Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2021, ended May 2, 2021. Comparisons are with the three and six months ended April 26, 2020. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended May 2, 2021 | Prior-year quarter | Six months ended May 2, 2021 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $5.582 billion | $3.957 billion | $10.744 billion | $8.119 billion |
| Gross margin | 47.5% | 44.2% | 46.6% | 44.4% |
| Operating income | $1.579 billion | $932 million | $2.862 billion | $1.974 billion |
| Operating margin | 28.3% | 23.6% | 26.6% | 24.3% |
| Net income | $1.330 billion | $755 million | $2.460 billion | $1.647 billion |
| Diluted EPS | $1.43 | $0.82 | $2.66 | $1.78 |
- Quarterly sales increased 41%; operating income rose 69%, net income 76%, and diluted EPS 74%. For the first six months, sales increased 32% and diluted EPS 49%. Fiscal 2021’s first half had 27 weeks versus 26 weeks in the prior-year period.
- Management attributed sales growth primarily to higher semiconductor equipment investment. Gross-margin improvement reflected higher sales and favorable customer and product mix, partly offset by increased freight and personnel costs.
- First-half operating cash flow was $2.608 billion, versus $1.622 billion. Capital expenditures were $325 million, versus $173 million. Cash used in investing activities was $435 million; cash used in financing activities was $1.226 billion.
- Cash and cash equivalents were $6.305 billion; short- and long-term investments totaled $2.029 billion. Total cash, cash equivalents and investments were $8.334 billion, compared with $7.276 billion at October 25, 2020. Working capital was $10.1 billion.
- Long-term debt was $5.450 billion; aggregate principal of senior unsecured notes was $5.5 billion. No amounts were outstanding under the revolving credit facilities or commercial-paper program. The company reported compliance with revolving-credit covenants.
- During the first half, the company repurchased $750 million of shares and paid $403 million in dividends. It authorized a new $7.5 billion repurchase program; approximately $8.0 billion remained available under its programs at quarter-end.
Segments and material changes
- Semiconductor Systems: Quarterly sales were $3.972 billion, up 55%; operating income was $1.542 billion, up 97%. Growth reflected investment in advanced nodes, specialty devices and memory. Quarterly segment operating margin rose to 38.8% from 30.5%.
- Applied Global Services: Quarterly sales were $1.203 billion, up 18%; operating income was $358 million, up 40%. Management cited higher spending on service agreements and spares. Segment margin rose to 29.8% from 25.1%.
- Display and Adjacent Markets: Quarterly sales were $375 million, up 3%; operating income fell to $65 million from $75 million, and margin declined to 17.3% from 20.5%, primarily due to unfavorable product mix. First-half sales were up 13%.
- Asia Pacific generated 87% of quarterly sales. China represented 33% and Korea 25%. Samsung Electronics and Taiwan Semiconductor Manufacturing Company together accounted for 40% of first-half sales. The filing also reports significant customer concentration within Semiconductor Systems and Display and Adjacent Markets.
Outlook, commentary and risks
- Management reported strong semiconductor-customer demand, continued strategic investment in technology transitions, growth in services, and recovery in the supply chain. It described the pandemic situation as fluid and uncertain. The filing text does not provide a clear quantified financial forecast or formal guidance for future periods.
- The Kokusai Electric acquisition agreement terminated on March 19, 2021, and Applied paid a $154 million termination fee in the quarter. The fee reduced GAAP operating income; the company excluded it in its disclosed non-GAAP adjusted results.
- The company recorded $158 million of first-half severance and related charges under a workforce realignment plan, including a voluntary retirement program and reductions in Display and Adjacent Markets. $36 million remained outstanding at quarter-end.
- Key risks include COVID-19-related disruption to supply chains, manufacturing and logistics; semiconductor-industry cyclicality; concentrated customers and geographic exposure; U.S.-China trade restrictions and export-license requirements; competition and rapid technology change; and potential inventory, warranty, tax, debt and cybersecurity risks.
- Management stated that cash generated from operations, cash balances and borrowing capacity should be sufficient for liquidity requirements over the next 12 months. The company had $775 million of remaining transition-tax payments due over the next five years. It disclosed guarantee arrangements with maximum potential payments of $346 million and parent guarantees of approximately $146 million; management did not consider payment under the arrangements probable.
- Management said it expects quarterly dividends to continue, subject to Board approval and the company’s financial and business circumstances. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether demand and customer spending, particularly in semiconductor equipment, remain strong and translate into sustained revenue and margin growth.
- How supply-chain constraints, freight costs, hiring and capacity expansion affect delivery, costs and margins.
- The extent of exposure to China and other Asian markets, export controls, and major customers; confirm customer concentration and any changes in orders.
- The ongoing cash impact of the $154 million Kokusai termination fee, severance plan, share repurchases, dividends and debt obligations.
- Whether the stated 12-month liquidity assessment remains supported by operating cash flow, working-capital needs and available borrowing capacity.
- How non-GAAP adjusted results compare with GAAP results, including the excluded termination fee and severance charges.