Applied Materials, Inc. — Q1 FY2010 Form 10-Q
Reporting period: Three months ended January 31, 2010. Fiscal Q1 had 14 weeks, versus 13 weeks in Q1 FY2009; year-over-year comparisons are therefore not fully like-for-like. The interim statements are unaudited.
Business context and financial performance
Applied Materials supplies equipment, services and software to semiconductor, display, solar and related industries. Management said industry conditions generally improved from the weak prior-year period, with stronger semiconductor equipment demand driving the quarter.
| Metric | Q1 FY2010 | Q1 FY2009 |
|---|---|---|
| New orders | $1.965 billion | $903 million |
| Net sales | $1.849 billion | $1.333 billion |
| Gross margin | $711 million; 38.5% | $392 million; 29.4% |
| Operating income (loss) | $116 million | $(196) million |
| Net income (loss) | $83 million | $(133) million |
| Diluted EPS | $0.06 | $(0.10) |
| Operating cash flow | $372 million | $(185) million |
| Capital expenditures | $53 million | $73 million |
Gross margin improved by 9.1 percentage points, which management attributed mainly to higher sales, product mix, better factory utilization and cost controls. Operating expenses included $104 million of restructuring and asset-impairment charges, compared with $133 million a year earlier. Interest income less expense was approximately $4 million, down from $9 million. The effective tax rate was a 30.3% provision, versus a 34.4% benefit in the prior-year quarter.
Segments and material changes
- Silicon: Sales of $970 million versus $546 million; operating income of $306 million versus $46 million. Orders rose substantially, led by memory and foundry customers.
- Applied Global Services: Sales of $426 million versus $345 million; operating income of $63 million versus $26 million, supported by spare-parts demand.
- Display: Sales of $132 million versus $149 million; operating income of $25 million versus $21 million. Orders increased as LCD-market conditions improved.
- Energy and Environmental Solutions: Sales of $321 million versus $293 million; operating loss narrowed to $36 million from $64 million. Orders fell 28%, largely due to weaker demand for SunFab thin-film lines amid credit constraints and uncertain market conditions.
Backlog was $2.9 billion at quarter-end, up 7% from October 25, 2009; the filing cautions that orders may be rescheduled or cancelled. Results also reflect the extra fiscal-quarter week and a changed methodology for allocating certain segment expenses; prior-year segment results were reclassified accordingly.
Cash, debt and liquidity
- Cash and cash equivalents were $1.399 billion; short- and long-term investments totaled $1.801 billion. Combined cash, cash equivalents and investments were $3.200 billion, down $67 million from October 25, 2009.
- Operating cash flow was $372 million. Investing activities used $490 million, including $323 million paid for Semitool net of cash acquired; financing activities used $60 million, primarily for $80 million of dividends.
- Current assets were $5.849 billion and current liabilities $2.278 billion. Total debt was approximately $213 million, including $2 million current and $211 million long-term.
- No amounts were outstanding under the company’s credit facilities, which provided up to $1.1 billion in unsecured borrowing capacity. Management said available cash, operating cash generation and borrowing capacity should meet liquidity needs for the next 12 months.
- Days sales outstanding rose to 67 days from 62 in the preceding quarter. Receivables were $1.267 billion, net of a $73 million doubtful-account allowance; inventory was $1.664 billion.
Outlook, notable items and risks
- Management expected FY2010 net sales to exceed FY2009 net sales; the filing gives no specific numerical sales or earnings forecast.
- Semitool was acquired in December 2009 for $323 million net of cash acquired and is to be included in Silicon segment results beginning Q2 FY2010. Applied also acquired substantially all assets of Advent Solar in November 2009.
- A restructuring program announced in November 2009 targets a reduction of approximately 1,300–1,500 positions, or 10–12% of the workforce, over 18 months. Q1 charges were $104 million.
- After quarter-end, the board approved increasing the quarterly dividend to $0.07 per share and authorized a new stock-repurchase program of up to $2 billion over three years. The prior repurchase program had been suspended in November 2008.
- Key risks include cyclical and difficult-to-forecast end markets; customer concentration and order cancellations; customer and supplier financing constraints; inventory and receivables exposure; solar-market and government-policy uncertainty; competitive and technology changes; and acquisition integration and impairment risks. A 100-basis-point rise in interest rates was estimated to reduce fixed-income portfolio fair value by about $20 million.
- Legal matters include ongoing patent disputes with Jusung and a proposed settlement of Semitool shareholder litigation. Management did not expect the described proceedings to materially adversely affect consolidated financial condition or results, but outcomes remain uncertain. The filing also identifies a Korean investigation involving current and former employees.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the surge in orders and backlog converts into recognized sales, given the extra week, acquisition effects and the possibility of cancellations or rescheduling.
- Whether semiconductor-led demand and improved gross margins persist, and whether weak SunFab demand continues to weigh on the energy segment.
- The expected timing and total cost of the workforce restructuring, and whether targeted savings offset continuing operating costs.
- Semitool and Advent Solar integration, purchase accounting, and the assumptions supporting acquired goodwill and intangible assets.
- Customer credit quality, receivable collections, inventory exposure and the effect of changing SunFab contracts on working capital.
- Progress on the stated FY2010 sales outlook and the sustainability of dividends and the newly authorized repurchase program.