Applied Materials, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 25, 2020 (52 weeks). The filing also reports fourth-quarter results. Applied Materials supplies equipment, services and software to semiconductor, display and related industries.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $17.202 billion | $14.608 billion | +18% |
| Gross profit / gross margin | $7.692 billion / 44.7% | $6.386 billion / 43.7% | Margin +1.0 point |
| Operating income / margin | $4.365 billion / 25.4% | $3.350 billion / 22.9% | Income +30%; margin +2.5 points |
| Net income | $3.619 billion | $2.706 billion | +34% |
| Diluted EPS | $3.92 | $2.86 | +$1.06 |
| Cash from operating activities | $3.804 billion | $3.247 billion | +$557 million |
Fourth quarter: Net sales were $4.688 billion, net income $1.131 billion and diluted EPS $1.23. Compared with the prior-year fourth quarter, sales rose from $3.754 billion and net income from $698 million.
Cash, debt and liquidity: Cash and cash equivalents were $5.351 billion; cash, cash equivalents and investments totaled $7.276 billion. Long-term debt was $5.448 billion, with no current portion reported. Working capital was $8.9 billion. Capital expenditures were $422 million; operating cash flow less capital expenditures was approximately $3.382 billion. The company reported $5.5 billion in debt principal and $12.507 billion in contractual obligations, including debt, interest, leases, tax obligations and purchase commitments.
Segments and changes versus prior year
- Semiconductor Systems: Sales rose 26% to $11.367 billion; operating income increased 51% to $3.714 billion. Growth reflected stronger foundry and logic investment, advanced-node spending and a recovery in memory investment.
- Applied Global Services: Sales rose 8% to $4.155 billion, while operating income increased 2% to $1.127 billion. Services, spares and comprehensive service agreements supported growth; margin declined 1.5 points to 27.1%.
- Display and Adjacent Markets: Sales declined 3% to $1.607 billion and operating income declined 1% to $291 million. Lower TV equipment investment was partly offset by mobile-product demand.
- Sales to China were $5.456 billion, or 32% of consolidated sales; Taiwan accounted for 23% and Korea 18%. Sales outside the United States were approximately 90% of the total.
- Backlog increased to $6.656 billion from $6.473 billion; approximately 16% was not expected to be filled within 12 months. The filing cautions that backlog can be delayed or canceled and is not necessarily indicative of future sales.
Outlook, risks and unusual items
- Management reported strong semiconductor customer demand and continued supply-chain recovery, but described the pandemic situation as fluid and uncertain. The filing provides no specific numerical financial guidance.
- COVID-19 disrupted supply chains, manufacturing, travel and customer-site work, and increased freight, personnel and other costs. Management said customer investments in semiconductor technology continued despite these challenges.
- U.S. export-control changes and licensing requirements for certain sales to China create uncertainty for customer demand and market access. Customer and geographic concentration, industry cyclicality, competition, supplier constraints and technology transitions are other key risks.
- The proposed $2.2 billion acquisition of Kokusai Electric remained subject to regulatory approvals and other closing conditions. The parties had extended the outside date to December 30, 2020; a $2.0 billion term-loan commitment was available to help finance the transaction. The filing notes a possible $154 million termination fee in specified circumstances.
- FY2020 included a $33 million loss on early extinguishment of debt. The company issued $1.5 billion of new notes and redeemed $1.35 billion of notes due in 2020 and 2021. The lower effective tax rate, 13.1% versus 17.2%, reflected tax benefits and changes in uncertain tax positions, partly offset by an unfavorable settlement.
- Applied repurchased $649 million of shares and paid $787 million in dividends. The board’s repurchase authorization had $1.3 billion remaining. Management anticipated quarterly dividends but said future declarations remained at the board’s discretion.
- Auditors issued unqualified opinions on the financial statements and internal control. Inventory valuation was identified as a critical audit matter; inventory carrying value was $3.904 billion, up from $3.474 billion.
Important facts for investors to verify
- Whether semiconductor equipment spending and service demand remain strong, and whether FY2020 margin gains persist.
- How export restrictions, customer concentration and spending in China, Taiwan and Korea affect sales and backlog conversion.
- Whether supply-chain, freight and pandemic-related costs improve, and whether inventory growth results in excess or obsolete inventory charges.
- The status, regulatory outcome, financing and terms of the proposed Kokusai Electric acquisition.
- Debt repayment and refinancing needs, tax-payment timing, and the sustainability of dividends and share repurchases.