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 26, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-6920
APPLIED MATERIALS, INC. (Exact name of registrant as specified in its charter)
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3050 Bowers Avenue
Santa Clara, California 95054-3299
(Address of principal executive offices, including zip code)
(408) 727-5555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ].
Number of shares outstanding of the issuer's common stock as of January 26, 2003: 1,655,200,035
APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTER ENDED JANUARY 26, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of October 27, 2002 and January 26, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations:
Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART I. FINANCIAL INFORMATION Item 1. Financial Statements
APPLIED MATERIALS, INC.
See accompanying notes to consolidated condensed financial statements.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
-------------------------
(In thousands, except per January 27, January 26,
share amounts) 2002 2003
- ---------------------------------------- ----------- ------------
Net sales............................. $1,000,460 $1,054,209
Cost of products sold................. 615,008 663,827
----------- ------------
Gross margin.......................... 385,452 390,382
Operating expenses:
Research, development and
engineering...................... 246,799 243,205
Marketing and selling.............. 83,804 92,217
General and administrative......... 70,043 72,801
Restructuring and other charges.... 85,479 99,338
----------- ------------
Loss from operations.................. (100,673) (117,179)
Interest expense...................... 11,991 11,342
Interest income....................... 48,132 35,372
----------- ------------
Loss before income taxes.............. (64,532) (93,149)
Benefit for income taxes.............. 19,037 27,479
----------- ------------
Net loss.............................. ($45,495) ($65,670)
=========== ============
Loss per share:
Basic.............................. ($0.03) ($0.04)
Diluted............................ ($0.03) ($0.04)
----------- ------------
Weighted average number of shares:
Basic.............................. 1,636,418 1,650,612
Diluted............................ 1,636,418 1,650,612
- -------------------------------------------------------------------
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
October 27, January 26,
(In thousands) 2002 2003
- ---------------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $1,284,791 $1,292,948
Short-term investments.................... 3,644,735 3,695,986
Accounts receivable, net.................. 1,046,016 891,297
Inventories............................... 1,273,816 1,217,107
Deferred income taxes..................... 565,936 560,047
Other current assets...................... 257,499 221,362
------------ ------------
Total current assets......................... 8,072,793 7,878,747
Property, plant and equipment, net........... 1,764,937 1,755,101
Other assets................................. 387,035 391,066
------------ ------------
Total assets................................. $10,224,765 $10,024,914
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................. $40,323 $40,336
Current portion of long-term debt......... 9,453 9,567
Accounts payable and accrued expenses..... 1,348,156 1,200,618
Income taxes payable...................... 103,524 47,887
------------ ------------
Total current liabilities.................... 1,501,456 1,298,408
Long-term debt............................... 573,853 573,745
Deferred income taxes and other liabilities.. 129,807 136,282
------------ ------------
Total liabilities............................ 2,205,116 2,008,435
------------ ------------
Stockholders' equity:
Common stock.............................. 16,480 16,552
Additional paid-in capital................ 2,022,546 2,050,803
Retained earnings......................... 5,962,014 5,896,344
Accumulated other comprehensive
income................................... 18,609 52,780
------------ ------------
Total stockholders' equity................... 8,019,649 8,016,479
------------ ------------
Total liabilities and stockholders' equity... $10,224,765 $10,024,914
============ ============
*
Amounts as of January 26, 2003 are unaudited. Amounts as of October 27, 2002 are from the October 27, 2002
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
------------------------
January 27, January 26,
(In thousands) 2002 2003
- ----------------------------------------------------- ----------- -----------
Cash flows from operating activities:
Net loss........................................... ($45,495) ($65,670)
Adjustments required to reconcile loss from
continuing operations to cash provided
by/(used for) operating activities:
Depreciation and amortization.................. 91,857 103,801
Deferred income taxes.......................... 4,341 20,320
Non-cash portion of restructuring charge....... 27,605 --
Acquired in-process research and development
expense...................................... 8,000 --
Changes in assets and liabilities, net of
amounts acquired:
Accounts receivable, net.................. (18,923) 163,753
Inventories............................... 148,932 62,480
Other current assets...................... (28,891) 37,536
Other assets.............................. 1,867 (24,191)
Accounts payable and accrued expenses..... (168,542) (155,509)
Income taxes payable...................... 83,072 (56,233)
Other liabilities......................... (2,715) 1,164
----------- -----------
Cash provided by continuing operations............... 101,108 87,451
----------- -----------
Cash flows from investing activities:
Capital expenditures, net of retirements........... (86,586) (76,881)
Cash paid for acquisitions, net of cash acquired... (81,962) --
Proceeds from sales and maturities of short-term
investments...................................... 535,197 707,412
Purchases of short-term investments................ (860,438) (740,203)
----------- -----------
Cash used for investing.............................. (493,789) (109,672)
----------- -----------
Cash flows from financing activities:
Short-term debt activity, net...................... 64,603 (1,613)
Long-term debt activity, net....................... (525) (858)
Common stock transactions, net..................... 79,326 28,329
----------- -----------
Cash provided by financing........................... 143,404 25,858
----------- -----------
Effect of exchange rate changes on cash.............. (5,592) 4,520
----------- -----------
Increase/(decrease) in cash and cash equivalents..... (254,869) 8,157
Cash and cash equivalents - beginning of period...... 1,356,304 1,284,791
----------- -----------
Cash and cash equivalents - end of period............ $1,101,435 $1,292,948
=========== ===========
Cash payments for interest (in thousands) were $239 for the three months ended January 27, 2002 and $115 for the three months ended January 26, 2003. Net cash activities for income taxes (in thousands) were $104,085 of refunds for the three months ended January 27, 2002 and $27,385 of payments for the three months ended January 26, 2003.
See accompanying notes to consolidated condensed financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED JANUARY 26, 2003
1) Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed
financial statements of Applied Materials, Inc. (Applied) included herein
have been prepared on a basis consistent with the October 27, 2002 audited
consolidated financial statements and include all material adjustments,
consisting of normal recurring adjustments, necessary to fairly present the
information set forth therein. These unaudited interim consolidated
condensed financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in
Applied's Form 10-K for the fiscal year ended October 27, 2002. Applied's
results of operations for the three months ended January 26, 2003 are not
necessarily indicative of future operating results.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.
All historical financial information presented herein has been restated to reflect a two-for-one stock split in the form of a 100 percent stock dividend, effective April 16, 2002.
Certain prior year amounts have been reclassified to conform to the fiscal 2003 financial statement presentation.
2) Earnings Per Share
Basic earnings per share has been determined using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share has been determined using the weighted average number of common shares
and equivalents (representing the dilutive effect of stock options)
outstanding during the period. Applied's net income has not been adjusted
for any period presented for purposes of computing basic or diluted earnings
3) Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts
receivable from selected customers. Applied sold accounts receivable under
these agreements of $199 million for the three months ended January 27, 2002
and $122 million for the three months ended January 26, 2003. Discounting
fees were not material for the three months ended January 27, 2002 or
January 26, 2003, and were recorded as interest expense. At January 26,
2003, $75 million of sold receivables remained outstanding under these
agreements. A portion of these sold receivables is subject to certain
recourse provisions. Applied has not experienced any losses under these
recourse provisions, and receivables sold under these provisions have terms
and credit risk characteristics similar to Applied's overall receivables
portfolio.
4) Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out (FIFO) basis. Components of inventories were as
follows (in thousands):
October 27, January 26,
2002 2003
----------- -----------
Customer service spares............ $644,352 $587,518
Raw materials...................... 191,956 199,312
Work-in-process.................... 195,409 169,744
Finished goods..................... 242,099 260,533
----------- -----------
$1,273,816 $1,217,107
=========== ===========
5) Other Assets
Components of other assets were as follows (in thousands):
October 27, January 26,
2002 2003
----------- -----------
Purchased technology, net.......... $112,920 $109,153
Goodwill, net...................... 202,290 201,973
Other.............................. 71,825 79,940
----------- -----------
$387,035 $391,066
=========== ===========
Purchased technology and other intangible assets are amortized over their estimated useful lives of three to 10 years using the straight-line method.
Components of intangible assets were as follows (in thousands):
October 27, 2002 January 26, 2003
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------- -------------- -------------
Amortized intangible assets:
Purchased technology......... $312,529 $199,609 $320,529 $211,376
Other........................ 23,600 7,390 23,600 8,280
-------------- ------------- -------------- -------------
$336,129 $206,999 $344,129 $219,656
============== ============= ============== =============
Unamortized intangible assets:
Goodwill..................... $248,160 $45,870 $247,843 $45,870
============== ============= ============== =============
Aggregate amortization expense was $13 million for both of the three month
periods ended January 27, 2002 and January 26, 2003. As of January 26, 2003,
future estimated amortization expense is expected to be: $49 million for
fiscal 2003, $48 million for fiscal 2004, $19 million for fiscal 2005, $13
million for fiscal 2006 and $5 million for fiscal 2007. In connection with
the adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," as of the beginning of fiscal 2002,
goodwill is no longer amortized but reviewed periodically for impairment.
During fiscal 2001, Applied established a venture capital fund, Applied Materials Ventures I, L.P. (Ventures I), to invest in privately-held, early- stage companies engaged in developing communications components, systems and sub-systems. Ventures I's investment objectives were subsequently expanded to include systems, devices and processing technology based on nanotechnology for specific applications and products. Ventures I is a limited partnership with Applied as the sole limited partner and an independent party as the general partner. Applied has committed to fund $50 million in capital contributions, but has reserved the option to discontinue capital contributions at $25 million. Applied's capital contributions to Ventures I totaled approximately $9 million at October 27, 2002 and $11 million at January 26, 2003. As provided for in the partnership agreement, the general partner has control over investment decisions and operations of Ventures I. Accordingly, Applied accounts for its investment using the equity method. Capital contributions, net of the prorata share of Venture I's results of operations, have been included in other assets and totaled $6 million at October 27, 2002 and $7 million at January 26, 2003. Applied does not expect its investment in Ventures I to have a material effect on its financial condition or results of operation.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." FIN 46 provides guidance on the identification, classification and accounting of variable interest entities. If certain criteria are met, Applied may be required to consolidate Ventures I during the fourth fiscal quarter of 2003. Applied is in the process of assessing the effect of this Interpretation. For further details of the provisions of FIN 46, see Note 12 of Notes to the Consolidated Condensed Financial Statements.
6) Accounts Payable and Accrued Expenses
Components of accounts payable and accrued expenses were as follows
(in thousands):
October 27, January 26,
2002 2003
----------- -----------
Accounts payable................... $269,275 $200,686
Compensation and benefits.......... 255,231 131,692
Installation and warranty.......... 214,004 200,982
Deferred revenue................... 117,827 178,975
Other.............................. 491,819 488,283
----------- -----------
$1,348,156 $1,200,618
=========== ===========
Applied adopted Financial Accounting Standards Board Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Indebtedness of Others" (FIN 45) during the first fiscal quarter of 2003. FIN 45 requires disclosures concerning Applied's obligations under certain guarantees.
Applied products are generally sold with a 12-month warranty period following installation. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region.
Changes in the warranty reserves during the first fiscal quarter of 2003 were as follows (in thousands):
Balance, October 27, 2002...... $168,175
Provisions for warranty........ 29,224
Consumption of reserves........ (39,717)
-----------
Balance, January 26, 2003...... $157,682
===========
During the ordinary course of business, Applied also provides standby
letters of credit or other guarantee instruments to certain parties as
required. As of January 26, 2003, the maximum potential amount of future
payments that Applied could be required to make under these guarantee
agreements is approximately $49 million. Applied has not recorded any
liability in connection with these guarantee arrangements beyond that
required to appropriately account for the underlying transaction being
guaranteed. Applied does not believe, based on historical experience and
information currently available, that it is probable that any amounts will
be required to be paid under these guarantee arrangements.
Additionally, Applied guarantees payments for certain wholly owned subsidiary short-term borrowings, term loans and overdraft facilities totaling $175 million. Under these arrangements, in the event a subsidiary does not make the required payments, Applied could be required to fulfill these obligations. The total amount outstanding as of January 26, 2003 under these arrangements was $59 million and was recorded on Applied's consolidated condensed balance sheet. Applied also guarantees payments for certain wholly owned subsidiary lease obligations, which could require Applied to pay approximately $3 million per quarter in the event the subsidiary does not make the required payments. These leases will expire between 2004 and 2014. As of January 26, 2003, Applied has not recorded any liability related to guarantees of wholly owned subsidiary obligations. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under wholly owned subsidiary guarantees.
In connection with certain business combinations and purchased technology acquisitions, Applied was subject to contingent consideration arrangements at January 26, 2003. These arrangements are based upon sales volume or other events taking place subsequent to the acquisition. Depending upon the circumstances of each agreement, the payment of the contingency results in an increase to goodwill or a charge to operating expenses. Amounts paid under these arrangements have not been, and are not expected to have, a material effect on Applied's financial condition or results of operations.
7) Restructuring and Other
During the first fiscal quarter of 2003 and in response to the continuing
downturn in the semiconductor industry, Applied recorded a pre-tax
restructuring charge of $99 million, or $0.04 per share, for employee-
related costs and consolidation of facilities. As a result of this action,
Applied reduced its global workforce by approximately 1,750 positions or 11
percent. The majority of the affected employees were based in Santa Clara,
California and Austin, Texas and represented multiple company activities and
functions. The restructuring charge of $99 million contained no non-cash
items. The majority of the cash outlays are anticipated to occur in fiscal
2003.
Restructuring and other items for the first fiscal quarter of 2002 totaled $85 million, or $0.04 per share. During the first fiscal quarter of 2002, Applied recorded $8 million for in-process research and development expense in connection with its acquisitions of Schlumberger's electron-beam wafer inspection business and Global Knowledge Services, Inc. (GKS). For further details regarding these acquisitions, see Note 10. Also during the first fiscal quarter of 2002, in response to the continuing downturn in the semiconductor industry, Applied recorded a pre-tax restructuring charge of $77 million for employee-related costs, consolidation of facilities and other costs, and reduced its global workforce by approximately 1,100 positions, or six percent. The majority of the affected employees were based in Santa Clara, California and Austin, Texas, and represented multiple company activities and functions. The restructuring charge of $77 million consisted of $49 million of cash outlays and $28 million of non-cash charges, primarily for fixed asset write-offs.
At January 26, 2003, the remaining restructuring reserve consisted of $13 million related to the restructuring implemented in the fourth fiscal quarter of 2001, $15 million related to the restructuring implemented in the first fiscal quarter of 2002 and $62 million related to the restructuring implemented in the first fiscal quarter of 2003. Restructuring activity for the first fiscal quarter of 2003 was as follows (in thousands):
Severance
and Benefits Facilities Other Total
------------ ---------- --------- ---------
Balance, October 27, 2002...... $1,993 $32,015 $3,300 $37,308
Provision...................... 80,133 19,205 0 99,338
Cash Outlays................... (37,868) (7,667) (800) (46,335)
------------ ---------- --------- ---------
Balance, January 26, 2003...... 44,258 43,553 2,500 90,311
============ ========== ========= =========
8) Derivative Financial Instruments
In accordance with Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities," all
of Applied's derivative financial instruments, consisting of forward
exchange contracts and currency option contracts such as Japanese yen, euro
and British pounds are recorded at their fair value on the balance sheet,
either in other current assets or accounts payable and accrued expenses.
Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of any hedges, must be
recognized currently in earnings. The effective portion of the gain or loss
is reported as a component of accumulated other comprehensive income in
stockholders' equity, and is reclassified into earnings when the hedged
transaction affects earnings. All amounts included in accumulated other
comprehensive income at January 26, 2003 will be reclassified to earnings
within 12 months. Changes in the fair value of currency option contracts due
to changes in time value are excluded from the assessment of effectiveness,
and are recognized in cost of products sold. The change in option time value
was not material for the three months ended January 27, 2002 or January 26,
2003. If the transaction being hedged fails to occur, or if a portion of any
derivative is ineffective, Applied immediately recognizes the gain or loss
on the associated financial instrument in general and administrative
expenses. The amount recognized due to the anticipated transactions failing
to occur were not material for the three months ended January 27, 2002 and
January 26, 2003.
Derivative-related activity in accumulated other comprehensive income for the three months ended January 26, 2003 decreased by $1 million, comprised of a $3 million net increase in fair value of derivatives, offset by $4 million of net gains reclassified from accumulated other comprehensive income to earnings.
9) Stockholders' Equity
Comprehensive Income/(Loss)
Components of comprehensive income/(loss), on an after-tax
basis where applicable, were as follows
(in thousands):
Three Months Ended
------------------------
January 27, January 26,
2002 2003
----------- -----------
Net loss............................ ($45,495) ($65,670)
Change in unrealized gain/(loss) on
investments....................... (15,028) 20,154
Change in unrealized gain/(loss) on
derivative instruments
designated and qualifying as
cash flow hedges.................. 7,019 (519)
Foreign currency translation
adjustments....................... (15,342) 14,536
----------- -----------
Comprehensive loss.................. ($68,846) ($31,499)
=========== ===========
Components of accumulated other comprehensive income, on an after-tax basis where applicable, were as follows (in thousands):
October 27, January 26,
2002 2003
----------- -----------
Unrealized gain on investments...... $41,257 $61,411
Unrealized gain on derivative
instruments designated and
qualifying as cash flow hedges.... 5,987 5,468
Cumulative translation adjustments.. (28,635) (14,099)
----------- -----------
Accumulated other comprehensive
income............................ $18,609 $52,780
=========== ===========
Stock Repurchase Program
Since March 1996, Applied has systematically repurchased shares of its
common stock in the open market to partially fund its stock-based employee
benefit plans. Upon the expiration of the previous authorization on March
22, 2001, the Board of Directors extended the stock repurchase program and
authorized the repurchase of up to $2 billion of Applied's common stock in
the open market over the succeeding three years. Under this new
authorization, Applied will continue a systematic stock repurchase program
and may also make additional stock repurchases from time to time, depending
on market conditions, stock price and other factors.
During the three months ended January 27, 2002, Applied did not repurchase any stock. During the three months ended January 26, 2003, Applied repurchased 3,073,000 shares of its common stock at an average price of $16.25, for a total cash outlay of $50 million.
10) Business Combinations
On November 20, 2001, Applied acquired the assets of Schlumberger's
electron-beam wafer inspection business for $66 million in cash. In
connection with this acquisition, Applied recorded acquired in-process
research and development expense of $6 million and goodwill of $81 million,
net of adjustments to the initial purchase price allocation, partially
offset by net liabilities acquired of $21 million. The amount of acquired
in-process research and development expense was determined by identifying
research projects for which technological feasibility had not been
established and for which no alternative future use existed. The value of
the projects identified as in-process was determined by calculating the
total development costs incurred, estimating the portion of development
costs related to the aspect of the project that Applied expects to utilize,
and then calculating the current value of these historical development costs
using a Consumer Price Index adjustment.
On December 3, 2001, Applied acquired GKS, a provider of advanced data mining services to improve semiconductor manufacturing yield and efficiency, for $16 million in cash. In connection with this acquisition, Applied recorded acquired in-process research and development expense of $2 million, goodwill of $6 million, purchased technology of $4 million and other items of $4 million. The amount of acquired in-process research and development expense was determined by identifying research projects for which technological feasibility had not been established and for which no alternative future use existed. The value of the projects identified as in- process was determined by estimating the future cash flows from the projects once commercially feasible, discounting the net cash flows back to their present value at a rate commensurate with the level of risk and maturity of the projects, and then applying a percentage-of-completion to the calculated value.
On April 8, 2002, Applied acquired Electron Vision Corporation, a designer, manufacturer and seller of e-beam stabilization and curing tools for the semiconductor, thin film head and micro-fabrication industries, for $26 million in cash. In connection with this acquisition, Applied recorded goodwill of $13 million, net of adjustments to the initial purchase price allocation, and purchased technology of $16 million, partially offset by other items of $3 million, primarily for deferred tax liabilities.
For all of the purchase business combinations discussed above, the results of operations prior to the acquisition dates were not material in relation to those of Applied for any of the periods presented herein. Goodwill is not amortized but is reviewed periodically for impairment, in accordance with SFAS No. 142, and purchased technology is amortized over its useful life of five years. These acquisitions have not had, and are not expected to have, a material effect on Applied's financial condition or results of operations.
11) Notes Payable
Applied has credit facilities for unsecured borrowings in various currencies
up to approximately $673 million, of which $500 million is comprised of two
revolving credit agreements in the U.S. with a group of banks. The
agreements provide for borrowings at various rates, including the lead
bank's prime reference rate, and include financial and other covenants with
which Applied was in compliance at January 26, 2003. No amounts were
outstanding under these agreements at October 27, 2002 or January 26, 2003.
Both agreements expire in March 2003. Applied does not plan to renew or
replace these agreements at expiration, but may seek similar credit
facilities in the future. The remaining credit facilities of approximately
$173 million are primarily with Japanese banks at rates indexed to their
prime reference rate. At January 26, 2003, $40 million was outstanding under
these credit facilities.
12) Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 eliminates SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," which required all gains and
losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item. Under SFAS No.145, such gains and
losses should be classified as extraordinary only if they meet the criteria
of APB Opinion No. 30. In addition, SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Applied does not expect the adoption of SFAS
No. 145, which will become effective at varying dates from May 2002 to
Applied's fiscal 2003, to have a material effect on its financial condition
or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation" to provide two additional alternative transition methods if a company voluntarily decides to change its method of accounting for stock-based employee compensation to the fair- value method. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 by requiring that companies make quarterly disclosures regarding the pro forma effects of using the fair-value method of accounting for stock- based compensation, effective for interim periods beginning after December 15, 2002. Applied will adopt the disclosure provisions of SFAS No. 148 for the second fiscal quarter of 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights, known as "variable interest entities" (VIEs); and 2) which business enterprise is the primary beneficiary and when it should consolidate the VIE. This new model for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial interest; or 2) whose equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Certain disclosures are effective immediately. Applied is in the process of assessing the effect of FIN 46, but does not expect its implementation to have a material effect on its financial condition or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain information contained in this Quarterly Report on Form 10-Q is forward- looking in nature. All statements included in this Quarterly Report on Form 10- Q or made by management of Applied Materials, Inc. and its subsidiaries (Applied), other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied's future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. These forward-looking statements are based on management's estimates and projections as of the date hereof and include the assumptions that underlie such statements. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should", "would," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section below entitled "Trends, Risks and Uncertainties." Other risks and uncertainties are disclosed in Applied's prior SEC filings, including its Annual Report on Form 10-K for the fiscal year ended October 27, 2002. These and many other factors could affect Applied's future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf.
Results of Operations
Applied is a supplier of semiconductor manufacturing equipment and services to the global semiconductor industry. Business activity in the semiconductor and semiconductor manufacturing equipment industries has been cyclical; for this and other reasons, Applied's results of operations for the three months ended January 26, 2003 may not necessarily be indicative of future operating results.
The continued and prolonged downturn, which Applied believes may be the most severe decline in the history of the semiconductor industry, has resulted in a significant decrease in demand for manufacturing equipment. Inventory buildups in telecommunication products, slower than expected personal computer sales and slow global economic growth caused semiconductor companies to reevaluate their capital spending and reschedule or cancel existing orders. These factors resulted in a sequential decline in orders that began in the first fiscal quarter of 2001 and continued through the fourth fiscal quarter of 2001. Flat orders in the first fiscal quarter of 2002 were followed by a slight improvement in orders in the second and third fiscal quarters of 2002 as customers reacted to a spike in demand for logic integrated circuits. When the anticipated business did not meet customer expectations these customers reduced capital spending, rapidly causing further sequential declines in orders from the third fiscal quarters level through the first fiscal quarter of 2003.
Applied received new orders of $1.0 billion for the first fiscal quarter of 2003 compared to $1.6 billion for the fourth fiscal quarter of 2002 and $1.1 billion for the first fiscal quarter of 2002. New orders for the first fiscal quarter of 2003 declined by 35 percent from the preceding quarter. The decline in orders was broad-based, occurring in most products and regions, however a significant portion of the regional decline in new orders occurred in Taiwan, primarily due to a lack of capacity orders.
New orders by region for the two past consecutive quarters were as follows (dollars in millions):
Three Months Ended
---------------------------------
October 27, 2002 January 26, 2003
--------------- ----------------
($) (%) ($) (%)
------- ------ ------- -------
North America*......... 313 20 273 27
Japan.................. 300 19 217 21
Europe................. 224 14 180 18
Taiwan................. 319 21 139 14
Asia-Pacific**......... 214 14 129 12
Korea.................. 187 12 78 8
------- ------ ------- -------
Total 1,557 100 1,016 100
======= ====== ======= =======
*
Primarily the United States.Applied's backlog for the most recent three fiscal quarters was as follows: $3.1 billion at January 26, 2003, $3.2 billion at October 27, 2002 and $3.3 billion at July 28, 2002. Backlog consists of only orders for which written authorizations have been accepted, shipment dates within 12 months have been assigned and revenue has not been recognized. Due to possible customer changes in delivery schedules and cancellations of orders, Applied's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period.
During fiscal 2002, net sales remained relatively flat for the first and second fiscal quarters, followed by a modest increase in the third fiscal quarter, followed by a slight decline in the fourth fiscal quarter and declined further in the first fiscal quarter of 2003. Net sales for the first fiscal quarter of 2003 decreased 27 percent from the fourth fiscal quarter of 2002 and increased five percent from the first fiscal quarter of 2002. The overall decrease in net sales was due primarily to the continued uncertainties associated with the prolonged downturn and the macro-economic climate discussed previously. Net sales by region for the first fiscal quarters of 2002 and 2003 were as follows (dollars in millions):
Three Months Ended
---------------------------------
January 27, 2002 January 26, 2003
--------------- ----------------
($) (%) ($) (%)
------- ------ ------- -------
North America*......... 336 34 363 34
Japan.................. 205 20 188 18
Europe................. 167 17 144 14
Taiwan................. 111 11 98 9
Asia-Pacific**......... 92 9 91 9
Korea.................. 89 9 170 16
------- ------ ------- -------
Total 1,000 100 1,054 100
======= ====== ======= =======
*
Primarily the United States.Gross margin was 37.0 percent for the first fiscal quarter of 2003, compared to 41.7 percent for the fourth fiscal quarter of 2002 and 38.5 percent for the first fiscal quarter of 2002. The decline in the gross margin percentage for the first fiscal quarter of 2003 as compared to preceding periods was principally attributable to underabsorption of manufacturing and field service costs as a result of lower business volumes.
Excluding restructuring and other charges, operating expenses were 39 percent of net sales for the three months ended January 26, 2003, compared to 32 percent for the fourth fiscal quarter of 2002 and 40 percent for the first fiscal quarter of 2002. In terms of absolute dollars, excluding restructuring and other charges, operating expenses declined by $59 million or 13 percent from the fourth fiscal quarter of 2002. The reduction in operating expenses was attributable to ongoing cost reduction programs. In terms of absolute dollars, excluding restructuring and other charges, operating expenses for the three months ended January 26, 2003 increased slightly by $8 million or approximately two percent from the first fiscal quarter of 2002 principally due to increases in marketing and selling expenses.
Restructuring activities for the first fiscal quarter of 2003 totaled $99 million or $0.04 per share. This charge consisted of employee related costs and consolidation of facilities. Restructuring and other items for the first fiscal quarter of 2002 totaled $85 million, or $0.04 per share. Other items consisted of a pre-tax charge of $8 million for acquired in-process research and development and a pre-tax restructuring charge of $77 million associated with employee related costs, consolidation of facilities and other costs. For further details, see Note 7 of Notes to Consolidated Condensed Financial Statements in this Form 10-Q.
Net interest income was $24 million for the three months ended January 26, 2003, a decrease from $36 million for the three months ended January 27, 2002, due primarily to lower average interest rates.
Financial Condition, Liquidity and Capital Resources
During the first fiscal quarter of 2003, Applied increased its cash, cash equivalents and short-term investments by $59 million from October 27, 2002 to $4.99 billion at January 26, 2003. Applied generally has generated cash from operating activities, primarily from net income/loss, as adjusted to exclude the effect of non-cash charges, and working capital management. Applied has not undertaken any significant external financing activities for several years.
Applied generated cash from operating activities of $87 million for the first fiscal quarter of 2003. The primary sources of cash were from the effect of non-cash charges, changes in working capital components, including accounts receivable, inventories and payables, offset by the first fiscal quarter net loss. Applied utilized programs to sell accounts receivable of $122 million for first fiscal quarter of 2003. These receivable sales had the effect of increasing cash and reducing accounts receivable and days sales outstanding. Applied has not experienced any losses under these programs, and receivables sold under these programs have terms and credit risk characteristics similar to Applied's overall receivables portfolio. Days sales outstanding was 77 days at the end of the first fiscal quarter of 2003, compared to 66 days at the end of fiscal 2002. For further details regarding accounts receivable sales, see Note 3 of Notes to Consolidated Condensed Financial Statements. Inventories were reduced by $57 million during the first fiscal quarter of 2003 principally due to lower customer service spares inventories.
Applied used $110 million of cash for investing activities during the first fiscal quarter of 2003. Capital expenditures, net of retirements, were $77 million for first fiscal quarter of 2003. The majority of capital expenditures consisted of the purchase of facilities in Hillsboro, Oregon for $52 million previously held under a synthetic lease. The remainder of the capital spending consisted of application laboratories, equipment and related facilities. Investing activities also included purchases and sales of short-term investments, which used approximately $33 million of cash.
Applied generated $26 million of cash from financing activities for the first fiscal quarter of 2003, consisting of issuances of common stock under employee stock plans, offset by stock repurchases. Since March 1996, Applied has systematically repurchased shares of its common stock in the open market to partially fund its stock-based employee benefit and incentive plans. Financing activities also included borrowings and repayments of debt.
To date, Applied has not declared or paid cash dividends to its stockholders due to a number of factors, including the volatile nature of the semiconductor industry and the potential requirements to finance working capital in the event of a significant upturn in business. Applied reevaluates this practice periodically, but is not contemplating the payment of a cash dividend. From time to time, Applied declares a stock split in the form of a stock dividend. The most recent stock dividend was approved and distributed during fiscal 2002. Specifically, on March 21, 2002, Applied's Board of Directors approved a two- for-one stock split of Applied's common stock, which was distributed on April 16, 2002 in the form of a 100 percent stock dividend to stockholders of record as of April 1, 2002.
Although cash requirements will fluctuate based on the timing and extent of these factors, Applied's 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's liquidity requirements for the next 12 months. For further details regarding Applied's operating, investing and financing activities see the Consolidated Condensed Statements of Cash Flows.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Please see the discussion of critical accounting policies in Applied's Annual Report on Form 10-K for the fiscal year ended October 27, 2002.Trends, Risks and Uncertainties
The industry that Applied serves is highly volatile and
unpredictable.
As a supplier to the semiconductor industry, Applied is subject to the business
cycles that characterize the industry-the timing, length and volatility of
these cycles are difficult to predict. The semiconductor industry has
historically been cyclical because of sudden changes in demand for
semiconductors and capacity requirements, including capacity utilizing the
latest technology. The rate of changes in demand, including end demand, is
accelerating, and the effect of these changes upon Applied is occurring sooner,
exacerbating the volatility of these cycles. These changes have affected the
timing and amounts of customers' capital equipment purchases and investments in
new technology. These industry cycles create pressure on Applied's net sales,
gross margin and earnings. In addition to affecting Applied's customers and
suppliers, these cycles challenge key management, engineering and other
employees of Applied who are vital to Applied's success.
During periods of declining demand for semiconductor manufacturing equipment, customers typically reduce purchases, delay delivery of products and/or cancel orders. During downturns, Applied must be able to timely and effectively align its cost structure with prevailing market conditions, to manage its inventory levels to reduce the possibility of future inventory write-downs resulting from obsolescence and liability to suppliers for order cancellations, and to motivate and retain key employees. In previous downturns, Applied has reduced its workforce, consolidated facilities and reallocated resources. During periods of rapid growth, Applied must be able to acquire and/or develop sufficient manufacturing capacity and inventory to meet customer demand, and to attract, hire, assimilate and retain a sufficient number of qualified people. If Applied is unable to achieve its objectives in a timely manner during changes in business conditions, there could be a material adverse effect on its business, financial condition and results of operations.
The semiconductor equipment industry is currently experiencing a continued and prolonged downturn. Management believes that this current downturn may be the most severe decline in history and cannot predict when a recovery will begin or what the industry's rate of growth will be in such a recovery. The timing of a recovery and the industry's rate of growth in such a recovery will be affected by the global uncertainties discussed below.
Applied is exposed to the risks of operating a global business.
Currently, 66 percent of Applied's revenues result from sales outside the
United States, with an increasing percentage of sales to customers in Asia.
Certain manufacturing facilities and suppliers are also located outside the
United States. Managing Applied's global operations presents challenges,
including periodic regional economic downturns, trade balance issues, varying
business conditions and demands, political instability, variations in
enforcement of intellectual property and contract rights in different
jurisdictions, differences in the ability to develop relationships with
suppliers and other local businesses, changes in U.S. and international laws
and regulations including U.S. export restrictions, fluctuations in interest
and currency exchange rates, the ability to provide sufficient levels of
technical support in different locations, cultural differences, shipping delays
and terrorist acts or acts of war, among other risks. Many of these challenges
are present in China, which represents a large potential market for
semiconductor equipment and where Applied anticipates significant opportunity
for growth. Global uncertainties with respect to: 1) economic growth rates in
various countries; 2) sustainability of demand for electronics products;
3) capital spending by semiconductor manufacturers; 4) price weakness for
certain semiconductor devices; and 5) political instability in regions where
Applied has operations, such as Israel and Asia, may also affect Applied's
business, financial condition and results of operations.
Applied operates in a highly competitive industry characterized by increasingly rapid technological changes.
Applied's future success depends on performing better than its competitors in a
number of ways, including its ability to timely and cost-effectively:
1) develop new products, services and technologies, including those utilizing
new materials, such as copper; 2) develop improvements to existing products,
services and technologies; 3) develop new markets in the semiconductor industry
for its products and services; 4) introduce new products and services to the
marketplace; 5) achieve market acceptance; 6) qualify new or improved products
for volume manufacturing with its customers; 7) commence and adjust production
to meet customer demands; and 8) price products and services appropriately. The
development, introduction of and the ability to support an increasingly broader
set of new or improved products and technologies, including those enabling the
transition to smaller device feature sizes, new materials and 300mm wafers,
grows increasingly complex and expensive over time. Such new or improved
products may involve higher costs and reduced efficiencies compared to
Applied's more established products and could adversely affect Applied's gross
margins. If Applied does not develop and introduce new or improved products,
services and technologies in a timely and cost-effective manner in response to
changing market conditions or customer requirements, its competitive position,
financial condition and results of operations could be materially and adversely
affected.
Applied is exposed to risks as a result of ongoing changes in the semiconductor
industry.
Ongoing changes in the semiconductor industry, including more complex
technology requirements, the increasing percentage of business from customers
in Asia, increasing pressure on semiconductor manufacturers to allocate
resources to activities that enhance their competitive advantage, the
increasing significance of consumer electronics as a driver for demand for
semiconductors and the related focus on lower costs, have in turn resulted in
the increasing importance of spares and service as a growing percentage of
semiconductor equipment suppliers' business. These changes are also requiring
semiconductor manufacturing equipment suppliers to provide increasing levels of
process integration support. If Applied does not successfully manage the risks
resulting from these changes in the semiconductor industry, its business,
financial condition and results of operations could be materially and adversely
affected.
Applied is exposed to risks associated with a highly concentrated customer
base.
Applied's customer base is highly concentrated. Orders from a relatively
limited number of semiconductor manufacturers have accounted for, and likely
will continue to account for, a substantial portion of Applied's net sales,
which may lead customers to demand pricing and other terms less favorable to
Applied. In addition, sales to any single customer may vary significantly from
quarter to quarter. If current customers delay, cancel or do not place orders,
Applied may not be able to replace these orders with new orders. As Applied's
products are configured to customer specifications, changing, rescheduling or
canceling orders may result in significant and often non-recoverable costs. The
resulting fluctuations in the amount of or terms for orders could have a
material adverse effect on Applied's business, financial condition and results
of operations.
Manufacturing interruptions or delays could affect Applied's ability to meet customer demand.
Applied's business depends on its ability to manufacture products that meet the
rapidly changing demands of its customers. Applied's ability to manufacture
depends in part on the timely delivery of parts, components, and subassemblies
(collectively parts) from suppliers. Some key parts may be obtained only from a
single supplier or a limited group of suppliers. Significant interruptions of
manufacturing operations as a result of the failure or inability of suppliers
to timely deliver quality parts, natural disasters (such as earthquakes or
tornadoes), or other causes (such as information technology or infrastructure
failures, regional economic downturns, political instability or terrorist acts
or acts of war) could result in delayed product deliveries or manufacturing
inefficiencies. Any or all of these factors could materially and adversely
affect Applied's business, financial condition and results of operations.
Applied is exposed to various risks related to the regulatory environment.
Applied is subject to various risks related to: 1) new, different, inconsistent
or even conflicting laws, rules and regulations that may be enacted by
legislative bodies and/or regulatory agencies in the countries in which Applied
operates and with which Applied must comply; and 2) disagreements or disputes
between national or regional regulatory agencies related to international
trade.
For example, the World Trade Organization (WTO) has determined that the U.S. Foreign Sales Corporation (FSC) and Extraterritorial Income (ETI) exclusion constitute a prohibited export subsidy warranting the possible imposition of trade sanctions on certain goods, including semiconductor manufacturing equipment. Applied has benefited from FSC and ETI tax provisions. The elimination of these tax benefits or imposition of sanctions could materially and adversely affect Applied's financial condition and results of operations.
During fiscal 2002, Applied filed an application with the SEC for an exemptive order confirming that it is not subject to the Investment Company Act of 1940 (the Act), which requires companies primarily engaged in the business of investing in securities to comply with additional rules and regulations. Largely due to the industry downturn, Applied's ratios of investments to total assets and of interest income to net income have increased, resulting in the risk that Applied could be deemed to be covered by the Act. If the SEC does not grant the exemption, Applied may have to take other actions that could adversely affect its results of operations in order not to be subject to the Act.
Applied is subject to risks of non-compliance with environmental and safety regulations.
Applied is subject to environmental and safety regulations in connection with
its business operations, including but not limited to regulations related to
the development, manufacturing and use of its products. Failure or inability to
comply with existing or future environmental and safety regulations could
result in significant remediation liabilities, the imposition of fines and/or
the suspension or termination of development, manufacturing or use of certain
of its products, each of which could have a material adverse effect on
Applied's business, financial condition and results of operations.
Applied is exposed to risks associated with acquisitions.
Applied has made, and may in the future make, acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including but not limited
to: 1) diversion of management's attention from other operational matters;
2) the inability to realize expected synergies resulting from the acquisition;
3) failure to commercialize purchased technology; and 4) impairment of acquired
intangible assets as a result of technological advancements or worse-than-
expected performance of the acquired company. Mergers and acquisitions are
inherently subject to multiple significant risks, and the inability to
effectively manage these risks could materially and adversely affect Applied's
business, financial condition and results of operations.
Applied is exposed to various risks related to legal proceedings or claims.
Applied currently is, and in the future may be, involved in legal proceedings
or claims regarding patent infringement, intellectual property rights,
antitrust, environmental regulations, securities, contracts, employment and
other matters (see Part II below). In addition, from time to time, Applied
receives notification from customers who believe that Applied owes them
indemnification or other obligations related to infringement claims made
against the customers by third parties. These legal proceedings and claims,
whether with or without merit, are time-consuming and expensive to prosecute or
defend and divert management's attention and resources. There can be no
assurance regarding the outcome of current or future legal proceedings or
claims. In addition, Applied's intellectual property rights may not provide
significant competitive advantages if they are circumvented, invalidated or
obsoleted by the rapid pace of technological change. Furthermore, the laws of
other countries permit the protection of Applied's proprietary rights to
varying extents, compared to U.S. laws. Applied's success is dependent in part
upon the protection of its intellectual property rights. Infringement of
Applied's rights by a third party could result in uncompensated lost market and
revenue opportunities for Applied. If Applied is not able to resolve a claim,
negotiate a settlement of the matter, obtain necessary licenses on commercially
reasonable terms, and/or successfully prosecute or defend its position,
Applied's business, financial condition and results of operations could be
materially and adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Applied purchases forward exchange and currency option contracts to hedge certain existing and anticipated foreign currency denominated transactions expected to occur during the next year. Gains and losses on these contracts are generally recognized in income when the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on forward exchange and currency option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Net foreign currency gains and losses were not material for the three months ended January 26, 2003.
Applied has performed an analysis to assess the potential financial effect of reasonably possible near-term changes in interest and foreign currency exchange rates. Based upon Applied's analysis, the effect of such rate changes is not expected to be material to Applied's financial condition, results of operations or cash flows.Item 4. Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, Applied's principal executive officer and principal financial officer have concluded that Applied's disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act) are effective to ensure that information required to be disclosed by Applied in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in Applied's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation and up to the filing date of this Quarterly Report on Form 10-Q. Since there were no significant deficiencies or material weaknesses identified, there were no corrective actions taken.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
PAERT II. OTHER INFORMATION
Item 1. Legal Proceedings
Novellus
On June 13, 1997, after Varian Associates, Inc. (Varian) failed to respond to
requests by Applied to discuss certain patent issues, Applied filed a lawsuit
against Varian captioned Applied Materials, Inc. v. Varian Associates, Inc.
(case no. C-97-20523-RMW) in the United States District Court for the Northern
District of California, alleging infringement of several of Applied's patents
concerning PVD technology. On July 7, 1997, Applied amended that action to
allege infringement of those same Applied PVD patents against Novellus Systems,
Inc. (Novellus) and to add Novellus as a defendant, as a result of Novellus'
acquisition of Varian's thin film systems PVD business. On June 23, 1997,
Novellus filed a separate lawsuit against Applied captioned Novellus Systems,
Inc. v. Applied Materials, Inc. (case no. C-97-20551-EAI) in the United States
District Court for the Northern District of California, alleging infringement
by Applied of several PVD technology patents that were formerly owned by
Varian. Novellus seeks damages for past infringement, a permanent injunction,
treble damages for willful infringement, pre-judgment interest and attorneys'
fees. In September 2000, Applied and Varian settled their disputes, and on
October 3, 2000, Applied's claims against Varian and Varian's claims and
counterclaims against Applied were dismissed with prejudice with respect to the
Inova system as it was made and sold as of May 7, 1997. The litigation with
Novellus continues. Fact discovery has closed in the actions. The court has set
a trial date of May 27, 2003. Applied believes it has meritorious claims and
defenses and intends to pursue them vigorously.
Axcelis Technologies
On January 8, 2001, Axcelis Technologies, Inc. (Axcelis), formerly a subsidiary
of Eaton Corporation, filed a lawsuit in the United States District Court for
the District of Massachusetts, captioned Axcelis Technologies, Inc. v. Applied
Materials, Inc. (case no. 01-10029 DPW). The lawsuit alleges that Applied
infringes a patent concerning ion implantation owned by Axcelis. The complaint
also alleges various Massachusetts state and common law tortious interference
and unfair competition claims. Axcelis seeks a preliminary and permanent
injunction, damages, costs and attorneys' fees. On April 12, 2001, Applied
answered the complaint by denying all allegations and counterclaimed for
declaratory judgment of invalidity and non-infringement, and violations of
various unfair and deceptive trade practices laws. Applied seeks damages, a
permanent injunction, costs and attorneys' fees. Fact and expert discovery have
closed. On December 10, 2002, the Court issued a ruling interpreting the claims
of the patent. Summary judgment motions have been filed and are scheduled to be
heard in March, 2003. Trial on infringement issues only is set for May 12,
2003. Applied believes it has meritorious defenses and counterclaims to the
action and intends to pursue them vigorously.
Linear Technology
On March 2, 2001, Linear Technology Corp. (LTC) filed a third party complaint
against Applied in the United States District Court for the Eastern District of
Texas, captioned Texas Instruments, Inc. v. Linear Technology Corp. v. Applied
Materials, Inc. (case no. 2-01-CV4 (DF)). The complaint against Applied alleged
that Applied is obligated to indemnify LTC and defend LTC for certain claims in
the underlying patent infringement lawsuit brought by Texas Instruments, Inc.
(TI) against LTC. The complaint also alleged claims for breach of contract,
breach of warranty, and various unfair business practices. In the complaint,
LTC alleged that, before LTC purchased certain equipment from Applied, Applied
failed to disclose to LTC that TI previously had won a jury verdict against
Hyundai Electronics Industries Co., Ltd. (Hyundai) for patent infringement
based on Hyundai's use of certain semiconductor equipment including some
Applied tools. LTC's Texas lawsuit against Applied sought indemnification and
damages from Applied and an order requiring Applied to defend LTC in the
underlying lawsuit with TI. On January 15, 2002, the Court granted TI's motion
to sever Applied and the other third party defendants from the action and
dismissed LTC's action against Applied and the other third party defendants
without prejudice. On March 12, 2002, LTC filed a complaint against Applied in
the Superior Court for the County of Santa Clara, captioned Linear Technology
Corp. v. Applied Materials, Inc., Novellus Systems, Inc. and Tokyo Electron
Ltd., (case no. CV806004) alleging claims for breach of contract, fraud and
deceit, negligent misrepresentation, suppression of fact, unfair competition,
breach of warranty, express contractual indemnity, implied equitable indemnity
and declaratory relief. On November 12, 2002, LTC filed an amended complaint in
the Santa Clara action asserting essentially the same claims as in the original
complaint but adding an additional assertion that LTC and TI have settled their
litigation. In the amended compliant, LTC seeks damages, punitive damages,
injunctive relief and restitution. LTC also seeks costs and attorneys' fees
including costs and attorneys' fees for the TI litigation. LTC has also
asserted similar claims against certain other semiconductor equipment
manufacturers. Applied has moved to dismiss the amended complaint. No trial
date has been set. Applied believes that it has meritorious defenses and
intends to pursue them vigorously.
Semitool
On June 11, 2001, Semitool, Inc. (Semitool) filed a lawsuit against Applied in
the United States District Court for the Northern District of California,
captioned Semitool, Inc. v. Applied Materials, Inc. (case no. CV-01-2277 CRB).
The lawsuit alleged that Applied infringed a patent concerning seed repair and
electroplating owned by Semitool. Semitool sought a preliminary and permanent
injunction, damages, costs and attorneys' fees. On July 12, 2001, before
Applied had answered the complaint, Semitool voluntarily dismissed its action
against Applied in the Northern District of California. On the same day,
Semitool filed a substantially identical action against Applied in the United
States District Court for the District of Oregon captioned Semitool, Inc. v.
Applied Materials, Inc. (case no. CV'01-1066 AS). On July 13, 2001, Applied
filed a declaratory judgment action against Semitool in the Northern District
of California captioned Applied Materials, Inc. v. Semitool, Inc. (case no. CV-
01-2673 BZ). In that action, Applied seeks a declaration that Applied has not
infringed the Semitool patent and that Semitool's patent is invalid and
unenforceable. Applied also seeks costs and attorneys' fees. The California
Court has ordered Applied's action against Semitool transferred to the District
of Oregon. The actions are proceeding together in Oregon. Semitool has also
asserted similar claims against certain other semiconductor equipment
manufacturers. Discovery is ongoing. The Oregon Court has issued an order
interpreting the patent claims and has rescheduled the trial date from June 30,
2003 to February 3, 2004. Applied believes it has meritorious claims and
defenses and intends to pursue them vigorously.
David Scharf
On July 31, 2001, David Scharf, an individual, filed a lawsuit against Applied
in the United States District Court for the Central District of California,
captioned David Scharf v. Applied Materials, Inc. (case no. 01-06580 AHM). The
lawsuit alleges that Applied has infringed, has induced others to infringe and
has contributed to others' infringement of a patent concerning color
synthesizing scanning electron microscope technology. Mr. Scharf seeks a
preliminary and permanent injunction, damages and costs. Applied has answered
the complaint and counterclaimed for declaratory judgment of non-infringement
and invalidity. On May 10, 2002, Mr. Scharf filed a request for re-examination
of his own patent. On June 26, 2002, the case was removed from the Court's
active docket after the parties stipulated to stay the case pending the results
of that re-examination. On July 11, 2002, Applied filed its own request for re-
examination of Mr. Scharf's patent with the Patent and Trademark Office, which
was granted on September 19, 2002. Applied believes it has meritorious defenses
and counterclaims and intends to pursue them vigorously.
ASMI
On August 27, 2002, ASM America, Inc. and ASM International, N.V. (collectively
"ASMI") filed a lawsuit against Applied in the United States District Court
for the District of Arizona, captioned ASM America, Inc. and ASM International,
N.V. v. Applied Materials, Inc. (case no. Civ'02 1660 PHX SMM). The lawsuit
seeks a judicial declaration that ASMI does not infringe six patents belonging
to Applied that relate to remote cleaning of CVD chambers and to deposition of
silicon nitride. The suit also seeks a judicial declaration that two of those
six patents are invalid. On December 16, 2002, Applied responded to the
complaint by denying the allegations and counterclaimed by seeking a
declaratory judgment of infringement and validity of two of the patents related
to remote cleaning of CVD chambers. Applied seeks damages, a preliminary and
permanent injunction, costs and attorneys' fees. Applied also moved to dismiss
the complaint with respect to four of the patents and moved for a more
definitive statement with respect to two of ASMI's causes of action. No trial
date has been set. Applied believes it has meritorious defenses and
counterclaims and intends to pursue them vigorously.
Varian Semiconductor Equipment Associates, Inc.
On September 13, 2002, Varian Semiconductor Equipment Associates, Inc. filed a demand
for arbitration with the American Arbitration Association asserting that Applied
Materials has breached a patent license agreement between Varian and Applied Materials
dated January 1, 1992. Varian seeks to recover royalties, interest and attorneys' fees.
The arbitration hearing is scheduled to commence on March 31, 2003.
Applied believes it has meritorious defenses and
counterclaims and intends to pursue them vigorously.
Robert Bosch GmbH
On October 10, 2002, Robert Bosch GmbH (Bosch), a German company, filed a
lawsuit against Applied in the United States District Court for the District of
Delaware, captioned Robert Bosch GmbH v. Applied Materials, Inc. (civil action
no. 02-1523). The lawsuit alleges that Applied infringes two patents owned by
Bosch related to anisotrophic etching. Bosch seeks a preliminary and permanent
injunction, damages, costs and attorneys' fees. Applied has recently been
served with the complaint, but has not yet answered it. No trial date has been
set. Applied believes it has meritorious defenses and intends to pursue them
vigorously.
From time to time, Applied receives notification from customers claiming that such customers are entitled to indemnification or other obligations from Applied related to infringement claims made against the customers by third parties. In addition, Applied is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, Applied does not believe that any of these other existing legal matters will have a material adverse effect on its financial condition or results of operations.
Item 5. Other Information
Earnings to Fixed Charges
The ratio of earnings/(loss) to fixed charges for the three months ended January 27, 2002 and January 26, 2003, and for each of the last five fiscal years, was as follows:
Three Months Ended
Fiscal Year -----------------------
------------------------------------------------ January 27, January 26,
1998 1999 2000 2001 2002 2002 2003
-------- -------- -------- -------- -------- ---------- -----------
7.56x 14.03x 32.82x 11.80x 4.58x (1.58)x (2.87)x
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Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit No. Description
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K:
1. A Report on Form 8-K was filed on November 6, 2002. The report contained information announcing a First Amendment to Rights Agreement, dated as of November 6, 2002, between Applied Materials, Inc. and Computershare Investor Service, LLC, as Rights Agent.
2. A Report on Form 8-K was filed on January 31, 2003. The report contained information announcing Applied Materials, Inc.'s press release issued on January 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| APPLIED MATERIALS, INC. |
March 10, 2003
| By: | /s/ Joseph R. Bronson |
|
| |
| Joseph R. Bronson | |
|
Executive Vice President,
Global Executive Committee and Chief Financial Officer |
| By: | /s/ Nancy H. Handel |
|
| |
| Nancy H. Handel | |
|
Group Vice President,
Deputy Chief Financial Officer and Corporate Controller |
APPLIED MATERIALS, INC.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION
I, James C. Morgan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applied Materials, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
| /s/ JAMES C. MORGAN |
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| |
| James C. Morgan | |
|
Chairman and Chief Executive Officer |
I, Joseph R. Bronson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applied Materials, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
| /s/ JOSEPH R. BRONSON |
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| |
| Joseph R. Bronson | |
|
Executive Vice President,
Office of the President and Chief Financial Officer |