<PAGE> 1
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 29, 1997
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
- ----------------------------- 95134
(Address of principal -----
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 March 29, 1997 16,435,961 shares of the Registrant's common stock, no par
value, were issued and outstanding.
1
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NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED MARCH 29, 1997
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
March 29, 1997 and December 31, 1996. 3
Condensed Consolidated Statements of Income
for the three months ended March 29, 1997
and March 31, 1996. 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 29, 1997
and March 31, 1996. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of 8
Financial Condition and Results of
Operations
Part II: Other Information
Item 1: Legal Proceedings 10
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
2
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------
Assets March 29, December 31,
1997 1996 (1)
(unaudited)
- ------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 47,109 $ 65,762
Short-term investments 136,357 110,906
Accounts receivable, net 129,108 119,710
Inventories 57,507 55,448
Deferred taxes 16,445 18,058
Prepaid and other current assets 5,601 4,085
--------------------
Total current assets 392,127 373,969
Property and equipment:
Machinery and equipment 64,667 60,240
Furniture and fixtures 4,604 4,660
Leasehold improvements 36,594 36,309
--------------------
105,865 101,209
Less accumulated depreciation and amortization 38,471 34,991
--------------------
67,394 66,218
Other assets 18,488 19,600
--------------------
$478,009 $459,787
====================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------
Current liabilities:
Current obligations under lines of credit $12,220 $13,153
Accounts payable 26,230 26,047
Accrued payroll and related expenses 10,043 17,404
Accrued warranty 18,938 18,566
Other accrued liabilities 8,036 10,210
Income taxes payable 6,697 771
--------------------
Total current liabilities 82,164 86,151
Commitments and contingencies
Shareholders' equity:
Common stock 135,764 128,751
Cumulative translation adjustment (510) (81)
Retained earnings 260,591 244,966
--------------------
Total shareholders' equity 395,485 373,636
--------------------
$478,009 $459,787
====================
</TABLE>
See accompanying notes.
- -------------
(1) Derived from the December 31, 1996 audited financial statements.
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(in thousands, except per share data) Three Months Ended
(unaudited) March 29, March 31,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Net sales $101,628 $115,284
Cost of sales 45,732 48,419
-------------------
Gross profit 55,896 66,865
Operating expenses
Research and development 16,842 12,303
Selling, general and administrative 17,531 17,205
-------------------
Total operating expenses 34,373 29,508
-------------------
Operating income 21,523 37,357
Interest income, net 2,133 1,888
-------------------
Income before provision for income taxes 23,656 39,245
Provision for income taxes 8,043 13,736
-------------------
Net income $ 15,613 $ 25,509
===================
Net income per share $0.91 $1.55
===================
Shares used in per share calculations 17,137 16,508
===================
</TABLE>
See accompanying notes.
4
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(in thousands) Three Months Ended
(unaudited) March 29, March 31,
1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $15,613 $25,509
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,572 2,493
Changes in operating assets and liabilities
Accounts receivable (9,598) (5,216)
Inventories (811) (10,376)
Prepaid taxes and other current assets 96 (888)
Accounts payable 183 1,492
Accrued payroll and related expenses (7,577) (4,872)
Accrued warranty 372 1,052
Other accrued liabilities (2,174) 2,938
Income taxes payable 7,603 3,514
--------------------
Total adjustments (8,334) (9,863)
--------------------
Net cash provided by operating activities 7,279 15,646
--------------------
Cash flows from investing activities:
Maturities and sale (purchases) of Available-For-Sale
Debt Securities, net (25,451) (16,557)
Capital expenditures (5,904) (7,249)
(Increase)decrease in other assets 1,020 (844)
--------------------
Net cash used for investing activities (30,335) (24,650)
--------------------
Cash flows from financing activities:
Proceeds (payments)on lines of credit, net (933) (307)
Repurchase of common stock - (855)
Proceeds from sale of common stock 5,336 2,132
--------------------
Net cash provided by financing activities 4,403 970
--------------------
Net decrease in cash and cash equivalents (18,653) (8,034)
Cash and cash equivalents at the beginning of the period 65,762 60,114
--------------------
Cash and cash equivalents at the end of the period $47,109 $52,080
====================
Supplemental Disclosures
Cash paid during the period for:
Interest $ 79 $ 93
Income taxes $ 359 $ 9,288
Other noncash charges:
Income tax benefits from employee stock plans $ 1,677 $ 529
</TABLE>
See accompanying notes.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 29, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended December 31,
1996.
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 29, 1997 Dec 31, 1996
- -----------------------------------------------------------------
<S> <C> <C>
Purchased parts $42,203 $40,211
Work-in-process 9,748 11,347
Finished goods 5,556 3,890
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$57,507 $55,448
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</TABLE>
3. LINES OF CREDIT
The Company has lines of credit with four banks under which the Company can
borrow up to $14,220,000 at the banks' prime rate which expire at various dates
through June 1998. A portion of this facility ($12,220,000) 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 29, 1997 there
were no borrowings by the parent company, and $12,220,000 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.
In February 1997, the Financial Accounting Standards Board issued the Statement
on Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share,"
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the first quarter ended March 29,
1997 and March 31, 1996 of $.04 and $.05 per share, respectively. The impact
of SFAS 128 on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
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5. LITIGATION
See Part II, Item 1 of this Form 10-Q for a description of legal proceedings.
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 three months ended March 29,1997 were $101.6 million compared
with $115.3 million for the comparable year-ago quarter, and $104.6 million for
the immediately preceeding quarter. The decrease in net sales from the year-ago
quarter and the immediately preceding quarter are primarily due to a shift in
product mix from the Company's older Concept One product line to the leading
edge Concept Two product line and an overall decline in demand for
semiconductor equipment which began in the third quarter of 1996. Although the
Company continues to see strong demand for its leading edge Concept Two product
line, bookings for the first quarter of 1997 did not achieve a 1:1 ratio.
Gross profit for the three months ended March 29,1997 was $55.9 million
compared with $66.9 million for the comparable year-ago quarter, and $58.6
million for the immediately preceeding quarter. The decreases from the year-ago
quarter and the immediately preceeding quarter are primarily due to the
decrease in net sales. Gross profit as a percentage of net sales for the three
months ended March 29,1997 was 55% compared with 58% for the comparable
year-ago quarter, and 56% for the immediately preceeding quarter. The decrease
in gross profit as a percentage of net sales from the year-ago quarter and the
immediately preceeding quarter were due to several factors which include the
shift in mix from the Company's Concept One to its leading edge Concept Two
products, pricing pressures due to the industry slow-down and lower absorption
of fixed overhead costs due to reduced manufacturing activity.
Research and development expenses for the three months ended March 29,1997 were
$16.8 million compared with $12.3 million for the comparable year-ago quarter,
and $15.6 million for the immediately preceeding quarter. Research and
development expenses as a percentage of net sales for the three months ended
March 29,1997 were 16.6% compared with 10.7% for the comparable year-ago
quarter, and 14.9% for the immediately preceeding quarter. The increases in
research and development expenses in absolute dollars and as a percentage of
net sales are a result of the Company's continuing commitment to invest in new
products at levels required for industry leadership.
Selling, general, and administrative expenses for the three months ended March
29,1997 were $17.5 million compared with $17.2 million for the comparable
year-ago quarter, and $19.4 million for the immediately preceeding quarter.
Selling, general, and administrative expenses as a percentage of net sales for
the three months ended March 29,1997 was 17.2% compared with 14.9% for the
comparable year-ago quarter, and 18.5% for the immediately preceeding quarter.
The slight increase in selling, general, and administrative expenses in absolute
dollars from the comparable year-ago quarter is a result of higher legal
expenses. The decrease in selling, general, and administrative expenses from
the immediately preceding quarter is a result of ongoing efforts to reduce these
expenses in absolute dollars and as a percentage of net sales.
Net interest for the three months ended March 29,1997 was $2.1 million compared
with $1.9 million for the comparable year-ago quarter, and $2.3 million for the
immediately preceeding quarter. The increase from the year-ago quarter is due
to higher cash balances, offset by decreased interest rates.
The Company's effective tax rate for the three months ended March 29,1997 was
34% compared with 35% for the comparable year-ago quarter and the immediately
8
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preceeding period. The decrease results from the fact that the research and
development tax credit was extended by the U.S. Congress during the second half
of 1996.
Net income for the three months ended March 29,1997 was $15.6 million or $0.91
per share compared with $25.5 million or $1.55 per share for the comparable
year-ago quarter, and $16.9 million or $1.02 per share for the immediately
preceeding quarter. The decreases were primarily due to the lower net sales,
gross profit and increasing research and development expenses.
The number of shares used in the per share calculations for the three months
ended March 29,1997 was 17.1 million compared with 16.5 million for the
comparable year-ago quarter and 16.6 million for the immediately preceeding
period. The increase in shares used in the per share calculations is primarily
due to increased stock options and the dilutive effect of common stock
equivalents due to the higher average stock price during the quarter.
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 29, 1997 consisted of $183.5 million of cash,
cash equivalents and short term investments. This amount represents an increase
of $6.8 million from the December 31, 1996 balance of $176.6. In addition at
March 29, 1997, there was $14.2 million available under bank lines of credit
that expire at various dates through June 1998. At March 29, 1997 approximately
$12.2 million was outstanding under these bank lines of credit which bear
interest at the banks' prime lending rates or offshore reference rates. At March
29, 1997 the Company has pledged securities of approximately $34.6 million in
connection with certain lease agreements for five buildings and undeveloped
land.
During the three months ended March 29, 1997, the Company's cash and cash
equivalents decreased $18.7 million to $47.1 million from $65.7 million at
December 31, 1996. Net cash provided by operating activities during the first
three months of 1997 was $7.3 million due primarily to net income of $15.6
million, depreciation and amortization of $3.6 million and increases in income
taxes payable of $7.6 million. These amounts were partially offset by increases
in accounts receivable of $9.6 million, accrued payroll of $7.6 million and
other accrued liabilities of $2.2 million. The increase in accounts receivable
was primarily due to longer collection cycles in the Pacific Rim region. Days
Sales Outstanding increased to 99 days at March 29, 1997 from 97 days at
December 31, 1996.
Cash flows from investing activities used $30.3 million during the first three
months of 1997. During this period, net purchases of Available- For-Sale Debt
Securities and capital expenditures used $25.5 million and $5.9 million,
respectively. During the first three months of 1997, net cash provided by
financing activities was $4.4 million, due primarily to proceeds from common
stock option exercises of $5.3 million. 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.
See Part II, Item 1, "Legal Proceedings" for a discussion on the possible effect
of final resolution of the Company's litigation with Applied Materials, Inc.
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"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements regarding the Company continuing to see strong demand for
its leading edge Concept Two product line, the Company's continuing commitment
to invest in new products at levels required for industry leadership and the
statement regarding the Company's ongoing efforts to reduce selling, general and
administrative expenses in absolute dollars and as a percentage of net sales,
and the statement regarding the Company's cash needs over the next twelve
months, 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.
PART II OTHER INFORMATION
Item 1
Legal Proceedings
On January 20, 1995, Applied Materials, Inc. (Applied) filed a patent
infringement suit against the Company, alleging that the Company's TEOS
products infringe one of Applied's patents that was issued in November 1994. On
April 11, 1997 a federal district court jury in the case of Applied Materials,
Inc. v. Novellus Systems, Inc. in the United States District Court for the
Northern District of California decided that the use of a TEOS process in
Novellus' Concept One, Concept Two, and Maxus products infringes Applied's U.S.
Patent No. 5,362,526. Applied has indicated that it intends to seek an
injunction against Novellus' shipment of systems using the TEOS process. A
number of additional issues remain to be decided in the case including certain
of Novellus' defenses to the claims. If Applied were to prevail in overcoming
Novellus' remaining defenses, the amount of damages, if any, to which Applied
may be entitled must also be determined. Because there still must be decisions
on certain Novellus defenses as well as a determination of damages, if any, the
Company is at this time unable to reasonably estimate the possible damages or
range of damages. Accordingly, the Company has not provided for a charge to
operations in the financial statements with respect to this contingent
liability. However, to the extent that the Company's defenses are not upheld,
the amount of damages which could be assessed against the Company would have a
material adverse impact on the Company's financial condition. In addition,
depending on the scope of any injunction entered by the court, the Company's
future operating results could be materially and adversely affected.
On September 15, 1995, Applied and the Company filed separate lawsuits each
claiming the other is liable for patent infringement. As the lawsuits,
including counterclaims, are now amended, the Company alleges that: (1)
Applied's tungsten products infringe three of the Company's patents, issued in
July 1993, and December 1994, respectively. (2) Applied's TEOS products
infringe one of the Company's patents issued in June 1995. Applied alleges that
one of the Company's tungsten processes infringes one of Applied's patents that
was issued in 1991. Discovery is ongoing in the matters initiated on September
15, 1995 and trial is currently scheduled for August 1997, but is expected to
be continued until a later date. Management's expectations are that the
ultimate resolution of this matter 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.
In the normal course of business, the Company from time to time receives
inquiries with regard to possible patent infringements. Management believes
that it is unlikely that the outcome of the patent infringement inquiries will
have a material adverse effect on the Company's financial position or results
of operations.
Item 6
Exhibits and Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended March 29,
1997. No exhibits are filed with this report.
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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/ ROBERT H. SMITH
--------------------------------------------
Robert H. Smith
Executive Vice President
Finance and Administration
(Principal Financial and Accounting Officer)
April 23, 1997
-----------------
Date
11
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INDEX OF EXHIBITS
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-29-1997
<CASH> 47,109
<SECURITIES> 136,357
<RECEIVABLES> 132,012
<ALLOWANCES> 2,904
<INVENTORY> 57,507
<CURRENT-ASSETS> 392,127
<PP&E> 105,865
<DEPRECIATION> 38,471
<TOTAL-ASSETS> 478,009
<CURRENT-LIABILITIES> 82,164
<BONDS> 0
0
0
<COMMON> 135,764
<OTHER-SE> 260,081
<TOTAL-LIABILITY-AND-EQUITY> 478,009
<SALES> 101,628
<TOTAL-REVENUES> 101,628
<CGS> 45,732
<TOTAL-COSTS> 45,732
<OTHER-EXPENSES> 34,373
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 21,523
<INCOME-TAX> 8,043
<INCOME-CONTINUING> 15,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,613
<EPS-PRIMARY> .91
<EPS-DILUTED> 0
</TABLE>
