<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 27, 1999
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)
4000 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 April 30, 1999 38,768,875 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 MARCH 27, 1999
INDEX
Part I: Financial Information
<TABLE>
<CAPTION>
Item 1: Condensed Consolidated Financial Statements Page
<S> <C>
Condensed Consolidated Balance Sheets at
March 27, 1999 and December 31, 1998. 3
Condensed Consolidated Statements of Income
for the three months ended March 27, 1999
and March 28, 1998. 4
Condensed Consolidated Statements of Cash Flows for
the three months ended March 27, 1999
and March 28, 1998. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3: Quantitative and Qualitative Disclosure About
Market Risks 16
Part II: Other Information
Item 1: Legal Proceedings 17
Item 6: Exhibits and Reports on Form 8-K 17
Signatures 17
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Assets March 27, December 31,
1999 1998 (1)
(unaudited)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 154,220 $ 81,224
Short-term investments 185,810 49,594
Accounts receivable, net 152,945 173,364
Inventories 77,625 69,223
Deferred taxes 20,901 21,003
Prepaid and other current assets 5,668 4,687
---------------------------
Total current assets 597,169 399,095
Property and equipment:
Machinery and equipment 115,832 113,268
Furniture and fixtures 9,759 8,295
Leasehold improvements 52,578 52,237
---------------------------
178,169 173,800
Less accumulated depreciation and amortization 74,904 68,221
---------------------------
103,265 105,579
Long-term deferred taxes 16,660 17,516
Other assets 32,746 29,749
---------------------------
Total Assets $ 749,840 $ 551,939
===========================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 25,021 $ 30,966
Accrued payroll and related expenses 10,986 13,138
Accrued warranty 24,084 25,872
Other accrued liabilities 19,790 23,720
Income taxes payable 1,974 4,792
Current obligations under lines of credit 12,696 12,986
---------------------------
Total current liabilities 94,551 111,474
Long-term debt -- 65,000
Commitments and contingencies
Shareholders' equity:
Common stock 446,947 176,140
Retained earnings 210,996 201,581
Accumulated other comprehensive income (loss) (2,654) (2,256)
---------------------------
Total shareholders' equity 655,289 375,465
---------------------------
Total Liabilities and Shareholders' Equity $ 749,840 $ 551,939
===========================
</TABLE>
See accompanying notes.
(1) Derived from the December 31, 1998 audited financial statements.
3
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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 27, March 28,
1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Net sales $115,231 $163,214
Cost of sales 54,097 73,283
------------------------
Gross profit 61,134 89,931
Operating expenses
Research and development 26,544 30,872
Selling, general and administrative 21,871 27,348
------------------------
Total operating expenses 48,415 58,220
------------------------
Operating income 12,719 31,711
Interest income, net 1,348 31
------------------------
Income before provision for income taxes 14,067 31,742
Provision for income taxes 4,642 10,792
------------------------
Net income $ 9,425 $ 20,950
========================
Basic net income per share $ 0.26 $ 0.62
========================
Diluted net income per share $ 0.25 $ 0.60
========================
Shares used in basic calculation 35,976 33,816
========================
Shares used in diluted calculation 37,798 34,857
========================
</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) Mar. 27, Mar. 28,
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 9,425 $ 20,950
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 958 (1,321)
Depreciation and amortization 6,683 5,294
Changes in operating assets and liabilities
Accounts receivable 20,419 (49,471)
Inventories (8,600) (2,791)
Prepaid and other current assets (981) 1,638
Accounts payable (5,945) 29,992
Accrued payroll and related expenses (2,152) (6,317)
Accrued warranty (1,788) 1,745
Other accrued liabilities (3,930) 511
Income taxes payable 1,611 11,000
---------------------------
Total adjustments 6,275 (9,720)
---------------------------
Net cash provided by operating activities 15,700 11,230
---------------------------
Cash flows from investing activities:
Maturities and sales (purchases) of available-for-sale
Debt Securities, net (136,216) 3,747
Capital expenditures (4,568) (12,219)
Decrease (increase) in other assets (2,997) 555
---------------------------
Net cash used for investing activities (143,781) (7,917)
---------------------------
Cash flows from financing activities:
Payments on lines of credit, net (65,290) (9)
Repurchase of common stock (11) (90)
Proceeds from sale of common stock 266,378 3,104
---------------------------
Net cash provided by financing activities 201,077 3,005
---------------------------
Net increase in cash and cash equivalents 72,996 6,318
Cash and cash equivalents at the beginning of the period 81,224 59,265
---------------------------
Cash and cash equivalents at the end of the period $ 154,220 $ 65,583
===========================
Supplemental Disclosures
Cash paid during the period for:
Interest $ 918 $ 1,188
Income taxes $ 503 $ --
Other noncash charges:
Income tax benefits from employee stock plans $ 4,429 $ 213
</TABLE>
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 condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and 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
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended March 27,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
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>
- --------------------------------------------------------------------------------
Mar. 27, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $56,488 $50,591
Work-in-process 17,380 13,005
Finished goods 3,757 5,627
------- -------
$77,625 $69,223
======= =======
</TABLE>
3. LINES OF CREDIT
The Company has lines of credit with three banks which expire at various dates
through 2002 under which the Company can borrow up to $13,696,000 at the banks'
prime rate. A portion of this facility ($12,696,000) is available to the
Company's Japanese subsidiary, Nippon Novellus Systems K.K. ("Nippon Novellus")
Borrowings by the subsidiary are at the banks' offshore reference rate. At March
27, 1999 and December 31, 1998, the amounts outstanding were $12.7 and $13.0
million, respectively. All borrowings outstanding under the line of credit were
by Nippon Novellus.
4. NET INCOME PER SHARE
In accordance with Statement on Financial Accounting Standards No. 128,
"Earnings per Share," basic net income per common share is computed based on
weighted average common shares outstanding during the period. Diluted earnings
per share is computed using the 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.
6
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
------------------------
Three Months Ended
Mar. 27, Mar. 28,
1999 1998
------------------------
<S> <C> <C>
Numerator:
Net income $ 9,425 $20,950
Denominator:
Denominator for basic earnings per
share-weighted-average shares
outstanding 35,976 33,816
Employee stock options 1,822 1,041
------------------------
Denominator for diluted earnings per
share-adjusted weighted-average
shares outstanding 37,798 34,857
========================
Basic earnings per share $ 0.26 $ 0.62
========================
Diluted earnings per share $ 0.25 $ 0.60
========================
</TABLE>
5. LONG-TERM DEBT
In June 1997, the Company entered into a five year $125 million Senior Credit
Facility structured as an unsecured revolving credit line. Borrowings, at the
option of the Company, bear interest at either a base rate plus a margin or the
London Interbank Offering Rate ("LIBOR") plus a margin for interest periods of
one to six months. As of March 27, 1999, borrowings of $65 million under the
revolving line of credit which were outstanding at December 31, 1998 were
repaid.
The credit facility contains certain restrictive financial covenants. At March
27, 1999, the Company was in compliance with these covenants.
6. COMMITMENTS
The Company has lease agreements on twelve properties. The agreements are for
five years each with the option to extend for an additional two years at an
interest rate that approximates LIBOR. At current interest rates the annual
lease payments total approximately $14.2 million. During the term of the leases,
the Company may elect to purchase the properties for an amount that approximates
the lessor's cost of the property and any current rent due and payable.
These leases contain certain restrictive financial covenants. At March 27, 1999,
the Company was in compliance with these covenants.
7
<PAGE> 8
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the Statement on Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income.
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Three Months Ended
March 27, 1999 March 28, 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 9,425 $ 20,950
Foreign currency translation adjustment (398) (635)
-------- --------
Comprehensive income $ 9,027 $ 20,315
======== ========
</TABLE>
The components of accumulated other comprehensive income (loss), net of related
tax are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
March 27, 1999 Dec. 31, 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustment $(2,654) $(2,256)
======= =======
</TABLE>
8
<PAGE> 9
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 27, 1999 were $115.2 million,
compared with $163.2 million for the comparable year-ago quarter, and $106.0
million for the immediately preceding quarter. The decrease in net sales from
the year-to-year quarter reflects the slowdown in capital spending by
semiconductor manufacturers, particularly for capacity purchases. Bookings for
the first quarter of 1999 exceeded the 1:1 book to bill ratio. In the second
quarter of 1999, the Company anticipates sequential bookings growth, sequential
revenue growth, sequential earnings growth, and the book to bill ratio to exceed
one to one.
International net sales (including export sales) for the three months ended
March 27, 1999, were 59.9% as a percentage of total net sales, which compares to
the prior year period of 45.4% and 45.3% for the immediately preceding quarter.
The increase from the comparable year ago and immediately preceding quarter
relate primarily to higher net sales in Korea.
Gross profit as a percentage of net sales for the three months ended March 27,
1999 and the immediately preceding quarter was 53.1%, compared with 55.1% for
the comparable year-ago period. The decrease in gross profit percentage from the
year-ago quarter is primarily due to unabsorbed fixed overhead costs from lower
shipment volume, partially offset by continuing cost control efforts. The
Company anticipates that it will experience competitive pricing pressures in the
future which the Company hopes will be offset by cost reduction programs and
increasing sales volumes resulting in near term gross margins that are
consistent with first quarter levels.
Research and development expenses for the three months ended March 27, 1999 were
$26.5 million compared with $30.9 million for the comparable year-ago quarter,
and $23.5 million for the immediately preceding quarter. Research and
development expenses as a percentage of net sales for the three months ended
March 27, 1999 represented 23.0% compared with the 18.9% for the comparable
year-ago period, and 22.1% for the immediately preceding quarter. The increases
in research and development expenses as a percentage of net sales reflects the
Company's increasing commitment to the development of new products, including
additional Concept Two modules, advanced PVD systems, electrofill systems,
advanced "gap fill" technology, primary conductor metals, low K dielectric
materials and additional advanced technologies for the next generation of
smaller geometry fabrication lines, as well as equipment to process 300mm
wafers.
Selling, general, and administrative expenses for the three months ended March
27, 1999 were $21.8 million compared with $27.3 million in the comparable
year-ago quarter, and $20.8 million from the immediately preceding quarter.
Selling, general, and administrative expenses as a percentage of net sales for
the three months ended March 27, 1999 were 18.9% compared with 16.8% for the
comparable year-ago quarter, and 19.6% for the immediately preceding quarter.
The decrease in absolute dollars from the comparable year ago quarter is due to
the Company's cost cutting efforts. The increase in absolute dollars from the
immediately preceding quarter is related to normal seasonal variations in
expenditures.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
Net interest income for the three months ended March 27, 1999 was $1.3 million
compared with $31,000 for the comparable year-ago quarter, and $340,000 recorded
in the immediately preceding quarter. The increase in net interest income
compared with the comparable year-ago quarter and immediately preceding quarter
is primarily due to increased average cash and short-term investment balances
over the past year. During the three months ended March 27, 1999, the Company
completed a secondary public offering of 3.86 million shares of common stock,
resulting in net proceeds to the Company of $255.3 million. In addition,
long-term borrowings of $65 million were repaid subsequent to the stock
offering, which resulted in a reduction of interest expense.
The Company's effective tax rate for the three months ended March 27, 1999 and
immediately preceding quarter was 33% compared with 34% for the comparable
year-ago period. The decrease in the effective tax rate from the comparable
year-ago quarter is due to the increased benefit from research and development
tax credits for 1999.
Deferred tax assets were $49.8 and $49.2 million net of valuation allowances of
$16.1 and $16.9 million at March 27, 1999 and December 31, 1998, respectively.
The Company believes that it is more likely than not that these assets will be
realized by an offset against the recognized tax liability of $12.2 and $11.1
million at March 27, 1999 and December 31, 1998, respectively, and by future
taxable income.
Net income for the three months ended March 27, 1999 was $9.4 million or $0.25
per share compared with $21.0 million or $0.60 per share for the comparable
year-ago period, and $8.1 million or $0.23 per share for the immediately
preceding quarter. The sequential quarterly increase in net income was due
primarily to increased net sales partially offset by higher research and
development expenditures. Net income compared to the prior year quarter is lower
in absolute dollars and on a per share basis as a result of lower net sales and
increases in research and development spending as a percentage of net sales.
The number of shares used in the per share calculations for the three months
ended March 27, 1999 was 37.8 million compared with 34.9 million for the
comparable year-ago period and 35.4 million for the immediately preceding
period. The increase in shares used compared to the comparable year-ago and
immediately preceding quarter is primarily due to an increased number of common
stock equivalents resulting from a common stock offering of 3.86 million shares
during the three months ended March 27, 1999.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
YEAR 2000
The Company is aware of the issues associated with the operation of information
technology ("IT") and non-information technology ("Non-IT") systems as the
millennium (year 2000) approaches. The "Year 2000" problem is pervasive and
complex, with the possibility to affect many IT and Non-IT systems, as the
result of the rollover of the two digit year value from "99" to "00". The
concern is whether such systems will properly recognize data sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail. In addition to
the Company's own systems, the Company relies, directly and indirectly, on
external systems of its customers, suppliers, creditors, financial
organizations, utilities providers and governmental entities, both domestic and
internationally (collectively, "Third Parties"). Consequently, the Company could
be affected through disruptions in the operations of the Third Parties with
which the Company interacts. Furthermore, the purchasing frequency and volume of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to make their current systems Year 2000
compliant.
The Company is utilizing both internal and external resources to address (a) the
Company's state of readiness (including the readiness of Third Parties, with
which the Company interacts) with respect to the Year 2000 problem, (b) the
costs to the Company to address Year 2000 issues related to internal IT and
Non-IT systems, which, if uncorrected, could have a material adverse effect on
the business, financial condition or results of operations of the Company, (c)
the known risks related to the consequences of any failure to correct any Year
2000 problems identified by the Company, and (d) what contingency plans, if any,
should be adopted by the Company should any identified Year 2000 problems not be
corrected.
State of Readiness.
The following discussion broadly addresses the Company's efforts to identify and
address the Company's and applicable Third Parties' Year 2000 problems with
respect to (a) the Company's products, (b) the Company's information technology
systems, including facilities and infrastructure, and (c) the Company's
suppliers. However, it would be impracticable for the Company to attempt to
address all Year 2000 problems of Third Parties that have been or may in the
future be identified. Specifically, Year 2000 problems have been or may in the
future be identified with respect to the IT and Non-IT systems of Third Parties
having widespread national and international interactions with persons and
entities generally (for example, certain IT and Non-IT systems of governmental
agencies, utilities and telecommunications, information and financial networks)
that, if uncorrected, could have a material adverse impact on the Company's
business, financial condition or results of operations. Notwithstanding anything
set forth below, the Company is not in a position to address any such Year 2000
problems.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
(a) The Company's products.
The Company has completed a Year 2000 compliance evaluation of all of its
products utilizing testing guidelines prepared by Sematech, a consortium
of suppliers to the worldwide semiconductor manufacturers that assists its
members with strategic marketing opportunities. It is the Company's plan
to comply with Sematech's guidelines for Year 2000 compliance. The
Company's new products are designed to be Year 2000 compliant. However,
some of the Company's older products will require upgrades for Year 2000
compliance. At this time, software upgrades have been or will be provided
to all Novellus customers products free of charge. Any hardware needed to
achieve Year 2000 compliance on out of warranty systems will need to be
purchased from Novellus. However, notwithstanding such efforts, any
failure of the Company's products to perform, including system
malfunctions due to the onset of Year 2000, could result in claims against
the Company, which could have a material adverse effect on the Company's
business, results of operations or financial condition. Moreover, the
Company's customers could choose to convert to other Year 2000 compliant
products in order to avoid such malfunctions, which could have a material
adverse effect on the Company's business, financial condition or results
of operations.
In June of 1997, the Company acquired the Thin Films Systems division of
Varian Associates, Inc. (TFS). During the Company's evaluation of Year
2000 readiness for its products, it was determined that some of the TFS
products acquired from Varian Associates, Inc. are not, and will not be
Year 2000 compliant prior to December 31, 1999. The Company is taking
measures to inform its applicable customers of that fact. The Company
currently anticipates that the failure of such products to be Year 2000
compliant will not have a material adverse effect on the Company's
business, results of operations or financial condition.
(b) Information technology systems including facilities and infrastructure.
The Company currently uses standard mass-market vendor supplied software
on its desktop systems and laptops. These standard software applications
limit the number of information technology vendors that Novellus must work
with to ensure Year 2000 readiness. Many of these vendors are still
implementing their Year 2000 compliance programs. Novellus maintains
maintenance contracts with all information technology vendors and will
implement the Year 2000 compliant versions of hardware and/or software as
required when those solutions are available. As of March 27, 1999,
Novellus believes that its mass-market vendor supplied software is Year
2000 compliant for all of Novellus' business applications. Novellus also
uses a third party service provider to provide electronic exchange of data
(EDI). The vendor software is Year 2000 compliant, therefore, we do not
believe we face any significant EDI Year 2000 issues. The Company believes
the Company's hardware for workstations, servers, and network routers will
be Year 2000 compliant by the end of the second quarter of 1999. As of
March 27, 1999, approximately 95% of the Company's hardware and software
applications were Year 2000 compliant. However, no assurance can be
provided that all such programs will be implemented in a timely manner or
that the failure to so implement such programs will not have a material
adverse effect on the Company's business, results of operations or
financial condition.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
The Company has already assessed its Year 2000 risk with respect to
building automation systems, electronic security systems, utility and
water systems. Formal queries to landlords, local fire departments, water
and utility providers for the Company's domestic and international
locations were sent during March 1999. Novellus believes that the
Company's building automation systems, electronic security systems,
utility and water systems will be Year 2000 compliant by the end of the
second quarter of 1999.
(c) Suppliers.
Novellus has contacted those suppliers that could have a material adverse
impact on Novellus' ability to provide uninterrupted service to its
customers should the IT or Non-IT systems of such suppliers have
uncorrected Year 2000 problems.
By the end of March 1999, 90% of these suppliers had documentation with
respect to their Year 2000 readiness on file with Novellus. The remaining
10% are being contacted to complete the Sematech Year 2000 Readiness
Supplier Questionnaire or to document their Year 2000 compliance status as
is appropriate for their business. However, such documentation does not
assure Year 2000 compliance of the IT and Non-IT systems used by such
suppliers, but instead provides only a description of their relevant
systems and the status of efforts, if any, by such suppliers to make such
systems Year 2000 compliant. Accordingly, no assurance can be provided
that (a) the IT and Non-IT systems of Company suppliers (including those
suppliers who have provided documentation to the Company regarding their
Year 2000 compliance) will be Year 2000 compliant, (b) that such
documentation accurately and fully reflects the Year 2000 compliance
status of such suppliers' systems, or (c) that the failure by any such
suppliers' systems to be Year 2000 compliant will not have a material
adverse effect on the Company's business, results of operations or
financial condition.
Costs to Address Year 2000 Issues.
The Company currently expects to incur total software, hardware and
systems-related costs of approximately $1.7 million in connection with
remediations of Year 2000 compliance issues. Of the estimated total costs,
approximately $1.5 million has been incurred to date. There can be no assurance
that the cost estimates associated with the Company's Year 2000 issues will
prove to be accurate or that the actual costs will not have a material adverse
effect on the Company's business, results of operations or financial condition.
Known Risks.
The Company currently anticipates that any identified Year 2000 problem
affecting its own systems or that of its significant customers, suppliers,
creditors, financial organizations and utilities providers will be either
corrected by December 31, 1999 or will not have a material adverse affect on the
Company's business, financial condition or results of operations. Moreover, the
Company is working to minimize any disruption to the business of its vendors and
suppliers due to Year 2000 problems that may have a material adverse affect on
the Company's business, financial condition or results of its operations.
However, notwithstanding the Company's efforts to identify and correct such Year
2000 problems, there can be no assurance that the Company will be successful in
addressing the year 2000 problems as they
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
pertain to its products and its internal systems, and that the failure to do so
would not have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, notwithstanding such efforts,
there can be no assurance that the systems of third parties with which the
Company interacts will not suffer from Year 2000 problems, or that such problems
would not have a material adverse effect on the Company's business, financial
condition or results of operations. In particular, Year 2000 problems that have
been or may in the future be identified with respect to the IT and Non-IT
systems of third parties having widespread national and international
interactions with persons and entities generally (for example, certain IT and
Non-IT Systems of governmental agencies, utilities and information and financial
networks) could have a material adverse impact on the Company's business,
financial condition or results of operations.
Contingency Plans.
The Company currently is in the process of reviewing its Year 2000 compliance
plans to determine what contingency plans, if any, are appropriate. The Company
does not currently have any contingency plans. The Company anticipates
completing such review and preparing contingency plans, if appropriate, by
September 1999. There can be no assurance that such measures will prevent the
occurrence of Year 2000 problems, which could have a material adverse effect
upon the Company's business, results of operations or financial condition.
EURO CONVERSION
On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their new common legal currency. As of that date, the Euro traded on
currency exchanges and the legacy currencies remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, noncash payments can be made in
the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or legacy currency. Between January 1, 1999 and
January 1, 2002 the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that they will no longer be available. The
Euro conversion may affect cross-border competition by creating cross-border
transparency. The Company is assessing its pricing/marketing strategy in order
to ensure that it remains competitive in a broader European market. The Company
is also assessing its information technology systems to allow for transactions
to take place in both legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will be need to be modified. The Company's currency risk and risk
management for operations in participating countries may be reduced as the
legacy currencies are converted to the Euro.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically 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 27, 1999 consisted of $340.0
million of cash, cash equivalents and short-term investments. This amount
represents an increase of $209.2 million from the December 31, 1998 balance of
$130.8 million. During the first quarter of 1999, the Company completed a
secondary public offering of 3.86 million shares of common stock that resulted
in net proceeds to the Company of $255.3 million. During the second quarter of
1997, the Company entered into a five year $125 million Senior Credit Facility
structured as an unsecured revolving credit line. The borrowings, at the option
of the Company, bear interest at either a base rate plus a margin or LIBOR plus
a margin for interest periods of one to six months. During March 1999, total
borrowings of $65 million under the Senior Credit Facility were repaid. The
Senior Credit Facility requires the Company to be in compliance with certain
financial covenants. At March 27, 1999, the Company was in compliance with these
financial covenants. In addition, at March 27, 1999, there was $13.7 million
available under bank lines of credit that expire at various dates through June
2002. At March 27, 1999, approximately $12.7 million was outstanding under these
bank lines of credit, which bear interest at the banks' prime lending rates or
offshore reference rates.
During the three months ended March 27, 1999, the Company's cash and cash
equivalents increased $73.0 million to $154.2 million from $81.2 million at
December 31, 1998. Net cash provided by operating activities during the first
three months of 1999 was $15.7 million due primarily to net income of $9.4
million, non-cash depreciation and amortization charges of $6.7 million, and
decreases in accounts receivable of $20.4 million. The decrease in accounts
receivable was due to the collection of receivables that became due during the
quarter. These amounts were partially offset by increases in inventories of $8.6
million and decreases in accounts payable of $5.9 million, accrued payroll and
related expenses of $2.2 million, and other accrued liabilities of $3.9 million.
Net cash flows used for investing activities was $143.8 million during the first
three months of 1999. During this period, the Company had net purchases of
$136.2 million of available-for-sale debt securities. In addition, the Company
had capital expenditures of $4.6 million during the period and an increase in
other assets of $3.0 million.
During the first three months of 1999, net cash provided by financing activities
increased $201.1 million due primarily to $266.4 million of proceeds from the
sale of common stock and the exercise of employee stock options. Of this total,
$255.3 million resulted from the secondary public offering of 3.86 million
shares of common stock in February 1999. These amounts were partially offset by
a decrease in long-term debt of $65.3 million, which was repaid from the
proceeds of the common stock offering during the first three months of 1999.
The Company expects investments in property and equipment in the current fiscal
year to approximate $32.0 million of which $4.6 million had been incurred as of
March 27, 1999. The Company intends to finance these investments from existing
cash balances and cash flows from operations.
15
<PAGE> 16
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
The statements contained in this Report on Form 10-Q that are not purely
historical in nature are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21 E of the Securities
Exchange Act of 1934, including without limitation, statements regarding the
Company's estimations, anticipations, determinations, commitments, expectations,
plans, hopes, beliefs, intentions or strategies regarding the future. Forward
looking statements include, without limitation, the statement regarding the
Company's anticipations as to sequential bookings growth, sequential revenue
growth, sequential earnings growth, and the book to bill ratio exceeding one to
one in the second quarter of 1999, the Company's anticipations as to continued
pressure on the Company's gross margins and the Company's hopes with respect
thereto, the Company's increasing commitment to the development of new products,
the Company's belief as to the realization of tax assets, the Company's beliefs
regarding the Year 2000 status of its vendor supplied software and Company
hardware, the Company's belief that its building automation systems, electronic
security systems, utility and water systems will be Year 2000 compliant by the
end of the second quarter of 1999, the Company's expected cost to remediate Year
2000 compliance issues, the Company's anticipation that any identified Year 2000
problems will be either corrected by December 31, 1999 or will not have a
material adverse impact on the Company, and the Company's anticipation that its
review of its Year 2000 compliance plans will be completed by September 1999,
under "Part I Financial Information, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations," the statements regarding, the Company's beliefs as to the
sufficiency of its current cash position to meet the Company's needs, the
Company's expectations as to the amount of its property and equipment
investments in the current fiscal year, and the Company's intention to finance
such investments from existing cash balances and cash flows from operations,
under "Part I Financial Information, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." These forward-looking statements involve risks and
uncertainties including, but not limited to, domestic and international economic
conditions, product demand and industry capacity, competitive products and
pricing, manufacturing efficiencies, new product development, ability to enforce
patents, the outcome of 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
the Company's most recent Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q.
16
<PAGE> 17
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not Applicable
(b) Report on Form 8-K filed February 26, 1999 reporting the
issuance, in February 1999, of 3,860,000 shares of the
Company's common stock pursuant to a registered public
offering.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
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
/s/ J. Michael Dodson
-----------------------------------------
J. Michael Dodson
Vice President and Corporate
Controller (Chief Accounting
Officer)
May 10, 1999
------------
Date
17
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-27-1999
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