Applied Materials, Inc. — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended January 31, 2021. The quarter contained 14 weeks, compared with 13 weeks in the prior-year quarter ended January 26, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $5,162 | $4,162 | +24% |
| Gross margin | 45.5% | 44.6% | +0.9 points |
| Operating income / margin | $1,283 / 24.9% | $1,042 / 25.0% | Income +23%; margin -0.1 points |
| Net income | $1,130 | $892 | +27% |
| Diluted EPS | $1.22 | $0.96 | +$0.26 |
| Cash from operations | $1,421 | $987 | +$434 |
Non-GAAP adjusted diluted EPS was $1.39, versus $0.98. Non-GAAP adjusted operating margin was 29.0%, versus 25.7%; these measures exclude specified items, including severance, acquisition-related costs and certain COVID-19 expenses.
Segments and business drivers
- Semiconductor Systems: Sales of $3,553 million, up 26%; operating income of $1,261 million, up 38%; operating margin 35.5%, versus 32.5%. Management cited increased foundry, logic and memory investment.
- Applied Global Services: Sales of $1,155 million, up 16%; operating income of $332 million, up 19%; margin 28.7%, versus 27.9%. Growth reflected service agreements and spares, as well as the additional fiscal-week effect.
- Display and Adjacent Markets: Sales of $411 million, up 24%; operating income of $65 million, up 71%; margin 15.8%, versus 11.4%. Increased mobile-display equipment investment was partly offset by lower TV-related investment.
Approximately 88% of sales were to Asia Pacific customers. Samsung represented 20% and Taiwan Semiconductor Manufacturing Company 18% of consolidated sales.
Cash, liquidity and debt
- Cash and cash equivalents were $6.213 billion; short- and long-term investments totaled $2.011 billion. Combined cash and investments were $8.224 billion, up from $7.276 billion at October 25, 2020.
- Operating cash flow was $1.421 billion; investing cash outflow was $216 million, including $121 million of capital expenditures; financing cash outflow was $343 million, mainly dividends and equity-award tax withholding.
- Working capital was $9.8 billion. Long-term debt was $5.449 billion, with $5.5 billion aggregate principal outstanding. No amounts were drawn on the $1.5 billion revolving facility, the acquisition-related term loan commitment, or the commercial paper program.
- Quarterly dividends paid were $201 million. The board had declared a $0.22-per-share dividend payable in March 2021. No shares were repurchased in the quarter.
- Management stated that operating cash generation, existing cash and borrowing capacity should cover liquidity needs for the next 12 months.
Material developments, outlook and risks
- Q1 included $152 million of severance and related charges from a workforce realignment and voluntary retirement program; $147 million remained accrued at quarter-end. The lower GAAP operating margin, despite higher sales and gross margin, reflects this and other expense growth.
- The proposed Kokusai Electric acquisition’s base price was amended from $2.2 billion to $3.5 billion. The outside date was extended to March 19, 2021; the transaction remained subject to regulatory and other closing conditions. Certain termination circumstances could require a $154 million fee. The related $2.0 billion term-loan commitment was extended through April 30, 2021.
- Management reported strong semiconductor customer demand and continued supply-chain recovery, but emphasized that the pandemic’s effects remained fluid and uncertain. The filing text does not provide a clear quantitative revenue or EPS forecast for the next quarter.
- Principal risks include COVID-19-related supply, manufacturing and logistics disruption; U.S.-China trade restrictions and export-license requirements; cyclical and concentrated customer demand; geographic concentration; and execution and approval risks for the Kokusai acquisition. China-related rules could limit sales to certain customers.
- Other exposures include $857 million of remaining Tax Act transition-tax payments over six years and guarantees with a maximum potential payment of approximately $356 million. Management did not consider payment under those guarantees probable. Ordinary-course legal matters were not expected by management to have a material effect.
Important facts for investors to verify
- Whether Kokusai Electric received required approvals, closed by the extended deadline, and was financed on the expected terms.
- How much of sales growth and cash generation reflects the extra week, receivables factoring, customer advances and contract-liability movements.
- Whether semiconductor demand, regional/customer concentration and export-control developments support continued growth without weakening margins.
- The recurring cost and cash effects of the severance plan, and whether reported GAAP margins converge with adjusted results.
- Whether pandemic-related supply-chain and operating risks, transition-tax payments and other commitments alter management’s stated liquidity outlook.