1999 ANNUAL REPORT
FISCAL YEAR ENDED OCTOBER 31, 1999
Net sales
Gross margin
(% of net sales)
Research, development and engineering
(% of net sales)
Marketing, selling, general and administrative
(% of net sales)
Income from continuing operations before taxes and equity in net
income/(loss) of joint venture
Effective tax rate (%)
Income from continuing operations***
(% of net sales)
Net income***
Earnings per diluted share:
Continuing operations
Discontinued operations
Total
Weighted average common shares and equivalents (in thousands)
Order backlog
Working capital
Current ratio
Long-term debt
Stockholders’ equity
Book value per share
Total assets
Capital expenditures, net
Regular full-time employees
Graphical information:
Stockholders’ equity (in millions)
Return on assets **** (percent)
Debt to capital ratio (percent)
Each fiscal year ended on the last Sunday in October.
**
Certain amounts have been reclassified. See Note 4 of Notes to
Consolidated Financial Statements.
***
Income from continuing operations included net one-time expenses,
on an after-tax basis, of: $16,315 for fiscal 1996, $25,257 for
fiscal 1997, $165,093 for fiscal 1998 and $22,194 for fiscal
1999. In addition to the net one-time expenses included in income
from continuing operations, net income also included an
after-tax expense of $20,996 from discontinued operations in
fiscal 1998 and after-tax income from discontinued operations of
$20,996 in fiscal 1999.
****
Based on income from continuing operations.
In addition to historical statements, this Annual Report,
including this Management’s Discussion and Analysis,
contains forward-looking statements. Forward-looking statements
contain words such as “expects,”
“anticipates,” “believes,” “may,”
“will,” “estimates,” or similar expressions.
These forward-looking statements represent the opinions of the
management of Applied Materials, Inc. and its subsidiaries
(Applied Materials) only as of the date hereof, and Applied
Materials assumes no obligation to update this information. These
forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ
materially from those stated or implied. Risks and uncertainties
include, but are not limited to, those discussed below,
particularly in the section entitled “Trends, Risks and
Uncertainties.”
Applied Materials is the world’s largest supplier of
semiconductor manufacturing equipment to the global semiconductor
industry. Demand for Applied Materials’ products can change
significantly from period to period as a result of numerous
factors, including, but not limited to, changes in:
1) global economic conditions; 2) supply and demand for
semiconductors; 3) the profitability of semiconductor
manufacturers resulting from memory device price fluctuations;
and 4) advanced technology and/or capacity requirements of
semiconductor manufacturers. For this and other reasons, Applied
Materials’ results of operations for fiscal 1997, 1998 and
1999 may not necessarily be indicative of future operating
results.
Applied Materials’ business was subject to cyclical industry
conditions in fiscal 1997, 1998 and 1999. As a result of these
conditions, there were significant fluctuations in Applied
Materials’ quarterly new orders and net sales, both within
and across fiscal years. Demand for semiconductor manufacturing
equipment has historically been volatile as a result of sudden
changes in semiconductor supply and demand, as well as rapid
technological advances in both semiconductor devices and wafer
fabrication processes. Information with respect to quarterly new
orders and net sales is as follows:
1997:
New orders
Net sales
1998:
New orders
Net sales
1999:
New orders
Net sales
Each region in the global semiconductor equipment market exhibits
unique characteristics that can cause, and in the past have
caused, capital equipment investment patterns to vary
significantly from period to period. Information with respect to
net sales by geographic region is as follows:
North America*
Taiwan
Japan
Europe
Korea
Asia-Pacific
Total
Primarily the United States.
During 1996, the semiconductor industry experienced a slowdown as
a result of excess production capacity and sharply decreasing
memory device prices. This slowdown caused semiconductor
manufacturers to reduce and delay their investments in
semiconductor manufacturing equipment, thus negatively affecting
Applied Materials’ results of operations for the second half
of fiscal 1996 and first half of fiscal 1997.
During Applied Materials’ third fiscal quarter of 1997, the
semiconductor industry began to recover from this slowdown, and
Applied Materials was able to achieve higher levels of quarterly
new orders and net sales for its fourth fiscal quarter of 1997.
These new orders and net sales levels were driven by
strengthening demand for leading-edge technology from logic and
microprocessor device manufacturers, increased manufacturing
capacity requirements of foundry customers located primarily in
Taiwan, and selected strategic investments in 0.25 micron
technology by Dynamic Random Access Memory
(DRAM) manufacturers.
A semiconductor industry downturn began during the first half of
Applied Materials’ fiscal 1998. This downturn was much more
sudden and severe than the industry slowdown in 1996, and
resulted from the convergence of several factors: an economic
crisis in Asia; semiconductor industry overcapacity (particularly
for DRAM devices); and reduced profitability for semiconductor
manufacturers resulting from declining semiconductor prices and a
movement among end users to sub-$1,000 PCs. This downturn caused
a rapid decline in quarterly net sales throughout fiscal 1998 as
semiconductor manufacturers significantly reduced and delayed
their purchases of semiconductor manufacturing equipment during
the last three fiscal quarters of 1998.
For fiscal 1999, Applied Materials was able to achieve record
levels of new orders, net sales and net income as a result of a
semiconductor industry recovery. During Applied Materials’
fiscal 1999, the semiconductor industry rapidly recovered from
the 1998 downturn and transitioned to a period of capacity
expansion and advanced technology investment. This industry
recovery and expansion in customer investment levels was driven
primarily by strong demand for communications and electronic
products, improved economic conditions in Asia, better pricing
for memory chips and tightening supply of key semiconductor
products. Applied Materials was able to benefit from the
increased volume generated by the industry recovery and
transition.
Gross margin as a percentage of net sales was 46.7 percent
for fiscal 1997, 46.1 percent for fiscal 1998 and
47.8 percent for fiscal 1999. The decrease in gross margin
as a percentage of net sales from fiscal 1997 to fiscal 1998 was
the result of lower overall business volume, combined with
underutilization of manufacturing resources during the second
half of fiscal 1998, as business volume dropped significantly.
The increase in gross margin as a percentage of net sales from
fiscal 1998 to fiscal 1999 was due primarily to higher business
volume, reduced manufacturing cycle times and the favorable
effects of operational programs emphasizing productivity
improvements and cost reduction.
Applied Materials’ future operating results depend, to a
considerable extent, on its ability to maintain a competitive
advantage in the products and services it provides. Applied
Materials believes that it is critical to continue to make
substantial investments in research and development to ensure the
availability of innovative technology that meets the current and
projected requirements of its customers’
Graphical information:
Sales by geographic region
RD&E expenses (in millions)
most advanced chip designs. Research, development and engineering
(RD&E) expenses increased for each of the last three years,
from $568 million for fiscal 1997, to $644 million for
fiscal 1998 and to $682 million for fiscal 1999. As a
percentage of net sales, RD&E expenses increased from
13.9 percent for fiscal 1997 to 15.9 percent for fiscal
1998, and then decreased to 14.0 percent for fiscal 1999.
The decrease as a percentage of net sales in fiscal 1999 was due
to higher net sales for fiscal 1999.
Applied Materials increased its absolute spending from fiscal
1997 to fiscal 1998 to address the shrinking of semiconductor
device feature sizes, the beginning of a shift to the use of new
materials, such as copper, and the expected transition from 200mm
wafer processing to 300mm wafer processing. Applied Materials
was able to offer, or achieve advanced stages of development for,
numerous significant new products in fiscal 1998 for fabricating
smaller design features and copper-based semiconductor devices.
The accelerated shrinking of design features can be demonstrated
by the fact that orders for systems capable of fabricating
devices with design feature sizes at or below 0.25 micron, more
advanced than the previous industry production standard of 0.35
micron, increased from fiscal 1997 to fiscal 1998. Applied
Materials’ 300mm product development efforts were reduced
significantly during the course of fiscal 1998 as a result of the
semiconductor industry’s decision to delay migration to
300mm wafer processing.
During fiscal 1999, Applied Materials continued its extensive
development of wafer fabrication equipment for smaller feature
sizes and copper-based devices. For fiscal 1999, orders for
systems capable of fabricating devices with design feature sizes
at or below 0.25 micron continued to increase as a
percentage of total systems orders. Applied Materials’
investment in research and development for copper-based devices
resulted in a broad line of copper-based products being available
for sale by the end of fiscal 1999. Additionally, Applied
Materials completed development of, and began to offer, numerous
advances to its existing products and technologies in fiscal
1999. Development efforts for 300mm products increased
significantly in the second half of fiscal 1999 in response to
some early customer requests for evaluation systems and in
anticipation of expected customer requirements for this
capability in fiscal 2000.
Marketing, selling, general and administrative (MSG&A)
expenses increased from $567 million for fiscal 1997, to
$594 million for fiscal 1998 and to $658 million for
fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was due
to increased costs for regional infrastructure, information
systems, advertising and protection of intellectual property
rights. The increase from fiscal 1998 to fiscal 1999 was
primarily caused by higher costs of incentive and benefit
programs, increased investments in various information technology
programs, including the implementation of a new enterprise
resource planning system and Year 2000 compliance, and increased
costs to support higher net sales. As a percentage of net sales,
MSG&A expenses increased from 13.9 percent for fiscal
1997 to 14.7 percent for fiscal 1998, because net sales
declined rapidly in fiscal 1998 before MSG&A expenses could
be reduced accordingly. MSG&A expenses as a percentage of net
sales decreased to 13.5 percent for fiscal 1999 due
primarily to higher net sales during fiscal 1999.
Non-recurring operating expense items for fiscal 1997 consisted
of $60 million of acquired in-process research and
development expense incurred in connection with two acquisitions
and $16 million of bad debt expense. Non-recurring items for
fiscal 1998 consisted of $32 million of acquired in-process
research and development expense for the acquisition of licensed
technology, an expense of $70 million for impairment in the
value of purchased technology from a prior period acquisition,
and restructuring charges of $135 million for costs
associated with headcount reductions and consolidation of
facilities. Non-recurring items for fiscal 1999 consisted of
$5 million of merger expenses and $43 million of
acquired in-process research and development expense incurred in
connection with the acquisitions discussed below. For further
details, see Note 7 of Notes to Consolidated Financial
Statements.
Net non-recurring income of $69 million for fiscal 1997
resulted from litigation settlements with Novellus Systems, Inc.
($80 million of income) and General Signal Corporation
($11 million of expense). Net non-
recurring income of $15 million for fiscal 1998 was from a
litigation settlement with ASM International, N.V. (ASMI). Net
non-recurring income of $30 million for fiscal 1999 was from
payments received from ASMI associated with the 1998 litigation
settlement. For further details, see Note 8 of Notes to
Consolidated Financial Statements.
Interest expense was $21 million for fiscal 1997,
$45 million for fiscal 1998 and $47 million for fiscal
1999. The increase from fiscal 1997 to fiscal 1998 was primarily
the result of interest expense associated with $400 million
of debt issued by Applied Materials during the fourth fiscal
quarter of 1997. There was no significant change in interest
expense from fiscal 1998 to fiscal 1999 because Applied
Materials’ outstanding interest-bearing obligations and
their respective interest rates did not change significantly
during these periods.
Interest income was $60 million for fiscal 1997,
$80 million for fiscal 1998 and $105 million for fiscal
1999. The increases from year to year can be attributed
primarily to increasing cash and investment balances over the
three-year period.
Applied Materials’ effective income tax rate was
37.6 percent for fiscal 1997, 34 percent for fiscal
1998 and 32.3 percent for fiscal 1999. The 37.6 percent
effective income tax rate for fiscal 1997 was higher than
Applied Materials’ expected rate of 35 percent due to
the non-tax deductible nature of $60 million of acquired
in-process research and development expense. The reduction to a
34 percent effective income tax rate for fiscal 1998 was
attributable to several factors, including reduced state income
taxes, reinstatement or enactment of U.S.-based income tax
credits and a shift in the geographic composition of Applied
Materials’ pre-tax income to entities operating in countries
with lower tax rates. Applied Materials expected an effective
income tax rate of 31 percent for fiscal 1999, which
decreased from the fiscal 1998 effective rate due primarily to
the reinstatement of the U.S. federal research and development
(R&D) tax credit and favorable California income tax
legislation with respect to R&D and manufacturers investment
tax credits. However, Applied Materials’ actual effective
income tax rate for fiscal 1999 was 32.3 percent due to the
non-tax deductible nature of $43 million of acquired
in-process research and development expense. Applied
Materials’ future effective income tax rate depends on
various factors, such as tax legislation, the geographic
composition of Applied Materials’ pre-tax income, non-tax
deductible expenses incurred in connection with acquisitions and
the effectiveness of its tax planning strategies.
In September 1993, Applied Materials and Komatsu, Ltd. (Komatsu)
formed Applied Komatsu Technology, Inc. (AKT), a joint venture
corporation that developed, manufactured and marketed thin film
transistor manufacturing systems for Flat Panel Displays (FPDs).
Because Applied Materials and Komatsu each owned 50 percent
of the AKT joint venture, Applied Materials accounted for its
interest in the joint venture using the equity method. During the
fourth fiscal quarter of 1998, Applied Materials decided to
discontinue the operations of AKT over a 12-month period. As a
result of this decision, Applied Materials recorded a
$40 million provision for discontinued operations,
consisting of $19 million primarily for immediate headcount
reductions and lease terminations, and $21 million for net
expenses and other obligations expected to be incurred during, or
at completion of, the 12-month wind-down period. In addition to
the above amounts, Applied Materials also recorded its
$18 million share of AKT’s operating losses as a
component of discontinued operations. In late fiscal 1999, an
overall improvement in demand for FPDs enhanced AKT’s
financial condition and improved its business outlook. This
change caused Applied Materials to reassess its decision to
discontinue AKT’s operations. Based on this reassessment,
Applied Materials reversed its decision to discontinue the
operations of AKT and acquired Komatsu’s 50 percent
interest in AKT for $87 million in cash. As a result, the
$21 million provision established in fiscal 1998 for net
expenses and other obligations expected to be incurred during the
wind-down of AKT’s operations was reversed into income in
fiscal 1999, and all prior period amounts relating to AKT’s
continuing operations were reclassified from discontinued
operations to continuing operations. These reclassifications had
no effect on Applied Materials’ net income for any period
affected, and were recorded in accordance with Emerging Issues
Task Force Issue No. 90-16, “Accounting for
Discontinued Operations Subsequently Retained.” The
acquisition of AKT was accounted for as a purchase business
combination. The purchase price in excess of the fair value of
AKT’s net tangible assets was allocated to intangible assets
and in-process research and development expense. For further
details, see Note 4 of Notes to Consolidated Financial
Statements.
On December 11, 1998, Applied Materials acquired Consilium,
Inc. (Consilium), a supplier of integrated semiconductor and
electronics manufacturing execution systems and services, in a
stock-for-stock merger accounted for as a pooling of interests.
Due to the immateriality of Consilium’s financial position
and
results of operations in relation to those of Applied Materials,
Applied Materials’ prior period financial statements have
not been restated. Applied Materials issued 1.7 million
shares of its common stock to complete this transaction, and
recorded $5 million of transaction costs as a one-time
operating expense. The Consilium acquisition did not have a
material effect on Applied Materials’ financial condition or
results of operations for fiscal 1999. On October 5, 1999,
Applied Materials acquired Obsidian, Inc. (Obsidian), a developer
of fixed-abrasive chemical mechanical polishing solutions for
the semiconductor industry, by issuing shares of common stock
having a market value of $150 million. The Obsidian acquisition
was accounted for as a purchase business combination. The
purchase price in excess of the fair value of Obsidian’s net
tangible assets was allocated to intangible assets and
in-process research and development expense. Except for
in-process research and development expense of $35 million,
the Obsidian acquisition did not have a material effect on
Applied Materials’ financial condition or results of
operations. Additionally, as
discussed above, Applied Materials acquired the remaining
50 percent of AKT on October 29, 1999. For further
details, see Note 14 of Notes to Consolidated Financial
Statements.
In June 1999, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 137 (SFAS 137), “Accounting for Derivative
Instruments and Hedging Activities — Deferral of the
Effective Date of FASB Statement No. 133.”
SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities, and
SFAS 137 defers its effective date to all fiscal quarters of
all fiscal years beginning after June 15, 2000. Applied
Materials 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.
Applied Materials increased its cash, cash equivalents and
short-term investments from $1.8 billion at October 25,
1998 to $2.8 billion at October 31, 1999. Applied
Materials’ financial condition remained strong, with a ratio
of current assets to current liabilities of 3.1:1 and 3.0:1 at
October 25, 1998 and October 31, 1999, respectively.
Applied Materials has been able to generate cash from continuing
operations in each of the last three fiscal years. The primary
source of cash from continuing operations has been income from
continuing operations, as adjusted to exclude the effect of
non-cash items such as depreciation and amortization, intangible
asset write-downs, and acquired in-process research and
development expense. Income from continuing operations, adjusted
to exclude the effect of non-cash items, for each of the last
three fiscal years was: $741 million for 1997;
$626 million for 1998; and $1.0 billion for 1999. The
other source or use of cash from continuing operations has been
changes in assets and liabilities other than those assets and
liabilities resulting from investing and financing activities.
Net changes in assets and liabilities tend to represent a use of
cash during periods of revenue growth because Applied Materials
generally incurs costs and expends cash in advance of receiving
cash from its customers. Likewise, during periods of declining
revenue, net changes in assets and liabilities tend to represent
a source of cash because expenditures for inventory and other
purchases decrease while receivables from prior periods, which
were higher revenue periods, are collected. The cash effect of
changes in assets and liabilities for each of the last three
fiscal years was: a $39 million use in 1997; a
$190 million source in 1998; and an $88 million use in
1999.
In addition to being a function of revenue performance, the cash
effect of changes in assets and liabilities is subject to
operational efficiency and productivity. For example, earlier
collection of accounts receivable and increased inventory
turnover both have a positive effect on cash flow. Applied
Materials steadily improved its collection of accounts receivable
and inventory turnover over the three-year period from fiscal
1997 through fiscal 1999. In addition to earlier collection of
accounts receivable, Applied Materials also utilized programs to
sell accounts receivable of $303 million in fiscal 1997,
$488 million in fiscal 1998 and $945 million in fiscal
1999. 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 13 of Notes to Consolidated Financial Statements.
Capital expenditures, net (in millions)
Land, buildings and improvements
Other
Total
Working capital (in millions)
Applied Materials used $1.0 billion of cash for investing
activities in fiscal 1997, $574 million in fiscal 1998 and
$989 million in fiscal 1999. Investing activities typically
consist of purchases of short-term investments, purchases of
capital assets to support long-term growth and acquisitions of
technology or other companies to allow access to new market
segments or emerging technology.
Applied Materials generated $391 million of cash from
financing activities in fiscal 1997, used $123 million in
fiscal 1998 and generated $301 million in fiscal 1999.
Financing activities typically include sales and repurchases of
Applied Materials’ common stock, as well as borrowings and
repayments of debt. Net debt activity contributed
$318 million of cash in fiscal 1997, and required
$64 million of cash in fiscal 1998 and $17 million of
cash in fiscal 1999. During fiscal 1997, net common stock
activity contributed $72 million of cash as sales of common
stock to Applied Materials’ employees through stock option
and stock purchase plans exceeded Applied Materials’ open
market repurchases of its own common stock. During fiscal 1998,
net common stock activity required $59 million of cash as
stock repurchases increased and sales to employees decreased
significantly, reflecting Applied Materials’ lower average
stock price in fiscal 1998. During fiscal 1999, net common stock
activity generated $317 million of cash as a result of a
significant decrease in stock repurchases and a significant
increase in stock sales to employees, reflecting Applied
Materials’ higher average stock price in 1999. Since March
1996, Applied Materials has systematically repurchased shares of
its common stock in the open market to partially fund its
stock-based employee benefit and incentive plans.
At October 31, 1999, Applied Materials’ principal
sources of liquidity consisted of $2.8 billion of cash, cash
equivalents and short-term investments, and approximately
$650 million of available credit facilities. Applied
Materials has a $250 million revolving line of credit
agreement that expires in March 2000, but is expected to be
renewed, and a $250 million credit agreement that expires in
March 2003; no amounts were outstanding under these agreements
at the end of any fiscal year presented. The remaining credit
facilities of $150 million are primarily with Japanese banks
at rates indexed to their prime reference rate. No material
amounts were outstanding under these credit facilities at the end
of any fiscal year presented. In addition to cash and available
credit facilities, Applied Materials may from time to time raise
additional capital in the debt and equity markets. Applied
Materials’ 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 cash requirements will fluctuate based on
the timing and extent of these factors, Applied Materials’
management believes that cash generated from operations, together
with the liquidity provided by existing cash balances and
borrowing capability, will be sufficient to satisfy Applied
Materials’ liquidity requirements for the next
12 months.
highly volatile and unpredictable.
The semiconductor industry has historically been cyclical because
of sudden changes in supply and demand for semiconductors.
Although semiconductors are used in many different products, the
markets for those products are interrelated to various degrees.
The timing, length and severity of these cycles are difficult to
predict. The health of the semiconductor manufacturing equipment
industry is affected by these semiconductor industry cycles.
During periods of declining demand for semiconductor
manufacturing equipment, Applied Materials 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.
During periods of rapid growth, Applied Materials 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.
The inability of Applied Materials to achieve its objectives in a
timely manner during these industry cycles could have a material
adverse effect on its financial condition and results of
operations.
Applied Materials operates in a highly competitive industry
characterized by increasingly rapid technological changes.
Applied Materials’ 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. There can be no assurance that Applied Materials will be
able to conduct these activities as successfully in the future
as it has in the past.
New products and technologies include those for new materials,
including copper and low-k dielectrics, 300mm wafers and
0.18 micron and below devices. The introduction of new
products and technologies grows increasingly complex over time.
If Applied Materials 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.
operating a global business.
Applied Materials has operations and sites located throughout the
world to support its sales and services to the global
semiconductor industry. 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,
and in the past have caused, 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
among the many risks associated with operating a global business
that could materially and adversely affect demand for Applied
Materials’ products (systems and related services).
could negatively affect Applied Materials’ business.
Applied Materials generates a significant portion of its revenue
from customers in Asian countries. Although Asian economies have
stabilized to some degree since early to mid-fiscal 1998, Applied
Materials remains cautious about general macroeconomic
developments in Asia, particularly in Japan and Taiwan. The
economies of Japan and Taiwan are important to the overall
financial health of the Asian region, and if they deteriorate,
the economies of other countries, particularly those in Asia,
could also be negatively affected. Negative economic developments
in Asia could have, and in the past have had, a material adverse
effect on demand for Applied Materials’ products.
result in decreased demand for Applied Materials’ products.
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.
This could have, and in the past has had, a material and adverse
effect on demand for Applied Materials’ products.
DRAM prices are volatile, and a decrease in DRAM prices may
result in customers canceling orders for, or delaying delivery
of, Applied Materials’ products.
If DRAM prices decline to levels that do not allow manufacturers
to operate profitably, these manufacturers may cancel or delay
orders for Applied Materials’ products, which could have,
and in the past has had, a material and adverse effect on Applied
Materials’ financial condition and results of operations.
with acquisitions.
Applied Materials 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: 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. For example, in fiscal 1998, Applied
Materials recorded a $70 million pre-tax expense for the
write-down of purchased technology acquired in a previous year
that became impaired because of rapid changes in technology and
deteriorating business conditions. The inability to effectively
manage acquisition risks could materially and adversely affect
Applied Materials’ 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 Materials’ business.
Applied Materials uses numerous vendors to supply parts,
components and subassemblies (collectively “parts”) for
the manufacture and support of its products. Although Applied
Materials 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. Applied Materials 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 Applied Materials’
results of operations will not be materially and adversely
affected if, in the future, Applied Materials does not receive in
a timely and cost-effective manner a sufficient quantity of
parts to meet its production requirements.
Applied Materials’ order backlog may be reduced by
customer cancellations or delays, which could have a negative
effect on Applied Materials’ future sales.
Applied Materials’ backlog increased from $917 million
at October 25, 1998 to $1.7 billion at October 31,
1999. Applied Materials 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 may delay delivery of products or
cancel orders, subject to penalties. Due to possible customer
changes in delivery schedules and cancellations of orders,
Applied Materials’ backlog at any particular date is not
necessarily indicative of actual sales for any succeeding period.
Delays in delivery schedules and/or a reduction of backlog
during any particular period could have, and in the past has had,
a material adverse effect on Applied Materials’ business
and results of operations.
Applied Materials is subject to the risk of business
interruptions from implementing a new enterprise resource
planning system.
Applied Materials recently implemented a new enterprise resource
planning system that replaced substantially all order fulfillment
and manufacturing applications. Significant interruption of
Applied Materials’ business resulting from
post-implementation issues such as system response time, vendor
software application code errors, or system design and
configuration problems could result in delayed product deliveries
or manufacturing inefficiencies, which could materially and
adversely affect Applied Materials’ financial condition and
results of operations.
risk of interruptions from natural disasters such as
earthquakes.
Business interruptions can be caused by natural disasters or
other unplanned catastrophic events. Several offices and
facilities of Applied Materials and its customers and suppliers
are located near major earthquake faults in the United States and
in certain foreign countries. In the event of significant
interruption to Applied Materials’ business, or the
businesses of its customers or suppliers, resulting from a
natural disaster or other catastrophic event, Applied
Materials’ financial condition and results of operations
could be materially and adversely affected.
with non-compliance of environmental regulations.
Applied Materials is subject to environmental regulations related
to the disposal of hazardous wastes used in the development,
manufacturing and demonstration of its products. Applied
Materials strives to exceed the requirements of applicable
environmental regulations and believes it is in full compliance
with such regulations. However, 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 Materials’
financial condition and results of operations.
Applied Materials is exposed to the risk that third parties
may violate its proprietary rights or accuse Applied Materials of
infringing upon their proprietary rights.
Applied Materials’ success is dependent upon the protection
of its proprietary rights. In the high-tech industry,
intellectual property is an important asset that is always at
risk of infringement. Applied Materials incurs costs to file for
patents and defend its intellectual property and relies upon the
laws of the United States and of foreign countries in which
Applied Materials develops, manufactures or sells its products to
protect its proprietary rights. However, there can be no
assurance that these proprietary rights will provide competitive
advantages, or that other parties will not challenge, invalidate
or circumvent these rights. Infringement upon Applied
Materials’ proprietary rights by a third party could result
in uncompensated lost market and revenue opportunities for
Applied Materials.
Other parties may assert that Applied Materials’ products,
systems, processes or other technology infringe upon their
patents or other intellectual property rights. In such cases,
Applied Materials evaluates its position and considers the
available alternatives, which may include seeking licenses to use
the technology in question on commercially reasonable terms or
defending its position. However, if Applied Materials is not able
to negotiate the necessary licenses on commercially reasonable
terms or successfully defend its position, Applied
Materials’ financial condition and results of operations
could be materially and adversely affected.
risks.
Applied Materials is currently involved in litigation regarding
patent infringement, intellectual property rights, antitrust and
other matters (see Note 13 of Notes to Consolidated
Financial Statements), and could become involved in additional
legal proceedings or claims in the future. 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.
fluctuations.
Significant operations of Applied Materials are conducted in
foreign currencies, primarily Japanese yen. Applied Materials
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 Applied Materials’ financial condition or results
of operations.
2000 issues.
The information provided herein is a “Year 2000 Readiness
Disclosure” for purposes of the Year 2000 Information and
Readiness Disclosure Act.
Applied Materials established a Year 2000 Program Office to
address Year 2000 issues through four key readiness programs. A
brief description of the activities under these programs is as
follows:
Internal Infrastructure Readiness Program This program
encompassed all major categories of applications and hardware in
use by Applied Materials. Under this program, Applied Materials
completed an inventory of applications and information technology
and non-information technology hardware, and categorized them as
either “mission critical” or “non-mission
critical” based upon certain factors, such as whether a
failure of the application or hardware could cause personal
injury or significant disruption to any portion of Applied
Materials’ business. All mission critical applications and
hardware were tested and remediated as appropriate. Applied
Materials has not experienced any significant Year 2000 issues
associated with its mission critical systems.
Supplier Readiness Program This program focused on
minimizing two areas of risk associated with suppliers: 1) a
supplier’s product integrity; and 2) a supplier’s
ability to continue providing products and services in
accordance with Applied Materials’ standards and
requirements. In addition to products and services from key
suppliers that are used in manufacturing its products, Applied
Materials relies on commercial or governmental suppliers for
infrastructure-related services, including utilities,
transportation, financial, governmental, communications and other
services. As of January 10, 2000, Applied Materials has not
been affected by the Year 2000 issue associated with these
suppliers.
Product Readiness Program This program focused on
identifying and resolving Year 2000 issues existing in Applied
Materials’ products. Among other activities, Applied
Materials completed a Year 2000 readiness evaluation of its
current generation of released products based on a series of
industry-recognized testing scenarios and, as appropriate,
addressed the Year 2000 issues associated with any component of
its products. Unless otherwise requested by a customer, all
products that shipped on or after January 1, 1999 were Year
2000 ready. As of January 10, 2000, Applied Materials was
not aware of any significant Year 2000 issues directly related to
a failure of its products to be Year 2000 ready.
Customer Readiness Program This program focused on
customer support issues, including the coordination of retrofit
activities for older generation products, testing existing
customer electronic transaction capability and providing other
services to Applied Materials’ customers. This program also
included establishing a Year 2000 Customer Response Center to
support customers on and around January 1, 2000. This
program will continue to make customer support teams available
through Applied Materials’ second fiscal quarter of 2000 to
assist customers who have chosen not to upgrade Applied
Materials’ products or who experience any Year 2000 issues,
including those associated with the leap year.
Year 2000 Issues of Acquired Companies During fiscal 1999,
Applied Materials acquired Consilium, Obsidian and AKT. For the
most part, the Year 2000 programs of these companies were modeled
after, or fully integrated into, Applied Materials’ four
key readiness programs. As of January 10, 2000, Applied
Materials was not aware of any significant Year 2000 issues
associated with any of these companies or their products.
However, as a software company, Consilium is assisting customers
in evaluating Year 2000 issues that may relate to
Consilium’s products, and will continue to assist its
customers in their Year 2000 efforts after January 1, 2000.
Estimated Costs Applied Materials estimates that total
Year 2000 costs will range from $30 million to
$40 million, with $27 million spent as of October 31,
1999. 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 was accelerated
because of Year 2000 capability concerns. The remaining
costs are for customer support programs and program office
management, which are planned to continue through Applied
Materials’ second fiscal quarter of 2000.
Most Likely Worst-Case Scenario and Risks Associated with the
Year 2000 Issue The year 2000 is a leap year, and
February 29, 2000 is a date frequently associated with the
Year 2000 issue. In addition, some Year 2000 issues may not be
discovered until well after January 1, 2000. Therefore,
Applied Materials believes risks associated with the Year 2000
issue may continue to exist after January 1, 2000. Applied
Materials believes its most likely worst-case scenarios after
January 1, 2000 will relate to undiscovered problems
associated with its products, due to the inability to anticipate
every possible Year 2000 problem, or due to problems associated
with the interaction between Applied Materials’ products and
its customers’ applications. A failure in Applied
Materials’ products could result in claims against Applied
Materials, increased warranty or service costs, or a delay or
loss of revenue, any of which could materially and adversely
affect Applied Materials’ financial condition and results of
operations. Finally, Applied Materials believes it has taken
steps to identify and remediate Year 2000 issues under its
various readiness programs. However, if efforts to identify and
address Year 2000 issues in Applied Materials’ products,
customer and supply base, or infrastructure were not successful,
including those issues associated with the leap year, Applied
Materials may experience unanticipated problems that could
materially and adversely affect its financial condition and
results of operations.
At October 31, 1999, Applied Materials’ investment
portfolio includes fixed-income securities with a fair value of
approximately $2.2 billion. These securities are subject to
interest rate risk, and will decline in value if interest rates
increase. Due to the short duration of Applied Materials’
investment portfolio, an immediate 10 percent increase in
interest rates is not expected to have a material effect on
Applied Materials’ near-term financial condition or results
of operations.
Applied Materials’ long-term debt bears interest at fixed
rates; therefore, Applied Materials’ results of operations
would only be affected by interest rate changes to the extent
that variable rate short-term notes payable are outstanding. Due
to the short-term nature and insignificant amount of Applied
Materials’ short-term notes payable, an immediate
10 percent change in interest rates is not expected to have
a material effect on Applied Materials’ near-term results of
operations.
Significant operations of Applied Materials are conducted in
foreign currencies, primarily Japanese yen. Forward exchange and
currency option contracts are purchased to hedge a portion of,
but not all, existing firm commitments and foreign currency
denominated transactions expected to occur within 12 months.
Gains and losses on these contracts are recognized in the
Consolidated Statements of Operations at the time that 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
Materials to risks that would otherwise result from changes in
currency exchange rates. Applied Materials does not use
derivative financial instruments for trading or speculative
purposes. Net foreign currency gains and losses did not have a
material effect on Applied Materials’ results of operations
for fiscal 1997, 1998 or 1999.
Forward exchange contracts are denominated in the same currency
as the underlying transactions (primarily Japanese yen and
British pounds), and the terms of the forward foreign exchange
contracts generally match the terms of the underlying
transactions. At October 31, 1999, the majority of Applied
Materials’ outstanding forward exchange contracts are marked
to market (see Note 2 of Notes to Consolidated Financial
Statements), as are the related underlying transactions being
hedged; therefore, the effect of exchange rate changes on forward
contracts is expected to be substantially offset by the effect
of these changes on the underlying transactions. The effect of an
immediate 10 percent change in exchange rates on forward
exchange contracts and the underlying hedged transactions
denominated in Japanese yen and British pounds is not expected to
be material to Applied Materials’ near-term financial
condition or results of operations. Applied Materials’
downside risk with respect to currency option contracts (Japanese
yen) is limited to the premium paid for the right to exercise
the option. Premiums paid for options outstanding at
October 31, 1999 were not material.
Net sales
Cost of products sold
Gross margin
Operating expenses:
Research, development and engineering
Marketing and selling
General and administrative
Non-recurring items
Income from operations
Non-recurring income, net
Interest expense
Interest income
Income from continuing operations before taxes and equity in net
income/(loss) of joint venture
Provision for income taxes
Income from continuing operations before equity in net
income/(loss) of joint venture
Restructuring charges from joint venture
Equity in net income/(loss) of joint venture
Income from continuing operations
Provision for discontinuance of joint venture
Net income
Earnings per share:
Basic — continuing operations
Basic — discontinued operations
Total basic
Diluted — continuing operations
Diluted — discontinued operations
Total diluted
Weighted average number of shares:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance for doubtful accounts of $630
in
1998 and $1,874 in 1999
Inventories
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation
Other assets
Total assets
Current liabilities:
Notes payable
Current portion of long-term debt
Accounts payable and accrued expenses
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock; $.01 par value per share; 1,000 shares
authorized; no shares issued
Common stock; $.01 par value per share; 1,100,000 shares
authorized; 367,864 shares outstanding in 1998 and 382,666 shares
outstanding
in 1999
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income/(loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
Balance at October 27, 1996
Components of comprehensive income:
Net income
Translation adjustments
Comprehensive income
Net issuance under stock plans, including tax benefits of $82,543
Stock repurchases
Balance at October 26, 1997
Components of comprehensive income:
Net income
Translation adjustments
Comprehensive income
Net issuance under stock plans, including tax benefits of $26,112
Stock repurchases
Balance at October 25, 1998
Components of comprehensive income:
Net income
Translation adjustments
Comprehensive income
Net issuance under stock plans, including tax benefits of
$159,844
Issuance for acquisitions
Stock repurchases
Balance at October 31, 1999
See accompanying Notes to Consolidated Financial Statements.
Cash flows from operating activities:
Net income
Provision for discontinuance of joint venture
Adjustments required to reconcile income from continuing
operations to cash provided by continuing operations:
Equity in net (income)/loss and restructuring charges of joint
venture
Acquired in-process research and development expense
Write-down of intangible asset
Bad debt expense
Depreciation and amortization
Deferred income taxes
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable
Inventories
Other current assets
Other assets
Accounts payable and accrued expenses
Income taxes payable
Other liabilities
Cash provided by continuing operations
Cash flows from investing activities:
Capital expenditures, net of retirements
Cash paid for acquisitions, net of cash acquired
Cash paid for licensed technology
Proceeds from sales of short-term investments
Purchases of short-term investments
Cash used for investing
Cash flows from financing activities:
Short-term debt activity, net
Long-term debt borrowings
Long-term debt repayments
Issuance of common stock under stock plans
Repurchases of common stock
Cash provided by/(used for) financing
Effect of exchange rate changes on cash
Increase in cash and cash equivalents
Cash and cash equivalents — beginning of year
Cash and cash equivalents — end of year
Cash payments for interest were $18,802, $46,296 and $45,605 in
1997, 1998 and 1999, respectively. Cash payments for income taxes
were $130,247 and $264,886 in 1997 and 1998, respectively, and
net income tax refunds were $13,925 for 1999.
See accompanying Notes to Consolidated Financial Statements.
Policies
Principles of Consolidation and Basis of
Presentation The consolidated financial statements
include the accounts of Applied Materials, Inc. and its
subsidiaries (Applied Materials) after elimination of
intercompany balances and transactions.
Applied Materials’ fiscal year ends on the last Sunday in
October of each year. Fiscal 1999 contained 53 weeks,
whereas fiscal 1997 and 1998 contained 52 weeks. The
inclusion of an additional week in fiscal 1999 did not have a
material effect on Applied Materials’ financial condition or
results of operations.
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 consolidated financial statements and accompanying notes.
Actual results could differ materially from those estimates.
Cash Equivalents and Short-Term Investments All
highly-liquid investments with a remaining maturity of three
months or less at the time of purchase are considered to be cash
equivalents. All of Applied Materials’ short-term
investments are classified as available-for-sale at the balance
sheet dates. Investments classified as available-for-sale are
recorded at fair value and any material temporary difference
between the cost and fair value of an investment is presented as
a separate component of accumulated other comprehensive income/
(loss).
Inventories Inventories are stated at the lower
of cost or market, with cost determined on a first-in, first-out
(FIFO) basis.
Property, Plant and Equipment Property, plant
and equipment is stated at cost. Depreciation is provided over
the estimated useful lives of the assets using the straight-line
method. Estimated useful lives for financial reporting purposes
are as follows: buildings and improvements, five to
33 years; demonstration and manufacturing equipment, three
to five years; and furniture, fixtures and other equipment, three
to 15 years. Land improvements are amortized over the
shorter of 15 years or the useful life. Leasehold
improvements are amortized over the shorter of five years or the
lease term.
Intangible Assets Purchased technology and
goodwill are presented at cost, net of accumulated amortization,
and are amortized over their estimated useful lives of five to
10 years using the straight-line method.
Long-Lived Assets Applied Materials reviews
long-lived assets and identifiable intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable.
Applied Materials assesses these assets for impairment based on
estimated future cash flows from these assets.
Revenue Recognition Systems and spares revenue
is generally recognized upon shipment. A provision for the
estimated cost of system installation and warranty is recorded
when revenue is recognized. Service revenue is generally
recognized ratably over the period of the related contract.
Derivative Financial Instruments Applied
Materials uses financial instruments such as forward exchange
contracts to hedge a portion, but not all, of its firm
commitments denominated in foreign currencies, and uses currency
option contracts to hedge a portion, but not all, of its
anticipated and uncommitted transactions expected to be
denominated in foreign currencies. The terms of currency
instruments used for hedging purposes are generally consistent
with the timing of the committed or anticipated transactions
being hedged. The purpose of Applied Materials’ foreign
currency management is to minimize the effect of exchange rate
changes on actual cash flows from foreign currency denominated
transactions. Gains and losses on forward exchange and currency
option contracts are deferred and recognized in the Consolidated
Statements of Operations when the related transactions being
hedged are recognized. If the underlying transaction being hedged
fails to occur, or occurs prior to the maturity of the financial
instrument, Applied Materials immediately recognizes the gain or
loss on the associated financial instrument. Those forward
exchange contracts that have been marked to market are included
in accounts payable and accrued expenses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)