Applied Materials, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended October 30, 2011 (52 weeks). The filing also reports fourth-quarter results. Applied Materials supplies equipment, services and software to semiconductor, display, solar and related industries through four segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions.
Financial results and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $10.517 billion | $9.549 billion |
| Gross margin | $4.360 billion; 41% | $3.715 billion; 39% |
| Operating income | $2.398 billion; 23% margin | $1.384 billion; 14% margin |
| Net income | $1.926 billion | $938 million |
| Diluted EPS | $1.45 | $0.70 |
| Operating cash flow | $2.426 billion | $1.723 billion |
| Capital expenditures | $209 million | $169 million |
| Cash, cash equivalents and investments | $7.174 billion | $3.892 billion |
| Long-term debt | $1.947 billion | $204 million |
| Working capital | $7.561 billion | $3.877 billion |
New orders were $10.142 billion, down 1%; year-end backlog fell 26% to $2.392 billion from $3.244 billion. The reported effective tax rate was 19%, compared with 32% in FY2010. Management attributed the lower rate partly to foreign income mix, tax incentives, reinstatement of the U.S. R&D tax credit and a favorable IRS audit settlement.
Changes and segment trends
- Sales rose 10%, while operating income rose 73% and net income more than doubled. Higher crystalline-silicon solar equipment sales and stronger spares and refurbished-equipment revenue supported growth.
- Silicon Systems Group sales increased 2% to $5.415 billion; operating income declined 7% to $1.764 billion. Reduced memory demand, higher headcount costs and Samsung volume-based rebates weighed on results.
- Applied Global Services sales rose 29% to $2.413 billion, and operating income rose 43% to $482 million, driven chiefly by spares and refurbished equipment.
- Display sales declined 22% to $699 million and operating income fell 45% to $147 million amid weaker LCD-TV investment and unfavorable product mix.
- Energy and Environmental Solutions sales rose 34% to $1.990 billion and the segment returned to operating profit of $453 million, versus a $466 million loss in FY2010. Higher c-Si sales and the absence of prior-year SunFab restructuring charges were important factors. Sales of new fully integrated SunFab lines had been discontinued.
- Fourth-quarter net sales were $2.182 billion, compared with $2.886 billion in FY2010 Q4; quarterly orders fell to $1.596 billion, down 33% from the prior quarter. The company reported that all three equipment markets were in a capacity-driven downturn at year-end.
Outlook, unusual items and risks
- The filing gives no specific quantified FY2012 revenue or earnings guidance. Management said recovery timing in capital-equipment investment depended largely on the macroeconomic environment and described softening demand, semiconductor spending restraint, LCD overcapacity and solar overcapacity/customer financing constraints.
- In November 2011, after fiscal year-end, Applied completed its Varian acquisition for approximately $4.2 billion net of cash acquired. It was funded with existing cash and $1.75 billion of senior unsecured notes issued in June 2011. Post-acquisition cash, cash equivalents and investments were approximately $3.0 billion. The acquired ion-implantation business was expected to enter the Silicon Systems Group and Applied Global Services in FY2012.
- FY2011 operating results included $60 million of favorable restructuring-reserve adjustments, $30 million of asset-impairment charges and a $27 million net gain on facility sales. The FY2010 comparison included $486 million of charges associated with the Energy and Environmental Solutions restructuring, including substantial SunFab inventory charges.
- FY2011 operating cash flow included strong earnings and working-capital movements; the company also received a $276 million U.S. federal tax refund, including interest. Share repurchases were $468 million and cash dividends paid were $397 million.
- Key risks include highly cyclical and unpredictable customer capital spending, customer and geographic concentration, order delays or cancellations, supplier constraints, rapid technology change and competition, solar oversupply and policy dependence, global economic and currency risks, and execution/integration risks from the Varian acquisition. Three customers represented 32% of consolidated sales; approximately 81% of sales were outside the United States.
- Legal matters included ongoing Korean criminal proceedings involving certain current or former Applied employees over alleged misuse of Samsung confidential information; Applied and Samsung had settled potential civil claims separately. The company said it did not expect the described proceedings or other claims to materially adversely affect consolidated results, but outcomes remain uncertain.
Important facts for investors to verify
- Whether orders and backlog stabilize or recover after the sharp FY2011 second-half slowdown, particularly the fourth-quarter decline.
- Whether the Varian acquisition delivers expected strategic and financial benefits, and how its debt, cash usage, integration costs, goodwill and acquired intangibles affect FY2012 results.
- Whether solar equipment demand and customer financing improve, given the segment’s heavy China exposure and industry oversupply concerns.
- How sustainable FY2011 earnings and the 19% tax rate are, considering the $176 million tax benefit from the IRS settlement and other favorable tax factors.
- Whether liquidity remains adequate after the acquisition and ongoing dividends, repurchases, debt service and contractual obligations.