Applied Materials' Thin-Film Exit

Source: WSJ

Applied Materials Inc. (AMAT) plans to restructure its energy and environmental business, a move expected to cost up to $425 million and affect 500 jobs, as the company shifts the segment's focus and seeks to bring it back to profitability in fiscal 2011.

The restructuring is an admission that Applied Materials' previous effort to focus on cheaper but less efficient thin-film solar panel products was misplaced. Instead, the Santa Clara, Calif., semiconductor-equipment maker said Wednesday that it will focus on crystalline silicon solar and advanced energy, including light emitting diode technology.

"Today's actions are designed to align our thin-film infrastructure with market realities," Chief Financial Officer George Davis said on a conference call. The company also raised its earnings guidance for the third quarter by a couple pennies, excluding certain charges.

Applied Materials, whose traditional business is focused on making tools used by semiconductor manufacturers, entered thin-film solar panels in an attempt to take share away from devoted crystalline silicon panel makers. The business suffered mightily, though, as silicon costs plummeted and Applied Materials' core customer base of start-up companies needing full-service assistance dried up in the economic downturn.

Patrick Ho of Stifel Nicolaus & Co. said that while some of the energy and environmental unit's woes are market-related, "I also think that it was a failed venture from Applied because of its own internal strategic direction." After all, he said, there are other successful thin-film solar companies, such as First Solar Inc. (FSLR).

Applied Materials, which recently had about 13,000 employees globally, plans to discontinue sales to new customers for some thin-film solar panel equipment. It also intends to sell its low-emissivity architectural-glass coatings line while continuing development in emerging technologies in "smart" electrochromic glass.

The company's shares added 9 cents to $12.43, a rather nondescript reaction as analysts said the company's decision had been a long time coming.

"It was a huge drag on profitability," RBC Capital Markets analyst Mahesh Sanganeria said of the energy and environmental segment.

CFO Davis said the company now believes the Energy and Environmental Solutions unit's break-even point will be at or slightly below $700 million, with the company planning to cut annual operating expenses by $100 million over the next three quarters.

Lowering the break-even point is important psychologically, said Gary Hsueh, analyst at Oppenheimer & Co., but he warned that the actual magnitude of the restructuring "may be a little bit lackluster." Hsueh estimates that the $100 million in annualized cost savings only adds about 7 cents a share.

Applied Materials will book restructuring-related charges of $375 million to $425 million, or 18 cents to 21 cents a share, including 14 cents a share in the fiscal third quarter ended June 30. That total charge includes $240 million in inventory charges and another $95 million in equipment and asset impairments, as much of the material used for the SunFab panels isn't easily transferable to other product lines. Excluding the charges, Applied Materials sees per-share earnings between 24 cents and 28 cents for the third quarter, 2 cents above its prior view. Analysts, on average, projected third-quarter earnings of 24 cents a share, according to Thomson Reuters.