Applied Materials (AMAT) Outlook Lowered to Stable by S&P Following Termination of Tokyo Electron Deal

Standard & Poor's Ratings Services said it revised its outlook on Applied Materials (Nasdaq: AMAT) to stable from positive. At the same time, we affirmed our 'A-' corporate credit rating and other ratings on the company.

The outlook revision to stable reflects our view that the anticipated product portfolio and market position enhancements resulting from the planned merger with Tokyo Electron will not materialize as a result of Applied Materials' termination oof the transaction.

Applied Materials is the leading worldwide supplier of semiconductor manufacturing equipment in terms of total revenues.

"The ratings on Applied Materials reflect our view of the company's still leading competitive position across multiple semiconductor equipment product categories and its scale efficiencies," said Standard & Poor's credit analyst David Tsui.

The semiconductor industry's inherent cyclicality, risk of technological obsolescence, and customer concentration risk partly offset those advantages. The company operates in a highly competitive semiconductor capital equipment industry, which has experienced consolidation over the past few years with ASML Holding's acquisition of Cymer Inc. in May 2013 and Lam Research Corp.'s merger with Novellus Systems Inc. in June 2012. Applied Materials also participated in the industry's consolidation through its successful merger with Varian Semiconductor Equipment Inc. in 2011. We expect Applied Materials to continue to seek acquisitions to complement its already market-leading position and broaden its business portfolio and market presence. Applied Materials also experiences considerable customer concentration risk, with about 50% of revenue in fiscal 2014 derived from its top three customers. This is primarily a result of semiconductor companies' ongoing transitions to
fabless or fab-lite models, indicated by outsourced semiconductor manufacturing. We view Applied Materials' business risk profile as "satisfactory."

The stable outlook reflects our view of the company's leading position across multiple semiconductor equipment product categories, its modest financial profile that provides a cushion for industry cyclicality, and its strong ability to generate free operating cash flow.

We would lower the rating if the company's market share declines meaningfully due to an industry downturn or competitive pressures, leading to adjusted leverage sustained above 1.5x. We would also lower the rating if Applied Materials were to implement a significantly more aggressive financial policy.

We could consider an upgrade if the company significantly improves its product portfolio and competitive position either organically or through acquisitions, while maintaining its leverage at or below the 1.5x level. However, we view this scenario to be unlikely.

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