Applied Materials, Inc. — FY2022 Form 10-K
Business context and reporting period. Applied Materials supplies semiconductor and display manufacturing equipment, services and software. Its three reportable segments are Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets. This is the annual report for the fiscal year ended October 30, 2022 (52 weeks), not a standalone fourth-quarter report.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $25.785 billion | $23.063 billion |
| Gross margin | 46.5% | 47.3% |
| Operating income / margin | $7.788 billion / 30.2% | $6.889 billion / 29.9% |
| Net income | $6.525 billion | $5.888 billion |
| Diluted EPS | $7.44 | $6.40 |
| Cash from operations | $5.399 billion | $5.442 billion |
- Sales increased 12%; net income rose 11%. Gross margin fell 0.8 percentage points, as higher material, freight, logistics and personnel costs outweighed favorable product mix and higher average selling prices.
- Segment sales: Semiconductor Systems $18.797 billion (+15%); AGS $5.543 billion (+11%); Display and Adjacent Markets $1.331 billion (-19%). Semiconductor Systems operating margin declined to 37.1% from 38.8%; AGS was 30.0% versus 30.1%; Display rose to 19.5% from 19.2%.
- Cash and investments totaled $4.561 billion at year-end, down from $7.514 billion. Working capital was $8.5 billion. Operating cash flow was nearly flat year over year; inventories increased to $5.932 billion from $4.309 billion, and days sales outstanding rose to 82 from 74.
- Long-term debt was $5.457 billion; senior unsecured notes had $5.5 billion principal outstanding. The $1.5 billion revolving credit facility had no borrowings at year-end.
- Financing used $7.043 billion of cash, including $6.103 billion in share repurchases and $873 million in dividends. Capital expenditures were $787 million.
Material changes and unusual items
- Total backlog increased to $19.011 billion from $11.758 billion. Semiconductor Systems backlog rose to $12.691 billion; approximately 32% of total backlog was not reasonably expected to be filled within 12 months. Backlog may be delayed or cancelled and is not a forecast of future sales.
- China represented 28% of sales ($7.254 billion), down 4% year over year; Taiwan sales rose 32% to $6.262 billion. Three customers each represented at least 10% of annual sales: TSMC 20%, Samsung 12%, and Intel 10%.
- FY2021 included $157 million of severance charges and a $154 million deal termination fee. FY2022 reported results included a $4 million severance adjustment.
- GAAP diluted EPS was $7.44; management’s non-GAAP adjusted diluted EPS was $7.70. The filing’s reconciliation includes acquisition-related and integration costs and tax adjustments, among other items.
Outlook, management commentary and risks
- Management expected FY2023 memory spending to decline as some customers deferred capacity additions amid weakness in consumer electronics and PCs; advanced foundry and logic demand was expected to remain strong. Supply-chain shortages were expected to persist, with shipment execution a priority.
- Following U.S. export regulations announced in October 2022, Applied estimated up to $2.5 billion lower China sales and up to a 1 percentage-point reduction in overall gross margin in FY2023. December 2022 export rules were expected to reduce backlog not reasonably expected within 12 months by about $989 million and longer-term remaining performance obligations by about $944 million. The company was seeking additional licenses; the rules’ effects remained under assessment.
- Management believed operating cash generation, cash balances and borrowing capacity would meet liquidity needs for the next 12 months. It anticipated continuing quarterly dividends, subject to Board approval and business conditions.
- Key risks include semiconductor-equipment cyclicality, concentrated customers and regional exposure, export restrictions, supply-chain and logistics constraints, inflation and higher costs, technology transitions, and COVID-19-related disruption. In August 2022, the company received a U.S. Attorney’s Office subpoena seeking information about certain China customer shipments and said it was cooperating; the outcome could not be predicted.
- Potential tax changes include required capitalization and amortization of R&D costs beginning FY2023 if not deferred, and new U.S. minimum-tax and stock-repurchase excise-tax provisions. Applied was evaluating their effects.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified inventory excess and obsolescence estimates as a critical audit matter, citing judgment involved in forecasting demand and inventory consumption.
Important facts for investors to verify
- How export-license decisions and subsequent U.S. rules affect China sales, backlog, service obligations and FY2023 margins.
- Whether supply constraints ease and whether elevated inventory and receivables convert into shipments and cash without material write-downs.
- Whether expected memory weakness and strength in advanced foundry and logic spending match customer investment trends.
- Customer concentration and regional exposure, including the impact of changes in large customers’ spending or payment capacity.
- Cash and investment levels, substantial buybacks and dividends, and the company’s capacity to fund capital needs while servicing $5.5 billion of notes.
- Developments in the China-shipment subpoena, tax examinations and new tax-law impacts.