Applied Materials(US:AMAT)2025-08-21 20:02PART I. FINANCIAL INFORMATION Item 1: Financial Statements (Unaudited) Unaudited Q3 2025 financials show increased quarterly revenue and gross profit, but nine-month net income declined due to higher taxes, with decreased operating cash flow and significant capital returns Consolidated Condensed Statements of Operations Consolidated condensed statements of operations detail key financial performance metrics for the three and nine months ended July 27, 2025 Consolidated Condensed Statements of Operations Summary | Metric | Three Months Ended Jul 27, 2025 ($ millions) | Three Months Ended Jul 28, 2024 ($ millions) | YoY Change | Nine Months Ended Jul 27, 2025 ($ millions) | Nine Months Ended Jul 28, 2024 ($ millions) | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $7,302 | $6,778 | +7.7% | $21,568 | $20,131 | +7.1% | | Gross Profit | $3,562 | $3,205 | +11.1% | $10,543 | $9,562 | +10.3% | | Income from Operations | $2,233 | $1,942 | +15.0% | $6,577 | $5,821 | +13.0% | | Net Income | $1,779 | $1,705 | +4.3% | $5,101 | $5,446 | -6.3% | | Diluted EPS | $2.22 | $2.05 | +8.3% | $6.29 | $6.52 | -3.5% | - The decrease in net income for the nine-month period was primarily driven by a significantly higher provision for income taxes, which rose to $1.903 billion in 2025 from $811 million in 202410 Consolidated Condensed Balance Sheets Consolidated condensed balance sheets present the company's financial position as of July 27, 2025, and October 27, 2024 Consolidated Condensed Balance Sheets Summary | Balance Sheet Item | July 27, 2025 ($ millions) | October 27, 2024 ($ millions) | Change ($ millions) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $5,384 | $8,022 | -$2,638 | | Total current assets | $19,718 | $21,220 | -$1,502 | | Total assets | $34,211 | $34,409 | -$198 | | Total liabilities | $14,707 | $15,408 | -$701 | | Total stockholders' equity | $19,504 | $19,001 | +$503 | Consolidated Condensed Statements of Cash Flows Consolidated condensed statements of cash flows detail cash movements from operating, investing, and financing activities for the nine months ended July 27, 2025 Consolidated Condensed Statements of Cash Flows Summary | Cash Flow Activity (Nine Months Ended) | July 27, 2025 ($ millions) | July 28, 2024 ($ millions) | | :--- | :--- | :--- | | Cash provided by operating activities | $5,130 | $6,102 | | Cash used in investing activities | ($2,643) | ($1,256) | | Cash used in financing activities | ($5,146) | ($2,701) | | Net (decrease) increase in cash | ($2,659) | $2,145 | - Key uses of cash in financing activities for the nine months ended July 27, 2025, included $4.044 billion for common stock repurchases and $1.019 billion for dividend payments26 Notes to Consolidated Condensed Financial Statements Notes to the financial statements provide additional details on significant accounting policies, tax rates, and legal proceedings - The effective tax rate for Q3 2025 was 30.6%, a significant increase from 13.0% in Q3 2024, primarily due to a $410 million valuation allowance against deferred tax assets for corporate alternative minimum tax (CAMT) credits, resulting from the enactment of the One Big Beautiful Bill Act104 - The Board of Directors approved a new $10.0 billion stock repurchase program in March 2025, with approximately $14.8 billion remaining available for future repurchases as of July 27, 202587 - The company is subject to multiple government subpoenas since 2022 from the U.S. Department of Justice, U.S. Commerce Department, and the U.S. SEC relating to certain China customer shipments and export controls compliance, with the outcome and potential loss currently not reasonably estimable110 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 7% year-over-year revenue growth for the first nine months of fiscal 2025 to strategic customer investments, particularly in Semiconductor Systems, while gross margin improved due to favorable product mix and pricing, despite a significant increase in the effective tax rate impacting nine-month net income Results of Operations This section analyzes the company's revenue, gross margin, and operating expenses for the three and nine months ended July 27, 2025 - Gross margin for the three and nine months ended July 27, 2025, increased to 48.8% and 48.9% respectively, driven by higher net revenue, favorable customer and product mix, and increased average selling prices141142 - RD&E expenses increased for the three and nine-month periods due to additional headcount for product development and higher depreciation, aligning with the company's growth strategy151 - The effective tax rate for Q3 2025 surged to 30.6% from 13.0% in the prior year, mainly due to a $410 million valuation allowance against deferred tax assets related to CAMT credits following new legislation157 Segment and Geographic Performance This section analyzes revenue performance across key business segments and major geographic regions for the nine months ended July 27, 2025 Segment Revenue (Nine Months Ended) | Segment Revenue (Nine Months Ended) | FY2025 ($ millions) | FY2024 ($ millions) | YoY Change | | :--- | :--- | :--- | :--- | | Semiconductor Systems | $16,038 | $14,734 | +9% | | Applied Global Services | $4,760 | $4,586 | +4% | | Display | $705 | $674 | +5% | - Semiconductor Systems revenue growth was driven by customer investments in leading-edge manufacturing, with increased spending from foundry, logic, and NAND customers143 Geographic Revenue (Nine Months Ended) | Geographic Revenue (Nine Months Ended) | FY2025 ($ millions) | FY2024 ($ millions) | YoY Change | | :--- | :--- | :--- | :--- | | China | $6,565 (30%) | $7,981 (40%) | -18% | | Korea | $4,389 (20%) | $3,321 (16%) | +32% | | Taiwan | $5,023 (23%) | $2,726 (14%) | +84% | | United States | $2,408 (11%) | $2,665 (13%) | -10% | | Europe | $742 (4%) | $1,038 (5%) | -29% | Financial Condition, Liquidity and Capital Resources This section discusses the company's cash flow, liquidity, and capital allocation strategies, including stock repurchases and dividends - Cash from operating activities decreased to $5.1 billion in the first nine months of fiscal 2025 from $6.1 billion in the prior year, primarily due to lower collections of receivables, higher income tax payments, and higher vendor payments168169 - The company used $5.1 billion in financing activities, primarily for $4.0 billion in common stock repurchases and $1.0 billion in dividend payments174 - The U.S. CHIPS and Science Act provided a 25% investment tax credit, which reduced current income taxes payable by $309 million and will reduce future taxes payable by $154 million as of July 27, 2025182 Item 3: Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and foreign currency risks, where a hypothetical 100 basis point increase in interest rates would decrease the fair value of available-for-sale securities by approximately $37 million, and a 10% adverse change in exchange rates would result in a $181 million decrease in the fair value of hedging contracts - Interest Rate Risk: An immediate hypothetical 100 basis point increase in interest rates would decrease the fair value of the company's $3.5 billion in available-for-sale securities by approximately $37 million193 - Foreign Currency Risk: A hypothetical 10% adverse change in foreign currency exchange rates would result in a decrease in the fair value of hedging contracts by $181 million as of July 27, 2025197 Item 4: Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period, with no material changes in internal control over financial reporting during the third quarter of fiscal 2025 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of July 27, 2025200 - No changes in internal control over financial reporting occurred during the third quarter of fiscal 2025 that materially affected, or are reasonably likely to materially affect, internal controls201 PART II. OTHER INFORMATION Item 1: Legal Proceedings The company is involved in various legal proceedings and government investigations, notably multiple subpoenas since 2022 from U.S. authorities regarding China customer shipments and export controls compliance, with the outcome and potential loss currently not reasonably estimable - Since 2022, the company has received multiple subpoenas from U.S. government authorities (DOJ, Commerce Department, SEC) regarding certain China customer shipments and export controls compliance110217 - The company is cooperating fully with the investigations but cannot predict the outcome or reasonably estimate a range of potential loss or penalties110 Item 1A: Risk Factors The company identifies several key risks, with a significant focus on geopolitical and trade-related issues, including semiconductor industry volatility, global economic uncertainties, U.S. export regulations targeting China, a highly concentrated customer base in Asia, potential supply chain disruptions, cybersecurity threats, and complex, changing tax laws Business and Industry Risks This section outlines risks related to industry volatility, global trade issues, and customer concentration in the semiconductor market - The industries served are volatile and difficult to predict, with demand impacted by technology shifts, end-user demand, and global economic conditions207 - Global trade issues, particularly U.S. export regulations for semiconductor technology sold to China, have limited the market for certain products and services and increased exposure to competition215216 - The customer base is highly concentrated geographically, particularly in China, Taiwan, and Korea, exposing the business to greater volatility from the actions of a few customers or regional policies222 Operational and Financial Risks This section details risks concerning cybersecurity, complex tax laws, and the ability to attract and retain key employees - The company is exposed to cybersecurity threats and has experienced incidents, which can cause business disruption, theft of intellectual property, and reputational damage248 - Complex and changing tax laws pose a significant risk, as the recently enacted One Big Beautiful Bill Act (OBBBA) accelerates certain tax deductions, negatively impacting the company's ability to use its corporate alternative minimum tax (CAMT) credit deferred tax asset, resulting in a full valuation allowance256 - The company's success depends on its ability to attract, retain, and motivate key employees, which is challenged by global competition for talent and economic fluctuations254 Legal, Compliance, and Other Risks This section covers risks from legal proceedings, government investigations, and the complex global regulatory environment - The company is exposed to risks from legal proceedings and government investigations, including ongoing inquiries from U.S. authorities regarding China shipments and export controls compliance266 - Operating globally subjects the company to a complex and changing regulatory environment, including laws related to trade, antitrust, cybersecurity, and environmental standards, where violations could result in significant fines and penalties268 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The company continued its stock repurchase program during the quarter, with the Board authorizing an additional $10.0 billion in March 2025, leaving approximately $14.8 billion available for future repurchases, and repurchasing 6.3 million shares for approximately $1.038 billion during the three-month period - In March 2025, the Board of Directors approved a new common stock repurchase program authorizing $10.0 billion, with approximately $14.8 billion remaining available for future repurchases as of July 27, 2025273 Common Stock Repurchases (Three Months Ended July 27, 2025) | Period (2025) | Total Shares Purchased (millions) | Average Price Paid per Share ($) | Total Paid ($ millions) | | :--- | :--- | :--- | :--- | | Apr 28 - May 25 | 3.7 | $159.65 | $586 | | May 26 - Jun 22 | 2.1 | $166.37 | $345 | | Jun 23 - Jul 27 | 0.5 | $188.76 | $107 | | Total | 6.3 | $164.47 | $1,038 |