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| NVLS > SEC Filings for NVLS > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K, other than statements that are purely historical, are forward-looking statements and are based upon management's present expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. As such, forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated. We do not undertake, and expressly disclaim, any obligation to update this forward-looking information, except as required under applicable law.
The following information should be read in conjunction with "Part I, Item 1. Business," "Part I, Item 6. Selected Financial Data" and "Part II, Item 8. Consolidated Financial Statements" and the notes thereto. Forward-looking statements in this Annual Report on Form 10-K may be identified by words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" or similar expressions, and include, without limitation:
• Statements about the growth of the semiconductor industry; market size, share and demand (particularly demand for corporate and consumer electronic devices); product performance; our expectations, objectives, anticipations, intentions and strategies regarding the future; expected operating results, revenues and earnings; and current and potential litigation, which statements are subject to various uncertainties, including, without limitation, those discussed in "Item 1A. Risk Factors";
• The statements in "Item 1. Business - Semiconductor Group," concerning (1) the likelihood that in 2009 unit demand for semiconductors will fall for the first time since 2001, leading to a decline in semiconductor inventories and (2) our expectation that chip unit growth and spending on semiconductor equipment will resume in 2010 and beyond, which statements are subject to certain risks and uncertainties, including, without limitation, fluctuations in market demand for semiconductors, inability to accurately predict chip unit growth and further cost cutting measures which prevent spending on semiconductor equipment in the through 2010;
• The statements in "Item 1. Business - Semiconductor Business Strategy,"
concerning (1) our focus on reducing customer costs; (2) our intent to broaden
our interconnect offerings; (3) our strategy to expand our market presence in
Asia; (4) our strategy to anticipate the technologies that customers need and
design innovative products to enhance their manufacturing capabilities and
(5) our plan to leverage our low cost manufacturing structure, which
statements are subject to various risks and uncertainties, including, without
limitation, shifts in demand from expensive, high-performance products to
lower priced, conventional products, resulting in reduced profit for
semiconductor manufacturers, increases in the costs of material, labor or
conducting a global business, or inability to enhance our systems'
productivity, which may preclude us from containing costs to customers; the
current and other periodic downturns in the semiconductor industry and the
global or domestic economy, political or economic instability in Asia;
inability to allocate sufficient resources to R&D efforts; and fluctuations in
interest and foreign currency exchange rates;
• The statements in "Item 1. Business - Semiconductor Products" of our beliefs in the performance and effectiveness of our products, including that we have an important advantage in extending copper/low-k processes to advanced semiconductor devices based on our understanding of interactions between planarization, deposition and surface preparation, which statements are subject to various risks and uncertainties, including, among others, the inaccuracy of our assessment of our products' capabilities; technical difficulties which preclude our products from performing as expected; competitors' greater financial, marketing, technical, customer service or other resources, broader product lines, and larger and more established sales organizations and customer bases; future competition from new market entrants, competitors' design and performance product improvements that may offer superior price or performance features over our products, difficulties integrating, developing and commercializing SpeedFam-IPEC CMP systems, and difficulties in selecting, developing, manufacturing and marketing our new products or enhancing our existing products;
• The statements in "Item 1. Business - Customers" concerning our expectation that sales of our products to relatively few customers will account for a high percentage of our net sales in the foreseeable future, which statement is subject to certain risks and uncertainties, including unexpected loss of a major customer, inability to provide our customers with cost effective products and inability to predict the changing needs of our customers;
• The statement in "Item 1. Business - Research and Development" regarding our belief that R&D expenditures will continue to represent a substantial percentage of sales, which statement is subject to certain risks and uncertainties, including, among others, the risk that we may be unable to allocate substantial resources to R&D;
• The statements in "Item 1. Business - Manufacturing" regarding our belief that our outsourcing strategy enables us to minimize our fixed costs and capital expenditures while also providing the flexibility to increase capacity as needed and allows us to focus on product differentiation through system design and quality control, which statements are subject to various risks and uncertainties, including, without limitation, a prolonged inability to obtain certain components imperative to our operations and our failure to work efficiently with suppliers;
• The statement in "Item 1. Business - Competition" regarding our belief as to our ability to compete favorably in our market segments, which statement is subject to various risks and uncertainties, including, among others, the greater financial, marketing, technical or other resources, broader product lines, greater customer service capabilities and larger and more established sales organizations and customer bases that some of our competitors possess, future competition from new market entrants from overseas and domestic sources, our competitors' improvement of the design and performance of their products that may offer superior price or performance features as compared to our products, and our success in selecting, developing, manufacturing and marketing our new products or enhancing our existing products;
• The statements in "Item 1. Business - Patents and Proprietary Rights" regarding (1) our intentions to vigorously protect our intellectual property rights, (2) our intention to file additional patent applications as appropriate, (3) our belief that the outcomes of current litigation will not have a material impact on our business, financial condition or results of operations; and (4) our belief that in the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the intellectual property rights of others; which statements are subject to various risks and uncertainties, including, without limitation, the risk that patents will not be issued from any of our pending applications or that claims allowed from existing or pending patents will not be sufficiently broad to protect our technology, the risk that litigation could result in substantial cost and diversion of our effort and the risk that adverse litigation determinations could result in a loss of our intellectual property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products;
• The statement in "Item 1. Business - Environmental Matters" that federal, state and local provisions regulating discharge of materials into the environment and remedial agreements or other environmental actions are not expected to have a material effect on our capital expenditures, financial condition, results of operations or competitive position, which statement is subject to certain risks and uncertainties, including, among others, that we have inaccurately assessed the environmental impact of our activities or the compliance requirements of environmental provisions and agreements;
• The statement in "Item 2. Properties" that our facilities are sufficient to meet our needs for the foreseeable future, which statement is subject to certain risks and uncertainties, including, among others, inaccurate estimates related to our facility needs and an unexpected need to expand operations;
• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview of Our Business and Industry" regarding (1) our close relationships with our customers and substantial investments in R&D positioning us for future growth, (2) the likelihood that in 2009 unit demand for semiconductors will fall for the first time since 2001, leading to a decline in semiconductor inventories, (3) our expectation that chip unit growth and spending on semiconductor equipment will resume in 2010 and beyond, (4) our anticipation that revenues in the near term will be generated from technology upgrades and maintenance on, or replacement, of currently deployed equipment, (5) our continued focus on operational execution to improve profitability, (6) our plan to continue managing both our variable and fixed cost structure with the objective of minimizing our net cash outflow during fiscal 2009, (7) our goal to align our cost structure to survive the unusually low capital expenditure requirements of our customers in the short-term while maintaining sufficient resources to adequately respond to our customers when the industry returns to a more normal steady state of capital expenditure, (8) our expectation that gross profit, as a percentage of net sales, will continue to be negatively impacted in 2009 due to lower facilities utilization on reduced shipment volumes, and (9) our expectation that net orders will continue to fluctuate; which statements are subject to numerous risks and uncertainties, including, without limitation, our inability to maintain our customer accounts, fluctuations in market demand for semiconductors, inability to accurately predict chip unit growth and further cost cutting measures which prevent spending on semiconductor equipment in the through 2010, instability in the semiconductor industry and inability to predict the origin of revenues, our inability to realize marketable products from our investment in R&D, our inability to reduce our cost structure and reduce expenses through business shutdowns and other cost reducing strategies, our inability to attain market acceptance for new product introductions and the cyclical nature of the semiconductor industry;
• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition - Critical Accounting Policies" regarding the calculation of allowances, reserves, and other estimates that are based on historical experience, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources, and the significant judgments of management that underlie the preparation of our consolidated financial statements including, without limitation, (1) our belief that deferred tax assets will be realized due to future income and our ability to carry back losses to prior years and (2) the positive or negative impact on gross profit of possible revisions to estimated warranty liability, which statements are subject to certain risks and uncertainties, including, among others, the inaccuracy of our calculations, estimates, assumptions and judgments, regarding critical accounting policies; that actual and future product failure rates, material usage, installation costs, customer reserves or other estimates may differ from our historical experience, requiring revisions to our estimated doubtful account allowances, additional inventory write-downs, restructuring charges, litigation, warranty, and other reserves; the insufficiency of anticipated future income, whether due to a downturn in the semiconductor industry or increases in expenses; and the accuracy of our estimates and beliefs regarding warranty liability;
• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Sales" of our strategies, beliefs, plans, expectations and anticipations including (1) our plans to continue to focus on expanding our market presence in Asia, (2) our belief that significant additional growth potential exists in this region over the long term, which statements are subject to numerous risks and uncertainties, including, without limitation, inability to predict our ability to acquire a substantial market share in Asia, political or economic instability in Asia, and fluctuations in interest and foreign currency exchange rates;
• The statements in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Research and Development (R&D)" of our
strategies, beliefs, plans, expectations and anticipations including,
(1) continuation of our R&D commitment to improvement of new products and
• The statements in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Income Taxes" regarding (1) our expectation to achieve tax rates lower than current federal rates due to the geographical mix of income at lower rates, foreign tax credit planning strategies and capital and foreign losses which may be carried forward from prior years and (2) our belief that we have adequate accruals for any potential adjustment resulting from foreign tax examinations, which statements are subject to certain risks and uncertainties including changes to our eligibility for foreign tax credits, shifts in our geographical mix of income and our inability to adequately estimate the amount of potential adjustments;
• The statement in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" that
(1) we expect to use any proceeds from our credit agreement for working
capital and other corporation purposes and (2) our current cash positions,
operating cash flow and available borrowings will be sufficient to meet our
needs for the next 12 months to execute our business plan; which statements
are subject to certain risks and uncertainties, including unanticipated
limitations on the use of proceeds from certain credit agreements and
inability to accurately predict cash outlays and an unanticipated need for
additional liquid assets in the next 12 months to fund operations and
repurchases of our Common Stock;
• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements" that it is not probable that we will be required to pay any amounts under standby letters of credit arrangements or guarantee arrangements on behalf of our consolidated subsidiaries, which statement is subject to certain risks and uncertainties, including, without limitation, the inaccuracy of our assessment of our obligations under credit and guarantee arrangements;
• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" that (1) we have made adequate provision for potential exposure related to inventory on order which may go unused, and (2) we expect to make payments of $0.5 million related to our pension and post-retirement benefit plans in fiscal 2009, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to predict our exposure related to inventory on order which may go unused and inaccuracies related to the amount of payments to be made to the Company's pension and post-retirement benefit plans;
• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Purchase Commitments" that we made adequate provision for potential exposure related to inventory on order which may go unused, which statement is subject to certain risks and uncertainties, including, without limitation, an unanticipated decline in demand that would increase our inventory-related exposure;
• The statement in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting Pronouncements" and "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies - Recent Accounting Pronouncements" that (1) we do not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next twelve months and (2) we do not anticipate the adoption of FSP 157-2, SFAS 160 or FSP 142-3 will have a significant impact on our Consolidated Financial Statements, which statements are subject to certain risks and uncertainties, including, without limitation, inability to accurately assess the impact of recent accounting pronouncements on our Consolidated Financial Statements;
• The statement in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk" that we believe that an immediate change to interest rates to variable short-term borrowings will not have a material effect on our results, which statement is subject to certain risks and uncertainties, including, without limitation, that we have inaccurately assessed our future borrowing needs;
• The statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2. Significant Accounting Policies - Concentration and Other Risks" regarding (1) our expectation that sales of our products to a few customers will account for a high percent of our total system sales in the foreseeable future and (2) our belief that there is no significant risk of nonperformance of payment obligations of counterparties, which statements are subject to certain risks and uncertainties, including, without limitation, our inability to retain current customers due to unforeseeable market changes, unexpected loss of a major customer that accounts for a high percent of our total sales, and inability to accurately predict the creditworthiness of large financial institutions;
• Our statement in "Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial Statements - Note 3. Financial Instruments" that we believe the $13.0 million of impairment we recorded is temporary as we have both the ability and intent to hold these securities to recovery, which statement is subject to certain risks and uncertainties, including, without limitation, our assumption that we will continue to have the ability to hold the securities and that the value of these securities will be recovered without incurring significant losses;
• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5. Goodwill and Other Intangible Assets" of our future estimated amortization expense for the identifiable intangible assets, which statement is subject to certain risks and uncertainties, including, without limitation, the accuracy of our accounting judgments and estimates underlying the amortization expense amount;
• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 7. Restructuring and Other Charges (Benefits)" that we estimate that future rent obligations will be paid in cash through 2017, which statement is subject to certain risks and uncertainties, including, without limitation unanticipated amendments to our leased facilities and inability to accurately predict the effectiveness of our restructuring plans;
• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements - Note 8. Borrowing Arrangements" that
(1) we expect to use the proceeds from our long-term senior unsecured
revolving credit facility, if any, for working capital and other general
corporate purposes, including the repurchase of our own common shares, and
(2) we may utilize such line of credit to fund the repayment of our current
outstanding debt due June 25, 2009, which statements are subject to certain
risks and uncertainties, including, without limitation unanticipated need to
use credit facility proceeds to pay expenses prior to the expiration of the
long-term senior unsecured revolving credit facility in 2011 and an unexpected
increase in expenses; and
• Our statement in "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 12. Income Taxes" that we do not anticipate a reduction of our unrecognized tax benefits as a result of a lapse of the applicable statutes of limitations, which statement is subject to certain risks and uncertainties, including, without limitation our inability to predict our unrecognized tax benefits.
Introduction
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide readers with an understanding of Novellus. Our MD&A addresses the following topics:
• Overview of Our Business and Industry;
• Financial Performance Overview;
• Results of Operations;
• Liquidity and Capital Resources;
• Off-Balance Sheet Arrangements;
• Contractual Obligations; and
• Recent Accounting Pronouncements.
Overview of Our Business and Industry
Novellus Systems, Inc. is a California corporation organized in 1984. At Novellus, we primarily develop, manufacture, sell and support equipment used in the fabrication of integrated circuits, commonly called chips or semiconductors. Customers for these products manufacture chips for sale or for incorporation in their own products, or provide chip-manufacturing services to third parties. The segment of our business serving this area is the Semiconductor Group. In 2004, Novellus entered into market segments beyond semiconductor manufacturing with the acquisition of Peter Wolters AG, a German company specializing in lapping and polishing equipment for a number of industries. With the acquisition of Switzerland-based Voumard Machine Co. SA in 2005, we expanded our product offerings to include high-precision machine manufacturing tools. We call this segment the Industrial Applications Group (IAG).
In the Semiconductor Group our business depends on capital expenditures made by integrated circuit manufacturers, who in turn are dependent on corporate and consumer demand for integrated circuits and the electronic products which use them. Since the industry in which we operate is driven by spending for electronic products, our business is directly affected by growth or contraction in the global economy as well as by the adoption of new technologies. Demand for personal computers, the expansion of the Internet and telecommunications industries, and the emergence of new applications in consumer electronics have a direct impact on our business. In addition, the industry is characterized by intense competition and rapidly changing technology. We continue to work closely with our customers and make substantial investments in research and development in order to deliver innovative products which enhance productivity for our customers and utilize the latest technology. We believe these investments have positioned us for future growth.
In the Industrial Applications Group our business depends on capital expenditures made by manufacturers in sectors such as automotive, aircraft and electronic products, parts and components. At the broadest level, the demand for machine tools is highly sensitive to macroeconomic conditions, as our customer base includes some of the most cyclically sensitive industries in the economy. As a result, such variables as the outlook for overall economic growth, fixed investment and durable goods shipments directly affect the growth of our business. Our industrial business also depends on niche applications in addition to the general machine tool cycle. As we continue to expand our capabilities in this segment, our operations are increasingly impacted by the prime wafer industry which, similar to the semiconductor segment, is also characterized by intense competition and rapidly changing technology.
As a supplier to the global semiconductor and semiconductor-related industries, we are subject to business cycles and trends which are difficult to predict. As indicated above, our Semiconductor Group products are used to manufacture chips . . .
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