UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-6920
APPLIED MATERIALS, INC. (Exact name of registrant as specified in its charter)
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3050 Bowers Avenue
Santa Clara, California 95054-3299
(Address of principal executive offices, including zip code)
(408) 727-5555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ].
Number of shares outstanding of the issuer's common stock as of July 29, 2001: 816,269,159
APPLIED MATERIALS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of October 29, 2000 and July 29, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Recent Accounting Pronouncements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION Item 1. Financial Statements
APPLIED MATERIALS, INC.
See accompanying notes to consolidated condensed financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
----------------------- -----------------------
(In thousands, except per July 30, July 29, July 30, July 29,
share amounts) 2000 2001 2000 2001
- -------------------------------- ----------- ----------- ----------- -----------
Net sales....................... $2,732,028 $1,333,871 $6,644,249 $5,974,438
Cost of products sold........... 1,340,126 800,839 3,297,428 3,253,783
----------- ----------- ----------- -----------
Gross margin.................... 1,391,902 533,032 3,346,821 2,720,655
Operating expenses:
Research, development and
engineering................ 303,946 277,333 780,509 926,251
Marketing and selling........ 128,426 125,979 340,718 389,188
General and administrative... 133,291 114,369 343,998 306,481
Non-recurring items.......... -- 14,150 40,000 72,564
----------- ----------- ----------- -----------
Income from operations.......... 826,239 1,201 1,841,596 1,026,171
Non-recurring income............ -- -- 68,158 --
Interest expense................ 12,665 10,709 38,154 34,981
Interest income................. 48,970 54,153 127,962 166,699
----------- ----------- ----------- -----------
Income before income taxes...... 862,544 44,645 1,999,562 1,157,889
Provision for income taxes...... 258,763 16,120 599,807 344,527
----------- ----------- ----------- -----------
Net income...................... $603,781 $28,525 $1,399,755 $813,362
=========== =========== =========== ===========
Earnings per share:
Basic........................ $0.75 $0.04 $1.74 $1.00
Diluted...................... $0.70 $0.03 $1.63 $0.96
Weighted average number of shares:
Basic........................ 809,345 814,920 804,532 812,219
Diluted...................... 862,071 853,905 858,585 848,793
- ----------------------------------------------------------------------------------
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
October 29, July 29,
(In thousands) 2000 2001
- ---------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $1,647,604 $1,365,036
Short-term investments.................... 2,580,435 3,315,886
Accounts receivable, net.................. 2,351,379 1,315,800
Inventories............................... 1,503,751 1,453,996
Deferred income taxes..................... 549,108 545,598
Other current assets...................... 206,870 244,711
------------ ------------
Total current assets......................... 8,839,147 8,241,027
Property, plant and equipment, net........... 1,366,782 1,653,001
Other assets................................. 339,801 339,258
------------ ------------
Total assets................................. $10,545,730 $10,233,286
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................. $94,676 $99,993
Current portion of long-term debt......... 11,621 4,652
Accounts payable and accrued expenses..... 2,268,608 1,502,940
Income taxes payable...................... 384,806 138,689
------------ ------------
Total current liabilities.................... 2,759,711 1,746,274
Long-term debt............................... 573,126 565,893
Deferred income taxes and other liabilities.. 108,545 126,505
------------ ------------
Total liabilities............................ 3,441,382 2,438,672
------------ ------------
Stockholders' equity:
Common stock.............................. 8,125 8,163
Additional paid-in capital................ 1,930,212 1,827,316
Retained earnings......................... 5,185,181 5,998,543
Accumulated other comprehensive
income/(loss)............................ (19,170) (39,408)
------------ ------------
Total stockholders' equity................... 7,104,348 7,794,614
------------ ------------
Total liabilities and stockholders' equity... $10,545,730 $10,233,286
============ ============
*
Amounts as of July 29, 2001 are unaudited. Amounts as of October 29, 2000 are from the October 29, 2000audited financial statements.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
--------------------------
July 30, July 29,
(In thousands) 2000 2001
- --------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income...................................... $1,399,755 $813,362
Adjustments required to reconcile net income to
cash provided by operating activities:
Depreciation and amortization............... 269,602 282,726
Deferred income taxes....................... 9,483 (379)
Non-cash portion of restructuring charge.... -- 18,418
Adjustment to conform fiscal year end
for Etec Systems, Inc..................... (708) --
Changes in assets and liabilities, net of
amounts acquired:
Accounts receivable, net............... (905,950) 942,138
Inventories............................ (415,573) 6,710
Other current assets................... (28,171) (21,992)
Other assets........................... (9,708) (52,994)
Accounts payable and accrued expenses.. 475,211 (638,599)
Income taxes payable................... 150,647 (241,978)
Other liabilities...................... 14,003 20,915
------------ ------------
Cash provided by operating activities............. 958,591 1,128,327
------------ ------------
Cash flows from investing activities:
Capital expenditures, net of retirements........ (225,532) (537,671)
Proceeds from sales of short-term investments... 1,415,241 1,593,010
Purchases of short-term investments............. (1,868,480) (2,328,461)
------------ ------------
Cash used for investing activities................ (678,771) (1,273,122)
------------ ------------
Cash flows from financing activities:
Short-term debt activity, net................... 32,327 20,790
Long-term debt repayments....................... (4,177) (8,585)
Common stock transactions, net.................. 171,071 (114,758)
------------ ------------
Cash provided by/(used for) financing activities.. 199,221 (102,553)
------------ ------------
Effect of exchange rate changes on cash........... (4,327) (35,220)
------------ ------------
Increase/(decrease) in cash and cash equivalents.. 474,714 (282,568)
Cash and cash equivalents - beginning of period... 868,121 1,647,604
------------ ------------
Cash and cash equivalents - end of period......... $1,342,835 $1,365,036
============ ============
For the nine months ended July 30, 2000, cash
payments for interest and income taxes were $22,336
and $445,779, respectively. For the nine months
ended July 29, 2001, cash payments for interest
and income taxes were $21,449 and $567,131, respectively.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED JULY 29, 2001
1) Basis of Presentation
In the opinion of management, the unaudited interim consolidated
condensed financial statements of Applied Materials, Inc. (Applied) included
herein have been prepared on a basis consistent with the October 29, 2000
audited consolidated financial statements and include all material adjustments,
consisting of normal recurring adjustments, necessary to fairly present the
information set forth therein. These unaudited interim consolidated condensed
financial statements should be read in conjunction with the October 29, 2000
audited consolidated financial statements and notes thereto included in
Applied's Form 10-K for the fiscal year ended October 29, 2000. Applied's
results of operations for the three and nine months ended July 29, 2001 are not
necessarily indicative of future operating results.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
2) Earnings Per Share
Basic earnings per share has been determined using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share has been determined using the weighted average number of common shares and
equivalents (representing the dilutive effect of stock options) outstanding
during the period. Applied's net income has not been adjusted for any period
presented for purposes of computing basic or diluted earnings per share.
For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average fair market value of Applied's common stock for the period. For the three months ended July 29, 2001, options to purchase approximately 7,754,000 shares of common stock at an average exercise price of $71.96 were excluded from the computation, and for the nine months ended July 29, 2001, options to purchase approximately 10,737,000 shares of common stock at an average exercise price of $65.42 were excluded from the computation.
3) Accounts Receivable, Net
Applied has agreements with various financial institutions to sell
accounts receivable from selected customers. Applied sold accounts receivable
under these agreements of $1.1 billion for the nine months ended July 30, 2000
and $1.1 billion for the nine months ended July 29, 2001. Discounting fees were
not material for the three or nine months ended July 30, 2000 or July 29, 2001,
and were recorded as interest expense. At July 29, 2001, $285 million of sold
receivables remained outstanding under these agreements. A portion of these sold
receivables is subject to certain recourse provisions. Applied has not
experienced any losses under these recourse provisions, and receivables sold
under these provisions have terms and credit risk characteristics similar to
Applied's overall receivables portfolio.
4) Inventories
Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis. Components of inventories were
as follows (in thousands):
October 29, July 29,
2000 2001
------------ ------------
Customer service spares............ $443,595 $550,164
Raw materials...................... 384,840 370,243
Work-in-process.................... 413,228 200,475
Finished goods..................... 262,088 333,114
------------ ------------
$1,503,751 $1,453,996
============ ============
5) Accounts Payable and Accrued Expenses
Components of accounts payable and accrued expenses were as follows
(in thousands):
October 29, July 29,
2000 2001
------------ ------------
Accounts payable................... $649,681 $262,559
Compensation and benefits.......... 446,848 193,083
Installation and warranty.......... 363,697 304,019
Deferred revenue................... 144,447 173,063
Other.............................. 663,935 570,216
------------ ------------
$2,268,608 $1,502,940
============ ============
6) Non-recurring Items
During the third fiscal quarter of 2001, Applied recorded $10 million of
acquired in-process research and development expense in connection with its
acquisition of Oramir Semiconductor Equipment Ltd. For further details regarding
this acquisition, see Note 10 of Notes to Consolidated Condensed Financial
Statements. Also during the third fiscal quarter of 2001, in response to
continued reductions in capital spending by semiconductor manufacturers, Applied
recorded a pre-tax restructuring charge of $4 million associated with severance
and benefits costs. Total non-recurring items for the third fiscal quarter of
2001 amounted to $14 million, or $0.02 per diluted share after tax.
During the second fiscal quarter of 2001, Applied took actions to reduce headcount, which consisted primarily of a voluntary separation plan in North America, and to consolidate certain facilities. In connection with these actions, Applied reduced its global workforce by approximately 1,000 employees, or three percent, and recorded a pre-tax restructuring charge of $58 million, or $0.05 per diluted share after tax. The majority of the affected employees were based in Santa Clara, California and Austin, Texas, and represented multiple company activities and functions. Total cash outlays for these restructuring activities will be approximately $40 million. The remaining $18 million of non-cash restructuring charges consists primarily of compensation expense for accelerated vesting of certain stock options and reserves for certain assets. During the third fiscal quarter of 2001, approximately $20 million of cash was used for restructuring costs. The majority of the remaining cash outlays are expected to occur during the fourth fiscal quarter of 2001.
Restructuring activity was as follows (in thousands):
Severance
and Benefits Facilities Other Total
------------ ----------- ---------- ----------
Provision................. $46,693 $6,523 $5,198 $58,414
Amount utilized........... (19,628) -- -- (19,628)
------------ ----------- ---------- ----------
Balance, April 29, 2001... 27,065 6,523 5,198 38,786
Provision................. 4,150 -- -- 4,150
Amount utilized........... (19,267) (2,855) (3,099) (25,221)
------------ ----------- ---------- ----------
Balance, July 29, 2001.... $11,948 $3,668 $2,099 $17,715
============ =========== ========== ==========
During the second fiscal quarter of 2000, Applied recorded $40 million of pre-tax operating expenses for costs incurred in connection with its acquisition of Etec Systems, Inc.
7) Non-recurring Income
During the second fiscal quarter of 2000, Applied recorded $68 million of
pre-tax, non-operating income related to a prior litigation settlement with ASM
International, N.V. (ASMI). This amount consisted of: 1) the final cash payment
from ASMI of $35 million related to an outstanding note receivable; and 2) a net
gain of $33 million on the exercise of ASMI warrants and subsequent sale of the
resulting shares.
8) Derivative Financial Instruments
Applied adopted Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS 137 and SFAS 138, in the first fiscal quarter of 2001. SFAS
133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities, and requires that all derivatives, including
foreign currency exchange contracts, be recognized on the balance sheet at fair
value. Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of any hedges, must be recognized
currently in earnings. All of Applied's derivative financial instruments are
recorded at their fair value in other current assets or accounts payable and
accrued expenses. The transition adjustment upon adoption of SFAS 133 was
not material.
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, principally Japanese yen. The purpose of Applied's foreign currency management is to manage the effect of exchange rate fluctuations on certain foreign denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.
Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur within the next 12 months. In accordance with SFAS 133, these hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges, and are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of other comprehensive income in stockholders' equity, and is reclassified into earnings when the hedged transaction affects earnings. All amounts included in other comprehensive income at July 29, 2001 will be reclassified to earnings within 12 months. Changes in the fair value of currency option contracts due to changes in time value are excluded from the assessment of effectiveness, and are recognized in cost of products sold. For the three and nine months ended July 29, 2001, the change in option time value was not material. If the underlying transaction being hedged fails to occur, or if a portion of any derivative is ineffective, Applied immediately recognizes the gain or loss on the associated financial instrument in general and administrative expenses. Applied recorded an immaterial amount of net gains due to the anticipated transaction failing to occur for the three and nine months ended July 29, 2001.
Forward exchange contracts are used to hedge certain foreign currency denominated assets or liabilities. These derivatives are not designated for SFAS 133 hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
Derivative-related activity in accumulated other comprehensive income/(loss) for the nine months ended July 29, 2001 was as follows. There was no material transition adjustment. The change in unrealized gains on derivative instruments designated and qualifying as cash flow hedges totaled $15 million, comprised of $78 million of net increase in fair value of derivatives, offset by $63 million of net gains reclassified from accumulated other comprehensive income/(loss) to earnings.
9) Stockholders' Equity
Comprehensive Income
Components of comprehensive income/(loss), on an after-tax
basis where applicable, were as follows
(in thousands):
Three Months Ended Nine Months Ended
----------------------- -----------------------
July 30, July 29, July 30, July 29,
2000 2001 2000 2001
----------- ----------- ----------- -----------
Net income...................... $603,781 $28,525 $1,399,755 $813,362
Change in unrealized gain on
derivative instruments
designated and qualifying as
cash flow hedges.............. -- (25,096) -- 14,662
Foreign currency translation
adjustments................... (8,674) (8,341) (15,392) (34,900)
----------- ----------- ----------- -----------
Comprehensive income/(loss)..... $595,107 ($4,912) $1,384,363 $793,124
=========== =========== =========== ===========
Components of accumulated other comprehensive income/(loss), on an after-tax basis where applicable, were as follows (in thousands):
October 29, July 29,
2000 2001
------------ ------------
Unrealized gain on derivative
instruments designated and
qualifying as cash flow hedges..... $ -- $14,662
Cumulative translation adjustments... (19,170) (54,070)
------------ ------------
Accumulated other comprehensive
income/(loss)...................... ($19,170) ($39,408)
============ ============
Stock Repurchase Program
Since March 1996, Applied has systematically repurchased shares of its
common stock in the open market to partially fund its stock-based employee
benefit plans. Upon the expiration of the previous authorization on March 22,
2001, the Board of Directors extended the share repurchase program and
authorized the repurchase of up to $2 billion of Applied's common stock in the
open market over the next three years. Under this new authorization, Applied
will continue a systematic stock repurchase program and may also make additional
share repurchases from time to time, depending on market conditions, share price
and other factors.
During the nine months ended July 30, 2000, Applied repurchased 751,000 shares of its common stock at an average price of $80.06, for a total cash outlay of $60 million. During the nine months ended July 29, 2001, Applied repurchased 6,866,000 shares at an average price of $41.71, for a total cash outlay of $286 million.
10) Business Combination
On June 27, 2001, Applied acquired Oramir Semiconductor Equipment Ltd., a
supplier of advanced laser cleaning technologies for semiconductor wafers, in a
purchase business combination for $21 million in cash. In connection with this
acquisition, Applied recorded acquired in-process research and development
expense of $10 million and goodwill of $12 million. Management has assigned a
useful life of seven years to the goodwill. This acquisition did not have a
material effect on Applied's financial condition or results of operations.
On March 29, 2000, Applied acquired Etec Systems, Inc. (Etec), a supplier of mask pattern generating equipment for the semiconductor and electronics industries, in a stock-for-stock merger. This transaction was accounted for as a pooling-of-interests; therefore, all prior period amounts have been restated. Applied issued approximately 29 million shares of its common stock to complete this transaction, and recorded $40 million of transaction costs as a one-time operating expense.
Prior to the merger, Etec's fiscal year end (July 31) was different than Applied's (last Sunday in October). Fiscal 2000 amounts included herein for Etec have been conformed to Applied's fiscal year. As a result, Etec's net loss for the three months ended October 31, 1999 was reflected as an adjustment to retained earnings in the first fiscal quarter of 2000.
11) Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," providing guidance on the recognition, presentation and
disclosure of revenue in financial statements. Applied is required to adopt SAB
101 in the fourth fiscal quarter of 2001, retroactively effective to the
beginning of fiscal 2001. Management has adopted the following implementation
plan. For all transactions where legal title passes to the customer upon
shipment, Applied will generally continue to recognize revenue upon shipment for
all products that have previously been demonstrated to meet product
specifications, except for revenue associated with certain installation-related
tasks, which will be deferred until such tasks are complete. For new products or
products that have not previously been demonstrated to meet product
specifications, revenue will be recognized at customer technical acceptance. For
transactions where legal title does not transfer at shipment, revenue will be
recognized when legal title passes to the customer, which is typically at
customer technical acceptance.
Under the provisions of SAB 101, the change in revenue recognition resulting from SAB 101 will be reported with fiscal 2001 annual results as a change in accounting principle. Management is in the process of quantifying the exact effect of the implementation of SAB 101 on Applied's reported financial condition and results of operations. While SAB 101 will not affect the fundamental economics of Applied's business as measured by shipments and cash flows, the implementation of SAB 101 will result in changes to the timing of recognition of certain of Applied's revenues, and therefore may have a material effect on Applied's reported financial condition and results of operations.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations." SFAS 141 supersedes Accounting Principles Board (APB) Opinion No. 16, "Business Combinations," and SFAS 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Applied does not expect the adoption of SFAS 141 to have a material effect on its financial condition or results of operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets." SFAS 142 supersedes APB Opinion No. 17, "Intangible Assets," and requires the discontinuance of goodwill amortization. In addition, SFAS 142 includes provisions regarding the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with certain early adoption permitted. Applied is in the process of assessing the effect of adopting SFAS 142, and expects to adopt SFAS 142 for its first fiscal quarter of 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain information contained in this Quarterly Report on Form 10-Q is forward-looking in nature. All statements included in this Quarterly Report on Form 10-Q or made by management of Applied Materials, Inc. and its subsidiaries (Applied), other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied's future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should, " "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section below entitled "Trends, Risks and Uncertainties." Other risks and uncertainties are disclosed in Applied's prior SEC filings, including its Annual Report on Form 10-K for the fiscal year ended October 29, 2000. These and many other factors could affect Applied's future financial 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.
Results of Operations
Applied is a supplier of semiconductor manufacturing equipment and services to the global semiconductor industry. Business activity in the semiconductor and semiconductor manufacturing equipment industries has been cyclical; for this and other reasons, Applied's results of operations for the three and nine months ended July 29, 2001 may not necessarily be indicative of future operating results.During fiscal 2000, strong demand for Applied's products was driven by semiconductor manufacturers' needs for additional capacity and new technology to meet strong consumer demand for Internet, communications and digital applications and products. In addition, the semiconductor industry began transitioning to smaller device sizes, new materials, such as copper, and 300mm wafer processing, all of which required new manufacturing equipment and technology solutions. As a result of the industry expansion and technology transitions, Applied achieved record levels of new orders, net sales and net income for each quarter of fiscal 2000.
During the first fiscal quarter of 2001, slowing worldwide demand for semiconductors resulted in a rapid decline in demand for manufacturing equipment. Inventory buildups in telecommunication products, slower than expected personal computer sales and slower global economic growth caused semiconductor companies to reevaluate their capital spending plans. This decline in demand deepened into a severe industry downturn during the second and third fiscal quarters of 2001 due to continued weakness in the macro-economic climate and consumption of electronic goods, which resulted in further capital spending cutbacks by customers.
Applied received new orders of $1.2 billion for the third fiscal quarter of 2001 compared to $1.4 billion for the second fiscal quarter of 2001 and $3.3 billion for the third fiscal quarter of 2000. The decrease in new orders was due primarily to the industry cycles discussed above. New orders by region were as follows (dollars in millions):
Three Months Ended
-----------------------------------
April 29, 2001 July 29, 2001
---------------- ----------------
($) (%) ($) (%)
------- ------- ------- -------
North America*..................... 332 24 530 44
Taiwan............................. 265 20 185 15
Japan.............................. 282 21 225 19
Europe............................. 189 14 167 14
Korea.............................. 83 6 41 3
Asia-Pacific....................... 202 15 60 5
------- ------- ------- -------
Total............................ 1,353 100 1,208 100
======= ======= ======= =======
*
Primarily the United States.Applied's backlog at July 29, 2001 was $2.6 billion, compared to $3.0 billion at April 29, 2001 and $3.9 billion at January 28, 2001.
Net sales for the third fiscal quarter of 2001 decreased 30 percent from the second fiscal quarter of 2001 and 51 percent from the third fiscal quarter of 2000. Net sales for the nine months ended July 29, 2001 decreased 10 percent from the comparable period of fiscal 2000. The decreases in net sales were due primarily to the industry cycles discussed above. Net sales by region were as follows (dollars in millions):
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
July 30, 2000 July 29, 2001 July 30, 2000 July 29, 2001
-------------- -------------- -------------- --------------
($) (%) ($) (%) ($) (%) ($) (%)
------- ------ ------- ------ ------- ------ ------- ------
North America*... 720 26 443 33 1,666 25 1,696 28
Taiwan........... 673 25 216 16 1,743 26 944 16
Japan............ 366 13 270 21 1,047 16 1,472 25
Europe........... 399 15 202 15 964 14 876 15
Korea............ 251 9 82 6 643 10 421 7
Asia-Pacific..... 323 12 121 9 581 9 565 9
------- ------ ------- ------ ------- ------ ------- ------
Total.......... 2,732 100 1,334 100 6,644 100 5,974 100
======= ====== ======= ====== ======= ====== ======= ======
*
Primarily the United States.Applied's gross margin was 40.0 percent for the third fiscal quarter of 2001, compared to 44.8 percent for the second fiscal quarter of 2001 and 50.9 percent for the third fiscal quarter of 2000. Gross margin for the nine months ended July 29, 2001 was 45.5 percent, compared to 50.4 percent for the comparable period of fiscal 2000. The decreases from prior periods were caused primarily by factory underabsorption due to the decrease in business volume, and changes in product mix due to 300mm start-up and learning curve costs.
Excluding non-recurring items, operating expenses were 39 percent of net sales for the three months ended July 29, 2001, compared to 27 percent for the second fiscal quarter of 2001 and 21 percent for the third fiscal quarter of 2000. Operating expenses were 27 percent of net sales for the nine months ended July 29, 2001, compared to 22 percent for the nine months ended July 30, 2000. The increases as a percentage of net sales were due primarily to the decrease in net sales. In terms of absolute dollars, operating expenses for the three months ended July 29, 2001 were eight percent lower than for the third fiscal quarter of 2000, due primarily to reductions in discretionary and compensation expenditures. Operating expenses for the nine months ended July 29, 2001 were 11 percent higher than for the nine months ended July 30, 2000, primarily due to increased research and development spending to support the semiconductor industry's transition to 300mm wafer processing, new materials (including copper) and smaller chip feature sizes.
Non-recurring items for the third fiscal quarter of 2001 amounted to $14 million, or $0.02 per diluted share after tax. These items consisted of a non-tax deductible charge of $10 million for acquired in-process research and development associated with the acquisition of Oramir Semiconductor Equipment Ltd. and a pre-tax restructuring charge of $4 million associated with severance and benefit costs. Non-recurring items for the second fiscal quarter of 2001 consisted of a pre-tax restructuring charge of $58 million, or $0.05 per diluted share after tax. Non-recurring items for the second fiscal quarter of 2000 consisted of $40 million of pre-tax operating expenses incurred in connection with the acquisition of Etec Systems, Inc. For further details, see Note 6 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
Net interest income was $43 million for the three months ended July 29, 2001 and $132 million for the nine months ended July 29, 2001, an increase from $36 million for the three months ended July 30, 2000 and $90 million for the nine months ended July 30, 2000, due to higher average cash and investment balances.
Applied expected an effective income tax rate of 29.5 percent for the three and nine months ended July 29, 2001, which decreased from the effective income tax rate of 30 percent for the three and nine months ended July 30, 2000, due to a shift in the geographic composition of Applied's pre-tax income. However, Applied's actual effective income tax rate was 36.1 percent for the three months ended July 29, 2001 and 29.8 percent for the nine months ended July 29, 2001 due to the non-tax deductible nature of acquired in-process research and development expense.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," providing guidance on the recognition, presentation and disclosure of revenue in financial statements. Applied is required to adopt SAB 101 in the fourth fiscal quarter of 2001, retroactively effective to the beginning of fiscal 2001. Management is in the process of quantifying the exact effect of the implementation of SAB 101 on Applied's reported financial condition and results of operations. While SAB 101 will not affect the fundamental economics of Applied's business as measured by shipments and cash flows, the implementation of SAB 101 will result in changes to the timing of recognition of certain of Applied's revenues, and therefore may have a material effect on Applied's reported financial condition and results of operations.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations." SFAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. Applied does not expect the adoption of SFAS 141 to have a material effect on its financial condition or results of operations.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which requires the discontinuance of goodwill amortization. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with certain early adoption permitted. Applied is in the process of assessing the effect of adopting SFAS 142, and expects to adopt SFAS 142 for its first fiscal quarter of 2002.
For further details regarding the above recent accounting pronouncements, see Note 11 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
Financial Condition, Liquidity and Capital Resources
Applied's financial condition at July 29, 2001 remained strong, with a ratio of current assets to current liabilities of 4.7:1, compared to 3.2:1 at October 29, 2000. Applied had cash, cash equivalents and short-term investments of $4.7 billion at July 29, 2001.
For the nine months ended July 29, 2001, cash, cash equivalents and short-term investments increased by $453 million. Significant sources of cash were net income, excluding depreciation and amortization expense, and a decrease in accounts receivable. These sources of cash were partially offset by changes in working capital, particularly decreases in accounts payable and accrued expenses and income taxes payable, capital expenditures to complete strategic infrastructure projects and repurchases of common stock. For further details, see the Consolidated Condensed Statements of Cash Flows in this Form 10-Q.
Applied utilized programs to sell accounts receivable of $1.1 billion during the nine months ended July 29, 2001, of which $285 million remained outstanding at July 29, 2001. Receivable sales have the effect of increasing cash and reducing accounts receivable and days sales outstanding. For further details regarding accounts receivable sales, see Note 3 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
At July 29, 2001, Applied's principal sources of liquidity consisted of $4.7 billion of cash, cash equivalents and short-term investments and approximately $580 million of available credit facilities, including $250 million from the 364-Day Credit Agreement dated March 10, 2000, the expiration of which has been extended to March 8, 2002. Applied's liquidity is affected by many factors, some of which are based on normal ongoing operations, and others of which relate to the uncertainties of global economies and the semiconductor and semiconductor equipment industries, and also may be affected from time to time by potential additional share repurchases. Although Applied's cash requirements fluctuate based on the timing and extent of these factors, Applied believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy liquidity requirements for the next 12 months.
Trends, Risks and Uncertainties
The highly cyclical semiconductor equipment industry is currently
experiencing a severe downturn.
The semiconductor industry has historically been cyclical because of
sudden changes in customer capacity requirements and demand for semiconductors,
which have affected the timing and amounts of capital equipment purchases by our
customers. As suppliers to the semiconductor industry, the semiconductor
equipment industry is in turn characterized by up and down business cycles, the
timing, length and volatility of which are difficult to predict. These cycles
create pressure on Applied's revenue, gross margin and profit. In addition,
these cycles strain key management, engineering and other employees who are
vital to Applied's success.
Management believes that the current industry downturn may be the steepest decline in history, and management cannot predict when a recovery will begin. During periods of declining demand for semiconductor manufacturing equipment, customers typically reduce purchases, delay delivery of products and/or cancel orders. During this downturn, Applied must be able to quickly and effectively align its cost structure with prevailing market conditions and motivate and retain key employees. If Applied is unable to achieve its objectives in a timely manner during the current downturn, there could be a material adverse effect on its financial condition and results of operations.
Applied is exposed to the risks associated with industry overcapacity.
Inventory buildups in telecommunication products, slower than expected
personal computer sales and slower global economic growth have dramatically
decreased demand for semiconductors. This decreased demand has resulted in
excess production capacity for semiconductor manufacturers and has caused these
manufacturers to reevaluate their capital spending plans. Delays or
cancellations of orders by semiconductor manufacturers have caused, and may
continue to cause, fluctuations in the utilization of Applied's manufacturing
facilities. Continued decreased demand and overcapacity could materially and
adversely affect Applied's business, financial condition and results of
operations.
Applied is exposed to the risks of operating a global business.
Currently, a significant percentage of Applied's revenues result from
sales outside the U.S. Certain manufacturing facilities and suppliers are also
located abroad. Managing Applied's global operations presents challenges,
including periodic regional economic downturns, trade balance issues, varying
business conditions and demands, political instability, U.S. export
restrictions, fluctuations in interest and currency exchange rates and cultural
diversities, among other risks. For example, global uncertainties with respect
to: 1) decreased rates of gross domestic product growth globally;
2) factory capacity utilization; 3) capital spending in the
telecommunications and personal computer industries; and 4) memory price
weakness may affect Applied's business, financial condition and results of
operations.
Applied operates in a highly competitive industry characterized by
increasingly rapid technological changes.
Applied's competitive advantage and future success depend on its ability
to successfully: 1) develop new products and technologies; 2) develop new
markets in the semiconductor industry for its products and services; 3)
introduce new products to the marketplace in a timely manner; 4) qualify new
products with its customers; and 5) commence and adjust production to meet
customer demands. The introduction of an increasingly broader set of new
products and technologies, including those to support the transition to new
materials, smaller linewidths and 300mm systems, grows increasingly complex over
time. Such new product introductions may involve higher costs and reduced
efficiencies compared to Applied's more established products, and could
adversely affect Applied's gross margins. If Applied does not develop and
introduce new products and technologies in a timely and cost-effective manner in
response to changing market conditions or customer requirements, its competitive
position, financial condition and results of operations could be materially and
adversely affected.
Applied is exposed to risks associated with acquisitions.
Applied has made, and may in the future make, acquisitions of, or
significant investments in, businesses with complementary products, services
and/or technologies. Acquisitions involve numerous risks, including but not
limited to: 1) diversion of management's attention from other operational
matters; 2) lack of synergy, or the inability to realize expected synergies,
resulting from the acquisition; 3) failure to commercialize purchased
technology; and 4) acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of the acquired
company. Mergers and acquisitions are inherently risky and the inability to
effectively manage these risks could materially and adversely affect Applied's
business, financial condition and results of operations.
Applied is subject to risks of non-compliance with environmental and
safety regulations.
Applied is subject to environmental and safety regulations in connection
with its business operations, including but not limited to regulations related
to the development, manufacturing and use of its products. From time to time,
Applied receives notices alleging violations of these regulations. It is
Applied's policy to respond promptly to these notices and to take necessary
corrective action. Failure or inability to comply with existing or future
environmental and safety regulations could result in significant remediation
liabilities, the imposition of fines and/or the suspension or termination of
development, manufacturing or use of certain of its products, each of which
could have a material adverse effect on Applied's financial condition and
results of operations.
Manufacturing interruptions or delays could affect Applied's ability to meet
customer demand.
Applied's business depends on its ability to manufacture products that
meet the rapidly changing demands of its customers. Applied's ability to
manufacture depends in part on the timely delivery of parts, components, and
subassemblies (collectively "parts") from suppliers. Some key parts
may be obtained only from a single supplier or a limited group of suppliers.
Significant interruptions of manufacturing operations as a result of natural
disasters (such as earthquakes or tornadoes), the failure or inability of
suppliers to timely deliver quality parts, or other causes (such as software
issues or infrastructure failures) could result in delayed product deliveries or
manufacturing inefficiencies. Any or all of these could materially and adversely
affect Applied's financial condition and results of operations.
The shortage of energy supplies in California could negatively affect
Applied's operations.
California has experienced energy alerts caused by the shortage and
substantially increased costs of electricity and natural gas supplies in recent
months, which may continue. Although the majority of Applied's manufacturing
operations are located outside of California, Applied conducts its major
research, development and engineering and pilot manufacturing activities in
California. In addition, California's power crisis may affect other regions of
the U.S. If Applied encounters a disruption in its energy supplies and its
backup generators fail to provide adequate power, or if energy costs continue to
rise sharply, Applied's financial condition and results of operations may be
materially and adversely affected.
Applied is exposed to risks presented by required changes in revenue
recognition procedures under SAB 101.
In December 1999, the Securities and Exchange Commission issued SAB 101,
"Revenue in Financial Statements," providing guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Applied is required to adopt SAB 101 in the fourth fiscal quarter of 2001,
retroactively effective to the beginning of fiscal 2001. As a result of the
provisions of SAB 101, Applied's ability to recognize revenue for certain
product shipments depends upon technical acceptance by the customer. If
acceptances are not timely provided for any reason, this could have a material
adverse effect on Applied's reported financial condition and results of
operations.
Applied is exposed to various risks related to legal proceedings or
claims.
Applied currently is, and in the future may be, involved in legal
proceedings or claims regarding patent infringement, intellectual property
rights, antitrust, environmental regulations, contracts and other matters (see
Part II below). These legal proceedings and claims, whether with or without
merit, could be time-consuming and expensive to prosecute or defend, and could
divert management's attention and resources. There can be no assurance regarding
the outcome of current or future legal proceedings or claims. In addition,
Applied's intellectual property rights may not provide significant competitive
advantages if they are circumvented, invalidated or obsoleted by the rapid pace
of technological change. Furthermore, the laws of other countries permit the
protection of Applied's proprietary rights to varying extents compared to U.S.
laws. Applied's success is dependent in part upon the protection of its
intellectual property rights. Infringement of Applied's rights by a third party
could result in uncompensated lost market and revenue opportunities for Applied.
If Applied is not able to resolve a claim, negotiate a settlement of the matter,
obtain necessary licenses on commercially reasonable terms, and/or successfully
prosecute or defend its position, Applied's financial condition and results of
operations could be materially and adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Applied purchases forward exchange and currency option contracts to hedge certain existing and anticipated foreign currency denominated transactions expected to occur during the next year. Gains and losses on these contracts are recognized in income when the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on forward exchange and currency option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Net foreign currency gains and losses were not material for the three or nine months ended July 29, 2001.
Applied has performed an analysis to assess the potential financial effect of reasonably possible near-term changes in interest and foreign currency exchange rates. Based upon Applied's analysis, the effect of such rate changes is not expected to be material to Applied's cash flows, financial condition or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Novellus
On June 13, 1997, Applied filed a lawsuit against Varian Associates, Inc.
(Varian) captioned Applied Materials, Inc. v. Varian Associates, Inc. (case no.
C-97-20523-RMW) in the United States District Court for the Northern District of
California, alleging infringement of several of Applied's patents concerning
physical vapor deposition (PVD) technology. On July 7, 1997, Applied amended
that action to allege infringement of those same Applied PVD patents against
Novellus Systems, Inc. (Novellus) and to add Novellus as a defendant, as a
result of Novellus' acquisition of Varian's thin film systems PVD business. On
June 23, 1997, Novellus filed a separate lawsuit against Applied captioned
Novellus Systems, Inc. v. Applied Materials, Inc. (case no. C-97-20551-EAI) in
the United States District Court for the Northern District of California,
alleging infringement by Applied of several PVD technology patents that were
formerly owned by Varian. Novellus seeks damages for past infringement, a
permanent injunction, treble damages for willful infringement, pre-judgment
interest and attorneys' fees. In September 2000, Applied and Varian settled
their disputes, and on October 3, 2000, Applied's claims against Varian and
Varian's claims and counterclaims against Applied were dismissed with prejudice.
The litigation with Novellus continues. Fact discovery has closed in these
actions. The court has canceled the August 2001 trial date and no new trial
date has been set. Applied believes it has meritorious claims and defenses and
intends to pursue them vigorously.
Plasma Physics
On April 17, 2000, Applied filed a lawsuit against Plasma Physics Corp.
(PPC) and Solar Physics Corp. (SPC). The lawsuit seeks a judicial declaration
that Applied's chemical vapor deposition equipment does not infringe two patents
owned by PPC and exclusively licensed to SPC and/or that those patents are
invalid or unenforceable. On July 31, 2000, PPC and SPC answered the complaint
and filed a conditional counterclaim alleging that Applied had contributed to or
induced others to infringe the two patents. PPC and SPC seek an injunction
prohibiting infringement by Applied and an award of costs, expenses and
attorneys' fees. The counterclaim is conditional because PPC and SPC have stated
that they will not sue Applied for infringement of the two patents if the Court
dismisses the lawsuit initiated by Applied for lack of subject matter
jurisdiction. The Court subsequently denied without prejudice PPC and SPC's
motion to dismiss the lawsuit for lack of subject matter jurisdiction, but
stated that PPC and SPC could renew the motion to dismiss if appropriate after
further discovery. Discovery has commenced. No trial date has been set.
U.S. Department of Justice, Antitrust Division
In September 2000, Applied received notice from the Department of
Justice, Antitrust Division that it had begun an investigation into Applied's
licensing of technology. Although neither the extent nor the outcome of this
investigation can be determined at this time, Applied does not believe that the
outcome will have a material adverse effect on its financial condition or
results of operations.
Axcelis Technologies
On January 8, 2001, Axcelis Technologies, Inc. (Axcelis), formerly a
subsidiary of Eaton Corporation, filed a lawsuit in the United States District
Court for the District of Massachusetts captioned Axcelis Technologies, Inc. v.
Applied Materials, Inc. (case no. 01-10029 DPW). The lawsuit alleges that
Applied infringes a patent concerning ion implantation owned by Axcelis. The
complaint also alleges various Massachusetts state and common law tortious
interference and unfair competition claims. Axcelis seeks a preliminary and
permanent injunction, damages, costs and attorneys' fees. On April 12, 2001,
Applied answered the complaint by denying all allegations and counterclaimed for
declaratory judgment of invalidity and non-infringement and violations of
various unfair competition and deceptive practices laws. Applied seeks damages,
a permanent injunction, costs and attorneys' fees. Fact discovery has closed. No
trial date has been set. Applied believes it has meritorious defenses and
counterclaims to the action and intends to pursue them vigorously.
Linear Technology Corp.
On March 2, 2001, Linear Technology Corp. (LTC) filed a third party
complaint against Applied in the United States District Court for the Eastern
District of Texas captioned Texas Instruments, Inc. v. Linear Technology Corp.
v. Applied Materials, Inc. (case no. 2-01-CV4 (DF)). The complaint against
Applied alleges that Applied is obligated to indemnify and defend LTC in the
underlying patent infringement lawsuit brought by Texas Instruments, Inc. (TI)
against LTC. The complaint also alleges claims for breach of contract, breach of
warranty, and various unfair business practices. In the complaint, LTC alleges
that Applied failed to disclose to LTC, before LTC purchased certain equipment
from Applied, that TI previously had won a jury verdict against Hyundai
Electronics Industries Co., Ltd. for patent infringement based on Hyundai's use
of certain semiconductor equipment including some Applied tools. LTC's lawsuit
against Applied seeks indemnification and damages from Applied, and an order
requiring Applied to defend LTC in the underlying lawsuit with TI. Applied has
brought a motion to dismiss all claims. The motion is pending before the court.
No trial date has been set.
Semitool, Inc.
On June 11, 2001, Semitool filed a lawsuit against Applied in the United
States District Court for the Northern District of California captioned
Semitool, Inc. v. Applied Materials, Inc. (case no. CV-01-2277 CRB). The lawsuit
alleges that Applied infringes a patent concerning seed repair and
electroplating owned by Semitool. Semitool seeks a preliminary and permanent
injunction, damages, costs and attorneys' fees. On July 12, 2001, before Applied
had answered the complaint, Semitool voluntarily dismissed its action against
Applied in the Northern District of California. On the same day, Semitool filed
a substantially identical action against Applied in the United States District
Court for the District of Oregon captioned Semitool, Inc. v. Applied Materials,
Inc. (case no. CV'01-1066 AS). On July 13, 2001, Applied filed a declaratory
judgment action against Semitool in the Northern District of California
captioned Applied Materials, Inc. v. Semitool, Inc. (case no. CV-01-2673 BZ). In
that action, Applied seeks a declaration that Applied has not infringed the
Semitool patent and that Semitool's patent is invalid and unenforceable. Applied
also seeks costs and attorneys' fees. Applied has moved the Oregon Court to
dismiss, stay or transfer to the Northern District of California Semitool's
Oregon action. Semitool has moved the California Court to dismiss or transfer to
Oregon Applied's California action. No trial dates have been set. Applied
believes it has meritorious claims and defenses and intends to pursue them
vigorously.
David Scharf
On July 31, 2001, an individual, David Scharf, filed a lawsuit against
Applied Materials in the United States District Court for the Central District
of California captioned David Scharf v. Applied Materials, Inc. (case no.
01-06580 AHM). The lawsuit alleges that Applied infringes, has induced others to
infringe and has contributed to others infringement of a patent concerning color
synthesizing scanning electron microscope technology. Mr. Scharf seeks a
preliminary and permanent injunction, damages and costs. Applied has not yet
responded to the complaint and no trial date has been set. Applied believes it
has meritorious claims and defenses and intends to pursue them vigorously.
Applied is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, Applied does not believe that any of these other existing legal matters will have a material adverse effect on its financial condition or results of operations.
Item 5. Other Information
The ratio of earnings to fixed charges for the nine months ended July 30, 2000 and July 29, 2001, and for each of the last five fiscal years, was as follows:
Nine Months Ended
Fiscal Year ----------------------
------------------------------------------------ July 30, July 29,
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- ---------- ----------
19.44x 19.01x 7.56x 14.03x 32.82x 22.01x 16.12x
======== ======== ======== ======== ======== ========== ==========
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: None
b) Applied did not file any reports on Form 8-K during its third fiscal quarter of 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| APPLIED MATERIALS, INC. |
August 24, 2001
| By: | /s/ Joseph R. Bronson |
|
| |
| Joseph R. Bronson | |
|
Executive Vice President,
Office of the President and Chief Financial Officer |
| By: | /s/ Nancy H. Handel |
|
| |
| Nancy H. Handel | |
|
Group Vice President,
Deputy Chief Financial Officer and Corporate Controller |