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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, 1995
OR
( ) TRANSITION REPORT PURSUANT TO 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
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Commission File Number
0-17157
NOVELLUS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0024666
(State or other jurisdiction (I.R.S. Employer
of incorporation of Identification
organization) Number)
81 VISTA MONTANA
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 26, 1995.
CLASS OUTSTANDING AT APRIL 26, 1995
Common Stock, no par value 16,264,850
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NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1995
INDEX
Part I: Financial Information
Item 1: Financial Statements Page
Consolidated Balance Sheets at
March 31, 1995 and December 31, 1994. 3
Consolidated Statements of Income
for the three months ended
March 31, 1995 and March 31, 1994. 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1995
and March 31, 1994. 5
Notes to consolidated financial
statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 1: Legal Proceedings 10
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
2
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NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------
Assets March 31 December 31,
1995 1994
(unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $54,644 $45,987
Short-term investments 91,695 90,552
Accounts receivable, net 66,572 60,590
Inventories 32,170 27,279
Prepaid taxes and other current assets 11,597 9,959
----------------------
Total current assets 256,678 234,367
Property and equipment:
Machinery and equipment 34,605 31,261
Furniture and fixtures 1,816 1,801
Leasehold improvements 13,829 11,875
----------------------
50,250 44,937
Less accumulated depreciation and amortization 18,763 15,528
----------------------
31,487 29,409
Other assets 1,480 1,224
----------------------
$289,645 $265,000
----------------------
----------------------
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------
Current liabilities:
Current obligations under lines of credit $4,448 $4,518
Accounts payable 15,518 14,845
Accrued payroll and related expenses 7,125 10,119
Accrued warranty 9,998 8,260
Other accrued liabilities 8,002 6,979
Income taxes payable 10,865 6,065
----------------------
Total current liabilities 55,956 50,786
Commitments and contingencies
Shareholders' equity:
Common stock 115,227 112,532
Cumulative translation adjustment 2,270 -
Retained earnings 116,192 101,682
----------------------
Total shareholders' equity 233,689 214,214
----------------------
$289,645 $265,000
----------------------
----------------------
</TABLE>
See accompanying notes.
3
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NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(in thousands, except per share data) Three Months
(unaudited) Ended March 31,
1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
Net sales $76,130 $42,437
Cost of sales 32,584 18,197
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Gross profit 43,546 24,240
Operating expenses
Research and development 8,286 5,586
Selling, general and administrative 12,241 8,155
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Total operating expenses 20,527 13,741
--------------------
Operating income 23,019 10,499
Interest income, net 2,145 472
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Income before provision for income taxes 25,164 10,971
Provision for income taxes 8,556 3,730
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Net income $16,608 $7,241
--------------------
--------------------
Net income per share $0.98 $0.47
--------------------
--------------------
Shares used in per share calculations 17,015 15,280
--------------------
--------------------
</TABLE>
See accompanying notes.
4
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NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(in thousands) Three Months
Ended March 31,
1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $16,608 $7,241
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,717 706
Changes in operating assets and liabilities
Accounts receivable (5,524) (3,834)
Inventories (4,959) (4,436)
Prepaid taxes and other current assets (1,638) (236)
Accounts payable 673 (513)
Accrued payroll and related expenses (2,994) (552)
Accrued warranty 1,738 601
Other accrued liabilities 1,023 (261)
Income taxes payable 5,508 2,132
----------------------
Total adjustments (4,456) (6,393)
----------------------
Net cash provided by operating activities 12,152 848
----------------------
Cash flows from investing activities:
Maturities (purchases) of Held-to-Maturity-Debt Securities (1,143) (10,025)
Capital expenditures (1,915) (60)
(Increase) decrease in other assets (256) 57
----------------------
Net cash used for investing activities (3,314) (10,028)
----------------------
Cash flows from financing activities:
Proceeds(payments) from lines of credit (70) 572
Repurchase of common stock (2,453) -
Common stock issued 2,342 55,500
----------------------
Net cash provided by (used in) financing activities (181) 56,072
----------------------
Net increase in cash and cash equivalents 8,657 46,892
Cash and cash equivalents at the beginning of the period 45,987 24,058
----------------------
Cash and cash equivalents at the end of the period $54,644 $70,950
----------------------
----------------------
Supplemental Disclosures
Cash paid during the period for:
Interest $64 $45
Income taxes $3,947 $958
Other noncash charges:
Income tax benefits from employee stock plans $708 $502
Systems transferred from property and equipment to inventory $83 $894
Systems transferred from inventory to property and equipment $151 $-
</TABLE>
See accompanying notes.
5
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NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles consistent with
those applied in, and should be read in conjunction with, the audited
consolidated financial statements for the year ended December 31, 1994 included
in the Annual Report on Form 10-K. The interim financial information is
unaudited, but reflects all normal recurring adjustments 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, 1995
are not necessarily indicative of results expected for the full year.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first out) or market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
March 31, 1995 Dec. 31, 1994
- ----------------------------------------------------------------
<S> <C> <C>
Purchased parts $15,571 $14,238
Work-in-process 15,230 10,971
Finished goods 1,369 2,070
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$32,170 $27,279
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--------- -----------
</TABLE>
3. LINES OF CREDIT
The Company has lines of credit with three banks under which the Company can
borrow up to $7,000,000 at the banks' prime rate which expire at various
dates through August, 1995. A portion of this facility ($5,000,000) is
available to the Company's Japanese subsidiary, Nippon Novellus Systems K.K.
Borrowings by the subsidiary are at the banks' offshore reference rate. At
March 31, 1995, there were no borrowings by the parent company, and
$4,448,000 by the subsidiary.
4. NET INCOME PER SHARE
Net income per share is based on weighted average common and dilutive common
equivalent shares outstanding during the period. Stock options are considered
common stock equivalents and are included in the weighted average computation
using the treasury stock method.
5. FOREIGN CURRENCY ACCOUNTING
To reflect the changing nature of the Company's Japanese subsidiary, the Company
changed the functional currency of the subsidiary from the U.S. Dollar to the
Japanese Yen effective January 1, 1995. The U.S. Dollar remains the functional
currency for all other foreign operations. Translation adjustments, which result
from the process of translating foreign currency financial statements into U.S.
dollars, are included in net earnings for those operations whose functional
currency is the U.S. dollar and as a separate component of shareholders' equity
for those operations whose functional currency is local currency.
6. COMMON STOCK REPURCHASE PROGRAM
In October 1992, the Company announced a systematic program to repurchase up to
700,000 shares of its Common Stock for issuance in future employee benefit and
compensation plans. At March 31, 1995, the Company had repurchased 51,000 shares
in the current quarter and 105,000 shares under the program to date.
6
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7. FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts to hedge against the
short-term impact of foreign currency orders denominated in yen, as well as to
hedge the Company's foreign net monetary asset position. The gains and losses on
these contracts are included in income in the year in which the related
transaction takes place. At March 31, 1995, the notional amount of foreign
exchange contracts used by the Company as hedging protection against foreign
currency exposure was approximately $23,923,000. These contracts expire on
various dates through January 1996.
8. DEBT SECURITIES
At March 31, 1995, all of the Company's debt securities were classified as held-
to-maturity and stated at amortized cost. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
securities to maturity. The following is a summary of cash and held-to-maturity
debt securities:
<TABLE>
<S> <C>
Cash and money market funds $15,278
U.S. Treasury securities and obligations
of U.S. Government Agencies 22,362
Other U.S. securities 68,535
Foreign securities 40,164
---------
Total cash, cash equivalents and short-term investments $146,339
---------
Cash and cash equivalents $54,644
Short-term investments 91,695
---------
Total cash, cash equivalents and short-term investments $146,339
---------
</TABLE>
9. LITIGATION
On January 30, 1995, Applied Materials, Inc. (Applied) filed an intellectual
property suit against the Company, alleging that the Company's TEOS products
infringe on one of Applied's patents that was issued in November 1994. Based on
the Company's preliminary analysis, the Company believes that the ultimate
resolution of the matter will not have a material adverse effect on the
Company's financial position or results of operations. (See further comments in
Part II, Item 1 of this document.)
7
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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 first quarter of 1995 were $76.1 million, an increase of 79.4%
from the $42.4 million reported for the same period of 1994. The increase is
primarily due to higher unit shipments across all product lines (including the
Company's 150 mm and 200 mm Concept One dielectric systems, and the Company's
Concept Two Altus tungsten systems). In addition, there were substantial sales
of the Concept Two Sequel dielectric systems that were first shipped in the
fourth quarter of 1994.
Gross profit increased to $43.5 million for the first quarter of 1995 from $24.2
million for the first quarter of 1994. The increase is primarily a result of
the increase in net sales. Gross profit as a percentage of net sales increased
slightly to 57.2% in the first quarter of 1995 from 57.1% in the first quarter
of 1994. The improvement over the prior period is primarily due to
manufacturing efficiencies and lower fixed costs per system resulting from the
higher volume of systems manufactured and shipped.
Research and development expenses for the first quarter of 1995 increased 48.3%
to $8.3 million from $5.6 million for the same period of 1994. Research and
development expenses decreased as a percentage of net sales from 13.2% in the
first quarter of 1994 to 10.9% in the first quarter of 1995. The Company
anticipates that research and development expenses will continue to increase in
absolute dollars to support new product development programs.
Selling, general, and administrative expenses for the first quarter of 1995
increased to $12.2 million from $8.2 million the same period of 1994. The
increase of 50.1% was due to higher levels of overhead and sales commissions to
support the higher revenues and the Company's increasing worldwide presence,
particularly in setting up and staffing a new sales and service office in
Taiwan. Selling, general, and administrative expenses decreased as a percentage
of net sales from 19.2% in the first quarter of 1994 to 16.1% in the first
quarter of 1995.
Net interest income increased to $2.1 million for the first quarter of 1995 from
$0.5 million for the first period of 1994. The increase was due to higher cash
balances resulting primarily from the 1.5 million share common stock offering in
the first quarter of 1994 (netting approximately $53.9 million), cash flows from
operations, proceeds from the exercise of stock options, and higher interest
rates.
8
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The Company's effective tax rate was 34.0% for the first quarters of 1995 and
1994.
Net income for the first quarter of 1995 increased 129.4% to $16.6 million
($0.98 per share) from $7.2 million ($0.47 per share) for the first quarter of
1994. The increase was primarily due to the higher revenues and corresponding
increases in gross profit, and greater interest income.
Shares used in per share calculations increased 11.3% to 17.0 million in the
first quarter of 1995 from 15.3 million in the first quarter of 1994. The
increases from first quarter 1994 were primarily as a result of the common stock
offering of 1.5 million shares completed in March, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital resources through cash flow
from operations, sales of equity securities, and borrowings. The Company's
primary sources of funds at March 31, 1995 consisted of $146.3 million of cash,
cash equivalents, and short term investments. In addition at March 31, 1995,
there was $7.0 million available under bank lines of credit that expire at
various dates through August 1, 1995. At March 31, 1995 approximately $4.4
million was outstanding under these bank lines of credit which bear interest at
the banks' prime lending rates.
During the quarter ended March 31, 1995, the Company's cash and cash equivalents
increased $8.6 million to $54.6 million from $46.0 million at December 31, 1994.
Net cash provided by operating activities increased $12.2 million due primarily
to net income of $16.6 million, and increases in income taxes payable of $5.5
million, partially offset by increases in accounts receivable of $5.5 million
and increases in inventories of $5.0 million. The increase in accounts
receivable was primarily due to the increased sales. The increase in
inventories resulted from higher manufacturing inventories to support increased
production schedules and higher service inventories to minimize response time to
our installed system base. Cash flows from investing activities used $3.3
million during the first quarter. Capital expenditures were approximately $1.9
million and consisted primarily of $1.7 million to expand manufacturing capacity
in the United States. The additional usage resulted primarily from purchases of
Held-to-Maturity-Debt-Securities of $1.1 million. Cash flows from financing
activities decreased $0.2 million due to repurchase of common stock of $2.4
million which slightly exceeded common stock issued of $2.3 million.
The Company expects to make expenditures for the year ended December 31, 1995 of
approximately $23.0 million to acquire capital and leasehold improvements,
primarily in the United States and in Japan. Of the $23.0 million,
approximately $1.9 million was expended through March 31, 1995. The Company
believes that its current cash position and cash generated through operations,
if any, will be sufficient to meet the Company's needs through at least the next
twelve months.
9
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PART II OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
As previously disclosed or incorporated by reference in Part I, Item 3, "Legal
Proceedings" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994, the Company is party to a lawsuit with Applied Materials,
Inc. ("Applied") filed on January 30, 1995 in the United States District Court,
Northern District of California.
On April 12, 1995, the Court severed and stayed discovery on the Company's
counterclaim against Applied in which the Company seeks an injunction against
and damages from Applied in connection with certain conduct by Applied
concerning the Company's customers.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended March 31, 1995.
No exhibits are filed with this report.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVELLUS SYSTEMS, INC.
REGISTRANT
/s/ William J. Wall
---------------------------
William J. Wall
Vice President
Finance and Administration
(Principal Financial and Accounting Officer)
MAY 9, 1995
Date
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