Business context and reporting period
Applied Materials, Inc. (Applied) filed this unaudited Form 10-Q for its third quarter and first nine months of fiscal 2009, ended July 26, 2009. The company supplies equipment, services and software to the semiconductor, display, solar and related industries. Results are compared with the periods ended July 27, 2008.
Financial performance and position
| Metric | Q3 FY2009 | Q3 FY2008 | Nine months FY2009 | Nine months FY2008 |
|---|---|---|---|---|
| Net sales | $1,134 million | $1,848 million | $3,487 million | $6,086 million |
| Gross margin | $325 million; 28.7% | $742 million; 40.2% | $872 million; 25.0% | $2,644 million; 43.4% |
| Operating income (loss) | ($77) million | $228 million | ($567) million | $1,039 million |
| Net income (loss) | ($55) million | $165 million | ($443) million | $730 million |
| Diluted EPS | ($0.04) | $0.12 | ($0.33) | $0.53 |
| Operating cash flow | Not stated for the quarter | $93 million | $1,584 million |
Q3 net sales fell 39% year over year; nine-month sales fell 43%. Lower sales, unfavorable product mix and reduced factory absorption drove margin compression. Nine-month gross margin also included $67 million of inventory-related charges. Q3 operating expenses for R&D, general and administrative, and marketing and selling totaled $402 million, down from $514 million a year earlier, mainly reflecting cost controls.
At July 26, 2009, cash and cash equivalents were $1.56 billion, short-term investments $583 million and long-term investments $990 million, totaling $3.13 billion in cash, cash equivalents and investments, down from $3.47 billion at October 26, 2008. Total current assets were $5.76 billion and current liabilities $2.04 billion. Debt was approximately $202 million, including $1 million current; no borrowings were outstanding under the company’s credit facilities. Nine-month investing activities provided $284 million, including $472 million net proceeds from investment sales and maturities; capital expenditures were $188 million. Financing activities used $233 million, including $240 million in dividends. The company reported $93 million of operating cash flow, supported by receivables collection and inventory reduction, partly offset by its net loss.
New orders were $1.07 billion in Q3, down 47%, and $2.62 billion for nine months, down 62%. Backlog was $3.0 billion at quarter-end, down from $3.2 billion at the prior quarter-end; Q3 cancellations were $146 million.
Material changes and segment results
- Silicon: Q3 sales were $498 million, down 34%, with $56 million operating income. Nine-month sales were $1.30 billion, down 60%, and the segment recorded a $6 million operating loss.
- Applied Global Services: Q3 sales were $343 million, down 44%, and operating income was $24 million. Nine-month sales fell 44% to $1.01 billion; operating income was $48 million.
- Display: Q3 sales fell 78% to $69 million and the segment had a $5 million operating loss. Nine-month sales fell 53% to $302 million.
- Energy and Environmental Solutions: Q3 sales rose 29% to $224 million, but the segment recorded a $53 million operating loss. Nine-month sales more than doubled to $875 million, while the operating loss widened to $211 million, reflecting R&D costs and unfavorable margins on initial SunFab line start-ups.
Q3 segment operating income totaled $22 million, but corporate and unallocated costs of $99 million resulted in a consolidated operating loss. The company’s $79 million of nine-month investment impairment charges included $45 million for its Sokudo equity-method investment, $20 million for publicly traded equities and $14 million for privately held investments.
Outlook, commentary and risks
Management said semiconductor and display equipment demand improved in Q3 but remained well below fiscal 2008 levels. It expected Q4 FY2009 orders and sales to increase from Q3, while full-year results were expected to remain below fiscal 2008. Management cautioned that forecasting was difficult and that sustainable improvement depended on recovery in customer end markets and investment in capacity and advanced technologies.
Key risks include volatile, cyclical end markets; customer cancellations, financing constraints and insolvencies; customer concentration; supplier disruption; inventory obsolescence; and the ability to manage costs and scale solar operations. The company recorded $159 million in nine-month restructuring and asset impairment charges, including a workforce reduction program targeting approximately 2,000 positions and $15 million of fixed-asset impairment. Bad-debt expense was $63 million, and the allowance for doubtful accounts was $67 million at quarter-end. Management said cash, operating cash generation and borrowing capacity should cover liquidity needs for the next 12 months.
In May 2009, Applied amended its $1.0 billion revolving credit agreement, replacing a funded-debt-to-adjusted-earnings covenant with minimum-liquidity and funded-debt-to-total-capital covenants and increasing fees and borrowing margins. It was in compliance at quarter-end. Potential payments under guarantee arrangements were $96 million; management did not consider payment probable. The filing describes ongoing patent disputes with Jusung in Taiwan and Korea and says the proceedings are not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q4 order and sales growth materialized, and how cancellations and backlog converted into recognized revenue.
- Whether customer demand, factory utilization and gross margins recovered; assess inventory exposure and the $67 million of inventory charges.
- Cash generation, receivables collectability and customer credit risk, including the $67 million receivables allowance and $63 million bad-debt expense.
- Progress and costs of restructuring, investment impairments and SunFab deployments, including the segment’s continuing operating losses.
- Liquidity and covenant headroom under the amended credit facility, and any material developments in legal or contingent matters.