Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended April 26, 2020; comparable periods ended April 28, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
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. The company said semiconductor customers continued strategic technology investments despite COVID-19 disruptions; it also reported that the pandemic affected supply chains, manufacturing, logistics and customer-site work.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $3,957 | $3,539 | $8,119 | $7,292 |
| Gross margin | 44.2% | 43.2% | 44.4% | 43.8% |
| Operating income | $932 | $776 | $1,974 | $1,684 |
| Operating margin | 23.6% | 21.9% | 24.3% | 23.1% |
| Net income | $755 | $666 | $1,647 | $1,437 |
| Diluted EPS | $0.82 | $0.70 | $1.78 | $1.50 |
Financial position, cash flow and capital
- Cash and investments: $7.382 billion at April 26, 2020, versus $5.321 billion at October 27, 2019. Cash and cash equivalents were $5.281 billion; short- and long-term investments totaled $2.101 billion.
- Six-month cash flows: Operating cash flow was $1.622 billion (prior year $1.634 billion); investing cash flow was $3 million (prior year use of $195 million); financing cash flow was $642 million (prior-year use of $1.763 billion). Capital expenditures were $173 million.
- Debt: Total debt was $6.815 billion, including $1.5 billion drawn on a new revolving credit facility in March to preserve financial flexibility during market uncertainty. The company repaid the full revolver balance on May 13, 2020. Long-term senior notes had $4.8 billion aggregate principal outstanding.
- Liquidity: Working capital was $8.0 billion at April 26, compared with $5.8 billion at October 27, 2019. Management said cash from operations, existing cash and borrowing capacity should meet liquidity needs for the next 12 months.
- Shareholder returns: The company repurchased $399 million of shares and paid $385 million in dividends during the first half. It declared a $0.22-per-share quarterly dividend payable in June 2020 and anticipated quarterly dividends, subject to board approval and business conditions.
Material changes and segment performance
- Q2 sales rose 12% year over year and first-half sales rose 11%; higher semiconductor equipment spending was the primary driver. Gross and operating margins also improved, reflecting sales growth and favorable customer and product mix, partly offset by higher freight and personnel costs and COVID-related expenses.
- Semiconductor Systems: Sales increased 18% in Q2 and 21% in the first half; Q2 operating margin rose to 30.5% from 26.5%. Growth reflected foundry and logic investment and, in Q2, increased memory spending.
- AGS: Sales increased 3% in Q2 and 4% in the first half, but operating income declined in both periods. Management cited higher headcount, customer-site travel restrictions and underutilization, freight costs, and temporary COVID-related compensation.
- Display and Adjacent Markets: Q2 sales increased 5%, while first-half sales declined 18%. First-half operating income fell 28%, reflecting lower sales and unfavorable mix. Display demand remained weak overall, with uneven investment by product and quarter.
- Asia Pacific accounted for 87% of Q2 sales. For the first half, Taiwan Semiconductor Manufacturing Company represented 26% of total sales and Samsung Electronics 17%, underscoring geographic and customer concentration.
Outlook, risks and unusual items
- The filing provides no clear numerical companywide revenue or earnings guidance. Management reported strong semiconductor customer demand and initial supply-chain recovery, but emphasized that the pandemic’s duration, severity and economic effects remained uncertain.
- COVID-19 risks include supply-chain and transportation disruption, production delays, restricted customer-site access, workforce availability and productivity, higher costs, and possible weaker demand, delayed deliveries or cancelled orders. Management said its estimates and assumptions were subject to increased judgment and volatility.
- Trade and export controls were a material risk. The filing discussed new U.S. export rules affecting certain China-related sales and possible effects on demand from customers supplying Huawei and affiliates.
- The proposed $2.2 billion cash acquisition of Kokusai Electric remained subject to regulatory approvals and customary closing conditions. A committed term loan of up to $2.0 billion was available to help finance it; the filing notes a potential $154 million termination fee in specified circumstances involving failure to obtain required regulatory approvals.
- Other notable items: first-half other comprehensive loss included a $136 million after-tax loss on derivatives, largely associated with interest-rate hedges. The company also recorded $10 million of incremental COVID-related employee compensation expense in Q2. The CARES Act had no material effect on the income-tax provision.
- Management said existing legal matters were not expected to materially affect financial condition or results. Maximum potential payments under certain guarantees were approximately $146 million; the company did not consider payment probable.
Important facts for investors to verify
- Whether semiconductor demand and supply-chain recovery persisted, and how COVID-19 affected subsequent orders, deliveries, costs and customer-site service.
- Whether the Kokusai Electric transaction received regulatory approval, closed, or triggered financing or termination obligations.
- Post-quarter debt and liquidity position, including the May 13 repayment of the $1.5 billion revolver and any later borrowing.
- Whether growth and margin trends in Semiconductor Systems offset continued weakness or volatility in AGS and Display and Adjacent Markets.
- Customer and regional concentration, including Taiwan and China exposure, and the practical impact of export-license rules and trade restrictions.
- Inventory, receivables and working-capital quality: inventory was $3.725 billion, accounts receivable $2.625 billion, and days sales outstanding were 60 days versus 58 a year earlier.