Applied Materials, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 29, 2012 (13 weeks). Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
Applied Materials supplies equipment, services and software to the semiconductor, display, solar and related industries. Its four reporting segments are Silicon Systems Group (SSG), Applied Global Services (AGS), Display, and Energy and Environmental Solutions (EES). The quarter included Varian Semiconductor Equipment Associates, acquired November 10, 2011.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $2,189 | $2,686 |
| Gross margin | $786; 36% | $1,136; 42% |
| Operating income | $179; 8% margin | $674; 25% margin |
| Net income | $117 | $506 |
| Diluted EPS | $0.09 | $0.38 |
| Operating cash flow | $181 | $425 |
Revenue fell 19% year over year, while net income declined 77%. Management attributed the sales decline primarily to weaker crystalline-silicon solar and LCD TV equipment demand. Gross margin was pressured by product mix, Varian inventory fair-value step-up amortization and other inventory charges. The effective tax rate was 26.4%, versus 25.6% a year earlier.
Segments, orders and backlog
- SSG: Sales of $1,344 and operating income of $271; sales were down 10% year over year. Foundry investment supported quarter-on-quarter improvement; DRAM investment remained low.
- AGS: Sales of $534 and operating income of $107; sales were down 6% year over year. Lower wafer starts and refurbished-equipment demand weighed on results.
- Display: Sales of $104 and operating income of $5; sales were down 29% year over year amid weak LCD TV equipment demand.
- EES: Sales of $207 and operating loss of $23, versus operating income of $144 a year earlier. Solar overcapacity and a $31 inventory charge contributed to the decline.
New orders were $2.008 billion, up 26% from the prior quarter but down 32% year over year. The sequential increase reflected stronger semiconductor equipment demand, partly offset by softness in spares and weak display and solar markets. Backlog was $2.162 billion, down 10% sequentially and 39% year over year; management cautioned that orders may be rescheduled or cancelled and backlog is not necessarily indicative of future sales.
Cash, debt and liquidity
- Cash, cash equivalents and investments totaled $2.952 billion at quarter-end, down from $7.174 billion at October 30, 2011, primarily reflecting the Varian acquisition.
- Operating cash flow was $181 million. Investing activities used $4.157 billion, including $4.179 billion net cash paid for Varian; capital expenditures were $37 million. Financing activities used $302 million, including $200 million of share repurchases and $104 million of dividends.
- Working capital was $3.7 billion. Long-term debt was $1.947 billion carrying value (estimated fair value $2.2 billion); no credit-facility borrowings were outstanding. The company had up to $1.6 billion of unsecured facilities and reported compliance with debt covenants.
- Quarter-end current assets were $6.157 billion and current liabilities $2.494 billion. Management said cash, operating cash generation and borrowing capacity should meet liquidity needs for the next 12 months.
Acquisition, outlook, risks and contingencies
Applied paid approximately $4.2 billion for Varian, net of cash acquired. Varian contributed approximately $200 million of sales and an operating loss of approximately $130 million in the quarter. The reported results included $153 million of acquisition-related charges, including inventory fair-value adjustments, acquired-intangible amortization, accelerated-vesting share compensation, deal costs and integration costs. These charges materially reduced GAAP margins; company non-GAAP measures exclude specified items and are not a substitute for GAAP results.
No specific numerical forward guidance is provided in the supplied filing text. Management described increased semiconductor equipment demand, particularly from foundry customers, but continued softness in spares and weak display and solar conditions. The filing emphasizes cyclical and difficult-to-forecast end markets, customer concentration, customer financial health, supply-chain and execution risks, and the possibility of acquired goodwill or intangible-asset impairment.
Notable exposures include ongoing litigation and patent proceedings, Korean criminal proceedings involving former Applied Materials Korea employees (the company is not named as a party), tax examinations, and environmental obligations. Management did not believe the legal matters or environmental liabilities were expected to have a material adverse effect. Potential payments under guarantee agreements were approximately $51 million; parent guarantees for subsidiary banking services were approximately $186 million.
Most important facts for investors to verify
- Whether the sequential increase in orders, especially foundry-related semiconductor demand, continued after quarter-end and converted to sales.
- Whether solar and display demand stabilized, given EES’s operating loss, low book-to-bill ratio and declining backlog.
- How much of the Varian-related charges are genuinely non-recurring, and whether integration delivers the expected benefits without further margin pressure.
- Cash generation and liquidity after the acquisition, alongside debt service, repurchases and dividends.
- Customer concentration and exposure to customer credit risk, particularly as two customers represented 39% of consolidated sales and Samsung represented 27%.
- Potential changes to preliminary Varian purchase accounting, including the valuation and recoverability of substantial acquired goodwill and intangible assets.