Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended April 29, 2012. Amounts are in millions except per-share data. Applied Materials supplies equipment, services and software to semiconductor, display, solar and related industries. The quarter’s results include Varian, acquired in November 2011; prior-year comparisons do not.
Key financial results
| Metric | Q2 FY2012 | Q2 FY2011 | First half FY2012 | First half FY2011 |
|---|---|---|---|---|
| Net sales | $2,541 | $2,862 | $4,730 | $5,549 |
| Gross margin | $1,011 (40%) | $1,189 (42%) | $1,797 (38%) | $2,325 (42%) |
| Operating income | $409 (16%) | $677 (24%) | $588 (12%) | $1,351 (24%) |
| Net income | $289 | $489 | $406 | $995 |
| Diluted EPS | $0.22 | $0.37 | $0.31 | $0.75 |
| Operating cash flow | Not stated separately for Q2 | $784 | $1,129 |
- Versus Q2 FY2011, sales fell 11%, net income 41%, and diluted EPS 41%. First-half sales declined 15% and net income 59% year over year.
- Q2 improved sequentially from Q1 FY2012: sales rose to $2,541 million from $2,189 million; net income to $289 million from $117 million; and gross margin to 40% from 36%.
- Management’s non-GAAP Q2 results were gross margin of $1,070 million (42%), operating income of $490 million (19%), net income of $349 million, and diluted EPS of $0.27. These exclude specified acquisition-related and other items and are not GAAP measures.
Financial position and capital allocation
- Cash, cash equivalents and investments totaled $3.241 billion at April 29, 2012, down from $7.174 billion at October 30, 2011, primarily following the Varian acquisition. Working capital was $3.7 billion.
- Long-term debt was $1.946 billion, with $1 million current; no credit-facility borrowings were outstanding. The company reported compliance with debt covenants. Credit facilities provided up to $1.6 billion of additional borrowing capacity.
- Operating cash flow was $784 million for the half-year. Investing activities used $4.416 billion, including $4.186 billion paid for the Varian acquisition, net of cash acquired. Financing activities used $563 million, including $400 million of share repurchases and $208 million of dividends paid.
- The Board authorized a new $3.0 billion repurchase program through March 2015. The company said it anticipates continuing quarterly dividends, subject to Board discretion.
Business changes, outlook and risks
- Semiconductor equipment demand, particularly from foundry customers, supported the sequential recovery: Q2 new orders were $2.765 billion, up 38% from Q1, while backlog was $2.372 billion. Orders were down 13% from Q2 FY2011; backlog may be changed, delayed or cancelled.
- First-half demand was sharply weaker in solar and display. Energy and Environmental Solutions reported a first-half operating loss of $86 million, versus income of $313 million a year earlier; Display operating income fell to $12 million from $58 million. Excess solar capacity and a display-industry downturn were cited.
- Varian contributed approximately $333 million of Q2 sales and $535 million for the first half. Acquisition-related charges were $69 million in Q2 and $222 million for the half, including purchase-accounting inventory adjustments, intangible amortization, accelerated-vesting compensation, deal and integration costs.
- On May 10, 2012, the company announced a restructuring of Energy and Environmental Solutions amid difficult solar PV and LED equipment conditions. Actions include relocating precision-wafering operations, significantly reducing LED development and affecting up to approximately 250 positions. Estimated pretax costs are $70–$100 million over 12–18 months beginning in Q3 FY2012.
- No specific revenue or earnings guidance is provided in the supplied filing text. Management stated that operating cash generation, existing liquidity and borrowing capacity should meet liquidity needs for the next 12 months.
- Key risks include highly cyclical end markets, concentrated customers and geographic exposure, customer credit and order cancellations, supply-chain and inventory risks, integration and impairment risks related to Varian, and potential changes in tax outcomes. The company tested goodwill in solar and display during Q2 and found no impairment, but warned future adverse conditions could lead to a material charge. Pending legal matters were not expected by management to materially affect financial condition or results, though outcomes remain uncertain.
Important facts for investors to verify
- Whether semiconductor order strength and the $2.372 billion backlog convert into sales, given the potential for cancellations and shipment changes.
- Whether solar and display market weakness, including the new restructuring and its $70–$100 million estimated cost, worsens or stabilizes.
- How Varian integration progresses and how much reported earnings continue to reflect acquisition-related charges and acquired-intangible amortization.
- Whether cash generation remains adequate after acquisition spending, dividends and repurchases, and whether customer liquidity or inventory conditions require additional provisions.
- Whether assumptions supporting goodwill valuations remain appropriate as industry conditions and business forecasts change.