Applied Materials, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2016, ended May 1, 2016. Comparisons are to the three and six months ended April 26, 2015, unless otherwise stated. Fiscal 2016’s first half contained 27 weeks versus 26 weeks in the prior-year period.
Financial performance and position
| Metric | Q2 FY2016 | Q2 FY2015 | First half FY2016 | First half FY2015 |
|---|---|---|---|---|
| Net sales | $2.450 billion | $2.442 billion | $4.707 billion | $4.801 billion |
| Gross margin | 41.0% | 41.6% | 40.8% | 41.1% |
| Operating income | $425 million | $416 million | $779 million | $874 million |
| Operating margin | 17.3% | 17.0% | 16.5% | 18.2% |
| Net income | $320 million | $364 million | $606 million | $712 million |
| Diluted EPS | $0.29 | $0.29 | $0.53 | $0.57 |
- Quarterly sales were nearly flat year over year; first-half sales declined 2%. Quarterly gross margin fell 0.6 percentage points year over year, while operating margin increased 0.3 points.
- Quarterly net income declined 12% year over year, despite higher operating income, primarily reflecting higher income tax and interest expense. The effective tax rate was 19.0%, versus 6.4% in the prior-year quarter.
- Management’s non-GAAP adjusted Q2 results were gross margin of 42.7%, operating margin of 19.2%, net income of $376 million and diluted EPS of $0.34. These measures exclude specified items, including acquired-intangible amortization and certain discrete items; they are not GAAP measures.
- Operating cash flow was $688 million for the first half, versus $358 million. Investing activities used $114 million, including $115 million of capital expenditures; financing activities used $2.901 billion.
- Cash and cash equivalents were $2.470 billion; short- and long-term investments totaled $1.104 billion. Working capital was $4.1 billion.
- Total debt was $3.343 billion, all long-term at quarter-end; the company repaid $1.205 billion of short-term debt during the first half. It had no borrowings under its credit facilities and was in compliance with debt covenants.
Business trends and material changes
- Q2 orders rose 52% sequentially and 37% year over year to $3.451 billion. Backlog increased to $4.168 billion, up 34% sequentially; approximately 73% was expected to ship within the next two quarters. The filing cautions that backlog may be rescheduled or canceled and is not necessarily predictive of future sales.
- Silicon Systems remained the largest segment: Q2 sales were $1.587 billion, up 2% year over year; segment operating income was $364 million, down 3%. First-half sales decreased 2% and operating income decreased 8% year over year.
- Applied Global Services Q2 sales were $648 million, essentially flat year over year; first-half sales increased 4%. Display Q2 sales were $167 million, up 2%, but first-half sales fell 13%. Energy and Environmental Solutions Q2 sales declined 34% to $48 million, reflecting continued solar-industry overcapacity.
- Asia Pacific accounted for 85% of Q2 sales. For the first half, Micron, Samsung and Intel each represented at least 10% of consolidated sales; the filing also reports substantial segment-level customer concentration.
Outlook, risks and unusual items
- Management expected 3D NAND and advanced foundry and logic-node spending to support the semiconductor business for the remainder of fiscal 2016, and anticipated strong mobile-display equipment demand. Solar equipment investment was expected to remain low amid excess capacity. The filing provides no specific numerical earnings or revenue guidance.
- Key risks include cyclical and hard-to-forecast customer spending, concentrated customers and geographic exposure, order cancellations or delays, competition and technology transitions, supply-chain disruption, and foreign-exchange, interest-rate and broader economic risks.
- Applied had $3.35 billion in senior notes outstanding. Approximately $2.4 billion of cash, cash equivalents and marketable securities held by foreign subsidiaries could be subject to U.S. tax if repatriated; management intended to indefinitely reinvest approximately $1.9 billion abroad. Management believed operating cash flow, cash and borrowing capacity would meet liquidity needs for at least 12 months.
- Fiscal 2015 tax comparisons include a $39 million quarterly and $35 million first-half tax-provision reduction related primarily to correction of an immaterial historical intercompany cost-of-sales tax-accounting error; no restatement was considered necessary. Prior-year results also included benefits and gains related to the terminated Tokyo Electron transaction, making comparisons less directly comparable.
- Potential guarantee payments were approximately $57 million; management did not consider payment probable. The company said ordinary-course legal matters were not expected to materially affect its financial condition or results. A Korean Supreme Court appeal remained pending in proceedings involving former employees; Applied was not a party. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the strong Q2 order growth and larger backlog convert into shipments and revenue, given cancellation and timing risks.
- Whether semiconductor and mobile-display demand supports management’s outlook, and whether solar overcapacity continues to pressure that segment.
- The sustainability of margins and earnings, including the effects of product mix, elevated R&D spending, and changing tax rates.
- The impact of customer concentration, especially in Display and Silicon Systems, and the heavy reliance on Asia Pacific sales.
- Cash deployment and leverage after $1.525 billion of first-half share repurchases, $228 million of dividends and debt repayments; the repurchase program had $150 million remaining.
- Foreign cash repatriation exposure, debt obligations, and the outcomes of tax, legal and other contingencies.