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Shares of Applied Materials (AMAT) lost roughly 5% of their value during the past trading week. The global semiconductor manufacturer announced its fourth quarter results on Thursday.

Fourth Quarter Results

Applied Materials reported fourth quarter revenues of $1.65 billion, down 24.6% on the year. Order intake fell to $1.47 billion, for a book-to-bill ratio of 0.89, implying lower revenues in the near term. Revenues beat analysts consensus of $1.58 billion.

Applied took large goodwill and impairment charges totaling $545 million. The company reported a GAAP operating loss of $499 million, and a net loss of $515 million or $0.42 per diluted share.

Non-GAAP net income came in at $70 million, or $0.06 per diluted share. This compares to analysts expectations of $0.03 per share.

For the full year of its fiscal 2012, Applied Materials reported orders of $8.04 billion on net sales of $8.72 billion. The company net earned $109 million, or $0.09 per diluted share. Non-GAAP net income came in at $960 million, or $0.75 per share.

CEO and Chairman Mike Splinter commented on the results,

In our fourth quarter, Applied delivered profit at the high end of our outlook despite challenging industry conditions in semiconductor, solar and display. Our strong cash flow performance allowed us to increase our quarterly dividend and share buybacks, returning $1.85 billion to stockholders in the year.

Detailed Information

Applied Materials took a $421 million goodwill impairment charge in its Energy and Environmental Solutions segment, on the back of deterioration in the solar equipment market. Applied furthermore took $124 million restructuring and integration charges related to the acquisition of Varian.

The Silicon Systems Group reported sales of $870 million, down 44% compared to the third quarter. Orders fell 36% and came in at $741 million, for a book-to-bill ratio of 0.85. Non-GAAP operating income fell to $95 million, for operating margins of 10.9%. GAAP operating income fell to $41 million or 4.7% of sales.

Applied Global Services reported sales of $621 million, up 7% compared to the third quarter. Orders were up 8% to $576 million, for a book-to-bill ratio of 0.93. Non-GAAP operating income rose to $171 million, for operating margins of 27.5%. GAAP operating income rose to $164 million, or 26.4% of net sales.

The display division reported sales of $93 million, down 35% on the quarter. Orders fell 24% to $83 million for a book-to-bill ratio of 0.89. Non-GAAP operating income fell to $4 million, or 4.3% of sales. GAAP operating income fell to $3 million, or 3.2% of sales.

The energy and environmental solution division reported sales of $62 million, down 19% on the quarter. Orders rose 86% to $65 million, for a book-to-bill ratio of 1.05. Non-GAAP operating losses came in at $46 million, with GAAP operating losses of $480 million as a result of the impairment charges.

Outlook

For the first quarter of its fiscal 2013, Applied Materials expects sales to fall between zero and 15% compared to its fourth quarter sales of $1.65 billion. The guidance implies first quarter revenues of $1.40-$1.65 billion, falling short of analysts consensus of $1.77 billion.

Non-GAAP earnings per share are expected to come in between $0.00 and $0.06 per share. Analysts expected Applied Materials to guide for earnings of $0.09 per share.

Net earnings include an approximate $0.05 share charge related to acquisitions and might be impacted by other charges.

CEO Splinter commented on the future,

We see improving business conditions entering 2013, with orders projected to increase after bottoming in the fourth quarter. Accelerated changes in device technology and the adoption of new materials in all of the industries we serve provide opportunities for Applied to build on our leadership and grow our market share.

Valuation

Applied Materials ended its fourth quarter of its fiscal 2012 with $3.0 billion in cash, equivalents and short term investments. The company operates with $1.9 billion in long term debt, for a net cash position of $1.1 billion.

The market currently values Applied Materials at $12.5 billion. This values operating assets at $11.4 billion This values the firm at 1.4 times annual revenues and over 100 times annual earnings.

Applied Materials pays quarterly dividend of $0.09 per share, for an annual dividend yield of 3.6%.

Investment Thesis

Year to date, shares of Applied Materials have lost some 5% of their value. Shares rose from levels of $11 in January to highs of $13 in February. Shares fell back to $10 in June on the back of weak results. After recovering to levels around $12 per share, shares are currently exchanging hands at $10.15 per share.

After trading around $20 in 2008, shares have fallen to levels around $10 during the financial crisis. Shares rebounded to $16 in the beginning of 2011, before falling back again. Between its fiscal 2008 and 2012, Applied Materials reported stagnant revenues around $8.0 billion. The company reported an almost $1 billion profit in 2008, with net earnings falling to $109 million in 2012 on the back of impairment charges.

The outlook for the full year of its fiscal 2013 looks rather bleak. Applied Material reported a 23.5% decline in annual revenues from 2011 to 2012. Revenues are expected to fall even further for its fiscal 2013. To combat the difficult market conditions, Applied Materials will cut 900 to 1,300 jobs, or 6 to 9% of its workforce.

Applied Materials expects that orders will recover in the first quarter, according to CEO Splinter. A growth recovery will be driven by the increased and continued popularity of mobile devices.

Earlier this year, I warned about the cyclicality of the business and the significant drag caused by the solar division. Applied still does not succeed in its attempt to structurally increase revenues and profits, while financial metrics remain inherently volatile.

I remain on the sidelines.

Source: Applied Materials: Solar Division Continues To Impact Profitability