Business context and reporting period
Applied Materials, Inc. (NASDAQ: AMAT) filed this unaudited Form 10-Q for the fiscal quarter ended July 30, 2023. The company supplies equipment, services and software to the semiconductor, display and related industries. Comparisons below are with the quarter ended July 31, 2022, the corresponding nine months, or the October 30, 2022 balance-sheet date, as indicated.
Financial performance and position
Amounts are in millions of dollars except per-share data, percentages and where noted.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $6,425 | $6,520 | $19,794 | $19,036 |
| Gross margin | 46.3% | 46.1% | 46.6% | 46.7% |
| Operating income | $1,802 | $1,924 | $5,683 | $5,794 |
| Operating margin | 28.0% | 29.5% | 28.7% | 30.4% |
| Net income | $1,560 | $1,606 | $4,852 | $4,934 |
| Diluted EPS | $1.85 | $1.85 | $5.73 | $5.59 |
- Quarterly sales declined 1% year over year; nine-month sales increased 4%. Quarterly net income fell 3%, while nine-month net income fell 2%. Diluted EPS was flat for the quarter and rose about 3% for the nine months.
- For the nine months, operating cash flow was $7,145, versus $4,542 a year earlier. Capital expenditures were $797; operating cash flow less capital expenditures was approximately $6,348, compared with approximately $3,978 in the prior-year period.
- At July 30, cash and cash equivalents were $6,025; short- and long-term investments totaled $2,687. Combined cash, cash equivalents and investments were $8,712, versus $4,561 at October 30, 2022. Working capital was $10.7 billion, compared with $8.5 billion at fiscal year-end.
- Debt included $5.5 billion principal of long-term senior notes and $200 million of commercial paper; carrying amounts were $5,460 and $199, respectively. No borrowings were outstanding on the $1.5 billion revolving credit facility.
- Nine-month cash used in financing was $2,066, including $1,489 of stock repurchases and $707 of dividends. The company reported $13.4 billion remaining under its repurchase authorization.
Material changes and operating trends
- Semiconductor Systems revenue was $4,676 in Q3, down 1%; nine-month revenue was $14,815, up 8%. Management cited stronger foundry and logic spending, particularly for mature nodes, while memory investment declined amid weak consumer-electronics demand and deferred capacity additions.
- Applied Global Services revenue rose 3% in both periods to $1,464 for Q3 and $4,261 for nine months. Management attributed growth mainly to legacy-system sales; export restrictions and lower customer utilization weighed on service agreements and spares.
- Display and Adjacent Markets revenue fell 29% in Q3 to $235 and 47% for nine months to $570, reflecting weaker consumer-electronics demand and lower customer investment. Nine-month segment operating income fell to $66 from $226.
- China sales declined 28% for the nine months to $4,284, or 22% of total sales, primarily reflecting U.S. export regulations and lower equipment investment. The United States and Europe recorded higher nine-month sales. Asia-Pacific remained 75% of nine-month sales.
- Q3 gross margin improved slightly, helped by product mix and average selling prices, partly offset by higher inventory charges. Operating margin fell, with higher operating expenses contributing. Nine-month RD&E expense increased $268 to $2,313, including a $30 fixed-asset impairment.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expected some supply shortages to persist through the remainder of fiscal 2023 and said increasing shipments while managing constraints remained a priority. Management believed operating cash generation, existing cash and borrowing capacity would cover liquidity needs for the next 12 months.
- Key risks include semiconductor and display industry cyclicality, customer concentration, export controls and licensing uncertainty, supply-chain constraints, and changes in customer demand and utilization. TSMC and Samsung accounted for 22% and 17% of nine-month sales, respectively.
- The company disclosed a U.S. Attorney’s Office subpoena received in August 2022 concerning certain China customer shipments. It is cooperating; the outcome and any potential loss or penalties cannot be predicted or reasonably estimated. Management did not believe other disclosed legal matters would materially affect financial condition or results, but outcomes remain uncertain.
- Nine-month results included $119 of impairment losses on privately held equity investments, recorded in interest and other income (expense), net. The company also noted that U.S. R&D capitalization requirements are expected to increase effective tax rates, deferred tax assets and cash tax liabilities beginning in fiscal 2023; the Inflation Reduction Act minimum tax may affect results beginning in fiscal 2024.
- Remaining unsatisfied performance obligations on contracts with original durations of at least one year were approximately $4.9 billion; about 56% was expected to be recognized within 12 months. This excludes contracts with expected durations of one year or less.
Important facts for investors to verify
- Whether semiconductor customer spending, especially memory demand, and display investment recover or weaken further.
- How export-control changes, license availability and the China-shipment investigation affect sales, service activity and potential liabilities.
- Whether supply constraints ease as expected and whether inventory charges, customer utilization and receivables collection affect margins and cash flow.
- The sustainability of operating cash flow and capital returns, including the pace of buybacks and dividends relative to investment needs.
- Potential effects of tax-law changes and the $119 million investment impairment on future tax expense and earnings.