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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 31, 1999 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Bowers Avenue, Santa Clara, California 95054-3299
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 727-5555
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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
January 31, 1999: 372,974,320
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APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-------------------------
(In thousands, except per Jan. 25, Jan. 31,
share amounts) 1998 1999
- ---------------------------------- ------------ ------------
Net sales.......................... $1,307,685 $742,477
Cost of products sold.............. 678,244 421,374
------------ ------------
Gross margin....................... 629,441 321,103
Operating expenses:
Research, development and
engineering................... 182,329 141,207
Marketing and selling........... 86,389 70,733
General and administrative...... 65,768 61,594
Non-recurring items ............ 32,227 5,000
------------ ------------
Income from operations............. 262,728 42,569
Income from litigation settlements. 80,000 20,000
Interest expense................... 11,864 11,470
Interest income.................... 21,279 25,546
------------ ------------
Income before taxes................ 352,143 76,645
Provision for income taxes......... 123,250 23,760
------------ ------------
Net income......................... $228,893 $52,885
============ ============
Earnings per share:
Basic........................... $0.62 $0.14
Diluted......................... $0.60 $0.14
Weighted average number of shares:
Basic........................... 366,894 370,530
Diluted......................... 379,101 388,233
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
Oct. 25, Jan. 31,
(In thousands) 1998 1999
- -------------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $575,205 $562,401
Short-term investments........................ 1,188,351 1,361,912
Accounts receivable, net...................... 764,472 671,319
Inventories................................... 555,881 552,779
Deferred income taxes......................... 337,906 338,217
Other current assets.......................... 97,140 110,911
------------ ------------
Total current assets............................. 3,518,955 3,597,539
Property, plant and equipment, net............... 1,261,520 1,226,701
Other assets..................................... 149,217 136,497
------------ ------------
Total assets..................................... $4,929,692 $4,960,737
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................. $644 $ --
Current portion of long-term debt............. 7,367 7,652
Accounts payable and accrued expenses......... 1,041,341 876,618
Income taxes payable.......................... 68,974 158,689
------------ ------------
Total current liabilities........................ 1,118,326 1,042,959
Long-term debt................................... 616,572 616,902
Deferred income taxes and other liabilities...... 74,173 80,761
------------ ------------
Total liabilities................................ 1,809,071 1,740,622
------------ ------------
Stockholders' equity:
Common stock.................................. 3,679 3,730
Additional paid-in capital.................... 792,145 842,664
Retained earnings............................. 2,328,940 2,381,825
Accumulated other comprehensive income........ (4,143) (8,104)
------------ ------------
Total stockholders' equity....................... 3,120,621 3,220,115
------------ ------------
Total liabilities and stockholders' equity....... $4,929,692 $4,960,737
============ ============
* Amounts as of January 31, 1999 are unaudited. Amounts as of October 25, 1998
are from the October 25, 1998 audited financial statements.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
--------------------------
Jan. 25, Jan. 31,
(In thousands) 1998 1999
- --------------------------------------------------- ------------ ------------
Cash flows from operating activities:
Net income...................................... $228,893 $52,885
Adjustments required to reconcile net income
to cash provided by operations:
Acquired in-process research and
development expense.......................... 32,227 --
Depreciation and amortization................. 66,889 70,788
Deferred income taxes......................... (383) 92
Changes in assets and liabilities, net of
amounts acquired:
Accounts receivable........................ (77,545) 104,530
Inventories................................ (65,223) 3,702
Other current assets....................... (74,662) (7,750)
Other assets............................... (1,572) 9,081
Accounts payable and accrued expenses...... (47,182) (171,883)
Income taxes payable....................... 33,332 86,847
Other liabilities.......................... 8,437 3,904
------------ ------------
Cash provided by operations....................... 103,211 152,196
------------ ------------
Cash flows from investing activities:
Capital expenditures, net of retirements........ (152,636) (39,267)
Cash paid for licensed technology............... (32,227) --
Proceeds from sales of short-term investments... 252,429 194,831
Purchases of short-term investments............. (228,030) (368,392)
------------ ------------
Cash used for investing........................... (160,464) (212,828)
------------ ------------
Cash flows from financing activities:
Short-term debt activity, net................... (1,943) (2,699)
Long-term debt activity, net.................... (1,399) (2,183)
Common stock transactions, net.................. (58,331) 52,130
------------ ------------
Cash provided by/(used for) financing............. (61,673) 47,248
------------ ------------
Effect of exchange rate changes on cash........... (804) 580
------------ ------------
Decrease in cash and cash equivalents............. (119,730) (12,804)
Cash and cash equivalents - beginning of period... 448,043 575,205
------------ ------------
Cash and cash equivalents - end of period......... $328,313 $562,401
============ ============
For the three months ended January 25, 1998, cash payments for interest and
income taxes were $870 and $86,300, respectively. For the three months ended
January 31, 1999, cash payments for interest were $1,392 and net income tax
refunds were $63,787.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED JANUARY 31, 1999
1) Basis of Presentation
In the opinion of management, the unaudited consolidated condensed
financial statements of Applied Materials, Inc. (the Company)
included herein have been prepared on a consistent basis with the
October 25, 1998 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 financial statements should
be read in conjunction with the October 25, 1998 audited
consolidated financial statements and notes thereto. The
Company's results of operations for the three months ended January
31, 1999 are not necessarily indicative of future operating
results.
The Company's fiscal year ends on the last Sunday in October of
each year. Fiscal 1998 contained 52 weeks, whereas fiscal 1999
will contain 53 weeks. The extra week in 1999 is in the first
fiscal quarter.
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
The Company calculates earnings per share according to the
provisions of Statement of Financial Accounting Standards No. 128
(SFAS 128), "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. For purposes of computing basic
and diluted earnings per share, SFAS 128 does not require the
Company's net income to be adjusted for any period presented.
For purposes of computing diluted earnings per share, weighted
average common share equivalents do not include stock options with
an exercise price that exceeds the average fair market value of
the Company's common stock for the period. For the three months
ended January 25, 1998, options to purchase approximately
1,999,000 shares of common stock at an average price of $41.14
were excluded from the computation, and for the three months ended
January 31, 1999, options to purchase approximately 681,000 shares
of common stock at an average price of $48.93 were excluded from
the computation.
3) 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 are as follows (in thousands):
October 25, January 31,
1998 1999
------------ ------------
Customer service spares............ $239,139 $229,627
Raw materials...................... 98,180 85,540
Work-in-process.................... 126,533 149,218
Finished goods..................... 92,029 88,394
------------ ------------
$555,881 $552,779
============ ============
4) Other Assets
The components of other assets are as follows (in thousands):
October 25, January 31,
1998 1999
------------ ------------
Purchased technology, net.......... $91,218 $87,519
Goodwill, net...................... 11,614 11,111
Other.............................. 46,385 37,867
------------ ------------
$149,217 $136,497
============ ============
Purchased technology and goodwill are presented at cost, net of
accumulated amortization, and are being amortized over their
estimated useful lives of eight years using the straight-line
method. The Company periodically analyzes these assets to
determine whether an impairment in carrying value has occurred.
5) Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as
follows (in thousands):
October 25, January 31,
1998 1999
------------ ------------
Accounts payable................... $182,616 $203,896
Compensation and benefits.......... 185,391 127,097
Installation and warranty.......... 179,742 161,833
Restructuring...................... 91,781 41,160
Other.............................. 401,811 342,632
------------ ------------
$1,041,341 $876,618
============ ============
6) Accrued Restructuring Costs
Restructuring activity during the first fiscal quarter of 1999 was as
follows (in thousands):
Severance
and
Benefits Facilities Total
------------ ------------ ------------
Balance, October 25, 1998.......... $35,286 $56,495 $91,781
Amount utilized.................... (27,792) (22,829) (50,621)
------------ ------------ ------------
Balance, January 31, 1999.......... $7,494 $33,666 $41,160
============ ============ ============
During the first fiscal quarter of 1999, $34 million of cash was
used for restructuring costs. The majority of the remaining cash
outlays of $29 million is expected to occur before the end of
fiscal 1999. The remaining non-cash restructuring costs of $12
million relate primarily to asset write-offs.
7) Acquisition
On October 12, 1998, the Company announced that it had entered
into an agreement to acquire Consilium, Inc. (Consilium), a
leading independent supplier of integrated semiconductor and
electronics manufacturing execution systems software and services,
in a stock-for-stock merger. The acquisition was consummated on
December 11, 1998 and has been accounted for as a pooling of
interests. The Company issued 1.7 million shares of its common
stock to complete this transaction. Since Consilium's historical
financial position and results of operations are not material in
relation to the Company's historical financial position and
results of operations, the Company's prior period financial
statements have not been restated. Except for one-time
transaction costs of $5 million, the acquisition did not have a
material effect on the Company's results of operations for the
first fiscal quarter of 1999.
8) Licensed Technology
During the first fiscal quarter of 1998, the Company entered into
an agreement with Trikon Technologies, Inc. for a non-exclusive,
worldwide, perpetual license of MORI(tm) plasma source and Forcefill(tm)
deposition technology. Because the development of this technology
had not yet reached technological feasibility at the time of its
acquisition and had no alternative future use, the Company
recognized $32 million, including transaction costs, of acquired
in-process research and development expense at the time of its
acquisition.
9) Litigation Settlement
During the first fiscal quarter of 1998, the Company settled all
outstanding litigation with ASM International, N.V. (ASMI). As a
result of this settlement, the Company received a convertible note
for $80 million, against which $15 million was collected in
November 1997.
During the fourth fiscal quarter of 1998, the Company determined,
based on facts and circumstances known at the time, that
collection of the remaining note balance was doubtful and recorded
a $65 million pre-tax, non-operating charge to fully reserve the
outstanding note balance.
During the first fiscal quarter of 1999, and subsequent to the
original maturity date of the note, the Company received a $20
million payment from ASMI and recorded the amount as pre-tax, non-
operating income. ASMI's payment was made in accordance with a
restructuring of ASMI's obligations under the November 1997
litigation settlement agreement. Pursuant to the new agreement,
ASMI agreed to pay $20 million upon completion of the
restructuring, $10 million on November 2, 1999 and $35 million no
later than November 2, 2000. The Company will recognize non-
operating income related to the remaining balance of the note
receivable on a cash receipts basis going forward. Certain other
obligations of ASMI were also modified under the new agreement;
however, these modifications are not expected to be material to
the Company's financial condition or results of operations.
Royalties received from ASMI pursuant to the settlement agreement
have not been, and are not expected to be, material.
10) Comprehensive Income
The Company 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 impact net income or total stockholders'
equity. The components of comprehensive income, on an after-tax
basis, are as follows (in thousands):
Three Months Ended
-------------------------
January 25, January 31,
1998 1999
------------ ------------
Net income......................... $228,893 $52,885
Foreign currency translation
adjustments...................... (8,649) (3,961)
------------ ------------
Comprehensive income............... $220,244 $48,924
============ ============
Accumulated other comprehensive income presented in the
accompanying consolidated condensed balance sheets consists
entirely of accumulated foreign currency translation adjustments.
11) Subsequent Event
In February 1999, the Company announced that it had reached a
settlement of patent litigation with STEAG AST Elektronik GmbH and
its subsidiary STEAG AST Elektronik USA, Inc. (collectively
"AST"). Under the settlement, patent suits and countersuits
concerning rapid thermal processing (RTP) technologies were
dismissed, certain technology was cross-licensed, and the Company
agreed not to sue AST on its illuminator patents if AST does not
use a particular RTP lamp array. The settlement is not expected
to have a material effect on the Company's financial condition or
results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical statements, this Quarterly Report on Form
10-Q contains forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those stated or implied. Forward-looking
statements are those that use the words "expects," "estimates,"
"will," "may," "anticipates," "believes" or similar
expressions. These forward-looking statements reflect management's
opinions only as of the date hereof, and Applied Materials, Inc.
(the Company) assumes no obligation to update this information.
Risks and uncertainties include, but are not limited to, those
discussed below and in the section entitled "Trends, Risks and
Uncertainties." Other risks and uncertainties are disclosed in
the Company's prior SEC filings, including the Annual Report on
Form 10-K for the fiscal year ended October 25, 1998.
Results of Operations
There continues to be uncertainty regarding global economies,
demand for semiconductors, advanced technology requirements and the
stability of memory device prices; therefore, for these and other
reasons, the Company's results of operations for the three months
ended January 31, 1999 are not necessarily indicative of future
operating results.
New Orders and Backlog
The Company received new orders of $1.0 billion for the first
fiscal quarter of 1999, versus $684 million for the fourth fiscal
quarter of 1998 and $1.3 billion for the first fiscal quarter of
1998. New orders improved from the fourth fiscal quarter of 1998
primarily due to higher Dynamic Random Access Memory (DRAM) prices
and continued customer migration to advanced technologies. The
decrease in new orders from the first fiscal quarter of 1998 is
primarily the result of a lower level of capacity investments by
semiconductor manufacturers.
New orders by region were as follows (dollars in millions):
Three Months Ended
-----------------------------------
October 25, 1998 January 31, 1999
---------------- ----------------
($) (%) ($) (%)
------- ------- ------- -------
North America*..................... 357 52 391 38
Europe............................. 83 12 178 17
Japan.............................. 115 17 206 20
Korea.............................. 34 5 64 6
Taiwan............................. 49 7 142 14
Asia-Pacific....................... 46 7 48 5
------- ------- ------- -------
Total.............................. 684 100 1,029 100
======= ======= ======= =======
*Primarily the United States
The Company's backlog at January 31, 1999 was $1.2 billion, versus
$917 million at October 25, 1998 and $1.6 billion at January 25,
1998.
Net Sales
The Company's net sales for the first fiscal quarter of 1999
increased 10.3 percent from the fourth fiscal quarter of 1998 due
primarily to a stronger DRAM market, as discussed above. Net sales
for the first fiscal quarter of 1999 decreased 43.2 percent from
the corresponding period of fiscal 1998, reflecting the lower order
levels achieved during the industry downturn in the second half of
fiscal 1998. For the first fiscal quarter of 1998, the Company
achieved record net sales of $1.3 billion, driven by strengthening
demand for 0.25 micron and below leading-edge capability from logic
device manufacturers, foundry capacity investments by customers
located primarily in Taiwan and selected strategic investments by
DRAM manufacturers.
Net sales by region were as follows (dollars in millions):
Three Months Ended
------------------------------
January 25, January 31,
1998 1999
-------------- --------------
($) (%) ($) (%)
------- ------ ------- ------
North America*. 471 36 324 44
Europe......... 196 15 135 18
Japan.......... 222 17 121 16
Korea.......... 52 4 30 4
Taiwan......... 288 22 96 13
Asia-Pacific... 79 6 36 5
------- ------ ------- ------
Total......... 1,308 100 742 100
======= ====== ======= ======
*Primarily the United States
Gross Margin
The Company's gross margin decreased from 48.1 percent for the
three month period ended January 25, 1998 to 43.2 percent for the
three month period ended January 31, 1999. The decrease in gross
margin was caused primarily by a decrease in business volume,
partially offset by the Company's efforts to improve efficiencies,
reduce cycle times and lower material costs.
Operating Expenses (Excluding Non-Recurring Items)
Excluding non-recurring items, operating expenses as a percentage
of net sales for the three months ended January 31, 1999 were 36.8
percent, versus 25.6 percent for the first fiscal quarter of 1998.
The increase as a percentage of net sales is primarily attributable
to lower business volume.
Non-Recurring Items
During the first fiscal quarter of 1998, the Company entered into
an agreement with Trikon Technologies, Inc. for a non-exclusive,
worldwide, perpetual license of MORI(tm) plasma source and Forcefill(tm)
deposition technology. Because the development of this technology
had not yet reached technological feasibility at the time of its
acquisition and had no alternative future use, the Company
recognized $32 million, including transaction costs, of acquired
in-process research and development expense at the time of its
acquisition.
The Company's results of operations for the first fiscal quarter of
1999 include $5 million of pre-tax operating expenses incurred in
connection with the acquisition of Consilium, Inc., which was
completed on December 11, 1998 and has been accounted for as a
pooling of interests.
Litigation Settlements
During the first fiscal quarter of 1999, and subsequent to the
original maturity date of a note received in connection with the
November 1997 settlement of all outstanding litigation with ASM
International, N.V. (ASMI), the Company received a $20 million
payment from ASMI and recorded the amount as pre-tax, non-operating
income. Pursuant to a restructuring of the November 1997
settlement agreement, ASMI has also agreed to pay $10 million on
November 2, 1999 and $35 million no later than November 2, 2000.
The Company will recognize non-operating income related to the
remaining balance of the note receivable on a cash receipts basis
going forward. For further information, see Note 9 of Notes to
Consolidated Condensed Financial Statements.
Interest Expense
Interest expense remained relatively consistent with the prior
year, decreasing from $12 million for the three months ended
January 25, 1998 to $11 million for the three months ended January
31, 1999. The Company's outstanding weighted average interest-
bearing obligations and interest rates did not change significantly
from period to period.
Interest Income
Interest income increased from $21 million for the three months
ended January 25, 1998 to $26 million for the three months ended
January 31, 1999. The increase resulted primarily from higher
average cash, cash equivalents and short-term investment balances.
Provision for Income Taxes
The Company's effective income tax rate for the first fiscal quarter
of 1999 was 31 percent, versus 35 percent for the first fiscal
quarter of 1998. The reduced rate primarily reflects the
reinstatement of the federal research and development (R&D) tax
credit and favorable California income tax legislation with respect
to R&D and manufacturers investment tax credits.
Subsequent Event
In February 1999, the Company announced that it had reached a
settlement of patent litigation with STEAG AST Elektronik GmbH and
its subsidiary STEAG AST Elektronik USA, Inc. (collectively
"AST"). Under the settlement, patent suits and countersuits
concerning rapid thermal processing (RTP) technologies were
dismissed, certain technology was cross-licensed, and the Company
agreed not to sue AST on its illuminator patents if AST does not
use a particular RTP lamp array. The settlement is not expected to
have a material effect on the Company's financial condition or
results of operations.
Foreign Currencies
Significant operations of the Company are conducted in foreign
currencies, primarily Japanese yen. Forward exchange and currency
option contracts are purchased 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 the
Company 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 31, 1999 or
January 25, 1998.
Financial Condition, Liquidity and Capital Resources
The Company's financial condition at January 31, 1999 improved,
with a ratio of current assets to current liabilities of 3.4:1,
compared to 3.1:1 at October 25, 1998. The Company ended the
quarter with cash, cash equivalents and short-term investments of
$1.9 billion.
The Company generated $152 million of cash from operations during
the first three months of fiscal 1999. The primary sources of
cash from operations were net income (plus non-cash charges for
depreciation and amortization expense) of $124 million, a decrease
in accounts receivable of $105 million and an increase in income
taxes payable of $87 million. These sources were partially offset
by a decrease in accounts payable and accrued expenses of $172
million. During the first fiscal quarter of 1999, approximately
$159 million of trade notes and accounts receivable were sold at a
discount to financial institutions.
The Company used $213 million of cash for investing activities
during the first three months of fiscal 1999, primarily for net
purchases of property, plant and equipment ($39 million) and short-
term investments ($174 million).
The Company generated $47 million of cash from financing activities
during the first three months of fiscal 1999, primarily from stock
option exercises and stock sales to employees through a stock
purchase plan.
The Company is authorized to systematically repurchase shares of
its common stock in the open market to reduce the dilution
resulting from its stock-based employee benefit and incentive
plans. This authorization is effective until the March 2001 Annual
Meeting of Stockholders. The Company did not repurchase any shares
of its common stock during the three months ended January 31, 1999.
As of January 31, 1999, the Company's principal sources of
liquidity consisted of $1.9 billion of cash, cash equivalents and
short-term investments and approximately $600 million of available
credit facilities. In addition to cash and available credit
facilities, the Company may from time to time raise additional
capital in the debt and equity markets. The Company'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 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
borrowing capability, will be sufficient to satisfy the Company's
liquidity requirements for the next twelve months.
Acquisition
On October 12, 1998, the Company announced that it had entered into
an agreement to acquire Consilium, Inc. (Consilium), a leading
independent supplier of integrated semiconductor and electronics
manufacturing execution systems software and services, in a stock-
for-stock merger. The acquisition was consummated on December 11,
1998 and has been accounted for as a pooling of interests. The
Company issued 1.7 million shares of its common stock to complete
this transaction. Since Consilium's historical financial position
and results of operations are not material in relation to the
Company's historical financial position and results of operations,
the Company's prior period financial statements have not been
restated. Except for one-time transaction costs of $5 million, the
acquisition did not have a material effect on the Company's results
of operations for the first fiscal quarter of 1999.
Trends, Risks and Uncertainties
Industry Volatility
The semiconductor equipment industry has historically been cyclical
and subject to sudden changes in supply and demand. The timing,
length and severity of these cycles are difficult to predict.
During periods of reduced and declining demand, the Company must be
able to quickly and effectively align its cost structure with
prevailing market conditions, and motivate and retain key
employees. During periods of rapid growth, the Company must be
able to acquire and/or develop sufficient manufacturing capacity to
meet customer demand, and hire and assimilate a sufficient number
of qualified people. There can be no assurance that the Company
will be able to achieve these objectives in a timely manner during
these industry cycles.
DRAM Prices
The DRAM market improved during the first fiscal quarter of 1999 as
device prices reached a level that enabled semiconductor
manufacturers to increase capital spending. If DRAM pricing
deteriorates, demand for the Company's products could be materially
and adversely affected.
PC Demand
Further shifts in demand from more expensive, high-performance
products to lower-priced products (sub-$1,000 PCs), or lower
overall demand for PCs, could result in reduced profitability for,
and lower capital spending by, semiconductor manufacturers, which
could materially and adversely affect demand for the Company's
products.
Asian Economies
Although Asian economies have stabilized to some degree, the
Company remains cautious about macroeconomic developments in Japan
and China. These two countries are primarily responsible for the
overall financial health of the region and if their economies
remain stagnant or deteriorate further, the economies of other
countries, particularly those in Asia, could also be negatively
affected. This could have a material adverse effect on demand for
the Company's products.
Global Business
The Company sells systems and provides services to customers
located throughout the world. Managing global operations and sites
located throughout the world presents challenges associated with,
among other things, cultural diversities and organizational
alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause
capital equipment investment patterns to vary significantly from
period to period. Periodic economic downturns, trade balance
issues, political instability and fluctuations in interest and
currency exchange rates are all risks that could materially and
adversely affect global demand for the Company's products and
services.
Highly Competitive Industry and Rapid Technological Change
The Company operates in a highly competitive industry characterized
by increasingly rapid technological changes. The Company's
competitive advantage and future success depend on its ability to
develop new products and technologies, to develop new markets in
the semiconductor industry for its products and services, to
introduce new products to the marketplace on a timely basis, to
qualify new products with its customers, and to commence production
to meet customer demands.
New products and technologies include those for copper
interconnect, processing of 300mm wafers and production of 0.18
micron and below devices. The introduction of new products and
technologies grows increasingly complex over time. If the Company
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.
The Company seeks to develop new technologies from both internal
and external sources. As part of this effort, the Company may make
acquisitions of, or significant investments in, businesses with
complementary products, services and/or technologies. Acquisitions
involve numerous risks, including, but not limited to: difficulties
and increased costs in connection with integration of the
operations, technologies, and products of the acquired companies;
possible write-downs of impaired assets; diverting management's
attention; and the potential loss of key employees of the acquired
companies. The inability to effectively manage these risks could
materially and adversely affect the Company's business, financial
condition and results of operations.
Dependence Upon Key Suppliers
The Company uses numerous suppliers to supply parts, components and
subassemblies (collectively "parts") for the manufacture and
support of its products. Although the Company makes reasonable
efforts to ensure that parts are available from multiple suppliers,
this is not always possible; accordingly, certain key parts may be
obtained from a single supplier or a limited group of suppliers.
These suppliers are, in some cases, thinly capitalized, independent
companies that generate significant portions of their business from
the Company and/or a small group of other companies in the
semiconductor industry. The Company has sought, and will continue
to seek, to minimize the risk of production and service
interruptions and/or shortages of key parts by: 1) selecting and
qualifying alternative suppliers for key parts; 2) monitoring the
financial stability of key suppliers; and 3) maintaining
appropriate inventories of key parts. There can be no assurance
that the Company's results of operations will not be materially and
adversely affected if, in the future, the Company does not receive
sufficient parts to meet its requirements in a timely and cost-
effective manner.
Backlog
The Company's backlog increased from $917 million at October 25,
1998 to $1.2 billion at January 31, 1999. The Company schedules
production of its systems based upon order backlog and customer
commitments. Backlog includes only orders for which written
authorizations have been accepted and shipment dates within 12
months have been assigned. However, customers generally may delay
delivery of products or cancel orders. Due to possible customer
changes in delivery schedules and cancellation of orders, the
Company's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period. A reduction
of backlog during any particular period could have a material
adverse effect on the Company's business, financial condition and
results of operations.
Risks Related to "Year 2000" Compliance
The Company has established a Year 2000 Program Office to address
certain Year 2000 issues. This office focuses on four key
readiness programs: 1) Internal Infrastructure Readiness,
addressing internal hardware and software, including both
information technology and non-information technology systems; 2)
Supplier Readiness, addressing the preparedness of suppliers
providing material incorporated into the Company's products; 3)
Product Readiness, addressing product functionality; and 4)
Customer Readiness, addressing customer support and transactional
activity. For each readiness area, the Company is systematically
performing a global risk assessment, conducting testing and
remediation (renovation and implementation), developing contingency
plans to mitigate unknown risk, and communicating Year 2000
information to employees, suppliers, customers and other third
parties.
Internal Infrastructure Readiness Program
The Company, assisted by a third party, has completed an inventory
of internal applications and information technology hardware and has
commenced work on remediation strategies and testing. Readiness
activities are intended to encompass all major categories of
applications in use by the Company, including applications used for
manufacturing, engineering, sales, finance and human resources.
Approximately 70 percent of mission critical applications have
either been tested and determined to be Year 2000 ready or are
undergoing testing but are believed to be Year 2000 ready based upon
representations by the supplier of the application. All other
mission critical applications are in the process of remediation.
All software remediation is scheduled to be completed by July 1,
1999. The Year 2000 compliance evaluation of hardware, including
hubs, routers, telecommunication equipment, workstations and other
items, is complete, and corrective action is scheduled to be
completed by July 1, 1999. In addition to applications and
information technology hardware, the Company has assessed its
non-information technology systems, including embedded systems,
facilities and other operations, such as financial, banking,
security and utility systems. Remediation activity is underway and
scheduled for completion by July 1, 1999. A contingency plan
addressing issues related to the Company's internal infrastructure
will be developed when ongoing testing and remediation activities
are complete. Although the Company believes it is feasible to
complete its evaluation and remediation efforts according to its
current schedule, there can be no assurance that all such activities
will be completed on time, or that such efforts will be successful.
Supplier Readiness Program
This program focuses on minimizing two areas of risk associated with
suppliers: 1) a supplier's product integrity; and 2) a supplier's
business capability to continue providing products and services.
The Company has identified and contacted key suppliers regarding
their relative risks in these two areas. To date, the Company has
received responses from approximately 95 percent of its key
suppliers, most of which indicate that the products provided to the
Company are either Year 2000 compliant or will be made Year 2000
compliant before the year 2000. The responses also indicate that
most suppliers are in the process of developing or executing
remediation plans to address Year 2000 issues that may affect their
ability to continue providing products and services to the Company.
For key suppliers, the Company has entered into an agreement with an
external consultant to conduct onsite audits of the suppliers' Year
2000 readiness. These audits are scheduled to be completed by June
30, 1999. Based on the results of these audits and the Company's
assessment of each supplier's Year 2000 readiness, the Company will
develop a supplier action list and contingency plan for each
supplier at risk. However, no assurance can be provided regarding
the effect or timely implementation of such action list or
contingency plans, or that suppliers will sufficiently address their
Year 2000 issues to enable them to continue providing products and
services to the Company in a timely manner.
Product Readiness Program
This program focuses on identifying and resolving Year 2000 issues
existing in the Company's products. The program encompasses a
number of activities, including testing, evaluation, engineering and
manufacturing implementation. The Company has completed a Year 2000
readiness evaluation for its current generation of released products
based upon a series of industry-recognized testing scenarios.
In connection with the Company's Year 2000 readiness evaluation,
the Company focused on identifying Year 2000 issues in two major
categories: machine control software and product embedded
processors. The Company performed impact studies for each product,
based on a representative configuration. In addition, by focusing
on the Company's parts most likely to include embedded processors,
the Company narrowed the number of parts requiring further
evaluation from several thousand to approximately 600 that could
contain embedded processors that may present potential Year 2000
issues. These 600 parts were evaluated further and tested as
required.
The Company's evaluation indicated that no human or equipment
safety impacts or product process control impacts are expected due
to the Year 2000 problem, but that certain screen displays, log
files and interface programs may be affected. The Company has
taken corrective action to address these affected displays, files
and programs, and has remediated any affected embedded processors.
In addition, the Company has informed customers of certain
potential product-specific impacts of the Year 2000 on the
Company's products.
Testing and engineering activity for the Company's current
generation of products is complete, and unless otherwise requested
by a customer, all products that shipped on or after January 1,
1999 were Year 2000 ready. However, the Company plans to make a
contingency team available to address issues related to product
readiness as a component of its Customer Readiness Program
discussed below. There can be no assurance that product testing
has identified all Year 2000 related issues or that the Company
will effectively address every failure of its products resulting
from Year 2000 issues.
Customer Readiness Program
This program focuses on customer support issues, including the
coordination of retrofit activity, testing existing customer
electronic transaction capability, and providing other services to
the Company's customers. The Company, in cooperation with its
customers, has completed an inventory and assessment of products in
use at substantially all of its customers' sites. The Company is
offering different upgrade packages for its products, including
various parts, software and services in the form of "Year 2000 ready
kits." For any customer requesting an upgrade to a system that
shipped after January 1, 1997, the upgrade is scheduled to be
completed by June 30, 1999. For systems that shipped prior to
January 1, 1997, the upgrade schedule is determined by customer
requirements. The Customer Readiness Program plans to make a
contingency team available, through the year 2000, to customers
experiencing difficulty with the Company's products. There can be no
assurance, however, that these activities will prevent or effectively
address the occurrence of Year 2000 related problems in the Company's
products in use at customer sites.
The Company estimates that total Year 2000 costs will range from
$30 million to $50 million, the majority of which will be incurred
by January 2000. To date, costs incurred directly for Year 2000
activities have totaled $6 million. This amount includes costs to
support customer satisfaction programs and services and other
internal costs, but does not include the cost of internal hardware
and software that was to be replaced in the normal course of
business but has been accelerated because of Year 2000 capability
concerns. The Company is continuing its assessments and developing
alternatives that will require changes to this estimate over time.
There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the programs described in
this section.
In conjunction with the Company's due diligence examination of
Consilium, which was acquired in December 1998, the Company
conducted a limited evaluation of Consilium's Year 2000 readiness.
Since then, the Company has further evaluated certain areas related
to Consilium's internal information technology and other systems,
and has discussed other readiness areas with the employees
responsible for Consilium's Year 2000 program. The Company is
currently evaluating Consilium's Year 2000 policies and programs
regarding their information technology and other systems, suppliers
and products, and is also integrating Consilium's policies and
programs into the Company's Year 2000 program. Until the Company
has completed its evaluation, there can be no assurances concerning
the Year 2000 readiness of Consilium's products and systems, the
probability that remediation efforts related to Consilium's
products and systems will be successful, or the materiality of the
costs of such assessment and remediation.
The programs described in this section are ongoing and, as such,
the Company may not yet have identified all potential Year 2000
complications. Therefore, at this time, the Company cannot
determine the potential impact of these complications and
contingencies on the Company's financial condition and results of
operations. If computer systems used by the Company or its
suppliers, or the software applications used in systems
manufactured and sold by the Company, fail or experience
significant difficulties related to the Year 2000, the Company's
financial condition and results of operations could be materially
and adversely affected.
Foreign Currency
Significant operations of the Company are conducted in foreign
currencies, primarily Japanese yen. The Company actively manages
its exposure to changes in currency exchange rates, but there can
be no assurance that future changes in currency exchange rates will
not have a material and adverse effect on the Company's financial
condition or results of operations.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European
Union established fixed conversion rates between each of their
existing sovereign currencies and the Single European Currency (the
"euro"). The participating countries adopted the euro as their
common legal currency on that date, with a transition period
through January 1, 2002 regarding certain elements of the euro
change. In early January, the Company implemented changes to its
internal systems to make them euro capable. The cost of systems
modifications to date has not been material, nor are future systems
modifications expected to be material. The Company does not expect
the transition to, or use of, the euro to materially and adversely
affect its business, financial condition or results of operations.
Litigation
The Company is currently involved in litigation regarding patent
infringement, intellectual property rights, antitrust and other
matters (see Part II, Item 1) and could become involved in
additional litigation in the future. The Company from time to time
receives and makes inquiries regarding possible patent
infringement, and is subject to various other legal proceedings and
claims, either asserted or unasserted. Any such 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 litigation or patent infringement inquiries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has performed an analysis to assess the potential
effect of reasonably possible near-term changes in interest and
foreign currency exchange rates. The effect of such rate changes
is not expected to be material to the Company's cash flows,
financial condition or results of operations. Net foreign currency
gains and losses were not material for the three months ended
January 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
AST and AG
In April 1997, the Company initiated separate lawsuits against
STEAG AST Electronik GmbH and STEAG AST Electronik USA, Inc.
(collectively "AST"), and AG Associates, Inc. (AG) (case no. C-97-
20375-RMW) in the United States District Court for the Northern
District of California, alleging infringement of certain patents
concerning rapid thermal processing (RTP) technology. In October
1997, AST and AG each filed counterclaims against the Company
alleging patent infringement concerning related technology.
In February 1999, the Company announced that it had reached a
settlement of patent litigation with AST. Under the settlement,
patent suits and countersuits concerning RTP technologies were
dismissed, certain technology was cross-licensed, and the Company
agreed not to sue AST on its illuminator patents if AST does not
use a particular RTP lamp array. The settlement is not expected to
have a material effect on the Company's financial condition or
results of operations.
Discovery in the case the Company brought against AG has commenced,
and trial has been set for September 1999. In August 1998, AG
filed two separate patent infringement lawsuits against the
Company, one in the United States District Court for the Northern
District of California (case no. C98-03044-WHO) and one in the
United States District Court for the District of Delaware (civil
action no. 98-479). On February 2, 1999, the Delaware District
Court issued an order transferring that case to the Northern
District of California. No trial dates have been set in these
actions. The Company continues to believe it has meritorious
claims and defenses against AG, and intends to pursue them
vigorously.
KLA
As a result of the Company's acquisition of Orbot Instruments, Ltd.
(Orbot), the Company is involved in a lawsuit captioned KLA
Instruments Corporation (KLA) v. Orbot (case no. C93-20886-JW) in
the United States District Court for the Northern District of
California. KLA alleges that Orbot infringes a patent regarding
equipment for the inspection of masks and reticles, and seeks an
injunction, damages and such other relief as the Court may find
appropriate. There has been limited discovery, but no trial date
has been set. Management believes it has meritorious defenses and
intends to pursue them vigorously.
Varian and Novellus
On June 13, 1997, the Company filed a lawsuit against Varian
Associates, Inc. (Varian) captioned Applied Materials, Inc. v.
Varian Associates, Inc. (case no. C-97-20523-RMW), alleging
infringement of several of the Company'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. The Company 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 the Company in violation
of antitrust laws. On June 23, 1997, Novellus filed a separate
lawsuit against the Company captioned Novellus Systems, Inc. v.
Applied Materials, Inc. (case no. C-97-20551-EAI), alleging
infringement by the Company of three patents concerning PVD
technology that were formerly owned by Varian. On July 8, 1997,
Varian filed a separate lawsuit against the Company captioned
Varian Associates, Inc. v. Applied Materials, Inc. (case no. C-97-
20597-PVT), alleging a broad range of conduct in violation of
federal antitrust laws and state unfair competition and business
practice laws. Discovery has commenced in these actions, but no
trial dates have been set. Management 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 one of the Company's wholly-owned subsidiaries, Applied
Materials Japan (AMJ), in Tokyo District Court in Japan, alleging
that AMJ is obligated to indemnify OKI for a portion of patent
license royalties paid by OKI to Texas Instruments, Inc. Several
hearings have been held, but no trial date has been set.
Management believes it has meritorious defenses and intends to
pursue them vigorously.
The Company 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, management does not believe that any of
these legal matters will have a material adverse effect on the
Company's financial condition or results of operations.
Item 5. Other Information
The ratio of earnings to fixed charges for the three months ended
January 25, 1998 and January 31, 1999, and for each of the last
five fiscal years, was as follows:
Three Months Ended
Fiscal Year ----------------------
------------------------------------------------ Jan. 25, Jan. 31,
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ---------- ----------
13.37x 21.25x 20.14x 18.96x 6.92x 20.10x 5.26x
======== ======== ======== ======== ======== ========== ==========
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(ii)(a) Amendment to Bylaws dated September 4, 1998.
3(ii)(b) Bylaws of Applied Materials, Inc. (as amended to
September 4, 1998).
10.1 Applied Materials, Inc. Employees' Stock Purchase Plan
(as amended and restated December 10, 1998),
previously filed as Appendix A to the Company's
Definitive Proxy Statement dated February 22, 1999,
and incorporated herein by reference.
10.2 Amendment dated January 26, 1999 to Receivables
Purchase Agreement dated October 22, 1998 between
Applied Materials, Inc. and Deutsche Financial
Services Corporation.
10.3 Receivables Purchase Agreement dated January 26, 1999
between Applied Materials, Inc. and Deutsche Financial
Services (UK) Limited.
27.0 Financial Data Schedule for the three months ended
January 31, 1999: filed electronically.
b) The Company did not file a report on Form 8-K during its
first fiscal quarter of 1999.
SIGNATURE
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.
March 9, 1999 By: /s/ Joseph R. Bronson
------------------------------
Joseph R. Bronson
Senior Vice President,
Office of the President,
Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
By: /s/ Michael K. O'Farrell
------------------------------
Michael K. O'Farrell
Vice President,
Global Controller and
Chief Accounting Officer
(Principal Accounting Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
3.(ii)(a) Amendment to Bylaws dated September 4, 1998.
3.(ii)(b) Bylaws of Applied Materials, Inc. (as amended to
September 4, 1998).
10.1 Applied Materials, Inc. Employees' Stock Purchase Plan
(as amended and restated December 10, 1998),
previously filed as Appendix A to the Company's
Definitive Proxy Statement dated February 22, 1999,
and incorporated herein by reference.
10.2 Amendment dated January 26, 1999 to Receivables
Purchase Agreement dated October 22, 1998 between
Applied Materials, Inc. and Deutsche Financial
Services Corporation.
10.3 Receivables Purchase Agreement dated January 26, 1999
between Applied Materials, Inc. and Deutsche Financial
Services (UK) Limited.
27.0 Financial Data Schedule for the three months ended
January 31, 1999: filed electronically.