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 January 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)
|
Delaware
|
94-1655526
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification Number)
|
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 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
January 30, 2000: 386,486,616
APPLIED MATERIALS, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations for the three months
ended January 31, 1999 and January 30, 2000
Consolidated Condensed Balance Sheets as of
October 31, 1999 and January 30, 2000
Consolidated Condensed Statements of Cash Flows for the three months
ended January 31, 1999 and January 30, 2000
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Financial Condition, Liquidity and Capital Resources
Trends, Risks and Uncertainties
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
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
(In thousands, except per January 31, January 30,
share amounts) 1999 2000
- ----------------------------------- ----------- -----------
Net sales.......................... $742,477 $1,666,957
Cost of products sold.............. 421,374 831,544
----------- -----------
Gross margin....................... 321,103 835,413
Operating expenses:
Research, development and
engineering................... 141,207 208,421
Marketing and selling........... 70,733 97,166
General and administrative...... 61,594 85,950
Non-recurring items............. 5,000 --
----------- -----------
Income from operations............. 42,569 443,876
Non-recurring income............... 20,000 --
Interest expense................... 11,470 12,119
Interest income.................... 25,546 37,484
----------- -----------
Income from continuing operations
before taxes and equity in net
income of joint venture......... 76,645 469,241
Provision for income taxes......... 23,760 140,772
----------- -----------
Income from continuing operations
before equity in net income
of joint venture................ 52,885 328,469
Equity in net income of
joint venture................... 3,457 --
----------- -----------
Income from continuing operations.. 56,342 328,469
Provision for discontinuance of
joint venture................... (3,457) --
----------- -----------
Net income......................... $52,885 $328,469
=========== ===========
Earnings per share:
Basic - continuing operations... $0.15 $0.85
Basic - discontinued operations. (0.01) --
----------- -----------
Total basic................... $0.14 $0.85
Diluted - continuing operations. $0.15 $0.80
Diluted - discontinued operations (0.01) --
----------- -----------
Total diluted................. $0.14 $0.80
Weighted average number of shares:
Basic........................... 370,530 384,992
Diluted......................... 388,233 409,817
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
October 31, January 30,
(In thousands) 1999 2000
- ---------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $823,272 $796,284
Short-term investments....................... 1,937,179 2,207,893
Accounts receivable, net..................... 1,198,069 1,320,362
Inventories.................................. 632,717 683,378
Deferred income taxes........................ 324,024 317,858
Other current assets......................... 145,200 136,753
------------ ------------
Total current assets............................ 5,060,461 5,462,528
Property, plant and equipment, net.............. 1,227,737 1,188,433
Other assets.................................... 418,306 407,038
------------ ------------
Total assets.................................... $6,706,504 $7,057,999
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................ $5,789 $595
Current portion of long-term debt............ 36,484 36,493
Accounts payable and accrued expenses........ 1,388,806 1,343,693
Income taxes payable......................... 238,314 207,230
------------ ------------
Total current liabilities....................... 1,669,393 1,588,011
Long-term debt.................................. 584,357 585,097
Deferred income taxes and other liabilities..... 116,152 128,345
------------ ------------
Total liabilities............................... 2,369,902 2,301,453
------------ ------------
Stockholders' equity:
Common stock................................. 3,827 3,865
Additional paid-in capital................... 1,257,512 1,347,450
Retained earnings............................ 3,075,589 3,404,058
Accumulated other comprehensive
income/(loss)............................... (326) 1,173
------------ ------------
Total stockholders' equity...................... 4,336,602 4,756,546
------------ ------------
Total liabilities and stockholders' equity...... $6,706,504 $7,057,999
============ ============
*
Amounts as of January 30, 2000 are
unaudited. Amounts as of October 31, 1999
are from the October 31, 1999 audited financial statements.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
--------------------------
January 31, January 30,
(In thousands) 1999 2000
- --------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income...................................... $52,885 $328,469
Adjustments required to reconcile net income
to cash provided by operations:
Depreciation and amortization................. 70,788 80,923
Deferred income taxes......................... 92 6,685
Changes in assets and liabilities, net of
amounts acquired:
Accounts receivable, net................... 104,530 (115,157)
Inventories................................ 3,702 (50,276)
Other current assets....................... (7,750) 8,765
Other assets............................... 9,081 (3,362)
Accounts payable and accrued expenses...... (171,883) (51,846)
Income taxes payable....................... 86,847 (31,900)
Other liabilities.......................... 3,904 11,756
------------ ------------
Cash provided by operations....................... 152,196 184,057
------------ ------------
Cash flows from investing activities:
Capital expenditures, net of retirements........ (39,267) (21,795)
Proceeds from sales of short-term investments... 194,831 322,535
Purchases of short-term investments............. (368,392) (593,249)
------------ ------------
Cash used for investing........................... (212,828) (292,509)
------------ ------------
Cash flows from financing activities:
Short-term debt activity, net................... (2,699) (6,522)
Long-term debt activity, net.................... (2,183) (1,092)
Common stock transactions, net.................. 52,130 89,976
------------ ------------
Cash provided by financing........................ 47,248 82,362
------------ ------------
Effect of exchange rate changes on cash........... 580 (898)
------------ ------------
Decrease in cash and cash equivalents............. (12,804) (26,988)
Cash and cash equivalents - beginning of period... 575,205 823,272
------------ ------------
Cash and cash equivalents - end of period......... $562,401 $796,284
============ ============
For the three months ended January 31, 1999, cash payments for interest were
$426 and net income tax refunds were $63,787. For the three months ended
January 30, 2000, cash payments for interest and income taxes were
$429 and $169,090, respectively.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED JANUARY 30, 2000
1) Basis of Presentation
In the opinion of management, the unaudited 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 and include all material adjustments,
consisting of normal recurring adjustments, necessary to fairly present the
information set forth therein. These 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 months ended January 30, 2000 are not
necessarily indicative of future operating results.
Applied's fiscal year ends on the last Sunday in October of each year.
Fiscal 1999 contained 53 weeks, whereas fiscal 2000 will contain 52 weeks.
For fiscal 1999, the first quarter contained 14 weeks, and all other
quarters contained 13 weeks. The additional week in the first fiscal quarter
of 1999 did not have a material effect on Applied's financial position or
results of operations.
Certain prior year amounts have been reclassified from discontinued
operations to continuing operations as a result of Applied's October 1999
acquisition of the remaining 50 percent that it did not own of Applied Komatsu
Technology, Inc. (AKT), a joint
venture that was previously treated as a discontinued operation. These
reclassifications had no effect on net income for any of the affected prior
periods. Effective with the beginning of fiscal 2000, AKT's results of
operations have been consolidated with those of Applied. AKT's results of
operations did not have a material effect on Applied's results of operations
for the first fiscal quarter of 2000.
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 is determined using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
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
January 30, 2000, the average fair market value of Applied's common stock
exceeded the exercise price of all options outstanding. Therefore, no stock
options were excluded from the diluted earnings per share computation for
the three months ended January 30, 2000.
3) Accounts Receivable, Net
Applied has several agreements with various financial institutions to sell
accounts receivable from selected customers. During the three months ended
January 31, 1999 and January 30, 2000, Applied sold $159 million and $348
million, respectively, of accounts receivable under these agreements. At
January 30, 2000, $393 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-month
periods ended January 31, 1999 or January 30, 2000, and were recorded
as interest expense.
4) 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, January 30,
1999 2000
------------ ------------
Customer service spares............ $239,082 $243,667
Raw materials...................... 102,843 151,123
Work-in-process.................... 202,312 193,122
Finished goods..................... 88,480 95,466
------------ ------------
$632,717 $683,378
============ ============
5) Other Assets
The components of other assets were as follows (in thousands):
October 31, January 30,
1999 2000
------------ ------------
Purchased technology, net.......... $205,213 $195,172
Goodwill, net...................... 162,015 156,480
Other.............................. 51,078 55,386
------------ ------------
$418,306 $407,038
============ ============
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.
6) Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses were as follows (in
thousands):
October 31, January 30,
1999 2000
------------ ------------
Accounts payable................... $363,179 $379,334
Compensation and benefits.......... 295,028 179,866
Installation and warranty.......... 228,892 251,180
Customer deposits.................. 83,390 81,720
Restructuring...................... 15,536 10,935
Other.............................. 402,781 440,658
------------ ------------
$1,388,806 $1,343,693
============ ============
7) Accrued Restructuring Costs
During fiscal 1998, Applied recorded pre-tax restructuring charges of $135
million, consisting of $75 million for headcount reductions and $60 million
for consolidation of facilities and related fixed assets. Restructuring
activity for fiscal 2000 was as follows (in thousands):
Severance
and
Benefits Facilities Total
------------ ------------ ------------
Balance, October 31, 1999.......... $5,434 $10,102 $15,536
Amount utilized.................... (2,356) (2,245) (4,601)
------------ ------------ ------------
Balance, January 30, 2000.......... $3,078 $7,857 $10,935
============ ============ ============
During the first fiscal quarter of 2000, $5 million of cash was used for
restructuring costs. The majority of the remaining cash outlays of $11
million is expected to occur in fiscal 2000.
8) Non-recurring Income
During the first fiscal quarter of 1999, Applied received a $20 million
payment from ASMI International, N.V. (ASMI) related to a prior litigation
settlement and recorded the amount as non-recurring income. ASMI's remaining
payment of $35 million is due in the first fiscal quarter of 2001.
9) Stockholders' Equity
Comprehensive Income
Applied adopted Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," in the first fiscal quarter of
1999. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components, but does not affect net income or
total stockholders' equity. Components of comprehensive income, on an after-
tax basis, are as follows (in thousands):
Three Months Ended
--------------------------
January 31, January 30,
1999 2000
----------- -----------
Net income......................... $52,885 $328,469
Foreign currency translation
adjustments...................... (3,961) 1,499
----------- -----------
Comprehensive income............... $48,924 $329,968
=========== ===========
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 three months ended January 30, 2000,
Applied repurchased 152,000 shares of its common stock at an average price
of $124.83 per share, for a total cash outlay of $19 million. During the
three months ended January 31, 1999, Applied did not repurchase any shares
of its common stock in accordance with its systematic plan.
Stock Dividend
On February 15, 2000, Applied's Board of Directors approved a two-for-one
stock split of Applied's common stock in the form of a 100 percent stock
dividend. Shares issuable pursuant to the stock dividend are expected to be
distributed on or about March 15, 2000 to stockholders of record as of
February 25, 2000. None of the share and per share data presented in this
Form 10-Q, including Note 10 below, has been adjusted to reflect this stock
dividend.
10) Pending Acquisition
On January 12, 2000, Applied announced that it entered into an agreement to
acquire Etec Systems, Inc. (Etec), a supplier of mask pattern generating
equipment for the worldwide semiconductor and electronics industries, in a
stock-for-stock merger that will be accounted for as a pooling of interests.
The closing of the transaction is subject to approval from Etec's
shareholders and clearance by regulatory authorities. Pursuant to the merger
agreement, each share of Etec's stock will be exchanged for 0.649 of a share
of Applied's common stock. Applied expects to issue approximately 14 million
shares of its common stock to complete this transaction.
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 identical customer base. Since
Applied operates in one segment, all required information regarding segment
revenues, profit and total assets is in the consolidated financial
statements.
12) Recent Accounting Pronouncements
In June 1998, the FASB 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.
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, product
successes, business strategies, projected costs, future 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 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.
Results of Operations
Applied is a supplier of semiconductor manufacturing equipment and services to
the semiconductor industry. During the first fiscal quarter of 2000, the
semiconductor manufacturing equipment industry continued to grow, as customers
increased capital spending for both capacity expansion and advanced technology
requirements in response to growing demand for semiconductors. Applied
achieved record quarterly levels for new orders, net sales and net income for
its first fiscal quarter of 2000. Historically, the semiconductor and
semiconductor manufacturing equipment industries have been cyclical;
therefore, Applied's results of operations for the three months ended January
30, 2000 may not necessarily be indicative of future operating results.
Applied received new orders of $2.4 billion for the first fiscal quarter of
2000, versus $1.6 billion for the fourth fiscal quarter of 1999 and $1.0
billion for the first fiscal quarter of 1999. New orders by region were as
follows (dollars in millions):
Three Months Ended
-----------------------------------
October 31, 1999 January 30, 2000
---------------- ----------------
($) (%) ($) (%)
------- ------- ------- -------
North America*..................... 456 28 591 25
Taiwan............................. 422 25 608 26
Japan.............................. 293 18 331 14
Europe............................. 325 20 277 12
Korea.............................. 31 2 326 14
Asia-Pacific....................... 118 7 226 9
------- ------- ------- -------
Total............................ 1,645 100 2,359 100
======= ======= ======= =======
*
Primarily the United States.
The increase in new orders from the fourth fiscal quarter of 1999 was
primarily the result of strong global demand for semiconductors, driven by a
growth of applications in telecommunication, internet-related and consumer
products. This increase in demand is driving Applied's customers to increase
and accelerate their capital spending in calendar year 2000 for expanded
capacity and more advanced technologies, such as copper materials and 0.18
micron and below applications. Applied's backlog at January 30, 2000 was $2.3
billion, compared to $1.7 billion at October 31, 1999.
Net sales for the first fiscal quarter of 2000 increased 6 percent from the
fourth fiscal quarter of 1999, and increased 125 percent from the first fiscal
quarter of 1999. The increase from the first fiscal quarter of 1999 was due
primarily to the industry growth mentioned in the preceding paragraph.
Business volume was much higher than the first fiscal quarter of 1999, as in
the prior year semiconductor manufacturers were still limiting capital
spending due to a severe industry downturn that began in early-to-mid 1998.
Net sales by region were as follows (dollars in millions):
Three Months Ended
----------------------------------
January 31, 1999 January 30, 2000
---------------- ----------------
($) (%) ($) (%)
--------- ------ --------- ------
North America*................... 324 44 408 24
Taiwan........................... 96 13 518 31
Japan............................ 121 16 296 18
Europe........................... 135 18 256 15
Korea............................ 30 4 64 4
Asia-Pacific..................... 36 5 125 8
--------- ------ --------- ------
Total.......................... 742 100 1,667 100
========= ====== ========= ======
*
Primarily the United States.
Applied's gross margin was 50.1 percent for the first fiscal quarter of 2000,
compared to 50.1 percent for the fourth fiscal quarter of 1999 and 43.2
percent for the first fiscal quarter of 1999. The increase from the prior year
quarter was caused primarily by higher business volume and the favorable
effects of restructuring and other operational programs implemented during
fiscal 1999.
Excluding non-recurring items, operating expenses as a percentage of net sales
were 23 percent for the three months ended January 30, 2000, compared to 37
percent for the first fiscal quarter of 1999. The decrease can be attributed
primarily to the increased business volume in fiscal 2000. In terms of
absolute dollars, operating expenses for the three months ended January 30,
2000 were higher than those for the comparable period of fiscal 1999. Research
and development spending increased $67 million to support development,
particularly for 300mm, copper and other advanced applications. Marketing,
selling, general and administrative expenses increased $51 million to support
Applied's higher level of business volume.
Non-recurring income for the three months ended January 31, 1999 related to
Applied's settlement of all outstanding litigation with ASM International,
N.V. For further details, see Note 8 of Notes to Consolidated Condensed
Financial Statements in this Form 10-Q.
Net interest income was $25 million for the three months ended January 30,
2000, compared to $14 million for the three months ended January 31, 1999. The
increase can be attributed primarily to higher average cash and investment
balances.
Applied's effective income tax rate for the three months ended January 30,
2000 was 30 percent, compared to 31 percent for the three months ended January
31, 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 January 30, 2000 improved, with a ratio of
current assets to current liabilities of 3.4:1, compared to 3.0:1 at October
31, 1999. Applied had cash, cash equivalents and short-term investments of
$3.0 billion at January 30, 2000.
For the three months ended January 30, 2000, cash, cash equivalents and
short-term investments increased by $244 million, primarily due to net income
(excluding depreciation and amortization expense) 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 $348 million during
the first fiscal quarter of 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 3 of Notes
to Consolidated Condensed Financial Statements in this Form 10-Q.
As of January 30, 2000, Applied's principal sources of liquidity consisted of
$3.0 billion of cash, cash equivalents and short-term investments and
approximately $650 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 that began in early 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
inability to realize expected synergies, resulting from the acquisition; and
5) acquired 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
acquisition risks, including those associated with the pending acquisition of
Etec, 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 litigation risks.
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 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 associated with non-compliance with environmental
regulations.
Applied is subject to environmental regulations related to the development,
manufacturing and demonstration 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 production,
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.
Applied is subject to risks from Year 2000 issues.
To date, Applied has not been significantly affected by Year 2000 issues.
Based on this experience, Applied does not expect any future Year 2000-related
issues to materially and adversely affect its financial condition or results
of operations.
In addition to the risks mentioned above, other risk factors are discussed in
detail in Applied's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999.
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 months ended January 30, 2000.
Applied has performed an analysis to assess the potential 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
KLA
As a result of Applied's acquisition of Orbot Instruments, Ltd. (Orbot) in
1997, Applied was involved in a lawsuit captioned KLA Instruments Corporation
(KLA) v. Orbot (case no. C-93-20886-JW) in the United States District Court
for the Northern District of California. KLA alleged that Orbot infringed a
patent regarding equipment for the inspection of masks and reticles, and
sought an injunction, damages and other relief. In February 2000, the parties
reached an agreement pursuant to which the case was dismissed without
prejudice.
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 patents concerning PVD technology 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 will be dismissed.
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 5. Other Information
The ratio of earnings to fixed charges for the three months ended January 31,
1999 and January 30, 2000, and for each of the last five fiscal years, was as
follows:
Three Months Ended
Fiscal Year ----------------------
------------------------------------------------ Jan. 31, Jan. 30,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ---------- ----------
21.25x 20.14x 18.96x 6.92x 14.76x 5.26x 25.51x
======== ======== ======== ======== ======== ========== ==========
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:
27.0 Financial Data Schedule for the three months ended January 30,
2000: filed electronically.
b) Applied did not file a report on Form 8-K during its first
fiscal quarter of 2000.
SIGNATURES
Pursuant to the requirement of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
March 8, 2000
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By: |
/s/ Joseph R. Bronson
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Joseph R. Bronson
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Senior Vice President,
Office of the President,
Chief Financial Officer and
Chief Administrative Officer
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Patrick Crom
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Vice President,
Global Controller and
Principal Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
27.0 Financial Data Schedule for the three months ended January 30, 2000:
filed electronically.
