Applied Materials Announces Second Quarter 2016 Results

Applied reports EPS of $0.29; non-GAAP EPS of $0.34 at high end of guidance range 

Generates $3.5 billion in new orders, highest in 15 years  

Returns $1 billion to shareholders through dividends and share repurchases

Expects record earnings per share in the third quarter of 2016

 

SANTA CLARA, Calif., May 19, 2016  -- Applied Materials, Inc. (AMAT) today reported results for its second quarter ended May 1, 2016.

 

Second quarter orders were $3.45 billion, up 52 percent sequentially and up 37 percent year over year. Backlog increased to $4.17 billion. Net sales of $2.45 billion were up 9 percent sequentially, flat year over year, and near the high end of guidance.

 

The company recorded gross margin of 41.0 percent, operating margin of 17.3 percent, and net income of $320 million or $0.29 per diluted share. On a non-GAAP adjusted basis, the company reported second quarter gross margin of 42.7 percent, operating margin of 19.2 percent, and net income of $376 million or $0.34 per diluted share.

The company generated $481 million in cash from operations during the second quarter, paid dividends of $113 million and used $900 million to repurchase 45 million shares of common stock.

 

“In our second quarter we booked our highest orders in 15 years and we expect to deliver record earnings in fiscal 2016,” said Gary Dickerson, president and CEO. “We are making significant progress with our strategy in semiconductor, display and service, and have a great pipeline of differentiated products that will fuel future growth.”

 

 

Quarterly Results Summary

														Change
		Q2 FY2016				Q1 FY2016				Q2 FY2015				Q2 FY2016 vs.  Q1 FY2016						Q2 FY2016 vs.  Q2 FY2015
		(In millions, except per share amounts and percentages)
New orders		$	3,451			$	2,275			$	2,515				52			%			37	%
Net sales		$	2,450			$	2,257			$	2,442				9			%			—	%
Gross margin		41.0		%		40.6		%		41.6		%			0.4			points			(0.6	) points
Operating margin		17.3		%		15.7		%		17.0		%			1.6			points			0.3	points
Net income		$	320			$	286			$	364				12			%			(12	)%
Diluted earnings per share (EPS)		$	0.29			$	0.25			$	0.29				16			%			—	%

 

														Change
Non-GAAP Adjusted Results		Q2 FY2016				Q1 FY2016				Q2 FY2015				Q2 FY2016 vs.  Q1 FY2016				Q2 FY2016 vs.  Q2 FY2015
		(In millions, except per share amounts and percentages)
Non-GAAP adjusted gross margin		42.7		%		42.4		%		43.2		%			0.3	points		(0.5		) points
Non-GAAP adjusted operating margin		19.2		%		17.8		%		19.5		%			1.4	points		(0.3		) points
Non-GAAP adjusted net income		$	376			$	302			$	362				25	%		4		%
Non-GAAP adjusted diluted EPS		$	0.34			$	0.26			$	0.29				31	%		17		%

Applied's non-GAAP adjusted results exclude the impact of the following, where applicable: certain items related to mergers and acquisitions; restructuring charges and any associated adjustments; impairments of assets, or investments; gain or loss on sale of strategic investments; and certain discrete adjustments and tax items. A reconciliation of the GAAP and non-GAAP adjusted results is provided in the financial tables included in this release. See also “Use of Non-GAAP Adjusted Financial Measures” section.

Business Outlook

In the third quarter of fiscal 2016, Applied expects net sales to be up 14 percent to 18 percent sequentially. Non-GAAP adjusted diluted EPS is expected to be in the range of $0.46 to $0.50.

This outlook excludes known charges related to completed acquisitions of $0.04 per share and does not exclude other non-GAAP adjustments that may arise subsequent to this release.

Second Quarter Reportable Segment Information

Silicon Systems	Q2 FY2016				Q1 FY2016				Q2 FY2015
	(In millions, except percentages)
New orders	$	1,966			$	1,275			$	1,704
Foundry		23	%			38	%			36	%
DRAM		17	%			29	%			31	%
Flash		49	%			22	%			21	%
Logic and other		11	%			11	%			12	%
Net sales		1,587				1,373				1,560
Operating income		364				265				374
Operating margin		22.9	%			19.3	%			24.0	%
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	410			$	312			$	418
Non-GAAP adjusted operating margin		25.8	%			22.7	%			26.8	%
Applied Global Services	Q2 FY2016				Q1 FY2016				Q2 FY2015
	(In millions, except percentages)
New orders	$	677			$	773			$	641
Net sales		648				626				646
Operating income		171				156				170
Operating margin		26.4	%			24.9	%			26.3	%
Display	Q2 FY2016				Q1 FY2016				Q2 FY2015
	(In millions, except percentages)
New orders	$	700			$	183			$	120
Net sales		167				213				163
Operating income		29				38				40
Operating margin		17.4	%			17.8	%			24.5	%
Energy and Environmental Solutions	Q2 FY2016				Q1 FY2016				Q2 FY2015
	(In millions, except percentages)
New orders	$	108			$	44			$	50
Net sales		48				45				73
Operating income (loss)		—				6				(5	)
Operating margin		—	%			13.3	%			(6.8	)%
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income (loss)	$	(1	)		$	4			$	(4	)
Non-GAAP adjusted operating margin		(2.1	)%			8.9	%			(5.5	)%

Backlog Information

Applied's backlog increased 34 percent to $4.17 billion and included positive adjustments of $58 million, primarily consisting of favorable foreign currency impact. Backlog composition by reportable segment was as follows:

Silicon Systems	49	%
Applied Global Services	23	%
Display	25	%
Energy and Environmental Solutions	3	%

Use of Non-GAAP Adjusted Financial Measures

Management uses non-GAAP adjusted results to evaluate the company’s operating and financial performance in light of business objectives and for planning purposes. These measures are not in accordance with GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. Applied believes these measures enhance 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. The presentation of this additional information should not be considered a substitute for results prepared in accordance with GAAP.

Webcast Information

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

Forward-Looking Statements

This press release contains forward-looking statements, including those regarding anticipated growth and trends in our businesses and markets, industry outlooks, technology transitions, our financial performance and market share positions, our earnings expectations, our business outlook for the third quarter of fiscal 2016, and other statements that are not historical facts. These statements and their underlying assumptions are subject to risks and uncertainties and are not guarantees of future performance. Factors that could cause actual results to differ materially from those expressed or implied by such statements include, without limitation: the level of demand for our products; global economic and industry conditions; consumer demand for electronic products; the demand for semiconductors; customers’ technology and capacity requirements; the introduction of new and innovative technologies, and the timing of technology transitions; our ability to develop, deliver and support new products and technologies; the concentrated nature of our customer base;  our ability to expand our current markets, increase market share and develop new markets; market acceptance of existing and newly developed products; our ability to obtain and protect intellectual property rights in key technologies; our ability to achieve the objectives of operational and strategic initiatives, align our resources and cost structure with business conditions, and attract, motivate and retain key employees; the variability of operating expenses and results among products and segments, and our ability to accurately forecast future results, market conditions, customer requirements and business needs; and other risks and uncertainties described in our SEC filings, including our most recent Forms 10-Q and 8-K. All forward-looking statements are based on management’s current estimates, projections and assumptions, and we assume no obligation to update them.

About Applied Materials

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

Contact:

Kevin Winston (editorial/media) 408.235.4498
Michael Sullivan (financial community) 408.986.7977

APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
		Three Months Ended												Six Months Ended
(In millions, except per share amounts)		May 1,  2016				January 31,  2016				April 26,  2015				May 1,  2016				April 26,  2015
Net sales		$	2,450			$	2,257			$	2,442			$	4,707			$	4,801
Cost of products sold		1,446				1,341				1,426				2,787				2,826
Gross profit		1,004				916				1,016				1,920				1,975
Operating expenses:
Research, development and engineering		386				374				365				760				716
Marketing and selling		102				106				109				208				220
General and administrative		91				82				140				173				257
Gain on derivatives associated with terminated business combination		—				—				(14		)		—				(92		)
Total operating expenses		579				562				600				1,141				1,101
Income from operations		425				354				416				779				874
Interest expense		37				42				24				79				47
Interest income and other income (loss), net		7				2				(3		)		9				(1		)
Income before income taxes		395				314				389				709				826
Provision for income taxes		75				28				25				103				114
Net income		$	320			$	286			$	364			$	606			$	712
Earnings per share:
Basic		$	0.29			$	0.25			$	0.30			$	0.54			$	0.58
Diluted		$	0.29			$	0.25			$	0.29			$	0.53			$	0.57
Weighted average number of shares:
Basic		1,113				1,146				1,230				1,130				1,227
Diluted		1,119				1,154				1,241				1,137				1,241

 

APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)		May 1,  2016				January 31,  2016				October 25,  2015
ASSETS
Current assets:
Cash and cash equivalents		$	2,470			$	2,962			$	4,797
Short-term investments		170				154				168
Accounts receivable, net		1,913				1,625				1,739
Inventories		1,924				1,835				1,833
Other current assets		251				334				724
Total current assets		6,728				6,910				9,261
Long-term investments		934				996				946
Property, plant and equipment, net		904				908				892
Goodwill		3,304				3,302				3,302
Purchased technology and other intangible assets, net		668				714				762
Deferred income taxes and other assets		537				496				145
Total assets		$	13,075			$	13,326			$	15,308
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt		$	—			$	—			$	1,200
Accounts payable and accrued expenses		1,630				1,457				1,833
Customer deposits and deferred revenue		981				850				765
Total current liabilities		2,611				2,307				3,798
Long-term debt		3,343				3,343				3,342
Other liabilities		556				508				555
Total liabilities		6,510				6,158				7,695
Total stockholders’ equity		6,565				7,168				7,613
Total liabilities and stockholders’ equity		$	13,075			$	13,326			$	15,308

 

APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)	Three Months Ended												Six Months Ended
	May 1,  2016				January 31,  2016				April 26,  2015				May 1,  2016				April 26,  2015
Cash flows from operating activities:
Net income	$	320			$	286			$	364			$	606			$	712
Adjustments required to reconcile net  income to cash provided by operating  activities:
Depreciation and amortization	96				96				90				192				182
Share-based compensation	48				54				47				102				95
Excess tax benefits from share-based  compensation	(3		)		(10		)		(12		)		(13		)		(51		)
Deferred income taxes	(22		)		15				(21		)		(7		)		7
Other	5				10				13				15				21
Net change in operating assets and liabilities	37				(244		)		(183		)		(207		)		(608		)
Cash provided by operating activities	481				207				298				688				358
Cash flows from investing activities:
Capital expenditures	(47		)		(68		)		(64		)		(115		)		(113		)
Cash paid for acquisitions, net of cash acquired	(8		)		—				—				(8		)		—
Proceeds from sales and maturities of investments	232				241				177				473				317
Purchases of investments	(182		)		(282		)		(203		)		(464		)		(344		)
Cash used in investing activities	(5		)		(109		)		(90		)		(114		)		(140		)
Cash flows from financing activities:
Debt repayments	—				(1,205		)		—				(1,205		)		—
Proceeds from common stock issuances and others	42				2				42				44				42
Common stock repurchases	(900		)		(625		)		—				(1,525		)		—
Excess tax benefits from share-based compensation	3				10				12				13				51
Payments of dividends to stockholders	(113		)		(115		)		(123		)		(228		)		(245		)
Cash used in financing activities	(968		)		(1,933		)		(69		)		(2,901		)		(152		)
Effect of exchange rate changes on cash  and cash equivalents	—				—				(1		)		—				(1		)
Increase (decrease) in cash and cash equivalents	(492		)		(1,835		)		138				(2,327		)		65
Cash and cash equivalents — beginning of period	2,962				4,797				2,929				4,797				3,002
Cash and cash equivalents — end of period	$	2,470			$	2,962			$	3,067			$	2,470			$	3,067
Supplemental cash flow information:
Cash payments for income taxes	$	51			$	44			$	118			$	95			$	207
Cash refunds from income taxes	$	98			$	5			$	2			$	103			$	5
Cash payments for interest	$	42			$	34			$	7			$	76			$	46

 

APPLIED MATERIALS, INC.
UNAUDITED SUPPLEMENTAL INFORMATION
Corporate Unallocated Expenses
(In millions)		Q2 FY2016				Q1 FY2016				Q2 FY2015
Share-based compensation		$	48			$	54			$	47
Certain items associated with terminated business combination		—				—				29
Gain on derivatives associated with terminated business combination, net		—				—				(14		)
Other unallocated expenses		91				57				101
Total corporate		$	139			$	111			$	163

 

Additional Information
		Q2 FY2016						Q1 FY2016						Q2 FY2015
New Orders and Net Sales by Geography
(In $ millions)		New Orders			Net Sales			New Orders			Net Sales			New Orders			Net Sales
United States		386			272			369			293			368			472
% of Total		11	%		11	%		16	%		13	%		15	%		19	%
Europe		194			97			156			138			131			169
% of Total		6	%		4	%		7	%		6	%		5	%		7	%
Japan		339			260			109			334			365			274
% of Total		10	%		10	%		5	%		15	%		15	%		11	%
Korea		792			506			373			273			607			536
% of Total		23	%		21	%		17	%		12	%		24	%		22	%
Taiwan		445			311			534			637			589			461
% of Total		13	%		13	%		23	%		28	%		23	%		19	%
Southeast Asia		392			252			232			87			103			96
% of Total		11	%		10	%		10	%		4	%		4	%		4	%
China		903			752			502			495			352			434
% of Total		26	%		31	%		22	%		22	%		14	%		18	%
Employees (In thousands)
Regular Full Time		14.8						14.6						14.3

 

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
		Three Months Ended												Six Months Ended
(In millions, except percentages)		May 1,  2016				January 31,  2016				April 26,  2015				May 1,  2016				April 26,  2015
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis		$	1,004			$	916			$	1,016			$	1,920			$	1,975
Certain items associated with acquisitions1		41				42				39				83				79
Reversals related to restructuring, net4		—				(1		)		—				(1		)		—
Non-GAAP adjusted gross profit		$	1,045			$	957			$	1,055			$	2,002			$	2,054
Non-GAAP adjusted gross margin		42.7		%		42.4		%		43.2		%		42.5		%		42.8		%
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis		$	425			$	354			$	416			$	779			$	874
Certain items associated with acquisitions1		46				48				45				94				91
Acquisition integration costs		—				—				—				—				1
Gain on derivatives associated with terminated  business combination, net		—				—				(14		)		—				(92		)
Certain items associated with terminated business combination2		—				—				29				—				49
Reversals related to restructuring, net3,4		(1		)		(1		)		—				(2		)		—
Non-GAAP adjusted operating income		$	470			$	401			$	476			$	871			$	923
Non-GAAP adjusted operating margin		19.2		%		17.8		%		19.5		%		18.5		%		19.2		%
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis5		$	320			$	286			$	364			$	606			$	712
Certain items associated with acquisitions1		46				48				45				94				91
Acquisition integration costs		—				—				—				—				1
Gain on derivatives associated with terminated  business combination, net		—				—				(14		)		—				(92		)
Certain items associated with terminated business  combination2		—				—				29				—				49
Reversals related to restructuring, net3,4		(1		)		(1		)		—				(2		)		—
Impairment (gain on sale) of strategic investments, net		(1		)		(2		)		6				(3		)		7
Loss on early extinguishment of debt		—				5				—				5				—
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items5		16				(29		)		(54		)		(13		)		(71		)
Income tax effect of non-GAAP adjustments		(4		)		(5		)		(14		)		(9		)		3
Non-GAAP adjusted net income		$	376			$	302			$	362			$	678			$	700

 

1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2	These items are incremental charges related to the terminated business combination agreement with Tokyo Electron Limited, consisting of acquisition-related and integration planning costs.
3	Results for the three months ended May 1, 2016 included a $1 million favorable adjustment of employee-related costs associated with the cost reductions in the solar business.
4	Results for the three months ended January 31, 2016 included a $1 million benefit from sales of solar equipment tools for which inventory had been previously reserved related to the cost reductions in the solar business.
5	Amounts for three and six months ended April 26, 2015 included an adjustment to decrease the provision for income taxes by $39 million and $35 million, respectively, with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.

 

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
		Three Months Ended												Six Months Ended
(In millions, except per share amounts)		May 1,  2016				January 31,  2016				April 26,  2015				May 1,  2016				April 26,  2015
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis1		$	0.29			$	0.25			$	0.29			$	0.53			$	0.57
Certain items associated with acquisitions		0.04				0.04				0.03				0.08				0.07
Certain items associated with terminated business combination		—				—				0.02				—				0.03
Gain on derivatives associated with terminated business  combination, net		—				—				(0.01		)		—				(0.05		)
Reinstatement of federal R&D tax credit, resolution  of prior years’ income tax filings and other tax items1		0.01				(0.03		)		(0.04		)		(0.01		)		(0.06		)
Non-GAAP adjusted earnings per diluted share		$	0.34			$	0.26			$	0.29			$	0.60			$	0.56
Weighted average number of diluted shares		1,119				1,154				1,241				1,137				1,241

 

1

Amounts for three and six months ended April 26, 2015 included an adjustment to decrease the provision for income taxes by $39 million and $35 million, respectively, with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.

 

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
		Three Months Ended												Six Months Ended
(In millions, except percentages)		May 1,  2016				January 31,  2016				April 26,  2015				May 1,  2016				April 26,  2015
Silicon Systems Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis		$	364			$	265			$	374			$	629			$	681
Certain items associated with acquisitions1		46				47				44				93				87
Non-GAAP adjusted operating income		$	410			$	312			$	418			$	722			$	768
Non-GAAP adjusted operating margin		25.8		%		22.7		%		26.8		%		24.4		%		25.5		%
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis		$	171			$	156			$	170			$	327			$	323
Certain items associated with acquisitions1		—				—				—				—				1
Non-GAAP adjusted operating income		$	171			$	156			$	170			$	327			$	324
Non-GAAP adjusted operating margin		26.4		%		24.9		%		26.3		%		25.7		%		26.4		%
Display Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis		$	29			$	38			$	40			$	67			$	112
Certain items associated with acquisitions1		—				—				—				—				1
Non-GAAP adjusted operating income		$	29			$	38			$	40			$	67			$	113
Non-GAAP adjusted operating margin		17.4		%		17.8		%		24.5		%		17.6		%		25.8		%
EES Non-GAAP Adjusted Operating Income (Loss)
Reported operating income (loss) - GAAP basis		$	—			$	6			$	(5	)		$	6			$	(9	)
Certain items associated with acquisitions1		—				1				1				1				2
Reversals related to restructuring, net2		(1		)		(3		)		—				(4		)		—
Non-GAAP adjusted operating income (loss)		$	(1	)		$	4			$	(4	)		$	3			$	(7	)
Non-GAAP adjusted operating margin		(2.1		)%		8.9		%		(5.5		)%		3.2		%		(5.5		)%

 

1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2	Results for the three months ended May 1, 2016 and January 31, 2016 and six months ended May 1, 2016 primarily included favorable adjustments of employee-related costs associated with the cost reductions in the solar business.

 

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED OPERATING EXPENSES
	Three Months Ended
(In millions)	May 1, 2016				January 31, 2016
Operating expenses - GAAP basis	$	579			$	562
Reversals related to restructuring, net	1				—
Certain items associated with acquisitions	(5		)		(6		)
Non-GAAP adjusted operating expenses	$	575			$	556

 

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED EFFECTIVE INCOME TAX RATE
	Three Months Ended
(In millions, except percentages)	May 1, 2016
Provision for income taxes - GAAP basis (a)	$	75
Reinstatement of federal R&D tax credit, resolutions of prior years’ income tax filings and other tax items	(16		)
Income tax effect of non-GAAP adjustments	4
Non-GAAP adjusted provision for income taxes (b)	$	63
Income before income taxes - GAAP basis (c)	$	395
Certain items associated with acquisitions	46
Reversals related to restructuring, net	(1		)
Gain on sale of strategic investments, net	(1		)
Non-GAAP adjusted income before income taxes (d)	$	439
Effective income tax rate - GAAP basis (a/c)	19.0		%
Non-GAAP adjusted effective income tax rate (b/d)	14.4		%