Business context and reporting period
Applied Materials, Inc. (Applied) filed this Form 10-K for the fiscal year ended October 31, 2010. Fiscal 2010 included 53 weeks; fiscal 2009 included 52 weeks. Applied supplies equipment, services and software to semiconductor, display and solar industries through four segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. Results reflected a broad recovery in semiconductor and display markets, while thin-film solar remained weak.
Financial results and key metrics
Unless otherwise indicated, amounts are in U.S. dollars.
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $9.549 billion | $5.014 billion |
| Gross margin | $3.715 billion; 39% | $1.431 billion; 29% |
| Operating income (loss) | $1.384 billion; 14% margin | $(394) million; (8)% margin |
| Net income (loss) | $938 million | $(305) million |
| Diluted EPS | $0.70 | $(0.23) |
| Operating cash flow | $1.723 billion | $333 million |
| Capital expenditures | $169 million | $248 million |
| Cash, cash equivalents and investments | $3.892 billion | $3.267 billion |
| Working capital | $3.877 billion | $3.749 billion |
| Long-term debt | $204 million | $201 million |
New orders more than doubled to $10.249 billion; backlog rose to $3.244 billion from $2.735 billion. The company generated $1.723 billion in operating cash, used $862 million in investing activities and $576 million in financing activities. It repurchased $350 million of shares and paid $349 million in dividends during the year. No amounts were outstanding under its $1.1 billion of credit facilities at year-end.
Segment performance
- Silicon Systems Group: Sales of $5.304 billion, up 171%; segment operating income of $1.892 billion. Four customers accounted for 51% of segment sales.
- Applied Global Services: Sales of $1.865 billion, up 34%; segment operating income of $337 million.
- Display: Sales of $899 million, up 79%; segment operating income of $267 million. Five customers represented 71% of segment sales.
- Energy and Environmental Solutions: Sales of $1.481 billion, up 28%; segment operating loss of $466 million. Increased crystalline-silicon solar sales were offset by thin-film solar weakness and restructuring-related charges.
For the fourth quarter, sales were $2.886 billion, net income was $468 million and diluted EPS was $0.35, compared with $1.526 billion, net income of $138 million and diluted EPS of $0.10 in the prior-year quarter.
Changes, outlook, risks and unusual items
- Revenue increased 90% year over year, driven principally by semiconductor equipment, with improved product mix, factory utilization and cost control lifting gross margin by 10 percentage points. SunFab inventory-related charges reduced FY2010 gross margin by about 3 percentage points.
- Applied recorded $245.9 million of restructuring and asset-impairment charges in operating expenses. Separately, its Energy and Environmental Solutions segment reported $486 million of restructuring, impairment and inventory-related charges; disclosures describe components and scopes differently, so investors should reconcile the amounts in the notes.
- In response to thin-film solar market conditions, Applied stopped selling fully integrated SunFab production lines to new customers, while continuing support for existing customers and sales of individual tools. A workforce reduction program was also underway.
- Applied acquired Semitool for $323 million net of cash acquired, adding electrochemical plating and wafer surface-preparation capabilities. It also acquired certain Advent Solar assets.
- Management said cash from operations, existing cash and borrowing capacity should be sufficient for liquidity needs over the next 12 months. The filing gives no specific revenue or earnings forecast. Applied anticipated continuing quarterly dividends, subject to Board discretion.
- Key risks include cyclical customer capital spending, customer and geographic concentration, order delays or cancellations, supply-chain constraints, rapid technology change and competition, solar policy/financing uncertainty, and exposure to global economic and financial-market conditions. Samsung represented 14% of FY2010 sales; Taiwan Semiconductor Manufacturing Company represented 11%.
- After year-end, Applied entered a three-year settlement agreement with Samsung resolving potential civil claims relating to alleged misuse of confidential information. The agreement provides volume-based rebates, incentives and credits; the financial impact depends on Samsung purchases. Criminal proceedings against individuals remain separate and ongoing; Applied and its subsidiaries are not defendants.
- Other notable items: Applied received an approximately $130 million federal tax refund; recorded $13 million of impairment charges on private-company investments; and disclosed $54 million of maximum potential payments under guarantee agreements, which it did not consider probable.
Most important facts for investors to verify
- Reconcile the Energy and Environmental Solutions charge disclosures, including the $486 million total and the components described in different sections of the filing.
- Assess whether the semiconductor recovery and increased orders converted into sustainable sales and margins; backlog may be delayed or canceled and is not necessarily predictive of future sales.
- Review the exposure to concentrated customers and Asia: 78% of sales were attributed to Asia Pacific, and Samsung and TSMC together accounted for 25% of sales.
- Evaluate the continuing losses and strategic position of thin-film solar, alongside the growth and profitability of crystalline-silicon solar products.
- Monitor the effect of Samsung’s rebates and incentives, the unresolved criminal proceedings, and the company’s tax examinations and $328 million gross unrecognized tax benefits.