Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2023, ended April 30, 2023. Comparisons are to the corresponding periods of fiscal 2022. 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.
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $6.630 billion | $6.245 billion | $13.369 billion | $12.516 billion |
| Gross profit | $3.094 billion | $2.927 billion | $6.239 billion | $5.886 billion |
| Gross margin | 46.7% | 46.9% | 46.7% | 47.0% |
| Operating income | $1.911 billion | $1.894 billion | $3.881 billion | $3.870 billion |
| Operating margin | 28.8% | 30.3% | 29.0% | 30.9% |
| Net income | $1.575 billion | $1.536 billion | $3.292 billion | $3.328 billion |
| Diluted EPS | $1.86 | $1.74 | $3.88 | $3.74 |
Financial position, cash flow and capital allocation
- Cash and investments: $7.122 billion at April 30, 2023, versus $4.561 billion at October 30, 2022. Working capital was $9.9 billion, up from $8.5 billion.
- Cash flow, six months: Operating activities provided $4.562 billion, compared with $3.073 billion a year earlier. Investing activities used $621 million, including $542 million of capital expenditures. Financing activities used $1.346 billion.
- Debt: $5.5 billion principal amount of senior unsecured notes and $200 million of commercial paper outstanding; balance-sheet debt was $5.658 billion. No amounts were drawn on the $1.5 billion revolving credit facility, whose termination date was extended to February 2026.
- Shareholder returns: Six-month dividends paid were $439 million and share repurchases totaled $1.054 billion. A new $10 billion authorization was approved in March 2023; approximately $13.9 billion remained available under the combined authorizations at quarter-end.
Management stated that operating cash generation, existing cash and borrowing capacity should be sufficient to meet liquidity requirements for the next 12 months.
Material changes and operating drivers
- Q2 sales increased 6% year over year; six-month sales increased 7%. Semiconductor Systems sales rose 12% in both comparisons, while Display and Adjacent Markets sales fell 56% in Q2 and 55% for six months. AGS sales increased 3% in both periods.
- Semiconductor Systems growth reflected foundry and logic investment, particularly in mature nodes. Memory spending declined as customers deferred capacity additions amid weak consumer-electronics demand.
- Margins narrowed despite higher sales. Management cited higher material costs and inventory charges, product mix and export-regulation impacts; higher selling prices and lower freight and logistics costs partly offset these pressures.
- Net income for the first six months declined 1% despite higher sales and operating income. Interest and other income (expense), net included a $117 million impairment loss on privately held equity investments; Q2 net expense in this line was $73 million.
- China sales declined 34% in Q2 and 38% for six months, associated with U.S. export regulations and lower investment. For the first six months, China represented 19% of sales, versus 33% a year earlier. Korea and the United States grew substantially.
- Two customers, TSMC and Samsung Electronics, represented 23% and 19% of six-month sales, respectively.
Outlook, risks and contingencies
- The filing provides no clear numerical company-wide revenue or earnings guidance. Management expected some supply shortages to persist through the remainder of fiscal 2023 and described increasing shipments as a priority.
- A major supplier’s February 2023 cybersecurity incident disrupted manufacturing and deliveries. Applied Materials said it had largely recovered but continued to mitigate operational effects and faced some ongoing parts delays.
- U.S. export restrictions have reduced sales opportunities in China and may further constrain product and service shipments, require licenses, and increase foreign competition. The company reported a U.S. Attorney’s Office subpoena received in August 2022 concerning certain China customer shipments; it is cooperating and said the outcome and any potential loss or penalties cannot be estimated.
- Other stated risks include cyclical customer capital spending, concentrated customers and geographic exposure, supply-chain constraints, changing technology requirements, competition, foreign-exchange and interest-rate exposure, and legal, regulatory and cybersecurity risks.
- Standby letters of credit and other guarantees had a maximum potential payment amount of approximately $592 million; management did not consider payment probable. Remaining transition-tax payments were $694 million over the next four years. The company noted that U.S. R&D capitalization rules are expected to increase tax rates, deferred tax assets and cash tax liabilities; the corporate minimum tax may affect results beginning in fiscal 2024.
Investor verification priorities
- Track the duration and financial effect of export restrictions, particularly on China sales and AGS services.
- Monitor whether supplier-related disruptions and other supply constraints resolve, and whether shipments, inventory charges and margins respond.
- Assess the sustainability of operating cash flow, including working-capital movements and the effect of receivables sales.
- Review customer concentration, memory and display demand, and changes in foundry and logic spending.
- Check the effect of the $117 million equity-investment impairment and any further valuation changes.
- Follow the government inquiry concerning China shipments, tax-law effects, and the company’s use of its expanded repurchase authorization.