Business Context and Reporting Period
Applied Materials, Inc. filed this Form 10-K for the fiscal year ended October 27, 2013 (52 weeks). The company supplies equipment, services and software to semiconductor, display, solar photovoltaic and related industries. Its four reportable segments are Silicon Systems Group (SSG), Applied Global Services (AGS), Display, and Energy and Environmental Solutions (EES). Results are highly cyclical and depend on customers’ capital spending and technology investment.
Financial Performance and Position
Amounts are in U.S. dollars; financial figures are in millions except per-share data.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $7,509 | $8,719 | -14% |
| Gross margin | $2,991 (39.8%) | $3,313 (38.0%) | Margin +1.8 points |
| Operating income | $432 (5.8%) | $411 (4.7%) | +$21 |
| Net income | $256 | $109 | +$147 |
| Diluted EPS | $0.21 | $0.09 | +$0.12 |
| Operating cash flow | $623 | $1,851 | -$1,228 |
| Cash, cash equivalents and investments | $2,896 | $2,992 | -$96 |
| Long-term debt | $1,946 | $1,946 | Unchanged |
| Backlog at year-end | $2,372 | $1,606 | +48% |
FY2013 operating cash flow fell mainly as accounts receivable and inventory increased. Working capital was $3.2 billion. The company reported $3.0 billion in total liabilities and $7.1 billion in stockholders’ equity. Its $1.5 billion committed revolving credit facility was undrawn; the company reported compliance with debt covenants.
Segment Results
| Segment | FY2013 sales | FY2013 operating income (loss) | Sales change vs. FY2012 |
|---|---|---|---|
| SSG | $4,775 | $876 | -14% |
| AGS | $2,023 | $436 | -11% |
| Display | $538 | $74 | +14% |
| EES | $173 | -$433 | -59% |
Fourth-quarter FY2013 sales were $1,988 million and net income was $183 million, compared with sales of $1,646 million and a net loss of $515 million in fourth-quarter FY2012. Diluted EPS was $0.15 versus a loss of $0.42.
Material Changes, Outlook and Risks
- Sales declined 14% year over year as semiconductor equipment spending, service demand and solar sales weakened. Display sales recovered with stronger TV equipment investment. New orders rose 5% to $8.466 billion, and year-end backlog increased to $2.372 billion; approximately 80% was expected to ship in the first two quarters of FY2014. Backlog can be delayed or cancelled.
- Gross margin improved despite lower sales, primarily reflecting lower inventory charges, favorable product mix and material cost reductions. GAAP results included $278 million of goodwill and intangible-asset impairment, all associated with EES. EES also recorded an operating loss of $433 million; excluding specified items, its non-GAAP operating loss was $115 million. FY2012 included a separate $421 million goodwill impairment.
- Management’s FY2014 priorities were to grow in wafer-fab equipment and Display, reduce solar losses, expand available markets, and fund semiconductor and other R&D through overhead and solar cost reductions. Management expected mobility to remain the principal semiconductor growth driver, Display investment to continue, and solar equipment demand to remain soft. These are expectations, not guarantees.
- Applied and Tokyo Electron Limited (TEL) agreed in September 2013 to a proposed merger of equals. Closing required shareholder and regulatory approvals; the filing described a planned $3.0 billion post-closing repurchase program and a possible $400 million termination fee in specified circumstances. The transaction was not completed as of the filing.
- Other principal risks include semiconductor and display investment cycles, solar manufacturing overcapacity, customer and geographic concentration, dependence on key suppliers, technology transitions and intense competition. Two customers represented 40% of consolidated sales; TSMC represented 27% and Samsung 13%. The filing also identifies trade, foreign-exchange, tax, litigation, cybersecurity, acquisition-integration and impairment risks.
- The company declared $469 million in dividends during FY2013 and paid $456 million. It repurchased $245 million of shares; $1.6 billion remained under its repurchase authorization. Management stated that cash, operating cash generation and borrowing capacity should meet liquidity needs for the next 12 months. Dividend and repurchase decisions remain subject to board discretion and business conditions.
- The 2012 global restructuring plan was expected to affect 900–1,300 positions and was expected to be substantially complete by the end of FY2014’s first quarter. Aggregate charges could reach $160 million; $145 million had been incurred through year-end FY2013. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Important Facts for Investors to Verify
- Whether the expected FY2014 shipment of backlog materialized, particularly given customer cancellations and delivery changes.
- Whether semiconductor and Display demand improved as management expected, and whether solar equipment demand and EES losses stabilized.
- How working-capital growth, particularly receivables and inventory, affected cash conversion after FY2013.
- Whether the TEL transaction received approvals and closed, and the resulting impact on ownership, capital allocation, integration and potential termination obligations.
- Whether impairment, restructuring, tax and customer-credit exposures led to further charges or cash demands.
- Reconcile GAAP and non-GAAP performance: FY2013 non-GAAP adjusted net income was $718 million and adjusted diluted EPS was $0.59, versus GAAP net income of $256 million and diluted EPS of $0.21.