Chronicle Journal: Finance

Applied Materials Announces Third Quarter 2020 Results

  • Quarterly revenue of $4.40 billion, up 23 percent year over year
  • GAAP EPS of $0.91 and non-GAAP EPS of $1.06, up 49 percent and 43 percent year over year, respectively
  • Returned $402 million to shareholders

SANTA CLARA, Calif., Aug. 13, 2020 (GLOBE NEWSWIRE) -- Applied Materials, Inc. (NASDAQ: AMAT) today reported results for its third quarter ended July 26, 2020.

Third Quarter Results

Applied generated revenue of $4.40 billion. On a GAAP basis, the company recorded gross margin of 44.5 percent, operating income of $1.11 billion or 25.2 percent of net sales, and earnings per share (EPS) of $0.91.

On a non-GAAP adjusted basis, the company reported gross margin of 45.0 percent, operating income of $1.16 billion or 26.4 percent of net sales, and EPS of $1.06.

The company returned $402 million to shareholders including $200 million in share repurchases and dividends of $202 million.

“Thanks to the hard work and agility of our employees and suppliers, Applied Materials is operating at pre-COVID levels of productivity and delivering outstanding financial results,” said Gary Dickerson, president and CEO. “By addressing our customers’ highest value problems, Applied is outperforming today and is positioned to grow faster than our markets over the next several years.”

Quarterly Results Summary

 Q3 FY2020  Q3 FY2019 Change
  
 (In millions, except per share amounts and percentages)
Net sales$4,395  $3,562  23%
Gross margin44.5% 43.7% 0.8 points
Operating margin25.2% 22.5% 2.7 points
Net income$841  $571  47%
Diluted earnings per share$0.91  $0.61  49%
Non-GAAP Adjusted Results     
Non-GAAP adjusted gross margin45.0% 44.0% 1.0 points
Non-GAAP adjusted operating margin26.4% 23.0% 3.4 points
Non-GAAP adjusted net income$976  $692  41%
Non-GAAP adjusted diluted EPS$1.06  $0.74  43%

A reconciliation of the GAAP and non-GAAP adjusted results is provided in the financial tables included in this release. See also “Use of Non-GAAP Adjusted Financial Measures” section.

Business Outlook

In the fourth quarter of fiscal 2020, Applied expects net sales to be approximately $4.60 billion, plus or minus $200 million. Non-GAAP adjusted diluted EPS is expected to be in the range of $1.11 to $1.23.

This outlook for non-GAAP adjusted diluted EPS excludes known charges related to completed acquisitions of $0.01 per share, includes the normalized tax benefit of share-based compensation of $0.02 per share and a net income tax benefit related to intra-entity intangible asset transfers of $0.02 per share, but does not reflect any items that are unknown at this time, such as any additional charges related to acquisitions or other non-operational or unusual items, as well as other tax related items, which we are not able to predict without unreasonable efforts due to their inherent uncertainty.

Third Quarter Reportable Segment Information

Semiconductor SystemsQ3 FY2020  Q3 FY2019
 (In millions, except percentages)
Net sales$2,916  $2,273 
Foundry, logic and other55% 49%
DRAM22% 27%
Flash memory23% 24%
Operating income958  613 
Operating margin32.9% 27.0%
Non-GAAP Adjusted Results  
Non-GAAP adjusted operating income$982  $624 
Non-GAAP adjusted operating margin33.7% 27.5%


Applied Global ServicesQ3 FY2020  Q3 FY2019
 (In millions, except percentages)
Net sales$1,034  $931 
Operating income273  259 
Operating margin26.4% 27.8%
Non-GAAP Adjusted Results  
Non-GAAP adjusted operating income$277  $259 
Non-GAAP adjusted operating margin26.8% 27.8%

         

Display and Adjacent MarketsQ3 FY2020  Q3 FY2019
 (In millions, except percentages)
Net sales$425  $339 
Operating income83  41 
Operating margin19.5% 12.1%
Non-GAAP Adjusted Results  
Non-GAAP adjusted operating income$87  $44 
Non-GAAP adjusted operating margin20.5% 13.0%

Use of Non-GAAP Adjusted Financial Measures

Applied provides investors with certain non-GAAP adjusted financial measures, which are adjusted for the impact of certain costs, expenses, gains and losses, including certain items related to mergers and acquisitions; restructuring charges and any associated adjustments; certain incremental expenses related to COVID-19; impairments of assets, or investments; gain or loss on sale of strategic investments; loss on early extinguishment of debt; certain income tax items and other discrete adjustments. On a non-GAAP basis, the tax effect related to share-based compensation is recognized ratably over the fiscal year. Additionally, non-GAAP results exclude estimated discrete income tax expense items associated with U.S. tax legislation. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are provided in the financial tables included in this release.

Management uses these non-GAAP adjusted financial measures to evaluate the company’s operating and financial performance and for planning purposes, and as performance measures in its executive compensation program. Applied believes these measures enhance an overall understanding of its performance and investors’ ability to review the company’s business from the same perspective as the company’s management, and facilitate comparisons of this period’s results with prior periods on a consistent basis by excluding items that management does not believe are indicative of Applied's ongoing operating performance. There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles, may be different from non-GAAP financial measures used by other companies, and may exclude certain items that may have a material impact upon our reported financial results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.

Webcast Information

Applied Materials will discuss these results during an earnings call that begins at 1:30 p.m. Pacific Time today. A live webcast and related slide presentation will be available at www.appliedmaterials.com. A replay will be available on the website beginning at 5:00 p.m. Pacific Time today.

Forward-Looking Statements

This press release contains forward-looking statements, including those regarding anticipated growth and trends in our businesses and markets, industry outlooks and demand drivers, technology transitions, our business and financial performance and market share positions, our capital allocation, our investment and growth strategies, our development of new products and technologies, our business outlook for the fourth quarter of fiscal 2020 and beyond, the impact of the COVID-19 pandemic and responses thereto on our operations and financial results; and other statements that are not historical facts. These statements and their underlying assumptions are subject to risks and uncertainties and are not guarantees of future performance. Factors that could cause actual results to differ materially from those expressed or implied by such statements include, without limitation: the level of demand for our products; global economic and industry conditions; the effects of regional or global health epidemics, including the severity and duration of the COVID-19 pandemic; global trade issues and changes in trade and export license policies, including the impact of the rules published by the U.S. Department of Commerce on April 28, 2020 and May 15, 2020 relating to certain export license requirements; consumer demand for electronic products; the demand for semiconductors; customers’ technology and capacity requirements; the introduction of new and innovative technologies, and the timing of technology transitions; our ability to develop, deliver and support new products and technologies; the concentrated nature of our customer base;  changes in income tax laws; our ability to expand our current markets, increase market share and develop new markets; market acceptance of existing and newly developed products; our ability to obtain and protect intellectual property rights in key technologies; our ability to achieve the objectives of operational and strategic initiatives, align our resources and cost structure with business conditions, and attract, motivate and retain key employees; the variability of operating expenses and results among products and segments, and our ability to accurately forecast future results, market conditions, customer requirements and business needs;  and other risks and uncertainties described in our SEC filings, including our recent Forms 10-Q and 8-K. All forward-looking statements are based on management’s current estimates, projections and assumptions, and we assume no obligation to update them.

About Applied Materials

Applied Materials, Inc. (Nasdaq: AMAT) is the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world. Our expertise in modifying materials at atomic levels and on an industrial scale enables customers to transform possibilities into reality. At Applied Materials, our innovations make possible the technology shaping the future. Learn more at www.appliedmaterials.com.

Contact:

Ricky Gradwohl (editorial/media) 408.235.4676
Michael Sullivan (financial community) 408.986.7977


APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

 Three Months Ended Nine Months Ended
(In millions, except per share amounts)July 26,
2020
 July 28,
2019
 July 26,
2020
 July 28,
2019
Net sales$4,395   $3,562  $12,514  $10,854 
Cost of products sold2,440   2,005  6,952  6,102 
Gross profit1,955   1,557  5,562  4,752 
Operating expenses:       
Research, development and engineering572   515  1,674  1,539 
Marketing and selling130   128  395  392 
General and administrative145   112  411  335 
Total operating expenses847   755  2,480  2,266 
Income from operations1,108   802  3,082  2,486 
Interest expense61   58  181  178 
Interest and other income (loss), net(7)  38  22  121 
Income before income taxes1,040   782  2,923  2,429 
Provision for income taxes199   211  435  421 
Net income$841   $571  $2,488  $2,008 
Earnings per share:       
Basic$0.92   $0.61  $2.71  $2.13 
Diluted$0.91   $0.61  $2.69  $2.11 
Weighted average number of shares:       
Basic915   929  916  943 
Diluted922   937  924  950 



APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)July 26,
2020
 October 27,
2019
ASSETS   
Current assets:   
Cash and cash equivalents$4,350  $3,129 
Short-term investments406  489 
Accounts receivable, net2,806  2,533 
Inventories3,952  3,474 
Other current assets734  581 
Total current assets12,248  10,206 
Long-term investments1,538  1,703 
Property, plant and equipment, net1,530  1,529 
Goodwill3,474  3,399 
Purchased technology and other intangible assets, net157  156 
Deferred income taxes and other assets2,224  2,031 
Total assets$21,171  $19,024 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Current portion of long-term debt$  $600 
Accounts payable and accrued expenses2,895  2,511 
Contract liabilities1,390  1,336 
Total current liabilities4,285  4,447 
Long-term debt, net of current portion5,447  4,713 
Income taxes payable1,237  1,275 
Other liabilities633  375 
Total liabilities11,602  10,810 
Total stockholders’ equity9,569  8,214 
Total liabilities and stockholders’ equity$21,171  $19,024 



APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)Three Months Ended Nine Months Ended
July 26,
2020
 July 28,
2019
July 26,
2020
 July 28,
2019
Cash flows from operating activities:       
Net income$841   $571   $2,488   $2,008  
Adjustments required to reconcile net income to cash provided by operating activities:       
Depreciation and amortization94   89   279   271  
Share-based compensation70   67   234   197  
Deferred income taxes79   8   98   57  
Other33   (10)  55   (19) 
Net change in operating assets and liabilities(250)  62   (665)  (93) 
Cash provided by operating activities867   787   2,489   2,421  
Cash flows from investing activities:       
Capital expenditures(87)  (93)  (260)  (344) 
Cash paid for acquisitions, net of cash acquired(80)  (5)  (107)  (28) 
Proceeds from sales and maturities of investments353   479   1,388   1,385  
Purchases of investments(178)  (543)  (1,010)  (1,370) 
Cash provided by (used in) investing activities8   (162)  11   (357) 
Cash flows from financing activities:       
Debt borrowings, net of issuance costs1,481      2,979     
Debt repayments(2,882)     (2,882)    
Proceeds from common stock issuances      91   73  
Common stock repurchases(200)  (528)  (599)  (1,903) 
Tax withholding payments for vested equity awards(3)  (3)  (166)  (83) 
Payments of dividends to stockholders(202)  (196)  (587)  (577) 
Cash used in financing activities(1,806)  (727)  (1,164)  (2,490) 
Increase (decrease) in cash, cash equivalents and restricted cash equivalents(931)  (102)  1,336   (426) 
Cash, cash equivalents and restricted cash equivalents—beginning of period5,396   3,116   3,129   3,440  
Cash, cash equivalents and restricted cash equivalents — end of period$4,465   $3,014   $4,465   $3,014  
        
Reconciliation of cash, cash equivalents, and restricted cash equivalents       
Cash and cash equivalents$4,350   $3,014   $4,350   $3,014  
Restricted cash equivalents included in deferred income taxes and other assets115      115     
Total cash, cash equivalents, and restricted cash equivalents$4,465   $3,014   $4,465   $3,014  
        
Supplemental cash flow information:       
Cash payments for income taxes$238   $221   $519   $453  
Cash refunds from income taxes$   $2   $5   $20  
Cash payments for interest$41   $33   $151   $143  



APPLIED MATERIALS, INC.
UNAUDITED SUPPLEMENTAL INFORMATION

Corporate and Other

(In millions)Q3 FY2020  Q3 FY2019
Unallocated net sales$20    $19   
Unallocated cost of products sold and expenses(156)  (63) 
Share-based compensation(70)  (67) 
Total$(206)  $(111) 



Additional Information

 Q3 FY2020  Q3 FY2019
Net Sales by Geography (In millions) 
United States399  552 
% of Total9% 15%
Europe196  162 
% of Total5% 5%
Japan472  556 
% of Total11% 16%
Korea1,051  445 
% of Total24% 12%
Taiwan687  596 
% of Total16% 17%
Southeast Asia120  134 
% of Total2% 4%
China1,470  1,117 
% of Total33% 31%
    
Employees (In thousands)   
Regular Full Time23.6  21.6 



 APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

 Three Months Ended Nine Months Ended
(In millions, except percentages)July 26,
2020
 July 28,
2019
 July 26,
2020
 July 28,
2019
Non-GAAP Adjusted Gross Profit       
Reported gross profit - GAAP basis$1,955   $1,557   $5,562   $4,752  
Certain items associated with acquisitions18   9   25   28  
Certain incremental expenses related to COVID-19515      23     
Non-GAAP adjusted gross profit$1,978   $1,566   $5,610   $4,780  
Non-GAAP adjusted gross margin45.0%  44.0%  44.8%  44.0% 
Non-GAAP Adjusted Operating Income       
Reported operating income - GAAP basis$1,108   $802   $3,082   $2,486  
Certain items associated with acquisitions112   13   38   41  
Acquisition integration and deal costs20   5   54   12  
Certain incremental expenses related to COVID-19520      30     
Non-GAAP adjusted operating income$1,160   $820   $3,204   $2,539  
Non-GAAP adjusted operating margin26.4%  23.0%  25.6%  23.4% 
Non-GAAP Adjusted Net Income       
Reported net income - GAAP basis$841   $571   $2,488   $2,008  
Certain items associated with acquisitions112   13   38   41  
Acquisition integration and deal costs20   5   54   12  
Certain incremental expenses related to COVID-19520      30     
Realized loss (gain) on strategic investments, net(8)  1   (1)  (6) 
Unrealized loss (gain) on strategic investments, net(5)  (9)  (1)  (25) 
Loss on early extinguishment of debt33      33     
Income tax effect of share-based compensation212      (13)  (4) 
Income tax effect of changes in applicable U.S. tax laws3         (24) 
Income tax effects related to intra-entity intangible asset transfers67   115   104   56  
Resolution of prior years’ income tax filings and other tax items(1)  (1)  (5)  75  
Income tax effect of non-GAAP adjustments4(15)  (3)  (30)  (2) 
Non-GAAP adjusted net income$976   $692   $2,697   $2,131  


These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
  
2GAAP basis tax benefit related to share-based compensation is recognized ratably over the fiscal year on a non-GAAP basis.
  
3Charges to income tax provision related to a one-time transition tax as a result of U.S. tax legislation.
  
4Adjustment to provision for income taxes related to non-GAAP adjustments reflected in income before income taxes.
  
5Temporary incremental employee compensation during the COVID-19 pandemic.


APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

 Three Months Ended Nine Months Ended
(In millions, except per share amounts)July 26,
2020
 July 28,
2019
 July 26,
2020
 July 28,
2019
Non-GAAP Adjusted Earnings Per Diluted Share       
Reported earnings per diluted share - GAAP basis$0.91   $0.61   $2.69   $2.11  
Certain items associated with acquisitions0.01   0.01   0.04   0.04  
Acquisition integration and deal costs0.02   0.01   0.05   0.01  
Certain incremental expenses related to COVID-190.02      0.03     
Loss on early extinguishment of debt0.03      0.03     
Realized loss (gain) on strategic investments, net(0.01)          
Unrealized loss (gain) on strategic investments, net   (0.01)     (0.03) 
Income tax effect of share-based compensation0.01      (0.02)    
Income tax effect of changes in applicable U.S. tax laws         (0.03) 
Income tax effects related to intra-entity intangible asset transfers0.07   0.12   0.11   0.06  
Resolution of prior years’ income tax filings and other tax items      (0.01)  0.08  
Non-GAAP adjusted earnings per diluted share$1.06   $0.74   $2.92   $2.24  
Weighted average number of diluted shares922   937   924   950  


 


APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

 Three Months Ended Nine Months Ended
(In millions, except percentages)July 26,
2020
 July 28,
2019
 July 26,
2020
 July 28,
2019
Semiconductor Systems Non-GAAP Adjusted Operating Income       
Reported operating income - GAAP basis$958  $613  $2,655  $1,823 
Certain items associated with acquisitions19  11  29  32 
Acquisition integration costs1    1   
Certain incremental expenses related to COVID-19214    20   
Non-GAAP adjusted operating income$982  $624  $2,705  $1,855 
Non-GAAP adjusted operating margin33.7% 27.5% 32.6% 27.6%
AGS Non-GAAP Adjusted Operating Income       
Reported operating income - GAAP basis$273  $259  $807  $827 
Certain incremental expenses related to COVID-1924    8   
Non-GAAP adjusted operating income$277  $259  $815  $827 
Non-GAAP adjusted operating margin26.8% 27.8% 26.7% 28.7%
Display and Adjacent Markets Non-GAAP Adjusted Operating Income       
Reported operating income - GAAP basis$83  $41  $196  $198 
Certain items associated with acquisitions13  2  9  9 
Acquisition integration costs  1    1 
Certain incremental expenses related to COVID-1921    1   
Non-GAAP adjusted operating income$87  $44  $206  $208 
Non-GAAP adjusted operating margin20.5% 13.0% 18.4% 17.4%


These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2Temporary incremental employee compensation during the COVID-19 pandemic.

Note: The reconciliation of GAAP and non-GAAP adjusted segment results above does not include certain revenues, costs of products sold and operating expenses that are reported within corporate and other and included in consolidated operating income.


UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED EFFECTIVE INCOME TAX RATE

 Three Months
Ended
  
(In millions, except percentages)July 26, 2020
  
Provision for income taxes - GAAP basis (a)$199 
Income tax effect of share-based compensation(12)
Income tax effects related to intra-entity intangible asset transfers(67)
Resolutions of prior years’ income tax filings and other tax items1 
Income tax effect of non-GAAP adjustments15 
Non-GAAP adjusted provision for income taxes (b)$136 
  
Income before income taxes - GAAP basis (c)$1,040 
Certain items associated with acquisitions12 
Acquisition integration and deal costs20 
Certain incremental expenses related to COVID-1920 
Realized loss (gain) on strategic investments, net(8)
Unrealized loss (gain) on strategic investments, net(5)
Loss on early extinguishment of debt33 
Non-GAAP adjusted income before income taxes (d)$1,112 
  
Effective income tax rate - GAAP basis (a/c)19.1%
  
Non-GAAP adjusted effective income tax rate (b/d)12.2%

 

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