Applied Materials, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 28, 2018; comparison is with the three months ended January 29, 2017. Fiscal quarters each contained 13 weeks. Dollar amounts are in millions unless noted.
Business context and performance
Applied Materials supplies equipment, services and software to the semiconductor, display and related industries. Revenue growth reflected strong customer investment in semiconductor manufacturing equipment and services, alongside continued display-equipment investment. Management noted strong foundry, logic and NAND demand and increased DRAM demand.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $4,204 | $3,278 | +28% |
| Gross profit / margin | $1,920 / 45.7% | $1,445 / 44.1% | +1.6 percentage points |
| Operating income / margin | $1,196 / 28.4% | $807 / 24.6% | +$389 / +3.8 points |
| Net income | $135 | $703 | -$568 |
| Diluted EPS | $0.13 | $0.65 | -$0.52 |
| Operating cash flow | $1,466 | $792 | +$674 |
Gross-margin improvement was attributed primarily to higher sales, favorable product mix and materials-cost savings. Operating expenses rose to $724 from $638, including research and development expense of $488 versus $417, as the company increased headcount and program spending.
Net income was sharply lower despite stronger operating results, principally because the quarter included a provisional $1.0 billion tax expense related to the U.S. Tax Cuts and Jobs Act. The charge reflected a transition tax on certain foreign earnings and remeasurement of U.S. deferred tax assets; management said the accounting remained provisional. The effective tax rate was 88.4%, versus 8.8%. The tax charge reduced diluted EPS by $0.94. On the company’s non-GAAP basis, adjusted net income was $1,135 and adjusted diluted EPS was $1.06, compared with $732 and $0.67, respectively, in the prior-year quarter.
Segments and material comparisons
| Segment | Sales | Operating income | Year-over-year highlights |
|---|---|---|---|
| Semiconductor Systems | $2,847 | $995 | Sales +32%; operating income +44%; margin 34.9%, up 2.8 points |
| Applied Global Services | $880 | $254 | Sales +30%; operating income +43%; margin 28.9%, up 2.6 points |
| Display and Adjacent Markets | $455 | $101 | Sales +8%; operating income down $14; margin 22.2%, down 5.1 points |
Semiconductor Systems growth reflected higher memory and logic spending, partly offset by lower foundry spending. Applied Global Services benefited from higher spares and services demand. Display sales increased with mobile-device manufacturing investment, but lower TV equipment sales, unfavorable mix and higher R&D spending reduced segment operating income. Samsung represented 20% and TSMC 13% of consolidated sales; customer concentration is also significant within individual segments.
Cash, debt and capital allocation
- Cash and cash equivalents were $6,799 at quarter-end, versus $5,010 at October 29, 2017. Cash, cash equivalents and investments totaled $8,657, versus $8,419.
- Operating cash flow was $1,466. Investing activities provided $1,352, largely reflecting net investment maturities and sales; capital expenditures were $203. Financing activities used $1,029, including $782 of share repurchases and $106 of dividends.
- Long-term debt was $5,305, broadly unchanged from $5,304 at fiscal year-end. No commercial paper or revolving-credit borrowings were outstanding. The company reported $1.6 billion of total credit facilities, including a $1.5 billion revolving facility.
- Working capital was $8.6 billion, compared with $8.8 billion at fiscal year-end. Customer deposits and deferred revenue rose to $2,018 from $1,665; income taxes payable rose to $1,158 from $392.
- Management believed operating cash generation, cash balances and borrowing capacity would be sufficient for liquidity needs over the next 12 months. Approximately $6.5 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries.
- After the quarter, the board authorized an additional $6.0 billion share-repurchase program and approved a quarterly dividend of $0.20 per share, up from the $0.10 per-share dividend declared during the quarter.
Outlook, risks and unusual items
The filing provides no specific quantitative revenue or earnings guidance. Management described semiconductor investment as healthy and display investment as continuing, but emphasized that customer spending is cyclical and can vary with technology transitions, end demand and capacity plans. Risks include industry volatility, concentrated customers, changing semiconductor and display demand, supply-chain constraints, competition and technology execution, international and currency exposure, cybersecurity, and tax uncertainty. The company also noted that customer orders can be delayed or canceled and that inventory, warranty and impairment estimates require judgment.
The company reported that ordinary-course legal claims and proceedings were not expected to have a material effect on consolidated financial condition or results of operations. Potential payments under standby letters of credit and other guarantees were approximately $72 million; separate parent guarantees for subsidiary banking arrangements were approximately $141 million. Management said it did not consider payment under the standby guarantees probable.
Important facts for investors to verify
- How the provisional $1.0 billion Tax Act charge and related transition-tax estimates change during the measurement period, and the eventual cash-payment timing.
- Whether strong semiconductor-equipment demand persists and how customer spending, geographic mix and concentration evolve.
- Whether the Display and Adjacent Markets segment recovers margin after its year-over-year decline.
- The sustainability of operating cash flow, including the effects of working-capital movements and the increased sale of receivables ($376 million versus $63 million in the prior-year quarter).
- How the additional buyback authorization and higher declared dividend affect cash deployment, share count and liquidity.
- Whether cyclical, customer, supply-chain, competitive, tax and international risks result in material changes to reported results.