Applied Materials, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the 13 weeks ended January 26, 2020. Comparisons are with the 13 weeks ended January 27, 2019. Amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2020 | Prior year | Change |
|---|---|---|---|
| Net sales | $4,162 | $3,753 | Up 11% |
| Gross profit / margin | $1,858 / 44.6% | $1,665 / 44.4% | Margin up 0.2 points |
| Operating income / margin | $1,042 / 25.0% | $908 / 24.2% | Margin up 0.8 points |
| Net income | $892 | $771 | Up $121 |
| Diluted EPS | $0.96 | $0.80 | Up $0.16 |
| Operating cash flow | $987 | $834 | Up $153 |
- Cash and cash equivalents were $3,424 at quarter-end; short- and long-term investments totaled $2,249, for cash, cash equivalents and investments of $5,673.
- Working capital was $6.2 billion, versus $5.8 billion at October 27, 2019. Current assets were $10,769 and current liabilities were $4,569.
- Total debt was $5,314, including $600 current and $4,714 long-term. No amounts were drawn on the disclosed revolving, term-loan or commercial-paper facilities.
- Investing activities used $162, including $102 of capital expenditures. Financing activities used $530, mainly for $200 of share repurchases, $192 of dividends paid and $153 of tax withholding on vested equity awards.
- The quarterly dividend declared was $0.21 per share. Approximately $1.7 billion remained under the stock repurchase authorization.
Business context and material changes
Applied supplies manufacturing equipment, services and software to semiconductor, display and related industries. Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets are its reportable segments.
| Segment | Sales | Year-over-year change | Operating income |
|---|---|---|---|
| Semiconductor Systems | $2,814 | Up 24% | $915, up 45% |
| Applied Global Services | $997 | Up 4% | $278, down 2% |
| Display and Adjacent Markets | $332 | Down 35% | $38, down 67% |
- Growth was led by semiconductor equipment demand, particularly foundry and logic investments. Semiconductor Systems operating margin rose to 32.5% from 27.8%.
- Memory customers spent less, delaying capacity additions and reducing fab utilization amid excess supply and inventory. Foundry, logic and other applications rose to 68% of Semiconductor Systems sales, from 44%.
- AGS revenue grew modestly with service agreements and legacy systems, while higher headcount to support growth weighed on segment operating income and margin.
- Display equipment demand remained weak, especially for mobile products and TVs, reducing segment revenue and margins.
- Geographically, Asia Pacific accounted for 86% of sales. Taiwan represented 33% and China 31% of total sales. TSMC accounted for 29% and Samsung Electronics 14% of total sales.
Outlook, risks and unusual items
- Management said the COVID-19 outbreak in China had affected and could further affect operations, customers and suppliers through quarantines, closures, and travel and logistics restrictions. Based on facts then available, management did not expect a material effect on fiscal 2020 financial results, but expected revenue timing within the year to change; the situation was described as fluid. This is a dated assessment, not a later update.
- The filing gives no clear numerical guidance for the next quarter or full fiscal year. Management said results can vary materially with cyclical customer spending, technology transitions, and semiconductor and display demand.
- 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 describes a potential $154 million termination fee under certain circumstances involving failure to obtain regulatory approvals.
- Management cited customer and geographic concentration, industry cyclicality, trade restrictions and export licensing, supply-chain interruptions, and the COVID-19 outbreak among material risks. Tax and regulatory developments and the ability to complete and integrate acquisitions are also risks.
- Applied reported $938 million of remaining U.S. transition-tax payments, payable over the next seven years, and said it expected operating cash, existing liquidity and borrowing capacity to meet requirements for the next 12 months.
- Potential future obligations include up to $105 million under standby letters of credit and other guarantees; management did not consider payment probable. The company said ordinary-course legal matters were not expected to materially affect financial condition or results.
- Q1 adoption of lease accounting resulted in recognition of $160 million in right-of-use assets, net of deferred rent, and $164 million in lease liabilities. The filing also reported acquisition-related costs and higher share-based compensation expense.
Important facts for investors to verify
- Whether COVID-19, trade restrictions or other supply-chain disruptions changed the company’s dated fiscal 2020 outlook or customer delivery schedules.
- Whether the proposed Kokusai Electric acquisition received approvals, closed on the disclosed terms, and required use of the committed financing.
- Whether foundry and logic strength persisted and memory and display spending recovered, given the quarter’s contrasting segment trends.
- Whether customer and geographic concentration, especially exposure to Taiwan and China, affected subsequent orders, revenue or collections.
- Whether cash generation, investment balances, debt maturities and shareholder returns remained consistent with management’s liquidity assessment.