Applied Materials, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 25, 2015 (13 weeks). Applied Materials supplies manufacturing equipment, services and software to the semiconductor, display and solar industries. Comparisons below are with the three months ended January 26, 2014, unless otherwise noted.
Financial and operating performance
- Revenue: Net sales were $2.359 billion, up 8% year over year and 4% sequentially. Silicon Systems Group contributed $1.446 billion; Applied Global Services $583 million; Display $275 million; and Energy and Environmental Solutions $55 million.
- Profit and margins: GAAP gross profit was $959 million, with a 40.7% gross margin (flat year over year; down 1.7 percentage points sequentially). Operating income was $458 million and operating margin 19.4%, versus $330 million and 15.1% a year earlier. Net income was $348 million, up from $253 million; diluted EPS was $0.28 versus $0.21. Non-GAAP adjusted net income was $338 million and adjusted diluted EPS $0.27.
- Cash flow: Operating cash flow was $60 million, down from $372 million a year earlier. The filing cites variable compensation payments, increased inventories, and decreases in customer deposits, deferred revenue and income taxes payable as factors. Capital expenditures were $49 million; dividends paid were $122 million. Cash and cash equivalents declined $73 million during the quarter.
- Liquidity and debt: Cash, cash equivalents and investments totaled $4.017 billion at quarter-end, versus $4.097 billion at October 26, 2014. Working capital was $4.4 billion. Long-term debt was $1.947 billion; no amounts were drawn on the $1.5 billion revolving credit facility or other reported credit facilities. The company reported compliance with debt covenants.
- Orders and backlog: New orders were $2.273 billion, essentially flat year over year. Backlog ended at $2.778 billion, down 5% sequentially; approximately 76% was expected to ship within the next two quarters. Backlog can change due to customer rescheduling or cancellations.
Material changes and business drivers
- Year-over-year sales growth was led by Display, up 73%, and Applied Global Services, up 15%; Silicon Systems Group sales declined 3%. Display sales rose sequentially largely because of the timing of TV-equipment shipments.
- Management reported stronger memory-equipment demand and continued foundry demand tied to advanced mobile chips. Solar equipment investment remained low amid industry overcapacity.
- GAAP operating income includes a $78 million gain on foreign-exchange options associated with the proposed Tokyo Electron Limited (TEL) combination, compared with a $24 million gain a year earlier. The gain is not representative of core operating performance; adjusted operating income was $447 million versus $380 million a year earlier.
- GAAP gross margin was flat year over year, while adjusted gross margin was 42.3%, down 0.2 percentage point. Management attributed margin pressure primarily to unfavorable product mix.
Outlook, risks and unusual items
- The filing provides no specific forward-quarter revenue or earnings guidance. Management describes demand as cyclical and says results can vary materially by quarter; it highlighted mobility-driven semiconductor investment, ongoing display capacity expansion, and continued weak solar-equipment investment.
- The proposed TEL business combination remained subject to customary conditions, including regulatory approvals, despite shareholder approval. Applied expected the combined company to commence a $3.0 billion share-repurchase program within 12 months after closing; completion and timing were not assured.
- Customer and geographic concentration are significant: Samsung accounted for 23% and TSMC 14% of consolidated sales; two customers represented 37% of total sales. Two semiconductor manufacturers accounted for about 50% of Silicon Systems Group sales. Asia-Pacific represented 72% of sales.
- Other disclosed exposures include industry cyclicality, customer order cancellations or delays, supply-chain disruptions, foreign-exchange and interest-rate risk, tax uncertainty, and potential inventory or goodwill impairment. Approximately $2.4 billion of cash and marketable securities held by foreign subsidiaries could be subject to U.S. taxes upon repatriation; about $1.9 billion was intended to remain permanently invested abroad.
- Standby letters of credit and other guarantees had a maximum potential payment of approximately $49 million; the company did not consider payment probable. The Korean Supreme Court appeal in a proceeding involving former employees remained pending; Applied stated it did not expect the described legal matters to materially affect its financial condition or results.
Investor verification points
- Assess how much of the earnings increase reflects operating performance versus the $78 million TEL-related derivative gain, acquisition-related costs and tax items; compare GAAP and adjusted results.
- Track whether operating cash flow recovers from $60 million and monitor working-capital movements, especially inventories and customer deposits/deferred revenue.
- Verify conversion of the $2.778 billion backlog into sales, given its sequential decline, customer cancellation/rescheduling risk and concentration among customers.
- Monitor the TEL transaction’s regulatory status, closing conditions and potential effects on financing and the proposed repurchase program.
- Evaluate customer, regional and segment concentration, particularly semiconductor demand, Display order volatility and persistent solar-industry overcapacity.