Applied Materials, Inc. — Fiscal 2015 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended July 26, 2015; comparisons are to the periods ended July 27, 2014 unless noted. Amounts are in millions of dollars except per-share data and percentages. The quarter’s results are not necessarily indicative of future results.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $2,490 | $2,265 | $7,291 | $6,808 |
| Gross profit / margin | $1,018 / 40.9% | $992 / 43.8% | $2,993 / 41.1% | $2,884 / 42.4% |
| Operating income / margin | $396 / 15.9% | $391 / 17.3% | $1,270 / 17.4% | $1,108 / 16.3% |
| Net income | $329 | $301 | $1,041 | $816 |
| Diluted earnings per share | $0.27 | $0.24 | $0.84 | $0.66 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $692 | $1,393 |
Quarterly sales rose 10% year over year and nine-month sales rose 7%. Quarterly net income increased 9%; nine-month net income increased 28%. The quarterly gross and operating margins contracted year over year. Management’s non-GAAP adjusted Q3 gross margin was 43.9%, operating margin 20.8%, net income $410 and diluted EPS $0.33; these measures exclude specified items and are not GAAP results.
Liquidity, debt and capital allocation
- At July 26, 2015, cash and cash equivalents were $2,574; short- and long-term investments were $1,127; combined cash, cash equivalents and investments were $3,701.
- Current assets were $7,043 and current liabilities $3,020, implying working capital of approximately $4.0 billion. Cash and cash equivalents declined $428 from the fiscal year-end balance.
- Total debt was $1,947, including $400 of short-term notes due 2016 and $1,547 of long-term debt. No amounts were outstanding under the $1.6 billion credit facilities; the company reported compliance with applicable covenants.
- Nine-month operating cash flow of $692 was down from $1,393, reflecting working-capital uses, including higher receivables and inventory and lower payables and customer deposits. Investing activities used $224, including $164 of capital expenditures; financing activities used $896.
- The company repurchased $625 of stock (32 million shares) and paid $368 of dividends in the first nine months. The quarterly dividend was $0.10 per share. A new $3.0 billion, three-year repurchase authorization was approved in April 2015; approximately $2.4 billion remained available at quarter-end.
Segments and material changes
- Silicon Systems Group: Q3 sales were $1,635, up 11% year over year; operating income was $411. New orders were $2,007, up 28% year over year. Memory demand and advanced-node investment supported orders, while foundry spending faced inventory, yield and equipment-reuse pressures.
- Applied Global Services: Q3 sales were $665, up 17%; operating income was $170. Nine-month sales increased 18%, supported by demand for spares, services and 200mm systems.
- Display: Q3 sales were $151, up 27%; operating income was $25. Orders rose sharply sequentially to $295, mainly from TV equipment, but shipment timing and product mix reduced quarterly sales and margins sequentially. Two customers represented about 85% of segment orders.
- Energy and Environmental Solutions: Q3 sales were $39, down 62%; operating loss was $52. Solar industry overcapacity continued to weigh on results. The quarter included $17 of restructuring and asset-impairment charges and $34 of inventory-related charges across the company, primarily related to solar cost reductions.
- Q3 total new orders were $2,892, up 17% year over year. Backlog was $3,100 at quarter-end; about 72% was expected to ship within the next two quarters. Backlog is subject to customer rescheduling and cancellations.
Outlook, unusual items and risks
- No quantified company-wide financial guidance is provided in the supplied filing text. Management anticipated lower foundry spending for the remainder of the year and gross-margin challenges in coming quarters, citing mobility-display and memory-related equipment demand and product mix.
- On April 26, 2015, Applied Materials and Tokyo Electron mutually terminated their proposed business combination; neither party owes a termination fee. Related derivatives produced a $89 gain for the first nine months, including a $3 loss in Q3; acquisition and integration costs also affected reported results.
- A second-quarter tax adjustment to correct an intercompany cost-of-sales recognition error reduced the nine-month tax provision by $35 and increased net income and diluted EPS by $0.03. The company said the error’s effects in originating periods were immaterial and no restatement was considered necessary. The adjustment did not affect consolidated cost of sales.
- Solar restructuring actions were expected to cost $45–$55 in total, with principal activities expected to be completed by fiscal Q1 2016. Management cited cyclical semiconductor, display and solar markets, customer concentration, inventory and customer liquidity, foreign-exchange and interest-rate exposure, and global supply-chain and geopolitical risks.
- Samsung represented 17% and Taiwan Semiconductor Manufacturing Company 15% of nine-month consolidated sales. Management stated that it believed disclosed legal matters would not materially affect consolidated financial condition or results. Disclosure controls were concluded to be effective.
Key investor verification points
- Assess whether the decline in operating cash flow and higher receivables and inventory reverse, and monitor collections and customer deposits.
- Track semiconductor order trends, foundry spending, backlog conversion and the effect of customer cancellations or shipment changes.
- Evaluate the duration and cost of solar restructuring, inventory charges and continued industry overcapacity.
- Separate recurring earnings from the tax correction, terminated-merger costs and derivative gains, and review the company’s non-GAAP reconciliations.
- Monitor margin trends, customer and regional concentration, the $400 debt maturity due in 2016, and cash deployment through repurchases and dividends.