Applied Materials, Inc. — Q3 FY2010 Form 10-Q
Business context and reporting period
Quarter ended August 1, 2010; nine-month results cover 40 weeks, versus 39 weeks in the comparable FY2009 period. Applied supplies equipment and services to semiconductor, display, solar and related industries. Results improved as semiconductor and display demand recovered; thin-film solar remained weak.
Financial performance and liquidity
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Net sales | $2.518B | $1.134B | $6.662B | $3.487B |
| Gross margin | $860M; 34% | $325M; 29% | $2.498B; 37% | $872M; 25% |
| Operating income (loss) | $183M | $(77)M | $685M | $(567)M |
| Net income (loss) | $123M | $(55)M | $470M | $(443)M |
| Diluted EPS | $0.09 | $(0.04) | $0.35 | $(0.33) |
- Orders rose 154% to $2.725B in Q3 and 175% to $7.223B for the nine months. Backlog was $3.1B at quarter-end, up 5% sequentially.
- Nine-month operating cash flow was $1.198B, versus $93M a year earlier. Investing activities used $847M, including $323M net cash paid for Semitool; financing activities used $362M, including dividends and repurchases.
- Cash and cash equivalents were $1.564B; short- and long-term investments totaled $2.063B. Combined cash, equivalents and investments were $3.628B, up $361M from October 25, 2009. Working capital was $3.7B.
- Debt was approximately $206M, with no borrowings under the $1.1B of credit facilities. The company reported compliance with facility covenants.
Material changes versus the prior comparable period
- Q3 sales more than doubled year over year, driven mainly by semiconductor equipment, with stronger display and crystalline-silicon solar sales also contributing. Nine-month sales increased 91%.
- Gross margin improved on higher volume, product mix, factory utilization and cost controls, but included $247M of Q3 SunFab inventory charges. These charges reduced Q3 gross margin by about 10 percentage points; $330M of SunFab inventory charges reduced the nine-month margin by about 5 points.
- Silicon Systems Group Q3 sales were $1.447B and operating income $525M; Applied Global Services sales were $468M and operating income $84M; Display sales were $216M and operating income $64M. Energy and Environmental Solutions reported a $371M operating loss.
Outlook, commentary, risks and unusual items
- Applied announced a restructuring of Energy and Environmental Solutions in response to adverse thin-film solar market conditions. Q3 charges totaled $405M: $247M inventory-related, $110M asset impairments, $45M severance and $3M other costs. The company plans to stop selling fully integrated SunFab lines to new customers, while supporting existing customers and continuing selected thin-film development. It expected the restructuring to affect 400–500 positions globally.
- Management gave no specific near-term revenue or earnings guidance in the provided filing text. It said cash from operations, existing cash and borrowing capacity should meet liquidity requirements for the next 12 months, and anticipated quarterly dividends, subject to board approval and business conditions.
- Solar demand risks include delays in utility-scale adoption, customer financing constraints, uncertainty in government policies and competition from crystalline-silicon technology. Applied warned that further adverse conditions could require updated goodwill forecasts and could result in material impairment charges; Q3 testing found no impairment of Energy and Environmental Solutions goodwill.
- Customer concentration and collection risks remain: Samsung represented 16% and TSMC 12% of nine-month sales; together they represented 22% of receivables at quarter-end. Days sales outstanding rose to 62 from 57 in the prior quarter.
- Legal matters include ongoing Korean criminal proceedings involving certain employees, including a former Applied Korea head, concerning alleged receipt and use of a customer’s confidential information. Applied was investigating and said the business impact could not yet be determined. The filing also describes ongoing patent disputes with Jusung.
Important facts for investors to verify
- Whether semiconductor and display demand, orders and backlog convert into sustained sales and margins.
- Whether SunFab restructuring costs, inventory exposure and any future impairment needs exceed current estimates.
- Customer liquidity, receivable collection and the effect of major-customer concentration.
- Developments in the Korean proceedings and any resulting customer, legal or reputational consequences.
- Cash deployment, including the remaining authorization under the $2B repurchase program and future dividend decisions.