Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2022, ended July 31, 2022; comparisons are with the quarter ended August 1, 2021. Year-to-date figures cover nine months. Fiscal 2022’s first nine months comprised 39 weeks versus 40 weeks in fiscal 2021.
Financial results
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $6.520B | $6.196B | $19.036B | $16.940B |
| Gross margin | 46.1% | 47.9% | 46.7% | 47.0% |
| Operating income | $1.924B | $2.013B | $5.794B | $4.875B |
| Operating margin | 29.5% | 32.5% | 30.4% | 28.8% |
| Net income | $1.606B | $1.716B | $4.934B | $4.176B |
| Diluted EPS | $1.85 | $1.87 | $5.59 | $4.52 |
- Cash flow: Nine-month operating cash flow was $4.542B, compared with $4.294B. Investing activities used $1.167B, including $564M of capital expenditures and $441M net cash paid for acquisitions. Financing activities used $5.416B.
- Liquidity and debt: At July 31, cash and cash equivalents were $2.956B; short- and long-term investments were $2.639B; combined cash, cash equivalents and investments totaled $5.595B, down from $7.514B at October 31, 2021. Long-term debt was $5.456B, representing $5.5B principal of senior notes. No amounts were drawn on credit facilities or commercial paper. Working capital was $8.6B, versus $9.8B at October 31, 2021.
- Working capital: Inventory rose to $5.506B from $4.309B. Contract liabilities increased to $2.828B from $2.076B. Days sales outstanding were 69, versus 56 a year earlier.
- Capital returns: The company repurchased $4.603B of stock and paid $650M in dividends in the first nine months. Approximately $6.4B remained authorized for repurchases at quarter-end.
Material changes and business performance
- Third-quarter sales increased 5% year over year, but operating income fell 4%, net income fell 6%, and diluted EPS declined 1%. Gross margin contracted 1.8 percentage points. For the nine months, sales rose 12%, operating income 19%, net income 18%, and diluted EPS 24%.
- Management attributed lower margins mainly to higher materials, freight and logistics costs and increased personnel costs; higher sales and favorable product mix partly offset these pressures. Third-quarter interest and other income turned to a $7M loss from $24M of income, largely reflecting investment losses.
- Semiconductor Systems: Q3 sales were $4.734B, up 6%; operating income was $1.701B, down 5%. Nine-month sales grew 15% to $13.759B. Higher costs weighed on segment margins.
- Applied Global Services: Q3 sales were $1.420B, up 10%, and operating income was $434M, up 10%, reflecting stronger service-agreement, spares and legacy-system demand.
- Display and Adjacent Markets: Q3 sales fell 23% to $333M and operating income fell 30% to $69M, primarily due to weaker investment in TV display manufacturing equipment.
- China accounted for 27% of Q3 sales; Taiwan 24%; Korea 19%. Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Intel represented 18%, 12% and 11% of nine-month sales, respectively.
Outlook, risks and unusual items
- Management said semiconductor demand remained strong and expected supply shortages to persist during fiscal 2022. Increasing shipments despite supply-chain and logistics constraints was identified as a priority. The filing provides no specific numerical forward guidance.
- COVID-19 restrictions and lockdowns, component shortages, transportation constraints and higher input costs had affected the company’s ability to meet demand and could continue to do so. Management said operating cash flow, cash balances and borrowing capacity should be sufficient for liquidity needs over the next 12 months.
- Other significant risks include semiconductor industry cyclicality, concentrated customers and geographic exposure, global economic uncertainty, and export controls and licensing requirements affecting sales to China. The company noted that obtaining export licenses may be difficult, costly or time-consuming.
- Potential tax changes include R&D expense capitalization and amortization beginning in fiscal 2023 absent legislative change, the CHIPS Act investment credit for qualifying property, and Inflation Reduction Act provisions that could affect the company from fiscal 2023 or 2024. The company was evaluating the effects. The new 1% stock-repurchase excise tax is effective January 1, 2023.
- Guarantees had a maximum potential payment exposure of approximately $534M; management did not believe payment was probable. Parent guarantees for subsidiary banking arrangements totaled approximately $297M. Management stated that pending legal matters were not expected to materially affect financial condition or results, while acknowledging outcomes cannot be predicted with certainty.
- Unusual year-to-date comparisons include a $154M deal termination fee and $158M of severance expense in the prior-year period; fiscal 2022 included a $4M severance adjustment. These items affect comparison of reported operating results.
Most important facts for investors to verify
- Whether supply-chain constraints ease or continue to limit shipments, and how costs affect gross and operating margins.
- Whether higher inventory and days sales outstanding convert into shipments and cash collections without excess or obsolete inventory charges.
- How export restrictions, customer concentration and regional demand—especially in China, Taiwan and Korea—affect sales.
- The effect of new tax provisions on cash flow, effective tax rate and planned share repurchases.
- Whether cash generation can sustain dividends and buybacks while funding capital expenditures, acquisitions and debt obligations.