Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AMAT > SEC Filings for AMAT > Form 10-K on 4-Dec-2013All Recent SEC Filings

Show all filings for APPLIED MATERIALS INC /DE | Request a Trial to NEW EDGAR Online Pro

Form 10-K for APPLIED MATERIALS INC /DE


4-Dec-2013

Annual Report


Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to facilitate an understanding of Applied's business and results of operations. This MD&A should be read in conjunction with Applied's Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this Form 10-K. MD&A consists of the following sections:

Overview: a summary of Applied's business and measurements

Results of Operations: a discussion of operating results

Segment Information: a discussion of segment operating results

Business Combinations: a summary of announced or completed business combinations and acquisitions

Recent Accounting Pronouncements: a discussion of new accounting pronouncements and its impact to Applied's consolidated financial statements

Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash, contractual obligations and financial position

Off-Balance Sheet Arrangements and Contractual Obligations

Critical Accounting Policies and Estimates: a discussion of critical accounting policies that require the exercise of judgments and estimates

Non-GAAP Adjusted Results: a presentation of results reconciling GAAP to non-GAAP adjusted measures

Overview
Applied provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related industries. Applied's customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal and other displays, solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 16 of Notes to Consolidated Financial Statements. A discussion of factors that could affect Applied's operations is set forth under "Risk Factors" in Part I, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in North America, Europe and Asia. Applied's equipment and service products are highly technical and are sold primarily through a direct sales force. Applied's results historically have been driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied's businesses is subject to highly cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and technological advances in fabrication processes. In light of this cyclicality, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter. As a result of these conditions and the changing global economic environment, there were significant fluctuations in Applied's quarterly new orders and net sales within and across the last three fiscal years.
Applied's strategic priorities for fiscal 2014 include growing its presence in wafer fab equipment and display, reducing its losses in the solar business, and expanding its overall available market. As part of this strategy, the Company has implemented initiatives to decrease overhead spending and further reduce solar operating expense to fund research and development in semiconductor and other key product areas. In semiconductor equipment, Applied intends to continue investment in 300mm, 450mm and other semiconductor technologies to strengthen the product pipeline and investment in the enhancement of technical relationships with customers.
On September 24, 2013, Applied entered into an agreement with Tokyo Electron Limited (TEL), a Japanese corporation and global supplier of semiconductor, flat panel display and photovoltaic panel production equipment, to effect a combination of their respective businesses into a new combined company. The combination is expected to bring together leading technologies and products and create an expanded set of capabilities in precision materials engineering and patterning. The closing of the transaction is subject to customary conditions, including approval by Applied's and TEL's stockholders and regulatory approvals.


Table of Contents

Results of Operations
The following table presents certain significant measurements for the past three fiscal years:

                                                                                    Change
Fiscal Year                 2013            2012           2011        2013 over 2012     2012 over 2011

                                     (In millions, except per share amounts and percentages)
New orders              $     8,466     $    8,037     $   10,142     $          429     $       (2,105 )
Net sales               $     7,509     $    8,719     $   10,517     $       (1,210 )   $       (1,798 )
Gross margin            $     2,991     $    3,313     $    4,360     $         (322 )   $       (1,047 )
Gross margin percent           39.8 %         38.0 %         41.5 %      1.8 points        (3.5) points
Operating income        $       432     $      411     $    2,398     $           21     $       (1,987 )
Operating margin
percent                         5.8 %          4.7 %         22.8 %      1.1 points       (18.1) points
Net income              $       256     $      109     $    1,926     $          147     $       (1,817 )
Earnings per diluted
share                   $      0.21     $     0.09     $     1.45     $         0.12     $        (1.36 )
Non-GAAP Adjusted
Results
Non-GAAP adjusted gross
margin                  $     3,160     $    3,566     $    4,397     $         (406 )   $         (831 )
Non-GAAP adjusted gross
margin percent                 42.1 %         40.9 %         41.8 %      1.2 points        (0.9) points
Non-GAAP adjusted
operating income        $     1,032     $    1,379     $    2,411     $         (347 )   $       (1,032 )
Non-GAAP adjusted
operating margin
percent                        13.7 %         15.8 %         22.9 %     (2.1) points       (7.1) points
Non-GAAP adjusted net
income                  $       718     $      960     $    1,717     $         (242 )   $         (757 )
Non-GAAP adjusted
earnings per diluted
share                   $      0.59     $     0.75     $     1.29     $        (0.16 )   $        (0.54 )

Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below. Fiscal 2013, 2012 and 2011 each contained 52 weeks. Mobility continued to be the largest influence on semiconductor industry spending during fiscal 2013. The first half of fiscal 2013 was characterized by strong demand for semiconductor equipment from foundry customers driven by demand for advanced mobile chips. In the second half of the year, demand from foundry customers softened, reflecting seasonal consumer buying patterns for mobility products, while demand from memory and logic customers improved. Mobility also represents a significant driver of display industry spending, and demand for mobile display equipment remained strong during fiscal 2013. Fiscal 2013 was also characterized by a recovery in demand for TV manufacturing equipment compared to weak industry levels in the prior year, resulting from higher consumer demand in emerging markets and for larger LCD TVs. In solar, while end market growth continued, investment in solar equipment remained low during fiscal 2013 due to continued excess manufacturing capacity in the industry.
Applied expects the mobility trend to remain the main growth driver for the semiconductor industry, and in turn for the Silicon Systems Group, in 2014. Applied also expects the overall display investment cycle to continue into 2014, while solar equipment demand is expected to remain soft in 2014. Fiscal 2012 was characterized by significant fluctuations in demand for semiconductor equipment, coupled with an extremely weak market environment for display and solar equipment. Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian) in the first quarter of fiscal 2012. Mobility was the greatest influence on semiconductor industry spending in fiscal 2012. Consumer buying patterns for electronic products, combined with growing semiconductor customer concentration, contributed to a seasonality effect, with relatively strong demand for semiconductor equipment led by foundry customers during the first half of fiscal 2012, followed by softening of demand from foundry and logic customers in the third quarter of fiscal 2012 and further declines across all categories of wafer fab equipment customers in the fourth quarter of fiscal 2012. Low investment levels for display equipment continued in fiscal 2012 due to decreased capacity requirements for larger flat panel televisions as conditions in this industry remained challenging. As with the semiconductor industry, demand for mobility products, such as smartphones and tablets, significantly influenced equipment spending in the display industry. In the solar industry, fiscal 2012 was characterized by continued excess manufacturing capacity, which led to significantly reduced demand for crystalline-silicon (c-Si) equipment, as well as weaker operating performance and outlook by the fourth quarter.


Table of Contents

The first nine months of fiscal 2011 reflected increased demand across all segments except Display, due to improved global economic and industry conditions, although demand softened for semiconductor, display and solar equipment in the last quarter of fiscal 2011. Towards the end of fiscal 2011, each of the semiconductor, display and solar industries was negatively impacted by uncertainty in the macroeconomic environment, and the display and solar equipment industries were also negatively impacted by overcapacity.

New Orders
New orders by reportable segment for the past three fiscal years were as
follows:

                                        Change                                Change
                      2013          2013 over 2012          2012          2012 over 2011          2011

                                              (In millions, except percentages)
Silicon
Systems Group  $ 5,507      65%           4%         $ 5,294      66%          (4)%        $  5,489      54%
Applied Global
Services         2,090      25%          (8)%          2,274      28%          (3)%           2,333      23%
Display            703       8%          157%            274       4%         (57)%             636       6%
Energy and
Environmental
Solutions          166       2%         (15)%            195       2%         (88)%           1,684      17%
Total          $ 8,466      100%          5%         $ 8,037      100%        (21)%        $ 10,142      100%

New orders for fiscal 2013 increased compared to fiscal 2012, primarily due to a recovery in demand for display manufacturing equipment and increased demand in semiconductor equipment, partially offset by lower demand for service products, as well as depressed demand for c-Si solar equipment due to continued excess manufacturing capacity in the solar industry. New orders for the Silicon Systems Group and Applied Global Services continued to comprise a majority of Applied's consolidated total new orders.
New orders for fiscal 2012 decreased for all segments compared to the same periods in the prior year, mostly due to the lower demand for c-Si solar and display equipment due to excess manufacturing capacity in the solar industry and the continued down cycle in the display industry, respectively, partially offset by the addition of orders attributable to Varian of $1.0 billion. The Silicon Systems Group's and Applied Global Services' relative share of total new orders increased compared to the prior year as a result of the addition of Varian and the sharp decrease in orders in Display and Energy and Environmental Solutions. New orders by geographic region, determined by the product shipment destination specified by the customer, were as follows:

                                        Change                                Change
                      2013          2013 over 2012          2012          2012 over 2011          2011

                                              (In millions, except percentages)
Taiwan         $ 2,885      34%          34%         $ 2,155      27%          (4)%        $  2,235      22%
China            1,339      16%          232%            403       5%         (80)%           2,066      20%
Korea              915      11%         (49)%          1,784      22%          39%            1,286      13%
Japan              822      10%          37%             600       7%         (40)%           1,001      10%
Southeast Asia     351       4%          24%             283       4%         (39)%             463       5%
Asia Pacific     6,312      75%          21%           5,225      65%         (26)%           7,051      70%
United States    1,419      17%         (29)%          1,995      25%          (4)%           2,069      20%
Europe             735       8%         (10)%            817      10%         (20)%           1,022      10%
Total          $ 8,466      100%          5%         $ 8,037      100%        (21)%        $ 10,142      100%

The recovery in demand for display manufacturing equipment in fiscal 2013 led to the increase in new orders from customers in China. The change in the composition of new orders from customers in Taiwan, Korea, Japan and the United States was primarily related to changes in customer demand for semiconductor equipment.
The decrease in new orders from customers in China in fiscal 2012 compared to fiscal 2011 primarily reflected reduced investments by solar manufacturers due to industry overcapacity.


Table of Contents

Changes in backlog during fiscal 2013 and 2012 were as follows:

                    2013        2012
                      (In millions)
Beginning balance $ 1,606     $ 2,392
New orders          8,466       8,037
Net sales          (7,509 )    (8,719 )
Net adjustments      (191 )      (104 )
Ending balance    $ 2,372     $ 1,606

Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; and (2) contractual service revenue and maintenance fees to be earned within the next 12 months. Applied's backlog at any particular time is not necessarily indicative of actual sales for any future periods, due to the potential for customer changes in delivery schedules or cancellation of orders. Approximately 80 percent of the backlog as of the end of fiscal 2013 is anticipated to be shipped within the first two quarters of fiscal 2014.
Applied's backlog was $2.4 billion at October 27, 2013 compared to $1.6 billion at October 28, 2012. Backlog adjustments were negative for fiscal 2013 and totaled $191 million, primarily consisting of customer cancellations and financial debookings.
Backlog by reportable segment as of October 27, 2013 and October 28, 2012 was as follows:

                                                         Change
                                        2013         2013 over 2012        2012

                                           (In millions, except percentages)
Silicon Systems Group              $ 1,295    55%         84%         $   705    44%
Applied Global Services                591    25%          2%             580    36%
Display                                361    15%         75%             206    13%
Energy and Environmental Solutions     125     5%          9%             115     7%
Total                              $ 2,372    100%        48%         $ 1,606    100%

Backlog increased in fiscal 2013 from fiscal 2012 across all segments. The increase in backlog was primarily due to increases in demand from memory customers and the recovery in demand for display manufacturing equipment. In the fourth quarter of fiscal 2013 approximately 49 percent of net sales in the Silicon Systems Group, Applied's largest business segment, were for orders received and shipped within the quarter, down from 53 percent in the fourth quarter of fiscal 2012.


Table of Contents

Net Sales
Net sales by reportable segment for the past three fiscal years were as follows:

                                        Change                                Change
                      2013          2013 over 2012          2012          2012 over 2011          2011

                                              (In millions, except percentages)
Silicon
Systems Group  $ 4,775      64%         (14)%        $ 5,536      64%           2%         $  5,415      51%
Applied Global
Services         2,023      27%         (11)%          2,285      26%          (5)%           2,413      23%
Display            538       7%          14%             473       5%         (32)%             699       7%
Energy and
Environmental
Solutions          173       2%         (59)%            425       5%         (79)%           1,990      19%
Total          $ 7,509      100%        (14)%        $ 8,719      100%        (17)%        $ 10,517      100%

For fiscal 2013 as compared to fiscal 2012, net sales in Display increased, reflecting the recovery of TV manufacturing equipment investment, while net sales across all other segments decreased. The decrease primarily reflected continued excess manufacturing capacity in the solar industry and lower investments in semiconductor equipment, spares and services. The Silicon Systems Group remains the largest contributor of net sales.
For fiscal 2012 as compared to fiscal 2011, net sales in the Silicon Systems Group increased slightly while net sales across all other segments decreased. The decreases reflected lower investments in c-Si solar and LCD TV equipment, partially offset by sales attributable to Varian.
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:

                                        Change                                Change
                      2013          2013 over 2012          2012          2012 over 2011          2011

                                              (In millions, except percentages)
Taiwan         $ 2,640      35%           9%         $ 2,411      28%          15%         $  2,093      20%
China              787      11%           1%             783       9%         (70)%           2,574      24%
Korea              924      12%         (51)%          1,897      22%          50%            1,263      12%
Japan              685       9%          (3)%            704       8%         (23)%             912       9%
Southeast Asia     320       4%           3%             312       3%         (47)%             592       5%
Asia Pacific     5,356      71%         (12)%          6,107      70%         (18)%           7,434      70%
United States    1,473      20%         (16)%          1,749      20%         (11)%           1,963      19%
Europe             680       9%         (21)%            863      10%         (23)%           1,120      11%
Total          $ 7,509      100%        (14)%        $ 8,719      100%        (17)%        $ 10,517      100%

The increase in net sales from customers in China in fiscal 2013 was primarily due to the recovery in demand for display manufacturing equipment. The changes in net sales from customers in Korea, the United States and Taiwan were primarily related to changes in customer demand for semiconductor equipment. The decrease in net sales from customers in China in fiscal 2012 compared to fiscal 2011 primarily reflected decreased investments in the solar and display industries due to overcapacity.


Table of Contents

Gross Margin
Gross margins for the past three fiscal years were as follows:

                                                                                   Change
                            2013           2012           2011        2013 over 2012     2012 over 2011

                                               (In millions, except percentages)
Gross margin            $    2,991     $    3,313     $    4,360     $         (322 )   $       (1,047 )
Gross margin (% of net
sales)                        39.8 %         38.0 %         41.5 %      1.8 points        (3.5) points
Non-GAAP Adjusted
Results
Non-GAAP adjusted gross
margin                  $    3,160     $    3,566     $    4,397     $         (406 )   $         (831 )
Non-GAAP adjusted gross
margin (% of net sales)       42.1 %         40.9 %         41.8 %      1.2 points        (0.9) points

Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
Gross margin and non-GAAP adjusted gross margin decreased in fiscal 2013 compared to fiscal 2012 reflecting lower sales. Gross margin percent and non-GAAP adjusted gross margin percent increased in fiscal 2013 compared to fiscal 2012 despite lower sales, due primarily to lower inventory charges, a favorable product mix, and material cost reductions. Gross margin and non-GAAP adjusted gross margin decreased in fiscal 2012 from fiscal 2011 due primarily to changes in segment and customer mix, additional inventory charges, and lower net sales, partially offset by sales for a thin film solar production line in fiscal 2012, for which inventory was fully reserved prior to fiscal 2012. In addition, the decrease in gross margin in fiscal 2012 was also affected by inventory fair value adjustments and intangible asset amortization associated with purchase accounting, mostly associated with the acquisition of Varian, which amounted to $253 million in fiscal 2012. Gross margin and non-GAAP adjusted gross margin during fiscal 2013, 2012 and 2011 included $50 million, $54 million and $48 million, respectively, of share-based compensation expense. Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the past three fiscal years were as follows:

                                                                                     Change
                            2013           2012           2011         2013 over 2012       2012 over 2011

                                                           (In millions)
Research, development
and engineering         $    1,320     $    1,237     $    1,118     $             83     $            119

Applied's future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Applied believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers' most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied's existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.


Table of Contents

In fiscal 2013, Applied increased its investment in 300mm product development. Applied developed new applications for its epitaxial technology, enabling industry transition to NMOS transistors at the 20nm node and enabling chip makers to build faster devices and deliver next-generation mobile computing power. Applied also released its next-generation defect review and classification technology that delivers industry-leading resolution used for finding, identifying and analyzing defects in 3D FinFET and high aspect ratio structures at 10nm nodes. Applied also continued to invest in the development of 450mm wafer fabrication equipment.
RD&E expenses increased in fiscal 2013 compared to the prior year. As part of its growth strategy, Applied has taken certain actions, including workforce reductions and reprioritization of existing spend, to enable increased funding for investments in technical capabilities and critical R&D programs in current and new markets, with a focus on semiconductor technologies. The increase in RD&E for fiscal 2012 compared to fiscal 2011 was primarily due to RD&E expenses related to Varian of approximately $180 million and continued investment in the development of equipment for smaller linewidths and 450mm wafers, partially offset by lower investments in solar R&D projects and the cessation of light-emitting diode (LED) equipment development. RD&E expense during fiscal 2013, 2012 and 2011 included $53 million, $54 million and $46 million, respectively, of share-based compensation expense. Marketing and Selling
Marketing and selling expenses for the past three fiscal years were as follows:

Change 2013 2012 2011 2013 over 2012 2012 over 2011

(In millions)

Marketing and selling $ 433 $ 481 $ 432 $ (48 ) $ 49

The decrease in marketing and selling expenses for fiscal 2013 compared to fiscal 2012 was primarily attributable to savings from restructuring programs along with a reduction in the bad debt provision during the year as a result of lower risk exposures in display and solar customers. The increase in marketing and selling expenses for fiscal 2012 compared to fiscal 2011 was primarily attributable to marketing and selling expenses incurred in connection with the acquisition of Varian. Marketing and selling expenses during fiscal 2013, 2012 and 2011 included $20 million, $22 million and $16 million, respectively, of share-based compensation expense.
General and Administrative
General and administrative (G&A) expenses for the past three fiscal years were as follows:

Change 2013 2012 2011 2013 over 2012 2012 over 2011

(In millions)

General and administrative $ 469 $ 595 $ 469 $ (126 ) $ 126

The decrease in G&A for fiscal 2013 compared to fiscal 2012 was primarily due to . . .

  Add AMAT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AMAT - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.