<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 September 30, 2000
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 November 3, 2000 131,448,371 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 SEPTEMBER 30, 2000
INDEX
Part I: Financial Information
<TABLE>
<CAPTION>
Item 1: Condensed Consolidated Financial Statements Page
<S> <C>
Condensed Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999. 3
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 2000 and September 25, 1999. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and September 25, 1999. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3: Quantitative and Qualitative Disclosure About Market Risk 15
Part II: Other Information
Item 1: Legal Proceedings 15
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands)
------------------------------------------------------------------------------------------
Sept. 30, Dec. 31,
2000 1999(1)
Assets (unaudited)
------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 679,828 $ 181,568
Short-term investments 423,620 203,689
Accounts receivable, net 355,624 213,678
Inventories 146,228 103,883
Deferred income taxes 34,633 24,521
Prepaid and other current assets 10,692 5,327
----------- -----------
Total current assets 1,650,625 732,666
Property and equipment:
Machinery and equipment 171,826 138,518
Furniture and fixtures 10,014 9,335
Leasehold improvements 57,005 54,349
Land 8,782 --
----------- -----------
247,627 202,202
Less accumulated depreciation and amortization 116,930 95,423
----------- -----------
130,697 106,779
Long-term deferred income taxes 5,976 11,770
Other assets 58,890 58,714
----------- -----------
Total Assets $ 1,846,188 $ 909,929
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 86,993 $ 43,438
Accrued payroll and related expenses 47,490 19,367
Accrued warranty 42,632 20,083
Other accrued liabilities 40,645 31,150
Income taxes payable 31,837 12,671
Current obligations under lines of credit 16,785 13,521
----------- -----------
Total current liabilities 266,382 140,230
Commitments and contingencies
Shareholders' equity:
Common stock 1,089,356 490,587
Retained earnings 495,136 277,671
Accumulated other comprehensive income (4,686) 1,441
----------- -----------
Total shareholders' equity 1,579,806 769,699
----------- -----------
Total Liabilities and Shareholders' Equity $ 1,846,188 $ 909,929
=========== ===========
</TABLE>
(1) Derived from the December 31, 1999 audited financial statements.
See accompanying notes.
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<TABLE>
<CAPTION>
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------------------------------
(in thousands, except per share data) Three Months Ended Nine Months Ended
------------------------ ------------------------
(unaudited) Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $359,097 $154,916 $959,156 $401,025
Cost of sales 154,987 71,195 415,360 186,588
-------- -------- -------- --------
Gross profit 204,110 83,721 543,796 214,437
Operating expenses
Selling, general and administrative 47,810 24,549 127,140 71,148
Research and development 50,234 30,567 136,336 87,020
-------- -------- -------- --------
Total operating expenses 98,044 55,116 263,476 158,168
-------- -------- -------- --------
Operating income 106,066 28,605 280,320 56,269
Interest income, net 17,512 3,892 36,338 8,801
-------- -------- -------- --------
Income before provision for income taxes 123,578 32,497 316,658 65,070
Provision for income taxes 38,309 10,724 98,164 21,473
-------- -------- -------- --------
Net income $ 85,269 $ 21,773 $218,494 $ 43,597
======== ======== ======== ========
Basic net income per share $ 0.65 $ 0.19 $ 1.74 $ 0.38
======== ======== ======== ========
Diluted net income per share $ 0.62 $ 0.18 $ 1.64 $ 0.37
======== ======== ======== ========
Shares used in basic calculation 130,920 116,823 125,308 113,694
======== ======== ======== ========
Shares used in diluted calculation 138,512 121,937 133,413 118,704
======== ======== ======== ========
</TABLE>
See accompanying notes.
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<TABLE>
<CAPTION>
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------
(in thousands) Nine Months Ended
(unaudited) Sept. 30, Sept. 25,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 218,494 $ 43,597
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (4,318) 4,462
Deferred compensation 1,342 --
Depreciation and amortization 31,285 21,813
Changes in operating assets and liabilities:
Accounts receivable (141,946) (11,190)
Inventories (43,018) (23,741)
Prepaid and other current assets (5,365) (5,375)
Accounts payable 43,555 22,404
Accrued payroll and related expenses 28,123 3,477
Accrued warranty 22,549 (7,047)
Other accrued liabilities 9,495 (2,932)
Income taxes payable 17,684 4,549
Income tax benefits from employee stock plans 36,516 6,318
--------- ---------
Total adjustments (4,098) 12,738
--------- ---------
Net cash provided by operating activities 214,396 56,335
--------- ---------
Cash flows from investing activities:
Maturities and sale (purchases) of available-for-sale
securities, net (223,230) (192,001)
Capital expenditures (53,743) (21,939)
Decrease/(increase)in other assets (2,309) (19,405)
--------- ---------
Net cash used in investing activities (279,282) (233,345)
--------- ---------
Cash flows from financing activities:
Proceeds/(payments) on lines of credit, net 3,264 227
Repayment on long-term debt -- (65,000)
Proceeds from sale of common stock 559,882 273,183
--------- ---------
Net cash provided by financing activities 563,146 208,410
--------- ---------
Net increase in cash and cash equivalents 498,260 31,400
Cash and cash equivalents at the beginning of the period 181,568 81,224
--------- ---------
Cash and cash equivalents at the end of the period $ 679,828 $ 112,624
========= =========
Supplemental Disclosures
Cash paid during the period for:
Interest $ 524 $ 1,461
Income taxes $ 44,927 $ 999
See accompanying notes.
</TABLE>
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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 and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
Certain amounts in prior year balances have been reclassified to conform to
current year presentation.
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>
-------------------------------------------------------------------
Sept. 30, 2000 Dec. 31, 1999
-------------------------------------------------------------------
<S> <C> <C>
Purchased parts $101,822 $71,688
Work-in-process 40,369 29,621
Finished goods 4,037 2,574
-------- ---------
$146,228 $103,883
======== =========
</TABLE>
3. LINES OF CREDIT
The Company has lines of credit with three banks which expire at various dates
through March 2001 under which the Company can borrow up to $16.8 million. These
facilities are available to the Company's Japanese subsidiary, Nippon Novellus
Systems K.K. Borrowings by the subsidiary are at the banks' offshore reference
rate. At September 30, 2000 and December 31, 1999, the amounts outstanding were
$16.8 million and $13.5 million, respectively.
4. EARNINGS 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 diluted calculation of weighted
average shares using the treasury stock method.
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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 Nine Months Ended
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 85,269 $ 21,773 $218,494 $ 43,597
Denominator:
Denominator for basic earnings per
share--weighted-average shares
outstanding 130,920 116,823 125,308 113,694
Employee stock options 7,592 5,114 8,105 5,010
-------- -------- -------- --------
Denominator for diluted earnings per
share--adjusted weighted-average
shares outstanding 138,512 121,937 133,413 118,704
======== ======== ======== ========
Basic earnings per share $ 0.65 $ 0.19 $ 1.74 $ 0.38
======== ======== ======== ========
Diluted earnings per share $ 0.62 $ 0.18 $ 1.64 $ 0.37
======== ======== ======== ========
</TABLE>
5. LONG-TERM DEBT
In June 1997, the Company entered into a five year, $125.0 million, Senior
Credit Facility structured as an unsecured revolving credit line. The credit
line expires in June 2002. 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 nine months. There
were no borrowings outstanding under the Senior Credit Facility at September 30,
2000 and December 31, 1999.
The Senior Credit Facility contains certain restrictive financial covenants. At
September 30, 2000 and December 31, 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. The lease terms expire at various dates
beginning on June 2002 through September 2003. At current interest rates, the
annual lease payments total approximately $20.5 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
September 30, 2000, the Company was in compliance with these covenants.
7
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
7. COMPREHENSIVE INCOME
As of January 1, 1999, 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
shareholder's equity, to be included in other comprehensive income.
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
--------------------------- ---------------------------
Three Months Ended Nine Months Ended
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 85,269 $ 21,773 $ 218,494 $ 43,597
Foreign currency translation
adjustment (482) 1,999 (1,346) 1,769
Net unrealized change in
available-for-sale securities (5,373) -- (4,781) --
--------- --------- --------- ---------
Comprehensive income $ 79,414 $ 23,772 $ 212,367 $ 45,366
========= ========= ========= =========
</TABLE>
The components of accumulated other comprehensive income (loss), net of related
tax are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Sept. 30, 2000 Dec. 31, 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustment $ 95 $ 1,441
Unrealized change in available-for-sale securities (4,781) --
------- -------
($4,686) $ 1,441
======= =======
</TABLE>
8. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including forward exchange contracts, and hedging activities. In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. SFAS
No. 133 is now effective for fiscal years beginning after June 15, 2000 and,
therefore, the Company will adopt this accounting standard effective January 1,
2001. Management believes the impact of SFAS No. 133 will not be material.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. On
March 24, 2000, the SEC issued Staff Accounting Bulletin 101A (SAB 101A), which
permitted the delay in the Company's implementation date of SAB 101 until the
second quarter of fiscal 2000. On June 26, 2000, the SEC issued Staff Accounting
Bulletin 101B (SAB 101B), which permitted a further delay in the Company's
implementation date of SAB 101 until the fourth quarter of fiscal 2000. The
Semiconductor Capital Equipment Industry Association and a number of association
members, including the Company, have met with the SEC to discuss and evaluate
the applicability of SAB 101 and various practical implementation
considerations. We currently expect to implement the provisions of SAB 101 in
the quarter ended December 31, 2000. Changes, if any, in our revenue recognition
policy resulting from the interpretation of
8
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
SAB 101 would not involve the restatement of prior period annual financial
statements, but would, to the extent applicable, be reported as a change in
accounting principle in the quarter ending December 31, 2000, as if SAB 101 had
been adopted on January 1, 2000. Accordingly, any shipments previously recorded
as revenue, including revenue reported for the first through third quarters of
fiscal 2000, that do not meet SAB 101's guidance will be recorded as revenue in
periods subsequent to that in which they were originally recorded.
Management believes that SAB 101, 101A and 101B, to the extent that they impact
us, will not materially affect the underlying strength or weakness of our
business operations as measured by the dollar value of our product shipments and
cash flows.
9. SUBSEQUENT EVENT
On October 25, 2000, the Company entered into definitive agreement to acquire
Gasonics International Corporation (Gasonics), a leading supplier of dry resist
removal and surface preparation equipment. Under the terms of the agreement,
Novellus will acquire Gasonics in a stock-for-stock merger transaction which
will be accounted for as a pooling-of-interests transaction. Each share of
Gasonics common stock outstanding as of the closing date will be converted into
0.52 shares of Novellus common stock on a fixed exchange ratio basis. The
merger is subject to certain closing conditions including Gasonics
shareholders' approval and regulatory filings. The merger is expected to close
in the first quarter of the Company's fiscal 2001.
The Company also announced that its board of directors rescinded its
authorization for the purchase of common stock under its common stock purchase
program of which 5.4 million shares were available for purchase.
9
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On October 25, 2000, the Company entered into definitive agreement to acquire
Gasonics International Corporation (Gasonics), a leading supplier of dry resist
removal and surface preparation equipment. Under the terms of the agreement,
Novellus will acquire Gasonics in a stock-for-stock merger transaction which
will be accounted for as a pooling-of-interests transaction. Each share of
Gasonics common stock outstanding as of the closing date will be converted into
0.52 shares of Novellus common stock on a fixed exchange ratio basis. The
merger is subject to certain closing conditions including Gasonics
shareholders' approval and regulatory filings. The merger is expected to close
in the first quarter of the Company's fiscal 2001.
The Company also announced that its board of directors rescinded its
authorization for the purchase of common stock under its common stock purchase
program of which 5.4 million shares were available for purchase.
RESULTS OF OPERATIONS
Net sales for the three and nine months ended September 30, 2000 were $359.1
million and $959.2 million, respectively. Net sales for the three and nine
months ended September 25, 1999 were $154.9 million and $401.0 million,
respectively. Net sales were $326.0 million in the quarter ended July 1, 2000.
The increase in net sales from the comparable year-ago periods and the
immediately preceding quarter is due to continuing strength in capacity and
advanced technology purchases of our core products. Bookings for the third
quarter of 2000 exceeded the 1:1 book-to-bill ratio. The Company anticipates
sequential revenue growth and the book-to-bill ratio to exceed one to one, in
the fourth quarter of 2000.
International net sales (including export sales) for the three and nine months
ended September 30, 2000, were 61.5% and 67.8%, respectively, as a percentage of
total net sales, which compares to the prior year periods of 60.4% and 60.2%
respectively, and 68.9% for the immediately preceding quarter. The increase to
comparable prior year-ago periods is primarily due to higher net sales in the
Pacific Rim.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. On
March 24, 2000, the SEC issued Staff Accounting Bulletin 101A (SAB 101A), which
permitted the delay in the Company's implementation date of SAB 101 until the
second quarter of fiscal 2000. On June 26, 2000, the SEC issued Staff Accounting
Bulletin 101B (SAB 101B), which permitted a further delay in the Company's
implementation date of SAB 101 until the fourth quarter of fiscal 2000. The
Semiconductor Capital Equipment Industry Association and a number of association
members, including the Company, have met with the SEC to discuss and evaluate
the applicability of SAB 101 and various practical implementation
considerations. We currently expect to implement the provisions of SAB 101 in
the quarter ended December 31, 2000. Changes, if any, in our revenue recognition
policy resulting from the implementation of SAB 101 would not involve the
restatement of prior period annual financial statements, but would, to the
extent applicable, be reported as a change in accounting principle in the
quarter ending December 31, 2000, as if SAB 101 had been adopted on January 1,
2000. Accordingly, any shipments previously recorded as revenue, including
revenue reported for the first through third quarters of fiscal 2000, that do
not meet SAB 101's guidance will be recorded as revenue in periods subsequent to
that in which they were originally recorded.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
Management believes that SAB 101, 101A and 101B, to the extent that they impact
us, will not materially affect the underlying strength or weakness of our
business operations as measured by the dollar value of our product shipments and
cash flows.
Gross profit as a percentage of net sales for the three months ended September
30, 2000 was 56.8% compared with 54.0% for the year-ago quarter. Gross profit as
a percentage of net sales increased slightly from 56.7% for the immediately
preceding quarter. Gross profit as a percentage of net sales for the nine months
ended September 30, 2000 and September 25, 1999 was 56.7% and 53.5%,
respectively. The increase in gross margin from the comparable year-ago periods
and the immediately preceding quarter is due to cost reduction efforts and
improved absorption of fixed overhead costs due to the increasing levels of
shipments.
Selling, general and administrative expenses for the three and nine months ended
September 30, 2000 were $47.8 million and $127.1 million, respectively, compared
with $24.5 million and $71.1 million in the comparable year-ago periods, and
$42.3 million in the immediately preceding quarter. Selling, general and
administrative expenses as a percentage of net sales for the three and nine
months ended September 30, 2000 were both 13.3%, compared to 15.8% and 17.7%,
respectively, for both comparable year-ago periods, and 13.0% for the
immediately preceding quarter. The increase in absolute dollars from the
comparable year-ago periods and the immediately preceding quarter is due to
incremental selling expenses associated with the increased sales volume, and
related costs associated with increased headcount to support the higher
shipments. The decrease as a percentage of net sales from the comparable prior
year-ago periods and the immediately preceding quarter is due to the Company's
ongoing efforts to control and minimize selling, general and administrative
costs despite the rapid growth of the Company.
Research and development expenses for the three and nine months ended September
30, 2000 were $50.2 million and $136.3 million, respectively, an increase of
$19.7 million and $49.3 million, respectively, when compared with comparable
year-ago periods. In addition, research and development expenses increased $4.1
million when compared with the immediately preceding quarter. Research and
development expenses as a percentage of net sales for the three and nine months
ended September 30, 2000 were 14.0% and 14.2%, respectively, compared with 19.7%
and 21.7%, respectively, for comparable year-ago periods, and 14.1% for the
immediately preceding quarter. The increase in absolute dollars from the
comparable year-ago periods and the immediately preceding quarter is primarily
due to higher headcount, project materials, and facilities costs reflecting the
Company's continuing 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.
Net interest income for the three and nine months ended September 30, 2000 was
$17.5 million and $36.3 million respectively, compared with $3.9 million and
$8.8 million for the comparable year-ago periods, and $13.3 million for the
immediately preceding quarter. On April 25, 2000, the Company completed a public
offering of approximately 9.0 million shares of common stock that resulted in
net proceeds to the Company of approximately $526.3 million. The increase in net
interest income for the three and nine months
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
ended September 30, 2000, when compared to comparable year ago periods, is
primarily due to interest earned on the increased cash and short-term
investments resulting from the funds raised in the equity offering and cash
generated internally, and from higher interest rates earned on the Company's
investment portfolio.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including forward exchange contracts, and hedging activities. In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133. SFAS
No. 133 is now effective for fiscal years beginning after June 15, 2000 and,
therefore, the Company will adopt this accounting standard effective January 1,
2001. Management believes the impact of SFAS No. 133 will not be material.
The Company's effective tax rate for the three and nine months ended September
30, 2000 was 31% compared with 33% for the comparable year-ago periods. The
decrease in the effective tax rate from the comparable year-ago periods is due
to increased benefits from the Company's tax credits.
Deferred tax assets were $64.3 million and $54.6 million, net of valuation
allowances of $11.6 million and $13.8 million at September 30, 2000 and December
31, 1999, 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 $21.5 million and $18.3 million at September 30, 2000 and December
31, 1999, respectively, and by future taxable income.
Net income for the three and nine months ended September 30, 2000 was $85.3
million and $218.5 million, or $0.62 and $1.64 per share respectively, compared
with net income of $21.8 million and $43.6 million, or $0.18 and $0.37 per
share, for the comparable year-ago periods, and net income of $75.7 million, or
$0.56 per share, for the immediately preceding quarter.
The number of shares used in the per share calculations for the three and nine
months ended September 30, 2000 was 138.5 million and 133.4 million,
respectively, compared with 121.9 million and 118.7 million for the comparable
year-ago periods and 136.0 million for the immediately preceding period. The
increases in shares used compared to the comparable year-ago periods are
primarily due to an increased number of common stock outstanding resulting from
the common stock offering of 9.0 million shares in April 2000.
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, non-cash 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 need to be modified. The Company's currency risk for operations
in participating countries may be reduced as the legacy currencies are converted
to the Euro.
12
<PAGE> 13
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 September 30, 2000 consisted of
$1,103.4 million of cash, cash equivalents and short-term investments. This
amount represents an increase of $718.2 million from the December 31, 1999
balance of $385.3 million. During the second quarter of 2000, the Company
completed a secondary public offering of 9.0 million shares of common stock that
resulted in net proceeds to the Company of $526.3 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 the LIBOR plus a margin for interest periods of one to
nine 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. The Company had no
outstanding borrowings against the facility at September 30, 2000, and was in
compliance with these financial covenants. In addition, at September 30, 2000,
there was $16.8 million available under bank lines of credit that expire at
various dates through March 2001. At September 30, 2000, approximately $16.8
million was outstanding under these bank lines of credit, which bear interest at
the banks' offshore reference rates.
During the nine months ended September 30, 2000, the Company's cash and cash
equivalents increased $498.3 million to $679.8 million from $181.6 million at
December 31, 1999. Net cash provided by operating activities during the first
nine months of 2000 was $214.4 million due primarily to net income of $218.5
million.
Net cash flows used for investing activities was $279.3 million during the first
nine months of 2000. During this period, the Company had capital expenditures of
$53.7 million, net maturities and sales of available-for-sale securities of
$223.2 million which were partially offset by a decrease in other assets of $2.3
million.
The Company expects investments in property and equipment in the current fiscal
year to approximate $102.0 million of which $86.7 million had been committed as
of September 30, 2000. The Company intends to finance these investments from
existing cash balances and cash flows from operations.
During the first nine months of 2000, net cash provided by financing activities
was $563.1 million primarily due to proceeds of $559.9 million from the sale of
common stock and a $3.3 million increase in the borrowings under the Company's
lines of credit.
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.
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<PAGE> 14
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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
expected adoption of SAB 101 and its impact on the Company, 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 2000, the Company's increasing commitment to the
development of new products, the Company's possible reduction of currency risk,
the Company's belief as to the realization of tax assets, 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. 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 for the year ended December 31, 1999 and Quarterly Reports on Form 10-Q for
the quarters ended March 31, 2000 and July 1, 2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
APPLIED MATERIALS LITIGATION
On July 7, 1997, prior to the consummation of the purchase of TFS from Varian,
Applied Materials ("Applied") filed a complaint (the "Applied Complaint")
against Varian in the United States District Court for the Northern District of
California San Jose Division, Civil Action No. C-97-20523 RMW, alleging, among
other things, infringement by Varian (including the making, using, selling
and/or offering for sale of certain products and systems made by TFS) of United
States Patent Nos. 5,171,412, 5,186,718, 5,496,455 and 5,540,821 (the "Applied
Patents"), which patents are owned by Applied.
Following consummation of the TFS purchase, the Company filed a complaint (the
"Company Complaint") against Applied in the same Court, Civil Action No.
C-97-20551 RMW, alleging infringement by Applied (including the making, using,
selling and/or offering for sale of certain products and systems) of United
States Patent Nos. 5,314,597, 5,330,628, and 5,635,036 (the "Company Patents"),
which patents the Company acquired from Varian in the TFS purchase. In the
Company Complaint, the Company also alleged that it is entitled to a declaration
from the Court that the Company does not infringe the Applied Patents and/or
that the Applied Patents are invalid and/or unenforceable. Applied has filed
counterclaims alleging that it does not infringe the Company Patents and that
the Company Patents are invalid and/or unenforceable.
Also after consummation of the TFS purchase, but some time after the Company
filed the Company Complaint, Applied sought to amend the Applied Complaint to
add the Company as a defendant. The Company has requested that the Court dismiss
the Company as a defendant in Applied's lawsuit against Varian. The Court has
not yet required the Company to file an answer to the Applied Complaint.
In addition to a request for a permanent injunction against further
infringement, the Applied Complaint includes a request for damages for alleged
prior infringement and treble damages for alleged "willful" infringement. In
connection with the consummation of the TFS purchase, Varian agreed, under
certain circumstances, to reimburse the Company for certain of its legal and
other expenses in connection with the defense and prosecution of this
litigation, and to indemnify the Company for a portion of any losses incurred by
the Company arising from this litigation (including losses resulting from a
permanent injunction). The Company and Varian believe that there are meritorious
defenses to Applied's allegations, including among other things, that the
Company's operations (including TFS products and systems) do not infringe the
Applied Patents and/or that the Applied Patents are invalid and/or
unenforceable. However, the resolution of intellectual property disputes is
often fact intensive and, therefore, inherently uncertain. Although the Company
believes that the ultimate outcome of the dispute with Applied will not have a
material adverse effect on the Company's business or results of operations
(taking into account both the defenses available to the Company and Varian's
reimbursement and indemnity obligations), there can be no assurances that
Applied will not ultimately prevail in this dispute and that, in such an event,
Varian's reimbursement and indemnity obligations will not be sufficient to fully
reimburse the Company for its losses. If Applied were to
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<PAGE> 16
prevail in this dispute, it could have a material adverse effect on the
Company's business or results of operations.
The Company Complaint also includes requests for damages for prior infringement
and treble damages for "willful" infringement, in addition to a request for a
permanent injunction against further infringement. Although the Company believes
that it will prevail against Applied, there can be no assurance that the Company
will prevail in its litigation against Applied. If Applied were to prevail
against the Company on the Company Complaint, it could have a material adverse
effect on the Company's business or results of operations.
On July 13, 1999, in the Company lawsuit against Applied where the Company had
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied had alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents.
On January 14, 2000, in response to summary judgment motions filed by the
Company and Varian, Applied withdrew its U.S. Patent No. 5,496,455 from the
lawsuits against the Company and Varian. On March 16, 2000, the Court granted
Varian's motion for summary judgment that claims 14 & 18 of Applied's U.S.
Patent No. 5,171,412 are invalid. In the same order, the Court gave Applied
three months to conduct discovery concerning an issue relating to the motion for
summary judgement that claim 21, the sole remaining claim, is invalid. After
that discovery period, the motion to invalidate claim 21 may be renewed.
On July 28, 2000, Applied Materials filed a motion for summary judgment of
non-infringement of the Company's U.S. Patent No. 5,330,628. On October 20,
2000, the Company filed a non-opposition to that motion, pending appeal of the
Court's claim construction. The Company has also withdrawn certain claims of its
U.S. Patent No. 5,314,597 from the litigation.
On August 8, 2000, the Court granted the Company's and Varian's motion for
summary judgment that the Inova does not infringe Applied's U.S. Patent No.
5,186,718, either literally or under the doctrine of equivalents.
On or about September 25, 2000, Varian and Applied executed a "License and
Settlement Agreement." On September 29, 2000 Varian and Applied filed a
Stipulated Dismissal with Prejudice with the Court that reciprocally dismisses
all causes of action that Varian and Applied had asserted or could have asserted
against one another in the litigation. In addition, Applied has stated, in its
agreement with Varian, that it will release the Company from all claims that
arose out of or relate to the litigation that relate to any infringement alleged
with respect to the Inova, in the form as it existed as of the effective date of
the TFS purchase. The Stipulated Dismissal, however, expressly excludes the
Company from the scope of any release.
SEMITOOL LITIGATION
On August 10, 1998, Semitool sued the Company for patent infringement in the
United States District Court for the Northern District of California. Semitool
alleges that the Company's SABRE(TM) and SABRE xT(TM) copper deposition systems
infringe two Semitool patents, U.S. Patent No. 5,222,310, issued June 29, 1993,
entitled "Single Wafer Processor with a Frame," and U.S. Patent No. 5,377,708,
issued January 3, 1995, entitled "Multi-Station Semiconductor Processor with
Volatilization." Semitool seeks an injunction against the Company's manufacture
and sale of SABRE(TM) and SABRE xT(TM) systems, and seeks damages for past
infringement. Semitool also seeks trebled damages for
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<PAGE> 17
alleged willful infringement. Semitool further seeks its attorneys' fees and
costs, and interest on any judgement.
On September 24, 1999, the Court ruled on the interpretation of the claims of
the Semitool patents. On December 18, 1999, the Company filed a motion for
summary judgement of non-infringement.
On March 17, 2000, the Court granted the Company's motion for summary judgement
of non-infringement. The Court ruled that the Company's SABRE(TM) and SABRE
xT(TM) systems do not infringe the two patents asserted by Semitool.
On May 15, 2000, Semitool filed a notice of appeal, appealing the Court's
judgement to the United States Court of Appeals for the Federal Circuit.
Semitool filed its opening brief on July 24, 2000. The Company filed its opening
brief on October 3, 2000.
PLASMA PHYSICS AND SOLAR PHYSICS LITIGATIONS
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
(collectively, "Plasma Physics") filed a patent infringement lawsuit against
many of the Company's Japanese and Korean customers. The suit was entitled
Plasma Physics and Solar Physics v. Fujitsu et al., Civil Action No. 99-8593,
and was pending in the United States District Court for the Eastern District of
New York. On July 24, 2000, the Court ordered Plasma Physics to re-file separate
complaints against the Japanese and Korean defendants, whereupon, Civil Action
No. 99-8593 would be dismissed without prejudice. In accordance with the Court's
order, Plasma Physics has since re-filed separate complaints against the
Japanese and Korean defendants in the United States District Court for the
Eastern District of New York. Many of the defendants have notified the Company
that they believe that the Company has indemnification obligations and liability
for the lawsuits.
Plasma Physics has asserted U.S. Patent Nos. 4,226,897, 5,470,784, and 5,543,634
(the "'897, '784, and '634 patents," respectively). Plasma Physics seeks an
injunction against the defendants' alleged infringement of the '784 and '634
patents (the '897 patent has expired). Plasma Physics also seeks trebled damages
for alleged willful infringement. Plasma Physics further seeks its attorney's
fees and costs, and interest on any judgement.
On April 17, 2000, Applied Materials filed a declaratory relief action against
Plasma Physics and Solar Physics requesting a judgement of non-infringement,
invalidity, and unenforceability with respect to the '897 and '784 patents. The
suit is entitled Applied Materials v. Plasma Physics and Solar Physics, Civil
Action No. 00-2199, and is pending in the United States District Court for the
Eastern District of New York. On May 23, 2000, Plasma Physics filed a motion to
dismiss Applied Material's complaint for a lack of subject matter jurisdiction.
Plasma Physics' motion to dismiss Applied Materials' complaint was denied
without prejudice on July 24, 2000. Plasma Physics subsequently filed an Answer
and Conditional Counterclaim.
On June 1, 2000, the Company filed a declaratory relief action against Plasma
Physics and Solar Physics requesting a judgement of non-infringement,
invalidity, and unenforceability with respect to the '897 and '784 patents. The
suit is entitled Novellus v. Plasma Physics and Solar Physics, Civil Action No.
00-3146, and is pending in the United States District Court for the Eastern
District of New York. On June 30, 2000, Plasma Physics filed a motion to dismiss
the Company's complaint for a lack of subject matter jurisdiction. Plasma
Physics' motion to dismiss the Company's complaint was denied without prejudice
on July 24, 2000. On July 31, 2000, Plasma Physics filed an Answer and
Conditional Counterclaim. Plasma Physics denies that the '897 and '784 patents
are invalid and unenforceable. Plasma Physics further denies that the
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<PAGE> 18
'784 patent is not infringed by the Company. Plasma Physics also asserted a
conditional counterclaim against the Company, alleging that the Company's PECVD
processing systems infringe the '784 patent.
The Company believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of the
Company's equipment does not infringe the Plasma Physics patents and/or that the
Plasma Physics patents are invalid and/or unenforceable. But the resolution of
intellectual property disputes is often fact intensive and, like most other
litigation matters, inherently uncertain. Although the Company believes that the
ultimate outcome of the dispute with Plasma Physics will not have a material
adverse effect on the Company's business, financial condition, or result of
operations (taking into account the defenses available to the Company), there
can be no assurances that Plasma Physics will not ultimately prevail in this
dispute and that the Company will not have any indemnity obligations or
liability. If Plasma Physics were to prevail in the dispute, it could have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K have been filed by the Company during the quarter
for which this report was filed.
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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
(Principal Financial Officer)
/s/ Kevin S. Royal
--------------------------------------------
Kevin S. Royal
Corporate Controller
(Principal Accounting Officer)
November 14, 2000
------------------
Date
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Number Description
--------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
