Applied Materials, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended October 26, 2014 (52 weeks). This is an annual filing, not a standalone quarterly report; fourth-quarter figures are noted separately. Applied supplies equipment, services and software to semiconductor, display, solar and related industries.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $9.072 billion | $7.509 billion |
| Gross margin | $3.843 billion; 42.4% | $2.991 billion; 39.8% |
| Operating income / margin | $1.520 billion; 16.8% | $432 million; 5.8% |
| Net income | $1.072 billion | $256 million |
| Diluted EPS | $0.87 | $0.21 |
| Cash from operations | $1.800 billion | $623 million |
| Capital expenditures | $241 million | $197 million |
| Cash, cash equivalents and investments | $4.097 billion | $2.896 billion |
| Long-term debt | $1.947 billion | $1.946 billion |
Operating cash flow less capital expenditures was approximately $1.559 billion in FY2014 (derived). Working capital was $4.1 billion. The company reported $1.95 billion of senior notes outstanding and no borrowings under its credit facilities or commercial-paper program. Its committed revolving credit facility was $1.5 billion, scheduled to expire in May 2017; the company reported covenant compliance and said available cash, operating cash flow and borrowing capacity should meet liquidity needs for the next 12 months.
FY2014 revenue rose 21% year over year. Growth and margin improvement reflected higher semiconductor and display equipment demand, increased semiconductor spares and services, lower manufacturing costs, product mix, sales of previously written-down tools, and recovery of a regional customs-duty assessment recorded in FY2013. GAAP net income included $34 million of additional tax provision versus the company’s November 2014 release, reducing reported diluted EPS by $0.03; the filing says this adjustment was not material and did not change previously announced non-GAAP results.
Fourth-quarter results
FY2014 Q4 net sales were $2.264 billion, gross margin $959 million, net income $256 million and diluted EPS $0.21. Silicon Systems Group orders fell 15% sequentially to $1.3 billion, while Display orders declined 56% sequentially to $130 million; Display sales rose 60% sequentially to $190 million, primarily on shipments of TV equipment to China. Energy and Environmental Solutions orders were $44 million and sales were $48 million, with sales down 53% sequentially.
Segments and demand
Silicon Systems Group generated $5.978 billion in sales, up 25%, with operating income of $1.391 billion. Applied Global Services sales were $2.200 billion, up 9%, with operating income of $573 million. Display sales were $615 million, up 14%, with operating income of $129 million. Energy and Environmental Solutions sales were $279 million, up 61%, and operating income was $15 million, versus a $433 million operating loss in FY2013. The improvement in that segment came from higher sales, cost reductions and other favorable items; solar equipment investment remained low amid industry overcapacity.
New orders increased 14% to $9.648 billion and year-end backlog rose 23% to $2.917 billion. About 80% of backlog was expected to ship in the first half of FY2015, but the filing cautions that customers can delay or cancel orders and backlog is not necessarily indicative of future sales. Approximately 78% of FY2014 sales were outside the United States, and Asia Pacific represented 71% of sales.
Outlook, material developments and risks
- Management expected mobility-related demand to remain the principal semiconductor growth driver in FY2015, with foundry and memory spending supporting equipment demand; it also expected display-equipment investment to remain healthy. These are qualitative expectations, not quantified earnings or revenue guidance.
- Strategic priorities for FY2015 included expanding wafer-fab and display equipment and services, improving solar profitability and broadening the company’s available market. RD&E spending was $1.428 billion, or about 16% of sales, focused in part on 3D chip technologies and 300mm products.
- The proposed combination with Tokyo Electron had shareholder approval, but remained subject to regulatory approvals. The planned combined company, Eteris N.V., was expected to be owned approximately 68% by Applied shareholders and 32% by TEL shareholders. Certain termination events could trigger a $400 million fee; a $3.0 billion post-closing repurchase program was contemplated, not completed.
- Key risks include cyclical and difficult-to-forecast customer capital spending; significant customer and geographic concentration; order changes and cancellations; semiconductor technology transitions and intense competition; supply-chain and single-source component exposure; solar overcapacity and trade measures; and foreign-exchange, tax and regulatory uncertainty. TSMC and Samsung represented 21% and 12% of consolidated sales, respectively.
- Other notable exposures include approximately $2.1 billion of foreign funds intended to be permanently reinvested outside the United States; $134 million of gross unrecognized tax benefits; and $46 million of maximum potential payments under standby letters of credit and other guarantees. Management reported no material effect expected from the legal matters described, but outcomes remain uncertain.
- The filing reported effective disclosure controls and effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Reconcile GAAP and non-GAAP results, especially acquisition-related amortization, merger costs, the FY2014 tax adjustment and prior-year solar impairments.
- Assess whether backlog converts to shipments and revenue as expected, including the risks of customer rescheduling or cancellation.
- Track semiconductor and display customer spending, concentration, and the sustainability of FY2014 margin improvement.
- Monitor the solar segment’s recovery, industry capacity and trade developments, and whether cost reductions produce sustained profitability.
- Verify the status and terms of the proposed TEL transaction, required approvals, potential termination exposure and post-closing repurchase plans.
- Review cash accessibility and repatriation tax implications, debt maturities and liquidity needs alongside dividends and capital allocation.