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Previous: STAGE STORES INC, 8-K, EX-99.1, 2000-06-08 |
Next: APPLIED MATERIALS INC /DE, 10-Q, EX-3.I.A, 2000-06-08 |
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 April 30, 2000 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 April 30, 2000: 807,554,777
APPLIED MATERIALS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of October 31, 1999 and April 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
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.
APPLIED MATERIALS, INC.
*
See accompanying notes to consolidated condensed financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
----------------------- -----------------------
(In thousands, except per May 2, April 30, May 2, April 30,
share amounts) 1999 2000 1999 2000
---------------------------------- ----------- ----------- ----------- -----------
Net sales.......................... $1,170,662 $2,190,031 $1,992,037 $3,912,221
Cost of products sold.............. 628,373 1,092,433 1,088,948 1,957,302
----------- ----------- ----------- -----------
Gross margin....................... 542,289 1,097,598 903,089 1,954,919
Operating expenses:
Research, development and
engineering................... 179,856 253,283 338,195 476,563
Marketing and selling........... 81,135 111,580 156,036 212,292
General and administrative...... 86,000 118,890 152,416 210,707
Non-recurring items............. -- 40,000 5,000 40,000
----------- ----------- ----------- -----------
Income from operations............. 195,298 573,845 251,442 1,015,357
Non-recurring income............... -- 68,158 20,000 68,158
Interest expense................... 11,753 13,259 23,376 25,489
Interest income.................... 24,264 41,072 50,704 78,992
----------- ----------- ----------- -----------
Income before taxes and equity
in net income/(loss)
of joint venture................ 207,809 669,816 298,770 1,137,018
Provision for income taxes......... 64,497 200,945 93,124 341,044
----------- ----------- ----------- -----------
Income before equity in net
income/(loss) of joint venture.. 143,312 468,871 205,646 795,974
Equity in net income/(loss) of
joint venture................... (1,182) -- 2,275 --
----------- ----------- ----------- -----------
Income from continuing operations.. 142,130 468,871 207,921 795,974
Provision for discontinuance of
joint venture................... 1,182 -- (2,275) --
----------- ----------- ----------- -----------
Net income......................... $143,312 $468,871 $205,646 $795,974
=========== =========== =========== ===========
Earnings per share:
Basic - continuing operations... $0.18 $0.58 $0.27 $0.99
Basic - discontinued operations. -- -- -- --
----------- ----------- ----------- -----------
Total basic................... $0.18 $0.58 $0.27 $0.99
Diluted - continuing operations. $0.17 $0.54 $0.25 $0.93
Diluted - discontinued operations -- -- -- --
----------- ----------- ----------- -----------
Total diluted................. $0.17 $0.54 $0.25 $0.93
Weighted average number of shares:
Basic........................... 776,130 805,142 772,606 801,940
Diluted......................... 819,832 861,200 813,068 856,666
CONSOLIDATED CONDENSED BALANCE SHEETS*
October 31, April 30,
(In thousands) 1999 2000
---------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $868,121 $1,186,813
Short-term investments....................... 1,951,254 2,187,115
Accounts receivable, net..................... 1,268,146 1,650,661
Inventories.................................. 727,107 979,751
Deferred income taxes........................ 341,668 331,266
Other current assets......................... 154,424 153,486
------------ ------------
Total current assets............................ 5,310,720 6,489,092
Property, plant and equipment, net.............. 1,278,269 1,241,786
Other assets.................................... 425,521 398,956
------------ ------------
Total assets.................................... $7,014,510 $8,129,834
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................ $5,789 $26
Current portion of long-term debt............ 36,484 42,055
Accounts payable and accrued expenses........ 1,442,718 1,633,690
Income taxes payable......................... 246,506 249,390
------------ ------------
Total current liabilities....................... 1,731,497 1,925,161
Long-term debt.................................. 584,357 575,847
Deferred income taxes and other liabilities..... 123,398 135,806
------------ ------------
Total liabilities............................... 2,439,252 2,636,814
------------ ------------
Stockholders' equity:
Common stock................................. 7,932 8,076
Additional paid-in capital................... 1,443,723 1,572,793
Retained earnings............................ 3,122,337 3,917,603
Accumulated other comprehensive
income/(loss)............................... 1,266 (5,452)
------------ ------------
Total stockholders' equity...................... 4,575,258 5,493,020
------------ ------------
Total liabilities and stockholders' equity...... $7,014,510 $8,129,834
============ ============
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
--------------------------
May 2, April 30,
(In thousands) 1999 2000
--------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income...................................... $205,646 $795,974
Adjustments required to reconcile net income
to cash provided by operations:
Depreciation and amortization............... 148,471 184,046
Deferred income taxes....................... 1,117 9,875
Adjustment to conform Etec's fiscal year.... -- (708)
Changes in assets and liabilities, net of
amounts acquired:
Accounts receivable, net............... (145,244) (384,592)
Inventories............................ (36,794) (257,840)
Other current assets................... (15,158) (787)
Other assets........................... (12,727) (7,442)
Accounts payable and accrued expenses.. (33,377) 199,047
Income taxes payable................... 125,793 2,440
Other liabilities...................... 9,670 13,224
------------ ------------
Cash provided by operations....................... 247,397 553,237
------------ ------------
Cash flows from investing activities:
Capital expenditures, net of retirements........ (100,180) (113,392)
Proceeds from sales of short-term investments... 435,893 861,645
Purchases of short-term investments............. (734,240) (1,097,506)
------------ ------------
Cash used for investing........................... (398,527) (349,253)
------------ ------------
Cash flows from financing activities:
Short-term debt activity, net................... 8,857 (8,033)
Long-term debt activity, net.................... (5,506) (3,359)
Common stock transactions, net.................. 71,155 129,214
------------ ------------
Cash provided by financing........................ 74,506 117,822
------------ ------------
Effect of exchange rate changes on cash........... (608) (3,114)
------------ ------------
Increase/(decrease) in cash and cash equivalents.. (77,232) 318,692
Cash and cash equivalents - beginning of period... 638,805 868,121
------------ ------------
Cash and cash equivalents - end of period......... $561,573 $1,186,813
============ ============
For the six months ended May 2, 1999, cash payments for interest were
$22,169 and net income tax refunds were $41,958. For the six months ended
April 30, 2000, cash payments for interest and income taxes were
$21,837 and $345,009, respectively.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
SIX MONTHS ENDED APRIL 30, 2000
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 31, 1999 audited
consolidated financial statements (as restated) 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 31, 1999 audited consolidated financial statements and
notes thereto included in Applied's 1999 Annual Report, which is
incorporated by reference in Applied's Form 10-K for the fiscal year ended
October 31, 1999. Applied's results of operations for the three and six
months ended April 30, 2000 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.
All historical financial information presented herein has been restated to reflect: 1) the acquisition of Etec Systems, Inc. (Etec), which was completed on March 29, 2000 and accounted for as a pooling-of-interests; and 2) a two-for-one stock split in the form of a 100 percent stock dividend, effective March 15, 2000.
During the fourth fiscal quarter of 1999, Applied Komatsu Technology, Inc. (AKT) became a wholly-owned subsidiary of Applied. Previously, AKT was a joint venture, in which Applied had a 50 percent ownership interest, that was accounted for as a discontinued operation. As a result of Applied's acquisition of AKT, certain prior year amounts were reclassified from discontinued operations to continuing operations. These reclassifications had no effect on net income for any affected prior period.
2) Business Combination
On March 29, 2000, Applied acquired Etec, a supplier of mask pattern
generating equipment for the semiconductor and electronics industries, in a
stock-for-stock merger accounted for as a pooling-of-interests. Applied
issued approximately 29 million shares of its common stock in conjunction
with this transaction, and recorded a one-time, pre-tax operating expense of
$40 million for costs associated with the merger. Additionally, Applied
recorded a one-time, pre-tax operating expense of $14 million ($6.5 million
in cost of products sold and $7.5 million in general and administrative
expenses) in the second fiscal quarter of 2000 to conform Etec's accounting
policies to those of Applied.
Prior to the merger, Etec's fiscal year end (July 31) was different than Applied's (last Sunday in October). Fiscal 1999 amounts included herein for Etec have not been conformed to Applied's fiscal year. Therefore, the three- and six-month periods ended May 2, 1999 include Etec's three- and six-month periods ended January 31, 1999, and the October 31, 1999 consolidated condensed balance sheet includes Etec's balances as of July 31, 1999. 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 has been reflected as an adjustment to retained earnings in the first fiscal quarter of 2000. Etec's net sales and net loss for the three months ended October 31, 1999 were $43,305,000 and $708,000, respectively.
Net sales and net income for each company from the beginning of the periods presented to the date of consummation of the merger (March 29, 2000) were as follows (in thousands):
Three Months Ended Six Months Ended
-------------------------- --------------------------
May 2, April 30, May 2, April 30,
1999 2000 1999 2000
------------ ------------ ------------ ------------
Net sales:
Applied........ $1,117,626 $2,168,613 $1,860,103 $3,835,570
Etec........... 53,036 21,418 * 131,934 76,651 *
------------ ------------ ------------ ------------
Combined....... $1,170,662 $2,190,031 $1,992,037 $3,912,221
============ ============ ============ ============
Net income:
Applied........ $141,639 $475,923 $194,524 $804,392
Etec........... 1,673 (7,052)* 11,122 (8,418)*
------------ ------------ ------------ ------------
Combined....... $143,312 $468,871 $205,646 $795,974
============ ============ ============ ============
*
Does not include amounts for the period from March 29, 2000 through April 30, Such amounts have been included with Applied's.3) 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 April 30, 2000, options to purchase approximately 44,000 shares of common stock at an average exercise price of $98.17 were excluded from the computation, and for the six months ended April 30, 2000, options to purchase approximately 2,462,000 shares of common stock at an average exercise price of $84.33 were excluded from the computation.
4) Accounts Receivable, Net
Applied has numerous agreements with various financial institutions to sell
accounts receivable from selected customers. During the six months ended May
2, 1999 and April 30, 2000, Applied sold $410 million and $763 million,
respectively, of accounts receivable under these agreements. At April 30,
2000, $385 million of sold receivables remained outstanding and subject to
certain recourse provisions. Applied does not expect these recourse
provisions to have a material effect on its financial condition or results
of operations. Discounting fees were not material for the three- and six-
month periods ended May 2, 1999 or April 30, 2000, and were recorded as
interest expense.
5) Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out (FIFO) basis. The components of inventories were as
follows (in thousands):
October 31, April 30,
1999 2000
------------ ------------
Customer service spares............ $267,623 $341,404
Raw materials...................... 124,051 233,209
Work-in-process.................... 246,953 285,176
Finished goods..................... 88,480 119,962
------------ ------------
$727,107 $979,751
============ ============
6) Other Assets
The components of other assets were as follows (in thousands):
October 31, April 30,
1999 2000
------------ ------------
Purchased technology, net.......... $205,667 $185,449
Goodwill, net...................... 162,015 150,945
Other.............................. 57,839 62,562
------------ ------------
$425,521 $398,956
============ ============
Purchased technology and goodwill are presented at cost, net of accumulated amortization, and are being amortized over their estimated useful lives of five to ten years using the straight-line method. Applied periodically analyzes these assets to determine whether an impairment in carrying value has occurred.
7) Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses were as follows (in
thousands):
October 31, April 30,
1999 2000
------------ ------------
Accounts payable................... $382,915 $501,865
Compensation and benefits.......... 302,433 289,474
Installation and warranty.......... 236,272 278,773
Customer deposits.................. 89,689 106,309
Other.............................. 431,409 457,269
------------ ------------
$1,442,718 $1,633,690
============ ============
An accrual of $7 million for restructuring actions taken in prior years, primarily in fiscal 1998, remains as of April 30, 2000, compared to $16 million as of October 31, 1999, and is included above in Other. This balance is expected to be utilized in fiscal 2000 in accordance with the restructuring plan.
8) Non-recurring Items
During the first fiscal quarter of 1999, Applied recorded $5 million of pre-
tax, non-recurring operating expenses for costs incurred in connection with
its December 1998 acquisition of Consilium, Inc. During the second fiscal
quarter of 2000, Applied recorded $40 million of pre-tax, non-recurring
operating expenses for costs incurred in connection with its March 2000
acquisition of Etec.
9) Non-recurring Income
During the first fiscal quarter of 1999, Applied received a $20 million
payment from ASM International, N.V. (ASMI) related to a prior litigation
settlement and recorded the amount as non-recurring income. During the
second fiscal quarter of 2000, Applied recorded an additional $68 million of
pre-tax, non-operating income related to the ASMI litigation settlement.
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.
10) Stockholders' Equity
Comprehensive Income
Components of comprehensive income, on an after-
tax basis, are as follows (in thousands):
Three Months Ended Six Months Ended
----------------------- -----------------------
May 2, April 30, May 2, April 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
Net income......................... $143,312 $468,871 $205,646 $795,974
Foreign currency translation
adjustments...................... (8,678) (8,357) (11,422) (6,718)
----------- ----------- ----------- -----------
Comprehensive income............... $134,634 $460,514 $194,224 $789,256
=========== =========== =========== ===========
Accumulated other comprehensive income/(loss) presented in the accompanying
consolidated condensed balance sheets consists entirely of foreign currency
translation adjustments.
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 and incentive plans. During the first six months of fiscal 1999,
Applied repurchased 1,090,000 shares of its common stock at an average price
of $18.35, for a total cash outlay of $20 million. During the six months
ended April 30, 2000, Applied repurchased 548,000 shares at an average price
of $77.33, for a total cash outlay of $42 million.
Stock Dividend
On February 15, 2000, Applied's Board of Directors approved a two-for-one
stock split in the form of a 100 percent stock dividend. Shares issuable
pursuant to the stock dividend were distributed on March 15, 2000 to
stockholders of record as of February 25, 2000. All share and per share
amounts presented herein have been restated to reflect the stock split.
11) Segment Information
In fiscal 1999, Applied adopted Statement of Financial Accounting Standards
No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information." Applied operates in one segment for the manufacture, marketing
and servicing of semiconductor wafer fabrication equipment. All material
operating units qualify for aggregation under SFAS 131 due to their similar:
economic characteristics; nature of products and services; procurement,
manufacturing and distribution processes; and customer base. Since
Applied operates in one segment, all required information regarding segment
revenues, profit and total assets can be obtained from the consolidated condensed
financial statements.
12) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." Applied will adopt SFAS 133
in the first fiscal quarter of 2001, and does not expect the adoption to
have a material effect on its financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements. Applied will be required
to adopt SAB 101 in the first fiscal quarter of 2001. Management has not yet
determined the potential effect of the implementation of SAB 101 on
Applied's financial condition or results of operations. However, since the
implementation of SAB 101 could result in changes to the timing of Applied's
revenue recognition, its effect could be material and adverse to Applied's
financial condition and results of operations in the period of
implementation.
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" and in Note 12 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q. 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 31, 1999. 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.
All historical financial information presented herein has been restated to reflect: 1) the acquisition of Etec Systems, Inc. (Etec), which was completed on March 29, 2000 and accounted for as a pooling-of-interests; and 2) a two- for-one stock split in the form of a 100 percent stock dividend, effective March 15, 2000.
Results of Operations
Applied is a supplier of semiconductor manufacturing equipment and services to the semiconductor industry. During the second fiscal quarter of 2000, demand for Applied's products continued to grow as semiconductor manufacturers added capacity and invested in new technology in response to strong demand for communications, server-related and consumer products and the resulting increase in semiconductor use. As a result, Applied's new orders, net sales and net income for the second fiscal quarter of 2000 reached new quarterly records. Historically, the semiconductor and semiconductor manufacturing equipment industries have been cyclical; therefore, Applied's results of operations for the three and six months ended April 30, 2000 may not necessarily be indicative of future operating results.
Applied received new orders of $2.9 billion for the second fiscal quarter of 2000, versus $2.5 billion for the first fiscal quarter of 2000 and $1.5 billion for the second fiscal quarter of 1999. New orders by region were as follows (dollars in millions):
Three Months Ended
-----------------------------------
January 30, 2000 April 30, 2000
---------------- ----------------
($) (%) ($) (%)
------- ------- ------- -------
North America*..................... 642 26 735 25
Taiwan............................. 616 25 741 25
Japan.............................. 352 14 425 15
Europe............................. 286 12 410 14
Korea.............................. 332 14 290 10
Asia-Pacific....................... 226 9 327 11
------- ------- ------- -------
Total............................ 2,454 100 2,928 100
======= ======= ======= =======
*
Primarily the United States.The increase in new orders from the first fiscal quarter of 2000 was primarily due to customers' capital spending for capacity, as they strive to meet increased demand for their products. Customers are also continuing to invest in advanced equipment to support 0.18 micron and below applications and new materials such as copper. Applied's backlog at April 30, 2000 was $3.2 billion, compared to $2.4 billion at January 30, 2000 and $1.7 billion at October 31, 1999.
Net sales for the second fiscal quarter of 2000 increased 27 percent from the first fiscal quarter of 2000, and increased 87 percent from the second fiscal quarter of 1999. Net sales for the six months ended April 30, 2000 increased 96 percent from the comparable period in 1999. The increase from the first fiscal quarter of 2000 was due primarily to the factors mentioned in the preceding paragraph. Business volume was lower in the first half of fiscal 1999 than in fiscal 2000 because the semiconductor and semiconductor manufacturing equipment industries were just beginning to recover from a severe industry downturn that began in early-to-mid 1998. Net sales increased significantly from the comparable periods in fiscal 1999 as the industry recovered from the downturn and entered a new period of growth, driven by customer investments in both capacity and advanced technology to meet rising demand. Net sales by region were as follows (dollars in millions):
Three Months Ended Six Months Ended
------------------------------ -----------------------------
May 2, 1999 April 30, 2000 May 2, 1999 April 30, 2000
-------------- -------------- -------------- --------------
($) (%) ($) (%) ($) (%) ($) (%)
------- ------ ------- ------ ------- ------ ------- ------
North America*...... 454 39 530 24 801 40 946 24
Taiwan.............. 186 16 544 25 293 15 1,070 27
Japan............... 218 19 366 17 359 18 681 17
Europe.............. 136 11 303 14 283 14 565 15
Korea............... 121 10 315 14 164 8 392 10
Asia-Pacific........ 56 5 132 6 92 5 258 7
------- ------ ------- ------ ------- ------ ------- ------
Total............. 1,171 100 2,190 100 1,992 100 3,912 100
======= ====== ======= ====== ======= ====== ======= ======
*
Primarily the United States.Applied's gross margin was 50.1 percent for the second fiscal quarter of 2000, compared to 49.8 percent for the first fiscal quarter of 2000 and 46.3 percent for the second fiscal quarter of 1999. Gross margin for the first six months of fiscal 2000 was 50.0 percent, compared to 45.3 percent for the first half of fiscal 1999. Increases from prior year periods were caused primarily by higher business volume. During the second fiscal quarter of 2000, Applied recorded a one-time, pre-tax expense of $6.5 million in cost of products sold to conform Etec's accounting policies to those of Applied.
Excluding non-recurring items, operating expenses were 22 percent of net sales for the three months ended April 30, 2000, compared to 30 percent for the second fiscal quarter of 1999, and 23 percent of sales for the first six months of fiscal 2000, compared to 32 percent for the first half of fiscal 1999. The decreases can be attributed primarily to increased business volume in fiscal 2000. In terms of absolute dollars, operating expenses for the three and six months ended April 30, 2000 were higher than those for the comparable periods of fiscal 1999. Research and development spending increased primarily for the development of: 1) equipment for 300mm wafer processing; 2) copper applications; and 3) other advanced processes and technologies. Marketing, selling, general and administrative expenses increased to support Applied's increased business volume. During the second fiscal quarter of 2000, Applied recorded a one-time, pre-tax operating expense of $7.5 million in general and administrative expenses to conform Etec's accounting policies to those of Applied.
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.
Non-recurring income for the second fiscal quarter of 2000 resulted from Applied's prior settlement of all outstanding litigation with ASM International, N.V. For further details, see Note 9 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
Net interest income for the three and six months ended April 30, 2000 was $28 million and $54 million, respectively, compared to $13 million and $27 million for the comparable periods of fiscal 1999. The increases can be attributed primarily to higher average cash and investment balances.
Applied's effective income tax rate for the three months ended April 30, 2000 was 30 percent, compared to 31 percent for the three months ended May 2, 1999. The lower rate resulted primarily from a shift in the geographic composition of pre-tax income to entities operating in countries with lower tax rates.
Financial Condition, Liquidity and Capital Resources
Applied's financial condition at April 30, 2000 remained strong, with a ratio of current assets to current liabilities of 3.4:1, compared to 3.1:1 at October 31, 1999. Applied had cash, cash equivalents and short-term investments of $3.4 billion at April 30, 2000.
For the six months ended April 30, 2000, cash, cash equivalents and short-term investments increased by $555 million. Significant sources of cash were net income (excluding depreciation and amortization expense), an increase in accounts payable and accrued expenses, and proceeds from stock issuances. These sources of cash were partially offset by uses of working capital, particularly increases in accounts receivable and inventories, required to support Applied's increased business volume. For further details, see the Consolidated Condensed Statements of Cash Flows in this Form 10-Q.
Applied utilized programs to sell accounts receivable of $763 million during the first half of fiscal 2000. These receivable sales had the effect of increasing cash and reducing accounts receivable and days sales outstanding. For further details regarding accounts receivable sales, see Note 4 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
As of April 30, 2000, Applied's principal sources of liquidity consisted of $3.4 billion of cash, cash equivalents and short-term investments and approximately $625 million of existing credit facilities. Applied's liquidity is affected by many factors, some of which are based on the normal ongoing operations of the business, and others of which relate to the uncertainties of global economies and the semiconductor and semiconductor equipment industries. 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 industry that Applied serves is highly volatile and unpredictable.
The semiconductor industry has historically been cyclical because of sudden
changes in semiconductor supply and demand, and corresponding pricing. The
health of the semiconductor manufacturing equipment industry is affected by
these semiconductor industry cycles, the timing, length and severity of which
are difficult to predict. Although semiconductors are used in many different
products, the markets for those products are interrelated to various degrees.
During periods of rapid growth, Applied must be able to acquire and/or develop
sufficient manufacturing capacity and inventory to meet customer demand, and
to attract, hire, assimilate and retain a sufficient number of qualified
people. During periods of declining demand for semiconductor manufacturing
equipment, customers may reduce purchases, delay delivery of products and/or
cancel orders. Therefore, Applied must be able to quickly and effectively
align its cost structure with prevailing market conditions, to manage its
inventory levels in order to reduce the possibility of future inventory write-downs
resulting from obsolescence, and to motivate and retain key employees.
If Applied is unable to achieve its objectives in a timely manner during these
industry cycles, there could be a material adverse effect on its 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 develop new products and technologies, develop new markets in the
semiconductor industry for its products and services, introduce new products
to the marketplace in a timely manner, qualify new products with its
customers, and commence and adjust production to meet customer demands. The
introduction of new products and technologies grows increasingly complex over
time. If Applied does not develop and introduce new products and technologies
in a timely manner in response to changing market conditions or customer
requirements, its financial condition and results of operations could be
materially and adversely affected.
Applied is exposed to the risks of operating a global business.
Managing Applied's global operations presents challenges that could materially
and adversely affect demand for Applied's systems and related services. These
challenges include cultural diversities, periodic economic downturns (such as
the Asian economic crisis in fiscal 1998), trade balance issues, political
instability and fluctuations in interest and currency exchange rates, among
other risks.
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) difficulties and increased costs in connection with integration of the
personnel, operations, technologies and products of acquired companies; 2)
diversion of management's attention from other operational matters; 3) the
potential loss of key employees of acquired companies; 4) lack of synergy, or
the inability to realize expected synergies, resulting from the acquisition;
and 5) acquired intangible assets becoming impaired as a result of
technological advancements or worse-than-expected performance of the acquired
company. In addition, the Financial Accounting Standards Board has indicated
that they plan to rescind the pooling-of-interests method of acquisition
accounting. This could result in significant charges resulting from
amortization of intangible assets recorded in connection with future
acquisitions, and may alter Applied's acquisition strategy. Mergers and
acquisitions, including Applied's acquisition of Etec, 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.
Failure of critical suppliers to deliver sufficient quantities of product in a
timely and cost-effective manner could negatively affect Applied's business.
Applied uses numerous vendors to supply parts, components and subassemblies
(collectively "parts") for the manufacture and support of its products.
Although Applied makes reasonable efforts to ensure that parts are available
from multiple suppliers, this is not always possible; accordingly, some key
parts may be obtained only from a single supplier or a limited group of
suppliers. There can be no assurance that Applied's results of operations will
not be materially and adversely affected if, in the future, Applied does not
receive in a timely and cost-effective manner a sufficient quantity of parts
to meet its production requirements.
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 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. 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.
Applied is subject to risks of non-compliance with environmental
regulations.
Applied is subject to environmental 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 any necessary
corrective actions. Failure or inability to comply with existing or future
environmental regulations could result in significant remediation liabilities,
the imposition of fines and/or the suspension or termination of development,
manufacturing or use, 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. Significant interruptions of
manufacturing operations as a result of natural disasters, software issues,
infrastructure failure, or other cause, could result in delayed product
deliveries or manufacturing inefficiencies, any or all of which could
materially and adversely affect Applied's financial condition and results of
operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Applied purchases forward exchange and currency option contracts to hedge certain existing firm commitments and 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 six months ended April 30, 2000.
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
Varian and 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. The complaint was later
amended on July 7, 1997 to include Novellus Systems, Inc. (Novellus) as a
defendant as a result of Novellus' acquisition of Varian's thin film systems
PVD business. Applied seeks damages for past infringement, a permanent
injunction, treble damages for willful infringement, pre-judgment interest and
attorneys' fees. Varian answered the complaint by denying all allegations,
counterclaiming for declaratory judgment of invalidity and unenforceability
and alleging conduct by Applied in violation of antitrust laws. 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 three PVD technology patents that were formerly
owned by Varian. On July 8, 1997, Varian filed a separate lawsuit against
Applied captioned Varian Associates, Inc. v. Applied Materials, Inc. (case no.
C-97-20597-PVT) in the United States District Court for the Northern District
of California, alleging a broad range of conduct in violation of federal
antitrust laws and state unfair competition and business practice laws. On
July 16, 1999, Varian was granted permission to file a First Amended Complaint
in that action. On November 8, 1999, the Court granted in part Applied's
partial motion to dismiss the First Amended Complaint. On December 10, 1999,
Varian filed its Second Amended Complaint and Applied has answered. Discovery
has commenced in these actions. The Court has scheduled trial of all patent
claims for April 2001. No other trial dates have been set. Applied believes it
has meritorious claims and defenses and intends to pursue them vigorously.
OKI
In November 1997, OKI Electric Industry, Co., Ltd. (OKI) filed suit against
Applied's subsidiary, Applied Materials Japan (AMJ), in Tokyo District Court
in Japan, alleging that AMJ is obligated to pay OKI relating to license
payments OKI made to a third party. In February 2000, the dispute was resolved
on mutually acceptable terms and conditions, and the case was dismissed on
March 17, 2000.
Plasma Physics
On April 17, 2000, Applied filed a lawsuit in the United States District Court
for the Eastern District of New York captioned Applied Materials, Inc. v.
Plasma Physics Corp. ("PPC") and Solar Physics Corp. ("SPC") (case no. CV-
00-2199). 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. PPC and SPC are expected to respond to Applied's lawsuit
shortly. No trial date or other deadlines have been set.
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 legal matters will have a
material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on March 21, 2000 in San Jose, California. Nine incumbent directors were re-elected and one new director was elected without opposition to serve one-year terms in office. The results of this election were as follows:
Name of Director Votes For (shares) Votes Withheld (shares)
--------------------------- ------------------------- --------------------------
James C. Morgan............ 647,458,406 15,160,778
Dan Maydan................. 647,472,272 15,146,912
Michael H. Armacost........ 647,612,624 15,006,560
Deborah A. Coleman......... 647,506,684 15,112,500
Herbert M. Dwight, Jr...... 647,498,826 15,120,358
Philip V. Gerdine.......... 647,665,172 14,954,012
Tsuyoshi Kawanishi......... 609,863,794 52,755,390
Paul R. Low................ 647,356,966 15,262,218
Steven L. Miller........... 647,347,754 15,271,430
Stan Shih.................. 643,169,256 19,449,928
On a proposal to amend Applied's Certificate of Incorporation to increase the
number of shares of common stock authorized for issuance from 1,100,000,000 to
2,500,000,000, there were 570,927,532 votes cast in favor, 89,413,234 votes
cast against, 2,214,018 abstentions and 64,400 broker non-votes. On a proposal
to approve the amended and restated 1995 Equity Incentive Plan, there were
443,451,968 votes cast in favor, 215,980,386 votes cast against, 3,122,430
abstentions and 64,400 broker non-votes. On a proposal to approve the amended
and restated Senior Executive Bonus Plan, there were 638,028,686 votes cast in
favor, 20,083,288 votes cast against, 4,507,210 abstentions and no broker non-
votes.
Item 5. Other Information
The ratio of earnings to fixed charges for the six months ended May 2, 1999 and April 30, 2000, and for each of the last five fiscal years, was as follows:
Six Months Ended
Fiscal Year ----------------------
------------------------------------------------ May 2, April 30,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ---------- ----------
18.81x 19.44x 19.01x 7.56x 14.03x 8.73x 20.49x
======== ======== ======== ======== ======== ========== ==========
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
3(i)(a) Certificate of Amendment of Certificate of Incorporation of Applied Materials, Inc., as filed with the Secretary of State of the State of Delaware on March 31, 2000.
3(i)(b) Certificate of Incorporation of Applied Materials, Inc., as amended to March 31, 2000.
10.1 $250,000,000 364-Day Credit Agreement dated March 10, 2000, among Applied Materials, Inc., Citicorp USA, Inc. as Agent, and Bank of America N.A. as Co-Agent.
10.2 The Applied Materials, Inc. amended and restated 1995 Equity Incentive Plan, previously filed as Appendix A to Applied Materials' Preliminary Proxy Statement dated February 4, 2000, and incorporated herein by reference.
10.3 The Applied Materials, Inc. amended and restated Senior Executive Bonus Plan, previously filed as Appendix B to Applied Materials' Preliminary Proxy Statement dated February 4, 2000, and incorporated herein by reference.
27.0 Financial Data Schedule for the six months ended April 30, 2000: filed electronically.
b) A Report on Form 8-K was filed on April 12, 2000. The report contained
information related to the acquisition of Etec Systems, Inc. by Applied Materials, Inc.,
which was completed on March 29, 2000.
SIGNATURES
Pursuant to the requirement 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. |
June 7, 2000
| By: | /s/ Joseph R. Bronson |
|
| |
| Joseph R. Bronson | |
|
Senior Vice President,
Office of the President, Chief Financial Officer and Chief Administrative Officer |
| By: | /s/ Patrick Crom |
|
| |
| Patrick Crom | |
|
Vice President,
Global Controller and Chief Accounting Officer |
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
3(i)(a) Certificate of Amendment of Certificate of Incorporation of
Applied Materials, Inc., as filed with the Secretary of State of the
State of Delaware on March 31, 2000.
3(i)(b) Certificate of Incorporation of Applied Materials, Inc.,
as amended to March 31, 2000.
10.1 $250,000,000 364-Day Credit Agreement dated March 10, 2000, among
Applied Materials, Inc., Citicorp USA, Inc. as Agent, and Bank of
America N.A. as Co-Agent.
10.2 The Applied Materials, Inc. amended and restated 1995 Equity Incentive
Plan, previously filed as Appendix A to Applied Materials' Preliminary
Proxy Statement dated February 4, 2000, and incorporated herein by
reference.
10.3 The Applied Materials, Inc. amended and restated Senior Executive
Bonus Plan, previously filed as Appendix B to Applied Materials'
Preliminary Proxy Statement dated February 4, 2000, and incorporated
herein by reference.
27.0 Financial Data Schedule for the six months ended April 30, 2000:
filed electronically.
|
|