UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1994 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Bowers Avenue, Santa Clara, California 95054-
3299
Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (408) 727-
5555
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Number of shares outstanding of the issuer's common stock as of
July 31, 1994: 83,734,000
2
PART I. FINANCIAL INFORMATION
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
July 31, Aug. 1, July 31, Aug. 1,
(In thousands, except 1994 1993 1994 1993
per share data)
Net sales $ 440,228 $ 281,370 $1,192,009 $752,636
Costs and expenses:
Cost of products sold 234,656 155,398 641,067 424,541
Research, development
and engineering 52,494 37,058 135,386 101,072
Marketing and selling 39,851 27,056 113,254 75,652
General and administrative 20,279 16,585 60,500 45,151
Other, net 701 1,365 815 3,443
Income from operations 92,247 43,908 240,987 102,777
Interest expense 3,659 3,373 10,779 10,318
Interest income 2,946 1,514 7,214 4,835
Income from consolidated companies
before taxes and cumulative
effect of accounting change 91,534 42,049 237,422 97,294
Provision for income taxes 32,036 13,876 83,097 32,107
Income from consolidated companies
before cumulative effect of
accounting change 59,498 28,173 154,325 65,187
Equity in net loss of joint
venture 1,362 - 3,727 -
Income before cumulative effect of
accounting change 58,136 28,173 150,598 65,187
Cumulative effect of a change in
accounting for income taxes - - 7,000 -
Net income $ 58,136 $ 28,173 $ 157,598 $65,187
Earnings per share*
Before cumulative effect of
accounting change $ 0.68 $ 0.34 $ 1.78 $ 0.79
Net income $ 0.68 $ 0.34 $ 1.86 $ 0.79
Average common shares and
equivalents* 86,033 82,532 84,654 82,056
* Retroactively restated for a two-for-one stock split in the
form of a 100% stock dividend effective October 5, 1993.
See accompanying notes to consolidated condensed
financial statements.
3
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
July 31, Oct. 31,
(In thousands) 1994 1993
ASSETS
Current assets:
Cash and cash equivalents $73,509 $119,597
Short-term investments 214,503 146,583
Accounts receivable, net 394,214 256,020
Inventories 243,956 154,597
Deferred income taxes 67,894 62,413
Other current assets 43,783 36,706
Total current assets 1,037,859 775,916
Property, plant and
equipment, net 411,211 327,704
Other assets 17,606 16,532
Total assets $1,466,676 $1,120,152
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Notes payable $44,737 $41,645
Current portion of
long-term debt 15,392 7,017
Accounts payable and
accrued expenses 352,359 282,699
Income taxes payable 43,276 49,167
Total current liabilities 455,764 380,528
Long-term debt 112,295 121,076
Deferred income taxes and
other non-current
obligations 25,124 19,786
Total liabilities 593,183 521,390
Stockholders' equity:
Common stock 837 804
Additional paid-in capital 363,257 256,429
Retained earnings 482,827 325,230
Cumulative translation
adjustments 26,572 16,299
Total stockholders' equity 873,493 598,762
Total liabilities and
stockholders' equity $1,466,676 $1,120,152
*Amounts as of July 31, 1994 are unaudited.
Amounts as of October 31, 1993 were obtained
from the October 31, 1993 audited financial
statements.
See accompanying notes to consolidated condensed
financial statements.
4
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
July 31, Aug.1,
(In thousands) 1994 1993
Cash flows from operating activities:
Net income $157,598 $65,187
Adjustments required to reconcile
net income to cash flows
provided by operations:
Depreciation and amortization 42,223 27,459
Cumulative effect of a change in
accounting for income taxes (7,000) -
Equity in net loss of joint venture 3,727 -
Changes in assets and liabilities:
Accounts receivable (125,005) (40,613)
Inventories (81,181) (35,827)
Other current assets (6,353) (8,751)
Other assets (3,399) (908)
Accounts payable and
accrued expenses 57,860 41,976
Income taxes payable (3,799) 4,211
Other long-term liabilities 4,441 1,409
(118,486) (11,044)
Cash provided by operations 39,112 54,143
Cash flows from investing activities:
Capital expenditures (121,363) (56,435)
Proceeds from short-term investments 115,114 114,180
Purchases of short-term investments (183,034) (189,755)
Cash used for investing (189,283) (132,010)
Cash flows from financing activities:
Short-term borrowing (repayments), net 236 (3,989)
Long-term debt borrowing - 5,505
Long-term debt repayments (3,863) (5,835)
Sales of common stock, net 106,861 1,107
Cash provided by financing 103,234 (3,212)
Effect of exchange rate changes
on cash 849 (310)
Decrease in cash and cash equivalents (46,088) (81,389)
Cash and cash equivalents
at beginning of period 119,597 159,453
Cash and cash equivalents
at end of period $73,509 $78,064
Cash payments for interest expense were $8,355 and $8,006 for the
nine months ended July 31, 1994 and August 1, 1993, respectively.
Cash payments for income taxes were $63,264 and $27,039 for the
nine months ended July 31, 1994 and August 1, 1993, respectively.
See accompanying notes to consolidated condensed
financial statements.
5
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED JULY 31, 1994
(In thousands)
1) Basis of Presentation
In the opinion of management, the unaudited consolidated
interim financial statements included herein have been
prepared on the same basis as the October 31, 1993 audited
consolidated financial statements and include all
adjustments, consisting of only normal recurring adjustments,
necessary to fairly state the information set forth therein.
Certain amounts in the consolidated statement of cash flows
for the nine months ended August 1, 1993 have been
reclassified to conform with the current year's presentation.
2) Earnings Per Share
Earnings per share is computed on the basis of the weighted
average number of common shares and common equivalent shares
from dilutive stock options.
3) Inventories
Inventories are stated at the lower of cost or market, with
cost determined on the basis of first-in,
first-out (FIFO).
The components of inventories are as follows:
July 31, 1994 October 31, 1993
Customer service spares $61,174 $45,584
Systems raw materials 60,614 32,294
Work-in-process 90,429 57,526
Finished goods 31,739 19,193
$243,956 $154,597
4) Income Taxes
Effective November 1, 1993, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." The Company adopted SFAS
109 prospectively.
6
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED JULY 31, 1994
(In thousands)
4) Income Taxes, continued,
The adoption of SFAS 109 changes the Company's method of
accounting for income taxes from the deferred method, pursuant to
APB 11, to an asset and liability approach. Under APB 11,
deferred taxes are recognized for income and expense items that
are reported in different years for financial reporting purposes.
Under the asset and liability approach of SFAS 109, deferred
assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
existing tax bases.
The cumulative effect of adopting SFAS 109 resulted in a one-time
credit of $7,000, or $0.08 per share, and is reported separately
in the Consolidated Condensed Statement of Operations for the
nine month period ended July 31, 1994.
Deferred tax assets (liabilities) at November 1, 1993 relate
to the following:
Deferred tax assets:
Financial accruals not currently tax deductible:
Inventory $13,454
Warranty and installation 21,022
Other 19,458
State income taxes 8,135
Other 4,344
Total deferred tax assets 66,413
Deferred tax liabilities:
Depreciation and other (7,193)
Net deferred tax assets $59,220
5) Notes Payable
On August 1, 1994, the Company's $50,000 revolving credit
agreement expired and was extended through the completion of
a new agreement. On September 8,1994, the Company completed
a new $125,000 revolving credit agreement in the U.S. with a
group of eight banks. The agreement includes facility fees,
allows for borrowings at rates including the lead bank's prime
reference rate, requires compliance with certain financial
covenants and expires in September 1998.
7
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
NINE MONTHS ENDED JULY 31, 1994
6) Long-Term Debt
On September 1,1994, the Company issued $100 million in ten year
non-callable Senior Notes bearing interest at 8% and maturing on
September 1, 2004. The notes were priced at 99.269 percent to
yield 8.108%. The notes contain certain financial covenants that
include limitations on additional borrowings by U.S.
subsidiaries, liens placed on assets, and sale and leaseback
transactions.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the third quarter of fiscal 1994 Applied Materials, Inc. reported
record net sales of $440.2 million. New orders of $503.7 million
were received during the quarter, driven by increased demand for the
Company's Physical Vapor Deposition (PVD) systems, Chemical Vapor
Deposition (CVD) systems and High Temperature Film (HTF) systems and
continued strong demand for Metal Chemical Vapor Depositions (MCVD)
systems and customer support and spares. Backlog at July 31, 1994
was $560.9 million.
Results of Operations
The Company's worldwide net sales for the three and nine month periods
ended July 31, 1994 increased by 56 percent and 58 percent,
respectively, from the corresponding periods in fiscal 1993. This
growth can be primarily attributed to increased unit sales of the
Company's single-wafer, multi-chamber systems and increases in
customer support revenues for all of the regions served by the
Company. Compared with the nine months ended August 1, 1993, Implant
systems, PVD systems, Etch systems, MCVD systems and customer support
and spares sales were all up significantly. Regionally, 61 percent of
the Company's net sales for the third quarter of fiscal 1994 were to
customers located outside North America compared to 63 percent in the
comparable 1993 period. Sales to customers located outside North
America represented 62 percent in the first three quarters of 1994 and
1993. Fiscal 1994 year to date sales to customers located in
Asia/Pacific (excluding Japan) increased 65 percent from the prior
year and accounted for 16 percent of the Company's fiscal 1994 and
1993 year to date sales. This increase in year to date sales was
driven primarily by sales to Korean DRAM manufacturers and sales to
companies in Taiwan and Singapore making investments in logic and
foundry facilities. Sales to customers in Japan during the three and
nine month periods ended July 31, 1994 showed increases of 47 percent
and 61 percent, respectively, over the comparable periods in fiscal
1993 as DRAM manufacturers began expansions of new eight-inch lines.
Sales in Japan represented 27 percent of total fiscal 1994 year to
date sales compared to 26 percent of fiscal 1993 year to date sales.
Fiscal 1994 year to date sales to customers in Europe increased 47
percent over fiscal 1993 year to date sales due to increasing demand
for capacity to produce advanced telecommunication devices and
consumer products. Although the Company has experienced high growth
rates for more than two years, the Company's expectation is that such
rates will moderate due to projected slower growth in capacity driven
demand for semiconductor production equipment.
Gross margin as a percentage of sales for the three and nine month
periods ended July 31, 1994 increased approximately two and three
percentage points, respectively, from the corresponding periods in
fiscal 1993. The continued improvement in gross margin percentage
primarily reflects economies of scale in manufacturing and service and
support operations as net sales reached record levels. However, past
margin trends are not necessarily indicative of future margin
performance.
9
Operating expenses for the three and nine month periods ended July 31,
1994 decreased approximately three and four percentage points,
respectively, as a percentage of sales compared to the corresponding
periods in fiscal 1993. This improvement was driven primarily by the
Company's record sales levels. The Company intends to continue
investing funds for facilities expansion, information systems
technology and personnel to support higher volumes of business and
thus the Company's expectation is that operating expenses as a
percentage of sales will increase in the fourth quarter of fiscal
1994.
The Company's effective tax rate for the third quarter and first three
quarters of fiscal 1994 was 35 percent, up from 33 percent in fiscal
1993. This increase is due to recently enacted U.S. tax legislation
as well as variations in the Company's worldwide income mix and
foreign taxes. Management anticipates the 35 percent effective tax
rate will continue through the end of fiscal 1994.
Net income of $157.6 million for the nine month period ended July 31,
1994 includes the favorable impact of an accounting change of $7.0
million, or $0.08 per share, from the cumulative effect of the
adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes"(SFAS 109). The Company adopted SFAS 109
prospectively and the cumulative accounting change is reported
separately in the Consolidated Condensed Statements of Operations.
The market served by the Company is characterized by rapid
technological change, increasingly precise customer specifications and
global service requirements. The Company's future operating results
may be affected by inherent uncertainties characteristic of the
worldwide semiconductor equipment industry. Such uncertainties
include, but are not limited to, the development of new technologies,
the anticipated transition to a new generation of microprocessors,
competitive pricing pressures, global economic conditions, and the
availability of needed components. Accordingly, recent historical
operating results should be only one factor in evaluating the future
financial performance of the Company.
Financial Condition, Liquidity and Capital Resources
The Company's financial condition at July 31, 1994 remained strong.
Total current assets at July 31, 1994 were 2.3 times total current
liabilities, compared to 2.0 at October 31, 1993. During the first
three quarters of fiscal 1994, cash, cash equivalents, and short-term
investments increased $22 million. Cash provided by operations since
October 31, 1993 totaled $39.1 million, resulting primarily from net
income and increases in accounts payable and accrued expenses, offset
by increased inventory and accounts receivable levels. The increase in
accounts receivable was due to increased net sales over the prior
period. Inventory levels have increased in order to fulfill customer
orders scheduled for delivery in the fourth quarter of fiscal 1994.
Other uses of cash include
10
investments in facilities and capital equipment of $121.4 million and
net borrowing reductions of $3.6 million. Capital expenditures are
expected to be approximately $180 million for fiscal year 1994. This
amount is higher than originally planned due to greater than
anticipated growth requiring additional funds for facilities
expansion, investments in demonstration and test equipment,
information systems and other capital expenditures. The Company is
continuing to manage its manufacturing capacity to ensure that
customer demands will be met. Cash provided by financing activities
included proceeds from the sale of 2.3 million shares of the Company's
common stock in the second quarter of fiscal 1994.
At July 31, 1994, the Company's principal sources of liquidity
consisted of $288 million of cash and short-term investments and
$128.7 million in available U.S. and foreign credit facilities. In
addition, the Company filed a shelf registration with the Securities
and Exchange Commission during the second quarter of fiscal 1994 for
the sale of common stock and issuance of debt securities. The Company
received $111.0 million from the sale of 2.3 million shares of common
stock in the second quarter of fiscal 1994 and $98.6 million from the
issuance of Senior notes on September 1, 1994. The Company's
liquidity is affected by many factors, some based on the on-going
operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these
factors, management believes that cash generated from operations,
together with the liquidity provided by existing cash balances and
current borrowing arrangements, will be sufficient to satisfy
commitments for capital expenditures and other cash requirements for
the balance of fiscal 1994 and throughout fiscal 1995.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the first of two lawsuits filed by the Company
against Advanced Semiconductor Materials, Inc., Epsilon
Technology, Inc. (doing business as ASM Epitaxy) and
Advanced Semiconductor Materials International N.V.
(the defendants, together, hereafter referred to as
"ASM"), described in the Company's Annual Report on Form
10-K for its fiscal year ended October 31, 1993 and in
the Company's Form 10-Q for the quarter ended May 1,
1994, Judge William Ingram of the United States District
Court for the Northern District of California in San
Jose issued an injunction against ASM's sale and use of
the ASM Epsilon I epitaxial reactor in the United
States, but also granted a stay of the injunction
pending an appeal by ASM of the Court's earlier decision
that the Epsilon I infringes certain of the Company's
patents. The stay order requires that ASM pay a fee, as
a security for the Company's interests, for each Epsilon
I sold by ASM in the U.S after the date of the
injunction. ASM has filed a Notice of Appeal. Judge
Whyte of the same Court separately ruled that the
proceedings to resolve the issues of damages and willful
infringement, which had been bifurcated for separate
trial, will be stayed pending ASM's appeal of the
infringement issue.
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:
10.18 Applied Komatsu Technology, Inc. 1994 Executive
Incentive Stock Purchase Plan, together with forms of Promissory Note,
1994 Executive Incentive Stock Purchase Agreement, and Loan and Security
Agreement.
b) No reports on Form 8-K were filed by the Company during
the quarter ended July 31, 1994.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
APPLIED MATERIALS, INC.
September 12, 1994 By: \ s\Gerald F.Taylor
Gerald F. Taylor
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
By: \ s\Michael K. O'Farrell
Michael K. O'Farrell
Corporate Controller
(Principal Accounting Officer)
13
INDEX TO EXHIBITS
Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K:
Page
10.18 Applied Komatsu Technology, Inc. 1994 Executive 14
Incentive Stock Purchase Plan, together with forms of
Promissory Note, 1994 Executive Incentive Stock
Purchase Agreement, and Loan and Security Agreement.