01—Abstract
Summary
Summary of the 10-K filed January 24, 1997. Cited figures are marked; the original filing is the authoritative source.
Applied Materials' fiscal 1996 10-K (year ended October 27, 1996) shows a company at the peak of a strong growth cycle that was beginning to turn.
Net sales rose 35% to $4.14 billiona, net income grew 32% to $599.6 million, and EPS reached $3.27, with a gross margin of 47%. Management flagged a sharp downturn in the second half of the year, when new orders fell roughly 40% versus the first half as semiconductor makers cut memory-driven fab capacity investment. In response, the company cut about 800 employees and took a $25.1 million restructuring charge in Q4.
Backlog ended at $1.4 billionb, down from $1.5 billion, and the company warned that growth rates in fiscal 1996 and 1995 may not be indicative of 1997. The balance sheet remains strong. Cash, equivalents and short-term investments totaled $1.04 billion, the current ratio was 2.9:1, and long-term debt was $275 million against $2.37 billion of stockholders' equity.
Operating cash flow was $692 millionc. The company has never paid cash dividends and has no plans to do so. Capital spending is planned at about $250 million for fiscal 1997, and the company is expanding its metrology and inspection business through the pending acquisitions of Opal and Orbot for roughly $285 million combined.
The key risks for investors are the cyclicality of the semiconductor equipment market, pricing pressure, and ongoing patent litigation, including multiple suits with ASM and Novellus and a General Signal case. Management believes these cases will not have a material adverse effect, but the outcomes and the pace of the industry downturn will be the main drivers of fiscal 1997 results.
02—Key points
Key Highlights
- Net sales rose 35% to $4.14 billion in fiscal 1996, with net income up 32% to $599.6 million and EPS of $3.27.
- New orders fell about 40% in the second half of fiscal 1996 versus the first half, as memory price declines drove semiconductor makers to cut capital spending.
- A $25.1 million restructuring charge in Q4 covered the elimination of roughly 800 employees and the consolidation of facilities.
- Backlog stood at $1.4 billion at October 27, 1996, down from $1.5 billion a year earlier.
- Cash and short-term investments of $1.04 billion, a 2.9:1 current ratio, and $692 million in operating cash flow give the company a strong financial position.
- Pending acquisitions of Opal (about $175 million) and Orbot (about $110 million) mark entry into the metrology and inspection equipment market.
- No cash dividends have been paid, and none are planned; the company repurchased 1.185 million shares in fiscal 1996 to offset dilution.
03—Questions
Frequently Asked Questions
Why did Applied Materials' business slow in the second half of fiscal 1996?
Sharply lower memory device prices, caused by excess DRAM capacity, led semiconductor manufacturers to cut fab capacity investment and delay or cancel orders. New orders fell about 40% in the second half of fiscal 1996 compared with the first half, which prompted the workforce reduction and restructuring charge.
How strong is the company's balance sheet and liquidity?
Very strong. At October 27, 1996 the company held $1.04 billion in cash, equivalents and short-term investments, had a current ratio of 2.9:1, and carried $275 million of long-term debt against $2.37 billion in stockholders' equity. It also had a $240 million revolving credit line that is undrawn and expires in February 2000.
What are the main litigation risks?
The company is involved in many patent suits. The most significant include its ongoing actions against ASM (where it has won permanent injunctions on several epitaxial reactor patents), its Novellus TEOS and tungsten CVD cases with a jury trial set for March 1997, and a General Signal suit alleging infringement of five patents by its multi-chamber equipment. Management believes it has meritorious defenses and that these matters will not have a material adverse effect, but outcomes are uncertain.
What is the outlook for fiscal 1997 and what are the company's capital and acquisition plans?
Management said fiscal 1996 and 1995 growth rates may not indicate 1997 results, and that a continued downturn could further pressure pricing and orders. Capital expenditures are expected to be about $250 million in fiscal 1997, and the Opal and Orbot acquisitions (roughly $285 million, mostly cash) were expected to close in the first quarter of fiscal 1997, along with a $56 million early repayment of senior notes.
04—Continue