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 25, 2020 contained in the Company's Form 10-K filed onDecember 11, 2020 . 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 and investments, including the proposed acquisition ofKokusai Electric Corporation (Kokusai Electric ), 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 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 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 and community. Applied continues to maintain 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 has a multi-phase plan to return to working on-site, which takes into consideration factors such as Applied's business needs, local government regulations, community case trends, and recommendation 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 Materials is committed to helping those most impacted by the ongoing COVID-19 pandemic. 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 with medical facilities, provided blood analysis systems to medical professionals and sent emergency support to food banks. 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 -------------------------------------------------------------------------------- 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, AppliedGlobal Services , and Display and Adjacent Markets. A summary of financial information for each reportable segment is found in Note 17 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 January 31, January 26, 2021 2020 Change (In millions, except per share amounts and percentages) Net sales$ 5,162 $ 4,162 $ 1,000 Gross margin 45.5 % 44.6 % 0.9 points Operating income$ 1,283 $ 1,042 $ 241 Operating margin 24.9 % 25.0 % (0.1) points Net income$ 1,130 $ 892 $ 238 Earnings per diluted share$ 1.22 $ 0.96 $ 0.26 Fiscal 2021 and 2020 contain 53 weeks and 52 weeks, respectively, and the first three months of fiscal 2021 and 2020 contained 14 and 13 weeks, respectively. COVID-19 was designated a pandemic during fiscal 2020 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 aU.S. 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. Even with the ongoing challenges faced during the pandemic, semiconductor equipment customers continued to make strategic investments in new technology transitions during the three months endedJanuary 31, 2021 . Foundry and logic spending increased in the three months endedJanuary 31, 2021 compared to the same period in the prior year led by customer investment in advanced foundry-logic nodes. Spending by memory customers increased in the three months endedJanuary 31, 2021 compared to the same period in the prior year, as the industry continues to recover from excess supply and inventory levels. Applied saw continued growth in its services business compared to the same period in the prior year driven by an increase in the installed base of equipment and in long-term service agreements. Applied's display and adjacent markets revenue increased in the three months endedJanuary 31, 2021 compared to the same period in the prior year due to increased investment in display manufacturing equipment for mobile products. 36 -------------------------------------------------------------------------------- Table of Contents In response to the ongoing COVID-19 pandemic and evolving conditions and worldwide response, Applied made adjustments to its global operations and continues to see recovery within its supply chain and strong demand from semiconductor customers. However, 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 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 Operations Net Sales Net sales for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions, except percentages) Semiconductor Systems$ 3,553 69 %$ 2,814 68 % 26 % Applied Global Services 1,155 22 % 997 24 % 16 % Display and Adjacent Markets 411 8 % 332 8 % 24 % Corporate and Other 43 1 % 19 - % 126 % Total$ 5,162 100 %$ 4,162 100 % 24 % For the three months endedJanuary 31, 2021 compared to the same period in the prior year, net sales increased primarily due to increased customer investments in semiconductor equipment. The Semiconductor Systems segment continued to represent the largest contributor of total 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 January 31, January 26, 2021 2020 Change (In millions, except percentages) China $ 1,383 27 %$ 1,272 31 % 9 % Korea 1,289 25 % 508 12 % 154 % Taiwan 1,200 23 % 1,365 33 % (12) % Japan 458 9 % 351 8 % 30 % Southeast Asia 190 4 % 72 2 % 164 % Asia Pacific 4,520 88 % 3,568 86 % 27 % United States 343 6 % 441 10 % (22) % Europe 299 6 % 153 4 % 95 % Total $ 5,162 100 %$ 4,162 100 % 24 % The changes in net sales in all regions, other thanChina , in the three months endedJanuary 31, 2021 compared to the same period in the prior year primarily reflected changes in semiconductor equipment spending. The increase in net sales to customers inChina for the three months endedJanuary 31, 2021 compared to the same period in the prior year was primarily due to increased investments in display manufacturing equipment and customer spending on comprehensive service agreements. 37 -------------------------------------------------------------------------------- Table of Contents Gross margins for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change Gross margin 45.5 % 44.6 % 0.9 points Gross margin in the three months endedJanuary 31, 2021 increased compared to the same period 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 and higher personnel costs due to increase in headcount to provide manufacturing capacity and flexibility. Gross margin during the three months endedJanuary 31, 2021 andJanuary 26, 2020 included$36 million and$31 million of share-based compensation expense, respectively. Research, Development and Engineering Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions) Research, development and engineering$ 606 $ 552 $ 54 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 months endedJanuary 31, 2021 compared to the same period in the prior year were primarily due to additional headcount. 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 endedJanuary 31, 2021 andJanuary 26, 2020 included$40 million and$35 million of share-based compensation expense, respectively. Marketing and Selling Marketing and selling expenses for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions) Marketing and selling$ 147 $ 135 $ 12 Marketing and selling expenses for the three months endedJanuary 31, 2021 increased compared to the same period in fiscal 2020 primarily due to additional headcount. Marketing and selling expenses during the three months endedJanuary 31, 2021 andJanuary 26, 2020 included$13 million and$11 million of share-based compensation expense, respectively. 38 -------------------------------------------------------------------------------- Table of Contents General and Administrative General and administrative (G&A) expenses for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions) General and administrative$ 161 $ 129 $ 32 G&A expenses in the three months endedJanuary 31, 2021 increased compared to the same period in the prior year primarily due to additional headcount and higher expense associated with business combination activities. G&A expenses during the three months endedJanuary 31, 2021 andJanuary 26, 2020 included$18 million and$16 million of share-based compensation expense, respectively. Severance and Related Charges Severance and related charges for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions) Severance and related charges$ 152 $ -$ 152 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. During the first quarter of fiscal 2021, Applied recognized$152 million of severance and related charges in connection with the Fiscal 2021 Severance Plan. Interest Expense and Interest and Other Income (Loss), net Interest expense and interest and other income (loss), net for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions) Interest expense$ 61 $ 59$ 2 Interest and other income (loss), net$ 18 $ 22$ (4) Interest expense incurred was primarily associated with issued senior unsecured notes. Interest expense in the three months endedJanuary 31, 2021 remained relatively flat compared to the same period in the prior year. Interest and other income, net in the three months endedJanuary 31, 2021 decreased compared to the same period in the prior year, primarily driven by lower interest income, partially offset by higher net gain from investments during the three months endedJanuary 31, 2021 compared to the same period in the prior year. 39 -------------------------------------------------------------------------------- Table of Contents Income Taxes Provision for income taxes and effective tax rates for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions, except percentages) Provision for income taxes $ 110$ 113 $ (3) Effective tax rate 8.9 % 11.2 % (2.3) 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 27, 2020 , theU.S. government enacted the Consolidated Appropriations Act. The enactment of this Act does not result in any material adjustments to Applied's provision for income taxes. Applied's effective tax rates for the first quarter of fiscal 2021 and 2020 were 8.9 percent and 11.2 percent, respectively. The effective tax rate for the first quarter of fiscal 2021 was lower than the same period in the prior fiscal year primarily due to a tax benefit related to severance and related charges recorded in the first quarter of fiscal 2021 and higher income inSingapore , which is subject to a lower tax rate. These tax benefits were partially offset by the reduction in excess tax benefits from stock-based compensation in the first quarter of fiscal 2021 when compared to the first quarter of the prior fiscal year. 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 17 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 as devices scale to advanced technology nodes. Semiconductor equipment customers continued to make strategic investments in new technology transitions during the first three months of fiscal 2021. Foundry and logic spending increased, in absolute dollars, in the three months endedJanuary 31, 2021 compared to the same period in the prior year led by customer investment in advanced foundry-logic nodes. Spending by memory customers also increased in the three months endedJanuary 31, 2021 compared to the same period in the prior year. Certain significant measures for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Change (In millions,
except percentages and ratios)
Net sales$ 3,553 $ 2,814 $ 739 26 % Operating income$ 1,261 $ 915 $ 346 38 % Operating margin 35.5 % 32.5 % 3.0 points Net sales for Semiconductor Systems by end use application for the periods indicated were as follows: Three Months Ended January 31, January 26, 2021 2020 Foundry, logic and other 58 % 68 % Dynamic random-access memory (DRAM) 17 % 15 % Flash memory 25 % 17 % 100 % 100 % Net sales for the three months endedJanuary 31, 2021 increased, in absolute dollars, compared to the same period in the prior year primarily due to higher spending from memory customers. Operating margin for the three months endedJanuary 31, 2021 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 costs. In the three months endedJanuary 31, 2021 , three customers each accounted for at least 10 percent of this segment's net sales. 41 -------------------------------------------------------------------------------- Table of Contents 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 January 31, January 26, 2021 2020 Change (In millions, except percentages) Korea$ 1,126 32%$ 365 13% 208 % Taiwan $ 972 27%$ 1,179 42% (18) % 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 AppliedGlobal 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 January 31, January 26, 2021 2020 Change (In millions,
except percentages and ratios)
Net sales$ 1,155 $ 997 $ 158 16 % Operating income$ 332 $ 278 $ 54 19 % Operating margin 28.7 % 27.9 % 0.8 points Net sales for the three months endedJanuary 31, 2021 increased compared to the same period in the prior year primarily due to higher customer spending on comprehensive service agreements and spares, including the impact of an additional one week during the first quarter of fiscal 2021, partially offset by lower customer spending on legacy systems. Operating margin for the three months endedJanuary 31, 2021 compared to the same period in the prior year increased primarily due 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 endedJanuary 31, 2021 , one customer accounted for more than 10 percent of this segment's total 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. 42 -------------------------------------------------------------------------------- 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. 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 January 31, January 26, 2021 2020 Change (In millions,
except percentages and ratios)
Net sales $ 411$ 332 $ 79 24 % Operating income $ 65$ 38 $ 27 71 % Operating margin 15.8 % 11.4 % 4.4 points Net sales for the three months endedJanuary 31, 2021 increased 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. Operating margin for the three months endedJanuary 31, 2021 increased compared to the same period in the prior year due to higher net sales and favorable changes in customer and product mix. In the three months endedJanuary 31, 2021 , three customers each accounted for at least 10 percent of this segment's net sales, and together they accounted for approximately 77 percent of this segment's total net sales, with two customers accounting for approximately 66 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 January 31, January 26, 2021 2020 Change (In millions, except percentages) China $ 337 82%$ 304 92% 11% 43
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Table of Contents Financial Condition, Liquidity and Capital Resources Applied's cash, cash equivalents and investments consist of the following:
January 31, October 25,
2021 2020
(In millions)
Cash and cash equivalents $ 6,213 $ 5,351
Short-term investments 410 387
Long-term investments 1,601 1,538
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:
Three Months Ended
January 31, 2021 January 26, 2020
(In millions)
Cash provided by operating activities $ 1,421 $ 987
Cash used in investing activities$ (216) $
(162)
Cash used in financing activities$ (343) $
(530)
Operating Activities Cash from operating activities for the three months endedJanuary 31, 2021 was$1.4 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 three months of fiscal 2021 compared to the same period in the prior year primarily due to better cash collections and higher tax refunds, partially offset by higher payments to suppliers and variable compensation. 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$369 million and$206 million of accounts receivable during the three months endedJanuary 31, 2021 andJanuary 26, 2020 , respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months endedJanuary 31, 2021 andJanuary 26, 2020 . Applied's working capital was$9.8 billion as ofJanuary 31, 2021 and$8.9 billion as ofOctober 25, 2020 . Days sales outstanding for the three months endedJanuary 31, 2021 andJanuary 26, 2020 were 58 days and 59 days, respectively. Days sales outstanding varies due to the timing of shipments and payment terms. The decrease in days sales outstanding was primarily due to higher revenue and accounts receivable factoring compared to the same period in the prior year. Investing Activities Applied used$216 million of cash in investing activities during the three months endedJanuary 31, 2021 . Capital expenditures totaled$121 million , net cash paid for an immaterial acquisition was$12 million and purchases of investments, net of proceeds from sales and maturities of investments were$83 million during the three months endedJanuary 31, 2021 . 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 -------------------------------------------------------------------------------- Table of Contents Financing Activities Applied used$343 million of cash in financing activities during the three months endedJanuary 31, 2021 , consisting primarily of cash dividends to stockholders of$201 million and tax withholding payments for vested equity awards of$142 million . InDecember 2020 , Applied's Board of Directors declared a quarterly cash dividend, payable inMarch 2021 , in the amount of$0.22 , per share. 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. 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 ofJanuary 31, 2021 . Remaining credit facilities in the amount of approximately$77 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 bothJanuary 31, 2021 andOctober 25, 2020 . InAugust 2019 , Applied entered into a term loan credit agreement (Term Loan Credit Agreement) with a group of lenders (Term Loan 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. InDecember 2020 , Applied entered into an amendment to the Term Loan Credit Agreement with the Term Loan Lenders which, among other things, (i) extends toApril 30, 2021 the expiration date of the Lenders' commitments to fund the term loan and (ii) provides that the Lenders' commitments to fund the term loan shall terminate automatically if the SPA is terminated without the consummation of the transactions contemplated by the SPA. 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. No amounts were outstanding under the Term Loan Credit Agreement at bothJanuary 31, 2021 andOctober 25, 2020 . 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 ofJanuary 31, 2021 , 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. InMay 2020 , Applied issued$750 million aggregate principal amount of 1.750% senior unsecured notes due 2030 and$750 million aggregate principal amount of 2.750% senior unsecured notes due 2050, in a registered public offering. InJune 2020 , Applied used a portion of the net proceeds from the offering to redeem the outstanding$600 million in aggregate principal amount of its 2.625% senior unsecured notes dueOctober 1, 2020 and$750 million in aggregate principal amount of its 4.300% senior unsecured notes dueJune 15, 2021 , at a total aggregate redemption price of$1.4 billion . As a result, Applied recognized a$33 million loss on early extinguishment of these senior unsecured notes during the third quarter of fiscal 2020. Applied had senior unsecured notes in the aggregate principal amount of$5.5 billion outstanding as ofJanuary 31, 2021 . 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. 45 -------------------------------------------------------------------------------- Table of Contents 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 ofJanuary 31, 2021 , the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately$356 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 ofJanuary 31, 2021 , Applied has provided parent guarantees to banks for approximately$153 million to cover these arrangements. 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 ofJanuary 31, 2021 , Applied had$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. 46 -------------------------------------------------------------------------------- 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. 47 -------------------------------------------------------------------------------- Table of Contents 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.Goodwill and Intangible Assets 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. 48 -------------------------------------------------------------------------------- Table of Contents 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. 49 -------------------------------------------------------------------------------- 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 and severance charges and any associated adjustments; certain incremental expenses related to COVID-19; impairments of assets, or investments; gain or loss on sale of strategic investments; loss on early extinguishment of debt; certain income tax items and other discrete adjustments. On a non-GAAP basis, the tax effect related to share-based compensation is recognized ratably over the fiscal year. Additionally, non-GAAP results exclude estimated discrete income tax expense items associated 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. 50 -------------------------------------------------------------------------------- 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 January 31, January 26, (In millions, except percentages) 2021 2020 Non-GAAP Adjusted Gross Profit Reported gross profit - GAAP basis$ 2,349 $ 1,858 Certain items associated with acquisitions1 8 9 Certain incremental expenses related to COVID-192 12 - Non-GAAP adjusted gross profit$ 2,369 $ 1,867 Non-GAAP adjusted gross margin 45.9 % 44.9 % Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis$ 1,283 $ 1,042 Certain items associated with acquisitions1 13 13 Acquisition integration and deal costs 24 13 Certain incremental expenses related to COVID-192 24 - Severance and related charges3 152 - Non-GAAP adjusted operating income$ 1,496 $ 1,068 Non-GAAP adjusted operating margin 29.0 % 25.7 % Non-GAAP Adjusted Net Income Reported net income - GAAP basis$ 1,130 $ 892 Certain items associated with acquisitions1 13 13 Acquisition integration and deal costs 24 13 Certain incremental expenses related to COVID-192 24 - Severance and related charges3 152 - Realized loss (gain) on strategic investments, net (2) 2 Unrealized loss (gain) on strategic investments, net (6) 2 Income tax effect of share-based compensation4 (29) (33)
Income tax effects related to intra-entity intangible asset transfers
20 21
Resolution of prior years' income tax filings and other tax items
(3) (1)
Income tax effect of non-GAAP adjustments5 (41) (5)
Non-GAAP adjusted net income $ 1,282 $ 904 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
January 31, January 26,
(In millions, except per share amounts) 2021 2020
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis $ 1.22 $ 0.96
Certain items associated with acquisitions 0.01 0.01
Acquisition integration and deal costs 0.02 0.01
Certain incremental expenses related to COVID-19 0.02 -
Severance and related charges 0.13 -
Income tax effect of share-based compensation (0.03) (0.03)
Income tax effects related to intra-entity intangible asset transfers
0.02 0.03
Non-GAAP adjusted earnings per diluted share $ 1.39 $ 0.98
Weighted average number of diluted shares 925 927
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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
January 31, January 26,
(In millions, except percentages) 2021 2020
Semiconductor Systems Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis
$ 1,261 $ 915 Certain items associated with acquisitions1 10 10 Acquisition integration costs (2) - Certain incremental expenses related to COVID-192 12 - Non-GAAP adjusted operating income$ 1,281 $ 925 Non-GAAP adjusted operating margin 36.1 % 32.9 % AGS Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis$ 332 $ 278 Certain incremental expenses related to COVID-192 8 - Non-GAAP adjusted operating income$ 340 $ 278 Non-GAAP adjusted operating margin 29.4 % 27.9 %
Display and Adjacent Markets Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis
$ 65 $ 38 Certain items associated with acquisitions1 1 3 Certain incremental expenses related to COVID-192 1 - Severance and related charges3 8 - Non-GAAP adjusted operating income$ 75 $ 41 Non-GAAP adjusted operating margin 18.2 % 12.3 %
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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