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Applied Materials, Inc.$44.30$1.182.74%

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 Applied Materials Delivers Record Quarterly and Annual Revenue and Earnings Per Share
   Thursday, November 17, 2016 4:01:22 PM ET

-- Applied delivers record annual EPS of $1.54, up 38 percent year over year, and non-GAAP EPS of $1.75, up 47 percent year over year

-- Semiconductor Systems segment achieves highest quarterly and annual revenue in 15 years

-- Applied Global Services generates record quarterly and annual orders and revenue

-- Display and Adjacent Markets delivers record quarterly and annual revenue

Applied Materials, Inc. (AMAT ) today reported results for its fourth quarter and fiscal year ended October 30, 2016.

Fourth quarter new orders were $3.03 billion, up 25 percent year over year. Backlog of $4.58 billion was up 46 percent year over year. Net sales of $3.30 billion were up 39 percent year over year.

The company recorded fourth quarter gross margin of 42.4 percent, operating margin of 23.6 percent, and diluted earnings per share (EPS) of $0.56. On a non-GAAP adjusted basis, fourth quarter gross margin increased 1.5 points year over year to 43.7 percent, operating margin grew 5.9 points year over year to 25.2 percent, and diluted EPS grew by 128 percent year over year to $0.66.

The company generated $797 million in cash from operations and returned $279 million to shareholders through stock repurchases and cash dividends.

Full Year Results

In fiscal 2016, new orders grew 23 percent to $12.42 billion and net sales increased 12 percent to $10.83 billion. The company recorded gross margin of 41.7 percent, operating income of $2.15 billion or 19.9 percent of net sales, and diluted EPS of $1.54. On a non-GAAP adjusted basis, gross margin increased 300 basis points to 43.2 percent, operating income increased 24 percent to $2.35 billion or 21.7 percent of net sales, and diluted EPS increased 47 percent to $1.75.

The company generated $2.47 billion in cash from operations, paid dividends of $444 million and used $1.89 billion to repurchase 96 million shares of common stock at an average price of $19.82.

"In fiscal 2016, we grew orders, revenue, and earnings to the highest levels in the company’s history, and made significant progress towards our longer-term strategic and financial goals," said Gary Dickerson, President and CEO. "We’ve focused our organization and investments to deliver highly differentiated solutions that enable customers to build new devices and structures that were never possible before."

"As we look to 2017 and beyond, we see sustainable growth as new demand drivers layer on top of our traditional end markets in computing, mobility and consumer electronics," said Bob Halliday, Senior Vice President and CFO. "The industries we serve are bigger and more attractive, our opportunity set is larger, our customer relationships are stronger, and we’re excited about our new product pipeline."

Quarterly Results Summary

                                                                                Change
                                   Q4 FY2016      Q3 FY2016      Q4 FY2015      Q4 FY2016    Q4 FY2016
                                                                                vs.          vs.
                                                                                Q3 FY2016    Q4 FY2015
                                   (In millions, except per share amounts and percentages)
New orders                         $   3,032      $   3,658      $   2,424      (17  %)      25   %
Net sales                          $   3,297      $   2,821      $   2,368      17   %       39   %
Gross margin                       42.4      %    42.3      %    40.5      %    0.1  points  1.9  points
Operating margin                   23.6      %    21.1      %    17.9      %    2.5  points  5.7  points
Net income                         $   610        $   505        $   336        21   %       82   %
Diluted earnings per share (EPS)   $   0.56       $   0.46       $   0.28       22   %       100  %
Non-GAAP Adjusted Results
Non-GAAP adjusted gross margin     43.7      %    43.7      %    42.2      %    --   points  1.5  points
Non-GAAP adjusted operating margin 25.2      %    22.8      %    19.3      %    2.4  points  5.9  points
Non-GAAP adjusted net income       $   722        $   550        $   347        31   %       108  %
Non-GAAP adjusted diluted EPS      $   0.66       $   0.50       $   0.29       32   %       128  %

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 first quarter of fiscal 2017, Applied expects net sales to be in the range of $3.20 billion to $3.34 billion; the midpoint of the range would be an increase of approximately 45 percent, year over year. Non-GAAP adjusted diluted EPS is expected to be in the range of $0.62 to $0.70; the midpoint of the range would be an increase of approximately 154 percent, year over year.

This outlook for non-GAAP adjusted diluted EPS excludes known charges related to completed acquisitions of $0.04 per share, but does not reflect any items that are unknown at this time, such as any additional charges related to acquisitions or other non-operational or unusual items, as well as other tax related items, which we are not able to predict without unreasonable efforts due to their inherent uncertainty.

Fourth Quarter and Fiscal Year Reportable Segment Information

Semiconductor Systems              Q4 FY2016        Q3 FY2016      Q4 FY2015      FY2016       FY2015
                                   (In millions, except percentages)
New orders                         $      1,833     $   2,215      $   1,444      $  7,289     $  6,581
Foundry                            64            %  57        %    35        %    46       %   34       %
DRAM                               10            %  14        %    21        %    16       %   25       %
Flash                              16            %  15        %    31        %    26       %   28       %
Logic and other                    10            %  14        %    13        %    12       %   13       %
Net sales                          2,127            1,786          1,494          6,873        6,135
Operating income                   667              511            318            1,807        1,410
Operating margin                   31.4          %  28.6      %    21.3      %    26.3     %   23.0     %
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $      713       $   556        $   365        $  1,991     $  1,588
Non-GAAP adjusted operating margin 33.5          %  31.1      %    24.4      %    29.0     %   25.9     %
Applied Global Services            Q4 FY2016        Q3 FY2016    Q4 FY2015    FY2016       FY2015
                                   (In millions, except percentages)
New orders                         $      794       $   590      $   743      $  2,775     $  2,582
Net sales                          693              657          611          2,589        2,447
Operating income                   193              175          160          682          630
Operating margin                   27.8          %  26.6    %    26.2    %    26.3     %   25.7     %
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $      193       $   176      $   159      $  683       $  633
Non-GAAP adjusted operating margin 27.8          %  26.8    %    26.0    %    26.4     %   25.9     %
Display and Adjacent Markets       Q4 FY2016        Q3 FY2016    Q4 FY2015    FY2016       FY2015
                                   (In millions, except percentages)
New orders                         $      387       $   803      $   219      $  2,160     $  828
Net sales                          452              313          235          1,206        944
Operating income                   103              63           28           245          191
Operating margin                   22.8          %  20.1    %    11.9    %    20.3     %   20.2   %
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $      103       $   63       $   28       $  245       $  194
Non-GAAP adjusted operating margin 22.8          %  20.1    %    11.9    %    20.3     %   20.6   %

Backlog Information

Applied’s backlog decreased 7 percent from the prior quarter to $4.58 billion and included negative adjustments of $106 million, primarily due to changes in expected timing of shipments and other adjustments, partially offset by favorable foreign currency impacts. Backlog composition by reportable segment was as follows:

Semiconductor Systems        45 %
Applied Global Services      19 %
Display and Adjacent Markets 34 %
Corporate and Other          2  %

Use of Non-GAAP Adjusted Financial Measures

Applied provides investors with certain non-GAAP adjusted financial measures, which are adjusted to exclude the impact of certain costs, expenses, gains and losses, including certain items related to mergers and acquisitions; restructuring charges and any associated adjustments; impairments of assets, or investments; gain or loss on sale of strategic investments; income tax items and certain other discrete adjustments. 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 included in this release.

Management uses these 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 our 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 we do not believe are indicative of our ongoing operating performance. 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.

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 business and financial performance and market share positions, our development of new products and technologies, our business outlook for the first quarter of fiscal 2017, 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 at www.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                 Twelve Months Ended
(In millions, except per share amounts)                             October 30, July 31,   October 25, October 30,  October 25,
                                                                    2016        2016       2015        2016         2015
Net sales                                                           $   3,297   $  2,821   $   2,368   $   10,825   $   9,659
Cost of products sold                                               1,898       1,629      1,409       6,314        5,707
Gross profit                                                        1,399       1,192      959         4,511        3,952
Operating expenses:
Research, development and engineering                               394         386        363         1,540        1,451
Marketing and selling                                               114         107        96          429          428
General and administrative                                          114         103        77          390          469
Gain on derivatives associated with terminated business combination --          --         --          --           (89       )
Total operating expenses                                            622         596        536         2,359        2,259
Income from operations                                              777         596        423         2,152        1,693
Interest expense                                                    38          38         32          155          103
Interest income and other income, net                               1           6          6           16           8
Income before income taxes                                          740         564        397         2,013        1,598
Provision for income taxes                                          130         59         61          292          221
Net income                                                          $   610     $  505     $   336     $   1,721    $   1,377
Earnings per share:
Basic                                                               $   0.56    $  0.47    $   0.28    $   1.56     $   1.13
Diluted                                                             $   0.56    $  0.46    $   0.28    $   1.54     $   1.12
Weighted average number of shares:
Basic                                                               1,081       1,083      1,182       1,107        1,214
Diluted                                                             1,093       1,093      1,190       1,116        1,226

APPLIED MATERIALS, INC.

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)                                         October 30,  July 31,    October 25,
                                                      2016         2016        2015
ASSETS
Current assets:
Cash and cash equivalents                             $   3,406    $  2,828    $   4,797
Short-term investments                                343          438         168
Accounts receivable, net                              2,279        1,852       1,739
Inventories                                           2,050        2,026       1,833
Other current assets                                  275          255         724
Total current assets                                  8,353        7,399       9,261
Long-term investments                                 929          960         946
Property, plant and equipment, net                    937          905         892
Goodwill                                              3,316        3,305       3,302
Purchased technology and other intangible assets, net 575          621         762
Deferred income taxes and other assets                478          509         145
Total assets                                          $   14,588   $  13,699   $   15,308
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt                                       $   200      $  --       $   1,200
Accounts payable and accrued expenses                 2,056        1,800       1,833
Customer deposits and deferred revenue                1,376        1,164       765
Total current liabilities                             3,632        2,964       3,798
Long-term debt                                        3,143        3,343       3,342
Other liabilities                                     596          573         555
Total liabilities                                     7,371        6,880       7,695
Total stockholders’ equity                            7,217        6,819       7,613
Total liabilities and stockholders’ equity            $   14,588   $  13,699   $   15,308

APPLIED MATERIALS, INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)                                                                          Three Months Ended                         Twelve Months Ended
                                                                                       October 30,    July 31,     October 25,    October 30,    October 25,
                                                                                       2016           2016         2015           2016           2015
Cash flows from operating activities:
Net income                                                                             $   610        $  505       $   336        $   1,721      $   1,377
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization                                                          100            97           96             389            371
Share-based compensation                                                               51             48           46             201            187
Excess tax benefits from share-based compensation                                      (5        )    (5       )   (2        )    (23       )    (56       )
Deferred income taxes                                                                  7              21           (159      )    21             (134      )
Other                                                                                  18             5            (11       )    38             53
Net change in operating assets and liabilities                                         16             310          165            119            (635      )
Cash provided by operating activities                                                  797            981          471            2,466          1,163
Cash flows from investing activities:
Capital expenditures                                                                   (88       )    (50      )   (53       )    (253      )    (215      )
Cash paid for acquisitions, net of cash acquired                                       (11       )    3            (2        )    (16       )    (4        )
Proceeds from sales and maturities of investments                                      553            208          200            1,234          1,100
Purchases of investments                                                               (443      )    (483     )   (202      )    (1,390    )    (1,162    )
Cash provided by (used in) investing activities                                        11             (322     )   (57       )    (425      )    (281      )
Cash flows from financing activities:
Debt borrowings (repayments), net of issuance costs                                    --             (2       )   2,581          (1,207    )    2,581
Proceeds from common stock issuances and others                                        44             --           45             88             88
Common stock repurchases                                                               (171      )    (196     )   (700      )    (1,892    )    (1,325    )
Excess tax benefits from share-based compensation                                      5              5            2              23             56
Payments of dividends to stockholders                                                  (108      )    (108     )   (119      )    (444      )    (487      )
Cash provided by (used in) financing activities                                        (230      )    (301     )   1,809          (3,432    )    913
Increase (decrease) in cash and cash equivalents                                       578            358          2,223          (1,391    )    1,795
Cash and cash equivalents -- beginning of period                                       2,828          2,470        2,574          4,797          3,002
Cash and cash equivalents -- end of period                                             $   3,406      $  2,828     $   4,797      $   3,406      $   4,797
Supplemental cash flow information:
Cash payments for income taxes                                                         $   13         $  49        $   149        $   157        $   407
Cash refunds from income taxes                                                         $   9          $  1         $   2          $   113        $   12
Cash payments for interest                                                             $   41         $  34        $   7          $   151        $   92

APPLIED MATERIALS, INC.

UNAUDITED SUPPLEMENTAL INFORMATION

Corporate and Other

(In millions)                                                            Q4 FY2016     Q3 FY2016     Q4 FY2015    FY 2016     FY 2015
New orders                                                               $   18        $   50        $   18       $  192      $  113
Unallocated net sales                                                    $   25        $   65        $   28       $  157      $  133
Unallocated cost of products sold and expenses                           (160     )    (170     )    (65     )    (538    )   (523    )
Share-based compensation                                                 (51      )    (48      )    (46     )    (201    )   (187    )
Certain items associated with terminated business combination            --            --            --           --          (50     )
Gain on derivatives associated with terminated business combination, net --            --            --           --          89
Total                                                                    $   (186 )    $   (153 )    $   (83 )    $  (582 )   $  (538 )

Additional Information

                                      Q4 FY2016            Q3 FY2016          Q4 FY2015
New Orders and Net Sales by Geography
(In $ millions)                       New        Net       New        Net     New      Net
                                      Orders     Sales     Orders     Sales   Orders   Sales
United States                         221        289       259        289     282      301
% of Total                            7     %    9     %   7     %    10  %   12  %    13  %
Europe                                212        256       212        124     155      172
% of Total                            7     %    8     %   6     %    5   %   6   %    7   %
Japan                                 262        364       270        321     452      278
% of Total                            9     %    11    %   7     %    11  %   19  %    12  %
Korea                                 432        632       689        472     207      239
% of Total                            14    %    19    %   19    %    17  %   8   %    10  %
Taiwan                                1,170      1,154     1,240      741     846      758
% of Total                            39    %    35    %   34    %    26  %   35  %    32  %
Southeast Asia                        84         161       139        303     100      143
% of Total                            3     %    5     %   4     %    11  %   4   %    6   %
China                                 651        441       849        571     382      477
% of Total                            21    %    13    %   23    %    20  %   16  %    20  %
Employees (In thousands)
Regular Full Time                     15.6                 15.2               14.6
                                       FY 2016              FY 2015
New Orders and Net Sales by Geography
(In $ millions)                        New        Net       New        Net
                                       Orders     Sales     Orders     Sales
United States                          1,235      1,143     1,323      1,630
% of Total                             10    %    11    %   13    %    17    %
Europe                                 774        615       576        642
% of Total                             6     %    6     %   6     %    7     %
Japan                                  980        1,279     1,786      1,078
% of Total                             8     %    12    %   18    %    11    %
Korea                                  2,286      1,883     1,709      1,654
% of Total                             19    %    17    %   17    %    17    %
Taiwan                                 3,389      2,843     2,808      2,600
% of Total                             27    %    26    %   28    %    27    %
Southeast Asia                         847        803       430        432
% of Total                             7     %    7     %   4     %    4     %
China                                  2,905      2,259     1,472      1,623
% of Total                             23    %    21    %   14    %    17    %

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

                                                                                                           Three Months Ended                         Twelve Months Ended
(In millions, except percentages)                                                                          October 30,    July 31,     October 25,    October 30,    October 25,
                                                                                                           2016           2016         2015           2016           2015
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis                                                                         $   1,399      $  1,192     $   959        $   4,511      $   3,952
Certain items associated with acquisitions                                                                 42             42           42             167            162
Inventory charges (reversals) related to restructuring                                                     --             (1       )   1              (2        )    35
Other significant gains, losses or charges, net                                                            --             --           (2        )    --             (2        )
Non-GAAP adjusted gross profit                                                                             $   1,441      $  1,233     $   1,000      $   4,676      $   4,147
Non-GAAP adjusted gross margin                                                                             43.7      %    43.7     %   42.2      %    43.2      %    42.9      %
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                                                                     $   777        $  596       $   423        $   2,152      $   1,693
Certain items associated with acquisitions                                                                 47             47           47             188            185
Acquisition integration and deal costs                                                                     --             2            --             2              2
Gain on derivatives associated with terminated business combination, net                                   --             --           --             --             (89       )
Certain items associated with terminated business combination                                              --             --           --             --             50
Inventory charges (reversals) related to restructuring and asset impairments, net                          --             (1       )   (1        )    (3        )    49
Other significant gains, losses or charges, net                                                            8              --           (13       )    8              6
Non-GAAP adjusted operating income                                                                         $   832        $  644       $   456        $   2,347      $   1,896
Non-GAAP adjusted operating margin                                                                         25.2      %    22.8     %   19.3      %    21.7      %    19.6      %
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis                                                                           $   610        $  505       $   336        $   1,721      $   1,377
Certain items associated with acquisitions                                                                 47             47           47             188            185
Acquisition integration and deal costs                                                                     --             2            --             2              2
Gain on derivatives associated with terminated business combination, net                                   --             --           --             --             (89       )
Certain items associated with terminated business combination                                              --             --           --             --             50
Inventory charges (reversals) related to restructuring and asset impairments, net                          --             (1       )   (1        )    (3        )    49
Impairment (gain on sale) of strategic investments, net                                                    6              --           (2        )    3              4
Loss on early extinguishment of debt                                                                       --             --           --             5              --
Other significant gains, losses or charges, net                                                            8              --           (13       )    8              6
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items 57             1            (18       )    45             (110      )
Income tax effect of non-GAAP adjustments                                                                  (6        )    (4       )   (2        )    (19       )    (17       )
Non-GAAP adjusted net income                                                                               $   722        $  550       $   347        $   1,950      $   1,457
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 July 31, 2016 and twelve months ended October 30, 2016 primarily included benefit from sales of solar equipment tools for which inventory had been previously reserved related to the cost reductions in the solar business.
4 Results for the three months ended October 25, 2015 included a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans and $1 million of inventory charges related to cost reductions in the solar business. Results for fiscal 2015 primarily included $35 million of inventory charges and $17 million of restructuring charges and asset impairments related to cost reductions in the solar business, and a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans.
5 Results for the three and twelve months ended October 30, 2016 included a loss of $8 million due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period.
6 Results for the three and twelve months ended October 25, 2015 included immaterial correction of errors related to prior periods, partially offset by costs related to executive termination.
7 Amounts for fiscal 2016 and 2015 included resolution of prior years’ income tax filings and other tax items. Amounts for fiscal 2015 included an adjustment to decrease the provision for income taxes by $28 million with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.02. 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.
8 These amounts represent non-GAAP adjustments above multiplied by the effective tax rate within the jurisdictions the adjustments affect.

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

                                                                                                           Three Months Ended                   Twelve Months Ended
(In millions, except per share amounts)                                                                    October 30,  July 31,  October 25,   October 30,  October 25,
                                                                                                           2016         2016      2015          2016         2015
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis                                                           $   0.56     $  0.46   $   0.28      $   1.54     $   1.12
Certain items associated with acquisitions                                                                 0.04         0.04      0.04          0.16         0.14
Certain items associated with terminated business combination                                              --           --        --            --           0.03
Gain on derivatives associated with terminated business combination, net                                   --           --        --            --           (0.05    )
Restructuring, inventory charges and asset impairments                                                     --           --        --            --           0.03
Other significant gains, losses or charges, net                                                            0.01         --        (0.01    )    0.01         0.01
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items 0.05         --        (0.02    )    0.04         (0.09    )
Non-GAAP adjusted earnings per diluted share                                                               $   0.66     $  0.50   $   0.29      $   1.75     $   1.19
Weighted average number of diluted shares                                                                  1,093        1,093     1,190         1,116        1,226
1 Amounts for fiscal 2016 and 2015 included resolution of prior years’ income tax filings and other tax items. Amounts for fiscal 2015 included an adjustment to decrease the provision for income taxes by $28 million with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.02. 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                   Twelve Months Ended
(In millions, except percentages)                               October 30,  July 31,   October 25,  October 30,    October 25,
                                                                2016         2016       2015         2016           2015
Semiconductor Systems Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                          $   667      $  511     $   318      $   1,807      $   1,410
Certain items associated with acquisitions                      46           45         47           184            178
Non-GAAP adjusted operating income                              $   713      $  556     $   365      $   1,991      $   1,588
Non-GAAP adjusted operating margin                              33.5    %    31.1   %   24.4    %    29.0      %    25.9      %
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                          $   193      $  175     $   160      $   682        $   630
Certain items associated with acquisitions                      --           1          --           1              1
Inventory charges related to restructuring                      --           --         --           --             3
Other significant gains, losses or charges, net                 --           --         (1      )    --             (1        )
Non-GAAP adjusted operating income                              $   193      $  176     $   159      $   683        $   633
Non-GAAP adjusted operating margin                              27.8    %    26.8   %   26.0    %    26.4      %    25.9      %
Display and Adjacent Markets Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                          $   103      $  63      $   28       $   245        $   191
Certain items associated with acquisitions                      --           --         --           --             3
Non-GAAP adjusted operating income                              $   103      $  63      $   28       $   245        $   194
Non-GAAP adjusted operating margin                              22.8    %    20.1   %   11.9    %    20.3      %    20.6      %
1 These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2 Results for the twelve months ended October 30, 2015 included $3 million of inventory charges related to cost reduction in the solar business.
3 Results for the three and twelve months ended October 25, 2015 included immaterial correction of errors related to prior periods, partially offset by costs related to executive termination.

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.

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED OPERATING EXPENSES

                                                Three Months Ended
(In millions)                                   October 30, 2016  July 31, 2016
Operating expenses - GAAP basis                 $     622         $    596
Certain items associated with acquisitions      (5          )     (5        )
Acquisition integration and deal costs          --                (2        )
Other significant gains, losses or charges, net (8          )     --
Non-GAAP adjusted operating expenses            $     609         $    589

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED EFFECTIVE INCOME TAX RATE

                                                                                                            Three Months Ended
(In millions, except percentages)                                                                           October 30, 2016
Provision for income taxes - GAAP basis (a)                                                                 $      130
Reinstatement of federal R&D tax credit, resolutions of prior years’ income tax filings and other tax items (57           )
Income tax effect of non-GAAP adjustments                                                                   6
Non-GAAP adjusted provision for income taxes (b)                                                            $      79
Income before income taxes - GAAP basis (c)                                                                 $      740
Certain items associated with acquisitions                                                                  47
Impairment of strategic investments, net                                                                    6
Other significant gains, losses or charges, net                                                             8
Non-GAAP adjusted income before income taxes (d)                                                            $      801
Effective income tax rate - GAAP basis (a/c)                                                                17.6          %
Non-GAAP adjusted effective income tax rate (b/d)                                                           9.9           %

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