<PAGE>
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 June 30, 1996
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______ to
Commission File Number
0-17157
-------
Novellus Systems, Inc.
----------------------
(Exact name of Registrant as specified in its charter)
California 77-0024666
- ------------- ---------------
(State or other jurisdiction (I.R.S. Employer
of incorporation of Identification
organization) Number)
3970 North First Street
- -----------------------
San Jose, California
- -----------------------
(Address of principal 95134
- ----------------------- -----
executive offices) (Zip Code)
- ------------------
Registrant's telephone number, including area code:
(408) 943-9700
- --------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ----
As of July 31, 1996, 16,092,945 shares of the Registrant's common stock, no par
value, were issued and outstanding.
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NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
INDEX
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995. 3
Condensed Consolidated Statements of Income
for the three and six months ended
June 30, 1996 and June 30, 1995. 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 1996
and June 30, 1995. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II: Other Information
Item 4: Submission of Matters to a Vote of Securities 11
Holders
Item 6: Exhibits and Reports on Form 8-K 11
Signatures 12
2
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NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
- -------------------------------------------------------------------------------
Assets June 30, December 31,
1996 1995 (1)
(unaudited)
- -------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $52,112 $60,114
Short-term investments 110,130 89,685
Accounts receivable, net 114,042 112,088
Inventories 46,540 36,779
Deferred taxes 16,280 16,666
Prepaid and other current assets 4,778 2,831
----------------------
Total current assets 343,882 318,163
Property and equipment:
Machinery and equipment 58,611 41,916
Furniture and fixtures 3,731 2,587
Leasehold improvements 32,285 23,947
----------------------
94,627 68,450
Less accumulated depreciation and amortization 28,888 23,745
----------------------
65,739 44,705
Other assets 2,648 1,820
----------------------
$412,269 $364,688
======================
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------
Current liabilities:
Current obligations under lines of credit $11,910 $7,369
Accounts payable 23,059 32,866
Accrued payroll and related expenses 14,228 15,578
Accrued warranty 16,501 15,261
Other accrued liabilities 13,711 9,580
Income taxes payable 4,778 11,252
----------------------
Total current liabilities 84,187 91,906
Commitments and contingencies
Shareholders' equity:
Common stock 122,804 118,423
Cumulative translation adjustment 174 764
Retained earnings 205,104 153,595
----------------------
Total shareholders' equity 328,082 272,782
----------------------
$412,269 $364,688
See accompanying notes. ======================
(1) Derived from December 31, 1995 audited financial statements
3
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NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------ -----------------
(in thousands, except per share data) Three Months Six Months
(unaudited) Ended June 30, Ended June 30,
1996 1995 1996 1995
- ------------------------------------------------------------ ------------------
Net sales $120,248 $87,398 $235,532 $163,528
Cost of sales 50,430 36,714 98,849 69,298
------------------- ------------------
Gross profit 69,818 50,684 136,683 94,230
Operating expenses
Research and development 12,443 9,641 24,746 17,927
Selling, general and administrative 18,283 14,286 35,489 26,527
------------------- ------------------
Total operating expenses 30,726 23,927 60,235 44,454
------------------- ------------------
Operating income 39,092 26,757 76,448 49,776
Interest income, net 1,684 2,300 3,573 4,445
-------------------- -----------------
Income before provision for income taxes 40,776 29,057 80,021 54,221
Provision for income taxes 14,272 9,879 28,008 18,435
-------------------- -----------------
Net income $26,504 $19,178 $52,013 $35,786
==================== =================
Net income per share $1.60 $1.12 $3.15 $2.10
==================== =================
Shares used in per share calculations 16,531 17,123 16,520 17,069
==================== =================
See accompanying notes.
4
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NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands) Six Months
(unaudited) Ended June 30,
1996 1995
- --------------------------------------------------------------------------------
Cash flows provided by operating activities:
Net income $52,013 $35,786
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,496 4,921
Changes in operating assets and liabilities
Accounts receivable (2,254) (10,139)
Inventories (18,067) (9,458)
Prepaid taxes and other current assets (1,561) (2,486)
Accounts payable (9,807) 3,774
Accrued payroll and related expenses (1,350) (489)
Accrued warranty 1,240 2,320
Other accrued liabilities 4,131 2,841
Income taxes payable (5,032) 683
------------------
Total adjustments (27,204) (8,033)
------------------
Net cash provided by operating activities 24,809 27,753
------------------
Cash flows from investing activities:
Maturities and sale (purchases) of Available-For-Sale
Debt Securities (20,445) -
Maturities (purchases)of Held-to-Maturity-Debt Securities - (5,679)
Capital expenditures (18,514) (7,145)
(Increase)in other assets (828) (470)
------------------
Net cash(used for)investing activities (39,787) (13,294)
------------------
Cash flows from financing activities:
Proceeds(payments) on lines of credit, net 4,541 (360)
Repurchase of common stock (592) (3,638)
Proceeds from sale of common stock 3,027 3,676
------------------
Net cash provided by (used for)financing activities 6,976 (322)
------------------
Net increase (decrease)in cash and cash equivalents (8,002) 14,137
Cash and cash equivalents at the beginning of the period 60,114 45,987
------------------
Cash and cash equivalents at the end of the period $52,112 $60,124
==================
Supplemental Disclosures
Cash paid during the period for:
Interest $176 $122
Income taxes $31,563 $19,072
Other noncash charges:
Income tax benefits from employee stock plans $1,442 $2,397
Systems and parts transferred from property and equipment
to inventory $- $1,531
Systems and parts transferred from inventory to property
and equipment $8,306 $2,720
See accompanying notes.
5
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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 six
month periods ended June 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):
- ----------------------------------------------------------------
June 30, 1996 Dec. 31, 1995
- ----------------------------------------------------------------
Purchased parts $32,242 $17,571
Work-in-process 11,531 14,550
Finished goods 2,767 4,658
--------- -----------
$46,540 $36,779
========= ===========
3. LINES OF CREDIT
The Company has lines of credit with four banks under which the Company can
borrow up to $15,000,000 at the banks' prime rate which expire at various
dates through April 1997. A portion of this facility ($13,000,000) 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
June 30, 1996, there were no borrowings by the parent company, and
$11,910,000 by the subsidiary.
4. NET INCOME PER SHARE
Net income per share is based on weighted average common and dilutive common
equivalent shares outstanding during the period. Stock options are considered
common stock equivalents and are included in the weighted average computation
using the treasury stock method.
5. COMMON STOCK REPURCHASE PROGRAM
In October 1992, the Company announced a program to repurchase up to 700,000
shares of its Common Stock for issuance in future employee benefit and
compensation plans. During the first quarter of 1996, the Company completed this
program by purchasing 5,000 shares, which resulted in a total of 700,000 shares
purchased as of March 31, 1996. In January 1996, the Company announced an
additional program to repurchase up to 1,000,000 shares of its common stock to
minimize the dilutive effect of future share issuance in connection with
6
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the Company's employee benefit and compensation plans. As of June 30, 1996, the
Company had purchased 11,800 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 June 30, 1996, the notional amount of
foreign exchange contracts used by the Company as hedging protection against
foreign currency exposure was approximately $31,321,000. 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 that was issued in November 1994. On September
15, 1995, the Company filed a patent infringement suit against Applied, alleging
that Applied's tungsten products infringe one of the Company's patents issued in
August 1993. Also on September 15, 1995, Applied filed a patent infringement
suit against the Company, alleging that one of the Company's tungsten processes
infringes one of Applied's patents that was issued in 1991. On October 10, 1995,
the Company filed a counterclaim alleging that Applied's TEOS products infringe
on one of the Company's patents that was issued in June 1995. On October 26,
1995, the Company filed an amended counterclaim alleging that Applied's tungsten
products infringe one of the Company's patents issued in December 1994.
Management's expectations are that the ultimate resolution of these matters will
not have a material adverse effect on the Company's financial position, cash
flows, or results of operations; however based on future developments,
management's estimate of the ultimate outcome could change in the near term.
8. NEW LEASE AGREEMENT
On April 10, 1996, the Company entered into a new lease agreement for five
buildings in the San Jose area, three of which are currently occupied and were
previously leased by the Company. The agreement is for five years at 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.
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 quarter and six months ended June 30, 1996 were $120.2
million and $235.5 million, increases of 38% and 44% from the $87.4 million and
the $163.5 million reported for the quarter and six months ended June 30, 1995,
respectively. The increases are primarily due to higher unit shipments
of our Concept Two product line in Japan and the other Pacific Rim countries.
The Company is beginning to see some of the order pushouts and slowdowns that
are currently affecting the semiconductor equipment industry. A worldwide
slowdown in demand will affect the Company's ability to continue sequential
quarterly gains in net sales and maintain favorable comparisons with prior year
net sales.
Gross profit was $69.8 million and $136.7 million for the second quarter and
first half of 1996 as compared to $50.7 million and $94.2 million in the second
quarter and first six months of 1995, respectively. The increase is primarily a
result of the increase in net sales. Gross profit as a percentage of net sales
at 58.1% in the second quarter of 1996 was approximately equal to the 58.0%
recorded in the second quarter of 1995. For the six months ended June 30, 1996
gross profit was 58.0% as compared to 57.6% for the six months ended June 30,
1995. The improvement in gross profit percentage in the first six months of 1996
over the prior period is primarily due to improvements in manufacturing
efficiencies due to the increased volumes of the Company's newer products.
Research and development expenses for the quarter and six months ended June 30,
1996 increased 29% and 38% to $12.4 million and $24.7 million from $9.6 million
and $17.9 million in the same periods of 1995, respectively. Research and
development expenses as a percentage of net sales were 10.4% and 10.5% for the
second quarter and first half of 1996 which was slightly below the 11.0% in
both the second quarter and first half of 1995 due to increased sales. The
Company remains committed to a high level of expenditure on research and
development to support new product development efforts.
Selling, general, and administrative expenses for the second quarter and first
half of 1996 increased to $18.3 million and $35.5 million from $14.3 million and
$26.5 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 expanding
operations worldwide. Selling, general, and administrative expenses as a
percentage of net sales were 15.2% and 15.1% in the second quarter and first
half of 1996 as compared to 16.4% and 16.2% in the second quarter and first half
of 1995, respectively. The Company is continually looking to mitigate the growth
of these expenses.
Net interest income decreased to $1.7 million and $3.6 million for the second
quarter and first half of 1996 from $2.3 million and $4.4 million for the
8
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comparable period of 1995. The decrease in net interest income was primarily the
result of lower interest rates.
The Company's effective tax rate was 35% for the second quarter and first half
of 1996, as compared to 34% for the second quarter and first half of 1995. The
increase results from the fact that the research and development tax credit has
not yet been extended by the U.S. Congress to 1996.
Net income for the second quarter and first half of 1996 was $26.5 million or
$1.60 per share and $52.0 million or $3.15 per share, which represents a 38% and
45% increase (43% and 50% increases in per share amounts) from the $19.2 million
or $1.12 per share and $35.8 million or $2.10 per share recorded in the second
quarter and first half of 1995, respectively. The increases were primarily due
to the higher net sales. Due to net sales possibly being affected by order
slowdowns and pushouts, continued quarterly sequential increases in net income
and favorable comparisons to prior year net income may prove difficult to
achieve.
The number of shares used in the per share calculations was 16.5 million at the
end of the second quarter and first half of 1996, representing a decrease from
the 17.1 million at the end of the second quarter and first half of 1995
primarily due to the activity in the Company's common stock repurchase program.
Approximately 600,000 shares of common stock were repurchased in late 1995 and
early 1996.
The Company has financed its operations and capital resources through cash flow
from operations, sales of equity securities, and borrowings. The Company's
primary sources of funds at June 30, 1996 consisted of $162.2 million of cash,
cash equivalents, and short term investments. In addition at June 30, 1996,
there was $15.0 million available under bank lines of credit that expire at
various dates through April 30, 1997. At June 30, 1996 approximately $11.9
million was outstanding under these bank lines of credit which bear interest at
the banks' prime lending rates or offshore reference rates. At June 30, 1996,
the Company has pledged securities of appoximately $29.7 million in
connection with the new lease agreement for five buildings in San Jose,
California.
During the six months ended June 30, 1996, the Company's cash and cash
equivalents decreased $8.0 million to $52.1 million from $60.1 million at
December 31, 1995. Net cash provided by operating activities during the first
half of 1996 was $24.8 million due primarily to net income of $52.0 million,
depreciation and amortization of $5.5 million and increases in other accrued
liabilities of $4.1 million. These amounts were partially offset by increases in
accounts receivable of $2.3 million, inventories of $18.1 million, accounts
payable of $9.8 million and income taxes payable of $5.0 million. The increase
in accounts receivable was primarily due to the increased sales. Days Sales
Outstanding decreased to 77 days at June 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 $39.8 million during the
first six months of 1996. During the first half of 1996, net purchases of
Available-For-Sale Debt Securities and capital expenditures
9
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used $20.4 million and $18.5 million, respectively. During the first half of
1996, net cash provided by financing activities was $7.0 million, due to
increase in proceeds on lines of credit to finance the Company's growth in Japan
of $4.5 million and proceeds (net of repurchases)of common stock of $2.5
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.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements regarding the impact of a worldwide slowdown in demand on
net sales and net income, the Company's commitment to a high level of
expenditure on research and development to support new product development
efforts, the Company's efforts to mitigate the growth in general and
administrative expenses 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.
10
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PART II OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders, held on May 17, 1996, the
following proposals were adopted by the margins indicated.
1. Election of Directors
Nominee In Favor Withheld
------- -------- --------
Richard S. Hill 13,598,698 63,647
D. James Guzy 13,599,102 63,243
Glen Possley 13,598,602 63,743
Joseph Van Poppelen 13,599,091 64,254
Robert H. Smith 13,597,502 64,843
Tom Long 13,599,080 63,265
2. Approval of an Amendment to the Company's 1992 Stock Option Plan to Increase
the Shares Reserved for Issuance by 680,000 Shares
In Favor Opposed Abstained Broker Non-Votes
-------- ------- --------- ----------------
10,115,664 3,399,146 33,845 113,690
3. Approval of an Amendment to the Company's 1992 Employee Stock Purchase Plan
to Increase the Shares Reserved for Issuance by 40,000 Shares
In Favor Opposed Abstained Broker Non-Votes
-------- ------- --------- ----------------
13,171,698 199,502 39,086 252,059
4. Ratification of Appointment of Ernst & Young LLP as Certified Public
Accountants of the Company for the next fiscal year ended December 31, 1996
In Favor Opposed Abstained
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13,607,088 26,809 28,448
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended June 30, 1996.
No exhibits are filed with this report.
11
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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)
August 13, 1996
---------------
Date
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES
3 AND 4 OF THE COMPANY'S FORM 10Q FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 52,112
<SECURITIES> 110,130
<RECEIVABLES> 116,535
<ALLOWANCES> 2,493
<INVENTORY> 46,540
<CURRENT-ASSETS> 343,882
<PP&E> 94,627
<DEPRECIATION> 28,888
<TOTAL-ASSETS> 412,269
<CURRENT-LIABILITIES> 84,187
<BONDS> 0
0
0
<COMMON> 122,804
<OTHER-SE> 205,278
<TOTAL-LIABILITY-AND-EQUITY> 412,269
<SALES> 235,532
<TOTAL-REVENUES> 235,532
<CGS> 98,849
<TOTAL-COSTS> 98,849
<OTHER-EXPENSES> 60,235
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> 80,021
<INCOME-TAX> 28,008
<INCOME-CONTINUING> 52,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,013
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.15
</TABLE>
