Applied Materials, Inc. — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended May 1, 2011. The comparable six-month period in FY2010 included 27 weeks, versus 26 weeks in FY2011. Financial amounts below are in millions of dollars, except per-share data and percentages.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $2,862 | $2,296 | $5,549 | $4,144 |
| Gross margin | $1,189; 41% | $927; 40% | $2,325; 42% | $1,638; 40% |
| Operating income | $677; 24% margin | $386; 17% margin | $1,351; 24% margin | $502; 12% margin |
| Net income | $489 | $264 | $995 | $347 |
| Diluted EPS | $0.37 | $0.20 | $0.75 | $0.26 |
| Operating cash flow | Not presented quarterly | $1,129 | $899 |
- New orders were $3.185 billion in Q2, up 26% year over year, and $6.157 billion for the first half, up 37%. Backlog reached $3.9 billion at May 1, versus $3.2 billion at October 31, 2010.
- Cash, cash equivalents and investments totaled $4.577 billion at May 1, up from $3.892 billion at October 31, 2010. Working capital was $4.7 billion.
- Total debt was approximately $205 million, including $204 million long-term debt and $1 million current debt. No borrowings were outstanding under the company’s credit facilities at May 1.
- Six-month cash flows: $1.129 billion provided by operations; $34 million used in investing; and $396 million used in financing. Financing included $268 million of share repurchases and $186 million of dividends. Capital expenditures were $81 million.
- Current assets were $7.944 billion and current liabilities $3.251 billion. Customer deposits and deferred revenue increased to $1.279 billion from $847 million.
Material changes and segment trends
- Sales rose 25% in Q2 and 34% for the first half. Management attributed growth principally to semiconductor equipment and services and crystalline-silicon solar products, amid stronger industry conditions.
- Energy and Environmental Solutions sales rose to $637 million in Q2 from $166 million; segment operating income was $170 million versus a $145 million loss. Growth reflected c-Si demand, particularly in China, where government subsidies supported customer orders. Prior-year results included an $83 million thin-film equipment inventory charge.
- Display sales fell 41% in Q2 to $158 million and segment operating income declined to $31 million from $90 million, reflecting weaker demand for core LCD products, partly offset by touch-panel and LTPS systems.
- Silicon Systems Group Q2 sales increased 3% to $1.453 billion, while operating income was $491 million versus $498 million. Foundry and logic demand strengthened, while memory investment declined.
- Applied Global Services Q2 sales increased 35% to $614 million. Operating income was $91 million; margin declined to 15% from 20%, including the effect of $24 million of impairment charges.
Outlook, commentary, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management stated that operating cash flow, existing cash and borrowing capacity should meet liquidity needs for the next 12 months.
- On May 4, 2011, after quarter-end, Applied agreed to acquire Varian Semiconductor Equipment Associates for $63 per share in cash, approximately $4.9 billion fully diluted, subject to shareholder and regulatory approvals. Applied planned to fund it with cash and debt, established a $2 billion bridge facility, and put in place a new undrawn $1.5 billion revolving facility. The agreement includes potential termination fees of $147 million payable by Varian in specified circumstances and $200 million payable by Applied if certain antitrust approvals fail.
- Management expected temporarily to reduce share repurchases because of the planned Varian acquisition. The quarterly dividend was increased from $0.07 to $0.08 per share.
- Q2 operating results included a $28 million favorable restructuring adjustment, partly offset by $24 million of asset impairment charges. Six-month results included $60 million of favorable restructuring adjustments, partly offset by $27 million of impairments. These items affect comparability.
- Key exposures include cyclical semiconductor, display and solar markets; customer and geographic concentration; dependence of solar demand on subsidies and end-market economics; customer liquidity and order cancellations; supply-chain and inventory risks; and acquisition financing, integration and regulatory approval. TSMC and Samsung each represented 13% of first-half sales; Japan’s earthquake and tsunami had not caused a material impact through the reporting date, but future effects were uncertain.
- Other disclosed matters include ongoing patent disputes with Jusung and Korean criminal proceedings involving former and current employees of other companies, including a former Applied Korea executive. Applied reported that it did not believe the described proceedings would materially adversely affect its consolidated financial condition or results.
Most important facts for investors to verify
- Whether the Varian acquisition received approvals, closed as planned, and required debt or cash funding beyond announced facilities.
- Whether the strong order growth and $3.9 billion backlog converted into recognized sales; the filing cautions that orders may be rescheduled or canceled.
- Whether c-Si demand in China remained supported by subsidies and whether solar-industry capacity or product oversupply weakened demand.
- Whether Display weakness, semiconductor memory spending, customer concentration, or supply-chain constraints affected subsequent results.
- Whether the reported margin improvement is sustainable apart from restructuring adjustments, impairment charges, product mix, utilization and other unusual items.