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AMAT > SEC Filings for AMAT > Form 10-Q on 20-Feb-2014All Recent SEC Filings

Show all filings for APPLIED MATERIALS INC /DE

Form 10-Q for APPLIED MATERIALS INC /DE


20-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes to assist in understanding Applied's results of operations and financial condition. Financial information as of January 26, 2014 should be read in conjunction with the financial statements for the fiscal year ended October 27, 2013 contained in the Company's Form 10-K filed December 4, 2013.
All statements in this report and those made by the management of Applied, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include those regarding Applied's future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management's plans and objectives for future operations, research and development, strategic acquisitions and joint ventures, the proposed business combination with Tokyo Electron Limited, growth opportunities, restructuring activities, customer demand and spending, backlog, working capital, liquidity, investment portfolio and policies, and legal proceedings and claims, as well as industry trends and outlooks. Forward-looking statements may contain words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "potential" and "continue," the negative of these terms, or other comparable terminology. These forward-looking statements are based on management's estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Any expectations based on forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, "Risk Factors" below and elsewhere in this report. These and many other factors could affect Applied's future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.

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 Condensed Financial Statements. A discussion of factors that could affect Applied's operations is set forth under "Risk Factors" in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel and Asia. Applied's broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.
Applied's results are 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 the nature and timing of 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.


Table of Contents

The following table presents certain significant measurements for the periods indicated:

                                      Three Months Ended                                 Change
                                                                               Q1 2014            Q1 2014
                          January 26,      October 27,     January 27,          over                over
                             2014             2013            2013             Q4 2013            Q1 2013

                                       (In millions, except per share amounts and percentages)
New orders              $       2,285     $     2,092     $     2,113     $           193     $          172
Net sales               $       2,190     $     1,988     $     1,573     $           202     $          617
Gross margin            $         891     $       795     $       582     $            96     $          309
Gross margin percent             40.7 %          40.0 %          37.0 %       0.7 point          3.7 points
Operating income        $         330     $       211     $        39     $           119     $          291
Operating margin
percent                          15.1 %          10.6 %           2.5 %      4.5 points         12.6 points
Net income              $         253     $       183     $        34     $            70     $          219
Earnings per diluted
share                   $        0.21     $      0.15     $      0.03     $          0.06     $         0.18
Non-GAAP Adjusted
Results
Non-GAAP adjusted gross
margin                  $         930     $       835     $       626     $            95     $          304
Non-GAAP adjusted gross
margin percent                   42.5 %          42.0 %          39.8 %       0.5 point          2.7 points
Non-GAAP adjusted
operating income        $         380     $       323     $       112     $            57     $          268
Non-GAAP adjusted
operating margin
percent                          17.4 %          16.2 %           7.1 %      1.2 points         10.3 points
Non-GAAP adjusted net
income                  $         279     $       228     $        69     $            51     $          210
Non-GAAP adjusted
earnings per diluted
share                   $        0.23     $      0.19     $      0.06     $          0.04     $         0.17

Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results." Fiscal 2014 and 2013 each contain 52 weeks, and the first three months of fiscal 2014 and 2013 each contained 13 weeks. Mobility continues to be the largest influence on semiconductor industry spending. The first quarter of fiscal 2014 was characterized by strong demand for semiconductor equipment by foundry customers driven by demand for advanced mobile chips. Mobility also represents a significant driver of display industry spending, resulting in continued capacity expansion for mobile applications. Demand for TV manufacturing equipment continues to be driven by the market for larger LCD TVs, although this sector remains susceptible to highly cyclical conditions. Investment in solar equipment remained low during the first quarter of fiscal 2014, despite continued end-market growth, due to ongoing excess manufacturing capacity in the industry.
On September 24, 2013, Applied announced an agreement with Tokyo Electron Limited (TEL), a Japanese corporation and global supplier of semiconductor and flat panel display production equipment, and provider of technical support and services for semiconductor, flat panel display and PV 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. Under the agreement, which was amended February 14, 2014, 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

New Orders
New orders by reportable segment for the periods indicated were as follows:

                                         Three Months Ended                             Change
                                                                                   Q1 2014   Q1 2014
                       January 26,          October 27,          January 27,        over      over
                           2014                 2013                 2013          Q4 2013   Q1 2013

                                           (In millions, except percentages)
Silicon Systems
Group               $ 1,569      69%     $ 1,390      66%     $ 1,363      64%       13%       15%
Applied Global
Services                597      26%         548      26%         544      26%       9%        10%
Display                  79       3%         114       6%         138       7%      (31)%     (43)%
Energy and
Environmental
Solutions                40       2%          40       2%          68       3%       -%       (41)%
Total               $ 2,285      100%    $ 2,092      100%    $ 2,113      100%      9%        8%

New orders for the first quarter of fiscal 2014 increased compared to the prior quarter due to higher demand for semiconductor equipment and for services, partially offset by lower demand for display equipment due to the segment's uneven orders pattern. The Silicon Systems Group's proportion of total new orders relative to other segments increased compared to the prior quarter and continues to comprise the majority of the Company's total new orders. New orders for the first quarter of fiscal 2014 increased compared to the same period in fiscal 2013, primarily as a result of increased demand for semiconductor equipment and spares, partially offset by lower demand for display and solar equipment.
New orders by geographic region, determined by the product shipment destination specified by the customer, were as follows:

                               Three Months Ended                         Change
                                                                     Q1 2014   Q1 2014
                 January 26,       October 27,       January 27,      over      over
                    2014              2013              2013         Q4 2013   Q1 2013

                                  (In millions, except percentages)
Taiwan         $   984    43%    $   721    34%    $   906    43%      36%       9%
China              326    14%        486    23%        238    11%     (33)%      37%
Korea              240    11%        209    10%        198     9%      15%       21%
Japan              163     7%        117     6%        181     9%      39%      (10)%
Southeast Asia      50     2%         95     5%         65     3%     (47)%     (23)%
Asia Pacific     1,763    77%      1,628    78%      1,588    75%      8%        11%
United States      403    18%        261    12%        391    19%      54%       3%
Europe             119     5%        203    10%        134     6%     (41)%     (11)%
Total          $ 2,285    100%   $ 2,092    100%   $ 2,113    100%     9%        8%

The change in new order composition by region in the first quarter of fiscal 2014 compared to the prior quarter primarily reflected changes in relative demand for semiconductor equipment among foundry, memory and logic customers. The decrease in new orders from customers in China reflected lower demand for TV equipment compared to the prior quarter, due to timing of customer orders. The increase in new orders from customers in China in the first quarter of fiscal 2014 from the first quarter of fiscal 2013 was primarily due to higher demand for semiconductor equipment, partially offset by lower orders for TV and solar manufacturing equipment. The increases in new orders for these same periods from Taiwan and Korea were primarily due to improved demand for semiconductor equipment from foundry customers.


Table of Contents

Changes in backlog during the three months ended January 26, 2014 were as follows:

                    January 26,
                        2014
                   (In millions)
Beginning balance $        2,372
New orders                 2,285
Net sales                 (2,190 )
Net adjustments              (32 )
Ending balance    $        2,435

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. Backlog adjustments included $33 million of currency adjustments. Approximately 83 percent of the backlog as of the end of the first quarter of fiscal 2014 is anticipated to be shipped within the next two quarters.
Backlog by reportable segment as of the end of the most recent three fiscal quarters was as follows:

                                                                                    Q1 2014   Q1 2014
                        January 26,          October 27,            July 28,         over      over
                            2014                 2013                 2013          Q4 2013   Q3 2013

                                            (In millions, except percentages)
Silicon Systems
Group                $ 1,370      56%     $ 1,295      55%     $ 1,171      51%       6%        17%
Applied Global
Services                 659      27%         591      25%         585      26%       12%       13%
Display                  281      12%         361      15%         409      18%      (22)%     (31)%
Energy and
Environmental
Solutions                125       5%         125       5%         124       5%       -%        1%
Total                $ 2,435      100%    $ 2,372      100%    $ 2,289      100%      3%        6%

Total backlog increased slightly in the first quarter of fiscal 2014 compared to the prior quarter, and backlog composition changed, due to higher demand for semiconductor equipment and services and lower orders for TV equipment due to uneven customer order patterns. In the first quarter of fiscal 2014, approximately 47 percent of net sales in the Silicon Systems Group, Applied's largest business segment, were for orders received and shipped within the quarter, slightly down from 49 percent in the prior quarter.


Table of Contents

Net Sales
Net sales by reportable segment for the periods indicated were as follows:
                                         Three Months Ended                             Change
                                                                                   Q1 2014   Q1 2014
                       January 26,          October 27,          January 27,        over      over
                           2014                 2013                 2013          Q4 2013   Q1 2013

                                           (In millions, except percentages)
Silicon Systems
Group               $ 1,484      68%     $ 1,243      63%     $   969      62%       19%       53%
Applied Global
Services                507      23%         538      27%         471      30%      (6)%       8%
Display                 159       7%         163       8%          87       5%      (2)%       83%
Energy and
Environmental
Solutions                40       2%          44       2%          46       3%      (9)%      (13)%
Total               $ 2,190      100%    $ 1,988      100%    $ 1,573      100%      10%       39%

Net sales for the first quarter of fiscal 2014 increased compared to the prior quarter primarily reflecting increased investments in semiconductor equipment. The Silicon Systems Group's relative share of total net sales increased compared to the prior quarter and remains the largest contributor of net sales. The Silicon Systems Group and Applied Global Services comprised at least 90 percent of Applied's total net sales for all periods presented.
For the first quarter of fiscal 2014 compared to the same period in the prior year, net sales increased due to higher customer investments in semiconductor and display equipment.
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:

                               Three Months Ended                         Change
                                                                     Q1 2014   Q1 2014
                 January 26,       October 27,       January 27,      over      over
                    2014              2013              2013         Q4 2013   Q1 2013

                                  (In millions, except percentages)
Taiwan         $   705    32%    $   589    30%    $   565    36%      20%       25%
China              589    27%        204    10%        127     8%     189%      364%
Korea              201     9%        231    12%        205    13%     (13)%     (2)%
Japan              164     8%        276    14%         98     6%     (41)%      67%
Southeast Asia      87     4%         89     4%         58     4%     (2)%       50%
Asia Pacific     1,746    80%      1,389    70%      1,053    67%      26%       66%
United States      280    13%        357    18%        401    25%     (22)%     (30)%
Europe             164     7%        242    12%        119     8%     (32)%      38%
Total          $ 2,190    100%   $ 1,988    100%   $ 1,573    100%     10%       39%

The increase in net sales from customers in China in the first quarter of fiscal 2014 compared to the prior quarter primarily reflected higher investments in semiconductor and display equipment, while the decrease in net sales from customers in Japan and Europe was mainly due to reduced investments in semiconductor equipment.
The changes in net sales from customers in China, Taiwan and United States in the first quarter of fiscal 2014 compared to the same period in the prior year were primarily due to changes in relative demand for semiconductor equipment among foundry, memory and logic customers.


Table of Contents

Gross Margin
Gross margins for the periods indicated were as follows:

                                                     Three Months Ended                            Change
                                                                                          Q1 2014         Q1 2014
                                        January 26,      October 27,     January 27,        over            over
                                            2014            2013            2013          Q4 2013         Q1 2013

                                                             (In millions, except percentages)
Gross margin                           $        891     $       795     $       582     $       96     $        309
Gross margin percent                           40.7 %          40.0 %          37.0 %    0.7 point       3.7 points
Non-GAAP Adjusted Results
Non-GAAP adjusted gross margin         $        930     $       835     $       626     $       95     $        304
Non-GAAP adjusted gross margin percent         42.5 %          42.0 %          39.8 %    0.5 point       2.7 points

Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results."
Gross margin and non-GAAP adjusted gross margin, as well as gross margin percent and non-GAAP adjusted gross margin percent, increased in the first quarter of fiscal 2014 compared to the prior quarter and the comparable period in the prior year, primarily reflecting higher net sales, the absence of a regional customs duty assessment charge recorded in the fourth quarter of the fiscal 2013, and lower inventory charges and manufacturing costs. Gross margin and non-GAAP adjusted gross margin during the three months ended January 26, 2014, October 27, 2013 and January 27, 2013 included $14 million, $13 million and $12 million, respectively, of share-based compensation expense. Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:

                                                         Three Months Ended                                Change
                                                                                                  Q1 2014        Q1 2014
                                          January 26,         October 27,       January 27,        over            over
                                              2014               2013              2013           Q4 2013        Q1 2013

                                                                           (In millions)

Research, development and engineering $ 356 $ 338 $ 304 $ 18 $ 52

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 historically has maintained 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.

As part of its growth strategy, Applied has taken certain actions, including workforce reductions and reprioritization of existing spending, to enable increased funding for investments in technical capabilities and critical RD&E programs that address profitable opportunities in current and new markets, with a focus on semiconductor technologies. RD&E expenses in the first quarter of fiscal 2014 were higher than in the prior quarter and in the first quarter of fiscal 2013, reflecting the impact of these ongoing product development initiatives. RD&E expenses in the first quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013 also reflected the absence of a favorable variable compensation adjustment recorded in the prior quarter. RD&E expenses during the three months ended January 26, 2014, October 27, 2013 and January 27, 2013 included $17 million, $14 million and $12 million, respectively, of share-based compensation expense.


Table of Contents

Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:

                                                         Three Months Ended                                 Change
                                                                                                   Q1 2014         Q1 2014
                                           January 26,         October 27,       January 27,        over            over
                                              2014                2013              2013           Q4 2013         Q1 2013

                                                                            (In millions)

Marketing and selling $ 109 $ 99 $ 105 $ 10 $ 4

Marketing and selling expenses for the first quarter of fiscal 2014 were higher than in the prior quarter and the same period in fiscal 2013 primarily due to the reversal of provisions for bad debts recorded in the prior quarters. Marketing and selling expenses during the three months ended January 26, 2014, October 27, 2013 and January 27, 2013 included $6 million, $5 million, $5 million, respectively, of share-based compensation. General and Administrative
General and administrative (G&A) expenses for the periods indicated were as follows:

                                                         Three Months Ended                                Change
                                                                                                  Q1 2014        Q1 2014
                                           January 26,         October 27,       January 27,        over          over
                                              2014                2013              2013          Q4 2013        Q1 2013

                                                                          (In millions)

General and administrative $ 89 $ 117 $ 125 $ (28 ) $ (36 )

G&A expenses for the first quarter of fiscal 2014 decreased from the prior quarter and the comparable period in fiscal 2013 primarily due to the favorable impact of an unrealized gain of $24 million related to foreign exchange option contracts associated with the announced business combination with TEL. G&A expenses during the three months ended January 26, 2014, October 27, 2013 and January 27, 2013 included $9 million, $9 million and $8 million, respectively, of share-based compensation.
Restructuring Charges and Asset Impairments Restructuring charges and asset impairments for the periods indicated were as follows:

                                                            Three Months Ended                              Change
                                                                                                   Q1 2014        Q1 2014
                                              January 26,       October 27,       January 27,        over          over
                                                 2014              2013              2013          Q4 2013        Q1 2013

                                                                             (In millions)

Restructuring charges and asset impairments $ 7 $ 30 $ 9 $ (23 ) $ (2 )

On October 3, 2012, Applied announced a restructuring plan (the 2012 Global Restructuring Plan) to realign its global workforce and enhance its ability to . . .

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