Business context and reporting period
Applied Materials, Inc. (AMAT) filed this Form 10-K for fiscal 2012, ended October 28, 2012. Fiscal 2012 and 2011 each comprised 52 weeks. Applied supplies equipment, services and software to semiconductor, display and solar industries. The filing also reports fourth-quarter results; the requested “2012 Q4” is therefore summarized within the full-year context. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $8.719 billion | $10.517 billion |
| Gross margin | $3.313 billion; 38.0% | $4.360 billion; 41.5% |
| Operating income | $411 million; 4.7% margin | $2.398 billion; 22.8% margin |
| Net income | $109 million; $0.09 diluted EPS | $1.926 billion; $1.45 diluted EPS |
| Operating cash flow | $1.851 billion | $2.429 billion |
| Capital expenditures | $162 million | $209 million |
| Cash, cash equivalents and investments | $2.992 billion | $7.174 billion |
| Working capital | $2.837 billion | $7.561 billion |
| Long-term debt | $1.946 billion | $1.947 billion |
| Orders / ending backlog | $8.037 billion / $1.606 billion | $10.142 billion / $2.392 billion |
Fourth-quarter FY 2012 net sales were $1.646 billion, gross margin $586 million, operating loss $499 million, net loss $515 million and diluted loss per share $0.42. Orders were $1.465 billion, down 19% from the prior quarter; sales were down 30% sequentially. The quarter included a $421 million goodwill impairment charge and restructuring costs.
Cash flow from investing was a use of $4.660 billion, primarily reflecting the $4.190 billion net cash outlay for the Varian acquisition. Financing used $1.754 billion, including $1.416 billion of share repurchases and $434 million of dividends paid. The company had $1.5 billion available under its committed revolving credit agreement and no borrowings under its credit facilities at year-end. Management stated that operating cash flow, cash balances and borrowing capacity should meet liquidity needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue fell 17%; orders declined 21% and backlog declined 33% year over year, reflecting weaker semiconductor demand and sharply lower display and solar equipment activity.
- GAAP operating margin fell 18.1 percentage points and net income fell from $1.926 billion to $109 million. The results included the $421 million EES goodwill impairment, $168 million of restructuring and asset impairment charges, and $253 million of acquisition-related inventory fair-value and intangible amortization charges in gross margin.
- Non-GAAP results, which exclude specified acquisition, impairment, restructuring and other items, were $960 million net income and $0.75 diluted EPS, versus $1.723 billion and $1.30 in FY 2011. These are company-defined non-GAAP measures, not substitutes for GAAP results.
- Varian, acquired in November 2011 for approximately $4.2 billion net of cash acquired, contributed approximately $1.0 billion of FY 2012 revenue and an approximately $148 million operating loss, including acquisition-related charges.
- Segment revenue: Silicon Systems Group $5.536 billion (+2%); Applied Global Services $2.285 billion (-5%); Display $473 million (-32%); Energy and Environmental Solutions $425 million (-79%). EES reported a $668 million operating loss, versus $453 million operating income in FY 2011.
Outlook, commentary, risks and unusual items
- Management described a broad capacity-driven downturn at fiscal year-end. Semiconductor demand softened through the year, while display investment remained very weak and solar equipment demand suffered from excess manufacturing capacity and customer financial stress. The timing of any recovery was linked to macroeconomic conditions; the filing provides no specific earnings or revenue guidance.
- For 2013, stated priorities included expanding wafer-fab equipment share and technical capabilities, investing in 300mm and 450mm research and development, and selective investment in display and solar technologies.
- A global restructuring announced in October 2012 was expected to affect approximately 900–1,300 positions. Estimated total pretax charges were $180–$230 million, substantially in cash, with substantial completion expected by the end of FY 2013 Q3. The EES restructuring was estimated at $70–$100 million over 12–18 months; LED development had ceased.
- Key risks include industry cyclicality, customer and geographic concentration, order cancellations or delays, supply-chain constraints, technology transitions, competition, customer credit exposure, and solar trade actions and policy uncertainty. Two customers accounted for 36% of consolidated FY 2012 sales; Samsung represented 20% and TSMC 16%.
- Applied repurchased $1.416 billion of shares in FY 2012; $1.8 billion remained under the $3.0 billion authorization. The company anticipated continuing quarterly dividends, subject to Board approval and business conditions.
- Legal matters included Korean criminal proceedings involving certain current or former employees, with a decision scheduled for January 24, 2013, and ongoing patent disputes. Applied stated it did not believe the proceedings or other claims would materially affect consolidated financial condition or results, but outcomes were uncertain. Standby guarantees had a maximum potential payment of approximately $42 million; parent guarantees for subsidiary banking arrangements were approximately $102 million.
Important facts for investors to verify
- Whether semiconductor orders and backlog stabilize or continue to contract, and how much backlog converts to sales as scheduled.
- Whether Varian integration delivers sustainable contribution after acquisition-related costs and purchase-accounting charges.
- Assumptions behind the EES goodwill impairment and whether solar-market conditions could trigger further impairments or restructuring costs.
- Cash deployment, including repurchases and dividends, relative to liquidity needs, debt obligations and the cyclical downturn.
- Customer concentration, customer credit quality, and developments in the disclosed legal and tax matters.