Applied Materials, Inc. — Fiscal 2009 Form 10-K
Business context and reporting period. Applied Materials supplies equipment, services and software to semiconductor, display, solar and related manufacturers. This annual report covers the fiscal year ended October 25, 2009; fiscal Q4 is included in the filing’s quarterly data. The company reports four segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions.
Key financial metrics
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $5.014 billion | $8.129 billion |
| Gross margin | $1.431 billion; 28.5% | $3.443 billion; 42.4% |
| Operating income (loss) | $(394) million | $1.355 billion |
| Net income (loss) | $(305) million | $961 million |
| Diluted EPS | $(0.23) | $0.70 |
| Cash from operating activities | $333 million | $1.710 billion |
| Cash, cash equivalents and investments | $3.267 billion | $3.468 billion |
| Working capital / current ratio | $3.749 billion / 2.9 | $3.719 billion / 2.3 |
| Long-term debt | $201 million | $202 million |
| Order backlog | $2.735 billion | $4.848 billion |
Fiscal Q4 2009 net sales were $1.526 billion, gross margin was $559 million, net income was $138 million and diluted EPS was $0.10. Q4 new orders were $1.473 billion. The company reported $248 million in capital expenditures for FY 2009. It paid $320 million in dividends and used $23 million for share repurchases during the year; repurchases were suspended in November 2008.
Material changes versus the prior comparable period
- FY 2009 net sales declined 38% and new orders fell 55% versus FY 2008 amid severe economic and industry weakness. Gross margin fell to 28.5% from 42.4%, reflecting lower sales, product mix and factory under-absorption.
- The company moved from $961 million of net income to a $305 million net loss. Cash from operations fell to $333 million from $1.710 billion.
- Backlog declined from $4.8 billion to $2.7 billion, including $1.2 billion of negative backlog adjustments, primarily customer cancellations and financial debookings.
- Sales in Silicon fell to $1.960 billion from $4.005 billion; Applied Global Services to $1.397 billion from $2.329 billion; and Display to $502 million from $976 million. Energy and Environmental Solutions sales rose to $1.155 billion from $820 million, but its operating loss widened to $242 million from $183 million.
- Despite lower total cash and investments, working capital was broadly stable and the current ratio improved. The company had no amounts outstanding under its credit facilities at year-end.
Outlook, commentary, risks and unusual items
- Management expected a recovery in FY 2010, particularly in semiconductor capital equipment, and forecast total net sales to increase more than 30% versus FY 2009. Management cautioned that recovery depended on stronger customer end markets, factory utilization and investment. This is forward-looking guidance, not a guarantee.
- FY 2009 included $156 million of restructuring and asset impairment charges, including approximately $143 million of restructuring costs and $15 million of asset impairments. A workforce-reduction program targeted about 2,000 positions.
- The company recorded $84 million of investment impairment charges and a $63 million bad-debt provision associated with customer financial deterioration. Solar segment losses reflected R&D spending and unfavorable margins on initial SunFab line start-ups.
- After year-end, Applied announced another workforce reduction of approximately 1,300–1,500 positions over 18 months, with expected pre-tax costs of $100–$125 million. It also agreed to acquire Semitool for approximately $364 million, subject to tender, regulatory and other closing conditions; three purported class-action lawsuits followed the announcement.
- Key risks include semiconductor, display and solar cyclicality; customer concentration and cancellations; customer and supplier financing constraints; intense competition and rapid technological change; supply-chain and execution risks; and solar demand’s dependence on financing, economics and government incentives. Backlog is not necessarily indicative of future sales.
- Other contingencies include $83 million of maximum potential payments under guarantee arrangements, $325 million of gross unrecognized tax benefits, and ongoing patent and other legal matters. Management did not believe the disclosed legal proceedings would materially adversely affect consolidated financial condition or results.
- Management reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified audit opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether the anticipated FY 2010 sales recovery materialized, and how actual results compared with the greater-than-30% growth outlook.
- Whether order trends, backlog conversion and cancellation/debooking levels improved after the sharp FY 2009 decline.
- Whether gross margins recovered and whether solar operations reduced losses, particularly on SunFab projects.
- The cash, margin and customer-credit effects of the announced workforce reduction and Semitool transaction, including lawsuit and closing outcomes.
- Potential changes in customer bad debts, investment impairments, tax exposures and other disclosed contingencies.