Applied Materials, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended August 1, 2021; comparatives are the three and nine months ended July 26, 2020. Fiscal 2021’s first nine months contained 40 weeks versus 39 weeks in the prior year. Amounts are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $6.196 billion | $4.395 billion | $16.940 billion | $12.514 billion |
| Gross margin | 47.9% | 44.5% | 47.0% | 44.4% |
| Operating income | $2.013 billion | $1.108 billion | $4.875 billion | $3.082 billion |
| Operating margin | 32.5% | 25.2% | 28.8% | 24.6% |
| Net income | $1.716 billion | $841 million | $4.176 billion | $2.488 billion |
| Diluted EPS | $1.87 | $0.91 | $4.52 | $2.69 |
- Growth and margins: Q3 sales increased 41%; nine-month sales rose 35%. Management attributed growth primarily to stronger semiconductor equipment investment. Higher sales and favorable customer and product mix lifted gross margins; higher freight and personnel costs were offsets.
- Segments, Q3: Semiconductor Systems revenue was $4.454 billion (+53%) and operating income $1.785 billion; Applied Global Services revenue was $1.286 billion (+24%) and operating income $393 million; Display and Adjacent Markets revenue was $431 million (+1%) and operating income $99 million.
- Cash flow, nine months: Operating cash flow was $4.294 billion versus $2.489 billion. Investing activities used $629 million, including $462 million of capital expenditures; financing activities used $2.957 billion.
- Liquidity and debt: Cash and cash equivalents were $6.066 billion; short- and long-term investments totaled $2.102 billion. Working capital was $10.1 billion. Long-term debt carrying value was $5.451 billion, with $5.5 billion principal outstanding. No amounts were drawn on revolving credit facilities or commercial paper. Management stated available cash, operating cash generation and borrowing capacity should meet liquidity needs for the next 12 months.
- Capital returns: The company repurchased $2.250 billion of shares and paid $622 million of dividends in the first nine months. Approximately $6.5 billion remained authorized for repurchases as of August 1, 2021. Management anticipated continuing quarterly dividends, subject to Board approval and other factors.
Material changes and unusual items
- Q3 operating income increased $905 million year over year; the nine-month increase was $1.793 billion. Net income and diluted EPS also rose substantially.
- Nine-month results included $158 million in severance and related charges and a $154 million Kokusai Electric deal termination fee. The acquisition agreement terminated in March 2021. Neither charge was recorded in Q3.
- Cash used for share repurchases rose to $2.250 billion from $599 million in the prior-year nine-month period. Accounts receivable increased to $3.822 billion from $2.963 billion at fiscal 2020 year-end, and inventories rose to $4.117 billion from $3.904 billion.
- The effective tax rate was 13.3% for Q3 and 12.4% for the nine-month period, down from 19.1% and 14.9%, respectively, largely reflecting prior-year tax items and a current-year severance-related tax benefit.
Outlook, management commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management described continued customer investment in advanced and mature foundry/logic nodes, memory technologies, services and display equipment, while cautioning that results can vary significantly with industry conditions and investment timing.
- COVID-19 remained a source of uncertainty, with potential effects on supply chains, manufacturing, logistics, staffing, customer demand and costs. Management also cited higher freight costs and expanded headcount to support capacity and flexibility.
- Trade and export-control restrictions, particularly requirements affecting sales to certain China-based entities, could constrain sales. The business is highly international: 87% of nine-month sales were in Asia Pacific, and China represented 32% of sales.
- Customer concentration is material: Samsung Electronics accounted for 23% and Taiwan Semiconductor Manufacturing Company 16% of nine-month sales. The filing also notes concentrated customers in the Display and Adjacent Markets segment.
- Other disclosed exposures include cyclical semiconductor and display spending, supply constraints and inventory obsolescence, technology transitions and competition, foreign exchange and interest-rate risks, cybersecurity, tax uncertainty, and legal and regulatory matters. The company reported that ordinary-course legal matters were not expected to have a material effect; maximum potential payments under guarantee agreements were approximately $338 million, with no payment considered probable.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether semiconductor customer investment and margin improvements persist, particularly given elevated customer, geographic and product concentration.
- How supply-chain constraints, freight and personnel costs affect deliveries, working capital and gross margins.
- The effect of U.S. export-license rules and other trade restrictions on China-related sales and customer demand.
- Cash conversion and working-capital trends, including receivables, inventory and the company’s sale of $980 million of receivables during the nine-month period.
- Capital allocation: the pace of repurchases and dividends relative to operating cash flow, debt obligations and business investment needs.
- The final costs and effects of the Kokusai termination, severance plan, and remaining $775 million of Tax Act transition-tax payments due over the next five years.