APPLIED MATERIALS INC annual report, FY2018

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Applied Materials, Inc. — FY2018 Form 10-K

Reporting period: Fiscal year ended October 28, 2018 (52 weeks). The filing is an annual report, not a standalone Q4 filing; quarterly figures below are for the fourth fiscal quarter. Applied Materials supplies equipment, services and software to semiconductor, display and related manufacturers through Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets.

Financial performance and liquidity

  • FY2018 revenue: $17.253 billion, up 19% from $14.537 billion. Gross profit was $7.817 billion; gross margin was 45.3%, up 0.4 percentage points.
  • Profit: Operating income was $4.796 billion, up 24%, with a 27.8% operating margin. Net income was $3.313 billion, down from $3.434 billion; diluted EPS was $3.23 versus $3.17. Adjusted diluted EPS was $4.45.
  • Tax item: The Tax Cuts and Jobs Act resulted in approximately $1.1 billion of tax expense, reducing diluted EPS by $1.08. The reported effective tax rate rose to 29.4% from 8.0% in FY2017.
  • Cash flow: Operating cash flow was $3.787 billion, essentially flat year over year. Capital expenditures were $622 million, versus $345 million. Cash and investments totaled $5.598 billion at year-end, down from $8.419 billion.
  • Liquidity and debt: Working capital was $6.7 billion. Long-term debt was $5.309 billion on the balance sheet; principal notes outstanding totaled $5.35 billion. A $1.5 billion committed revolving facility had no borrowings outstanding, and management said available cash, operating cash flow and borrowing capacity should meet needs for the next 12 months.
  • Capital returns: The company repurchased $5.283 billion of shares and paid $605 million in dividends during FY2018. Dividends declared totaled $0.70 per share. At year-end, $4.3 billion remained under the then-current repurchase authorization.
  • Q4 FY2018: Revenue was $4.014 billion versus $3.969 billion in Q4 FY2017; net income was $876 million versus $982 million, and diluted EPS was $0.89 versus $0.91.

Segments and changes versus FY2017

  • Semiconductor Systems: Revenue of $10.903 billion, up 15%; operating income of $3.634 billion, up 15%; operating margin held at 33.3%. Memory and logic investment supported growth, while foundry spending declined. Memory represented a larger share of segment sales, while foundry’s share fell.
  • AGS: Revenue of $3.754 billion, up 24%; operating income of $1.102 billion, up 35%; margin increased to 29.4% from 27.1%. Growth was driven primarily by spares and services.
  • Display and Adjacent Markets: Revenue of $2.498 billion, up 31%; operating income of $679 million, up 35%; margin increased to 27.2% from 26.4%. Higher investment in TV display equipment was a key driver.
  • Demand mix and geography: Sales to China rose 86% to $5.113 billion, or 30% of total revenue; Korea and Taiwan sales declined 11% and 17%, respectively. Approximately 91% of revenue came from outside the United States. Samsung represented 13% of total sales and TSMC and Intel each represented 11%.
  • Backlog: Reported backlog was $6.092 billion versus $6.031 billion. The comparison is affected by a changed definition: FY2018 backlog no longer had the prior 12-month threshold; about 15% was not reasonably expected to be filled within 12 months. Backlog may be delayed or canceled.

Outlook, commentary and key risks

  • Management expected trends seen in the second half of 2018 to continue into early FY2019: lower memory spending, foundry customers prioritizing longer-lead-time equipment outside Applied’s portfolio, and lower display-equipment spending. It expected continued growth in semiconductor spares and services. No numerical FY2019 guidance is provided in the supplied filing text.
  • Management cited long-term semiconductor growth drivers including technology transitions and expanding applications, while continuing substantial investment in research and development. FY2018 RD&E expense was $2.019 billion, up from $1.774 billion.
  • Key exposures include cyclical and hard-to-forecast customer capital spending; concentrated customers and geographic exposure; trade restrictions, tariffs and export-license requirements; competition and rapid technology change; and supplier constraints, including reliance on limited sources for some parts.
  • Other risks include foreign-exchange and interest-rate movements, cybersecurity incidents, tax-law interpretation and examinations, and potential changes in customer orders that could affect inventory and margins. The company reported no material cybersecurity incidents to date and did not expect pending legal matters to materially affect consolidated results or financial condition.
  • Auditor KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial controls were effective as of year-end.

Important facts for investors to verify

  • How the FY2019 slowdown described by management developed, especially in memory, foundry and display spending, and whether services growth offset equipment weakness.
  • The final accounting and cash-payment schedule for the Tax Act transition tax; the filing reports estimated remaining tax-law obligations of $1.001 billion.
  • Whether the substantial FY2018 share repurchases and dividends remain sustainable alongside debt obligations, capital spending and operating cash needs.
  • Whether higher inventories ($3.722 billion, versus $2.930 billion) and accounts receivable ($2.565 billion, versus $2.338 billion) convert to sales and cash without material obsolescence or collection issues. FY2018 included $1.6 billion of receivables sold without recourse.
  • How backlog converts to revenue, considering its changed definition, customer rescheduling and cancellation rights, and the portion expected to be fulfilled after 12 months.