Applied Materials, Inc. — Fiscal 2023 Form 10-K
Reporting period: Fiscal year ended October 29, 2023 (52 weeks). This is an annual filing, not a standalone fourth-quarter report; standalone Q4 financial results are not provided in the supplied filing text. Applied Materials supplies semiconductor and display manufacturing equipment, services, and software through Semiconductor Systems, Applied Global Services (AGS), and Display and Adjacent Markets.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $26.517 billion | $25.785 billion | Up 3% |
| Gross margin | 46.7% | 46.5% | Up 0.2 percentage points |
| Operating income / margin | $7.654 billion / 28.9% | $7.788 billion / 30.2% | Income down $134 million; margin down 1.3 points |
| Net income | $6.856 billion | $6.525 billion | Up 5% |
| Diluted EPS | $8.11 | $7.44 | Up $0.67 |
| Operating cash flow | $8.700 billion | $5.399 billion | Up $3.301 billion |
| Capital expenditures | $1.106 billion | $787 million | Up $319 million |
Gross margin improved on favorable customer and product mix and higher average selling prices, partly offset by higher material costs and inventory charges. Operating income declined as operating expenses rose, notably RD&E. RD&E expense increased to $3.102 billion from $2.771 billion. Net income benefited in part from a lower effective tax rate, 11.1% versus 14.1%, and higher interest and other income.
At year-end, cash and cash equivalents were $6.132 billion and investments were $3.018 billion, totaling $9.150 billion, versus $4.561 billion a year earlier. Total debt was approximately $5.561 billion, including $100 million of commercial paper and $5.461 billion of long-term debt; no revolving-credit borrowings were outstanding. Working capital was $11.8 billion. Management said cash from operations, existing cash, and borrowing capacity should meet liquidity needs for the next 12 months. Operating cash flow less capital expenditures was approximately $7.6 billion.
Segments and material changes
- Semiconductor Systems: Sales rose 5% to $19.698 billion; operating income increased 2% to $7.090 billion, while margin declined to 36.0% from 37.1%. Foundry, logic, and other applications represented 77% of segment sales, up from 66%; flash memory fell to 6% from 15%.
- AGS: Sales rose 3% to $5.732 billion, while operating income was nearly flat at $1.657 billion and margin fell to 28.9% from 30.0%. Growth in long-term service agreements and legacy systems was partly offset by export restrictions and lower customer utilization.
- Display and Adjacent Markets: Sales fell 35% to $868 million and operating income fell 49% to $133 million, reflecting weaker investment in TV manufacturing equipment amid weak consumer-electronics demand.
- Backlog: $17.171 billion at year-end, down from $19.011 billion. About 30% was not reasonably expected to be filled within 12 months. Management cautions that backlog may change through delays or cancellations and is not necessarily indicative of future sales.
Sales to customers outside the United States were approximately 85% of total sales. Taiwan Semiconductor Manufacturing Company represented 19% of sales and Samsung Electronics 15%; customer concentration therefore remains significant.
Outlook, risks, and unusual items
- For fiscal 2024, management expected advanced foundry and logic demand to strengthen versus fiscal 2023, supported by PC, cloud, and AI data-center spending and technology investment. Memory spending was expected to increase; mature-node demand was expected to decline, particularly in industrial automation and automotive. These are directional expectations, not quantified company-wide guidance.
- U.S. export controls affecting China have limited certain sales and services and contributed to adverse revenue and margin effects. Applied received a U.S. Attorney’s Office subpoena in August 2022 and a Commerce Department subpoena in November 2023 concerning certain China customer shipments. The company said it is cooperating; it could not predict an outcome or reasonably estimate potential loss or penalties.
- Other principal risks include semiconductor-industry cyclicality, customer and geographic concentration, supply-chain constraints, rapid technology change and competition, evolving trade rules, cybersecurity, and tax-law changes. Backlog may be delayed or canceled; some key parts have limited qualified suppliers.
- A revised estimate of useful lives for certain buildings and manufacturing equipment is expected to reduce fiscal 2024 depreciation expense and increase pretax operating income by approximately $128 million. The new estimate applies prospectively.
- Starting in fiscal 2023, U.S. tax rules require capitalization and amortization of R&D costs, increasing cash tax liabilities. The 15% corporate minimum tax under the Inflation Reduction Act may affect results beginning in fiscal 2024; the company was evaluating the effect.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Inventory valuation was identified as a critical audit matter, reflecting judgment in estimating future demand and obsolescence.
Important facts for investors to verify
- Whether fiscal 2024 demand trends and export restrictions develop as management expected, particularly for China, memory, and mature-node equipment.
- Whether backlog converts to shipments and revenue on schedule, and whether further customer delays or cancellations occur.
- Inventory valuation and future inventory charges, given $5.725 billion in inventory and the auditor’s critical audit matter.
- Whether the expected $128 million fiscal 2024 depreciation benefit and tax-law changes affect reported earnings and cash taxes as described.
- Developments in the government inquiries concerning China shipments, including any potential financial or operational consequences.
- Debt maturities, capital returns, and liquidity: the company repurchased $2.2 billion of shares and paid $975 million in dividends during fiscal 2023.