uploads///A_Semiconductors_AMAT_Q Cash flow estimates

What AMAT’s Balance Sheet Says about Its Financial Position


Feb. 20 2017, Updated 7:35 a.m. ET

Applied Materials’ balance sheet

In the earlier few parts of the series, we saw that Applied Materials (AMAT) is currently in the uptrend of cyclical growth, which is converting into seasonal growth. The company is developing new products in the display and semiconductor segments, but faces threats from ADL (atomic layer deposition) technology and ASML’s EUV (extreme ultraviolet) technology.

These threats could slow AMAT’s growth, which would also impact its cash flows. Let’s see if the company’s balance sheet is strong enough to withstand small headwinds.

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Cash flow

As seen from the above graph, AMAT’s FCF (free cash flow) increased significantly in fiscal 2Q16 when the company started reporting revenue growth after several quarters of decline. The growth momentum continued in fiscal 3Q16 when the FCF reached its peak of $981 million. However, this momentum slowed to $709 million in fiscal 4Q16 as its accounts receivables and payables increased 23% and 14%, sequentially.

Another reason why FCF increased significantly was because the company reduced its share buyback from $900 million in fiscal 2Q16 to $171 million in fiscal 4Q16. In fiscal 2016, AMAT returned 106% of its FCF to shareholders.

For fiscal 1Q17, AMAT expects its FCF to fall to $700 million.

Cash and debt position

At the end of fiscal 4Q16, AMAT had cash reserves of $4.7 billion as against a long-term debt of $3.1 billion, resulting in a net cash balance of $1.5 billion.

Rival Lam Research (LRCX) has cash reserves of $6.1 billion as against a long-term debt of $1.8 billion, resulting in a net cash balance of $4.3 billion. On the other hand, KLA-Tencor (KLAC) has a net debt balance of around $140 million.

Thus, AMAT is well-positioned to take up long-term investments. However, if the company plans to take the merger and acquisition path, it could have a negative impact on its balance sheet.

Next, we will look at the industrial environment and how it could impact AMAT’s future growth.


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