
--------- ---------
DECREASE IN CASH AND EQUIVALENTS (7,596) (3,729)
CASH AND EQUIVALENTS:
Beginning of period 129,689 219,317
--------- ---------
End of period $ 122,093 $ 215,588
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Note Payable issued for additional facilities $ -- $ 750
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE> 6
SILICON VALLEY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been prepared
by the Company without audit and reflect all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management are necessary
to present fairly the financial position and the results of operations for the
interim periods. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the statements in
accordance with generally accepted accounting principles. For further
information, refer to the Consolidated Financial Statements and Notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1997. Results for fiscal 1998 interim periods are not necessarily
indicative of results to be expected for the fiscal year ending September 30,
1998.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's Consolidated
Condensed Financial Statements to conform to the current fiscal period
presentation.
3. INVENTORIES
<TABLE>
<CAPTION>
Inventories are comprised of:
December 31, September 30,
------------ ------------
1997 1997
------------ ------------
(In thousands)
<S> <C> <C>
Raw materials $ 90,914 $ 92,660
Work-in-process 128,956 128,662
Finished goods 9,185 7,131
------------ ------------
$ 229,055 $ 228,453
============ ============
</TABLE>
4. NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," effective October 1, 1997, which replaces prior Earnings
Per Share (EPS) reporting and requires dual presentation of basic and diluted
EPS. The Company has restated all prior periods to conform with this statement.
Basic net income per share is computed by dividing net income by the weighted
average number of common shares outstanding.
Diluted net income per share includes an additional 847,000 and 545,000 shares
at the quarters ended December 31, 1997 and 1996, respectively, to reflect the
potential dilution that could occur if dilutive stock options were converted
into common stock.
6
<PAGE> 7
5. TINSLEY LABORATORIES, INC. ACQUISITION
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. (TLI), in
a stock for stock transaction whereby approximately 1,091,000 shares of the
Company's Common Stock were exchanged for all outstanding shares of TLI Common
Stock. TLI designs, manufactures and sells precision optical components,
assemblies and systems to customers in a variety of industries and research
endeavors. The transaction was accounted for as a pooling of interests for
financial reporting purposes. All prior periods have been restated to include
TLI financial results.
7
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SILICON VALLEY GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are subject to
certain risks and uncertainties, including those discussed below, as well as
risk factors included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997, that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Forward-looking statements are indicated by an asterisk (*) following
the sentence in which such statement is made. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. The Company's products
are used in photolithography for exposure and photoresist processing, and in
deposition for oxidation/diffusion and low pressure chemical vapor deposition
(LPCVD). The Company manufactures and markets its photolithography exposure
products through its wholly owned subsidiary, SVG Lithography Systems, Inc.
(SVGL), its photoresist processing products through its Track Systems Division
(Track), its oxidation/diffusion and LPCVD products through its Thermco Systems
Division (Thermco), and its precision optical components through its wholly
owned subsidiary Tinsley Laboratories, Inc. (TLI).
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI").
(See "Liquidity and Capital Resources.") The transaction has been accounted for
as a pooling of interests for financial reporting purposes. All amounts
discussed below have been retroactively restated to reflect the inclusion of
TLI, which does not have a material effect on the overall results of the
Company.
The semiconductor industry into which the Company sells its products is highly
cyclical and has, historically, experienced periodic downturns which have had a
severe effect on the semiconductor industry's demand for semiconductor
processing equipment. During prior downturns the Company has experienced periods
of decreased customer order bookings, customer deferrals of scheduled equipment
delivery dates and order cancellations, which in turn have resulted in
significant reductions in the Company's net sales, gross margin and net income.
The Company expects that its operations as a whole will continue to be dependent
on the capital expenditures of semiconductor manufacturers, which in turn will
be dependent on anticipated demand for integrated circuits and products
utilizing integrated circuits.* There can be no assurance that the Company will
not again experience customer delivery deferrals, order cancellations or a
prolonged period of customer orders at reduced levels, any or a combination of
which would have an adverse effect on its operating results.* Any prolonged
weakness in demand experienced by the semiconductor industry is likely to have
an adverse effect on the Company's business and results of operations.*
8
<PAGE> 9
The Company includes in backlog only those customer orders scheduled to ship
within twelve months of the fiscal quarter-end. At September 30, 1997
approximately 10% of the Company's backlog consisted of orders from customers in
the Pacific Rim. As a result of the recent economic downturn in certain Asian
countries, during the first quarter of fiscal 1998, the Company removed
$38,000,000 of such orders from its backlog due to the rescheduling of shipment
dates beyond the Company's twelve month parameter. There can be no assurance
that the Company will be able to obtain additional orders from Pacific Rim
customers or that it will not experience cancellations or additional deferrals
of existing orders from customers in such countries, any of which would have an
adverse effect on the Company's business and results of operations.*
Historically, the Company has relied on a limited number of customers for a
substantial percentage of its net sales. In fiscal 1997, the Company's two
largest customers accounted for 60% of net sales, the largest representing 38%
of the total and during the first quarter of fiscal 1998, the Company's three
largest customers comprised 74% of net sales, the largest representing 49% of
the total. The loss of any significant customer, delays in shipments due to
rescheduling or reductions in orders by a significant customer, including
reductions in orders due to market, economic or competitive conditions in the
semiconductor industry, will adversely affect the Company's business and results
of operations.* The Company believes that, for the foreseeable future, due in
part to its customer base consisting primarily of manufacturers of logic
devices, it will continue to rely on a limited number of major customers for a
substantial percentage of its net sales.*
For the first quarter of fiscal 1998, net sales were $188,707,000, a 47%
increase from net sales of $128,022,000 during the year-earlier quarter and an
8% increase over fourth quarter fiscal 1997 net sales of $174,244,000. In
comparison to both the first and fourth quarters of fiscal 1998, the higher net
sales were the result of increased shipments by SVGL and Track offset in part by
lower Thermco shipments. During the first quarter of fiscal 1998, the Company
recorded new customer order bookings of $175,253,000 compared to bookings during
the year-earlier quarter of $130,282,000 and bookings during the preceding
quarter of $213,450,000. The Company includes in backlog only those orders to
which a purchase order number has been assigned by the customer, with all terms
and conditions agreed upon and for which delivery has been specified within
twelve months. As discussed above, during the first quarter of fiscal 1998,
$38,000,000 in Asian orders which were recorded in the preceding quarter were
removed from the Company's backlog due to the rescheduling of shipment dates
beyond the Company's twelve month backlog parameter. At December 31, 1997, the
Company had a backlog of $384,028,000 compared to the September 30, 1997 backlog
of $435,482,000, which included the orders discussed above. At December 31,
1997, the backlog included orders for 47 Micrascan photolithography systems.
With the addition of the Asian orders discussed above, SVGL had orders for 27
additional systems with scheduled delivery dates outside the twelve month
backlog window, including orders for six advanced technology 193 nanometer
Micrascan systems currently under development.
Gross margin was 39.4% for the first quarter of fiscal 1998, above gross margin
of 38.1% in the year-earlier quarter, but below fourth quarter of fiscal 1997
gross margin of 40.2%. As a result of the Company's fiscal calendar, as well as
its placement of floating holidays, the first quarter of fiscal 1998 had more
holidays and less work days than either the year-earlier or preceding quarters.
As a result, during the first quarter of fiscal 1998, the Company incurred a
proportionately higher percentage of overhead costs. The improvement in gross
margin over the year-earlier quarter resulted from higher volumes in Track,
offset in part by significantly lower volumes in Thermco and the overall effect
9
<PAGE> 10
of the increased overhead costs discussed above. Compared to the preceding
quarter, the decrease in gross margin was primarily the result of lower volumes
at Thermco and the overall effect of the increased overhead costs discussed
above, offset in part by lower costs associated with Track's most recent
product, the 200-APS.
Research, development and related engineering expenses are net of funding
received from outside parties under development agreements. Such funding is
typically payable upon the attainment of one or more development milestones
which are specified in the agreement. Neither the spending, nor the recognition
of the funding related to the development milestones is ratable over the term of
the agreements. For all three quarters being compared, such funding was
primarily related to agreements between SVGL and certain customers for the
development of a 193 nanometer Micrascan system. (See "SVG Lithography Systems,
Inc. (SVGL)".)
Research, development and related engineering expenses (R&D) were $21,069,000
(11.2% of net sales) during the first quarter of fiscal 1998 compared to
$17,674,000 (13.8% of net sales) during the first quarter of fiscal 1997 and
$21,101,000 (12.1% of net sales) in the preceding quarter. During the first
quarter of fiscal 1998 and the first and fourth quarters of fiscal 1997,
development funding of $2,368,000, $636,000 and $3,005,000, respectively, was
recognized and offset against R&D. In comparison to the year-earlier quarter,
the increase in R&D expense was primarily due to multiple lithography
development programs and efforts in all of the product groups to design
equipment capable of processing the next generation 300mm wafers, offset in part
by lower costs incurred on Track's 200-APS program. In comparison to the first
and fourth quarters of fiscal 1997, the decrease in R&D as a percentage of net
sales corresponds to the increase in net sales.
Marketing, general and administrative expenses (MG&A) were $36,687,000 (19.4% of
net sales) in the first quarter of fiscal 1998 compared to $28,003,000 (21.9% of
net sales) for the year-earlier quarter and $38,088,000 (21.9% of net sales) in
the preceding quarter. The increase in MG&A expenditures over year-earlier
quarter was primarily the result of costs related to the increased level of
shipments by SVGL and Track, offset in part by lower shipment related costs
incurred by Thermco. The decrease in MG&A from the preceding quarter was
principally due to lower amortization of prepaid royalties related to a second
quarter fiscal 1997 transaction with IBM. The prepaid royalties relate to
existing products and are being amortized through fiscal 2000 in proportion to
the related product sales. The decrease in MG&A as a percentage of net sales
compared to the first and fourth quarters of fiscal 1997 is primarily due to an
increase in net sales.
Operating income was $16,632,000 for the first quarter of fiscal 1998, an
increase over operating income during the first and fourth quarters of fiscal
1997 of $3,077,000 and $10,869,000, respectively. The increase in operating
income over the year-earlier quarter resulted from improved gross margins on
higher net sales offset in part by increased R&D and MG&A expenditures. The
increase in operating income over the preceding quarter was due to the combined
effect of higher net sales and slightly lower R&D and MG&A expenditures.
Interest and other income was $1,482,000 during the first quarter of fiscal 1998
compared to $2,813,000 during the year-earlier quarter and $2,214,000 during the
preceding quarter. In comparison to both the year-earlier and preceding quarters
the decrease was primarily the result of lower interest income due to lower
average cash balances available for investment, foreign currency translation and
exchange losses resulting from the strength of the U.S. dollar and the absence
of certain royalty income under an agreement which expired during the fourth
quarter of fiscal 1997.
During the first quarter of fiscal 1998, interest expense was $254,000 compared
to $229,000 and $265,000 during the first and fourth quarters of fiscal 1997,
respectively.
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<PAGE> 11
The Company recorded a 32% provision for income taxes for the first quarter of
fiscal 1998, compared to a 36% provision for all of fiscal 1997. Variations in
the Company's effective tax rate relate primarily to changes in the geographic
distribution of the Company's pretax income.
The minority interest represented that share of SVGL's operating results which
were attributable to its minority stockholder, IBM. In March 1997, the Company
purchased IBM's interest in SVGL for $3,000,000. The Company now accounts for
SVGL as a wholly-owned subsidiary. During the first quarter of fiscal 1997, the
reduction for minority interest was $194,000.
The Company had net income of $12,145,000 ($0.37 diluted earnings per share)
during the first quarter of fiscal 1998 compared to net income of $3,584,000
($0.11 diluted earnings per share) and $8,428,000 ($0.25 diluted earnings per
share) for the first and fourth quarters of fiscal 1997, respectively.
RISKS INHERENT IN THE COMPANY'S BUSINESS
Fluctuations in Quarterly Results. The Company has, at times during its
existence, experienced quarterly fluctuations in its operating results. Due to
the relatively small number of systems sold during each fiscal quarter and the
relatively high revenue per system, customer order rescheduling or
cancellations, or production or shipping delays can significantly effect
quarterly revenues and profitability. The Company has experienced, and may again
experience, quarters during which a substantial portion of the Company's net
sales are realized near the end of the quarter.* Accordingly, shipments
scheduled near the end of a quarter which are delayed for any reason can cause
quarterly net sales to fall short of anticipated levels. Since most of the
Company's expenses are fixed in the short term, such shortfalls in net sales
could have an adverse effect on the Company's business and results of
operations.* The Company's operating results may also vary from quarter to
quarter based upon numerous factors including the timing of new product
introductions, product mix, level of sales, the relative proportion of domestic
and international sales, activities of competitors, acquisitions, international
events, currency exchange fluctuations, and difficulties obtaining materials or
components on a timely basis.* In light of these factors, the Company may again
experience variability in its quarterly operating results.*
Rapid Technological Change; Dependence on New Product Development. Semiconductor
manufacturing equipment and processes are subject to rapid technological change.
The Company believes that its future success will depend upon its ability to
continue to enhance its existing products and their process capabilities and to
develop and manufacture new products with improved process capabilities that
enable semiconductor manufacturers to fabricate semiconductors more
efficiently.* The Company is developing products capable of processing 300mm
wafers to enable advanced semiconductor manufacturers to transition from the
current 200mm wafer standard.* Failure to successfully introduce these or any
other new products in a timely manner could result in the loss of competitive
position and could reduce sales of existing products.* In addition, new product
introductions could contribute to quarterly fluctuations in operating results as
orders for new products commence and increase the potential for a decline in
orders of existing products, particularly if new products are delayed.*
From time-to-time, the Company has experienced delays in the introduction of its
products and product enhancements due to technical, manufacturing and other
difficulties and may experience similar delays in the future.* For example,
during fiscal 1996, the Company announced a new Track product, the 200-APS.
Initial shipments of the 200-APS were scheduled to commence during the second
quarter of fiscal 1997, but have been delayed by approximately twelve months.*
There can be no assurance that the
11
<PAGE> 12
Company will not experience manufacturing problems as a result of instability of
the design of either the hardware or software elements of the new technology, or
be able to efficiently manufacture the 200-APS or other products.* These issues
could result in product delivery delays and a subsequent loss of future sales.*
Semiconductor manufacturers tend to select either a single supplier or a primary
supplier for a certain type of equipment. The Company believes that prolonged
delays in delivering initial quantities of newly developed products to multiple
customers, whether due to the protracted release of product from engineering
into manufacturing or due to manufacturing difficulties, could result in
semiconductor manufacturers electing to install competitive equipment in their
fabrication facilities and could preclude industry acceptance of the Company's
products.* Therefore, the Company's inability to effect the timely production of
new products or any failure of these products to achieve market acceptance could
have a material adverse effect on the Company's business and results of
operations.*
Historically, the unit cost of the Company's products has been the highest when
they are newly introduced into production and cost reductions have come over
time through engineering improvements, economies of scale and improvements in
the manufacturing process.* As a result, new products have, at times, had an
unfavorable impact on the Company's gross margins and results of operations.
There can be no assurance that the initial shipments of new products will not
have an adverse effect on the Company's profitability or that the Company will
be able to attain design improvements, manufacturing efficiencies or
manufacturing process improvements over time.* Further, the potential
unfavorable effect of newly introduced products on profitability can be
exacerbated when there is intense price competition in the marketplace.*
Competition. The semiconductor equipment industry is intensely competitive. The
Company faces substantial competition both in the United States and other
countries in all of its products. Significant competitive factors include
technology and cost of ownership, a formula which includes such data as initial
price, system throughput and reliability and time to maintain or repair. Other
competitive factors include familiarity with particular manufacturers' products,
established relationships between suppliers and customers, product availability
and technological differentiation. Occasionally, the Company has encountered
intense price competition with respect to particular orders and has had
difficulty establishing new relationships with certain customers who have
long-standing relationships with other suppliers.
Many of the Company's competitors are Japanese corporations. With the recent
strength of the U.S. dollar in relation to the Japanese yen, the Company's
ability to compete on the basis of price has been impaired. In light of the
recent economic downturn in certain Asian countries which represent significant
markets for such competitors, the Company believes that it may encounter more
severe price competition in its non-Asian markets.
Importance of the Japanese and Pacific Rim Markets. The Company's customers are
heavily concentrated in the United States and Europe. The Japanese and Pacific
Rim markets (including fabrication plants located in other parts of the world
which are operated by Japanese and Pacific Rim semiconductor manufacturers)
represent a substantial portion of the overall market for semiconductor
manufacturing equipment. To date, neither the Company's shipments into Japan nor
into the Pacific Rim have been significant. The Company believes that the
Japanese companies with which it competes have a competitive advantage because
their dominance of the Japanese and Pacific Rim semiconductor equipment market
provides them with the sales and technology base to compete more effectively
throughout the rest of the world. The Company is not engaged in any significant
collaborative effort with any Japanese or Pacific Rim semiconductor
manufacturers. As a result, the Company may be at a competitive disadvantage to
the Japanese equipment suppliers which are engaged in such collaborative
12
<PAGE> 13
efforts with Japanese and Pacific Rim semiconductor manufacturers. The Company
believes that it must substantially increase its share of these markets if it is
to compete as a global supplier.* Further, in many instances, Japanese and
Pacific Rim semiconductor manufacturers fabricate devices such as dynamic random
access memory devices ("DRAMs"), with potentially different economic cycles than
those affecting the sales of devices manufactured by the majority of the
Company's U.S. and European customers. Failure to secure customers in these
markets may limit the global market share available to the Company and may
increase the Company's vulnerability to industry or geographic downturns.*
In the past, several of the Company's larger customers have entered into joint
ventures ("JV") with European, Japanese or Pacific Rim semiconductor
manufacturers. In such cases, the Company has encountered intense price
competition from foreign competitors who are suppliers to the non-U.S. member of
the JV. Further, in certain instances the Company has not secured the equipment
order when the non-U.S. member has had the responsibility for selecting the
equipment to be used by the JV in its U.S. operations. There can be no assurance
that as the Company's customers form additional alliances, whether in the U.S.
or in other parts of the world, that the Company will be successful in obtaining
equipment orders or that it will be able to obtain orders with sufficient gross
margin to generate profitable transactions, either of which could have an
adverse effect on the Company's results of operations.*
In the Pacific Rim, the Company has invested in the staffing and facilities
necessary to sell, service and support customers, primarily in Korea, and
intends to commence such investments in Taiwan.* Throughout the Pacific Rim, the
Company is attempting to compete with established equipment suppliers with
significant market share and anticipates that it will encounter significant
price competition as well as competition based on technological ability.* There
can be no assurance that the Company's Pacific Rim operations will be
profitable, even if it is successful in obtaining significant sales into this
region.* Further, in light of the recent economic downturn in certain Asian
countries, there can be no assurance that the Company will be able to obtain
additional orders or that it will not experience cancellations or additional
deferrals of existing orders from customers in such countries, any of which
would have an adverse effect on the Company's business and results of
operations.*
Year 2000. As the year 2000 approaches, a universal issue has emerged regarding
how existing application software programs and operating systems can accommodate
date values. The Company is currently in the process of a thorough analysis of
the impact of modifying its computer software for the year 2000. Based upon its
preliminary findings, the Company believes that the software necessary to
effectively operate and manage its business will be modified, upgraded or
replaced in time to address such year 2000 issues and that the related costs of
such solutions will not have a material effect on its operating results.
Business Interruption. The Company manufactures its Track products in San Jose,
California and substantially all of its Thermco products in Orange, California.
SVGL's photolithography exposure products are manufactured in Wilton and
Ridgefield, Connecticut. If the Company were to lose the use of one of its
facilities as a result of an earthquake, flood or other natural disaster, the
resultant interruptions in operations would have a material adverse effect on
the Company's results of operations and financial condition. The Company's
California facilities are located in seismically active regions.
SVG Lithography Systems, Inc. (SVGL)
SVGL - Uncertain Market for Micrascan Products. The Company believes that the
photolithography exposure equipment market is one of the largest segments of the
semiconductor processing equipment
13
<PAGE> 14
industry.* To address this market, the Company has invested and expects to
continue to invest substantial resources in SVGL's Micrascan technology and its
family of Micrascan deep ultraviolet ("Deep UV") step and scan photolithography
systems, capable of producing line widths of .25 micron and below. The
development of a market for the Company's Micrascan step and scan
photolithography products will be highly dependent on the continued trend
towards finer line widths in integrated circuits. Lithography manufacturers have
been successful in extending the capability of I-Line steppers which have been
utilized in the fabrication of complex semiconductor devices with line widths of
less than 0.5 micron, such as 64 megabit DRAMs. The Company believes Deep UV
lithography will be required to fabricate devices with line widths below 0.3
micron.* Semiconductor manufacturers can purchase Deep UV steppers to produce
product at .25 micron line widths. However, the Company believes that as devices
increase in complexity and size and require finer line widths, the technical
advantages of Deep UV step and scan systems as compared to Deep UV steppers will
enable semiconductor manufacturers to achieve finer line widths, higher yields
and critical dimension control.* The Company also believes that the transition
to Deep UV step and scan systems will accelerate in calendar 1998 and that
advanced semiconductor manufacturers are beginning to require volume quantities
of production equipment as advanced as the current and pending versions of
Micrascan.* Currently, competitive Deep UV step and scan equipment capable of
producing .25 micron line widths is available in limited quantities from two
competitors, and the Company believes that at least one other manufacturer of
advanced photolithography systems will begin limited shipments of step and scan
machines in the near future.* There can be no assurance that the Company will be
successful in competing with such systems.* Further, if manufacturers of I-Line
or Deep UV steppers are able to further enhance existing technology to achieve
finer line widths sufficiently to erode the competitive and technological
advantages of Deep UV step and scan systems, demand for the Micrascan technology
may not develop as the Company expects.*
The Company believes that advanced logic devices and DRAMs will require
increasingly finer line widths.* Consequently, SVGL must continue to develop
advanced technology equipment capable of meeting its customers' current and
future requirements while offering those customers a progressively lower cost of
ownership.* In particular, the Company believes that it must continue its
development of future systems capable of printing line widths finer than .25
micron and processing 300mm wafers.*
SVGL - Need to Increase Manufacturing Capacity and System Output. The Company
believes that its ability to supply systems in volume will be a major factor in
customer decisions to commit to the Micrascan technology.* Based upon its
forecast of continued high growth in demand for photolithography equipment and
potential future demand for advanced lithography products, the Company has been
in the process of increasing SVGL's production capacity under an extremely
aggressive expansion schedule. In August 1996, as part of this expansion, the
Company purchased from The Perkin-Elmer Corporation a 243,000 square foot
facility occupied by SVGL in Wilton, Connecticut and an additional 201,000
square foot building, which SVGL now occupies, in Ridgefield, Connecticut.
Subsequently, the Company has invested in significant further capital
improvements related to the buildings purchased and the equipment required to
expand the production capabilities of SVGL and intends to continue such
investments through fiscal 1998.* In addition to the timely construction and
equipping of facilities, successful completion of this expansion will require
the continued recruitment, training and retention of a high quality workforce,
as well as the achievement of satisfactory manufacturing results on a scale
greater than SVGL has attempted in the past. There can be no assurance that the
Company can manage these efforts successfully. Any failure to manage such
efforts could result in product delivery delays and a subsequent loss of future
revenues. In particular, the Company believes that protracted delays in
delivering quantities of Micrascan products could result in semiconductor
manufacturers electing to install competitive equipment in their advanced
fabrication facilities, which
14
<PAGE> 15
could impede acceptance of the Micrascan products on an industry-wide basis. In
addition, the Company's operating results could also be adversely affected by
the increase in fixed costs and operating expenses related to increases in
production capacity if net sales do not increase commensurately.
The time required to build a Micrascan system is significant. If SVGL is to be
successful in supplying increased quantities of Micrascan systems, it will not
only need to be able to build more systems, it will need to build them faster.*
SVGL will require additional trained personnel and additional raw materials and
components, as well as improved manufacturing and testing techniques to both
facilitate volume and shorten manufacturing cycle time.* To that end, SVGL is
continuing to develop its vendor supply infrastructure, increase its staffing
levels and implement manufacturing improvements to meet anticipated shipment
volumes for 1998 and beyond.* Additionally, the Company must continue increasing
its field service and technical support organization staffing and infrastructure
to support the anticipated customer requirements. There can be no assurance that
the Company will not experience manufacturing difficulties or encounter problems
in its attempt to increase production and upgrade or expand existing
operations.*
One of the most critical components of the Micrascan systems are the projection
optics, which are primarily manufactured by SVGL. As part of its overall
investment in capacity, the Company is increasing SVGL's optical manufacturing
floorspace, procuring metrology equipment, and in some instances fabricating
test stands. The Company believes that in order for SVGL to attain it goals, it
must successfully reduce the cycle times required to build projection optics and
increase the optical manufacturing output.*
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI").
(See "Liquidity and Capital Resources".) A primary reason for the acquisition
was TLI's technology and expertise relating to aspherical lenses, a key
component of SVGL's photolithography products, the adaptation of certain of
TLI's manufacturing processes by SVGL and TLI's commencement of the fabrication
of non-aspherical lenses which are currently produced by SVGL.* There can be no
assurance that TLI's manufacturing technology is scaleable, or that such
expertise can be transferred without substantial time or expense, if at all.*
The inability of SVGL to transfer this production technology for use in
processes of a substantially larger scale or the inability of TLI to manufacture
non-aspherical lenses for SVGL in sufficient quantities to realize efficiencies
of scale could adversely effect the Company's ability to realize any significant
benefits from the acquisition of TLI.*
The Company believes that protracted delays in delivering quantities of both
current and future generations of Micrascan products to multiple customers could
result in semiconductor manufacturers electing to install competitive equipment
in their advanced fabrication facilities, and could preclude industry acceptance
of the Micrascan technology and products.* In addition, the Company's operating
results could also be adversely affected by the increase in fixed costs and
operating expenses related to increases in production capacity and field service
and technical support activities if net sales do not increase commensurately.*
SVGL - Sole Source Materials and Components. The raw material for a proprietary
component of the optical system for the Micrascan is available from only one
supplier. The supplier has expanded its capacity to meet SVGL's projected
requirements and has a contractual obligation to create and store agreed upon
quantities of safety stock. Additionally, a version of the Company's Micrascan
III photolithography system utilizes an Excimer laser which is manufactured in
volume by only one supplier and until the first quarter of fiscal 1998 was the
only vendor the Company had determined could meet its specifications. There can
be no assurance that either supplier will be able to supply the quantities of
15
<PAGE> 16
material required by SVGL.* If either supplier was unable to meet its
commitments, SVGL would be unable to manufacture the quantity of systems
required to meet the anticipated future demand, which would have a material
adverse effect on the Company's business and results of operations.* SVGL has
qualified an additional source of lasers for its current and future versions of
Micrascan systems, allowing the potential for the integration of such lasers
into its system configurations.*
SVGL - Research and Development Funding. Historically, the Company has depended
on external funding to assist in the high cost of development in its
photolithography operation. Beginning in fiscal 1996, the Company entered into
agreements with certain customers (the "Participants") whereby each agreed to
assist in funding the Company's development of an advanced technology 193
nanometer Micrascan system. In exchange for such funding, each Participant
received the right to purchase one such system and, in addition, received a
right of first refusal (ratable among such Participants) to all such machines
manufactured during the first two years following the initial system shipments.
For each initial system ordered, each Participant agreed to fund $5,000,000 in
such development costs. The agreements call for each Participant to pay
$1,000,000 of initial development funding and four subsequent payments of
$1,000,000 upon the completion of certain development milestones. The
Participants may withdraw from the development program without penalty, but
payments made against completed development milestones are not refundable and
all preferential rights to future equipment are forfeited. At December 31, 1997,
the Company had received $16,000,000 in funding from six Participants, of which
$10,454,000 had been recognized and offset against research and development
expenditures. In March 1997, one participant withdrew from the program . There
can be no assurances that the other Participants will remain in the program.* In
the event that the Company does not receive the funding anticipated under the
agreements, it would be required to replace the shortfall from its own funds or
other sources. If the Company were required to use its own funds, its research
and development expenses would increase and its operating income would be
reduced correspondingly. The agreements with the Participants stipulate that if
the Company receives funding for the development program in excess of
$25,000,000, it will issue, ratably to the Participants, credits totaling such
excess in the form of a cash discount which can be applied to the purchase of
additional systems by each Participant. There is no assurance that the Company
will receive all funding which it currently anticipates or that it will be able
to obtain future outside funding beyond that which it is currently receiving.
SVGL - Market Penetration. The Company believes that for SVGL to succeed in the
long term, it must sell its Micrascan products on a global basis.* The Japanese
market (including fabrication plants operated outside Japan by Japanese
semiconductor manufacturers) and the Korean market represent a substantial
portion of the overall market for photolithography exposure equipment. To date,
the Company has not been successful penetrating either of these markets. Recent
economic difficulties in certain Asian economies, particularly Korea, may
adversely effect the Company's ability to penetrate such markets.*
SVGL - Future Profitability. While the recent volume of orders for Micrascan
systems has been encouraging, they are not necessarily indicative of
industry-wide acceptance of the Micrascan technology. If SVGL is to attain its
objective of being a volume supplier of advanced photolithography systems, the
Company believes that it must expand its customer base to include additional
customers from whom it secures and successfully fulfills orders for
production-quantities of Micrascan systems.* Although SVGL is profitable, the
Company believes that as a result of costs associated with the continued
development of the Micrascan technology, the expansion of SVGL's manufacturing
capacity, the related increase in manpower and customer support, and the
potential difficulties inherent in manufacturing initial quantities of the .25
micron and sub-.25 micron Micrascan systems, in particular
16
<PAGE> 17
the projection optics required for these systems, there can be no assurance that
SVGL will be able to operate profitably in the future.*
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, cash and cash equivalents and temporary investments
totaled $189,884,000 a decrease of $16,777,000 from the September 30, 1997 total
of $206,661,000. Property and equipment purchased to facilitate the expansion of
SVGL's manufacturing capacity and increased accounts receivable corresponding to
the increased level of sales were the primary causes for the decrease and were
offset in part by cash generated by other operating activities.
On November 26, 1997, the Company acquired Tinsley Laboratories, Inc. ("TLI") in
exchange for approximately 1,091,000 shares of the Company's Common Stock. TLI
designs, manufactures and sells precision optical components, assemblies and
systems to customers in a variety of industries and research endeavors. The
transaction is being accounted for as a pooling of interests for financial
reporting purposes and is intended to qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended.*
The Company has a $75,000,000 unsecured revolving bank credit facility which
expires in December 2000. Advances under the facility bear interest at either
the U.S. prime rate or the LIBOR rate plus 1%. At February 13, 1998, there were
no borrowings outstanding under the facility.
The Company believes that it has sufficient working capital and available bank
credit to sustain operations and provide for the expansion of its business for
the foreseeable future.*
17
<PAGE> 18
PART II. OTHER INFORMATION
SILICON VALLEY GROUP, INC.
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
18
<PAGE> 19
SILICON VALLEY GROUP, INC.
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.
SILICON VALLEY GROUP, INC.
(Registrant)
Date: February 16, 1998 By:/s/ Papken S. Der Torossian
----------------------------
Papken S. Der Torossian
Chief Executive Officer and
Chairman of the Board
Date: February 16, 1998 By:/s/ Russell G. Weinstock
----------------------------
Russell G. Weinstock
Vice President Finance and
Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FIRST QUARTER OF FISCAL 1998 AS FILED IN THE
COMPANY'S FORM 10Q FOR THE QUARTERLY PERIOD ENDED DECEMVER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 122,093
<SECURITIES> 67,791
<RECEIVABLES> 165,289
<ALLOWANCES> 7,178
<INVENTORY> 229,055
<CURRENT-ASSETS> 590,935
<PP&E> 266,301
<DEPRECIATION> 102,605
<TOTAL-ASSETS> 764,610
<CURRENT-LIABILITIES> 171,041
<BONDS> 0
0
0
<COMMON> 400,332
<OTHER-SE> 182,773
<TOTAL-LIABILITY-AND-EQUITY> 764,610
<SALES> 188,707
<TOTAL-REVENUES> 188,707
<CGS> 114,319
<TOTAL-COSTS> 114,319
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> 17,860
<INCOME-TAX> 5,715
<INCOME-CONTINUING> 12,145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,145
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.37
</TABLE>
