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 31, 2021 contained in the Company's Form 10-K filed onDecember 17, 2021 . 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 ongoing 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, investments and divestitures, growth opportunities, restructuring and severance 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 Response
As the COVID-19 pandemic emerged in 2020,Applied Materials 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 ongoing COVID-19 pandemic remains protecting the health and safety of its employees and their families, customers, suppliers and community. Applied continues to support workplace flexibility such as remote working where possible and follow enhanced safety and health protocols-including screenings, social distancing, and use of personal protective equipment. Applied is keeping its labs and operations active and continuing to support customers. Applied has implemented a multi-phase plan to return to working on-site, which takes into consideration factors such as Applied's business and employee needs, local government regulations, community case trends, and recommendations from public health officials. The plan involves multiple phases that gradually allow additional workers to return onsite while practicing social distancing and other safety measures. Applied will continue to monitor and evaluate the ongoing COVID-19 pandemic and will work to respond appropriately to the impact of COVID-19 on its business, its customers' and suppliers' businesses and its communities. 35
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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, AppliedGlobal 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
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except per shareamounts and percentages)
Net sales $ 6,245$ 5,582 $ 663 $ 12,516 $ 10,744 $ 1,772 Gross margin 46.9 % 47.5 % (0.6) points 47.0 % 46.6 % 0.4 points Operating income $ 1,894$ 1,579 $ 315 $ 3,870 $ 2,862 $ 1,008 Operating margin 30.3 % 28.3 % 2.0 points 30.9 % 26.6 % 4.3 points Net income $ 1,536$ 1,330
1.74 $ 1.43 $ 0.31 $ 3.74 $ 2.66 $ 1.08 Fiscal 2022 and 2021 contain 52 weeks and 53 weeks, respectively, and the first six months of fiscal 2022 and 2021 contained 26 and 27 weeks, respectively.
Semiconductor equipment customers continued to make strategic investments in new technology transitions and new capacity during the six months endedMay 1, 2022 . Foundry and logic spending increased in the three and six months endedMay 1, 2022 compared to the same periods in the prior year driven by customer investment in both advanced and mature nodes. Spending by memory customers continued as the industry made investments to maintain balance between supply and demand and invested in new technology. Spending by DRAM customers increased and flash memory customers decreased in the three and six months endedMay 1, 2022 compared to the same periods in the prior year. While customer demand increased during the six months endedMay 1, 2022 compared to the same period in the prior year, supply chain and logistics constraints including COVID-19 related lockdowns in a key region impacted Applied's ability to fulfill demand in the first half of fiscal 2022. Applied expects demand to remain strong and supply shortages to persist during fiscal 2022, and managing these near-term supply chain constraints is a top priority. Applied saw continued growth in its services business compared to the same periods in the prior year driven by an increase in the installed base of equipment, long-term service agreements and spares and legacy systems sales. Applied's Display and Adjacent Markets revenue decreased in the six months endedMay 1, 2022 compared to the same period in the prior year primarily due to decreased investment in display manufacturing equipment for mobile products. 36
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In response to the ongoing COVID-19 pandemic and evolving conditions and worldwide response, Applied made adjustments to its global operations and is actively managing its responses in collaboration with its employees, customers and suppliers. However, the situation remains fluid and uncertain. For additional risks associated with the ongoing COVID-19 pandemic, see the risk factor entitled "The ongoing 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 OperationsNet Sales
Net sales for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except percentages)
Semiconductor Systems $ 4,458 72 % $ 3,972 71 % 12 % $ 9,025 72 % $ 7,525 70 % 20 %
Applied Global Services 1,383 22 % 1,203 22 % 15 % 2,703 22 % 2,358 22 % 15 %
Display and Adjacent Markets 381 6 % 375 7 % 2 % 747 6 % 786 7 % (5) %
Corporate and Other 23 - % 32 - % (28) % 41 - % 75 1 % (45) %
Total $ 6,245 100 % $ 5,582 100 % 12 % $ 12,516 100 % $ 10,744 100 % 16 %
For the three and six months ended May 1, 2022 compared to the same periods in
the prior year, net sales increased primarily due to increased customer
investments in semiconductor equipment as well as spend on spares and
comprehensive service agreements. The Semiconductor Systems segment continued to
represent the largest contributor of net sales.
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
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except percentages)
China $ 2,133 34 % $ 1,844 33 % 16 % $ 4,120 33 % $ 3,227 30 % 28 %
Korea 968 16 % 1,428 25 % (32) % 2,089 17 % 2,717 25 % (23) %
Taiwan 1,408 23 % 1,041 19 % 35 % 2,657 21 % 2,241 21 % 19 %
Japan 407 6 % 442 8 % (8) % 968 8 % 900 8 % 8 %
Southeast Asia 138 2 % 109 2 % 27 % 363 3 % 299 3 % 21 %
Asia Pacific 5,054 81 % 4,864 87 % 4 % 10,197 82 % 9,384 87 % 9 %
United States 702 11 % 489 9 % 44 % 1,549 12 % 832 8 % 86 %
Europe 489 8 % 229 4 % 114 % 770 6 % 528 5 % 46 %
Total $ 6,245 100 % $ 5,582 100 % 12 % $ 12,516 100 % $ 10,744 100 % 16 %
The changes in net sales in all regions in the three and six months ended May 1,
2022 compared to the same periods in the prior year primarily reflected changes
in semiconductor equipment spending and customer spending on comprehensive
service agreements. The decrease in net sales to customers in Korea for the
three and six months ended May 1, 2022 compared to the same periods in the prior
year primarily reflected decreased investment in semiconductor equipment.
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Gross margins for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
Gross margin 46.9 % 47.5 % (0.6) points 47.0 % 46.6 % 0.4 points
Gross margin in the three months ended May 1, 2022 decreased compared to the
same period in the prior year primarily driven by higher freight, logistics and
material costs, higher personnel costs due to an increase in headcount to
provide manufacturing capacity and flexibility, partially offset by the increase
in net sales and favorable changes in customer and product mix. Gross margin in
the six months ended May 1, 2022 increased compared to the same period in the
prior year primarily driven by the increase in net sales and favorable changes
in customer and product mix, partially offset by higher freight, logistics and
material costs and higher personnel costs due to an increase in headcount to
provide manufacturing capacity and flexibility. Gross margin during the three
months ended May 1, 2022 and May 2, 2021 included $36 million and $29 million of
share-based compensation expense, respectively. Gross margin during the six
months ended May 1, 2022 and May 2, 2021 included $78 million and $65 million of
share-based compensation expense, respectively.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions)
Research, development and
engineering $ 686 $ 617 $ 69 $ 1,340 $ 1,223 $ 117
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 May 1, 2022
compared to the same periods in the prior year were primarily due to additional
headcount and higher variable compensation expense. These increases reflect
Applied's ongoing investments 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 May 1, 2022 and May 2, 2021 included
$37 million and $31 million of share-based compensation expense, respectively.
RD&E expense during the six months ended May 1, 2022 and May 2, 2021 included
$80 million and $71 million of share-based compensation expense, respectively.
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Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions)
Marketing and selling $ 173 $ 148 $ 25 $ 340 $ 295 $ 45
Marketing and selling expenses for the three and six months ended May 1, 2022
increased compared to the same periods in prior year primarily due to additional
headcount. Marketing and selling expenses during the three months ended May 1,
2022 and May 2, 2021 included $12 million and $10 million of share-based
compensation expense, respectively. Marketing and selling expenses during the
six months ended May 1, 2022 and May 2, 2021 included $26 million and $23
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
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions)
General and administrative $ 174 $ 149 $ 25 $ 340 $ 310 $ 30
G&A expenses in the three and six months ended May 1, 2022 increased compared to
the same periods in the prior year primarily due to additional headcount. In
addition, the increase in the six months ended May 1, 2022 compared to the same
period in the prior year was partially offset by higher expense associated with
business combination activities during the first quarter of fiscal 2021. G&A
expenses during the three months ended May 1, 2022 and May 2, 2021 included $16
million and $14 million of share-based compensation expense, respectively. G&A
expenses during the six months ended May 1, 2022 and May 2, 2021 included $35
million and $32 million of share-based compensation expense, respectively.
Severance and Related Charges
Severance and related charges for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(Inmillions)
Severance and related charges $ -$ 6
In the first quarter of fiscal 2021, Applied enacted a severance plan (Fiscal 2021 Severance Plan) to realign its workforce. Under this plan, Applied implemented a one-time voluntary retirement program and other workforce reduction actions. The voluntary retirement program was available to certainU.S. employees who met minimum age and length of service requirements, as well as other business-specific criteria. In addition, Applied implemented other workforce reduction actions globally across the Display and Adjacent Markets business. Deal Termination Fee Operating income (loss) for both of the three and six months endedMay 2, 2021 included a$154 million deal termination fee associated with the termination of a Share Purchase Agreement withKokusai Electric Corporation and KKR HKE Investment L. P. during the second quarter of fiscal 2021. 39
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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
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions)
Interest expense $ 58 $ 61 $ 28 $ 27
Interest expense incurred was primarily associated with issued senior unsecured notes. Interest expense in the three and six months endedMay 1, 2022 remained relatively flat compared to the same periods in the prior year. Interest and other income, net in the three months endedMay 1, 2022 remained relatively flat compared to the same period in the prior year, primarily driven by impairment of certain strategic investments in the second quarter of fiscal 2021, offset by the impact of unfavorable foreign exchange fluctuation in the second quarter of fiscal 2022. Interest and other income, net in the six months endedMay 1, 2022 decreased compared to the same period in the prior year, primarily driven by the impact of unfavorable foreign exchange fluctuation during the six months endedMay 1, 2022 compared to the same period in the prior year. Income Taxes Provision for income taxes and effective tax rates for the periods indicated were as follows: Three Months Ended Six Months Ended May 1, May 2, May 1, May 2, 2022 2021 Change 2022 2021 Change (In millions, except percentages) Provision for income taxes$ 328 $ 215 $ 113 $ 461 $ 325 $
136
Effective tax rate 17.6 % 13.9 % 3.7 points 12.2 % 11.7 %
0.5 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. Applied's effective tax rates for the second quarter of fiscal 2022 and 2021 were 17.6 percent and 13.9 percent, respectively. The effective tax rate for the second quarter of fiscal 2022 was higher than the same period in the prior fiscal year primarily due to a reduction of deferred tax assets related to a new tax incentive inSingapore . Applied's effective tax rates for the first half of fiscal 2022 and 2021 were 12.2 percent and 11.7 percent, respectively. The effective tax rate for the first half of fiscal 2022 was higher than the same period in the prior fiscal year primarily due to a reduction of deferred tax assets related to a new tax incentive inSingapore , partially offset by changes in uncertain tax positions. 40 -------------------------------------------------------------------------------- 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, severance 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 electronics, 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.
Certain significant measures for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions,except percentages and ratios)
Net sales$ 4,458 $ 3,972 $ 486 12 %$ 9,025 $ 7,525 $ 1,500 20 % Operating income$ 1,648 $ 1,542 $ 106 7 %$ 3,419 $ 2,803 $ 616 22 % Operating margin 37.0 % 38.8 % (1.8) points 37.9 % 37.2 % 0.7 points
Net sales for Semiconductor Systems by end use application for the periods indicated were as follows:
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
2022 2021 2022 2021
Foundry, logic and other 65 % 56 % 63 % 57 %
Dynamic random-access memory (DRAM) 21 % 14 % 23 % 16 %
Flash memory 14 % 30 % 14 % 27 %
100 % 100 % 100 % 100 %
Net sales for the three and six months ended May 1, 2022 increased compared to
the same periods in the prior year. Semiconductor equipment customers continued
to make strategic investments in new technology transitions during the first six
months of fiscal 2022. Foundry and logic spending increased in the three and six
months ended May 1, 2022 compared to the same periods in the prior year driven
by customer investment in both advanced and mature nodes. Spending by DRAM
customers increased and flash memory customers decreased in the three and six
months ended May 1, 2022 compared to the same periods in the prior year due to
changes in investments in new technology and capacity.
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Operating margin for the three months endedMay 1, 2022 decreased compared to the same period in the prior year, primarily driven by higher freight, logistics and material costs and higher personnel costs due to the hiring of additional headcount to provide manufacturing capacity and flexibility, partially offset by higher net sales and favorable changes in customer and product mix. Operating margin for the six months endedMay 1, 2022 increased compared to the same period in the prior year, primarily reflecting higher net sales and favorable changes in customer and product mix, partially offset by higher personnel costs due to the hiring of additional headcount to provide manufacturing capacity and flexibility and higher freight, logistics and material costs. In the three months endedMay 1, 2022 , three customers each accounted for at least 10 percent of this segment's net sales, and together they accounted for approximately 45 percent of this segment's total net sales.
The following regions 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 Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except percentages)
Korea $ 776 17% $ 1,237 31% (37) % $ 1,734 19% $ 2,363 31% (27) %
China $ 1,422 32% $ 1,214 31% 17 % $ 2,708 30% $ 1,924 26% 41 %
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' 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
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except percentages and ratios)
Net sales $ 1,383 $ 1,203 $ 180 15 % $ 2,703 $ 2,358 $ 345 15 %
Operating income $ 422 $ 358 $ 64 18 % $ 825 $ 690 $ 135 20 %
Operating margin 30.5 % 29.8 % 0.7 points 30.5 % 29.3 % 1.2 points
Net sales for the three and six months ended May 1, 2022 increased compared to
the same periods in the prior year primarily due to higher customer spending on
comprehensive service agreements, spares and legacy systems. Operating margin
for the three and six months ended May 1, 2022 increased compared to the same
periods in the prior year primarily due to higher net sales, partially offset by
higher expense related to an increase in headcount to support business growth
and higher freight costs. In the three months ended May 1, 2022 , two customers
accounted for at least 10 percent of this segment's net sales.
There was no single region that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the periods presented.
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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 and equipment upgrades. 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. 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
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except percentages and ratios)
Net sales $ 381 $ 375 $ 6 2 % $ 747 $ 786 $ (39) (5) %
Operating income $ 81 $ 65 $ 16 25 % $ 157 $ 130 $ 27 21 %
Operating margin 21.3 % 17.3 % 4.0 points 21.0 % 16.5 % 4.5 points
Net sales for the three months ended May 1, 2022 remained relatively flat
compared to the same period in the prior year. Net sales for the six months
ended May 1, 2022 decreased compared to the same period in the prior year
primarily due to lower customer investments in display manufacturing equipment
for mobile products, partially offset by an increase in customer investment in
display manufacturing equipment for TVs. Operating margin for the three and six
months ended May 1, 2022 increased compared to the same periods in the prior
year primarily due to favorable product mix. In the three months ended May 1,
2022 , three customers each accounted for at least 10 percent of this segment's
net sales, and together they accounted for approximately 69 percent of this
segment's total 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 Ended
May 1, May 2, May 1, May 2,
2022 2021 Change 2022 2021 Change
(In millions, except percentages)
China $ 321 84% $ 315 84% 2% $ 656 88% $ 652 83% 1%
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Financial Condition, Liquidity and Capital Resources
Applied's cash, cash equivalents and investments consist of the following:
May 1, October 31,
2022 2021
(In millions)
Cash and cash equivalents $ 3,331 $ 4,995
Short-term investments 591 464
Long-term investments 2,102 2,055
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
May 1, 2022 May 2, 2021
(In millions)
Cash provided by operating activities
Operating Activities
Cash from operating activities for the six months endedMay 1, 2022 was$3.1 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, severance and related charges, share-based compensation and deferred income taxes. Cash provided by operating activities increased in the first six months of fiscal 2022 compared to the same period in the prior year primarily due to higher net income and cash collections, partially offset by higher inventory and income tax payments. Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable generally 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$570 million and$671 million of account receivables during the six months endedMay 1, 2022 andMay 2, 2021 , respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the six months endedMay 1, 2022 andMay 2, 2021 , respectively.
Applied's working capital was
Days sales outstanding for the three months endedMay 1, 2022 andMay 2, 2021 were 71 days and 55 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 unfavorable revenue linearity and lower accounts receivables factoring compared to the same period in the prior year.
Investing Activities
Applied used$551 million of cash in investing activities during the six months endedMay 1, 2022 . Capital expenditures totaled$354 million and purchases of investments, net of proceeds from sales and maturities of investments were$197 million , during the six months endedMay 1, 2022 . 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. 44
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Financing Activities
Applied used$4.2 billion of cash in financing activities during the six months endedMay 1, 2022 , consisting primarily of cash used for repurchases of common stock of$3.6 billion , dividends to stockholders of$425 million and tax withholding payments for vested equity awards of$256 million , partially offset by proceeds from common stock issuance of$96 million . InMarch 2022 andDecember 2021 , Applied's Board of Directors declared quarterly cash dividends, in the amount of$0.26 and$0.24 per share, respectively. The dividend declared inMarch 2022 is payable inJune 2022 . 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. InMarch 2022 , Applied's Board of Directors approved a common stock repurchase program authorizing$6.0 billion in repurchases, which supplemented the previously existing$7.5 billion authorization approved inMarch 2021 . As ofMay 1, 2022 , approximately$7.4 billion remained available for future stock repurchases under the repurchase program. 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. 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 ofMay 1, 2022 . Remaining credit facilities in the amount of approximately$62 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.
No amounts were outstanding under any of these facilities at both
Applied has a short-term commercial paper program under which Applied may issue unsecured commercial paper notes of up to a total amount of$1.5 billion . As ofMay 1, 2022 , 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. Applied had senior unsecured notes in the aggregate principal amount of$5.5 billion outstanding as ofMay 1, 2022 . See Note 10 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 ofMay 1, 2022 , the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately$532 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 of
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Others
OnDecember 22, 2017 , theU.S. government enacted the Tax Cuts and Jobs Act (Tax 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 ofMay 1, 2022 , Applied had$694 million of total payments remaining, payable in installments in the next four 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. Beginning in fiscal 2023, the Tax Act eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five or fifteen years. AlthoughCongress is considering legislation that would defer the capitalization and amortization requirement, there is no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it may reduce our cash flows beginning in fiscal 2023. 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. 46
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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.
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Allowance for Credit Losses
Applied maintains an allowance for credit losses 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 (FIFO) 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.
Applied reviews goodwill and intangible assets for impairment annually during
the fourth quarter of each fiscal year and whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The process of evaluating the potential impairment of goodwill and
intangible assets requires significant judgment, especially in emerging markets.
When reviewing 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.
In performing a qualitative assessment, Applied considers business conditions
and other factors including, but not limited to (i) adverse industry or economic
trends, (ii) restructuring actions and lower projections that may impact future
operating results, (iii) sustained decline in share price, and (iv) overall
financial performance and other events affecting the reporting units. If Applied
concludes that is more likely than not that the fair value of a reporting unit
is less than its carrying amount, then a quantitative impairment test is
performed by estimating the fair value of the reporting unit and comparing it to
its carrying value. If the carrying value of a reporting unit exceeds its fair
value, Applied would record an impairment charge equal to the excess of the
carrying value of the reporting unit's goodwill over its fair value.
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.
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.
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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.
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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 and severance charges and any
associated adjustments; certain incremental expenses related to COVID-19;
impairments of assets; gain or loss on 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.
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.
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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
May 1, May 2, May 1, May 2,
(In millions, except percentages) 2022 2021 2022 2021
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis $ 2,927 $ 2,653 $ 5,886 $ 5,002
Certain items associated with acquisitions1 7 7 13 15
Certain incremental expenses related to COVID-192 - - - 12
Other charges - 2 - 2
Non-GAAP adjusted gross profit $ 2,934 $ 2,662 $ 5,899 $ 5,031
Non-GAAP adjusted gross margin 47.0 % 47.7 % 47.1 % 46.8 %
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis $ 1,894 $ 1,579 $ 3,870 $ 2,862
Certain items associated with acquisitions1 10 12 19 25
Acquisition integration and deal costs 9 11 13 35
Certain incremental expenses related to COVID-192 - - - 24
Severance and related charges3 - 6 (4) 158
Deal termination fee - 154 - 154
Other charges - 6 - 6
Non-GAAP adjusted operating income $ 1,913 $ 1,768 $ 3,898 $ 3,264
Non-GAAP adjusted operating margin 30.6 % 31.7 % 31.1 % 30.4 %
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis $ 1,536 $ 1,330 $ 3,328 $ 2,460
Certain items associated with acquisitions1 10 12 19 25
Acquisition integration and deal costs 12 12 16 36
Certain incremental expenses related to COVID-192 - - - 24
Severance and related charges3 - 6 (4) 158
Deal termination fee - 154 - 154
Realized loss (gain) on strategic investments, net (2) 6 - 4
Unrealized loss (gain) on strategic investments, net (28) (26) (33) (32)
Other charges - 6 - 6
Income tax effect of share-based compensation4 14 6 (44) (23)
Income tax effects related to intra-entity intangible asset transfers
81 17 99 37
Resolution of prior years' income tax filings and other tax items
7 (10) (55) (13)
Income tax effect of non-GAAP adjustments5 6 (4) 6 (45)
Non-GAAP adjusted net income $ 1,636 $ 1,509 $ 3,332 $ 2,791 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. 3 The severance and related charges primarily related to a one-time voluntary retirement
program offered to certain eligible employees. 4 GAAP basis tax benefit related to share-based compensation is recognized ratably over
the fiscal year on a non-GAAP basis.
5 Adjustment to provision for income taxes related to non-GAAP adjustments reflected in
income before income taxes.
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APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
Three Months Ended Six Months Ended
May 1, May 2, May 1, May 2,
(In millions, except per share amounts) 2022 2021 2022 2021
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis $ 1.74 $ 1.43 $ 3.74 $ 2.66
Certain items associated with acquisitions 0.01 0.01 0.02 0.02
Acquisition integration and deal costs 0.01 0.01 0.02 0.03
Certain incremental expenses related to COVID-19 - - - 0.02
Severance and related charges - 0.01 - 0.13
Deal termination fee - 0.17 - 0.17
Realized loss (gain) on strategic investments, net - 0.01 - -
Unrealized loss (gain) on strategic investments, net (0.03) (0.03) (0.04) (0.02)
Income tax effect of share-based compensation 0.02 0.01 (0.05) (0.02)
Income tax effects related to intra-entity intangible asset transfers
0.09 0.02 0.11 0.04
Resolution of prior years' income tax filings and other tax items
0.01 (0.01) (0.06) (0.01)
Non-GAAP adjusted earnings per diluted share $ 1.85 $ 1.63 $ 3.74 $ 3.02
Weighted average number of diluted shares 883 927 890 926
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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
May 1, May 2, May 1, May 2,
(In millions, except percentages) 2022 2021 2022 2021
Semiconductor Systems Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis
$ 1,648 $ 1,542 $ 3,419 $ 2,803 Certain items associated with acquisitions1 8 10 15 20 Acquisition integration costs - - - (2) Certain incremental expenses related to COVID-192 - - - 12 Other charges - 3 - 3 Non-GAAP adjusted operating income$ 1,656 $ 1,555 $ 3,434 $ 2,836 Non-GAAP adjusted operating margin 37.1 % 39.1 % 38.0 % 37.7 % AGS Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis$ 422 $ 358 $ 825 $ 690 Certain incremental expenses related to COVID-192 - - - 8 Other charges - 1 - 1 Non-GAAP adjusted operating income$ 422 $ 359 $ 825 $ 699 Non-GAAP adjusted operating margin 30.5 % 29.8 % 30.5 % 29.6 %
Display and Adjacent Markets Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis
$ 81 $ 65 $ 157 $ 130 Certain items associated with acquisitions1 1 1 2 2 Certain incremental expenses related to COVID-192 - - - 1 Severance and related charges3 - - - 8 Non-GAAP adjusted operating income$ 82 $ 66 $ 159 $ 141 Non-GAAP adjusted operating margin 21.5 % 17.6 % 21.3 % 17.9 %
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. 3 The severance and related charges related to workforce reduction actions globally
across the Display and Adjacent Markets business.
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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