APPLIED MATERIALS, INC. The following management's discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes, and for a full understanding of Applied's results of operations and financial condition should be read in conjunction with the consolidated condensed financial statements and notes included in this Form 10-Q and the financial statements and notes for the fiscal year endedOctober 27, 2019 contained in the Company's Form 10-K filed onDecember 13, 2019 . This report contains forward-looking statements that involve a number of risks and uncertainties. Examples of forward-looking statements include those regarding Applied's future financial or operating results, customer demand and spending, end-user demand, Applied's and market and industry trends and outlooks, the impact of the coronavirus COVID-19 pandemic and responses thereto on Applied's operations and financial results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management's plans and objectives for future operations, research and development, strategic acquisitions and investments, including the proposed acquisition ofKokusai Electric Corporation (Kokusai Electric ), growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing, properties, legal proceedings and claims, and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements may contain words such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "intend," "potential" and "continue," the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, "Risk Factors," below and elsewhere in this report. These and many other factors could affect Applied's future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Forward-looking statements are based on management's estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements. Applied's Pandemic ResponseApplied Materials' business has been identified by theU.S. Department of Homeland Security as part of the Critical Infrastructure Sectors that the Federal government deems "essential to ensure the continuity of functions critical to public health and safety, as well as economic and national security" and that have "a special responsibility in these times to continue operations." Applied has responded quickly to put in place precautionary measures to keep its workplaces healthy and safe, while ensuring compliance with orders and restrictions imposed by government authorities, everywhere Applied operates in the world. Applied's top priority during the COVID-19 pandemic is protecting the health and safety of its employees and their families, customers and community. Applied introduced workplace flexibility such as working remotely where possible to reduce the number of people who are on campus each day. Applied is keeping its critical labs and operations active and continuing to support customers. In the interest of public health, all onsite operations are utilizing the minimum number of people to safely execute tasks and following enhanced safety and health protocols-including screenings, social distancing, and use of personal protective equipment.Applied Materials is committed to helping those most impacted by COVID-19. In regions around the world, Applied and its Foundation are addressing immediate humanitarian needs while investing resources to combat the long-term effect of the virus on the nonprofit organizations in its communities. Applied has shared masks and equipment to medical facilities, provided blood analysis systems and sent emergency support to food banks. 37 -------------------------------------------------------------------------------- Table of Contents Overview Applied provides manufacturing equipment, services and software to the semiconductor, display, and related industries. Applied's customers include manufacturers of semiconductor wafers and chips, liquid crystal and organic light-emitting diode (OLED) displays, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Each of Applied's businesses is subject to variable industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes. Applied operates in three reportable segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. A summary of financial information for each reportable segment is found in Note 16 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied's operations is set forth under "Risk Factors" in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily inthe United States ,Europe ,Israel , andAsia . Applied's broad range of equipment and service products are highly technical and are sold primarily through a direct sales force. Applied's results are driven primarily by customer spending on capital equipment and services to support key technology transitions or to increase production volume in response to worldwide demand for semiconductors and displays. While certain existing technologies may be adapted to new requirements, some applications create the need for an entirely different technological approach. The timing of customer investment in manufacturing equipment is also affected by the timing of next-generation process development, and the timing of capacity expansion to meet end-market demand. In light of these conditions, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter. The following table presents certain significant measurements for the periods indicated: Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2020 2019 Change 2020 2019 Change (In millions, except per share
amounts and percentages)
Net sales $ 3,957$ 3,539 $ 418 $ 8,119 $ 7,292 $ 827 Gross margin 44.2 % 43.2 % 1.0 points 44.4 % 43.8 % 0.6 points Operating income $ 932$ 776 $ 156 $ 1,974 $ 1,684 $ 290 Operating margin 23.6 % 21.9 % 1.7 points 24.3 % 23.1 % 1.2 points Net income $ 755$ 666 $ 89 $ 1,647 $ 1,437 $ 210 Earnings per diluted share $ 0.82$ 0.70 $ 0.12 $ 1.78 $ 1.50 $ 0.28 Fiscal 2020 and 2019 contain 52 weeks each, and the first six months of fiscal 2020 and 2019 each contained 26 weeks. During the three months endedApril 26, 2020 , COVID-19 was designated a pandemic and the resulting restrictions put in place worldwide impacted Applied's supply chains and manufacturing operations. The semiconductor industry was deemed to be part of a Critical Infrastructure Sector, allowing Applied to continue operations, while ensuring compliance with orders and restrictions imposed by government authorities by putting additional precautionary measures in place to keep its workplaces healthy and safe, everywhere Applied operates in the world. 38 -------------------------------------------------------------------------------- Table of Contents Even with the unprecedented challenges faced during the pandemic, semiconductor equipment customers continued to make strategic investments in new technology transitions during the three and six months endedApril 26, 2020 . Foundry and logic spending increased in the three and six months endedApril 26, 2020 compared to the same periods in the prior year led by customer investment in advanced foundry-logic nodes. Spending by memory customers increased in the three months endedApril 26, 2020 and decreased in the six months endedApril 26, 2020 compared to the same periods in the prior year, as they continue to adjust their new capacity additions and fab utilization rates in response to excess industry supply and inventory levels. Overall semiconductor systems revenue increased in the three and six months endedApril 26, 2020 compared to the same periods in the prior year. Applied saw modest growth in its services business driven by an increase in the installed base of equipment and continued growth in revenues from long-term service agreements compared to the same periods in the prior year. Applied's display and adjacent markets revenue increased in the three months endedApril 26, 2020 compared to the same periods in the prior year due to increased investment in display manufacturing equipment for mobile products, and declined in the six months endedApril 26, 2020 , compared to the same period in the prior year, due to continued weak demand for display manufacturing equipment for mobile products and TVs. In response to the ongoing COVID-19 pandemic and evolving worldwide response, Applied made adjustments to its global operations and is currently seeing progress in the initial recovery within its supply chain and strong demand from semiconductor customers. The situation remains fluid and uncertain. Applied is actively managing its responses in collaboration with its employees, customers and suppliers. For additional risks associated with the COVID-19 pandemic, see the risk factor entitled "The COVID-19 pandemic and global measures taken in response thereto have adversely impacted, and may continue to adversely impact, Applied's operations and financial results" in Part II, Item 1A, "Risk Factors." Results of Operations Net Sales Net sales for the periods indicated were as follows: Three Months Ended Six Months EndedApril 26 ,April 28 ,April 26 ,April 28, 2020 2019 Change 2020 2019 Change (In millions, except percentages) Semiconductor Systems$ 2,567 65 %$ 2,184 62 % 18 %$ 5,381 66 %$ 4,452 61 % 21 % Applied Global Services 1,018 26 % 984 28 % 3 % 2,015 25 % 1,946 27 % 4 % Display and Adjacent Markets 365 9 % 348 10 % 5 % 697 9 % 855 12 % (18) % Corporate and Other 7 - % 23 - % (70) % 26 - % 39 - % (33) % Total$ 3,957 100 %$ 3,539 100 % 12 %$ 8,119 100 %$ 7,292 100 % 11 % For the three and six months endedApril 26, 2020 compared to the same periods in the prior year, net sales increased primarily due to increased customer investments in semiconductor equipment. In addition, the increase in net sales in the six months endedApril 26, 2020 was partially offset by decreased customer investments in display manufacturing equipment. The Semiconductor Systems segment continued to represent the largest contributor of total net sales. 39
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Table of Contents Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:
Three Months Ended Six Months Ended
April 26 , April 28 , April 26 , April 28,
2020 2019 Change 2020 2019 Change
(In millions, except percentages)
China $ 1,138 29 % $ 993 28 % 15 % $ 2,410 30 % $ 1,961 27 % 23 %
Korea 753 19 % 441 13 % 71 % 1,261 16 % 1,013 14 % 24 %
Taiwan 1,029 26 % 794 22 % 30 % 2,394 29 % 1,450 20 % 65 %
Japan 467 12 % 520 15 % (10) % 818 10 % 1,171 16 % (30) %
Southeast Asia 58 1 % 119 3 % (51) % 130 1 % 279 4 % (53) %
Asia Pacific 3,445 87 % 2,867 81 % 20 % 7,013 86 % 5,874 81 % 19 %
United States 331 8 % 457 13 % (28) % 772 10 % 907 12 % (15) %
Europe 181 5 % 215 6 % (16) % 334 4 % 511 7 % (35) %
Total $ 3,957 100 % $ 3,539 100 % 12 % $ 8,119 100 % $ 7,292 100 % 11 %
The changes in net sales in all regions in the three and six months ended
April 26, 2020 compared to the same periods in the prior year primarily
reflected changes in semiconductor equipment spending. The increase in net sales
to customers in Taiwan and Korea for the three and six months ended April 26,
2020 compared to the same periods in the prior year was primarily due to
increased investments in semiconductor manufacturing equipment. The increase in
net sales to customers in China for the three and six months ended April 26,
2020 compared to the same periods in the prior year was primarily due to
increased investments in semiconductor manufacturing equipment and customer
spending on comprehensive service agreements, partially offset by a decrease in
customer spending in display manufacturing equipment. The decrease in net sales
to customers in all other regions for the three and six months ended April 26,
2020 compared to the same periods in the prior year primarily reflected a
decrease in investments in semiconductor and display manufacturing equipment.
Gross Margin
Gross margins for the periods indicated were as follows:
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
2020 2019 Change 2020 2019 Change
Gross margin 44.2 % 43.2 % 1.0 points 44.4 % 43.8 % 0.6 points
Gross margin in the three and six months ended April 26, 2020 increased compared
to the same periods in the prior year primarily due to the increase in net sales
and favorable changes in customer and product mix, partially offset by higher
freight costs, higher personnel costs due to the hiring of additional headcount
to provide manufacturing capacity and flexibility, underutilization of headcount
due to COVID-19 restrictions preventing travel to customer site and incremental
employee compensation related to the COVID-19 pandemic. Gross margin during the
three months ended April 26, 2020 and April 28, 2019 included $24 million and
$22 million of share-based compensation expense, respectively. Gross margin
during the six months ended April 26, 2020 and April 28, 2019 included $55
million and $44 million of share-based compensation expense, respectively.
40
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Table of Contents
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated
were as follows:
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
2020 2019 Change 2020 2019 Change
(In millions)
Research, development and
engineering $ 550 $ 508 $ 42 $ 1,102 $ 1,024 $ 78
Applied's future operating results depend to a considerable extent on its
ability to maintain a competitive advantage in the equipment and service
products it provides. Development cycles range from 12 to 36 months depending on
whether the product is an enhancement of an existing product, which typically
has a shorter development cycle, or a new product, which typically has a longer
development cycle. Most of Applied's existing products resulted from internal
development activities and innovations involving new technologies, materials and
processes. In certain instances, Applied acquires technologies, either in
existing or new product areas, to complement its existing technology
capabilities and to reduce time to market.
Management believes that it is critical to continue to make substantial
investments in RD&E to assure the availability of innovative technology that
meets the current and projected requirements of its customers' most advanced
designs. Applied has maintained and intends to continue its commitment to
investing in RD&E in order to continue to offer new products and technologies.
The increases in RD&E expenses during the three and six months ended April 26,
2020 compared to the same periods in the prior year were primarily due to
additional headcount and higher expense associated with share-based compensation
and variable compensation. These increases reflected Applied's ongoing
investment in product development initiatives, consistent with the Company's
strategy. Applied continued to prioritize existing RD&E investments in technical
capabilities and critical research and development programs in current and new
markets, with a focus on semiconductor technologies. RD&E expenses during the
three months ended April 26, 2020 and April 28, 2019 included $27 million and
$25 million of share-based compensation expense, respectively. RD&E expense
during the six months ended April 26, 2020 and April 28, 2019 included $62
million and $49 million of share-based compensation expense, respectively.
Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
2020 2019 Change 2020 2019 Change
(In millions)
Marketing and selling $ 130 $ 133 $ (3) $ 265 $ 264 $ 1
Marketing and selling expenses remained relatively flat for the three and six
months ended April 26, 2020 compared to the same periods in fiscal 2019
primarily. Marketing and selling expenses during the three months ended
April 26, 2020 and April 28, 2019 included $8 million and $7 million of
share-based compensation expense, respectively. Marketing and selling expenses
during the six months ended April 26, 2020 and April 28, 2019 included $19
million and $15 million of share-based compensation expense, respectively.
General and Administrative
General and administrative (G&A) expenses for the periods indicated were as
follows:
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
2020 2019 Change 2020 2019 Change
(In millions)
General and administrative $ 137 $ 113 $ 24 $ 266 $ 223 $ 43
41-------------------------------------------------------------------------------- Table of Contents G&A expenses in the three and six months endedApril 26, 2020 increased compared to the same periods in the prior year primarily due to higher expense associated with business combination activities, variable compensation, and share-based compensation. G&A expenses during the three months endedApril 26, 2020 andApril 28, 2019 included$12 million and$11 million of share-based compensation expense, respectively. G&A expenses during the six months endedApril 26, 2020 andApril 28, 2019 included$28 million and$22 million of share-based compensation expense, respectively. Interest Expense and Interest and Other Income (Loss), net Interest expense and interest and other income (loss), net for the periods indicated were as follows: Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2020 2019 Change 2020 2019 Change (In millions) Interest expense$ 61 $ 60 $ 1 $ 120 $ 120 $ - Interest and other income, net$ 7 $ 43 $ (36) $ 29 $ 83 $ (54) Interest expenses incurred were primarily associated with issued senior unsecured notes. Interest expense in the three and six months endedApril 26, 2020 remained relatively flat compared to the same periods in the prior year. Interest and other income, net in the three and six months endedApril 26, 2020 decreased compared to the same periods in fiscal 2019, primarily driven by higher unrealized gains on equity investment securities and interest income from investments in fiscal 2019, as well as higher impairments of strategic investments recorded in fiscal 2020. Income Taxes Provision for income taxes and effective tax rates for the periods indicated were as follows: Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2020 2019 Change 2020 2019 Change (In millions, except percentages) Provision for income taxes$ 123 $ 93 $ 30 $ 236 $ 210 $ 26 Effective tax rate 14.0 % 12.3 % 1.7 points 12.5 % 12.8 % (0.3) points Applied's provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes in income tax laws and the resolution of prior years' income tax filings. OnDecember 22, 2017 , theU.S. government enacted the Tax Cuts and Jobs Act (Tax Act). The Tax Act includes provisions that impact Applied starting in fiscal 2019, including a provision designed to tax global intangible low-taxed income (GILTI). As a result, Applied realized a tax benefit of$50 million in the second quarter and$96 million in the first half of fiscal 2019. OnJune 14, 2019 , theU.S. government released regulations that significantly affect how the GILTI provision of the Tax Act is interpreted. Accordingly, Applied reversed the tax benefit that had been realized in the first half of fiscal 2019. OnMarch 27, 2020 , theU.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The enactment of the CARES Act does not result in any material adjustments to Applied's provision for income taxes. Applied's effective tax rates for the second quarter of fiscal 2020 and 2019 were 14.0 percent and 12.3 percent, respectively. The effective tax rate for the second quarter of fiscal 2020 was higher than the same period in the prior fiscal year primarily due to an increase in tax expense in fiscal 2020 due to the tax benefit taken for GILTI in the second quarter of fiscal 2019 prior to the release of regulations onJune 14, 2019 which resulted in the benefit no longer being realizable. This was partially offset by changes in uncertain tax positions. Applied's effective tax rates for the first half of fiscal 2020 and 2019 were 12.5 percent and 12.8 percent, respectively. The effective tax rate for the first half of fiscal 2020 was lower than the same period in the prior fiscal year primarily due to changes in uncertain tax positions and excess tax benefits from share-based compensation. This was partially offset by an increase in tax expense in fiscal 2020 due to the tax benefit taken in the first half of fiscal 2019 for GILTI prior to the release of regulations onJune 14, 2019 which resulted in the benefit no longer being realizable. 42 -------------------------------------------------------------------------------- Table of Contents Segment Information Applied reports financial results in three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 16 of Notes to Consolidated Condensed Financial Statements. The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs for share-based compensation; certain management, finance, legal, human resource, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. The results for each reportable segment are discussed below. Semiconductor Systems Segment The Semiconductor Systems segment is comprised primarily of capital equipment used to fabricate semiconductor chips. Semiconductor industry spending on capital equipment is driven by demand for advanced electronic products, including smartphones and other mobile devices, servers, personal computers, automotive devices, storage, and other products, and the nature and timing of technological advances in fabrication processes, and as a result is subject to variable industry conditions. Development efforts are focused on solving customers' key technical challenges in transistor, interconnect, patterning and packaging performance as devices scale to advanced technology nodes. Semiconductor equipment customers continued to make strategic investments in new technology transitions during the first six months of fiscal 2020. Foundry and logic spending increased in the three and six months endedApril 26, 2020 compared to the same periods in the prior year led by customer investment in advanced foundry-logic nodes. Spending by memory customers increased in the three months endedApril 26, 2020 and decreased in the six months endedApril 26, 2020 compared to the same periods in the prior year, as they continue to adjust their new capacity additions and fab utilization rates in response to excess industry supply and inventory levels. Overall semiconductor systems revenue increased in the three and six months endedApril 26, 2020 compared to the same periods in the prior year. Certain significant measures for the periods indicated were as follows: Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2020 2019 Change 2020 2019 Change (In millions,
except percentages and ratios)
Net sales$ 2,567 $ 2,184 $ 383 18 %$ 5,381 $ 4,452 $ 929 21 % Operating income$ 782 $ 579 $ 203 35 %$ 1,697 $ 1,210 $ 487 40 % Operating margin 30.5 % 26.5 % 4.0 points 31.5 % 27.2 % 4.3 points
Net sales for Semiconductor Systems by end use application for the periods indicated were as follows:
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
2020 2019 2020 2019
Foundry, logic and other 56 % 58 % 62 % 51 %
Dynamic random-access memory (DRAM) 22 % 18 % 18 % 19 %
Flash memory 22 % 24 % 20 % 30 %
100 % 100 % 100 % 100 %
43-------------------------------------------------------------------------------- Table of Contents Net sales for the three months endedApril 26, 2020 increased, in absolute dollars, compared to the same period in the prior year primarily due to higher spending from foundry, logic and other customers, as well as increase in spending from memory customers. Net sales for the six months endedApril 26, 2020 increased compared to the same period in the prior year primarily due to higher spending from foundry, logic and other customers, partially offset by decreased spending from memory customers. Operating margin for the three and six months endedApril 26, 2020 increased compared to the same periods in the prior year, primarily reflecting higher net sales and favorable changes in customer and product mix, lower travel related spending due to COVID-19 travel restrictions, partially offset by increased RD&E expenses, higher freight costs, higher personnel costs due to the hiring of additional headcount to provide manufacturing capacity and flexibility and incremental employee compensation related to the COVID-19 pandemic. Two customers each accounted for more than 10 percent of this segment's total net sales, in the three months endedApril 26, 2020 . The following region accounted for at least 30 percent of total net sales for the Semiconductor Systems segment for one or more of the periods presented. Three Months Ended Six Months EndedApril 26 ,April 28 ,April 26 ,April 28, 2020 2019 Change 2020 2019 Change (In millions, except percentages)
Taiwan$ 815 32%$ 604 27% 35 %$ 1,993 37%$ 1,073 24% 86 % Applied Global Services Segment The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar products. Demand for Applied Global Services' service solutions are driven by Applied's large and growing installed base of manufacturing systems, and customers' needs to shorten ramp times, improve device performance and yield, and optimize factory output and operating costs. Industry conditions that affect Applied Global Services' sales of spares and services are primarily characterized by increases in semiconductor manufacturers' wafer starts and continued strong utilization rates, growth of the installed base of equipment, growing service intensity of newer tools, and the Company's ability to sell more comprehensive service agreements. Certain significant measures for the periods indicated were as follows: Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2020 2019 Change 2020 2019 Change (In
millions, except percentages and ratios)
Net sales$ 1,018 $ 984 $ 34 3 %$ 2,015 $ 1,946 $ 69 4 % Operating income$ 256 $ 283 $ (27) (10) %$ 534 $ 568 $ (34) (6) % Operating margin 25.1 % 28.8 % (3.7) points 26.5 % 29.2 % (2.7) points Net sales for the three and six months endedApril 26, 2020 increased compared to the same periods in the prior year primarily due to higher customer spending on comprehensive service agreements and legacy systems. In addition, the increase in net sales for the six months endedApril 26, 2020 was partially offset by lower customer spending on semiconductor spares. Operating income and operating margin for the three and six months endedApril 26, 2020 compared to the same periods in the prior year decreased primarily due to an increase in headcount to support business growth, underutilization of headcount due to COVID-19 restrictions preventing travel to customer sites, higher freight costs and incremental employee compensation related to the COVID-19 pandemic. In the three months endedApril 26, 2020 , three customers each accounted for more than 10 percent of this segment's total net sales. There was no region that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the periods presented. 44 -------------------------------------------------------------------------------- Table of Contents Display and Adjacent Markets Segment The Display and Adjacent Markets segment encompasses products for manufacturing liquid crystal and OLED displays, and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-oriented devices, equipment upgrades and flexible coating systems. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing large-scale LCD TVs, OLEDs, low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development of products that provide customers with improved performance and yields. Display industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs as well as larger and higher resolution displays for next generation mobile devices. The market environment for Applied's Display and Adjacent Markets segment was characterized by weak demand for manufacturing equipment for mobile products and TVs, compared to the same periods in the prior year. In addition, uneven spending patterns by customers in the Display and Adjacent Markets segment can cause significant fluctuations quarter-over-quarter, as well as year-over-year. Certain significant measures for the periods presented were as follows: Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, 2020 2019 Change 2020 2019 Change (In millions,
except percentages and ratios)
Net sales$ 365 $ 348 $ 17 5 %$ 697 $ 855 $ (158) (18) % Operating income$ 75 $ 42 $ 33 79 %$ 113 $ 157 $ (44) (28) % Operating margin 20.5 % 12.1 % 8.4 points 16.2 % 18.4 % (2.2) points Net sales for the three months endedApril 26, 2020 increased slightly compared to the same period in the prior year primarily due to higher customer investment in display manufacturing equipment for mobile products, partially offset by the decrease in customer investments in display manufacturing equipment for TVs. Net sales for the six months endedApril 26, 2020 decreased compared to the same period in the prior year primarily due to lower customer investments in display manufacturing equipment for mobile products and TVs. Operating income and operating margin for the three months endedApril 26, 2020 increased compared to the same period in the prior year due to favorable changes in customer and product mix and lower travel related spending due to COVID-19 travel restrictions. Operating income and operating margin for the six months endedApril 26, 2020 decreased compared to the same period in the prior year, reflecting lower net sales and unfavorable changes in customer and product mix, offset by lower travel related spending due to COVID-19 travel restrictions. In the three months endedApril 26, 2020 , two customers each accounted for at least 10 percent of this segment's net sales, and together they accounted for approximately 68 percent of this segment's total net sales, with one customer accounting for approximately 42 percent of net sales. The following region accounted for at least 30 percent of total net sales for the Display and Adjacent Markets segment for one or more of the periods presented: Three Months Ended Six Months EndedApril 26 ,April 28 ,April 26 ,April 28, 2020 2019 Change 2020 2019 Change (In millions, except percentages) China$ 312 85%$ 328 94% (5)%$ 616 88%$ 805 94% (23)% 45
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Table of Contents Financial Condition, Liquidity and Capital Resources Applied's cash, cash equivalents and investments consist of the following:
April 26, October 27,
2020 2019
(In millions)
Cash and cash equivalents $ 5,281 $ 3,129
Short-term investments 423 489
Long-term investments 1,678 1,703
Total cash, cash-equivalents and investments
Sources and Uses of Cash
A summary of cash provided by (used in) operating, investing, and financing
activities is as follows:
Six Months Ended
April 26, 2020 April 28, 2019
(In millions)
Cash provided by operating activities $ 1,622 $ 1,634
Cash provided by (used in) investing activities $ 3 $
(195)
Cash provided by (used in) financing activities $ 642 $
(1,763)
Operating Activities Cash from operating activities for the six months endedApril 26, 2020 was$1.6 billion , which reflects net income adjusted for the effect of non-cash charges and changes in working capital components. Non-cash charges included depreciation, amortization, share-based compensation and deferred income taxes. Cash provided by operating activities decreased in the first six months of fiscal 2020 compared to the same period in the prior year primarily due to higher payments to suppliers and income taxes, offset by higher cash collections. Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable without recourse. Applied, from time to time, also discounts letters of credit issued by customers through various financial institutions. The discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements. Applied sold$364 million and$1.1 billion of accounts receivable during the six months endedApril 26, 2020 andApril 28, 2019 , respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the six months endedApril 26, 2020 andApril 28, 2019 . Applied's working capital was$8.0 billion as ofApril 26, 2020 and$5.8 billion as ofOctober 27, 2019 . Days sales outstanding for the three months endedApril 26, 2020 andApril 28, 2019 were 60 days and 58 days, respectively. Days sales outstanding varies due to the timing of shipments and payment terms. The increase in days sales outstanding was primarily due to lower accounts receivable factoring compared to the same period in the prior year, partially offset by improved linearity. Investing Activities Applied generated$3 million of cash from investing activities during the six months endedApril 26, 2020 . Capital expenditures totaled$173 million and proceeds from sales and maturities of investments, net of purchases of investments were$203 million during the six months endedApril 26, 2020 . Applied's investment portfolio consists principally of investment grade money market mutual funds,U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies. 46 -------------------------------------------------------------------------------- Table of Contents Financing Activities Applied generated$642 million of cash from financing activities during the six months endedApril 26, 2020 , consisting primarily of net proceeds received from the borrowings under the Revolving Credit Agreement of$1.5 billion , offset by repurchases of common stock of$399 million , cash dividends to stockholders of$385 million and tax withholding payments for vested equity awards of$163 million . InMarch 2020 andDecember 2019 , Applied's Board of Directors declared quarterly cash dividends, in the amount of$0.22 and$0.21 per share, respectively. The dividend declared inMarch 2020 is payable inJune 2020 . Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied's financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied's stockholders. Applied has credit facilities for unsecured borrowings in various currencies of up to$1.6 billion , of which$1.5 billion is comprised of a committed revolving credit agreement (Revolving Credit Agreement) with a group of banks. The Revolving Credit Agreement includes a provision under which Applied may request an increase in the amount of the facility of up to$500 million for a total commitment of no more than$2.0 billion , subject to the receipt of commitments from one or more lenders for any such increase and other customary conditions. The Revolving Credit Agreement is scheduled to expire inFebruary 2025 , unless extended as permitted under the Revolving Credit Agreement. Applied entered into the Revolving Credit Agreement inFebruary 2020 , which replaced Applied's prior$1.5 billion revolving credit agreement that was scheduled to expire inSeptember 2021 . The Revolving Credit Agreement provides for borrowings inUnited States dollars that bear interest for each advance at one of two rates selected by Applied, plus an applicable margin, which varies according to Applied's public debt credit ratings. The Revolving Credit Agreement includes financial and other covenants with which Applied was in compliance as ofApril 26, 2020 . InMarch 2020 Applied borrowed the full$1.5 billion available under the Revolving Credit Agreement in order to increase its cash position and preserve financial flexibility in light of recent uncertainty in the global markets resulting from the COVID-19 outbreak. Applied may repay borrowings under the Revolving Credit Agreement at any time and the maturity date of the Revolving Credit Agreement isFebruary 21, 2025 , unless extended, at which time the outstanding amount of loans, if any, must be repaid in full. The initial interest rate for the borrowing under the Revolving Credit Agreement is one-month LIBOR plus a margin of 0.875%, based on Applied's public debt credit ratings. Subsequent toApril 26, 2020 , Applied repaid the full$1.5 billion of borrowings under the Revolving Credit Agreement onMay 13, 2020 . Pursuant to the terms of the Revolving Credit Agreement, Applied may at any time and from time to time borrow, repay and reborrow under the Revolving Credit Agreement during the term of the facility. Remaining credit facilities in the amount of approximately$74 million are with Japanese banks. Applied's ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks' prime reference rate denominated in Japanese yen. InAugust 2019 , Applied entered into a term loan credit agreement with a group of lenders. Under the agreement, the lenders have committed to make an unsecured term loan to Applied of up to$2.0 billion to finance in part Applied's planned acquisition of all outstanding shares ofKokusai Electric , to pay related transaction fees and expenses and for general corporate purposes. The commitments of the lenders to make the term loan will terminate if the transactions contemplated by the Share Purchase Agreement (SPA) are not consummated on or beforeJune 30, 2020 , which date may be extended by three months on two separate occasions if, on the applicable date, the only remaining conditions to closing relate to required regulatory approvals. The term loan, if advanced, will bear interest at one of two rates selected by Applied, plus an applicable margin, which varies according to Applied's public debt credit ratings, and must be repaid in full on the third anniversary of the funding date of the term loan. AtApril 26, 2020 ,$1.5 billion was outstanding under the Revolving Credit Agreement and no amounts were outstanding under the other credit facilities described above. AtOctober 27, 2019 no amounts were outstanding under any of these facilities. Applied has a short-term commercial paper program under which Applied may issue unsecured commercial paper notes of up to a total amount$1.5 billion . As ofApril 26, 2020 , Applied did not have any commercial paper outstanding but may issue commercial paper notes under this program from time to time in the future. The commercial paper program is backstopped by the Revolving Credit Agreement and borrowings under the Revolving Credit Agreement reduce the amount of commercial paper notes Applied can issue. 47 -------------------------------------------------------------------------------- Table of Contents Applied had senior unsecured notes in the aggregate principal amount of$5.4 billion outstanding as ofApril 26, 2020 . See Note 11 of the Notes to the Consolidated Condensed Financial Statements for additional discussion of existing debt. Applied may seek to refinance its existing debt and may incur additional indebtedness depending on Applied's capital requirements and the availability of financing. In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As ofApril 26, 2020 , the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately$146 million . Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements. Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As ofApril 26, 2020 , Applied has provided parent guarantees to banks for approximately$151 million to cover these arrangements. Others OnDecember 22, 2017 , theU.S. government enacted the Tax Cuts and Jobs Act. The Tax Act requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The transition tax expense is payable in installments over eight years, with eight percent due in each of the first five years starting with fiscal 2018. As ofApril 26, 2020 , Applied has$857 million of total payments remaining, payable in installments in the next six years. Before the Tax Act,U.S. income tax had not been provided for certain unrepatriated earnings that were considered indefinitely reinvested. Income tax is now provided for all unrepatriated earnings. Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied's management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied's liquidity requirements for the next 12 months. For further details regarding Applied's operating, investing and financing activities, see the Consolidated Condensed Statements of Cash Flows in this report. 48 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements in Applied's Annual Report on Form 10-K and Note 1 of Notes to Consolidated Condensed Financial Statements in this report describe the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies. A critical accounting policy is defined as one that is both material to the presentation of Applied's consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on Applied's financial condition or results of operations. Specifically, these policies have the following attributes: (1) Applied is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Applied could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Applied's financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. Applied bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Applied's operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties include those discussed in Part II, Item 1A, "Risk Factors." Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied's consolidated financial statements are fairly stated in accordance with accounting principles generally accepted inthe United States of America , and provide a meaningful presentation of Applied's financial condition and results of operations. Management believes that the following are critical accounting policies and estimates: Revenue Recognition Applied recognizes revenue when promised goods or services (performance obligations) are transferred to a customer in an amount that reflects the consideration to which Applied expects to be entitled in exchange for those goods or services. Applied performs the following five steps to determine when to recognize revenue: (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. Management uses judgment to identify performance obligations within a contract and to determine whether multiple promised goods or services in a contract should be accounted for separately or as a group. Judgment is also used in interpreting commercial terms and determining when transfer of control occurs. Moreover, judgment is used to estimate the contract's transaction price and allocate it to each performance obligation. Any material changes in the identification of performance obligations, determination and allocation of the transaction price to performance obligations, and determination of when transfer of control occurs to the customer, could impact the timing and amount of revenue recognition, which could have a material effect on Applied's financial condition and results of operations. Warranty Costs Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied's warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. As Applied's customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from Applied's estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied's business, financial condition and results of operations. 49 -------------------------------------------------------------------------------- Table of Contents Allowance for Doubtful Accounts Applied maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer's ability to meet its financial obligation to Applied or its payment trends, may require Applied to further adjust its estimates of the recoverability of amounts due to Applied, which could have a material adverse effect on Applied's business, financial condition and results of operations. Inventory Valuation Inventories are generally stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated net realizable value based upon assumptions about future demand. Applied evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on Applied's business, financial condition and results of operations.Goodwill and Intangible Assets Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also annually reviews goodwill and intangibles with indefinite lives for impairment. Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, Applied may be required to record an impairment charge to reduce the carrying value of the reporting unit to its estimated fair value. To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If Applied determines that the carrying value of a reporting unit's goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference. Applied determines the fair value of each reporting unit based on a weighting of an income and a market approach. Applied bases the fair value estimates on assumptions that it believes to be reasonable but that are unpredictable and inherently uncertain. Under the income approach, Applied estimates the fair value based on discounted cash flow method. The estimates used in the impairment testing are consistent with the discrete forecasts that Applied uses to manage its business, and considers any significant developments during the period. Under the discounted cash flow method, cash flows beyond the discrete forecasts are estimated using a terminal growth rate, which considers the long-term earnings growth rate specific to the reporting units. The estimated future cash flows are discounted to present value using each reporting unit's weighted average cost of capital. The weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the percentage of debt and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital is derived using both known and estimated market metrics, and is adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method is the median tax rate of comparable companies and reflects Applied's current international structure, which is consistent with the market participant perspective. Under the market approach, Applied uses the guideline company method which applies market multiples to forecasted revenues and earnings before interest, taxes, depreciation and amortization. Applied uses market multiples that are consistent with comparable publicly-traded companies and considers each reporting unit's size, growth and profitability relative to its comparable companies. 50 -------------------------------------------------------------------------------- Table of Contents Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. Indicators of potential impairment include, but are not limited to, challenging economic conditions, an unfavorable industry or economic environment or other severe decline in market conditions. Such conditions could have the effect of changing one of the critical assumptions or estimates used for the fair value calculation, resulting in an unexpected goodwill impairment charge, which could have a material adverse effect on Applied's business, financial condition and results of operations. See Note 10 of Notes to Consolidated Financial Statements for additional discussion of goodwill impairment. Income Taxes Applied's provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes to income tax laws and the resolution of prior years' income tax filings. Applied recognizes a current tax liability for the estimated amount of income tax payable on tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryforwards. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized. Applied recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized from such positions are estimated based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Any changes in judgment related to uncertain tax positions are recognized in Applied's provision for income taxes in the quarter in which such change occurs. Interest and penalties related to uncertain tax positions are recognized in Applied's provision for income taxes. The calculation of Applied's provision for income taxes and effective tax rate involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Applied's expectations could have an adverse material impact on Applied's results of operations and financial condition. 51 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Adjusted Financial Results Management uses 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. The non-GAAP adjusted financial measures presented below are adjusted to exclude 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; 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 withU.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 presented below. 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. 52 -------------------------------------------------------------------------------- Table of Contents The following tables present a reconciliation of the GAAP and non-GAAP adjusted consolidated results: APPLIED MATERIALS, INC. UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS Three Months Ended Six Months Ended April 26, April 28, April 26, April 28, (In millions, except percentages) 2020 2019 2020 2019 Non-GAAP Adjusted Gross Profit Reported gross profit - GAAP basis$ 1,749 $ 1,530 $ 3,607 $ 3,195 Certain items associated with acquisitions1 8 9 17 19 Certain incremental expenses related to COVID-195 8 - 8 - Non-GAAP adjusted gross profit$ 1,765 $ 1,539 $ 3,632 $ 3,214 Non-GAAP adjusted gross margin 44.6 % 43.5 % 44.7 % 44.1 % Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis$ 932 $ 776 $ 1,974 $ 1,684 Certain items associated with acquisitions1 13 14 26 28 Acquisition integration and deal costs 21 4 34 7 Certain incremental expenses related to COVID-195 10 - 10 - Non-GAAP adjusted operating income$ 976 $ 794 $ 2,044 $ 1,719 Non-GAAP adjusted operating margin 24.7 % 22.4 % 25.2 % 23.6 % Non-GAAP Adjusted Net Income Reported net income - GAAP basis$ 755 $ 666 $ 1,647 $ 1,437 Certain items associated with acquisitions1 13 14 26 28 Acquisition integration and deal costs 21 4 34 7 Certain incremental expenses related to COVID-195 10 - 10 - Realized loss (gain) on strategic investments, net 5 (4) 7 (6) Unrealized loss (gain) on strategic investments, net 2 (7) 4 (17) Income tax effect of share-based compensation2 8 1 (25) (4)
Income tax effect of changes in applicable
- - - (24)
Income tax effects related to amortization of
intra-entity intangible asset transfers 16 (31) 37 (59)
Resolution of prior years' income tax filings and other tax items
(3) 17 (4) 76
Income tax effect of non-GAAP adjustments4 (10) - (15) 1
Non-GAAP adjusted net income $ 817 $ 660 $ 1,721 $ 1,439 1 These items are incremental charges attributable to completed acquisitions, consisting
of amortization of purchased intangible assets.
2 GAAP basis tax benefit related to share-based compensation is recognized ratably over
the fiscal year on a non-GAAP basis. 3 Charges to income tax provision related to a one-time transition tax as a result of
income before income taxes. 5 Temporary incremental employee compensation during the COVID-19 pandemic.
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APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
(In millions, except per share amounts) 2020 2019 2020 2019
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis $ 0.82 $ 0.70 $ 1.78 $ 1.50
Certain items associated with acquisitions 0.01 0.01 0.02 0.03
Acquisition integration and deal costs 0.02 - 0.04 -
Certain incremental expenses related to COVID-19 0.01 - 0.01 -
Realized loss (gain) on strategic investments, net 0.01 - 0.01 -
Unrealized loss (gain) on strategic investments, net - - - (0.02)
Income tax effect of share-based compensation 0.01 - (0.03) (0.01)
Income tax effect of changes in applicable U.S. tax laws - - - (0.02)
Income tax effects related to amortization of
intra-entity intangible asset transfers 0.02 (0.03) 0.04 (0.06)
Resolution of prior years' income tax filings and other tax items
(0.01) 0.02 (0.01) 0.08
Non-GAAP adjusted earnings per diluted share $ 0.89 $ 0.70 $ 1.86 $ 1.50
Weighted average number of diluted shares 923 948 925 957
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The following table presents a reconciliation of the GAAP and non-GAAP adjusted
segment results:
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
Three Months Ended Six Months Ended
April 26, April 28, April 26, April 28,
(In millions, except percentages) 2020 2019 2020 2019
Semiconductor Systems Non-GAAP Adjusted Operating
Income
Reported operating income - GAAP basis $ 782 $ 579 $ 1,697 $ 1,210
Certain items associated with acquisitions1 10 10 20 21
Certain incremental expenses related to COVID-192 6 - 6 -
Non-GAAP adjusted operating income $ 798 $ 589 $ 1,723 $ 1,231
Non-GAAP adjusted operating margin 31.1 % 27.0 % 32.0 % 27.7 %
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis $ 256 $ 283 $ 534 $ 568
Certain incremental expenses related to COVID-192 4 - 4 -
Non-GAAP adjusted operating income $ 260 $ 283 $ 538 $ 568
Non-GAAP adjusted operating margin 25.5 % 28.8 % 26.7 % 29.2 %
Display and Adjacent Markets Non-GAAP Adjusted
Operating Income
Reported operating income - GAAP basis $ 75 $ 42 $ 113 $ 157
Certain items associated with acquisitions1 3 4 6 7
Non-GAAP adjusted operating income $ 78 $ 46 $ 119 $ 164
Non-GAAP adjusted operating margin 21.4 % 13.2 % 17.1 % 19.2 %
1 These items are incremental charges attributable to completed acquisitions, consisting
of amortization of purchased intangible assets.
2 Temporary 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.
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