Applied Materials, Inc. — Fiscal 2018 Second-Quarter Form 10-Q
Reporting period: Three and six months ended April 29, 2018; comparisons are with the periods ended April 30, 2017. Fiscal 2018 first-half figures cover 26 weeks. Amounts are in U.S. dollars.
Business context and results
Applied Materials supplies semiconductor and display manufacturing equipment, services, and software. Its three reportable segments are Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets. Management attributed first-half growth to healthy semiconductor equipment and services investment, including strong logic and NAND demand and increased DRAM demand, as well as customer investment in display equipment.
| Metric | Q2 FY2018 | Q2 FY2017 | First half FY2018 | First half FY2017 |
|---|---|---|---|---|
| Net sales | $4.567 billion | $3.546 billion | $8.771 billion | $6.824 billion |
| Gross margin | 45.8% | 45.1% | 45.7% | 44.6% |
| Operating income | $1.327 billion | $940 million | $2.523 billion | $1.747 billion |
| Operating margin | 29.1% | 26.5% | 28.8% | 25.6% |
| Net income | $1.129 billion | $824 million | $1.264 billion | $1.527 billion |
| Diluted EPS | $1.09 | $0.76 | $1.20 | $1.40 |
Key financial metrics and changes
- Revenue and margins: Sales rose 29% year over year in both Q2 and the first half. Gross margin increased 0.7 and 1.1 percentage points, respectively; management cited higher sales, favorable product mix, and materials cost savings.
- Segment performance: Q2 sales increased 25% in Semiconductor Systems to $2.999 billion, 30% in AGS to $943 million, and 53% in Display and Adjacent Markets to $600 million. First-half sales growth was 28%, 30%, and 30%, respectively. Segment operating income increased across all three businesses.
- Cash flow: First-half operating cash flow was $2.077 billion, versus $1.703 billion. Investing activities provided $1.374 billion, including net investment sales and maturities; capital expenditures were $324 million. Financing activities used $3.591 billion, primarily for $3.282 billion of share repurchases and $211 million of dividends. Cash and cash equivalents declined to $4.870 billion from $5.010 billion at fiscal year-end.
- Liquidity: Cash, cash equivalents, and investments totaled $6.566 billion, down from $8.419 billion at October 29, 2017. Working capital was $7.3 billion, compared with $8.8 billion at fiscal year-end. Management said operating cash generation, existing liquidity, and borrowing capacity should be sufficient for the next 12 months.
- Debt: Long-term debt was $5.306 billion, substantially unchanged from fiscal year-end; principal amount outstanding was $5.350 billion. No commercial paper or credit-facility borrowings were outstanding. The company reported $1.6 billion of available credit facilities, including a $1.5 billion revolving facility.
- Capital returns: The company repurchased 59 million shares for $3.282 billion in the first half and had $6.3 billion remaining under repurchase authorizations. The quarterly dividend was increased to $0.20 per share in February 2018.
Tax, outlook, and risks
- Unusual tax item: The Tax Cuts and Jobs Act produced a provisional first-half tax charge of approximately $1.1 billion, primarily from the transition tax on certain foreign earnings and remeasurement of U.S. deferred tax assets. This drove the first-half effective tax rate to 48.6%, versus 9.1% a year earlier, and reduced first-half diluted EPS by $1.02. The Q2 tax-related EPS reduction was $0.07. Tax accounting remained provisional and subject to revision. On a non-GAAP basis, first-half adjusted diluted EPS was $2.28, versus $1.46; Q2 adjusted diluted EPS was $1.22, versus $0.79.
- Management commentary: Management described semiconductor and display equipment demand as healthy during the first half and said it intended to maintain substantial R&D investment. The filing provides no specific forward-quarter revenue or EPS guidance.
- Risks: Results are exposed to cyclical and volatile semiconductor and display spending, changing technology requirements, customer concentration, and geographic concentration. Samsung, TSMC, and Intel each represented at least 10% of first-half sales; together they represented 42%. Approximately 91% of Q2 sales were to customers outside the United States. Other disclosed risks include trade restrictions and tariffs, supply-chain interruptions, competition, customer order changes, cybersecurity, and tax-law uncertainty.
- Contingencies: The company reported ordinary-course legal matters and claims but did not expect them to materially affect consolidated financial condition or results. Potential payments under standby letters of credit and similar guarantees were approximately $64 million; parent guarantees for subsidiary banking arrangements were approximately $150 million.
Important facts for investors to verify
- How provisional Tax Act estimates, including the transition-tax liability, may change as the measurement period and tax-authority guidance progress.
- Whether strong semiconductor and display investment persists, particularly given industry cyclicality, customer concentration, and regional exposure.
- Whether inventory growth—to $3.494 billion from $2.930 billion—and working-capital movements translate into sustained cash generation.
- The pace and funding of share repurchases and dividends relative to cash balances, debt, and operating needs.
- Whether customer and product mix, rising R&D spending, and the transition to new technologies support margins without increasing execution or supply-chain risks.