Cost cutting at Applied Materials solar division as orders down 62%

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Overcapacity within the PV industry hit Applied Materials sales and orders in its financial first quarter, leading to further cost reductions within its Energy and Environmental Solutions (EES) division. New orders in the segment were down 62% to only US$33 million, while sales of US$207 million were down 34% on the prior quarter. The segment had a non-GAAP operating loss of US$17 million and a GAAP operating loss of US$23 million. Overall, Applied generated orders of US$2.01 billion and net sales of US$2.19 billion, exceeding guidance.

“We have taken several cost actions in EES to date including workforce reductions, shortened workweeks, product program rationalization and spending controls,” commented George S. Davis, CFO of Applied Materials in a conference call to discuss quarterly results. “Over the past few quarters, operating expenses have been reduced by approximately 20% and we have removed over 50% of our manufacturing cost structure. Given the uncertain period to an uptick in demand, we are continuing to look for additional cost-saving opportunities in order to further lower breakeven levels. We'll provide an update of these actions at the Investor Analyst Meeting in March [2012].”

In the conference call Mike Splinter, chairman and chief executive officer, said the company remained confident in the long-term potential of its solar operations.

“Cell efficiency is becoming increasingly important for customers and as new technology is adopted, we expect to see an increase in demand for our leading-edge products as some portion of the industry's current capacity becomes obsolete,” noted Splinter.

However, management were not confident in predicting when an upturn in equipment sales would occur, though said they were surprised at the strong end-user demand for PV seen in the fourth quarter of 2011.

Splinter noted that Applied’s own estimates put effective PV manufacturing at over 40GW, while nameplate capacity was over 50GW. However, the executive noted that saleable product capacity was actually just over 40GW.

“If demand gets up to 35GW, this year, that's a significant closure of the gap of the capacity demand gap that we're dealing with right now. And you could see a more normal kind of buying pattern than we're seeing today,” explained Splinter.

He also noted that although the PV industry was in a period of capacity digestion, several top-tier manufacturers were said to have been running their production plants close to full utilization, suggesting that some could seek adding new capacity if demand remains strong, though no timeframes were discussed.

With industry consolidation and companies exiting the PV sector altogether, Applied’s management said that it had debooked some orders from its backlog, with approximately 75% coming from its non-semiconductor businesses. In total, Applied debooked US$146 million.

Management guided net sales in EES to be down greater than 40% in its second quarter financial year, due to continuing soft demand and the drawdown of backlog and deferred revenue. 

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