Applied Materials, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended January 29, 2023 (13 weeks), compared with the three months ended January 30, 2022. Applied Materials supplies semiconductor and display manufacturing equipment, services, and software. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $6,739 | $6,271 | Up 7% |
| Gross profit / margin | $3,145 / 46.7% | $2,959 / 47.2% | Margin down 0.5 points |
| Operating income / margin | $1,970 / 29.2% | $1,976 / 31.5% | Income down $6; margin down 2.3 points |
| Net income | $1,717 | $1,792 | Down 4% |
| Diluted EPS | $2.02 | $2.00 | Up $0.02 |
| Cash from operations | $2,270 | $2,658 | Down $388 |
| Capital expenditures | $287 | $144 | Up $143 |
Higher materials, freight and logistics costs, inventory charges, product mix, and export restrictions pressured margins; higher average selling prices partly offset these effects. Operating expenses rose to $1,175 from $983, including research and development expense of $771 versus $654. The effective tax rate increased to 12.4% from 6.9%, primarily reflecting prior-year tax benefits and settlement of uncertain tax positions. Lower average diluted shares (849 million versus 897 million) helped diluted EPS rise despite lower net income.
Segments: Semiconductor Systems sales were $5,162, up 13%; operating income was $1,917, up 8%, while margin fell to 37.1% from 38.8%. Applied Global Services sales were $1,369, up 4%; operating income was $383, down 5%. Display and Adjacent Markets sales were $167, down 54%; operating income fell to $8 from $76. Semiconductor Systems growth reflected foundry and logic spending, while memory spending weakened. Display results reflected lower customer investment amid consumer-electronics weakness.
Liquidity and debt: Cash and cash equivalents were $3,547 at quarter-end, compared with $1,995 at October 30, 2022; cash, cash equivalents, and investments totaled $6,135 versus $4,561. Working capital was $9.5 billion. Total debt was approximately $5.7 billion: $199 short-term debt and $5,458 long-term debt on the balance sheet (including $200 million commercial paper principal). The company had a $1.5 billion undrawn revolving credit facility and extended its termination date to February 2026 after quarter-end. Management said available cash, operating cash generation, and borrowing capacity should meet liquidity needs for the next 12 months.
Operating cash flow declined mainly due to lower year-over-year changes in deferred revenue and lower income tax refunds, partly offset by lower inventory payments. Financing activities included $250 of share repurchases, $220 of dividends, and $198 net commercial-paper proceeds. The quarterly dividend declared was $0.26 per share; $4.7 billion remained available under the $6.0 billion repurchase authorization.
Material changes and management outlook
- Sales rose 7%, supported by semiconductor equipment demand and improved supply-chain performance. China sales fell 42% to $1,145, while Taiwan sales rose 58% to $1,968.
- Management expected some supply shortages to persist through the remainder of FY2023 and said managing constraints to increase shipments remained a priority. A major supplier’s cybersecurity incident was expected to affect Q2 shipments; the impact assessment was ongoing.
- U.S. export regulations introduced in 2022 reduced China sales in Semiconductor Systems and Applied Global Services and may constrain future sales, service, and license approvals.
- The filing provides qualitative outlook but no clear numerical company-wide revenue or earnings guidance. Management noted that semiconductor customer spending was mixed: foundry and logic investment increased, while some memory customers deferred capacity additions.
- Two customers represented 42% of total sales: TSMC 27% and Samsung 15%. The company also disclosed a U.S. Attorney’s Office subpoena, received in August 2022, seeking information on certain China customer shipments; it is cooperating and cannot predict the inquiry’s outcome.
Risks, contingencies, and unusual items
- Industry cyclicality, weaker consumer-electronics demand, customer concentration, supply-chain and logistics constraints, and the supplier cyber incident could affect shipments, costs, and results.
- Export-control changes and the China inquiry create regulatory and operational uncertainty. Management did not believe the disclosed legal matters would materially affect consolidated financial condition or results, but outcomes are uncertain.
- Potential payments under standby letters of credit and other guarantees were approximately $614 million; the company said payment was not considered probable based on available information. Parent guarantees for subsidiary banking arrangements were approximately $300 million.
- Remaining transition-tax payments were $694 million over the next four years. U.S. rules requiring capitalization and amortization of R&D expenditures are expected to increase effective tax rates, deferred tax assets, and cash tax liabilities beginning in FY2023.
- One-time or noteworthy items include a non-material acquisition in the quarter, $287 million of capital expenditures, and the post-quarter extension of the revolving credit facility.
Investor verification priorities
- Track shipment and revenue effects from the supplier cybersecurity incident, ongoing supply constraints, and export-license restrictions, particularly for China and Q2.
- Assess whether margin pressure from costs, inventory charges, product mix, and export rules persists, and whether higher selling prices offset it.
- Monitor memory and display customer investment, China exposure, and the concentration represented by major customers.
- Reconcile operating cash flow and working-capital movements, including days sales outstanding, which rose to 73 days from 64 days in the prior-year quarter.
- Review the tax-rate and cash-tax effects of R&D amortization requirements, and monitor the subpoena and guarantees for any material developments.