Business context and reporting period
Applied Materials, Inc. filed this unaudited Form 10-Q for the fiscal second quarter ended May 2, 2010, and the six months then ended. The quarter is compared with the three months ended April 26, 2009; the six-month comparison has 27 weeks in fiscal 2010 versus 26 weeks in fiscal 2009. Applied supplies equipment and services to semiconductor, display, solar and related industries.
Financial results and liquidity
| Metric | Q2 FY2010 | Q2 FY2009 | Six months FY2010 | Six months FY2009 |
|---|---|---|---|---|
| Net sales | $2.296 billion | $1.020 billion | $4.144 billion | $2.353 billion |
| Gross margin | $927 million; 40.4% | $156 million; 15.2% | $1.638 billion; 39.5% | $547 million; 23.2% |
| Operating income (loss) | $386 million | $(293) million | $502 million | $(489) million |
| Net income (loss) | $264 million | $(255) million | $347 million | $(388) million |
| Diluted earnings (loss) per share | $0.20 | $(0.19) | $0.26 | $(0.29) |
Revenue and profitability rebounded sharply year over year, led by semiconductor equipment demand. Management attributed gross-margin improvement mainly to higher sales, improved product mix, better factory utilization and cost controls; an $83 million thin-film solar inventory charge partly offset those gains.
For the six months, operating cash flow was $899 million, versus cash used of $101 million a year earlier. Investing activities used $710 million, including $323 million for Semitool, and financing activities used $169 million, including dividends and share repurchases. Cash and cash equivalents were $1.596 billion; short- and long-term investments were $738 million and $1.230 billion, respectively. Total cash, cash equivalents and investments were $3.565 billion, up from $3.267 billion at October 25, 2009.
At May 2, 2010, total debt was approximately $207 million, including $2 million current and $205 million long-term. No amounts were drawn on credit facilities of up to $1.1 billion; the company reported compliance with their covenants. Current assets were $6.173 billion and current liabilities $2.576 billion, with working capital of approximately $3.6 billion. The six-month cash flow included a roughly $130 million federal tax refund from carrying back the prior-year net operating loss.
Material changes and operating trends
- New orders were $2.533 billion in Q2, versus $649 million, and $4.498 billion for six months, up 190% year over year. Backlog was $3.0 billion at quarter-end; the filing cautions that backlog may not convert to sales.
- Silicon segment sales rose to $1.404 billion in Q2 from $260 million; segment operating income was $498 million, compared with an $82 million loss. Applied Global Services sales were $456 million and operating income $90 million. Display sales were $270 million and operating income $90 million.
- Energy and Environmental Solutions remained weak: Q2 sales were $166 million versus $357 million and the segment operating loss widened to $145 million from $91 million. Six-month sales were $487 million and the segment loss was $181 million.
- Gross margin improved despite the solar inventory charge. Six-month restructuring and asset impairment charges were $113 million, including $104 million of restructuring charges under a program targeting a workforce reduction of approximately 1,300–1,500 positions over 18 months.
- The company acquired Semitool for approximately $323 million net of cash acquired and purchased substantially all assets of Advent Solar. Results include Semitool in Silicon and Advent Solar in Energy and Environmental Solutions.
Outlook, commentary, risks and contingencies
Management said economic and industry conditions generally improved in the first half of fiscal 2010, supporting stronger semiconductor and display demand. The filing provides no general company revenue or earnings guidance. Applied said it did not expect Energy and Environmental Solutions to achieve its previously stated fiscal 2010 breakeven goal, citing weak thin-film solar demand, customer financing difficulties, cancellations and delays.
Solar market weakness also reduced the estimated fair-value cushion over carrying value for the Energy and Environmental Solutions reporting unit to approximately $200 million, or 19% of carrying value. No goodwill impairment was recorded in the quarter, but further adverse conditions could result in a material impairment charge. Thin-film customer cancellations contributed to the $83 million inventory charge; additional inventory write-downs remain possible if demand weakens.
Principal disclosed risks include cyclical and difficult-to-forecast end markets, customer access to financing, concentrated customers, order cancellations, inventory and supply-chain exposure, competition and technology changes, and dependence on international markets. Samsung and Taiwan Semiconductor Manufacturing Company accounted for 18% and 14% of six-month sales, respectively; together they represented 30% of accounts receivable at quarter-end. A 100-basis-point rise in interest rates was estimated to reduce fixed-income portfolio fair value by approximately $23 million.
Legal matters include ongoing patent disputes with Jusung and Korean criminal proceedings involving certain current or former Applied Korea employees and alleged misuse of customer confidential information. Applied was not named as a party to the criminal action and said it could not determine the matter’s business impact. The company stated that it did not believe the described proceedings and claims would materially adversely affect consolidated financial condition or results, while noting outcomes cannot be predicted with certainty.
The board authorized up to $2 billion of repurchases over three years; Applied repurchased $100 million of shares during the six months. The quarterly dividend was increased from $0.06 to $0.07 per share, subject to board discretion. Management believed operating cash generation, existing cash and borrowing capacity would meet liquidity needs for the next 12 months.
Important facts for investors to verify
- Whether the sharp order and revenue recovery—especially in Silicon and Display—persists, and how much backlog converts to recognized sales.
- Whether thin-film solar cancellations, customer financing constraints and inventory exposure lead to further charges or goodwill impairment.
- Customer concentration and receivables collectability, including the exposure to Samsung and TSMC.
- The assumptions supporting the Energy and Environmental Solutions goodwill valuation and management’s revised outlook for that segment.
- Cash deployment, including the pace of repurchases and dividends, and the status and potential impact of the disclosed legal proceedings.