Business Context and Reporting Period
Company: Applied Materials, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 26, 2009 (Second Quarter of Fiscal 2009)
Business Overview: Applied Materials provides nanomanufacturing technology solutions for the global semiconductor, flat panel display, solar, and related industries. The company operates through four reportable segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions.
Key Financial Metrics
| Metric | Q2 2009 (3 Months) | Q2 2008 (3 Months) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Net Sales | $1,020 million | $2,150 million | $2,353 million | $4,237 million |
| Gross Margin | $156 million (15.2%) | $967 million (45.0%) | $547 million (23.2%) | $1,902 million (44.9%) |
| Operating Income (Loss) | ($293 million) | $438 million | ($489 million) | $811 million |
| Net Income (Loss) | ($255 million) | $303 million | ($388 million) | $565 million |
| Diluted EPS | ($0.19) | $0.22 | ($0.29) | $0.41 |
| Cash & Equivalents | $1,467 million | $1,412 million (Oct 2008) | N/A | |
| Total Debt | $202 million | $203 million (Oct 2008) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 53% in Q2 2009 and 44% YTD compared to the prior year, driven by significantly reduced demand for semiconductor and display equipment due to the global economic downturn.
- Margin Compression: Gross margin percentage dropped from 45.0% to 15.2% in Q2 2009. This was caused by lower sales volumes, unfavorable product mix, reduced factory absorption, and inventory charges.
- Significant Charges: The company recorded $166 million in pre-tax charges in Q2 2009, including:
- $77 million in impairment charges for equity method investments (Sokudo Co., Ltd.) and strategic investments.
- $27 million in restructuring and asset impairment charges.
- $47 million in inventory-related charges.
- $15 million in bad debt provisions.
- Operating Loss: The company swung from an operating income of $438 million in Q2 2008 to an operating loss of $293 million in Q2 2009.
Guidance, Outlook, and Risks
Management Commentary: Management expects industry conditions to remain "extremely challenging" for the remainder of fiscal 2009. Credit constraints and weak global economic conditions have led customers to reduce factory operations and spending plans. While factory utilization rates began to increase slightly in Q2, a meaningful recovery depends on sustainable end-market demand.
Outlook: Applied currently expects orders and net sales to be down overall for fiscal 2009. The company has temporarily suspended stock repurchases since November 2008 to maintain financial flexibility.
Risks and Contingencies:
- Customer Liquidity: Deteriorating financial conditions of customers led to a $63 million bad debt provision YTD. The company continues to monitor customer liquidity closely.
- Inventory Risk: Excess inventory risks remain high, particularly in the Energy and Environmental Solutions segment, where contracts require significant investment in work-in-process inventory.
- Legal Proceedings: Ongoing patent litigation with Jusung Engineering in Taiwan and Korea, though management believes it has meritorious defenses.
- Investment Portfolio: The company holds $13 million in structured investment vehicles and auction rate securities, representing 1% of total investments, which could face liquidity issues.
Investor Verification Checklist
- Backlog Quality: Verify the stability of the $3.2 billion backlog, noting $307 million in financial debookings and $202 million in cancellations during Q2.
- Customer Concentration: Assess exposure to major semiconductor and display customers who may face insolvency or further order cancellations.
- Restructuring Execution: Monitor the execution of the $145 million restructuring program announced in late 2008 to ensure cost reductions align with lower revenue levels.
- Solar Segment Viability: Evaluate the profitability of the Energy and Environmental Solutions segment, which reported an operating loss of $93 million in Q2 despite sales growth, due to negative margins on SunFab lines.
- Liquidity Position: Confirm the sufficiency of the $3.1 billion in cash and investments to fund operations and dividends without needing to draw on the $1.2 billion credit facility.