Applied Materials, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Reporting period: Quarter ended May 1, 2022; comparisons are with the quarter ended May 2, 2021. The six-month comparison is also included; fiscal 2021’s first half had one more week than fiscal 2022’s.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $6.245B | $5.582B | $12.516B | $10.744B |
| Gross margin | 46.9% | 47.5% | 47.0% | 46.6% |
| Operating income | $1.894B | $1.579B | $3.870B | $2.862B |
| Operating margin | 30.3% | 28.3% | 30.9% | 26.6% |
| Net income | $1.536B | $1.330B | $3.328B | $2.460B |
| Diluted EPS | $1.74 | $1.43 | $3.74 | $2.66 |
| Operating cash flow | — | $3.073B | $2.608B |
Quarterly sales rose 12% year over year; operating income increased 20% and diluted EPS increased 22%. For the first half, sales rose 16%, operating income 35%, and diluted EPS 41%. The quarterly gross-margin decline reflected higher freight, logistics, material and personnel costs, partly offset by higher sales and favorable mix. First-half gross margin improved modestly.
By segment, Q2 sales were Semiconductor Systems $4.458B (+12%), Applied Global Services $1.383B (+15%), and Display and Adjacent Markets $381M (+2%). First-half sales increased 20% in Semiconductor Systems and 15% in Applied Global Services, while Display and Adjacent Markets declined 5%.
Cash, liquidity and capital allocation
- At May 1, cash and cash equivalents were $3.331B; short- and long-term investments totaled $2.693B. Total cash, cash equivalents and investments were $6.024B, down from $7.514B at October 31, 2021.
- Current assets were $15.244B and current liabilities $6.650B; reported working capital was $8.6B, versus $9.8B at fiscal year-end.
- First-half operating cash flow was $3.073B. Capital expenditures were $354M; operating cash flow less capital expenditures was approximately $2.719B.
- Cash used in financing was $4.188B, including $3.603B of share repurchases and $425M of dividends. The company repurchased 27 million shares in the half. Approximately $7.4B remained available under its repurchase authorization.
- Long-term debt was $5.455B, principally senior unsecured notes; no revolving-credit borrowings or commercial paper were outstanding. The company reported $1.5B of committed revolving-credit capacity and said it was in compliance with facility covenants.
Changes, outlook and risks
- Management said semiconductor customer demand remained strong, but supply-chain and logistics constraints—including COVID-related lockdowns in a key region—limited the company’s ability to fulfill demand. It expected strong demand and supply shortages to persist during fiscal 2022; managing near-term constraints was a priority.
- Growth reflected customer investment in semiconductor equipment, spares and service agreements. Foundry/logic and DRAM spending increased; flash-memory spending decreased. Services growth was supported by the installed base and service agreements. Display equipment revenue was weaker year to date, particularly for mobile products.
- Prior-year comparisons included a $154M deal-termination fee and $158M of severance charges in the first half of FY2021. FY2022 recorded a $4M severance adjustment. These unusual items affect year-over-year operating comparisons. The Q2 effective tax rate increased to 17.6% from 13.9%, mainly due to reduced deferred tax assets related to a new Singapore tax incentive.
- The filing provides no clear quantified forward-quarter revenue or EPS guidance in the supplied text. Management stated that cash from operations, existing liquidity and borrowing capacity should cover liquidity needs for the next 12 months.
- Principal risks include supply and shipment disruptions, export-license and trade restrictions (especially involving China), semiconductor-industry cyclicality, customer and geographic concentration, inflation and rising costs, foreign-exchange exposure, and COVID-19 effects. Asia-Pacific represented 81% of Q2 sales; three customers accounted for at least 10% each of first-half sales. Legal matters were described as not expected to have a material effect, based on information then available. Potential guarantee payments were up to $532M; the company did not consider payment probable.
Important facts for investors to verify
- Whether supply constraints ease enough for Applied Materials to convert demand into shipments and revenue, and how constraints affect margins and working capital.
- Whether inventory growth—to $5.009B from $4.309B—and higher days sales outstanding (71 days versus 55) normalize.
- How customer, regional and export-control concentration—particularly China, Taiwan and Korea—affects sales and fulfillment.
- Whether cash generation can sustain substantial buybacks and dividends while supporting investment and liquidity; note first-half cash fell by $1.666B.
- How tax changes, including required R&D capitalization beginning in fiscal 2023 unless modified, affect cash flow and tax expense.