Applied Materials, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, three months ended January 30, 2022. The quarter comprised 13 weeks, versus 14 weeks in the comparable prior-year quarter ended January 31, 2021; year-over-year comparisons therefore include different period lengths.
Financial performance and position
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $6.271 billion | $5.162 billion | +21% |
| Gross margin | 47.2% | 45.5% | +1.7 points |
| Operating income / margin | $1.976 billion / 31.5% | $1.283 billion / 24.9% | Income +$693 million |
| Net income | $1.792 billion | $1.130 billion | +$662 million |
| Diluted EPS | $2.00 | $1.22 | +$0.78 |
| Operating cash flow | $2.658 billion | $1.421 billion | +$1.237 billion |
- Gross-margin improvement reflected higher sales and favorable customer and product mix, partly offset by higher freight, logistics and personnel costs.
- Segment sales were Semiconductor Systems $4.567 billion (+29%), Applied Global Services $1.320 billion (+14%), and Display and Adjacent Markets $366 million (-11%). Semiconductor Systems operating margin rose to 38.8%; Services margin was 30.5%; Display margin was 20.8%.
- Cash, cash equivalents and investments totaled $7.763 billion at quarter-end. Working capital was $9.4 billion. Current assets were $15.707 billion and current liabilities $6.264 billion.
- Long-term debt was $5.454 billion carrying value, representing $5.5 billion principal. No borrowings were outstanding under the revolving credit facilities or commercial-paper program.
- Investing activities used $138 million, including $144 million in capital expenditures. Financing activities used $2.252 billion, primarily for $1.803 billion of share repurchases, $214 million of dividends and $235 million of equity-award tax withholding. Cash and restricted cash increased by $268 million.
- The effective tax rate was 6.9%, down from 8.9%, primarily due to settlements of uncertain tax positions and higher excess tax benefits from share-based compensation.
Material changes and management commentary
- Management attributed the sales increase mainly to greater semiconductor-equipment investment, including higher foundry, logic and DRAM spending. Services growth reflected a larger installed base and increased comprehensive service agreements.
- Display and Adjacent Markets sales declined, mainly because of lower investment in equipment for mobile displays, partly offset by TV-related spending.
- Operating results benefited from increased sales and mix, and from the absence of the prior-year quarter’s $152 million severance charge; the current quarter recorded a $4 million severance adjustment.
- China accounted for 32% of sales, and Asia-Pacific overall accounted for 82%. Three customers—TSMC, Samsung and Intel—each represented at least 10% of consolidated sales.
- The company repurchased 12.4 million shares at an average $145.85 per share. Approximately $3.2 billion remained under its $7.5 billion authorization.
Outlook, risks and contingencies
- Management said demand was expected to remain strong and supply shortages to persist during fiscal 2022. Supply-chain constraints had already limited the company’s ability to fulfill demand; managing these constraints was identified as a priority. The filing provides no specific numerical full-year or next-quarter guidance.
- Key risks include COVID-19-related disruption, component and logistics shortages, customer concentration, semiconductor-industry cyclicality, and trade restrictions or export-license requirements affecting sales to certain Chinese entities. The company also cited inflation, higher shipping costs, foreign-exchange exposure and competition for skilled employees.
- Potential cash-flow consideration: $775 million of Tax Act transition-tax payments remained payable over the next five years. Beginning in fiscal 2023, required capitalization and amortization of research and development expenditures could affect cash flows and taxes if the requirement is not deferred or changed.
- Standby letters of credit and other guarantees had a maximum potential payment exposure of approximately $574 million; management did not consider payment probable. Parent guarantees for subsidiary banking arrangements totaled approximately $294 million. Management stated that existing legal matters were not expected to materially affect financial condition or results, while noting outcomes cannot be predicted with certainty.
- Management believed operating cash generation, cash balances and borrowing capacity would cover liquidity needs for the next 12 months. Disclosure controls were assessed as effective, with no material first-quarter changes to internal control over financial reporting.
Important facts for investors to verify
- Whether persistent supply constraints limit shipments, revenue conversion or margins despite strong demand.
- How customer concentration, China exposure and export-control developments affect orders and regional sales.
- Whether growth and margin trends remain robust after considering the prior-year quarter’s extra week and the prior-year severance charge.
- The impact of share repurchases and dividends on cash deployment, and the remaining repurchase authorization.
- Any enacted changes to fiscal 2023 R&D tax treatment and the resulting effects on cash flow and tax expense.