Applied Materials, Inc. — Q1 FY2016 Form 10-Q
Business context and reporting period. Applied Materials supplies equipment, services and software to the semiconductor, display and solar industries. The quarter ended January 31, 2016; fiscal Q1 2016 included 14 weeks, compared with 13 weeks in the year-earlier quarter ended January 25, 2015. Results are unaudited.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $2.257 billion | $2.359 billion | Down 4% |
| Gross profit / margin | $916 million / 40.6% | $959 million / 40.7% | Margin down 0.1 points |
| Operating income / margin | $354 million / 15.7% | $458 million / 19.4% | Down $104 million; margin down 3.7 points |
| Net income | $286 million | $348 million | Down 18% |
| Diluted EPS | $0.25 | $0.28 | Down $0.03 |
| Cash from operations | $207 million | $60 million | Up $147 million |
Operating cash flow benefited mainly from receivable collections and higher customer deposits, partly offset by lower accounts payable and accrued expenses. Capital expenditures were $68 million. Investing activities used $109 million; financing activities used $1.933 billion, including $1.205 billion of debt repayments, $625 million of repurchases and $115 million of dividends.
At January 31, cash and cash equivalents were $2.962 billion and short- and long-term investments totaled $1.150 billion, for $4.112 billion in cash, cash equivalents and investments. Working capital was $4.6 billion. Total debt was $3.343 billion, all long-term, versus $4.542 billion at October 25, 2015; the company repaid an $800 million subsidiary loan and redeemed $400 million of notes. No credit-facility borrowings were outstanding. Current liabilities were $2.307 billion and total liabilities were $6.158 billion.
New orders were $2.275 billion, essentially flat year over year and down 6% sequentially. Backlog ended at $3.109 billion, down 1% sequentially; approximately 73% was expected to ship within the next two quarters. Backlog may be changed, rescheduled or cancelled.
Segments and material changes
- Silicon Systems: Sales of $1.373 billion, down 5% year over year; operating income was $265 million, down $42 million. Lower memory-related demand and higher R&D costs pressured results. Orders fell 11% year over year.
- Applied Global Services: Sales of $626 million, up 7%; operating income was $156 million, up $3 million. Services demand supported growth, while lower utilization and higher inventory-related charges weighed on margins.
- Display: Sales of $213 million, down 23%; operating income was $38 million, down $34 million. Sequential results improved with higher TV equipment sales and favorable mix, but remained below the prior-year quarter.
- Energy and Environmental Solutions: Sales were $45 million, down 18%; operating income was $6 million versus a $4 million loss. Solar equipment investment remained depressed amid excess industry capacity.
GAAP operating income and margin declined more sharply than adjusted measures: non-GAAP adjusted operating income was $401 million and adjusted margin was 17.8%, versus $447 million and 18.9% a year earlier. The company’s adjustments chiefly include acquisition-related intangible amortization; non-GAAP measures are not substitutes for GAAP results.
Outlook, commentary and risks
Management said mobility continued to drive semiconductor spending. For the remainder of FY2016, it anticipated 3D NAND and advanced-node foundry spending to drive the semiconductor business. This is qualitative commentary; the filing provides no clear quantified companywide revenue or EPS guidance. Solar equipment investment was expected to remain challenged by industry overcapacity, and display demand was described as cyclical.
Key risks include volatile semiconductor, display and solar investment cycles; concentrated customers and geographic exposure; customer cancellations or shipment delays; competition and rapid technology change; supply-chain and manufacturing interruptions; foreign exchange, interest-rate and investment-portfolio exposure; and potential impairment of goodwill or acquired intangibles. About 87% of sales were to customers outside the United States. Three customers represented 34% of consolidated sales; TSMC, Micron and Samsung accounted for 13%, 11% and 10%, respectively.
Management stated that existing cash, operating cash generation and borrowing capacity should satisfy liquidity needs for the next 12 months. Approximately $2.1 billion of cash and marketable securities held by non-U.S. subsidiaries could be subject to U.S. tax if repatriated; $1.7 billion was intended to remain indefinitely reinvested abroad. The company had $1.5 billion available under its committed revolving credit facility and was in compliance with debt covenants.
Unusual items and contingencies
- The Q1 FY2016 effective tax rate was 8.9%, versus 20.4% a year earlier, reflecting geographic income mix and prior-year tax-liability changes. The filing notes that the retroactive R&D tax-credit benefit in Q1 is not expected to recur in subsequent quarters.
- Q1 FY2016 included a $5 million loss on early debt redemption. Q1 FY2015 included a $78 million gain on foreign-exchange derivatives related to the terminated Tokyo Electron transaction, along with $20 million of related transaction costs.
- Applied repurchased 35.4 million shares for $625 million at an average $17.64 per share; $1.05 billion remained under the $3.0 billion authorization. The company declared a $0.10 quarterly dividend and said it anticipated continuing quarterly dividends, subject to board approval and circumstances.
- Legal matters included an appeal to Korea’s Supreme Court in proceedings involving former employees; Applied and its subsidiaries were not parties. Management did not believe the disclosed legal matters would materially affect financial condition or results. Standby guarantees had a maximum potential payment of approximately $56 million; the company did not consider payment probable.
Important facts for investors to verify
- Whether semiconductor orders and backlog convert to shipments, particularly given Silicon Systems’ sequential order decline and customer concentration.
- Whether the anticipated 3D NAND and advanced-node foundry spending materializes, and how it affects sales and margins.
- How much of the low Q1 tax rate is nonrecurring, and the resulting tax-rate implications for later quarters.
- Cash deployment, repurchase pace, dividend capacity and debt obligations, including the company’s overseas cash and repatriation position.
- Solar overcapacity, display cyclicality, inventory levels and any resulting restructuring, warranty or impairment charges.