Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended April 28, 2013. Applied Materials supplies equipment, services and software to semiconductor, display and solar industries, whose demand is cyclical.
Financial performance
| Metric | Q2 FY2013 | Comparison |
|---|---|---|
| Net sales | $1.973 billion | Up 25% sequentially; down 22% year over year |
| Gross margin | $808 million; 41.0% | 41.0% versus 39.8% a year earlier |
| Operating income (loss) | $(68) million; (3.4)% margin | Versus $409 million and 16.1% margin a year earlier |
| Net income (loss) | $(129) million; $(0.11) per diluted share | Versus $289 million and $0.22 per diluted share a year earlier |
| Non-GAAP adjusted results | $285 million operating income; $199 million net income; $0.16 per diluted share | Exclude specified impairment, acquisition-related, restructuring and tax items; not GAAP measures |
For the first six months, sales were $3.546 billion, down 25% year over year; GAAP net loss was $95 million versus net income of $406 million. Gross margin was 39.2%, operating loss was $29 million, and diluted loss per share was $0.08. Non-GAAP adjusted net income was $268 million, or $0.22 per diluted share.
Cash flow and liquidity: First-half operating cash flow was $240 million, down from $784 million a year earlier. Capital expenditures were $100 million. Cash and cash equivalents were $1.545 billion; short- and long-term investments totaled $1.305 billion, for total cash, cash equivalents and investments of $2.850 billion. Working capital was approximately $2.9 billion. Management said existing cash, operating cash generation and borrowing capacity should cover liquidity needs for the next 12 months.
Debt and capital returns: Long-term debt was $1.946 billion; no amounts were drawn on credit facilities of up to $1.6 billion. The company was in compliance with debt covenants. First-half dividends paid were $216 million and share repurchases were $148 million. The quarterly dividend was raised to $0.10 per share from $0.09 in December 2012.
Material changes and business trends
- Sequentially, orders rose 7% to $2.266 billion and sales rose 25%, led by semiconductor and LCD TV equipment demand. Orders were still down 18% year over year; first-half orders declined 8%.
- Backlog reached $2.297 billion, up 43% from October 28, 2012. Approximately 75% was expected to ship within the next two fiscal quarters; the filing cautions that orders may be rescheduled or canceled.
- First-half sales fell across all segments: Silicon Systems Group down 28%, Applied Global Services down 9%, Display down 10%, and Energy and Environmental Solutions down 71%.
- Solar market overcapacity and weaker outlook prompted a $224 million goodwill impairment and $54 million intangible-asset impairment in Energy and Environmental Solutions. The segment reported a $322 million Q2 operating loss; its non-GAAP adjusted operating loss was $34 million.
- Asia Pacific generated 75% of first-half orders. Taiwan Semiconductor Manufacturing Company and Samsung Electronics represented 32% and 14% of first-half consolidated sales, respectively.
Outlook, risks and unusual items
- The filing provides no clear numerical company-wide revenue or earnings guidance. Management cited stronger semiconductor and LCD TV equipment orders, while solar equipment demand remained very low.
- Applied recorded $278 million of goodwill and intangible impairment charges. The goodwill charge was not tax-deductible, contributing to a 43.3% Q2 tax provision rate despite a pretax loss.
- The global restructuring plan was expected to affect approximately 900–1,300 positions; estimated total pretax charges were revised down to $120–$160 million, with $114 million incurred to date. The separate Energy and Environmental Solutions restructuring plan had incurred $70 million of estimated costs and could affect approximately 150 additional positions.
- Key risks include volatile semiconductor, display and solar investment cycles; concentrated customers and geographic exposure; order delays or cancellations; customer credit and collection risk; supply-chain disruptions; and further impairment if solar or other business outlooks weaken. Interest-rate sensitivity included an estimated $22 million decline in fixed-income portfolio fair value under an immediate 100-basis-point rate increase.
- Applied reported pending patent proceedings with Jusung and appeals in a Korean criminal case involving former and current employees; management did not believe the described legal matters would materially adversely affect consolidated financial condition or results.
Investor verification priorities
- Track whether sequential order growth converts into shipments and cash, and monitor backlog cancellations and timing.
- Assess continued semiconductor and display demand against year-over-year declines and customer concentration.
- Review solar market conditions, the Energy and Environmental Solutions segment’s adjusted losses, and assumptions behind the recorded impairment.
- Verify cash conversion, working-capital movements, and the sustainability of dividends and repurchases relative to operating cash flow.
- Compare GAAP results with non-GAAP adjustments, particularly impairment, acquisition-related costs, restructuring charges and tax effects.