Applied Materials, Inc. — Fiscal 2013 First-Quarter 10-Q
Business context and period. The filing covers the 13 weeks ended January 27, 2013. Applied Materials supplies equipment, services and software to semiconductor, display and solar industries. Its four reporting segments are Silicon Systems Group (SSG), Applied Global Services (AGS), Display, and Energy and Environmental Solutions (EES). Results are unaudited.
Financial results and liquidity
| Metric | Q1 FY2013 | Comparable period |
|---|---|---|
| Net sales | $1.573 billion | $2.189 billion Q1 FY2012; $1.646 billion Q4 FY2012 |
| Gross margin | $582 million; 37.0% | $786 million; 35.9% Q1 FY2012; $586 million; 35.6% Q4 FY2012 |
| Operating income (margin) | $39 million (2.5%) | $179 million (8.2%) Q1 FY2012; loss of $499 million Q4 FY2012 |
| Net income and diluted EPS | $34 million; $0.03 | $117 million; $0.09 Q1 FY2012; loss of $515 million; $(0.42) Q4 FY2012 |
| Non-GAAP adjusted results | Gross margin $626 million (39.8%); operating income $112 million (7.1%); net income $69 million; diluted EPS $0.06 | Adjusted net income $240 million and EPS $0.18 Q1 FY2012 |
| Operating cash flow | $16 million | $181 million Q1 FY2012 |
| Cash, cash equivalents and investments | $2.815 billion | $2.992 billion at October 28, 2012 |
| Long-term debt | $1.946 billion | Unchanged from October 28, 2012 |
| Working capital | $2.8 billion | Unchanged from October 28, 2012 |
Revenue declined 28% year over year and 4% sequentially. Gross margin dollars fell year over year, while the reported margin rate improved; management attributed margin-rate improvement versus the prior quarter to a higher semiconductor-equipment revenue mix and lower inventory charges. The year-over-year reported margin comparison also reflected Varian purchase-accounting adjustments in Q1 FY2012. Non-GAAP measures exclude specified acquisition-related items, restructuring, impairments and discrete tax items; they are not substitutes for GAAP results.
Operating cash flow was modest despite positive net income. Cash-flow movements included reductions in accounts payable and accrued expenses ($248 million) and customer deposits and deferred revenue ($77 million), partly offset by collections of receivables. Investing activities provided $253 million, including net investment-sale and maturity proceeds of $302 million, while capital expenditures were $49 million. Financing used $138 million, including $108 million of dividends and $48 million of share repurchases. The company had $1.6 billion of borrowing facilities available and no amounts drawn; it reported compliance with debt covenants.
The first-quarter tax benefit was $16 million, including an $11 million benefit from resolution of prior Varian-related tax uncertainties and a $10 million benefit from reinstatement of the federal R&D tax credit. These items materially affected the effective tax rate and reported earnings.
Material changes and operating trends
- New orders rose 44% sequentially to $2.113 billion and were up 5% year over year. SSG orders increased sharply sequentially, led by foundry customers; Display and EES orders also improved from low year-ago levels.
- Backlog increased 31% sequentially to $2.106 billion. Approximately 75% was expected to ship within the next two quarters, but the filing cautions that customer schedule changes and cancellations can make backlog an uncertain indicator of future sales.
- SSG sales were $969 million, down 28% year over year; AGS sales were $471 million, down 12%; Display sales were $87 million, down 16%; and EES sales were $46 million, down 78%. SSG operating income was $134 million; AGS, $89 million; Display, $3 million; and EES reported an operating loss of $54 million.
- EES remained under pressure from solar manufacturing overcapacity and delayed customer investment. Its reported loss was far smaller than Q4 FY2012, when a $421 million goodwill impairment was recorded; adjusted EES operating loss was $44 million in Q1 FY2013 versus $46 million in Q4 FY2012.
- Reported operating income improved substantially from Q4 FY2012, which included $421 million of goodwill impairment and $124 million of restructuring and asset-impairment charges. Q1 FY2013 included $9 million of restructuring and impairment charges.
Outlook, management commentary and risks
Management described stronger semiconductor-equipment orders, particularly from foundry customers, and cited mobility, connectivity and cloud computing as demand drivers. It said display customers remained cautious despite early signs of improving LCD-TV capacity needs; solar equipment investment remained weak amid excess capacity. No consolidated revenue, earnings or margin guidance is provided in the supplied filing text. Management expects cash from operations, existing liquidity and borrowing capacity to meet requirements for the next 12 months.
The 2012 global restructuring plan is expected to affect approximately 900–1,300 positions. Estimated total pretax costs were reduced to $120–$160 million, including $110 million incurred by quarter-end; substantial completion was expected by the end of Q3 FY2013, subject to local requirements. The separate EES restructuring plan was estimated at $70–$100 million over 12–18 months; $64 million had been incurred by quarter-end. Management said the global plan’s expected savings and headcount reductions remained within previously stated ranges.
Key risks include highly cyclical and difficult-to-forecast end markets; concentrated customers and geographic exposure; semiconductor spending variability; solar-sector overcapacity and customer financial stress; competition and rapid technology transitions; supply-chain disruptions; foreign-exchange, interest-rate and investment risks; and the possibility of future goodwill or intangible-asset impairments. Three semiconductor customers represented 56% of consolidated sales, and three customers represented about 75% of SSG sales. Taiwan accounted for 36% of consolidated sales; approximately 75% of sales were to customers outside the United States.
Contingencies include standby guarantees with a maximum potential payment of approximately $45 million and parent guarantees of approximately $102 million for subsidiary banking arrangements. The filing reports ongoing patent litigation with Jusung and appeals in Korean criminal proceedings involving former and current employees; Applied stated it did not believe the described proceedings and claims would materially adversely affect consolidated financial condition or results. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether the sharp increase in orders and backlog converts to shipments and revenue, given the filing’s cancellation and delivery-schedule caveat.
- Assess the quality and sustainability of earnings, including the tax benefits, acquisition-related accounting adjustments, restructuring costs and non-GAAP exclusions.
- Monitor operating cash generation and working-capital movements, especially accounts payable, customer deposits, inventory and deferred revenue.
- Check progress, remaining costs and expected savings from both restructuring plans, and whether EES losses improve as solar-market conditions change.
- Review customer concentration, especially major semiconductor customers and the high concentration of Display-segment sales.
- Monitor solar and display equipment demand, potential further impairments, tax exposures and developments in the disclosed legal matters.