Applied Materials, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the third quarter and first nine months of fiscal 2012, ended July 29, 2012; comparisons are with the periods ended July 31, 2011, unless stated otherwise. Applied Materials supplies equipment, services and software to the semiconductor, display and solar industries. Its four reportable segments are Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions (EES). Results include Varian, acquired in November 2011, from the beginning of fiscal 2012.
Financial performance
| Metric | Q3 FY2012 | First nine months FY2012 |
|---|---|---|
| Net sales | $2.343 billion; down 16% year over year | $7.073 billion; down 15% |
| Gross margin | $930 million; 39.7%, versus 42.5% | $2.726 billion; 38.5%, versus 42.1% |
| Operating income / margin | $322 million / 13.7%, versus $687 million / 24.7% | $910 million / 12.9%, versus $2.037 billion / 24.4% |
| Net income | $218 million, versus $476 million | $624 million, versus $1.471 billion |
| Diluted EPS | $0.17, versus $0.36 | $0.48, versus $1.10 |
| New orders | $1.799 billion; down 35% sequentially and 25% year over year | $6.572 billion; down 23% |
Q3 non-GAAP diluted EPS was $0.24, compared with $0.35 a year earlier. Non-GAAP measures exclude specified acquisition-related items, restructuring and impairment charges, certain tax items, and gains or losses on facility sales; they are not substitutes for GAAP results. Q3 sales were down 8% sequentially, and gross margin was nearly flat sequentially.
Cash flow and liquidity. For the first nine months, operating cash flow was $1.440 billion, compared with $1.728 billion in the prior-year period. Investing activities used $4.697 billion, including $4.189 billion paid for Varian, net of cash acquired; financing activities used $1.172 billion, including $900 million of repurchases and $323 million of dividends paid. Cash and cash equivalents were $1.529 billion; total cash, cash equivalents and investments were $3.222 billion, down from $7.174 billion at October 30, 2011. Working capital was $3.5 billion. Long-term debt was $1.946 billion; no amounts were drawn on $1.6 billion of credit facilities. Management said available cash, operating cash generation and borrowing capacity should meet liquidity needs for the next 12 months.
Margins and segment results. Q3 GAAP segment sales and operating income were: Silicon Systems Group, $1.545 billion and $427 million; Applied Global Services, $579 million and $122 million; Display, $142 million and $10 million; and EES, $77 million and a $102 million operating loss. EES’s performance reflected severe solar-market weakness and restructuring costs. Q3 Silicon Systems Group orders fell 41% sequentially, and total backlog decreased to $1.821 billion from $2.372 billion in the prior quarter.
Material changes and unusual items
- Varian contributed approximately $294 million of Q3 sales and $829 million for the first nine months. Acquisition-related charges were $53 million in Q3 and $275 million year to date, including inventory fair-value adjustments, acquired-intangible amortization, integration and other costs. Varian reported an operating loss of approximately $117 million for the nine-month period, including these effects.
- Q3 included $44 million of restructuring and asset impairment charges. The EES restructuring plan is expected to cost approximately $70 million to $100 million pre-tax over 12 to 18 months and affect up to approximately 250 positions globally; Q3 also included $13 million of related inventory charges in cost of sales.
- Cash and investments fell substantially after the Varian acquisition and shareholder distributions. During the first nine months, Applied repurchased 81 million shares for $900 million; the Q3 average repurchase price was $10.71 per share. A new program authorizes up to $3 billion of repurchases through March 2015.
- Goodwill increased by approximately $2.6 billion from the Varian acquisition. Second-quarter impairment tests found no impairment for EES or Display; management cautioned that weaker future business conditions or lower forecasts could lead to a material impairment charge.
Outlook, commentary and risks
Management expected semiconductor equipment investment to decline further in Q4 FY2012 as customers delayed capital spending amid softer demand and macroeconomic uncertainty. It expected weak display and solar equipment investment to continue. The filing provides no numerical Q4 revenue or earnings guidance.
Management described the first half of FY2012 as stronger for semiconductor equipment, led by foundry customers, while display and solar remained weak. In Q3, demand from foundry and logic customers softened. Solar industry capacity exceeded near-term demand, and display demand remained in a down cycle. The company emphasized the cyclical and difficult-to-forecast nature of its markets, customer order delays or cancellations, geographic and customer concentration, and risks to customer credit and collections. It also cited acquisition integration, supply-chain disruption, competition and technology transitions, foreign exchange, interest-rate exposure, and potential goodwill or intangible-asset impairment as risks. Two customers represented 40% of consolidated Q3 sales; Samsung and TSMC accounted for 23% and 17% of nine-month sales, respectively.
Other disclosed matters include ongoing Korean criminal proceedings involving former and current Applied Materials Korea employees; the company said it did not believe the proceedings or other claims would have a material adverse effect on consolidated financial condition or results. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track whether Q4 semiconductor investment and orders fell as management expected, and whether the $1.821 billion backlog converts to sales or is reduced by cancellations or schedule changes.
- Assess the pace and total cost of the EES restructuring against the $70 million to $100 million estimate, including charges not yet estimable.
- Evaluate Varian’s operating contribution separately from purchase-accounting and integration charges, and monitor realization of expected strategic benefits.
- Monitor cash and investment balances, debt, repurchases and dividends against operating cash flow, particularly following the acquisition-related decline in liquidity.
- Reassess EES and Display outlooks and the assumptions supporting goodwill valuations; the filing notes that weaker conditions or reduced forecasts could result in impairment.
- Review customer concentration, customer credit exposure, and the status and potential consequences of the disclosed legal proceedings.