01—Abstract
Summary
Summary of the 10-K filed January 23, 1998. Cited figures are marked; the original filing is the authoritative source.
Applied Materials' fiscal 1997 (year ended October 26, 1997) was a year of flat top-line results with a sharp second-half recovery.
Net sales were $4.07 billiona, essentially flat versus $4.14 billion in fiscal 1996, as the semiconductor downturn that began in 1996 weighed on the first half of the year. Net income fell 17% to $498.5 million ($1.32 per share) from $599.6 million ($1.63 per share). The decline was driven by a $59.5 million non-deductible acquired in-process R&D charge tied to the Opal and Orbot acquisitions, a $16.3 million bad debt charge related to Submicron Technology, and higher operating expenses, partly offset by $69 million in net litigation settlement income from Novellus and General Signal.
Quarterly results improved markedly through the year, with fourth-quarter sales of $1.28 billionb, the strongest quarter in the period, and record quarterly new orders, driven by logic/microprocessor demand, Taiwan foundry investment and 0.25-micron DRAM spending. The balance sheet remained strong but shifted toward more leverage and liquidity-intensive operations. Cash, equivalents and short-term investments totaled $1.54 billion, and the current ratio was 2.7:1.
Long-term debt rose to $623 millionc after the company issued $400 million of senior notes in October 1997, and the company repurchased 2.65 million shares for $78.2 million. Backlog grew to $1.72 billion from $1.42 billion. Management guided to capital expenditures of roughly $750 million in fiscal 1998, including a $430 million Santa Clara 300mm development program and the doubling of Austin manufacturing capacity, signaling a major capacity build-out ahead of expected demand.
For investors, the key positives are the strong order momentum, the fourth-quarter inflection, and the litigation settlements that improved near-term earnings. The principal risks are the cyclical nature of the semiconductor equipment market, continued dependence on DRAM capital spending, Asian currency and economic weakness (notably Korea and Japan), the ongoing patent litigation with Varian/Novellus, KLA, AST and AG, and the substantial fiscal 1998 spending commitments that will pressure free cash flow if demand softens.
02—Key points
Key Highlights
- Net sales of $4.07 billion were roughly flat versus $4.14 billion in fiscal 1996, but quarterly sales rose from $836 million in Q1 to $1.28 billion in Q4.
- Net income declined 17% to $498.5 million ($1.32 EPS) from $599.6 million ($1.63 EPS), including a $59.5 million non-deductible in-process R&D charge.
- Backlog increased to $1.72 billion from $1.42 billion, and the company reported record quarterly new orders and sales in the fourth quarter of 1997.
- Gross margin held near 46.7%, and R&D spending rose to $568 million (13.9% of sales) to fund 300mm and 0.25-micron product development.
- Litigation settlements added value: $80 million from Novellus and $80 million convertible note from ASM (with $15 million received), while a $11 million patent purchase from General Signal was paid.
- Liquidity remained strong with $1.54 billion in cash and short-term investments, a 2.7:1 current ratio, and a $400 million senior note issuance; debt ratings were upgraded to BBB+ and A3.
- Fiscal 1998 capital expenditures are planned at about $750 million, including a $430 million Santa Clara 300mm center and the doubling of Austin manufacturing capacity.
03—Questions
Frequently Asked Questions
Why did net income decline in fiscal 1997 despite relatively flat sales?
Net income fell to $498.5 million from $599.6 million mainly because of a $59.5 million non-tax-deductible acquired in-process R&D charge from the Opal and Orbot acquisitions, a $16.3 million bad debt expense related to Submicron Technology, and higher marketing, G&A and R&D spending. The effective tax rate also rose to 37.6% from 35.0%. These were partly offset by $69 million of net litigation settlement income and higher interest income of $59.7 million.
How strong is the demand outlook based on the filing?
Demand appeared to be recovering. Backlog rose to $1.72 billion from $1.42 billion, and management reported record quarterly new orders and net sales in Q4 1997, driven by logic and microprocessor makers, foundry investment in Taiwan, and 0.25-micron DRAM investments. However, the company cautioned that DRAM markets still had excess capacity and that recent order strength included significant strategic DRAM investments that could reverse.
What are the main risks investors should consider?
Key risks include the cyclical nature of semiconductor capital spending, dependence on DRAM customers, economic and currency weakness in Korea, Japan and other Pacific Rim markets, and reliance on new product success at 300mm and sub-0.25-micron geometries. The company also faces ongoing patent and antitrust litigation with Varian, Novellus, KLA, AST and AG, and the Orbot acquisition integration and intangible asset impairment could affect results.
How is the company funding its expansion and what does it mean for cash flow?
The company funded expansion with operating cash flow of $701.7 million, $400 million of senior notes issued in October 1997, and existing cash balances. Long-term debt rose to $623 million. Capital expenditures are expected to be about $750 million in fiscal 1998, so free cash flow could be pressured if demand weakens, although management believes operating cash flow, cash balances and credit facilities will be sufficient.
Did the litigation settlements materially affect results?
Yes, they were meaningful in fiscal 1997. The company recorded $69 million of net income from litigation settlements, primarily the $80 million Novellus payment less an $11 million General Signal payment. The ASM settlement, with an $80 million convertible note and $15 million received in November 1997, will add $80 million of pre-tax non-operating income in Q1 fiscal 1998, and ongoing royalties are not expected to be material.
04—Continue