Applied Materials, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended October 27, 2019 (52 weeks). This is an annual report, not a standalone quarterly filing; the filing also reports fourth-quarter results. Applied Materials supplies equipment, services and software to semiconductor, display and related industries through Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $14.608 billion | $16.705 billion | -13% |
| Gross profit / margin | $6.386 billion / 43.7% | $7.517 billion / 45.0% | Margin down 1.3 points |
| Operating income / margin | $3.350 billion / 22.9% | $4.491 billion / 26.9% | Income down 25%; margin down 4.0 points |
| Net income | $2.706 billion | $3.038 billion | -11% |
| Diluted EPS | $2.86 | $2.96 | -$0.10 |
| Operating cash flow | $3.247 billion | $3.787 billion | Down $540 million |
- Fourth-quarter FY2019 sales were $3.754 billion, net income $698 million, and diluted EPS $0.75, versus $3.759 billion, $757 million, and $0.77, respectively, in Q4 FY2018.
- Revenue by segment: Semiconductor Systems $9.027 billion (-15%); AGS $3.854 billion (+3%); Display and Adjacent Markets $1.651 billion (-28%). Semiconductor Systems operating margin fell to 27.3% from 32.5%; AGS margin was 28.6% versus 29.4%; Display margin fell to 17.8% from 25.0%.
- Cash, cash equivalents and investments totaled $5.321 billion at year-end, versus $5.598 billion. Working capital was $5.8 billion, down from $6.7 billion.
- Debt carrying value was $5.313 billion, including $600 million current and $4.713 billion long-term. The company also reported $5.35 billion aggregate principal of senior notes. No borrowings were outstanding under its revolving or acquisition term-loan facilities.
- Capital expenditures were $441 million. Financing activities used $3.115 billion, including $2.403 billion of share repurchases and $771 million of dividends. The board’s $6 billion repurchase authorization had $1.9 billion remaining.
- Backlog was $6.473 billion, up from $6.092 billion; approximately 12% was not expected to be filled within 12 months. The company cautions that backlog may change through delays or cancellations and is not necessarily indicative of future sales.
Changes, outlook and risks
- Lower memory-customer spending—amid excess supply and inventory, delayed capacity additions and reduced fab utilization—drove much of the semiconductor equipment decline. Foundry and logic spending increased. Display equipment demand weakened for mobile products and TVs. AGS grew modestly, supported by service agreements and legacy systems, while semiconductor spares demand softened.
- Gross margin declined primarily because of lower sales and unfavorable customer and product mix. Management continued significant R&D investment, which rose to $2.054 billion from $2.022 billion.
- Management said cash from operations, existing cash and borrowing capacity should cover liquidity needs for the next 12 months. The filing provides no specific forward revenue or earnings guidance. It anticipates quarterly dividends but notes future declarations remain at the board’s discretion.
- Applied agreed to acquire Kokusai Electric for $2.2 billion in cash, subject to regulatory approvals and other closing conditions. A $2.0 billion term-loan commitment was arranged to help fund the transaction; certain termination circumstances could trigger a $154 million fee.
- Tax items materially affect comparability: FY2018 included approximately $1.1 billion of Tax Act expense. FY2019’s effective tax rate was 17.2%, versus 30.9%; FY2019 also included a $96 million reversal of a previously recognized tax benefit and $87 million of expense related to uncertain tax positions. Adoption of intra-entity transfer tax guidance recorded a $1.6 billion deferred tax asset.
- Key risks include cyclical and unpredictable customer capital spending, concentrated customers and geographic exposure, U.S.–China and other trade restrictions and export licensing, supply-chain constraints, rapid technology change, and acquisition approval/integration risks. Approximately 87% of sales were outside the United States; Asia Pacific represented 81% of sales.
- Other items to monitor: inventory was $3.474 billion, and inventory valuation was identified as a critical audit matter because estimates depend on forecast demand. The auditor also identified valuation of intangible assets underlying the deferred tax asset as a critical audit matter. The auditor gave unqualified opinions on the financial statements and internal controls; management reported effective controls.
Investor verification priorities
- Assess whether memory spending, fab utilization and customer investment recovered, and whether the revenue and margin declines persisted.
- Verify Kokusai Electric’s regulatory status, final purchase price, financing and any changes to expected benefits or transaction terms.
- Review backlog conversion, cancellations or shipment timing, especially given the portion not expected to ship within 12 months.
- Examine cash-flow quality, receivables and inventory trends, including the effects of receivables sales and customer payment timing.
- Track debt maturities, tax installments and uncertain tax positions, and the sustainability of buybacks and dividends relative to operating cash generation.