Applied Materials, Inc. — Q3 Fiscal 2013 Form 10-Q
Reporting period: Three and nine months ended July 28, 2013. Figures are unaudited and in millions of dollars, except per-share data and percentages.
Business context
Applied Materials supplies manufacturing equipment, services and software to the semiconductor, display and solar industries. Its four reportable segments are Silicon Systems Group (SSG), Applied Global Services (AGS), Display, and Energy and Environmental Solutions (EES). Results are cyclical and depend on customers’ equipment spending, technology transitions and end-market demand.
Key financial results
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $1,975 | $2,343 | $5,521 | $7,073 |
| Gross margin | $806; 40.8% | $930; 39.7% | $2,196; 39.8% | $2,726; 38.5% |
| Operating income | $250 | $322 | $221 | $910 |
| Net income | $168 | $218 | $73 | $624 |
| Diluted EPS | $0.14 | $0.17 | $0.06 | $0.48 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $604 | $1,440 |
Q3 non-GAAP adjusted diluted EPS was $0.18, compared with $0.24 a year earlier; nine-month adjusted diluted EPS was $0.40 versus $0.69. These company-defined measures exclude specified acquisition-related items, impairments, restructuring and certain tax items and are not substitutes for GAAP results.
At July 28, cash and cash equivalents were $1.745 billion; short- and long-term investments totaled $1.285 billion, for total cash, cash equivalents and investments of $3.030 billion. Working capital was $3.0 billion. Long-term debt was $1.946 billion; no credit-facility borrowings were outstanding. The company reported compliance with debt covenants and approximately $1.6 billion of available revolving and other credit facilities.
For the first nine months, investing activities provided $158 million, including net proceeds of $299 million from investment sales and maturities less purchases; capital expenditures were $140 million. Financing used $409 million, including $336 million of dividends and $198 million of share repurchases. Cash increased $353 million from the fiscal-year opening balance.
Material changes and segment performance
- Q3 sales were essentially flat sequentially but down 16% year over year. Nine-month sales declined 22% year over year. Q3 gross margin percentage improved 1.1 percentage points year over year, while operating income fell to $250 million from $322 million.
- Q3 orders were $1.995 billion, down 12% sequentially but up 11% year over year. Backlog was $2.289 billion, essentially flat sequentially; about 82% was expected to ship within the next two quarters. Backlog can change through cancellations or schedule changes.
- SSG Q3 sales were $1.272 billion, down 18% year over year; its orders fell 22% sequentially as foundry demand softened. AGS sales declined 14% year over year. Display sales rose 13% year over year and orders increased substantially, primarily on LCD TV equipment demand. EES sales fell 42% year over year and the segment remained loss-making.
- For the first nine months, EES recorded a $403 million operating loss, including a $224 million goodwill impairment and $54 million intangible-asset impairment recognized in Q2. These charges reflected solar-sector overcapacity and a weaker outlook. The non-GAAP adjusted EES operating loss was $93 million.
- For the nine-month period, TSMC represented 29% of consolidated sales and Samsung 15%. Customer and regional concentration is significant: in Q3, two customers represented 44% of consolidated sales.
Outlook, risks and unusual items
The filing gives no explicit quantitative company-wide revenue or earnings guidance. Management described softer foundry demand in Q3, partly offset by improving memory and logic demand, strong mobile-display demand and increased LCD TV equipment investment. Solar equipment investment remained low amid excess manufacturing capacity, weak operating performance and uncertainty about recovery.
Management said it expected cash from operations, existing liquidity and borrowing capacity to meet requirements for the next 12 months. It anticipated continuing quarterly dividends, subject to Board approval and business conditions. The global restructuring plan, initially expected to be substantially complete by Q3 FY2013, was extended to Q1 FY2014; estimated total pre-tax costs remained $120–$160 million, with $118 million incurred. The EES restructuring plan had incurred $80 million of its estimated $70–$100 million total cost, including inventory-related charges.
Key risks include industry cyclicality, customer order deferrals or cancellations, customer concentration, supply-chain constraints, competition and technology transitions, and continued weakness or further impairment in solar-related assets. The company also identified interest-rate, currency, tax, geopolitical, intellectual-property and cybersecurity risks. A 100-basis-point rate increase was estimated to reduce the fair value of its fixed-income portfolio by about $20 million. Legal matters included pending Korean prosecutorial appeals concerning individuals (the company was not a party); Applied stated that it did not expect the described legal proceedings to materially adversely affect its financial condition or results.
Other notable items: the nine-month effective tax rate was 53.2%, elevated largely because the EES goodwill impairment was not tax deductible; Q3’s rate was 26.3%. About $1.3 billion of foreign-subsidiary cash and marketable securities could be subject to U.S. tax upon repatriation; approximately $0.9 billion was intended to remain permanently invested outside the United States.
Important facts for investors to verify
- Whether semiconductor orders and foundry demand recover, and how the $2.289 billion backlog converts to shipments and revenue.
- Whether solar-sector conditions stabilize, and whether EES requires further restructuring or asset impairments.
- The sustainability of margins and earnings after separating recurring operations from impairment, acquisition and restructuring adjustments.
- Customer concentration, including exposure to major semiconductor and display customers, and the impact of order changes or cancellations.
- Cash generation, inventory levels, foreign-held liquidity and the company’s ability to sustain dividends and repurchases through the cycle.