UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
   
(Mark one)  
þ
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended October 26, 200825, 2009
or
o
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from          to
 
Commission file number000-06920
 
Applied Materials, Inc.
(Exact name of registrant as specified in its charter)
 
 
   
Delaware
 94-1655526
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
   
3050 Bowers Avenue, P.O. Box 58039
 95052-8039
Santa Clara, California
 (Zip Code)
(Address of principal executive offices)
  
 
Registrant’s telephone number, including area code:
(408) 727-5555
 
Securities registered pursuant to Section 12(b) of the Act:
 
   
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, par value $.01 per share The NASDAQ Stock Market LLC
Rights to Purchase Series A Junior Participating Preferred StockThe NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.  oþ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þAccelerated filer oNon-accelerated filer oSmaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes o     No þ
 
Aggregate market value of the voting stock held by non-affiliates of the registrant as of April 25, 2008,26, 2009, based upon the closing sale price reported by the NASDAQ Global Select Market on that date: $25,798,127,144$15,579,209,892
 
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of November 21, 2008: 1,328,871,24520, 2009: 1,341,259,033
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
Portions of the definitive Proxy Statement for Applied Materials, Inc.’s Annual Meeting of Stockholders to be held on March 10, 20099, 2010 are incorporated by reference into Part III of thisForm 10-K.
 

 
Caution Regarding Forward-Looking Statements
 
Certain information in this Annual Report onForm 10-K (report orForm 10-K) of Applied Materials, Inc. and its subsidiaries (Applied or the Company), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, is forward-looking in nature. All statements in this report, including those made by the management of Applied, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied’s future financial results, operating results, cash flows and cash deployment strategies, business strategies, costs, products, working capital, competitive positions, management’s plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customer contracts, investments, liquidity, declaration of dividends, and legal proceedings, as well as market conditions and industry trends. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Item 1A, “Risk Factors,” below and elsewhere in this report. Other risks and uncertainties may be disclosed in Applied’s prior Securities and Exchange Commission (SEC) filings. 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 report or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.
 
The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report.

 

APPLIED MATERIALS, INC.
 
FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 26, 200825, 2009
 
TABLE OF CONTENTS
 
         
    Page
 
PART I
 
Item 1:
  Business  1 
 
Item 1A:
  Risk Factors  1314 
 
Item 1B:
  Unresolved Staff Comments  2223 
 
Item 2:
  Properties  2224 
 
Item 3:
  Legal Proceedings  2325 
 
Item 4:
  Submission of Matters to a Vote of Security Holders  2325 
 
PART II
 
Item 5:
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  2426 
 
Item 6:
  Selected Financial Data  2728 
 
Item 7:
  Management’s Discussion and Analysis of Financial Condition and Results of Operations  2829 
 
Item 7A:
  Quantitative and Qualitative Disclosures About Market Risk  45 
 
Item 8:
  Financial Statements and Supplementary Data  4546 
 
Item 9:
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  4546 
 
Item 9A:
  Controls and Procedures  46 
 
Item 9B:
  Other Information  46 
 
PART III
 
Item 10:
  Directors, Executive Officers and Corporate Governance  48 
 
Item 11:
  Executive Compensation  48 
 
Item 12:
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  48 
 
Item 13:
  Certain Relationships and Related Transactions, and Director Independence  50 
 
Item 14:
  Principal Accounting Fees and Services  50 
 
PART IV
 
Item 15:
  Exhibits and Financial Statement Schedules  51 
   Signatures  9598 
 EX-10.48EX-10.63
 EX-10.49
EX-10.50
EX-10.51
EX-10.52
EX-10.53
EX-10.54
EX-10.55
EX-10.56EX-10.64
 EX-21
 EX-23
 EX-24
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

 
PART I
 
Item 1:  Business
 
Incorporated in 1967, Applied, a Delaware corporation, provides Nanomanufacturing TechnologytmTechnologytm solutions for the global semiconductor, flat panel display, solar and related industries, with a broad portfolio of innovative equipment, service and software products. “Nanomanufacturing” is the production of ultra-small structures, including the engineering of thin films on substrates. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal displays (LCDs), solar photovoltaic cells and modules (solar PVs), and other electronic devices, who use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. The Company’s fiscal year ends on the last Sunday in October.
 
Applied is the world’s largest semiconductor fabrication equipment supplier based on revenue, with the capability to provide global deployment and support services. Applied also is a global leader inthe leading supplier of LCD fabrication equipment to the flat panel display industry and is ain 2009 Applied was named by VLSI Research as the leading supplier of solar PV manufacturing solutionssystems to the emerging solar industry.
 
Applied operates in four reportable segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 1012 of Notes to Consolidated Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference.
 
Silicon Segment
 
Applied’s Silicon Systems Group (SSG), reported under its Silicon segment, develops, manufactures and sells a wide range of manufacturing equipment used to fabricate semiconductor chips, also referred to as integrated circuits (ICs). Most chips are built on a silicon wafer base and include a variety of circuit components, such as transistors and other devices, that are connected by multiple layers of wiring (interconnects). Applied offers systems that perform most of the primary processes used in chip fabrication including:including atomic layer deposition (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), etch, rapid thermal processing (RTP), chemical mechanical planarization (CMP) and wafer metrology and inspection, as well as systems that etch, clean, measure and inspect circuit patterns on masks used in the photolithography process. Applied’s semiconductor manufacturing systems are used by both integrated device manufacturers and foundries to build memory, logic and other types of chips.
 
To build a chip, the transistors, capacitors and other circuit components are first created on the surface of the wafer by performing a series of processes to deposit and selectively remove portions of successive film layers. Similar processes are then used to build the layers of wiring structures on the wafer. As the density of the circuit components increases to enable greater computing capability in the same or smaller physical area, the complexity of building the chip also increases, necessitating more process steps to form smaller structures and more intricate wiring schemes. A typical, simplified process sequence for building the wiring or interconnect portion of a chip involves initially depositing a dielectric film layer onto the base layer of circuit components using a CVD system. An etch system is then used to create openings and patterns in the dielectric layer. To form the metal interconnects, these openings and patterns are subsequently filled with conducting material using PVDand/or electroplating technologies. A CMP step then polishes the wafer to achieve a flat surface. Additional deposition, etch and CMP steps are then performed to build up the layers needed to complete the interconnection of the circuit elements. Advanced chip designs require aboutmore than 500 steps involving these and other processes to complete the manufacturing cycle.
 
While some device manufacturers are still using aluminum as the main conducting material for building interconnect structures, most have transitioned to copper. Copper has lower resistance than aluminum and can carry more current in a smaller area. Applied is the leading supplier of systems for manufacturing copper-based chips, including equipment for depositing, etching and planarizing copper interconnect layers. Complementing the transition to copper to improve chip speed is the use of low dielectric constant (low k) films to replace silicon


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dioxide material as the insulator between the copper wiring structures. Applied also leads the industry in providing systems for depositing low k dielectric films.


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The transistor is another key area of the chip where semiconductor manufacturers are improving their device designs to enhance speed. Applied has the industry’s largest portfolio of technically advanced products for building smaller and faster transistors. One examplemethod of enhancing chip performance is strain engineering, a technique that stretches or compresses the space between atoms, allowing electrical current to flow more quickly, thus greatly enhancing chip performance.quickly. Multiple strain films are typically used in advanced devices since they have an additive effect on increasing transistor speed. Applied has a comprehensive portfolio of systems to enable these applications using CVD and epitaxial deposition technologies.
 
Most chips currently are fabricated using 65 nanometer (nm) and larger linewidth dimensions, although Applied is also working with customers on morenew technology for advanced nodes.nodes such as 45nm and below. Major chipmakers have announced that they will be integrating new high dielectric constant (high-k) and metal materials and processes in their transistor gate structures to increase chip performance and reduce power consumption. Applied has a comprehensive portfolio of fully characterized processes for building these high-k/metal gates. These solutions include an integrated dielectric gate stack tool that combines four critical processes in a single system, a portfolio of metallization technologies using ALD and PVD, and an innovative high temperature etch system.
Another emerging area for Applied’s technology is three-dimensional (3D) ICs in which chips are vertically stacked to deliver higher performance and functionality in a smaller area. The individual chips are electrically connected using deep holes called through-silicon vias (TSVs). Applied has the production-proven systems and processes required for the majority of TSV manufacturing steps, including mask, etch, film deposition and CMP systems. Applied is leading efforts to enable the adoption of TSV technology, working with consortiums and other equipment suppliers to lower the cost to customers for implementing TSV technology.
 
Most of Applied’s semiconductor equipment products are single-wafer systems with multiple process chambers attached to a base platform. This enables each wafer to be processed separately in its own environment, allowing precise process control, while the system’s multiple chambers enable simultaneous, high productivity manufacturing. Applied sells most of its single-wafer, multi-chamber systems on four basic platforms: the Centura®, the Endura®, the Producer® and the Vantage®. These platforms support ALD, CVD, PVD, etch and RTP technologies.
 
Over time, the semiconductor industry has migrated to increasingly larger wafers to build chips. The predominant or common wafer size used today for volume production of advanced chips is 300 millimeter (mm), or12-inch, wafers. Applied offers a comprehensive range of 300mm systems. Applied also offers earlier-generation 200mm systems, as well as products and services to support all of its systems, which are reported under its Applied Global Services segment.
 
The following summarizes Applied’s portfolio of products and their associated process technology areas reported under its Silicon segment.
 
Deposition
 
Deposition is a fundamental step in fabricating a chip. During deposition, layers of dielectric (an insulator), barrier, or electrically conductive (typically metal) films are deposited or grown on a wafer. Applied currently provides equipment to perform three types of deposition: ALD, CVD and PVD. In addition, Applied’s RTP systems can be used to perform certain types of dielectric deposition.
 
Atomic Layer Deposition
 
ALD is an advanced technology in which atoms are deposited one layer at a time to build chip structures. This technology enables customers to fabricate thin films of either conducting or insulating material with uniform coverage insub-nanometer sized structures. Applied offers ALD chambers for depositing tungsten andhigh-k/metal gate films. The Applied Centura iSprinttm Tungsten system (iSprint) combines an ALD chamber, which deposits a tungsten nucleation film, with a CVD tungsten bulk fill process in one system. The iSprint is used to form contact structures that connect the transistors to the wiring areas of the chip. Applied’s high-k/metal gate


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ALD process is part of the Centura Advanced Gate Stack system, which enables a single integrated solution for building high-k/metal gate structures.
 
Chemical Vapor Deposition
 
CVD is used by customers to deposit dielectric and metal films on a wafer. During the CVD process, gases that contain atoms of the material to be deposited react on the wafer surface, forming a thin film of solid material. Films deposited by CVD may be silicon oxide, single-crystal epitaxial silicon, amorphous silicon, silicon nitride, dielectric anti-reflective coatings, low k dielectric (for highly efficient insulating materials), aluminum, titanium,


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titanium nitride, polysilicon, tungsten, refractory metals or silicides. Applied offers the following CVD products and technologies:
 
The Applied Producer CVD platform — This high-throughput platform features Twin-Chamber® modules that have two single-wafer process chambers per unit. Up to three Twin-Chamber modules can be mounted on each Producer platform, giving it a simultaneous processing capacity of six wafers. Many dielectric CVD processes can be performed on this platform. The highest productivity model of this system is the Applied Producer GT, which has achieved rapid customer acceptance due to its fast wafer handling performance and compact design.
 
Low k Dielectric Films — Low k dielectric materials are used in copper-based chip designs to further improve interconnect speed. Using conventional CVD equipment, the Applied Producer Black Diamond® family of low k systems provides customers with a proven, cost-effective way to integrate a variety of low k films into advanced interconnect structures. To further increase the performance of the complete multi-layer dielectric structure, Applied offers a line of BLOKtm (barrier low k) films deposited with the Producer system.
 
Lithography-Enabling Solutions — Applied offers several technologies on the Producer system to help chipmakers extend their current 193nm lithography tools, including a line of Applied APFtm® (advanced patterning film) films and Applied DARC® (dielectric anti-reflective coating) films. Together, they provide a film stack with the precise dimensional control and compatibility needed to cost-effectively pattern nano-scale features without additional integration complexity.
 
Gap Fill Films — There are many steps during the chipmaking process in which very small and deep, or high aspect ratio (HAR), structures must be filled void-free with a dielectric film. Many of these applications include the deposition of silicon oxides in substrate isolation structures, contacts and interconnects. The Applied Centura Ultima HDP-CVD® (high-density plasma CVD) system has been an industry workhorse, providing multi-generational gap-fill capability for both logic and memory devices. The Company’s Applied Producer HARP (high aspect ratio process) provides customers with device scaling capability using sub-atmospheric CVD (SACVD) technology. In 2008, the Company introduced the Applied Producer eHARP, which extends gap-fill capability to 32nm and below byusingsub-atmospheric CVD (SACVD) technology enabling the seamless, void-free fill of more tightly packed HAR structures.
 
Strain Engineering Solutions — The Applied Producer HARPtm system also plays a key role in enhancing transistor performance, enabling chipmakers to boost chip speed by depositing strain inducingstrain-inducing dielectric films. Offering the industry’s first integrated stress nitride deposition and ultraviolet (UV) cure solution, the Applied Producer Celera CVD delivers benchmark levels of high-stress tensile silicon nitride films. The Company also offers the Applied Centura SiNgenPlus low pressure CVD system for low temperature silicon nitride films. Used together, and in conjunction with silicon germanium (SiGe) films using Applied’s epitaxial deposition technologies, these systems can provide additive strain engineering benefits.
 
Epitaxial Deposition — Epitaxial silicon (epitaxy or epi) is a layer of pure silicon grown in a uniform crystalline structure on the wafer to form a high quality base for the device circuitry. Epi technology is used in an increasing number of integrated circuit devices in both the wafer substrate and transistor areas of a chip to enhance speed. The Applied Centura Epi system integrates pre- and post-epi processes on the same system to improve film quality and reduce production costs. This system is also used for SiGe epi technology, which reduces power usage and increases speed in certain types of advanced chips. For emerging transistor designs, the Applied Centura RP Epi system offers selective epi processes to enable faster transistor switching through strain engineering techniques.


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Polysilicon Deposition — Polysilicon is a type of silicon used to form portions of the transistor structure within the integrated circuit device. The Applied Centura Polygentm LPCVD system is a single-wafer, multi-chamber product that deposits thin polysilicon films at high temperatures to create transistor gate structures. To address the challenging requirements of shrinking gate dimensions, the Applied Centura DPN Gate Stack system integrates chambers for decoupled plasma nitridation (DPN), RTP anneal and polysilicon deposition on one platform to enable superior film quality and material properties.


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Aluminum Deposition — Aluminum (Al) continues to be used by several memory manufacturers for interconnects. The Applied Endura iFill Al CVD/PVD system is used for building high-density interconnects in flash and DRAM memory chips. This advanced process, for sub-90nm generations, enables customers to replace tungsten structures with aluminum to achieve faster chips with fewer steps and less cost.
 
Tungsten Deposition — Tungsten is used in the contact area of a chip that connects the transistors to the wiring circuitry. In aluminum-based devices, tungsten is also used in the structures that connect the multiple layers of aluminum wiring. Applied has two products for depositing tungsten: the Applied Centura Sprint® Tungsten CVD system for 90nm and below devices and the Applied Centura iSprint ALD/CVD system for more advanced applications. The latter product combines ALD technology and CVD chambers on the same platform.
 
Physical Vapor Deposition
 
PVD is a physical process in which atoms of a gas, such as argon, are accelerated toward a metal target. The metal atoms chip off, or sputter away, and are then deposited on the wafer. Applied leads the industry in PVD technology with its Applied Endura PVD system. This system offers a broad range of advanced deposition processes, including aluminum, aluminum alloys, cobalt, titanium/titanium nitride, tantalum/tantalum nitride, tungsten/tungsten nitride, nickel, vanadium and copper.
 
The Applied Endura CuBS (copper barrier/seed) PVD system is widely used by customers for fabricating copper-based chips. Using PVD technology, the system deposits a tantalum-based barrier film that prevents copper material from entering other areas of the device and then a copper seed layer that primes the structure for the subsequent deposition of bulk copper. This system also features Activ Pre-clean technology to provide clean film interfaces while preserving the k-value integrity of the structure. In 2009, the Company introduced the Applied Endura CuBS RFX PVD system, extending its cost-effective CuBS technology to the 22nm node. Applied’s Endura system has also been used for many years in back-end applications to deposit metal layers before final bump or wire bonding packaging steps are performed. In 2009, the Company introduced a new cost-efficient platform specifically designed for under-bump metallization (UBM) and other back-end processes. The Applied Charger UBM PVD system’s new linear architecture offers reliable performance and very high productivity at a lowcost-per-wafer.
 
Etch
 
Etching is used many times throughout the integrated circuit manufacturing process to selectively remove material from the surface of a wafer. Before etching begins, the wafer is coated with a light-sensitive film, called photoresist. A photolithography process then projects the circuit pattern onto the wafer. Etching removes material only from areas dictated by the photoresist pattern. Applied offers a wide range of systems for etching dielectric, metal and silicon films to meet the requirements ofsub-100nm processing.
 
For dielectric applications, the Applied Centura eMax® system etches a broad range of dielectric films in the contact and interconnect regions of the chip. Applied’s Producer Etch system utilizes the Company’s Twin-Chamber Producer platform to target cost-sensitive dielectric etch applications in 90nm and below design geometries. To address advanced low k etch applications, the Applied Centura Enabler® Etch system performs etch, strip and clean steps in a single chamber. The Enabler’sall-in-one capability streamlines the process flow for advanced chip designs and significantly reduces operating costs. The Applied Centura Carina system uses innovative, high-temperature technology to deliver the etch capability essential for scaling logic and memory devices with high-k/metal gates at 45nm and below.
 
The Applied Centura AdvantEdgetm Silicon Etch system offers chipmakers high precision gate etching for advanced-generation devices. The Applied Centura Mariana Trench Etch system provides customers with the capability to scale memory devices by etching 80:1 aspect ratio structures. In 2009, the Company introduced the Applied Centura Silvia system, specifically designed for etching small, deep holes for TSV applications in 3D-ICs. For etching metals, the Applied Opus AdvantEdge Metal Etch uses an optimized 5-chamber platform configuration


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that enables customers to extend aluminum interconnect technology and productivity tosub-70nm dimensions for flash and DRAM memory applications.
 
Rapid Thermal Processing
 
RTP is a process in which a wafer is subjected to rapid bursts of intense heat that can take the wafer from room temperature to more than 1,000 degrees Celsius in less than 10 seconds. A rapid thermal process is used mainly for modifyingannealing, which modifies the properties, of deposited films. The Applied Centura Radiance®Plusand Applied Vantage RadOxtm RTP systems feature advanced RTP technology with differing platform designs. While the multi-chamber Centura


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platform offers exceptional process flexibility, the streamlined two-chamber Vantage platform is designed for dedicated high-volume manufacturing. These single-wafer RTP systems are also used for growing high quality oxide and oxynitride films, deposition steps that traditional large batch furnaces can no longer achieve with the necessary precision and control. With its proprietary radical-based oxidation process, the Applied Vantage RadOx system deposits high-performance transistor gate oxides with high productivity and low operating cost for flash memory applications.
 
Chemical Mechanical Planarization
 
The CMP process removes material from a wafer to create a flat (planarized) surface. This process allows subsequent photolithography patterning steps to occur with greater accuracy and enables film layers to build with minimal height variations. TheApplied has led the industry with its 300mm Applied Reflexion® LK system, leads the industry in CMP technology with important features such as integrated cleaning, film measurement and process control capabilities.
 
Metrology and Wafer Inspection
 
Applied offers several products for measuring features and inspecting defects on the wafer during various stages of the fabrication process. These systems enable customers to characterize and control critical dimension (CD) and defect issues, especially at advanced generation technology nodes.
 
Critical Dimension and Defect Review Scanning Electron Microscopes (CD-SEMs and DR-SEMs)
 
Scanning electron microscopes (SEMs) use an electron beam to form images of microscopic features of a patterned wafer at extremely high magnification. Applied’s SEM products provide customers with full automation, along with the high accuracy and sensitivity needed for measuring very small CDs. The Applied VeritySEM® Metrology system uses proprietary SEM imaging technology to enable precise control of the lithography and etching processes. The VeritySEM measures CDs withat a precision of less than 5 angstrom precision,3.2 angstroms, a requirement for 45nm32nm and below device production and incorporates automation and software advancements for significantly higher throughput in production.throughput. Applied’s OPC Checktm software for the VeritySEM system performs automated qualification of OPC-based (optical proximity correction) chip designs, significantly reducing mask (see Mask Making section below) verification time over conventional manual methods.
 
DR-SEMs review defects on the wafer (such as particles, scratches or residues) that are first located by a defect detection system and then classify the defects to identify their source. The high-throughput, fully automatic Applied SEMVisiontm Defect Analysis products enable customers to use this technology as an integral part of their production lines to analyze defects as small as 30nm with industry-leading throughput. The Applied SEMVision FIB integrates advanced defect review SEM capability with automated focused ion beam (FIB) technology in one system. The FIB provides a cross-sectional view of the defects reviewed by the SEM, enabling chipmakers to analyze the defects in minutes as part of their in-line review process.
 
Wafer Inspection
 
Using laser-based technology, defects can be detected on patterned wafers (wafers with printed circuit images) as they move between processing steps. Defects include particles, open circuit lines, and shorts between lines. Incorporating key advances in imaging technology, the Applied ComPlustm Inspection system, for darkfield applications, detects defects in devices with design rules of 65nm and below with the high speed required for customers’ volume production lines. The Applied UVisiontm® Inspection system is the industry’s first laser-based,


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three dimensional brightfield tool. Utilizing multi-beam, deep ultraviolet (DUV) laser illumination and high efficiency detectors, the UVision system uncovers previously undetectable defects on the wafer, enabling customers to rapidly resolve defect issues and achieve greater chip yields.
 
Mask Making
 
Masks are used by photolithography systems to transfer microscopic circuit designs onto wafers. Since an imperfection in a mask may be replicated on the wafer, the mask must be virtually defect-free. Applied provides systems for etching, cleaning and inspecting masks.


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The Applied Tetra IIItm Advanced Reticle Etch system, an advanced etch tool for fabricating leading-edge masks, is used by virtually every advanced mask maker in the world for 45nm photomask development and production. In 2008, the Company introduced the Applied Tetratm Reticle Clean, the industry’s first wet clean system to provide damage-free, nearly 100 percent particle removal efficiency for 32nm and beyond photomasks. The groundbreaking Applied Aera2tm Mask Inspection system also announced in 2008, allows customers to meet the most critical defect detection challenges of advanced masks. Using sophisticated aerial imaging technology, the Aera2 is the first mask inspection system that allows users to immediately see how the pattern on the mask will appear on the wafer, revealing only the defects most likely to print and significantly reducing inspection time.
 
Applied Global Services Segment
 
The Applied Global Services segment encompasses products and services designed to improve the performance and productivity, and reduce the environmental impact, of the fab operations of semiconductor, LCD and solar PV manufacturers. The in-depth expertise and best known methods of Applied’s extensive global support infrastructure enable Applied to continuously support customers’ production requirements. Approximately 2,700 trainedTrained customer engineers and process support engineers are deployed in more than a dozen countries. These engineers are usually located at or near customers’ fab sites and service over 22,00031,000 installed Applied systems, as well as non-Applied systems. Applied offers the following general types of services and products:
 
Fab Services — Applied offers a portfolio of fab-wide operations services to maintain and optimize customers’ fabrication facilities. Applied Genuine Parts are spare parts manufacturedPerformance Services offers customers comprehensive equipment support with performance-based pricing and predictable costs to Applied’s strict technical specifications and quality standards. Applied Services provides customers with optimized tool performance forenable improved total cost of ownership and a higher return on investment. Through its Metron Chamberownership. Included in this program is Applied’s ExpertConnect remote diagnostic capability, providing expert support around the clock. The Company also offers Performance Services unit, Applied is the industry’s leading provider of critical parts cleaning, coating refurbishment and analytical testing capabilities. Applied’s Advanced Wafer Reclaim Center in Taiwan uses state-of-the-art manufacturing systems and software to extend the lifecycle of 300mm silicon test wafers by over 45% and to reduce customers’ costs.
In 2008, the Company introducedfor its SunFabtm Performance Service program, a comprehensive, integrated support solution for Applied’s SunFabtm Thin Film Line for producing large-size solar PV panels, discussed further under the Energy and Environmental Solutions segment.panels. The first service product of its kind for the solar industry, the program enables customers to quickly ramp to volume production while optimizing the performance, cost and output of their SunFab lines.
The Company also offers Performance Spares, which are spare parts manufactured to Applied’s strict technical specifications and quality standards. The Company’s Metron Chamber Performance Services unit provides precision cleaning, technology-enhanced coating and refurbishment on chamber process kits and components. The unit also has extensive analytical testing capabilities to validate and certify performance specifications.
 
Mature Technology Services — Applied offers a wide range of products and services to extend the productive life of 200mm semiconductor fabs, including new and remanufactured 200mm equipment, system enhancements and fab transition services. Designed to maximize productivity and lower cost of ownership, these products also assist customers in implementing green manufacturing solutions. Applied’s 200mm systems are available in a broad range of production-proven technologies, including CVD, PVD, etch, implant, RTP, CMP, epitaxy, metrology and inspection tools.
 
Automation Systems — Applied offers automated factory-level and tool-level control software systems for semiconductor, LCD and solar cell manufacturing facilities. These enterprise solutions include manufacturing execution systems (MES) to automate the production of wafers and LCD and solar substrates, advanced process control systems, and scheduling and materials handling control systems. Applied also offers computerized maintenance management systems, performance tracking, and modeling and simulation tools for improving asset utilization. In 2008, Applied introduced itsApplied’s breakthrough E3 equipment engineering system solution, thatfor example, uniquely integrates all critical equipment automation and process control components. In 2009, the Company introduced its Applied SmartMove system, enabling wireless wafer management in non-automated 200mm and 300mm fabs.


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Abatement Systems — Applied’s family of Metron abatement systems is a comprehensive line of environmental solutions for the semiconductor, solar and display industries. These systems include a wide range ofpoint-of-use scrubbing tools includingsuch as wet, dry, thermal and integrated technologies for reliable, cost-effective abatement of exhaust gases. In 2008, the Company introduced theApplied’s Marathon SSeries, for its SunFab Thin Film line, the only integrated solution for PECVD reactive byproducts.example, offers smart abatement technology that specifically targets perfluorocarbon effluents from processing systems.


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Display Segment
 
Applied’s AKT subsidiary, reported under the Display segment, designs, manufactures and sells equipment to fabricate thin film transistor LCDs for televisions, computer displays and other consumer-oriented electronic applications. While similarities exist between the technologies utilized in chipmaking and LCD fabrication, the most significant differences are in the size and composition of the substrate. Substrates used to manufacture LCD panels can be more than 70 times larger in area than 300mm wafers and are made of glass, while wafers are made of silicon. This technology for deposition on large-size substrates is also used in the Applied SunFabtm Thin Film Line.
 
Applied supplies a wide range of systems that process and test different glass substrate sizes. For fabricating the transistor layer of these panels, the Company offers a line of plasma-enhanced CVD (PECVD) systems that use multi-chamber platform architecture to deposit dielectric and semiconducting films. The AKT-PiVottm 55KV system employs high-productivity, cost-efficient PVD technology to deposit metal and transparent conductive oxide films on the substrate. For manufacturing the color filter of LCD panels, Applied offers the AKT-NEW ARISTOtm 2200 for transparent conductive oxide film deposition.
 
ComplementingTo complement these systems, Applied also offers a line of electron beam test (EBT) systems for testing substrates during production for defective pixels and other imperfections. Featuring one of the industry’s fastest and most accurate pixel test technologies with the lowest operating cost, the EBT systems’ non-contact test technology enables the safe testing of high-value LCD TV panels without damaging or scratching the display.
 
To meet growing consumer demand for larger, more cost-efficient LCD TVs, LCD manufacturers have moved to increasingly large-sizedlarger-sized substrates. Applied’s latest generation (Gen) 10 systems can process substrates sized at approximately 2.85 x 3.05 meters, with each substrate enabling the production of up to six65-inch LCD TV screens. These Gen-10 systems include the AKT-90K PECVD and the Gen-10 AKT-90K EBT products, announced in fiscal 2008.products.
 
Energy and Environmental Solutions Segment
 
The Energy and Environmental Solutions segment includes manufacturing solutions for the generation and conservation of energy. Applied entered the solar PV market in 2006, announcing its objective to lower the overall cost per watt of solar electricity to parity with that of electricity generated by other sources such as the burning of fossil fuels. Applied offers manufacturing solutions for both wafer-based crystalline silicon (c-Si) and glass-based thin film applications to enable customers to increase the conversion efficiency and yields of solar PV devices.
 
In fiscal 2008,Applied’s extensive portfolio of solar PV cell fabrication technologies has made it the leading supplier of c-Si manufacturing systems worldwide. Key benefits of these systems are high-productivity, advanced ultra-thin wafer handling, and extensive automation, helping customers to lower the cost per watt. Applied expanded its capabilities and opportunities in the c-Si technology sector through its acquisition of Baccini S.p.A. (Baccini),offers a leading suppliercomprehensive line of automated metallization and test systems for c-Si solar PV cells. These products, combined with Applied’s suite of silicon wafering and deposition systems, have made Appliedcell manufacturing. In 2009, the leading supplierCompany introduced its Baccini Esattotm Technology, a high precision, multi-step printing capability designed to increase the efficiency of c-Si manufacturingsolar cells. Applied also offers systems worldwide. A key benefit of these systems isfor slicing and squaring wafers from silicon ingots. In 2009, the Company introduced its Applied HCT MaxEdgetm wire saw, featuring the industry’s first dual-wire management system for slicing ultra-thin wafers. Applied also introduced the HCT Diamond Squarertm system with novel diamond wire technology that they offer customers a way to reduce silicon consumptioneliminates the need for abrasive slurry and cost by using ultra-thin substrate wafers.significantly cuts electricity consumption.
 
For thin film applications, Applied developed the Applied SunFabtm Thin Film Line, which is the world’s only integrated glass- in/panel-out production line for manufacturing thin film silicon solar modules using 5.7 square meter (m2) glass substrates. These ultra-large panels, which are approximately four times the size of thin film solar panels offered by others in the industry, are intended for large-scale applications such as solar farms, utilities and building-integrated solar PV system installations. Applied has entered into multiple contracts for its SunFab line with customers in Europe, Asia and Saudi Arabia. In October 2008, the firstSeveral of these lines have passed final acceptance testing, enabling the customer to beginand


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customers have begun volume manufacturing of SunFab modules. SunFab modules have met the stringent requirements of the International Electrotechnical Commission (IEC), certifying that these modules will meet performance and safety specifications under challenging environmental conditions. In 2009, Applied announced its second-generation SunFab technology that enables customers to achieve a 22% reduction in materials cost.
 
Products in this segment also include the ATONtm in-line deposition system, a large-area platform for high-quality deposition and high-throughput in both c-Si and thin film solar PV cell manufacturing, as well as processes, materials-handling technologies and fabrication services. Other products includeroll-to-roll, vacuum web coating systems for high-performance deposition of a range of films on flexible substrates for functional, aesthetic or optical properties. In 2009, the Company shipped its new Applied Topmet 4450, the world’s largest and fastestroll-to-roll machine that deposits ultra-thin aluminum films for flexible packaging applications on 4.5m wide rolls of substrate material at 20 meters per second. Applied also offers large-area deposition equipment for the production of low-emissivity (low-E) and solar control architectural glass.


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Backlog
 
Applied manufactures systems to meet demand represented by order backlog and customer commitments. Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; (2) contractual service revenue and maintenance fees to be earned within the next 12 months; and (3) orders for SunFab lines that are anticipated to be recognized as revenue within the next 12 months.
 
Applied’s backlog increaseddecreased from $3.7 billion at October 28, 2007 to $4.8 billion at October 26, 2008.2008 to $2.7 billion at October 25, 2009. Applied’s backlog on any particular date is not necessarily indicative of actual sales for any succeeding period. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Backlog adjustments were positivenegative for fiscal 20082009 and totaled $140 million,$1.2 billion, consisting primarily of backlog obtained from acquired companies, partially offset bycustomer cancellations and currency adjustments.financial debookings, reflecting the decline in demand for semiconductor equipment. Delays in delivery schedulesand/or a reduction of backlog during any particular period could have a material adverse effect on Applied’s business and results of operations.
 
Manufacturing, Raw Materials and Supplies
 
Applied’s manufacturing activities consist primarily of procurement, assembly, test and integration of various proprietary and commercial parts, components and subassemblies (collectively, parts) that are used to manufacture systems. Products in the Silicon segment are manufactured in Austin, Texas and Rehovot, Israel. Remanufactured products in the Applied Global Services segment are produced primarily in Austin, Texas. Products in the Display segment are manufactured in Santa Clara, California; Alzenau, Germany; and Tainan, Taiwan. Products in the Energy and Environmental Solutions segment are manufactured primarily in Alzenau, Germany; Cheseaux, Switzerland; Treviso, Italy; and Santa Clara, California. Manufacturing requires raw materials, including a wide variety of mechanical and electrical components, to be manufactured to Applied’s specifications. Applied uses numerous companies, including contract manufacturers, to supply parts for the manufacture and support of its products. Although Applied makes reasonable efforts to assure that parts are available from multiple qualified suppliers, this is not always possible. Accordingly, some key parts may be obtained from only a single supplier or a limited group of suppliers. Applied seeks to reduce costs and to lower the risks of production and service interruptions, as well as shortages of key parts, by: (1) selecting and qualifying alternate suppliers for key parts; (2) monitoring the financial condition of key suppliers; (3) maintaining appropriate inventories of key parts; (4) qualifying new parts on a timely basis; and (5) locating certain manufacturing operations in areas that are closer to suppliers and customers.
 
Research, Development and Engineering
 
Applied’s long-term growth strategy requires continued development of new products. Applied’s significant investment in research, development and engineering (RD&E) has generally enabled it to deliver new products and technologies before the emergence of strong demand, thus allowing customers to incorporate these products into their manufacturing plans at an early stage in the technology selection cycle. Applied works closely with its global


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customers to design systems and processes that meet their planned technical and production requirements. Product development and engineering organizations are located primarily in the United States, as well as in Europe, Israel and China. In addition, Applied outsources certain RD&E activities, some of which are performed outside the United States. Process support and customer demonstration laboratories are located in the United States, China, Europe and Israel.
 
Applied’s investments in RD&E for product development and engineering programs to create or improve products and technologies over the last three years were as follows: $934 million (19 percent of net sales) in fiscal 2009, $1.1 billion (14 percent of net sales) in fiscal 2008 and $1.1 billion (12 percent of net sales) in fiscal 2007 and $1.2 billion (13 percent of net sales) in fiscal 2006.2007. Applied has spent an average of 1314 percent of net sales in RD&E over the last five years. In addition to RD&E for specific product technologies, Applied maintains ongoing programs for automation control systems, materials research and environmental control that have applicationsare applicable to its products. In fiscal 2008,2009, Applied focused on developing systems for semiconductor customers’ new chip designs with 45nm32nm and below geometries, including systems to enable faster transistors using strain engineering and high-k/metal gate technologies, as well as double


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patterning processes that enableallows customers to extend their existing 193nm lithography tools through additional technology generations. Applied also focused on developing technology for through-silicon vias, an emerging solution for interconnecting three dimensional chip stacks to provide better device performance, lower power consumption and the integration of heterogeneous devices. RD&E also included activities to develop products that enable lower-cost production of solar energy.energy and other products to enable energy conservation.
 
Marketing and Sales
 
Because of the highly technical nature of its products, Applied markets and sells products worldwide through a direct sales force. Approximately 81 percent of Applied’s fiscal 20082009 net sales were to regions outside of the United States. Net sales to customers by region as a percentage of total net sales were: Taiwan 2221 percent, North America (primarily the United States) 19 percent, Asia-Pacific (including China) 1618 percent, Korea 16Europe 15 percent, Japan 1514 percent, and Europe 12Korea 13 percent.
 
General economic conditions impact Applied’s business and financial results. From time to time, the markets in which products are sold experience weak economic conditions that may negatively impact sales. Applied’s business is usually not seasonal in nature, but it is cyclical, based on capital equipment investment by major semiconductor, flat panel display, solar PV and other manufacturers. These expenditures depend on many factors, including: anticipated market demand and pricing for semiconductors, LCDs, solar cells and modules, architectural glass and other substrates; the development of new technologies; customers’ factory utilization; capital resources and financing; and global and regional economic conditions.
 
Applied manages its business and reports financial results based on the segments described above, but does not allocate certain sales and marketing costs to the segments.
 
Information on net sales to unaffiliated customers and long-lived assets attributable to Applied’s geographic regions is included in Note 1012 of Notes to Consolidated Financial Statements. In fiscal 2009, Intel Corporation accounted for 12 percent of Applied’s net sales. Samsung Electronics Co., Ltd. accounted for 1610 percent of Applied’s net sales in fiscal 2008, 122009, 16 percent of Applied’s net sales in fiscal 2007,2008, and 1112 percent of Applied’s net sales in fiscal 2006.2007. These net sales were for products in multiple reportable segments.
 
Competition
 
The industries in which Applied operates are highly competitive and characterized by rapid technological change. Applied’s ability to compete generally depends on its ability to timely commercialize its technology, continually improve its products and develop new products that meet constantly evolving customer requirements. Significant competitive factors include technical capability and differentiation, productivity and cost-effectiveness. The importance of these factors varies according to customers’ needs, including product mix and respective product requirements, applications, and the timing and circumstances of purchasing decisions. Substantial competition exists in all areas of Applied’s business. Competitors range from small companies that compete with a single productand/or in a single region, to global, diversified companies with a range of products. Applied’s ability to


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compete requires a high level of investment in RD&E, marketing and in marketing, sales and global customer support activities. Management believes that many of Applied’s products have strong competitive positions.
 
The competitive environment for each segment is described below:
 
The semiconductor industry has been increasingly driven by consumer demand for lower-cost electronic products with increased capability and, to a lesser extent, by demand for commercial applications. As a result, products within the Silicon segment are subject to rapid changes in customer requirements, including transitions to smaller dimensions, new materials and an increasing number of applications. While certain existing technologies may be adapted to new requirements, some applications create the need for an entirely different technical approach. The rapid pace of technological change can quickly diminish the value of current technologies and products and create opportunities for existing and new competitors. Applied offers a broad portfolio of technically differentiated products that must continuously evolve to satisfy customers’ requirements in order to compete effectively. Applied allocates resources among its many product offerings and therefore may decide not to invest in an individual product to the same degree as competitors who specialize in fewer products. There are many competitors serving the semiconductor manufacturing equipment industry, with some offering a single product line and others offering


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multiple product lines. These competitors range from suppliers serving a single region to global, diversified companies.
 
Products and services within the Applied Global Services segment are characterized by demanding worldwide service requirements and a diverse group of numerous competitors. To compete effectively, Applied offers products and services to reduce costs, improve productivity, and lessen the environmental impact of customers’ fab operations. Significant competitive factors include productivity, cost-effectiveness, and the level of technical service and support. The importance of these factors varies according to customers’ needs and the type of products or services offered.
 
Products in the Display segment are subject to strong competition from a number of major competitors. Applied holds established market positions with its technically differentiated LCDthin film technology (TFT)-LCD manufacturing solutions for PECVD, color filter PVD and TFT array testing, although its market position cancould change rapidly if it does not meetquickly due to customers’ evolving requirements. In fiscal 2007, Applied entered the array PVD market with the AKT-PiVottm 55KV PVD system. As a recent entrant to this market, Applied faces significant competition from existing array PVD suppliers.
 
Applied’s products within the Energy and Environmental Solutions segment compete in diverse market areas, including equipment to make solar PV cells and modules, flexible electronics and energy-efficient glass. In solar, Applied offers products for two distinct technologies, c-Si wafer-based and thin film glass-based applications. As a recent entrant to the solar equipment business, Applied competes with many other companies that have more experience with solar applications. Applied also is a recent entrant to the flexible electronics equipment business, which operates in an emerging market sector characterized by diverse types of applications, customer requirements and competitors. Applied’s glass coating equipment faces significant competition from at least one established supplier and another recent market entrant.
 
Patents and Licenses
 
Management believes that Applied’s competitive position significantly depends upon the Company’s research, development, engineering, manufacturing and marketing capabilities, and not just on its patent position. However, protection of Applied’s technological assets by obtaining and enforcingthrough enforcement of its intellectual property rights, including patents, is important. Therefore, Applied’s practice is to file patent applications in the United States and other countries for inventions that Applied considers significant. Applied has a substantial number of patents in the United States and other countries, and additional applications are pending for new inventions. Although Applied does not consider its business materially dependent upon any one patent, the rights of Applied and the products made and sold under its patents, taken as a whole, are a significant element of Applied’s business. In addition to patents, Applied also possesses other intellectual property, including trademarks, know-how, trade secrets and copyrights.


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Applied enters into patent and technology licensing agreements with other companies when management determines that it is in itsthe Company’s best interest to do so. Applied pays royalties under existing patent license agreements for the use, in several of its products, of certain patented technologies that are licensed to Applied for the life of the patents. Applied also receives royalties from licenses granted to third parties. Royalties received from or paid to third parties have not been, and are not expected to be, material to Applied’s consolidated results of operations.
 
In the normal course of business, Applied periodically receives and makes inquiries regarding possible patent infringement. In dealing with such inquiries, it may become necessary or useful for Applied to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to Applied on commercially reasonable terms, or at all. If Applied is not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms,and/or successfully prosecute or defend its position, Applied’s business, financial condition and results of operations could be materially and adversely affected.
 
Environmental Matters
 
Two of Applied’s locations have been designated as environmental cleanup sites. In 1987, the United States Environmental Protection Agency designated one of the locations, in Santa Clara, California, as a Superfund site and named Applied as a “Responsible Party.” Cleanup activities at this site began in 1984 and were substantially


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completed in February 2002.2002, and present activities consist of annual sampling of wells. The California Regional Water Quality Control Board designated Applied as a “Discharger” with respect to another site in Sunnyvale, California. Applied was named a Discharger upon its acquisition of the property in 1997 solely due to its status as property owner. The prior owners of the siteand/or operators who caused the contamination are responsible for performing cleanup and monitoring activities.
 
Applied maintains a number of environmental, health and safety programs that are primarily preventive in nature. As part of these programs, Applied regularly monitors ongoing compliance and periodically conducts investigations of possible contamination.
 
Compliance with federal, state and local provisions regulating the discharge of materials into the environment, remedial agreements and other actions relating to the environment have not had, and are not expected to have, a material effect on Applied’s capital expenditures, competitive position, financial condition or results of operations.
 
The most recent report on Applied’s environmental, health and safety activities can be found onin the Company’s Citizenship Report on its website athttp://www.appliedmaterials.com/about/environment.html.This report is updated periodically. This website address is intended to be an inactive textual reference only. None of the information on Applied’s website is part of thisForm 10-K or is incorporated by reference herein.
 
Employees
 
At October 26, 2008,25, 2009, Applied employed 14,82412,619 regular employees and 586413 temporary employees. In the high-technology industry, competition for highly-skilled employees is intense. Applied believes that its future success is highly dependent upon its continued ability to attract, retain and motivate qualified employees. There can be no assurance that Applied will be able to attract, hire, assimilate, motivate and retain a sufficient number of qualified employees.


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Executive Officers of the Registrant
 
The following table and notes set forth information about Applied’s executive officers as of October 26, 2008:25, 2009:
 
   
Name of Individual
 
Position
 
James C. Morgan(1)Michael R. Splinter(1) Chairman of the Board of Directors,
Michael R. Splinter(2)President and Chief Executive Officer
Franz Janker(3)Janker(2) Executive Vice President, Sales and Marketing
Gilad Almogy(4)Senior Vice President, General Manager Display and Thin Film Solar ProductsCorporate Account Management
George S. Davis(5)Davis(3) Senior Vice President, Chief Financial Officer
Manfred Kerschbaum(6)Kerschbaum(4)Senior Vice President, Chief of Staff
Mark R. Pinto(5) Senior Vice President, General Manager Applied Global Services
Mark R. Pinto(7)Senior Vice President, Chief Technology Officer and General Manager Energy and Environmental Solutions
Thomas St. Dennis(8)Senior Vice President, General Manager Silicon Systems Group and Display, Chief Technology Officer
Joseph J. Sweeney(9)Sweeney(6) Senior Vice President, General Counsel and Corporate Secretary
Randhir Thakur(10)Thakur(7) Senior Vice President, General Manager of Strategic OperationsSilicon Systems
Chris Bowers(11)Bowers(8) Group Vice President, Chief of Staff and General Manager Corporate Services
Menachem Erad(12)Group Vice President, Chairman of Sokudo
Ron Kifer(13)Kifer(9) Group Vice President, Chief Information Officer
Jeannette L. Liebman(14)Mary Humiston(10) GroupCorporate Vice President, Global Human Resources
Charlie Pappis(11)Corporate Vice President, General Manager Applied Global Services
Yvonne Weatherford(15)Weatherford(12) Corporate Vice President, Corporate Controller
 
 
(1)Mr. Morgan, age 70, has been Chairman of the Board of Directors of Applied Materials, Inc. since 1987. Mr. Morgan served as Applied’s Chief Executive Officer from February 1977 to April 2003, and as Applied’s President from 1976 to 1987.
(2)Mr. Splinter, age 58, has been59, was named President, Chief Executive Officer and a member of Applied’s Board of Directors sinceupon joining Applied in April 2003.2003, and he has been Chairman of the Board of Directors since March 2009. Prior to joining Applied, Mr. Splinter worked for nearly


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20 years at Intel Corporation (Intel), most recently as Executive Vice President and Director of the Sales and Marketing Group, responsible for sales and operations worldwide. Mr. Splinter previously held various executive positions at Intel, including Executive Vice President and General Manager of the Technology and Manufacturing Group.
 
(3)(2)Mr. Janker, age 59, has been60 was named Executive Vice President, Corporate Account Management in September 2009. Prior to that he was the head of Sales and Marketing of Applied since May 2003. Beginning infrom May 2003 he wasto September 2009, initially as Senior Vice President, Sales and Marketing and, beginning in December 2004, he was promoted toas Executive Vice President, Sales and Marketing. He served as Senior Vice President, Global Operations and Corporate Marketing beginning in December of 2002. From December 1998 to 2002, he served as Group Vice President, Corporate Marketing and Business Management. From 1982 to 1998, Mr. Janker served in a variety of sales and marketing management positions with Applied in the United States and Europe.
 
(4)Dr. Almogy, age 43, was appointed Senior Vice President, General Manager, Display and Thin Film Solar Products in July 2008. From August 2007 to July 2008, Dr. Almogy served as Group Vice President, General Manager, Display Products and Process Diagnostics and Control Business Group. From July 2005 to August 2007, Dr. Almogy served as Group Vice President, General Manager, Process Diagnostics and Control Product Business Group and was Corporate Vice President, General Manager of the group from April 2002 to July 2005, and Vice President and Co-General Manager of the group from December 2000 to April 2002. He has held various other positions since joining Applied in 1997 when Applied acquired Orbot Instruments, Ltd. Dr. Almogy holds a Ph.D. in Applied Physics from the California Institute of Technology.
(5)(3)Mr. Davis, age 51,52, was promoted to Senior Vice President, Chief Financial Officer in December 2006. Mr. Davis was2006, after being appointed Group Vice President, Chief Financial Officer effective November 1, 2006. Previously, he had been Group Vice President, General Manager, Corporate Business Development since February 2005. From November 1999 to February 2005, Mr. Davis served as Vice President and Corporate Treasurer, where he managed Applied’s worldwide treasury operations and was responsible for investments, tax, financial risk management, and trade and export matters. Mr. Davis joined Applied in 1999.
 
(6)(4)Mr. Kerschbaum, age 54, has been55, was named Senior Vice President, Chief of Staff in September 2009. Prior to that he served as Senior Vice President, General Manager, Applied Global Services sincefrom January 2005. He2005 to September 2009. Mr. Kerschbaum was Senior Vice President, Global Operations from July 2004 to January 2005 and from October 2002 to May 2003. From May 2003 to July 2004, he was Group Vice President, Foundation Engineering and Operations. From January 1996 to October 2002, he held various positions in Applied Materials North America, most recently as Group Vice President, General Manager, Applied Materials North America. Mr. Kerschbaum has served in various other operations, customer service and engineering positions since joining Applied in 1983.
 
(7)(5)Dr. Pinto, age 49,50, has served as Senior Vice President since joining Applied in January 2004. His current responsibility is Chief Technology Officer and General Manager, Energy and Environmental Solutions.Solutions and Display as well as the corporate


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Chief Technology Officer. Prior to joining Applied, Dr. Pinto spent 19 years with Bell Laboratories and the Lucent Microelectronics Group, which later became Agere Systems Inc., most recently as Vice President of the Analog Products Division. Dr. Pinto holds a Ph.D. in Electrical Engineering from Stanford University.
 
(8)Mr. St. Dennis, age 55, was appointed Senior Vice President, General Manager, Silicon Systems Group in June 2007. Mr. St. Dennis returned to Applied in September 2005 as Senior Vice President, General Manager, Etch, Cleans, Front End and Implant Product Business Groups. He previously was with Applied from 1992 to 1999, most recently as Group Vice President, Planarization and Dielectric Deposition Product Business Group, and before that as Corporate Vice President, Physical Vapor Deposition Product Business Group. From 2003 to 2005, Mr. St. Dennis was an Executive Vice President and member of the Office of the CEO of Novellus Systems, Inc. He served as President and Chief Executive Officer of Wind River Systems, Inc. from 1999 to 2003.
(9)(6)Mr. Sweeney, age 60,61, has held the position of Senior Vice President, General Counsel and Corporate Secretary of Applied since July 2005, with responsibility for global legal affairs, intellectual property and security. From April 2002 to July 2005, Mr. Sweeney was Group Vice President, Legal Affairs and Intellectual Property, and Corporate Secretary. Mr. Sweeney joined Applied in 1993.
 
(10)(7)Dr. Thakur, age 46,47, has held the position of Senior Vice President, General Manager Silicon Systems since October 2009. Previously, he was Senior Vice President, General Manager, Thin Film Solar and Display. He was appointed Senior Vice President, General Manager, Strategic Operations when he returned torejoined Applied in May 2008. He previously was with Applied from 2000 to 2005 in a variety of executive roles including Group Vice President, General Manager for Front End Products. From September 2005 to


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May 2008, Dr. Thakur served as Executive Vice President of Technology and Fab Operations at SanDisk Corporation and as head of SanDisk’s worldwide operations. Prior to joining Applied in 2000, Dr. Thakur served in leadership roles at Steag Electronic Systems AG and Micron Technology.Technology, Inc.
 
(11)(8)Mr. Bowers, age 48, was appointed49, has been Group Vice President, Chief of Staff and General Manager, Corporate Services insince March 2008. From March 2008 to September 2009, he served as Chief of Staff. Prior to joining Applied, Mr. Bowers was a partner at the Hay Group, where he held various business leadership and consulting positions from 1992 to 2008. Most recently, he was Director of Client Services in Europe, the Middle East and Africa, and a member of the Hay Group Global R&D Council.
 
(12)Mr. Erad, age 60, was appointed in March 2008 as Group Vice President, Chairman of Sokudo Co. Ltd., a Japanese joint venture company owned by Applied and Dainippon Screen Manufacturing Co. Ltd. From February 2005 to March 2008, Mr. Erad served as Group Vice President, Chief of Staff. From January 2004 to February 2005, Mr. Erad served as Group Vice President, Strategic Planning and New Technology. He served as Group Vice President, New Business and New Products Group from May 2003 to January 2004. Mr. Erad joined Applied in 2002 as Group Vice President, Strategic Planning and New Business Development.
(13)(9)Mr. Kifer, age 57,58, joined Applied in May 2006 as Group Vice President and Chief Information Officer, Global Information Services. Prior to his appointment, Mr. Kifer spent five years with DHL in various executive management roles, most recently as the Senior Vice President and Chief Information Officer for North America, Asia Pacific and Emerging Markets.
 
(14)(10)Ms. Liebman,Humiston, age 61, has served as Group Vice President, Global Human Resources since July 2005. Ms. Liebman served as44, was appointed to Corporate Vice President, Global Human Resources from August 2003 toin June 2009. Since joining Applied in July 2005.2008, she served as the Vice President of Human Resources for both the Energy and Environmental Display SunFab Solar groups. Prior to joining Applied, in 2003, Ms. LiebmanHumiston was Vice President of Human Resources at Honeywell International Inc. from October 2002 to June 2008 with responsibility for various corporate and international organizations, and held various human resourcesexecutive positions at Intel.with PeoplePC, Gap, Inc. and GE.
 
(15)(11)Mr. Pappis, age 49, was appointed Corporate Vice President and General Manager of Applied Global Services in September 2009. He served as Corporate Vice President and General Manager for the Semiconductor Service Solutions group in Applied Global Services from January 2009 to September 2009. Prior to this, he served as general manager for Equipment Productivity Services in Applied Global Services. He has held various other management positions since joining Applied in 1986.
(12)Ms. Weatherford, age 57,58, has served as Corporate Vice President, Corporate Controller since December 2004. Ms. Weatherford was Appointed Vice President, Business Operations Controller from December 2001 to December 2004, and Appointed Vice President, Financial Operations Controller from October 2000 to December 2001. She has held various other finance roles since joining Applied in 1990.
 
Available Information
 
Applied’s website ishttp://www.appliedmaterials.com.Applied makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only. None of the information on Applied’s website is part of thisForm 10-K or is incorporated by reference herein.


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Item 1A:  Risk Factors
 
The following factors could materially affect Applied’s business, financial condition or results of operations and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.
 
The industries that Applied serves are volatile and unpredictable.difficult to predict.
 
As a supplier to the global semiconductor, flat panel display, solar and related industries, Applied is subject to business cycles, the timing, length and volatility of which can be difficult to predict and which vary by reportable segment. These industries historically have been cyclical due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on customers’ capacity utilization, production volumes, end-use demand, for customers’ products, inventory levels relative to demand, and access to affordable capital. These changes have affected the timing and amounts of customers’ purchases and investments in technology, and continue to affect Applied’s orders, net sales, operating expenses and net income.
 
To meet rapidly changing demand in each of the industries it serves, Applied must effectively manage its resources and production capacity for each of its segments andas well as across multiple segments. The challenging economic and industry conditions have adversely affected Applied’s customers and led to a significant decrease in demand for many of Applied’s products, although indications of improving conditions are beginning to appear. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified individuals; and continue to control costs. During periods of decreasing demand, for Applied’s products, Applied must be able to appropriately align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. During periods of increasing demand, Applied must have sufficient manufacturing capacity and inventory to meet customer


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demand; effectively manage its supply chain; and attract, retain and motivate a sufficient number of qualified individuals. If Applied is not able to timely and appropriately adapt to changes in its business environment, Applied’s business, financial condition or results of operations may be materially and adversely affected.
 
Applied is exposed to risks associated with the ongoingdifficult financial crisismarkets and weakeningweak global economy.
 
The recent severe tightening of the credit markets, turmoildisruption in the financial markets, and weakening global economy are contributingeconomic downturn experienced over the last several quarters contributed to significant slowdowns in the industries in which Applied operates, which slowdowns are expected tomay persist or worsen if these economic conditions are prolonged or deteriorate further. The markets for semiconductors and flat panel displays in particular depend largely on consumer spending. Economic uncertainty exacerbates negative trends in consumer spending and may cause certain Applied customers to push out, cancel, or refrain from placing orders for equipment or service orders,services, which may reduce net sales, reduce backlog, and affect Applied’s ability to convert backlog to sales and reduce net sales. Difficulties in obtaining capital and deterioratinguncertain market conditions may also lead to the inability of some customers to obtain affordable financing and to customer insolvencies, resulting in lower sales for Applied. Customers with liquidity issues may lead toand/or additional inventory or bad debt expense for Applied. These conditions may also similarly affect key suppliers, which could affectimpair their ability to deliver parts and result in delays for Applied’s products. In addition, these conditions may lead to strategic alliances by, or consolidation of, other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.
Further, these adverse conditions and uncertainty about future economic and industry conditions make it challenging for Applied to forecast its operating results, make business decisions, and identify the risks that may affect its business, sources and uses of cash, financial condition and results of operations. Applied may be required to implement additional cost reduction efforts, including restructuring activities,and/or modify its business model, which may adversely affect Applied’s ability to capitalize on opportunities in a market recovery. In addition, Applied maintains an investment portfolio that is subject to general credit, liquidity, foreign exchange, market and interest rate risks and that also includes some exposure to asset-backed and mortgage-backed securities. The risks to Applied’s investment portfolio may be exacerbated by deteriorating financial market conditions and, as a result, the value and liquidity of the investment portfolio could be negatively impacted and lead to impairment.impairment charges. If Applied is not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment and industry conditions, Applied’s business, financial condition or results of operations may be materially and adversely affected.


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Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.
 
The global semiconductor, flat panel display, solar and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries, including:
 
 • increasing capital requirements for building and operating new fabrication plants and the resulting effect on customers’ ability to raise the necessary capital;capital, particularly in a difficult financial market;
 
 • the varyingdifferences in growth rates ofamong the semiconductor, display and solar equipment industries;
• abrupt and unforeseen shifts in the nature and amount of customer and end-user demand;
 
 • the increasing cost and complexity for customers to move from product design to volume manufacturing, andwhich may slow the resulting impact onadoption rate for new technology adoption rates;manufacturing technology;
 
 • the importance of reducing the total cost of manufacturing system ownership, due in part to the increasing significance ofgreater demand for lower-cost consumer electronics as a driver for semiconductor and LCD demand;
• fluctuating levels ofcompared to business information technology spending;
 
 • the heightened importance to customers of system reliability and productivity and the effect on demand for fabrication systems as a result of their increasing productivity, device yield and reliability;
 
 • demandincreased need to develop products with sufficient differentiation to influence customers’ purchasing decisions;
• requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment;
 
 • price and performance trends for semiconductor devices, LCDs and solar PVs, and the corresponding effect on demand for such products;
 
 • the increasing importance of the availability of spare parts availability to maximize system uptime;the time that customers’ systems are available for production;
 
 • the increasing role for and complexity of software;software in Applied products; and
 
 • the increasing focus on reducing energy usage and improving the environmentenvironmental impact and sustainability.sustainability associated with manufacturing operations.
 
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the semiconductor, flat panel display, solar and related industries, its business, financial condition and results of operations could be materially and adversely affected.


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Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.
 
The largestgreatest portion of Applied’s revenues and profitability historically has comebeen derived from sales of manufacturing equipment to the global semiconductor industry, and this business historically has also beenindustry. In addition, a majority of the most profitable. Changes in therevenues of Applied Global Services is from sales of service products to semiconductor manufacturers. The semiconductor industry may leadis characterized by ongoing changes particular to a decreasethat industry, in the percentage of Applied’s revenue attributable to its semiconductor equipment business as a percentage of overall revenue, which in turn can negatively impact the Company’s net income. In addition to the general industry changes described in the preceding risk factor, which may result in decreased spending by customers and negatively impact the semiconductor industry is characterized by ongoingCompany’s financial condition and results of operations. The changes particular to that industry, including:include:
 
 • the increasing cost of semiconductor R&Dresearch and development due to many factors, includingincluding: decreasing linewidths on a chip; the increasing numberuse of new materials such as cobalt and yttrium; more complex device structures,structures; more applications and process steps,steps; increasing chip design costs; and the increasing cost and complexity and integration of an integrated manufacturing process development and chip design;process;
 
 • the growing number of types and varieties of semiconductors and expanding number of applications across multiple substrate sizes, resulting in divergent technical demands;sizes;
 
 • differing rates of market growth for,rates and capital investments by, various semiconductor device makers,requirements for different applications, such as memory (including NAND flash and DRAM), logic and foundry;foundry, and Applied’s ability to compete in these market segments;


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 • the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller linewidths to volume manufacturing, from one technology node to the next smaller technology node, and the resulting impact on the rates of technology transition and investment in capital equipment;
• semiconductor manufacturers’ increasing adoption of more productive 300mm systems and reductions in 200mm system capacity, and the resulting effect on demand for manufacturing equipment and services;
• the decreasing rate of capital expenditures as a percentage of semiconductor manufacturers’ revenue;
• the decreasing profitability of many semiconductor manufacturers, causing them to enter into collaboration or cost-sharing arrangements with other manufacturers, outsource manufacturing activities, focus only on specific markets or applications,and/or purchase less manufacturing equipment, which puts downward pressure on sales prices for, and the rate of investment in, capital equipment;
 
 • the effect of the decreasing number of new chip designs on the rate of capital equipment investment;technology developments in related markets, such as lithography, to which Applied may need to adapt;
 
 • technology changescompetitive factors that make it difficult to enhance market position, especially in related markets,larger market segments such as lithography;etch;
 
 • the increasing market fragmentation offor semiconductors, leading certain markets for semiconductors and the resulting effect on the number of individual markets that have the ability to financially justifybecome too small to support the cost of a new fabrication plant; and
 
 • the cost, technical complexity and timing of a proposed transition from 300 mm300mm to 450 mm wafers; and
• increasing costs, complexity and competitiveness in the semiconductor industry that has resulted in the decreasing profitability of many manufacturers, causing them to enter into collaboration, cooperation or cost-sharing arrangements with other manufacturers, to outsource some or all manufacturing activities, or to focus on particular markets or applications.450mm wafers.
 
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the semiconductor industry, its business, financial condition and results of operations could be materially and adversely affected.
 
Applied is exposed to risks as a result of ongoing changes specific to the flat panel display industry.
 
The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of LCD manufacturers and the concentrated nature of LCD end-use applications. Recently, industry growth has depended to a considerable extent on consumer demand for increasingly larger and more advanced TVs. In addition to the general industry changes described above in the third risk factor, the display industry is characterized by ongoing changes particular to that industry. These include technical and financial difficulties associated with transitioning to larger substrate sizes for LCDs, as well as the effect of a slowing rate of transition to larger substrate sizes on capital intensity and product differentiation. industry, including:
• technical and financial difficulties associated with transitioning to larger substrate sizes for LCDs;
• the effect of a slowing rate of transition to larger substrate sizes on capital intensity and product differentiation;
• new energy efficiency standards for large-screen LCD TVs ; and
• uncertainty with respect to future LCD technology end-use applications and growth drivers.
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the display industry, its business, financial condition and results of operations could be materially and adversely affected.


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Applied is exposed to risks as a result of ongoing changes specific to the solar industry.
 
AnApplied anticipates that an increasing portion of Applied’sits business iswill be in the emerging solar market, which Applied entered in 2006 and which, in addition to the general industry changes described above in the third risk factor, is characterized by ongoing changes particularspecific to the solar industry, including:
 
 • changes inthe impact on demand for solar PV products arising from among other things, the cost and performance of solar PV technology compared to the cost of electricity from the existing grid or other energy sources;
 
 • the adequacycritical role played by energy policies of or changesgovernments around the world in government energy policies,influencing the rate of growth of the solar market including the availability and amount of government incentives for solar power;power such as tax credits, rebates, renewable portfolio standards that require electricity providers to sell a targeted amount of energy from renewable sources, and goals for solar installations on government facilities;


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• changes in the nature and amount of end demand for solar PVs that adversely impact the profitability and growth rates of Applied’s products;
 
 • the extent of investment or participation in the solar market by utilities or other companies that generate, transmit or distribute power to end users;end-users;
 
 • evolving industry standards;
• difficulties associated with establishingstandards, such as a standard form factor for thin film solar modules;
 
 • varying levels of infrastructure investment for “smart grid” technologies to modernize and enhance the transmission, distribution and use of electricity, which link distributed solar PV sources to population centers, increase transmission capability, and optimize power usage;
• regulatory and third party certification requirements, and customers’ ability to timely satisfy thesesuch requirements;
 
 • a requirementthe increasing rates of certification by third partiesproduction of solar PVs in certain circumstances;China;
 
 • customers’ and end-users’ access to affordable financial capital;financing and capital by customers and end-users; and
 
 • the move to increasingly greater factory output and scalability of solar PVs, including output on a level sufficient to annually generate electricity on a gigawatt scale.PVs.
 
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the solar industry, its business, financial condition and results of operations could be materially and adversely affected.
 
Applied must adapt its business and product offerings to respond to competition and rapid technological changes.
 
As Applied operates in a highly competitive environment, its future success depends on many factors, including the effective commercialization and customer acceptance of its nanomanufacturing technology equipment, service and related products. In addition, Applied must successfully execute its growth strategy, including enhancing market share in existing markets, expanding into related markets, cultivating new markets and exceeding industry growth rates, while constantly improving its operational performance. The development, introduction and support of a broadening set of products in more varied competitive environments have grown increasingly complex and expensive over time. Furthermore, new or improved products may involveentail higher costs and reduced profits. Applied’s success is subject to many risks, including but not limited to its ability to timely, cost-effectively and successfully:
 
 • develop new products, improveand/or develop new applications for existing products, and adapt similar products for use by customers in different applicationsand/or markets with varying technical requirements;
 
 • appropriately price and achieve market acceptance of products;
 
 • differentiate its products from those of competitors and any disruptive technologies, meet performance specifications, and drive efficiencies and cost reductions;
 
 • maintain operating flexibility to enable different responses to different markets, customers and applications;
 
 • appropriately grow the profitability and market acceptance of its thin film solar products;
• allocate resources, including people and R&D funding, among Applied’s products and between the development of new products and the enhancement of existing products;products, as most appropriate and effective for future growth;
 
 • accurately forecast demand, work with suppliers and meet production schedules for its products;
 
 • improve its manufacturing processes and achieve cost efficiencies across product offerings;
 
 • adapt to changes in value offered by companies in different parts of the supply chain;
 
 • qualify products for volume manufacturing with its customers;


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 • implement changes in its design engineering methodology, including those that enable reduction of material costs and cycle time, greater commonality of platforms and types of parts used in different systems, greater effectiveness of product life cycle management, and reduced energy usage and environmental impact; and
 
 • successfully accomplish the simultaneousstart-up of multiple integrated thin film solar production lines.
 
If Applied does not successfully manage these challenges, its business, financial condition and results of operations could be materially and adversely affected.
 
TheOperating in multiple industries and the entry into new markets and industries entailsentail additional challenges.
 
As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing nanomanufacturing technology products or with new products developed internally or obtained through acquisitions. The entry into different markets involves additional challenges, including those arising from:
 
• the need to devote additional resources to develop new products for, and operate in, new markets;
• differing rates of profitability and growth among its multiple businesses;
 • Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks;
 
 • the complexity of managing multiple businesses with variations in production planning, execution, supply chain management and logistics;
 
 • the adoption of new business models, such as the supply of an integrated production line consisting of a suite of Applied and non-Applied equipment to manufacture solar PVs;
 
 • the need to undertake activities to grow demand for end-products;
• the need to develop adequate new business processes and systems;
 
 • Applied’s ability to rapidly expand its operations to meet increased demand and the associated effect on Applied’s working capital;
 
 • new materials, processes and technologies;
 
 • the need to attract, motivate and retain employees with skills and expertise in these new areas;
 
 • new and more diverse customers and suppliers, including some with limited operating histories, uncertainand/or limited funding, evolving business modelsand/or locations in regions where Applied does not have existing operations;
 
 • different customer service requirements;
 
 • newand/or different competitors with potentially more financial or other resources and industry experience;
 
 • entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and employmentsafety practices;
 
 • third parties’ intellectual property rights; and
 
 • the need to comply with, or work to establish, industry standards and practices.
 
If Applied does not successfully manage the risks resulting from its diversification and entry into new markets and industries, its business, financial condition and results of operations could be materially and adversely affected.
 
Applied is exposed to the risks of operating a global business.
 
In fiscal 2008,2009, approximately 81 percent of Applied’s net sales were to customers in regions outside the United States, with a majority of business from customers in Asia.States. Certain of Applied’s R&Dand/or manufacturing facilities, as well as suppliers to Applied, are also located outside the United States, including in China. Applied is also expanding its business and operations in new


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countries. The global nature of Applied’s business and operations presents challenges, including but not limited to those arising from:
 
 • varying regional and geopolitical business conditions and demands;
 
 • changes in political and social attitudes, laws, rules, regulations and policies to favor domestic companies over non-domestic companies;
• variations among, and changes in, local, regional, national or international laws and regulations (including tax and import and export/export restrictions), as well as the interpretation and application of such laws and regulations;
 
 • global trade issues, including those related to the interpretation and application of import and export licenses;
 
 • variations in protection of intellectual property and other legal rights;


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 • positions taken by U.S. governmental agencies regarding possible national commercialand/or security issues posed by international business operations;
 
 • fluctuating raw material and energy costs;
 
 • variations in the ability to develop relationships with suppliers and other local businesses;
 
 • fluctuations in interest rates and currency exchange rates, including the relative positionstrength or weakness of the U.S. dollar;
 
 • the need to provide sufficient levels of technical support in different locations;
 
 • political instability, natural disasters (such as earthquakes, floods or storms), pandemics, terrorism or acts of war in locations where Applied has operations, suppliers or sales;
 
 • cultural differences;
 
 • customer- or government-supported efforts to promote the development and growth of local competitors;
 
 • shipping costsand/or delays;
 
 • the need to continually improve the Company’s operating cost structure;
• difficulties and uncertainties associated with the entry into new countries;
• uncertainties with respect to economic growth rates in various countries; and
 
 • uncertainties with respect to growth rates for the manufacture and sales of semiconductors, LCDs and solar cellsPVs in the developing economies of certain countries.
 
Many of these challenges are present in China, which is experiencing significant growth of both suppliers and competitors to Applied. Applied and which Appliedfurther believes that China presents a large potential market for its products and opportunity for growth over the long term.term, although at lower projected levels of profitability and margins than historically have been achieved in other regions. In addition, Applied must regularly reassess the size, capability and location of its global infrastructure and make appropriate changes.changes, and must have effective change management processes and procedures to address changes in its business and operations. These challenges may materially and adversely affect Applied’s business, financial condition and results of operations.
 
Applied is exposed to risks associated with a highly concentrated customer base.
 
Applied’s semiconductor and flat panel display customer bases historically have been, and are becoming even more, highly concentrated.concentrated as a result of industry conditions. These conditions are also adversely affecting customers’ profitability and access to capital, which leads to lower R&D funding and capital expenditures. In addition, certain customers have entered into strategic alliances or industry consortia that have increased the influence of key industry participants in technology decisions made by their partners. In the solar area, while the number of solar PV manufacturing customers is increasingincreases as the number of market entrants grows, the size of contracts with particular customers is expected to rise substantially as the industry moves to greater solar module


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factory output capacity, including capacity sufficientcapacity. The ongoing adverse conditions in the credit and financial markets and industry slowdowns have caused, and may continue to annually generate electricity on a gigawatt scale.cause, some customers to postpone delivery, reduce or cancel orders, exit businesses, merge with other manufacturers or file for bankruptcy protection and potentially cease operations. In this environment, contracts or orders from a relatively limited number of semiconductor, display and solar manufacturers have accounted for, and are expected to continue to account for, a substantial portion of Applied’s business. In addition, the mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business. As Applied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant, non-recoverable costs. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied. In addition, certain customers have undergone significant ownershipand/or management changes, and outsourced manufacturing activities, have engaged in collaboration or cooperation arrangements with other customers, or have consolidated with other customers, each of which may result in additional complexities in managing customer relationships and transactions.transactions, as well as cancelled or decreased orders and lower net sales. These factors could have a material adverse effect on Applied’s business, financial condition and results of operations.
 
Applied is exposed to risks associated with acquisitions and strategic investments.
 
Applied has made, and in the future intends to make, acquisitions of, and investments in, companies, technologies or products in existing, related or new markets for Applied. Acquisitions involve numerous risks, including but not limited to:
 
 • diversion of management’s attention from other operational matters;
 
 • inability to complete acquisitions as anticipated or at all;


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 • inability to realize anticipated benefits;
 
 • failure to commercialize purchased technologies;
 
 • inability to capitalize on characteristics of new markets that may be significantly different from Applied’s existing markets and where competitors may have stronger market positions;
• failure to attract, retain and motivate key employees from the acquired business;
 
 • exposure to operational risks, rules and regulations to the extent such activities are located in countries where Applied has not historically conducted business;
 
 • challenges associated with managing larger, more diverse and more widespread operations;
 
 • inability to obtain and protect intellectual property rights in key technologies;
 
 • inadequacy or ineffectiveness of an acquired company’s internal controls;financial controls, disclosure controls and procedures,and/or environmental, health & safety, human resource, or other policies;
 
 • impairment of acquired intangible assets as a result of technological advancements orworse-than-expected performance of the acquired company or its product offerings;
• the risk of litigation or disputes with customers, suppliers, partners or stockholders of an acquisition target arising from a proposed or completed transaction;
 
 • unknown, underestimatedand/or undisclosed commitments or liabilities;
 
 • inappropriate scale of acquired entities’ critical resources or facilities for business needs; and
 • ineffective integration of operations, systems, technologies, products or employees of thean acquired companies.business.
 
Applied also makes strategic investments in other companies, including companies formed as joint ventures, which may decline in valueand/or not meet desired objectives. The success of these investments depends on various factors over which Applied may have limited or no control and, particularly with respect to joint ventures, requires


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ongoing and effective cooperation with strategic partners. The risks to Applied’s strategic investment portfolio may be exacerbated by unfavorable financial market and macroeconomic conditions and, as a result, the value of the investment portfolio could be negatively impacted and lead to impairment charges. Mergers and acquisitions and strategic investments are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect Applied’s business, financial condition and results of operations. If Applied does not successfully manage the risks associated with acquisitions and strategic investments, its business, financial condition and results of operations could be materially and adversely affected.
 
Manufacturing interruptions or delays could affect Applied’s ability to meet customer demand, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
 
Applied’s business depends on its ability to timely supply equipment, services and related products that meet the rapidly changing technical and volume requirements of its customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from suppliers. Some key parts may be subject to long lead-timesand/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the United States, including China. Further, the ongoing adverse conditions in the credit and financial markets and industry slowdowns have caused, and may continue to cause, some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations, potentially affecting Applied’s ability to obtain parts. Applied may experience significant interruptions of its manufacturing operations, delays in its ability to deliver products or services, increased costs or customer order cancellations as a result of:
 
 • the failure or inability of suppliers to timely deliver quality parts;
 
 • volatility in the availability and cost of materials;
 
 • difficulties or delays in obtaining required import or export approvals;
 
 • information technology or infrastructure failures;
 
 • natural disasters (such as earthquakes, floods or storms); or
 
 • other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war), that could result in delayed deliveries, manufacturing inefficiencies, increased costs or order cancellations.
 
In addition, Applied’s need to rapidly increase its business and manufacturing capacity to meet unanticipated increases in demand or expedited shipment schedules may exacerbate any interruptions in Applied’s manufacturing operations and supply chain and the associated effect on Applied’s working capital. Moreover, if actual demand for Applied’s products is different than expected, Applied may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. The volatility of demand for capital equipment increases capital, technical and other risks for companies in the supply chain. Any or all of these factors could materially and adversely affect Applied’s business, financial condition and results of operations.


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The failure to successfully implement and conduct off-shoring and outsourcing activities and other operational initiatives could adversely affect results of operations.
 
To better align its costs with market conditions, increase its presence in growing markets, enhance productivity, and improve efficiencies, Applied conducts engineering, software development and other operations in regions outside the United States, particularly India and China, and outsources certain functions to third parties, including companies in the United States, India, China and other countries. Outsourced functions include certain engineering, manufacturing, customer support, software development, information technology support, finance and administrative activities. The expanding role of third party providers has required changes to Applied’s existing operations and the adoption of new procedures and processes for retaining and managing these providers, as well as redistributing responsibilities as warranted, in order to realize the potential productivity and operational efficiencies, assure quality and continuity of supply, and protect Applied’s intellectual property. In addition, Applied has implemented several key operational initiatives intended to improve manufacturing efficiency, including


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integrate-to-order, module-final-test andmerge-in-transit programs. Applied also is implementing a multi-year, company-wide program to transform certain business processes, which includes transitioningincluding the transition to a single enterprise resource planning (ERP) software system to perform various functions. The conversionimplementation of additional functionality to this newthe ERP system will includeentails certain risks, including difficulties with data integritychanges in business processes that could disrupt Applied’s operations, such as its ability to track orders and business interruption.timely ship products, project inventory requirements, manage its supply chain and aggregate financial and operational data. The implementation of new initiatives may not achieve the anticipated benefits and may divert management’s attention from other operational activities, negatively affect employee morale, or have other unintended consequences.
 
If Applied does not effectively develop and implement its off-shoring and outsourcing strategies, if required export and other governmental approvals are not timely obtained, if Applied’s third party providers do not perform as anticipated, or if there are delays or difficulties in implementing a new ERP system or enhancing business processes, Applied may not realize anticipated productivity improvements or cost efficiencies, and may experience operational difficulties, increased costs (including energy and transportation), manufacturing interruptions or delays, inefficiencies in the structureand/or operation of its supply chain, loss of its intellectual property rights, quality issues, increased product time-to-marketand/time-to-marketand/or inefficient allocation of human resources, any or all of which could materially and adversely affect Applied’s business, financial condition and results of operations.
 
The ability to attract, retain and motivate key employees is vital to Applied’s success.
 
Applied’s success and competitiveness depend in large part on its ability to attract, retain and motivate key employees. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, changes in Applied’s management or leadership, competitors’ hiring practices, cost reduction activities (including workforce reductions, unpaid shutdowns and salary reductions), and the effectiveness of Applied’s compensation and benefit programs, including its equity-based programs. Applied periodically evaluates its overall compensation program and makes adjustments, as appropriate, to enhance its competitiveness. If Applied does not successfully attract, retain and motivate key employees, Applied may be unable to capitalize on its opportunities and its operating results may be materially and adversely affected.
 
Changes in tax rates or tax assets and liabilities could affect results of operations.
 
As a global company, Applied is subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the: (1) applicable tax laws; (2) amount and composition of pre-tax income in countries with differing tax rates; or (3) valuation of Applied’s deferred tax assets and liabilities. In addition, Applied is subject to regular examination by the Internal Revenue Service and other tax authorities.authorities, and from time to time initiates amendments to previously filed tax returns. Applied regularly assesses the likelihood of favorable or unfavorable outcomes resulting from these examinations and amendments to determine the adequacy of its provision for income taxes. Although Applied believes its tax estimates are reasonable, there can be no assurance that the tax authorities will agree with such estimates. Applied may have to engage in litigation to achieve the results reflected in the estimates, which may be time-consuming and expensive. There can be no assurance that Applied will be successful or that any final determination will not be materially different from the treatment reflected in Applied’s historical income tax provisions and accruals, which could materially and adversely affect Applied’s financial condition and results of operations.
 
Applied is exposed to various risks related to legal proceedings or claims and protection of intellectual property rights.
 
Applied from time to time is, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, securities, contracts, product


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performance, product liability, unfair competition, employment and other matters. In addition, Applied on occasion receives notification from customers who believe that Applied owes them indemnification or other obligations related to claims made against such customers by third parties. These legal proceedings and claims, whether with or without merit, may be time-consuming and expensive to prosecute or defend, divert management’s attention and resources,and/or inhibit Applied’s ability to sell its products. There can be no assurance regarding the outcome of


22

current or future legal proceedings or claims. Applied previously entered into a mutual covenant-not-to-sue arrangement with one of its competitors to decrease the risk of patent infringement lawsuits in the future. There can be no assurance that the intended results of this arrangement will be achieved or that Applied will be able to adequately protect its intellectual property rights with the restrictions associated with such a covenant. In addition, Applied’s success depends in significant part on the protection of its intellectual property and other rights. Infringement of Applied’s rights by a third party, such as the unauthorized manufacture or sale of equipment or spare parts, could result in uncompensated lost market and revenue opportunities for Applied. Applied’s intellectual property rights may not provide significant competitive advantages if they are circumvented, invalidated, rendered obsolete by the rapid pace of technological change, or if Applied does not adequately protect or assert these rights. Furthermore, the laws and practices of other countries, including China, India, Taiwan and Korea, permit the protection and enforcement of Applied’s rights to varying extents, which may not be sufficient to protect Applied’s rights. If Applied is not able to obtain or enforce intellectual property rights, resolve or settle claims, obtain necessary licenses on commercially reasonable terms,and/or successfully prosecute or defend its intellectual property position, Applied’s business, financial condition and results of operations could be materially and adversely affected.
 
Applied is subject to risks of non-compliance with environmental and safety regulations.
 
Applied is subject to environmental and safety regulations in connection with its global business operations, including but not limited to: regulations related to the development, manufacture and use of its products; recycling and disposal of materials used in its products or in producing its products; the operation of its facilities; and the use of its real property. The failure or inability to comply with existing or future environmental and safety regulations could result in: (1) significant remediation liabilities; (2) the imposition of fines; (3) the suspension or termination of the development, manufacture, sale or use of certain of its products; (4) limitations on the operation of its facilities or ability to use its real property;and/or (5) a decrease in the value of its real property, each of which could have a material adverse effect on Applied’s business, financial condition and results of operations.
 
Applied is exposed to various risks related to the regulatory environment.
 
Applied is subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodiesand/or regulatory agencies in the countries in which Applied operates; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules and regulations. If Applied is found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, Applied’s business, financial condition and results of operations could be materially and adversely affected.
 
Applied is subject to internal control evaluations and attestation requirements of Section 404 of the Sarbanes-Oxley Act.
 
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, Applied must include in its Annual Report onForm 10-K a report of management on the effectiveness of Applied’s internal control over financial reporting. Ongoing compliance with this requirement is complex, costly and time-consuming. If Applied fails to maintain effective internal control over financial reporting or Applied’s management does not timely assess the adequacy of such internal control, Applied could be subject to regulatory sanctions and the public’s perception of Applied may decline.


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Item 1B:  Unresolved Staff Comments
 
None.


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Item 2:  Properties
 
Information concerning Applied’s principal properties at October 26, 200825, 2009 is set forth below:
 
           
      Square
  
Location
 
Type
 
Principal Use
 
Footage
 
Ownership
 
Santa Clara, CA Office, Plant & Warehouse Headquarters, Marketing,Headquarters; Marketing;  1,640,000  Owned
    Manufacturing, Distribution,Manufacturing; Distribution;  573,000455,000  Leased
    Research, Development and Engineering      
Austin, TX Office, Plant & Warehouse Manufacturing  1,719,000  Owned
       327,000198,000  Leased
Rehovot, Israel Office, Plant & Warehouse Manufacturing,Manufacturing; Research, Development and Engineering  442,000  Owned
Alzenau, Germany Office, Plant & Warehouse Manufacturing,Manufacturing; Research, Development and Engineering  281,000  Leased
Cheseaux, Switzerland Office, Plant & Warehouse Manufacturing,Manufacturing; Research, Development, Engineering andEngineering; Customer Support  114,000173,000  Leased
Treviso, Italy Office, Plant & Warehouse Manufacturing,Manufacturing; Research, Development, Engineering andEngineering; Customer Support  55,00061,000  Leased
Tainan, Taiwan Office, Plant & Warehouse Manufacturing and Customer Support  148,000237,000  Owned
Xi’an, China Office, Plant & Warehouse Research, Development and Engineering  120,000486,000  Owned
Hsinchu, Taiwan Office & Warehouse Customer Support  90,000  Owned
       81,00028,000  Leased
Singapore Office Customer Support  76,00065,000  Leased
Shanghai, China Office & Warehouse Customer Support  59,00095,000  Leased
 
Because of the interrelation of Applied’s operations, properties within a country may be shared by the segments operating within that country. Products in the Silicon segment are manufactured in Austin, Texas and Rehovot, Israel. Remanufactured products in the Applied Global Services segment are produced primarily in Austin, Texas. Products in the Display segment are manufactured in Santa Clara, California; Alzenau, Germany; and Tainan, Taiwan. Products in the Energy and Environmental Solutions segment are primarily manufactured in Alzenau, Germany; Cheseaux, Switzerland; Treviso, Italy; and Santa Clara, California.
 
In addition to the above properties, Applied leases office space for marketing, sales, engineering and customer support offices in 8881 locations throughout the world: 2321 in Europe, 2018 in Japan, 1917 in North America (principally the United States), 1716 in Asia-Pacific (including China and India), 7 in Korea and 2 in Taiwan. At October 25, 2009, Applied had a 298,000 square foot facility under construction in Singapore.
 
In addition, Applied owns 112 acres of buildable land in Texas that could accommodate approximately 1,708,000 square feet of additional building space, 43 acres in California that could accommodate approximately 1,247,000 square feet of additional building space, and 6 acres in Colorado that could accommodate approximately 87,000 square feet of additional building space. Applied also leases: 13 acres in Taiwan that could accommodate approximately 270,000 square feet of additional building space; 5 acres in Singapore that could accommodate approximately 333,000 square feet of additional building space; 4 acres in Italy that could accommodate approximately 180,000 square feet of additional building space; 10 acres in Israel that could accommodate


22

approximately 111,000 square feet of additional building space; and 25 acres in China that could accommodate approximately 768,000 square feet of additional building space.


24

Applied considers the properties that it owns or leases as adequate to meet its current and future requirements. Applied regularly assesses the size, capability and location of its global infrastructure and periodically makes adjustments based on these assessments.
 
Item 3:  Legal Proceedings
 
The information set forth under “Legal Matters” in Note 1113 of Notes to Consolidated Financial Statements is incorporated herein by reference.
 
Item 4:  Submission of Matters to a Vote of Security Holders
 
None.


2325

 
PART II
 
Item 5:  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
The following table sets forth the high and low closing sale prices for the periods presented as reported on the NASDAQ Global Select Market.
 
                
 Price Range  Price Range 
 High Low  High Low 
Fiscal 2007
        
First quarter $19.54  $17.08 
Second quarter $19.68  $17.61 
Third quarter $21.80  $18.40 
Fourth quarter $22.96  $18.86 
Fiscal 2008
                
First quarter $19.42  $16.33  $19.42  $16.33 
Second quarter $21.53  $17.48  $21.53  $17.48 
Third quarter $20.79  $16.96  $20.79  $16.96 
Fourth quarter $19.33  $11.36  $19.33  $11.36 
Fiscal 2009
        
First quarter $13.31  $8.14 
Second quarter $11.92  $8.34 
Third quarter $13.49  $10.50 
Fourth quarter $14.01  $12.66 
 
Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of November 21, 2008,20, 2009, there were 5,0314,641 directly registered holders of Applied common stock.


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Performance Graph
 
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the period from October 26, 200331, 2004 through October 26, 2008.25, 2009. This is compared with the cumulative total return of the Standard & Poor’s 500 Stock Index and the RDG Semiconductor Composite Index over the same period. The comparison assumes $100 was invested on October 26, 200331, 2004 in Applied common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
 
Comparison of 5 Year Cumulative Total Return*
Among Applied Materials, Inc., The S&P 500 Index
And The RDG Semiconductor Composite Index
 
 
*$100 invested on October 26, 200310/31/04 in stock and October 31, 2003 in index-includingor index, including reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright© 20082009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
                        
                         10/31/04 10/30/05 10/29/06 10/28/07 10/26/08 10/25/09
 10/26/03 10/31/04 10/30/05 10/29/06 10/28/07 10/26/08
Applied Materials  100.00   77.97   79.51   84.65   93.55   57.28   100.00   101.98   108.58   119.99   73.46   85.26 
S&P 500 Index  100.00   109.42   118.96   138.40   158.56   101.32   100.00   108.72   126.49   144.90   92.60   101.68 
RDG Semicondutor Composite Index  100.00   75.06   81.20   84.08   97.96   54.18 
RDG Semiconductor Composite Index  100.00   108.03   111.90   130.06   71.98   88.52 
 
Dividends
 
During fiscal 2008,2009, Applied’s Board of Directors declared four quarterly cash dividends in the amount of $0.06 per share each quarter. The fourth quarterly cash dividend declared in fiscal 20082009 was paid on December 4, 20083, 2009 to stockholders of record as of November 13, 2008.12, 2009. During fiscal 2007,2008, Applied’s Board of Directors declared one quarterly cash dividend in the amount of $0.05 per share and threefour quarterly cash dividends in the amount of $0.06 per share each quarter. Dividends paiddeclared during fiscal 20082009 and fiscal 20072008 totaled $325$320 million and $306$325 million, respectively. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, 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 that cash dividends are in the best interest of Applied’s stockholders.


25

Repurchases of Applied Common Stock
 
The following table provides information as of October 26, 2008 with respect to the shares of common stock repurchased by Applied during the fourth quarter of fiscal 2008:
                 
           Maximum Dollar
 
        Total Number of
  Value of Shares
 
     Average
  Shares Purchased as
  that May Yet be
 
  Total Number of
  Price Paid
  Part of Publicly
  Purchased under
 
Period
 Shares Purchased  per Share  Announced Program*  the Program* 
  (Shares in
     (Shares in
  (Dollars in
 
  thousands)     thousands)  millions) 
 
Period #1                
(July 28, 2008 to August 24, 2008)  3,355  $18.25   3,355  $2,539 
Period #2                
(August 25, 2008 to September 21, 2008)  7,100  $17.08   7,100  $2,418 
Period #3                
(September 22, 2008 to October 26, 2008)  8,446  $13.91   8,446  $2,300 
                 
Total  18,901  $15.87   18,901     
*On September 15, 2006, the Board of Directors approved a stock repurchase program for up to $5.0 billion in repurchases over the subsequent three years, ending September 2009.
In November 2008, Applied announced that it had temporarily suspendedwas suspending stock repurchases in order to maintain financial flexibility in light of the deteriorating global economic and market conditions. The stock repurchase program that the Board of Directors approved in 2006 expired in September 2009.


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Item 6:  Selected Financial Data
 
The following selected financial information has been derived from Applied’s historical audited consolidated financial statements and should be read in conjunction with the consolidated financial statements and the accompanying notes for the corresponding fiscal years:
 
                                        
Fiscal Year Ended(1)
 2008 2007 2006 2005 2004  2009 2008 2007 2006 2005 
 (In thousands, except percentages, ratios, per share amounts and number of employees)  (In thousands, except percentages, ratios, per share amounts and number of employees) 
Net sales $8,129,240  $9,734,856  $9,167,014  $6,991,823  $8,013,053  $5,013,607  $8,129,240  $9,734,856  $9,167,014  $6,991,823 
Gross margin $3,442,828  $4,492,443  $4,291,802  $3,085,874  $3,701,245  $1,430,805  $3,442,828  $4,492,443  $4,291,802  $3,085,874 
(% of net sales)  42.4   46.1   46.8   44.1   46.2   28.5   42.4   46.1   46.8   44.1 
Research, development and engineering $1,104,122  $1,142,073  $1,152,326  $940,507  $991,873  $934,115  $1,104,122  $1,142,073  $1,152,326  $940,507 
(% of net sales)  13.6   11.7   12.6   13.5   12.4   18.6   13.6   11.7   12.6   13.5 
Marketing, selling, general and administrative $965,164  $952,443  $906,742  $697,402  $751,621  $734,518  $965,164  $952,443  $906,742  $697,402 
(% of net sales)  11.9   9.8   9.9   10.0   9.4   14.7   11.9   9.8   9.9   10.0 
Income before income taxes $1,408,718  $2,439,653  $2,166,971  $1,581,569  $1,829,250 
Income (loss) before income taxes $(485,803) $1,408,718  $2,439,653  $2,166,971  $1,581,569 
Effective tax rate(%)  31.8   29.9   30.0   23.5   26.1   37.2   31.8   29.9   30.0   23.5 
Net income $960,746  $1,710,196  $1,516,663  $1,209,900  $1,351,303 
Net income (loss) $(305,327) $960,746  $1,710,196  $1,516,663  $1,209,900 
(% of net sales)  11.8   17.6   16.5   17.3   16.9   ( 6.1)  11.8   17.6   16.5   17.3 
Earnings per diluted share $0.70  $1.20  $0.97  $0.73  $0.78 
Earnings (loss) per diluted share $(0.23) $0.70  $1.20  $0.97  $0.73 
Weighted average common shares  1,374,507   1,427,002   1,565,072   1,657,493   1,721,645   1,333,091   1,374,507   1,427,002   1,565,072   1,657,493 
Order backlog $4,847,598  $3,654,704  $3,398,280  $2,570,808  $3,368,382  $2,734,896  $4,847,598  $3,654,704  $3,398,280  $2,570,808 
Working capital(2) $3,718,605  $4,225,967  $3,644,974  $5,069,663  $6,020,747  $3,749,490  $3,718,605  $4,225,967  $3,644,974  $5,069,663 
Current ratio(2)  2.3   2.8   2.5   3.9   3.6   2.9   2.3   2.8   2.5   3.9 
Long-term debt $201,576  $202,281  $204,708  $407,380  $410,436  $200,654  $201,576  $202,281  $204,708  $407,380 
Cash dividends declared per common share $0.24  $0.23  $0.18  $0.09  $—  $0.24  $0.24  $0.23  $0.18  $0.09 
Stockholders’ equity $7,548,958  $7,821,409  $6,651,400  $8,928,549  $9,262,027  $7,094,608  $7,548,958  $7,821,409  $6,651,400  $8,928,549 
Book value per share $5.67  $5.64  $4.78  $5.56  $5.51  $5.29  $5.67  $5.64  $4.78  $5.56 
Total assets $11,006,318  $10,662,278  $9,480,837  $11,269,157  $12,093,445  $9,574,243  $11,006,318  $10,662,278  $9,480,837  $11,269,157 
Capital expenditures, net of loss on fixed asset retirements $281,080  $243,383  $151,117  $177,097  $171,538  $224,410  $281,080  $243,383  $151,117  $177,097 
Regular employees  14,824   14,550   14,072   12,576   12,191   12,619   14,824   14,550   14,072   12,576 
 
 
(1)Each fiscal year ended on the last Sunday in October.
 
(2)In fiscal 2006, Applied reclassified certain fixed-income securities from short-term investments to long-term investments; prior period balances have been reclassified to conform to the current period presentation.


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Item 7:Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7:  Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Management’s Discussion and Analysis (MD&A) is intended to facilitate an understanding of Applied’s business and results of operations. This MD&A should be read in conjunction with Applied’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in thisForm 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of thisForm 10-K. MD&A consists of the following sections:
 
 • Overview: a summary of Applied’s business, measurements and opportunities.
 
 • Results of Operations: a discussion of operating results.
 
 • Segment Information: a discussion of segment operating results.
 
 • Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash, contractual obligations and financial position.
 
 • Critical Accounting Policies: a discussion of critical accounting policies that require the exercise of judgments and estimates.
 
Overview
 
Applied provides Nanomanufacturing Technologytm solutions for the global semiconductor, flat panel display, solar and related industries, with a broad portfolio of innovative equipment, service and software products. Applied’s customers are primarily manufacturers of semiconductors, flat panel liquid crystal displays (LCDs), solar photovoltaic cells and modules (solar PVs), flexible electronics and energy-efficient glass. Applied operates in four reportable segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions. Product development and manufacturing activities occur primarily in North America, Europe, Israel and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.
 
Applied’s results arehistorically have been driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, LCDs, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and technological advances in fabrication processes. Credit constraints in the financial markets and the weak global economy are compounding the impact of the highly cyclical markets in which Applied operates.
 
The following table presents certain significant measurements for the past three fiscal years:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions, except per share amounts and percentages)  (In millions, except per share amounts and percentages) 
New orders $9,155  $9,677  $9,888  $4,097  $9,155  $9,677 
Net sales $8,129  $9,735  $9,167  $5,014  $8,129  $9,735 
Gross margin $3,443  $4,492  $4,292  $1,431  $3,443  $4,492 
Gross margin percent  42.4%  46.1%  46.8%  28.5%  42.4%  46.1%
Net income $961  $1,710  $1,517 
Earnings per share $0.70  $1.20  $0.97 
Net income (loss) $(305) $961  $1,710 
Earnings (loss) per share $(0.23) $0.70  $1.20 
Fiscal 2009 financial results reflected significantly reduced demand for manufacturing equipment and services due to extremely unfavorable global economic and industry conditions, particularly in the first half of fiscal 2009. Negative trends in consumer spending and pervasive economic uncertainty led some customers to dramatically reduce factory operations and to reduce their spending. In the second half of fiscal 2009, demand for semiconductor and display equipment increased, but was still down significantly from fiscal 2008 levels. Fiscal 2009 financial results included charges associated with restructuring programs. While Applied achieved profitability in the fourth quarter of fiscal 2009, a meaningful improvement in the equipment sector for fiscal 2010 will depend on a recovery


29

in customers’ end markets sufficient to support factories running at higher utilization and to encourage customers’ investments in new capacity, as well as advanced technologies. Applied currently expects a recovery in fiscal 2010, particularly in the market for semiconductor capital equipment, and anticipates that total net sales will increase more than 30 percent in fiscal 2010 as compared to fiscal 2009.
 
Fiscal 2008 financial results reflected decreased demand for semiconductor equipment and, to a lesser extent, service products, due to unfavorable market conditions in the semiconductor industry, partially offset by increased demand for LCD and solar products. New orders decreased from fiscal 2007 due to lower demand for semiconductor equipment from memory, foundry and logic chip manufacturers, partially offset by increased demand by LCD customers and, beginning in the first quarter of fiscal 2008, the recognition of orders for Applied’s SunFabtm Thin Film Line for manufacturing solar panels. Net sales decreased during fiscal 2008 compared to fiscal 2007 due to the decline in investment from memory and logic customers, partially offset by increased sales of crystalline silicon (c-Si) solar manufacturing products. Net income decreased in fiscal 2008 compared to fiscal 2007 due to lower net sales, offset in part by lower operating expenses. Fiscal 2008 financial results included charges associated with restructuring programs.


28

Fiscal 2007 financial results reflected improved conditions in the semiconductor industry that began with the industry’s recovery in 2006, while conditions in the display industry were mixed as manufacturers postponed capacity additions despite strong consumer demand for LCD TVs. Total orders decreased slightly from fiscal 2006, primarily due to the significant decline in demand for display manufacturing products, partially offset by increased demand for products and services in all other segments. Net sales increased duringin fiscal 2007 over fiscal 2006, primarily due toreflected strong demand from dynamic random access memory (DRAM) and flash memory chip manufacturers, partially offset by a significant decline in LCD equipment sales as manufacturers absorbed capacity following substantial investment in 2006. NetImproved net income improved in fiscal 2007 compared to fiscal 2006 due toreflected higher sales and lower operating expenses, offset in part by lower interest income. Fiscal 2007 financial results included restructuring and asset impairment and other charges associated with ceasing development of beamline implant products, and an in-process research and development (IPR&D) expense associated with the acquisition of certain net assets of Brooks Automation, Inc. (Brooks Software).
 
Fiscal 2006 results reflected a recovery in the semiconductor and flat panel display industries along with the global economy, as end-user demand for electronic products and LCDs drove increased customer investments in advanced silicon (particularly memory) and display products compared to fiscal 2005. During this period, Applied’s semiconductor customers increased both high-volume production and leading-edge 65nm and 45nm chip development. Improvements in operating performance were offset in part by restructuring and asset impairment charges, and an IPR&D expense associated with the acquisition of Applied Films Corporation (Applied Films).
Applied expects an unusually challenging environment for fiscal 2009. The turmoil in the financial markets and weakening global economy are compounding the impact of the highly cyclical markets in which Applied operates. Current negative trends in consumer spending and pervasive economic uncertainty have led some customers to decrease factory operations and to reassess their projected spending plans. As a result, on November 12, 2008, Applied announced that it will implement a restructuring program beginning in the first quarter of fiscal 2009. In addition, Applied’s ability to forecast customers’ future investments and its financial targets are limited in this uncertain macroeconomic climate. Applied currently expects that orders and revenue will be down overall and across most segments in fiscal 2009, with the exception of the Energy and Environmental Solutions segment.
Results of Operations
 
The following table presents certain quarterly and full fiscal year financial information:
 
                                        
 Fiscal Quarter Fiscal
  Fiscal Quarter Fiscal
 
 First Second Third Fourth Year  First Second Third Fourth Year 
 (In millions, except per share amounts)  (In millions, except per share amounts) 
2009:                    
New orders $903  $649  $1,072  $1,473  $4,097 
Net sales $1,333  $1,020  $1,134  $1,526  $5,014 
Gross margin $392  $156  $325  $559  $1,431 
Net income (loss) $(133) $(255) $(55) $138  $(305)
Earnings (loss) per diluted share $(0.10) $(0.19) $(0.04) $0.10  $(0.23)
2008:                                        
New orders $2,500  $2,414  $2,030  $2,212  $9,155  $2,500  $2,414  $2,030  $2,212  $9,155 
Net sales $2,087  $2,150  $1,848  $2,044  $8,129  $2,087  $2,150  $1,848  $2,044  $8,129 
Gross margin $935  $967  $742  $799  $3,443  $935  $967  $742  $799  $3,443 
Net income $262  $303  $165  $231  $961  $262  $303  $165  $231  $961 
Earnings per diluted share $0.19  $0.22  $0.12  $0.17  $0.70  $0.19  $0.22  $0.12  $0.17  $0.70 
2007:                                        
New orders $2,538  $2,648  $2,284  $2,206  $9,677  $2,538  $2,648  $2,284  $2,206  $9,677 
Net sales $2,277  $2,530  $2,561  $2,367  $9,735  $2,277  $2,530  $2,561  $2,367  $9,735 
Gross margin $1,063  $1,137  $1,216  $1,077  $4,492  $1,063  $1,137  $1,216  $1,077  $4,492 
Net income $403  $411  $474  $422  $1,710  $403  $411  $474  $422  $1,710 
Earnings per diluted share $0.29  $0.29  $0.34  $0.30  $1.20  $0.29  $0.29  $0.34  $0.30  $1.20 
2006:                    
New orders $2,041  $2,488  $2,670  $2,688  $9,888 
Net sales $1,858  $2,248  $2,543  $2,518  $9,167 
Gross margin $838  $1,045  $1,223  $1,186  $4,292 
Net income $143  $413  $512  $449  $1,517 
Earnings per diluted share $0.09  $0.26  $0.33  $0.30  $0.97 


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Applied’s business was subject to cyclical industry conditions in fiscal 2009, 2008 2007 and 2006.2007. As a result of these conditions and the global economic environment, there were significant fluctuations in Applied’s quarterly new orders and net sales, both within and across the fiscal years. Demand for manufacturing equipment has historically been volatile as a result of sudden changes in chip, LCD and LCDsolar PV supply and demand and other factors, including global economic and market conditions and rapid technological advances in fabrication processes. In response to the challenging economic environment in fiscal 2009, Applied implemented certain temporary cost reduction programs such as company-wide shutdowns.
 
New Orders
 
New orders by geographic region, which are attributed according to the location of customers’ facilities, were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions)  (In millions) 
China $749  $986  $783 
North America(1)  711   1,680   1,518 
Europe  675   1,134   1,035 
Taiwan $2,110  $2,703  $2,098   625   2,110   2,703 
North America(1)  1,680   1,518   1,901 
Asia-Pacific(2)  1,530   1,262   1,272 
Korea  1,477   1,639   1,758   559   1,477   1,639 
Japan  1,224   1,520   1,823   531   1,224   1,520 
Europe  1,134   1,035   1,036 
Southeast Asia  247   544   479 
              
 $9,155  $9,677  $9,888  $4,097  $9,155  $9,677 
              
 
 
(1)Primarily the United States.
(2)Includes China.
 
New orders decreased 55 percent to $4.1 billion in fiscal 2009 compared to fiscal 2008. The decrease in new orders was across all segments, and particularly in the semiconductor and display businesses, reflecting the challenging economic and industry conditions prevalent during fiscal 2009. Customer demand for semiconductor and LCD equipment began to recover in the second half of fiscal 20082009.
New orders decreased 5 percent to $9.2 billion from $9.7 billion in the prior year,fiscal 2008 compared to fiscal 2007, due to lower demand for semiconductor equipment from logic, memory, and foundry chip manufacturers, partially offset by increased demand for LCD and solar equipment, including the initial recognition of orders for the Applied SunFabtm Thin Film Line. Demand for LCD equipment slowed substantially in the fourth quarter of fiscal 2008, as Display customers absorbed capacity following robust demand over the preceding three quarters.
 
New orders for fiscal 2007 decreased 2 percent to $9.7 billion from $9.9 billion in the prior year, reflecting delays in investment by LCD customers, partially offset by increased demand for solar equipment, semiconductor equipment, and service products. Demand for semiconductor equipment slowed in the second half of fiscal 2007 as customers absorbed added capacity, while demand from LCD customers recovered in the fourth quarter of fiscal 2007.
 
Fiscal 2006 orders of $9.9 billion reflected increased semiconductor manufacturing equipment orders from memory manufacturers, increased service orders as a result of higher customer factory utilization and new product introductions, and increased display orders as customers invested in next-generation equipment.
Applied’s backlog foras of the end of each of the last three fiscal years was as follows: $2.7 billion at October 25, 2009, $4.8 billion at October 26, 2008, and $3.7 billion at October 28, 2007, and $3.4 billion at October 29, 2006.2007. Backlog increaseddecreased in fiscal 20082009 primarily due to customer cancellations and financial debookings which totaled $1.2 billion, reflecting the inclusion of ordersdecline in demand for products obtained through the acquisitions of Baccini S.p.A. (Baccini) and HCT Shaping Systems S.A. (HCT) that met Applied’s order recognition criteria during the third quarter of fiscal 2008 but did not qualify for order recognition at the time of the acquisition, partially offset by debookings, primarily of semiconductor equipment, and unfavorable currency adjustments.equipment. Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; (2) contractual service revenue and maintenance fees to be earned within the next 12 months; and (3) orders for SunFab lines that are anticipated to be recognized as revenue within the next 12 months. Due to the potential for customer changes in delivery schedules or cancellation of orders, Applied’s backlog at any particular time is not necessarily indicative of actual sales for any future periods.


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Net Sales
 
Net sales by geographic region, which are attributed according to the location of customers’ facilities, were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions)  (In millions) 
Taiwan $1,837  $2,679  $2,079  $1,026  $1,837  $2,679 
North America(1)  1,520   1,554   1,708   966   1,520   1,554 
Europe  753   949   956 
Japan  718   1,218   1,493 
Korea  1,309   1,847   1,699   664   1,309   1,847 
Asia-Pacific(2)  1,296   1,206   1,157 
Japan  1,218   1,493   1,518 
Europe  949   956   1,006 
China  635   780   717 
Southeast Asia  252   516   489 
              
 $8,129  $9,735  $9,167  $5,014  $8,129  $9,735 
              
 
 
(1)Primarily the United States.
(2)Includes China.
 
DuringNet sales decreased 38 percent to $5.0 billion in fiscal 2009 compared to fiscal 2008, netas a result of significantly lower sales of equipment and services to semiconductor and display customers, partially offset by increased sales of solar manufacturing equipment. Net sales decreased by 16 percent to $8.1 billion from $9.7 billion in fiscal 2008 compared to fiscal 2007, due to decreased investment from memory and logic chip manufacturers, partially offset by increased demand from solar and LCD customers. During fiscal 2007, net sales increased by 6 percent, to $9.7 billion from $9.2 billion in fiscal 2006, led by strength in memory capacity expansion throughout the year. In fiscal 2006, net sales of $9.2 billion followed the trend of increased orders for the year.
 
Gross Margin
 
Gross margin as a percentage of net sales decreased to 28.5 percent in fiscal 2009 from 42.4 percent in fiscal 2008, fromcompared to 46.1 percent in fiscal 2007, compared to 46.8 percent2007. The decrease in the gross margin percentage in fiscal 2006.2009 from fiscal 2008 was due to lower net sales, lower-margin product mix, and reduced factory absorption, offset in part by cost control initiatives. The decrease in the gross margin percentage from fiscal 2007 to fiscal 2008 was attributable to lower net sales and lower margin product mix. The decrease in the gross margin percentage from fiscal 2006 to fiscal 2007 was principally attributable to inventory-related charges of $56 million associated with ceasing development of beamline implant products, incremental charges attributable to acquisitions consisting of inventory fair value adjustments on products sold, amortization and product mix, partially offset by higher revenue levels and lower material costs. Gross margin during fiscal 2009, 2008 and 2007 and 2006 included $28 million, $32 million $27 million and $37$27 million, respectively, of equity-based compensation expense.
 
Research, Development and Engineering
 
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. Applied 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 historically has maintained its commitment to investing in RD&E in order to continue to offer new products and technologies. RD&E expenses were $934 million (19 percent of net sales) in fiscal 2009, $1.1 billion (14 percent of net sales) in fiscal 2008 and $1.1 billion (12 percent of net sales) in fiscal 2007 and $1.2 billion (13 percent of net sales) in fiscal 2006.2007. RD&E expense during fiscal 2009, 2008 and 2007 and 2006 included $50 million, $59 million $56 million and $76$56 million, respectively, of equity-based compensation expense. 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.
 
In fiscal 2009, Applied focused on developing systems for semiconductor customers’ new chip designs with 32nm and below geometries, including systems to enable faster transistors using strain engineering andhigh-k/metal gate technologies, as well as double patterning processes that enable customers to extend their existing 193nm lithography tools through additional technology generations. Applied also focused on developing


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technology for manufacturing next generation displays. RD&E also included activities to develop products that enable lower-cost production of solar energy and other products to enable energy conservation.
In fiscal 2008, Applied focused on the development of processes and systems for the continued scaling of semiconductor devices. Applied pioneered a self-aligned double patterning approach that can enable 22nm and below device fabrication using conventional optical lithography. The Company also developed technology for the


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implementation of through-silicon vias, an emerging solution for interconnecting 3D chip stacks to achieve better device performance, lower power consumption, reduced costs and the integration of heterogeneous devices.vias. Efforts were also focused on developing the systems and technology to reduce thecost-per-watt of solar electricity.
 
In fiscal 2007, Applied focused on developing systems for customers’ new chip designs with 45nm and below geometries, including systems to enable faster transistors using strain engineering and high-k/metal gate technologies, and patterning processes to enable customers to extend their existing 193 nm lithography tools through additional technology generations. Applied also continued to invest in solar research and development.
 
In fiscal 2006, Applied continued its development of systems to increase chip performance, especially for flash and DRAM devices. Applied also focused on developing systems for 32nm and 22nm copper/low k interconnect processing technologies to address critical manufacturing challenges that chipmakers face as they transition to future device generations, helping them to bring new products to market more rapidly while minimizing risk. Applied also continued to focus on developing LCD systems to process larger glass substrates.
There were no IPR&D charges recorded in either fiscal 2009 or 2008. During fiscal 2007, Applied recorded an IPR&D expense of $5 million associated with the acquisition of certain net assets of Brooks Software, a division of Brooks Automation Inc. During fiscal 2006, Applied recorded an IPR&D expense in the amount of $14 million related to the acquisition of Applied Films. Applied’s methodology for allocating the purchase price relating to purchased acquisitions to IPR&D was determined through established valuation techniques. The IPR&D was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed.
 
Marketing, Selling, General and Administrative
 
Marketing, selling, general and administrative expenses were $735 million (15 percent of net sales) in fiscal 2009, $965 million (12 percent of net sales) in fiscal 2008, and $952 million (10 percent of net sales) in fiscal 2007,2007. The decrease in marketing, selling, general and $907 million (10 percent of net sales)administrative expenses in fiscal 2006.2009 from fiscal 2008 was primarily due to cost control initiatives. The increase in marketing, selling, general and administrative expenses in fiscal 2008 from fiscal 2007 to 2008 was principally attributable to increased operating costs from business acquisitions and equity compensation expenses, offset in part by cost control initiatives. The increase in marketing, selling, general and administrative expenses from fiscal 2006 to 2007 was principally attributable to increased operating costs from acquired businesses, investments in the solar business expansion, and increased variable compensation expenses. These expenses were partially offset by lower equity compensation expenses and savings from cost control initiatives, including ceasing development of beamline implant products and transitioning to managed service providers to perform certain information technology and business infrastructure support. Marketing, selling and general and administrative expenses during fiscal 2009, 2008 and 2007 and 2006 included $69 million, $88 million $77 million and $104$77 million, respectively, of equity-based compensation expense.
 
Restructuring and Asset Impairments
 
During the first quarter of fiscal 2009, Applied announced a restructuring program to reduce its global workforce by approximately 1,800 positions. During the second quarter of fiscal 2009, Applied expanded the scope of the restructuring program by approximately 200 positions. During fiscal 2009, Applied recorded restructuring charges of $143 million associated with this program. The restructuring charges consisted of employee related costs to reduce the Company’s workforce through a combination of attrition, voluntary separation and other workforce reduction programs. During fiscal 2009, Applied also determined that the carrying value of certain fixed assets to be sold exceeded the estimated fair value and, as a result, recorded a $15 million impairment charge.
During the first quarter of fiscal 2008, Applied announced a global cost reduction plan (the Plan) that primarily affected its Silicon and Applied Global Services segments and related support organizations. As part of the Plan,this plan, Applied reduced its global workforce through a combination of job elimination and attrition. For fiscal 2008, Applied recorded restructuring charges of $29 million relating to the Plan,this plan, consisting primarily of employee terminationrelated costs to reduce its workforce. The affected employees were based in North America, Europe and Asia, and represented multiple functions.
 
During the second quarter of fiscal 2007, Applied’s Board of Directors approvedApplied announced a plan (the Implant Plan) to cease development of beamline implant products for semiconductor manufacturing and curtail the operations of its Implant group based in Horsham, England. Under the Implant Plan, Applied closed its research, development and manufacturing operations in Horsham in October 2007. CostsRestructuring charges under the Implant Plan for fiscal 2008 consisted of restructuring charges oftotaled $11 million and were associated with facilities. CostsRestructuring and asset impairment charges under the Implant Plan in fiscal 2007 consisted primarily of inventory-related charges reported as cost of products sold of $56 million, other operating expenses of $10aggregated $30 million and restructuring and asset impairment chargesconsisted of $30 million. Also as part of the Implant Plan, Applied recorded$21 million in restructuring charges of $22primarily associated with employee related costs and $9 million consisting primarily of employee termination costs to reduce its workforce.in asset impairments. The majority of the affected employees were based in Horsham, England, and represented multiple functions. Asset impairment charges included $8 million of fixed asset write-offs. TheCosts associated with the Implant group operatedPlan in fiscal 2007 also


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included inventory-related charges, reported as cost of products sold, of $56 million and other operating expenses of $10 million. The Implant group operated in the Silicon segment, and the results of its operations were not material to Applied’s financial position or results of operations.
 
During the first quarter of fiscal 2006, Applied’s Board of Directors approved a plan to disinvest a portion of Applied’s real estate and facilities portfolio (the Disinvestment Plan). Properties with an estimated fair value of $56 million were reported as assets held-for-sale and reclassified from property, plant and equipment on the Consolidated Balance Sheet. During fiscal 2006, Applied recorded an asset impairment charge of $124 million to write down the following properties to estimated fair value: (1) facilities in Narita, Japan, Chunan, Korea, Hillsboro, Oregon, and Danvers, Massachusetts; and (2) 26 acres of unimproved land in Hillsboro, Oregon. During fiscal 2006, Applied sold the Danvers facility for net proceeds of $16 million and recognized a gain of $4 million. During fiscal 2007, Applied sold the Hillsboro, Chunan, and Narita facilities and the Hillsboro land for total net proceeds of $38 million and recognized a gain of $3 million. Also in fiscal 2006, as part of the Disinvestment Plan, Applied recorded lease termination charges in the amount of $89 million related to the closure of its leased Hayward, California facility.
For further details, see Note 68 of Notes to Consolidated Financial Statements.
 
Net Interest and Other Income
 
Net interest and other income was $27 million for fiscal 2009, $89 million for fiscal 2008, and $98 million for fiscal 2007, and $149 million for fiscal 2006.
2007. The decrease in net interest and other income forin fiscal 2009 from fiscal 2008 was primarily due to a decrease in interest rates. The decrease in net interest and other income in fiscal 2008 from fiscal 2007 was primarily due to a reduction in short-term investments and a decrease in interest rates, during fiscal 2008, offset by a decrease in interest expense associated with scheduled debt maturities that occurred in September 2007. The decrease in net interest and other income from fiscal 2006 to 2007 was primarily due to a reduction in cash and investments during the fourth quarter of fiscal 2006 when Applied repurchased 145 million shares of its outstanding common stock for an aggregate purchase price of $2.5 billion under an accelerated stock buyback program.
 
Income Taxes
 
Applied’s effective income tax rate for fiscal 2009 was a benefit of 37.2 percent as compared to a provision rate wasof 31.8 percent for fiscal 2008, and a provision of 29.9 percent for fiscal 2007, and 30.0 percent for2007. The change in the fiscal 2006.2009 tax rate from the fiscal 2008 rate was principally attributable to the net loss before taxes incurred in fiscal 2009. Applied’s effective tax rate was higher for fiscal 2008 compared to fiscal 2007 as fiscal 2007 reflected benefitsa benefit of $36 million principally related to the favorable resolution of audits of prior years’ income tax filings, partially offset by a $13 million charge from the expensing of equity-based compensation. Applied’s effective tax rate of 30.0 percent for fiscal 2006 reflected benefits of $61 million principally related to the favorable resolution of audits of prior years’ income tax filings, partially offset by a $17 million charge from the expensing of equity-based compensation.
 
Applied’s future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of Applied’s pre-tax income, and non-tax deductible expenses incurred in connection with acquisitions. Management carefully monitors these factors and timely adjusts the effective income tax rate accordingly.
 
Segment Information
 
Applied operates in four reportable segments: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 1012 of Notes to Consolidated Financial Statements. Applied does not allocate to its reportable segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include those for equity-based compensation and certain components of variable compensation, corporate marketing and sales, corporate functions (certain management, finance, legal, human resources and RD&E), and unabsorbed information technology and occupancy. Effective in the first quarter of fiscal 2008, Applied renamed two of its reportable segments. The Fab Solutions segment was renamed Applied Global Services, and the Adjacent Technologies segment was renamed Energy and Environmental Solutions. In addition, Applied changed its management reporting system for services to report all service results in the Applied Global Services


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segment. Applied has reclassified segment operating results for fiscal 2007 and 2006 to conform to the fiscal 2008 presentation.
 
Discussions below include the results of each reportable segment.
 
Silicon Segment
 
The Silicon segment includes semiconductor capital equipment for deposition, etch, rapid thermal processing (RTP), chemical mechanical planarization (CMP), and metrology and inspection. Development efforts are focused on solving customers’ key technical challenges, including transistor performance and nanoscale patterning, and on improving chip manufacturing productivity to reduce costs.
 
Certain significant measures for the past three fiscal years were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions)  (In millions) 
New orders $4,092  $6,651  $6,555  $1,677  $4,092  $6,651 
Net sales $4,005  $6,512  $5,971  $1,960  $4,005  $6,512 
Operating income $1,242  $2,379  $2,000  $152  $1,242  $2,379 
 
Fiscal 2009 financial results reflected significantly reduced demand for manufacturing equipment due to extremely unfavorable global economic and industry conditions. Silicon new orders decreased 59 percent to $1.7 billion in fiscal 2009 compared to fiscal 2008. The decrease in new orders reflected significantly lower demand, primarily from memory and logic customers. Net sales decreased 51 percent to $2.0 billion in fiscal 2009


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compared to fiscal 2008. The decrease in net sales was due to decreased capital investments, primarily by memory customers. Operating income decreased 88 percent to $152 million in fiscal 2009 compared to fiscal 2008. The decrease in operating income was due to significantly lower sales resulting in lower factory absorption, partially offset by lower operating expenses from cost control initiatives. Operating income for fiscal 2009 also reflected an increase in bad debt expense. After an operating loss in the first half of fiscal 2009, the Silicon segment returned to operating profitability during the second half of the year, which was primarily driven by sales to foundry customers. During the year, the Company introduced a new platform specifically designed for under-bump metallization (UBM) and other back-end processes, the Applied Charger UBM PVD system.
Fiscal 2008 Silicon new orders decreased 38 percent to $4.1 billion in fiscal 2008 compared to fiscal 2007. The decrease in new orders was due to reduced demand for equipment from logic, memory and foundry customers. Net sales decreased 38 percent to $4.0 billion in fiscal 2008 compared to fiscal 2007. The decrease in net sales was due to decreased investment by logic and memory customers. Operating income decreased 48 percent to $1.2 billion in fiscal 2008 compared to fiscal 2007. The decrease in operating income was due to significantly lower revenue levels from the slowdown in the semiconductor equipment industry, partially offset by lower operating expenses attributable to continued focus on cost controls and improvement in manufacturing activities. In fiscal 2008, the Company launched two key products for photomask applications: the Applied Aera2 Mask Inspection system, which detects critical defects on a photomask, and the Applied Tetra Reticle Clean system, which cleans 32nm and below photomasks using wet clean chemistry. The Company also introduced the Applied Producer eHARP system for depositing films in high aspect ratio device structures.
 
Silicon orders increased 1 percent to $6.7 billion in fiscal 2007 compared to fiscal 2006, reflectingreflected the semiconductor industry’s strength during this period, driven by demand for cell phones, computers, digital TVs, game consoles, MP3 players and other electronic products. The majority of new orders were for memory applications as customers invested in leading-edge flash and DRAM memory devices, while orders from foundries remained at low levels. Net sales increased 9 percent to $6.5 billion in fiscal 2007 compared to fiscal 2006. The increase in net sales was due toreflected increased investment by memory and logic semiconductor customers in multiple areas, including etch, inspection, and RTP products. Operating income increased 19 percent to $2.4 billion in fiscal 2007 compared to fiscal 2006. The increase in operating income was due toreflected higher revenue levels and continued focus on cost controls. Operating income for fiscal 2007 included charges of $66 million related to ceasing development of beamline implant products. In fiscal 2007, the Company launched the Applied Producer GT a significant redesign of its successful Producer platform that offers faster, more cost-effective CVDfor chemical vapor deposition processing for 45 nm and beyond applications. To meet the challenges of fabricating next-generation transistors, Applied also announced its portfolio of high-k/metal gate solutions, including the Applied Advanced Gate Stack and Applied Centura Carina Etch systems. Other new etch systems introduced were the Applied Mariana Trench, for etching high aspect ratio structures, the Applied Opus AdvantEdge Metal Etch with anew 5-chamber platform, and the Applied Centura Tetra III Advanced Reticle Etch. The Company also added to its line of lithography-enabling systems with the new Applied Producer ACE SACVD and added to its line of strain engineering solutions with the Applied Producer Celera CVD.
During fiscal 2006, leading semiconductor manufacturers reported increased sales as the electronics market continued to grow. The demand for consumer electronics, including broadband, personal computers and cell phones with increasing digital content and complex chips, resulted in increased chip demand and the need for additional capacity. In addition to expanding consumer electronics demand, corporate information technology investment increased, with an emphasis on security, server consolidation and more robust internet infrastructures. During


34

fiscal 2006, demand increased in many areas, including etch, inspection and thin films products. Improved operating results in fiscal 2006 reflected an increase in business volume, offset in part by increases in variable compensation expenses. Applied continued its development of systems to increase chip performance, especially for flash and DRAM devices. To extend the usefulness of aluminum (the material used by many memory manufacturers for interconnects) to the sub-70nm node, the Company introduced two products, the Applied Endura CVD Al technology and Applied Centura AdvantEdge Metal Etch system. For faster copper interconnects, Applied launched its enhanced Endura CuBS/S II system with Aktiv Preclean, extending the system’s capability to the 45nm node and below, especially for use with ultra-low dielectric constant (low k) films. The Company introduced the Applied Endura iLB II (integrated liner-barrier) system, offering advances in PVD titanium and preclean technologies, to provide significantly reduced resistance for contact structures. The Company also focused on providing solutions to extend customers’ lithography technology, introducing the Applied Producer APF-e (advanced patterning film enhancement) system. The new APF-e film enables chipmakers to cost-effectively pattern nano-scale features without additional integration complexity while reducing their reliance on next-generation lithography systems.
Applied currently expects that the uncertain economic conditions, including credit concerns and lower consumer spending, will lead to further decline in demand for semiconductor equipment in fiscal 2009.
 
Applied Global Services Segment
 
The Applied Global Services segment encompasses technically differentiated products, including spares, services, certain earlier generation equipment products, and remanufactured equipment, to improve operating efficiency, reduce operating costs, and lessen the environmental impact of semiconductor, display and solar customers’ factories. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
 
Certain significant measures for the past three fiscal years were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions)  (In millions) 
New orders $2,249  $2,508  $2,413  $1,179  $2,249  $2,508 
Net sales $2,329  $2,353  $2,352  $1,397  $2,329  $2,353 
Operating income $575  $630  $685  $113  $575  $630 
Fiscal 2009 financial results reflected significantly reduced demand for manufacturing services due to extremely unfavorable global economic and industry conditions, as well as a significant reduction in the installed base of 200mm systems. New orders decreased 48 percent to $1.2 billion in fiscal 2009 compared to fiscal 2008, due primarily to decreased demand for spares and refurbished equipment arising from semiconductor manufacturers’


35

low wafer production volumes. Net sales decreased 40 percent to $1.4 billion in fiscal 2009 compared to fiscal 2008, reflecting lower sales of spares and refurbished equipment. Operating income decreased 80 percent to $113 million in fiscal 2009 compared to fiscal 2008 as a result of lower sales volumes, which led to lower infrastructure cost absorption, partially offset by lower operating expenses from cost control initiatives. Operating income for fiscal 2009 also included an increase in bad debt expense. In the second half of fiscal 2009, the Applied Global Services segment returned to operating profitability as sales of spares improved.
 
Fiscal 2008 results were impacted by lower levels of semiconductor and display customers’ factory utilization. New orders decreased 10 percent to $2.2 billion in fiscal 2008 compared to fiscal 2007, due to lower orders for spares, fab-wide services, and refurbished equipment, partially offset by increased orders for service and system enhancements. Net sales decreased 1 percent to $2.3 billion in fiscal 2008 compared to fiscal 2007. The net sales decrease reflected lower sales of fab-wide services and spares, offset by increased sales in services and system enhancements. Operating income decreased 9 percent to $575 million in fiscal 2008 compared to fiscal 2007 due to higher operating expenses in fiscal 2008.
 
New orders increased 4 percent to $2.5 billion in fiscal 2007 compared to fiscal 2006. The increase in new orders reflected increased demand for spare parts and services, as well as demand for factory automation products obtained as part of the Brooks Software acquisition. Net sales of $2.4 billion in fiscal 2007 were slightly up compared to fiscal 2006 due to increasedreflected increases in factory automation sales offset by declines in spares sales. Fiscal 2007 remanufactured equipment orders and net sales remained consistent with fiscal 2006 levels. Operating income decreased 8 percent to $630 million in fiscal 2007 compared to fiscal 2006 reflectingreflected changes in product mix and increased operating expenses and charges related to the Brooks Software acquisition.
Net sales in 2006 reflected increases in spare parts shipments and service contracts as a result of higher wafer starts and an increase in 200mm remanufactured equipment investment. During fiscal 2006, operating results reflected improved operational efficiencies and savings from cost control initiatives. Applied also expanded its product offerings with the introduction of abatement systems for reducing perfluorocarbon (PFC) emissions and additional chamber performance services capabilities.


35

Fiscal 2007 and 2006 new orders, net sales and operating income increased from the previously reported amounts due to the reclassification in fiscal 2008 of display service products from the Display segment.
Applied currently expects that the uncertain global economic conditions will lead to lower factory utilization by Applied’s customers, resulting in lower demand for Applied Global Services’ products in fiscal 2009.
 
Display Segment
 
The Display segment encompasses products for manufacturing LCDs for TVs, personal computers and other video-enabled devices. The business is focused on expanding market share by differentiation with larger-scale substrates, entry into new markets, and development of products to enable cost reductions through productivity and uniformity.
 
Certain significant measures for the past three fiscal years were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions)  (In millions) 
New orders $1,486  $273  $883  $287  $1,486  $273 
Net sales $976  $705  $824  $502  $976  $705 
Operating income $310  $159  $257  $65  $310  $159 
 
Fiscal 2009 financial results reflected significantly reduced demand for LCD equipment due to extremely unfavorable global economic and industry conditions. New orders decreased significantly to $287 million in fiscal 2009 compared to $1.5 billion in fiscal 2008, which reflected the slowdown in the display industry from fiscal 2008 when display manufacturers added capacity. Net sales decreased 49 percent to $502 million in fiscal 2009 compared to fiscal 2008 as a result of significantly lower orders. Operating income decreased to $65 million in fiscal 2009 from $310 million in fiscal 2008. Operating income decreased due to significantly lower revenue, partially offset by lower operating expenses due to cost control initiatives.
In fiscal 2008, new orders increased significantly to $1.5 billion in fiscal 2008 compared to $273 million in fiscal 2007. Increased orders were due to substantial increases in demand by Display customers in response to strong end-product demand. This demand for LCD equipment reached an inflexioninflection point in the third quarter of fiscal 2008 and decreased significantly in the fourth quarter of fiscal 2008, reflecting the volatility of the display industry. Net sales increased 38 percent to $976 million in fiscal 2008 compared to fiscal 2007, primarily due to customers’ investment in Gen-8 products. Operating income increased to $310 million in fiscal 2008 from $159 million in fiscal 2007. Operating income increased due to higher revenue levels, product mix and lower operating costs. In fiscal 2008, the Company introduced its Gen-10 systems that can process substrates sized at approximately 2.85 x 3.05 meters. These systems include the AKT-90K PECVD and AKT-90K EBT products.
 
New orders decreased 69 percent to $273 million infor fiscal 2007 compared to fiscal 2006, reflectingreflected delays in capacity expansion plans by LCD panel makers in light of excess inventories and end product sales price declines. Display customers increased spending levels in the fourth quarter


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of fiscal 2007 as panel makers began to experience more favorable market conditions. Net sales decreased 14 percent to $705 million in fiscal 2007. The decrease in net sales was attributable toreflected lower investment by LCD manufacturers as they absorbed capacity. Operating income decreased 38 percent to $159 million in fiscal 2007 compared to fiscal 2006, due toreflected lower revenues and factory absorption, product mix and higher operating expenses in support of the expanded product portfolio resulting from the acquisition of Applied Films in July 2006. In 2007, Applied launched the AKT-PiVottm 55KV system, which employs high-productivity, cost-efficient PVD technology to deposit metal and transparent conductive oxide films on the substrate.
 
During fiscal 2006, price reductions in consumer electronics accelerated the growth of the flat panel display market. As a result, display manufacturers increased investments in Gen-7, Gen-7.5, and Gen-8 systems. In addition, laptop demand continued to be strong, resulting in additional Gen-5 and Gen-5.5 fab investment. With the acquisition of Applied Films in fiscal 2006, Applied entered the PVD color filter market. During the last quarter of fiscal 2006, flat panel equipment demand began to slow as customers aligned their capacity plans and inventory levels. Fiscal 2006 results included a $5 million IPR&D expense related to the acquisition of Applied Films. Applied launched three FPD systems, the AKT-55K EBT, the AKT-55K PECVD and the AKT-NEW ARISTO 2200, for manufacturing Gen-8.5 panels, sized at 2.2m x 2.5m, which produce up to six55-inch LCD TV screens.
Fiscal 2007 and 2006 new orders, net sales and operating income reported herein are lower than the previously reported amounts due to the reclassification in fiscal 2008 of display service products from the Display segment to the Applied Global Services segment.


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Applied currently expects that the uncertain global economic conditions will result in decreasing consumer spending, leading to lower factory utilization by flat panel display manufacturers and lower demand for LCD equipment in fiscal 2009.
Energy and Environmental Solutions Segment
 
The Energy and Environmental Solutions segment includes products for fabricating solar PV cells and modules, high throughputroll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass. Applied began offering these products after the acquisition of Applied Films in fiscal 2006. This segment also includes products for manufacturing c-Si solar PVs that were obtained through the acquisitions of HCT Shaping Systems SA (HCT) in fiscal 2007 and Baccini S.p.A. (Baccini) in fiscal 2008. This business is focused on delivering solutions to generate and conserve energy, with an emphasis on lowering the cost to produce solar power by providing equipment to enhance manufacturing scale and efficiency.
 
Certain significant measures for the past three fiscal years were as follows:
 
                       
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In millions)  (In millions) 
New orders $1,329  $245  $37  $955  $1,329  $245 
Net sales $819  $165  $20  $1,155  $819  $165 
Operating loss $183  $89  $8  $242  $183  $89 
New orders of $955 million in fiscal 2009 decreased from $1.3 billion in fiscal 2008. The decrease in new orders was primarily due to decreased demand from c-Si customers and reflected the challenging global economic environment, solar manufacturers’ difficulties in obtaining cost-effective capital, and a decrease in end demand. Net sales of $1.2 billion in fiscal 2009 increased from $819 million in fiscal 2008 due to an increase in sales for the Applied SunFabtm Thin Film Line. The operating loss of $242 million in fiscal 2009 increased from $183 million in fiscal 2008 due to an increase in RD&E expenses and unfavorable gross margins associated with initial SunFab linestart-ups, offset in part by cost control initiatives. In 2009, the Company introduced its Baccini Esatto Technology, a high precision, multi-step printing capability designed to increase the efficiency of c-Si solar cells, and its Applied HCT MaxEdge wire saw, featuring the industry’s first dual-wire management system for slicing ultra-thin silicon wafers.
 
New orders of $1.3 billion in fiscal 2008 increased from $245 million in fiscal 2007. The increase in new orders was primarily due to the recognition of orders for the Applied SunFabtm Thin Film Line that began line beginning in the first quarter of fiscal 2008, as well as growth in orders for c-Si products. Net sales of $819 million in fiscal 2008 increased from $165 million in fiscal 2007 due to customers’ investment in c-Si products from the acquisitions of HCT and Baccini, andin addition to increased sales across all other products in the segment. The increase in net sales for fiscal 2008 included the first revenue recognition of an Applieda SunFabtm Thin Film Line. line. The operating loss of $183 million in fiscal 2008 increased from $89 million in fiscal 2007. The increase in operating loss reflected increased RD&E spending to develop products that enable lower-cost production of solar energy, increased operating costs, amortization of acquisition-related costs, and costs related to expansion of solar marketing efforts, partially offset by higher revenues.
 
New orders of $245 million in fiscal 2007 reflected increased from $37 million in fiscal 2006, due primarily to increased orders ofdemand for c-Si solar, glass and flexible electronics products. Net sales of $165 million in fiscal 2007 increased from $20 millionreflected higher net sales in fiscal 2006 due primarily to higher glass, flexible electronics and c-Si solar net sales.products. Operating loss of $89 million infor fiscal 2007 increased from $8 million in fiscal 2006, reflectingreflected increased RD&E spending to develop products and services that enable lower-cost production of solar energy and costs related to expansion of solar marketing efforts, offset by higher revenues. In fiscal 2007, Applied introduced the Applied SunFabtm Thin Film Line, the first integrated production line designed for manufacturing thin film silicon solar modules using 5.7 square meter glass panels.


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Orders and net sales in fiscal 2006 reflected the results of Applied Films’ solar, flexible electronics and energy-efficient glass products that Applied acquired in the third quarter. Fiscal 2006 results included a $9 million IPR&D expense related to the acquisition of Applied Films.
Business Combinations
On November 16, 2009, Applied entered into an agreement to acquire all of the outstanding shares of Semitool, Inc. (Semitool), a public company based in the state of Montana, for $11 per share in an all-cash tender offer. Semitool is a leading supplier of electrochemical plating and Equity-Method Investmentwafer surface preparation equipment used by semiconductor packaging and manufacturing companies globally. Under the terms of the agreement approved by the Boards of Directors of both companies, Applied will pay an aggregate purchase price of approximately $364 million based on the fully-diluted capitalization of Semitool. The acquisition will be conducted through a tender offer for all of the outstanding shares of Semitool and is conditioned on the occurrence or absence of certain events, including the tender of at least 66.67% of Semitool’s outstanding stock on a fully-diluted basis, as well as regulatory approvals and other customary closing conditions. In connection with this tender offer, Applied has been named as a defendant in three purported class action lawsuits filed in Montana state court. For further details, see Note 15 of Notes to Consolidated Financial Statements.
 
On January 31, 2008, Applied acquired all of the outstanding shares of Baccini, a privately-held company based in Italy, for a purchase price of $215 million in cash, net of cash and marketable securities acquired. The acquired business is a leading supplier of automated metallization and test systems for manufacturing c-Si photovoltaic cells.
 
On November 9, 2007, Applied purchased from Edwards Vacuum, Inc. certain assets of its Kachina semiconductor equipment parts cleaning and refurbishment business for $19 million.


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On August 23, 2007, Applied acquired all of the outstanding shares of Switzerland-based HCT for $463 million in cash, net of cash acquired. The acquired business is the world’s leading supplier of precision wafering systems used principally in manufacturing c-Si substrates for the solar industry.
 
On March 30, 2007, Applied purchased Brooks Software for $137 million in cash. The acquired business is a leading provider of factory management and control software to the semiconductor and flat panel display industries. Its products complement Applied’s existing software applications and enable Applied to offer customers a comprehensive computer integrated manufacturing solution for optimizing fab operations.
 
On August 14, 2006, Applied’s wholly-owned subsidiary, Metron Technology, Inc. (Metron), purchased certain parts cleaning and recycling assets in Singapore from UMS Solutions PTE Ltd. for $10 million. The acquisition enhanced the Company’s capabilities in Southeast Asia to provide advanced, high-quality parts cleaning services to support its customers’ semiconductor manufacturing requirements.
On July 20, 2006, Applied and Dainippon Screen Mfg. Co., Ltd. (Screen) completed the formation of Sokudo Co., Ltd. (Sokudo), a Japanese joint venture company, to deliver advanced track solutions for customers’ critical semiconductor manufacturing requirements. Track systems are a key part of semiconductor manufacturing and are used before and after photolithography to deposit, bake and develop the photoresist layer that defines circuit patterns. Screen owns 52 percent and holds the controlling interest in Sokudo, and Applied owns 48 percent of Sokudo. Screen transferred into Sokudo its existing track business and related intellectual property, including employees, products and its installed base of systems. Applied paid $147 million for its investment in Sokudo. Additionally, Applied contributed to Sokudo certain technology and related intellectual property and has provided key development employees. Screen performs manufacturing for Sokudo under an outsourcing agreement.
On July 7, 2006, Applied completed its acquisition of Applied Films, a leading supplier of thin film deposition equipment used in manufacturing LCDs, solar cells, flexible electronics and energy-efficient glass. Applied paid $28.50 per share in cash for each outstanding share of Applied Films for a total purchase price of approximately $484 million, or $328 million net of Applied Films’ existing cash and marketable securities. As part of the acquisition, Applied assumed Applied Films’ outstanding stock options and restricted stock unit awards that, at the acquisition date, had a total fair value of $26 million, of which $18 million was allocated to the purchase price and the remainder to unearned compensation. Upon the acquisition and subject to vesting, Applied Films stock options became exercisable for shares of Applied common stock and Applied Films restricted stock unit awards became payable in shares of Applied common stock totaling, in the aggregate, three million shares of Applied common stock.
On December 23, 2005, Applied acquired all of the outstanding shares of ChemTrace Corporation and ChemTrace Precision Cleaning, Inc. for $22 million in cash, net of cash acquired, of which $18 million was paid upon closing. This business provides customers with precision parts cleaning and materials testing solutions.
For further details, see Note 12Notes 14 and 15 of Notes to Consolidated Financial Statements.
 
Recent Accounting Pronouncements
 
In April 2008,October 2009, the Financial Accounting Standards Board (FASB)FASB issued authoritative guidance for revenue recognition with multiple deliverables. This authoritative guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. Applied will adopt this authoritative guidance prospectively commencing in its first quarter of fiscal 2010. The implementation is not expected to have a material impact on Applied’s financial position or results of operations.
In October 2009, the FASB Staff Position (FSP)No. 142-3, “Determination ofissued authoritative guidance for the Useful Life of Intangible Assets”(FSP 142-3).FSP 142-3accounting for certain revenue arrangements that include software elements. This authoritative guidance amends the factors an entity should considerscope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. Applied will adopt this authoritative guidance prospectively commencing in developing renewalits first quarter of fiscal 2010. The implementation is not expected to have a material impact on Applied’s financial position or extension assumptions used in determiningresults of operations.
In June 2009, the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwillissued authoritative guidance on variable interest entities, which becomes effective the first annual reporting period after November 15, 2009 and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions.FSP 142-3 iswill be effective for financial statements issuedApplied in fiscal 2011. This authoritative guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited.variable interests. Applied is evaluating the potential impact of the implementation ofFSP 142-3 this authoritative guidance on its consolidated financial position and results of operations.statements.
 
In March 2008,April 2009, the FASB issued Statement No. 161, “Disclosures about Derivative Instrumentsauthoritative guidance on accounting for assets acquired and Hedging Activities, an amendmentliabilities assumed in a business combination that arise from contingencies, which amends the provisions related to the initial


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recognition and measurement, subsequent measurement and disclosure of FASB Statement No. 133” (SFAS 161). SFAS 161assets and liabilities arising from contingencies in a business combination under previously issued guidance. The authoritative guidance requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. This authoritative guidance will be effective for Applied in fiscal 2010, with early adoption permitted.2010. Applied is


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evaluatingexpects that this authoritative guidance will have an impact on its consolidated financial statements, but the potential impactnature and magnitude of the implementationspecific effects will depend upon the nature, term and size of SFAS 161the acquired contingencies.
In December 2008, the FASB issued authoritative guidance on its financial position and resultsemployer’s disclosures about plan assets of operations.a defined benefit pension or other postretirement plan. Applied will comply with this authoritative guidance in fiscal 2010.
 
In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations” (SFAS 141(R)). The standard changesrevised the accounting forauthoritative guidance on business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalizedin-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition relatedacquisition-related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R)This authoritative guidance will be effective for Applied in fiscal 2010, with early adoption prohibited. Applied is evaluatingexpects that this authoritative guidance will have an impact on its consolidated financial statements, but the potential impactnature and magnitude of the implementationspecific effects will depend upon the nature, terms and size of SFAS 141(R) on its financial position and results of operations.the acquisitions it consummates after the effective date.
 
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). The standardauthoritative guidance on noncontrolling interests, which changes the accounting for noncontrolling (minority) interests in consolidated financial statements, including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS 160this authoritative guidance revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS 160This authoritative guidance will be effective for Applied in fiscal 2010, with early adoption prohibited. Applied is evaluating the potential impact of the implementation of SFAS 160this authoritative guidance on its financial position andor results of operations.
 
In February 2007, the FASB issued Statement No. 159, “The Fair Value Optionauthoritative guidance on the fair value option for Financial Assetsfinancial assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (SFAS 159),financial liabilities, which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. SFAS 159 will beThis authoritative guidance became effective for Applied inbeginning with its 2009 fiscal 2009. Management doesyear. Applied has not believeelected the effect of implementing SFAS 159 will have a material impact on the Company’sfair value measurement option for its financial positionassets or results of operations.liabilities that are not currently required to be measured at fair value.
 
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issuedFSP 157-1, “Application authoritative guidance on fair value measurements for purposes of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13”(FSP 157-1) andFSP 157-2, “Effective Date of FASB Statement No. 157”(FSP 157-2).FSP 157-1lease classification, which amends SFAS 157previously issued guidance on fair value measurements to remove certain leasing transactions from its scope.FSP 157-2 The FASB also issued authoritative guidance on the effective date of fair value measurements, which delays the effective date of SFAS 157for Applied for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of Applied’s first quarter of fiscal 2010. The measurement and disclosure requirements related to financial assets and financial liabilities arebecame effective for Applied beginning in the first quarter of fiscal 2009. In October 2008, the FASB issuedFSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”(FSP 157-3).FSP 157-3 authoritative guidance that clarifies the application of SFAS 157fair value measurements in a market that is not active, and provides guidance on the key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Applied will continue to evaluateadopted the applicationeffective portions of SFAS 157. Management does not believefair value measurements beginning in the effectfirst quarter of implementing SFAS 157 will have a material impact on the Company’s financial position or results of operations.fiscal 2009. See Note 3 for information and related disclosures regarding Applied’s fair value measurements.


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Financial Condition, Liquidity and Capital Resources
 
Applied’s cash, cash equivalents and investments decreased to $3.3 billion at October 25, 2009 from $3.5 billion at October 26, 2008, from $3.7 billion at October 28, 2007, due primarily to share repurchases and cash dividend distributions, offset bya decrease in cash generated from operating activities. Applied has not undertaken any significant external financing activities for several years.


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Cash, cash equivalents and investments consist of the following:
 
                
 October 26,
 October 28,
  October 25,
 October 26,
 
 2008 2007  2009 2008 
 (In millions)  (In millions) 
Cash and cash equivalents $1,412  $1,203  $1,577  $1,412 
Short-term investments  689   1,167   638   689 
Long-term investments  1,367   1,362   1,052   1,367 
          
Total cash, cash-equivalents and investments $3,468  $3,732  $3,267  $3,468 
          
 
Applied generated cash from operating activities of $333 million in fiscal 2009, $1.7 billion in fiscal 2008, and $2.2 billion in fiscal 2007, and $2.0 billion in fiscal 2006.2007. The primary sources of cash from operating activitiesoperations in fiscal 2009 were collections of accounts receivable and a reduction in inventories, which was offset by a decrease in accounts payable and accrued expenses and in income taxes payable. The net income, as adjusted to excludeloss incurred was offset by the effect of non-cash charges, including depreciation, amortization, restructuring and asset impairments, equity-based compensation, asset impairmentsimpairment of investments, and restructuring and IPR&D expenses, and changes in working capital levels, including accounts receivable and inventories.provision for bad debts. Applied utilized programs to discount letters of credit issued by customers of $299 million in fiscal 2009, $167 million in fiscal 2008, and $431 million in fiscal 2007, and $237 million in fiscal 2006.2007. 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. In fiscal 2009 and 2008, Applied factored accounts receivablesreceivable and discounted promissory notes totaling $125 million.$43 million and $138 million, respectively. Days sales outstanding were 75 days at the end of fiscal 2009 and 79 days at the end of both fiscal 2008 and 2007, and 80 days at the end of fiscal 2006. Inventories increased by $674 million in fiscal 2008, mainly due to a net inventory increase within the Energy and Environmental Solutions segment.2007.
 
Applied generated $113 million of cash from investing activities in fiscal 2009 and used $76 million and $977 million of cash in investing activities in fiscal 2008 and 2007, respectively, and generated $1.9 billion of cash from investing activities in fiscal 2006.respectively. Proceeds from sales and maturities of investments, net of purchases of investments, totaled $361 million in fiscal 2009 and $405 million in fiscal 2008. Purchases of investments, net of proceeds from sales and maturities of investments, totaled $150 million in fiscal 2007. Proceeds from sales and maturities of investments, net of purchases of investments, totaled $2.6 billion in fiscal 2006. Proceeds from the sale of investments in fiscal 2006 were used principally to fund Applied’s accelerated stock buyback initiated during that year.
 
Capital expenditures were $248 million in fiscal 2009, $288 million in fiscal 2008, and $265 million in fiscal 2007, and $179 million in fiscal 2006. Fiscal 2008 capital2007. These expenditures included investment in the implementation of a global business software system. Fiscal 2007 capital expenditures included investment inwere primarily for the implementation of an enterprise resource planning software system and in Applied’s new global development capabilitythe construction of a solar R&D/demonstration center in Xi’an, China. Fiscal 2006 capitalCapital expenditures in fiscal 2009 also included purchases of lab equipment, network infrastructure and three buildingsinvestment to construct a facility in Santa Clara, California that Applied had previously leased.Singapore.
 
Investing activities also included investments in technology and acquisitions of companies to allow Applied to access new market opportunities or emerging technologies. During fiscal 2008, Applied acquired all of the outstanding shares of Baccini, a privately-held company based in Italy, for a purchase price of $215 million in cash, net of cash and marketable securities acquired. During the yearAlso in fiscal 2008, Applied also purchased certain assets from Edwards Vacuum, Inc. certain assetsconsisting of its Kachina semiconductor equipment parts cleaning and refurbishment business for $19 million. During fiscal 2007, Applied acquired all of the outstanding shares of HCT for $463 million in cash, net of cash acquired, and certain net assets of Brooks Automation, Inc. consisting of its Brooks Software division for $137 million in cash. During fiscal 2006, Applied paid cash for acquisitions and the investment in a joint venture totaling $486 million. During fiscal 2006, Applied acquired the outstanding stock of Applied Films for $310 million in cash, net of cash and marketable securities acquired, and assumed equity awards with a fair value of $26 million, of which $18 million was included in the purchase price; formed a joint venture, Sokudo, with Dainippon Screen Mfg. Ltd., for which Applied paid $147 million in cash and contributed other assets; acquired certain assets of UMS Solutions for $10 million; and acquired ChemTrace Corporation and ChemTrace Precision Cleaning, Inc. for approximately $22 million in cash, net of cash acquired, of which $18 million was paid upon closing. See Note 1214 of Notes to Consolidated Financial Statements for additional details.
 
Applied used cash of $1.4 billion$281 million for financing activities in fiscal 2009, $1.4 billion in fiscal 2008, and $892 million in fiscal 2007, and $4.1 billion in fiscal 2006.2007. Financing activities included payment of cash dividends to stockholders and to a lesser extent issuances and repurchases of common stock and payment


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of dividends.stock. Since March 1996,November 2008, Applied has systematically repurchased sharestemporarily suspended stock repurchases in order to maintain financial flexibility in light of its common stock in the open market.uncertain global economic and market conditions. Cash used to repurchase shares totaled $23 million in fiscal 2009, $1.5 billion in fiscal 2008, and $1.3 billion in fiscal 2007,2007. In each of fiscal 2009 and $4.2 billion in fiscal 2006. During fiscal 2008, Applied’s Board of Directors declared four quarterly cash dividends in the amount of $0.06 per share each. The fourth quarterly cash dividend declared in fiscal 20082009 was paid on December 4, 2008,3, 2009 to stockholders of record as of November 13, 2008.12, 2009. During fiscal 2007, Applied’s Board


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of Directors declared one quarterly cash dividend in the amount of $0.05 per share and three quarterly cash dividends in the amount of $0.06 per share each. During fiscal 2006, Applied’s Board of Directors declared one quarterly cash dividend in the amount of $0.03 per share and three quarterly cash dividends in the amount of $0.05 per share each. Dividends paid during fiscal 2009, 2008 and 2007 and fiscal 2006 were $320 million, $325 million $306 million and $251$306 million, respectively. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, 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 that cash dividends are in the best interest of Applied’s stockholders. Financing activities also included borrowings and repayments of debt. Applied did not have any borrowings in fiscal years 2009, 2008 2007 or 2006. As2007. Cash used for debt repayments totaled $1 million for fiscal 2009, $2 million for fiscal 2008, and $202 million for fiscal 2007. Cash generated from issuances of October 26,common stock pursuant to Applied’s equity compensation programs totaled $62 million for fiscal 2009, $401 million for fiscal 2008, and $948 million for fiscal 2007.
Applied hadhas credit facilities for unsecured borrowings in various currencies of up to approximately $1.2 billion, of which $1.0 billion is comprised of a5-year revolving credit agreement with a group of banks that is scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at October 26, 2008.25, 2009. In May 2009, Applied amended certain terms of this credit agreement, including (i) replacing the funded-debt-to-adjusted-earnings ratio financial covenant with a minimum liquidity covenant and a funded-debt-to-total-capital ratio covenant and (ii) increasing the facility fee and applicable interest rate margins on advances. Remaining credit facilities in the amount of approximately $165 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 this agreementany of the above credit facilities at October 26, 2008. Cash used for debt repayments totaled $2 million for fiscal 2008, $202 million for fiscal 2007, and $8 million for fiscal 2006. Cash generated from issuances of common stock pursuant to Applied’s equity compensation programs totaled $401 million for fiscal 2008, $948 million for fiscal 2007, and $361 million for fiscal 2006.
On September 18, 2006, Applied entered into accelerated stock buyback agreements with Goldman Sachs under which Applied agreed to repurchase from Goldman Sachs shares of Applied’s outstanding common stock for an initial purchase price of $2.5 billion. Under the agreements, Applied purchased 145 million shares of its common stock on September 18, 2006 at a price per share of $17.20, and Goldman Sachs agreed to purchase an equivalent number of shares in the open market over the following four months. At the end of the four month period, Applied was entitled or subject to a price adjustment based upon the volume weighted average price of Applied common stock during the purchase period. On January 24, 2007, Applied settled the price adjustment of $132 million by payment in cash to Goldman Sachs, resulting in an adjusted price per share of $18.08. The repurchase was funded with Applied’s existing cash and investments. The repurchased shares were reported as treasury stock.25, 2009.
 
In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to certainthird parties as required for certain transactions initiated by either Applied or its subsidiaries. As of October 26, 2008,25, 2009, the maximum potential amount of future payments that Applied could be required to make under these guarantee arrangements was $167$83 million. Applied has not recorded any liability in connection with these guarantee arrangements 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 arrangements.
 
Applied expects that changes in its business will affect its working capital components, primarily related to its Energy and Environmental Solutions segment, which includes products for manufacturing solar PVs. Applied believes that the solar industry is moving to increasingly greater factory output of solar modules, including projects with an output capable of generating electricity on a gigawatt scale. Applied has entered into contracts with multiple customers for its SunFabtm Thin Film Line for projects of varying scale. Fulfillment of these contracts requires Applied to invest in inventory, particularly work in process, andwhich investment may be offset by customer deposits. Changes in these contracts may result in inventory charges if Applied may obtain customer deposits that reducedetermines the associated effect on other working capital components.inventory to be in excess of anticipated demand.
 
Applied’s investment portfolio consists principally of investment grade municipal bonds, money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds equity securities, and, to a small extent, 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.
In fiscal 2008,2009, as part of its regular investment review process, Applied recorded an insignificant impairment charge


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charges of $84 million associated with its equity method investment portfolio.in Sokudo Co., Ltd., other strategic investments and marketable securities. At October 26, 2008,25, 2009, Applied had a gross unrealized loss of $48$1 million due to a decrease in the fair market value of certain fixed-rate debt and equity securities as a result of the recent turmoil in the global financial markets.fixed income securities. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include: the length of time and extent to which fair market value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and Applied’s abilitywhether it is morelikely-than-not that Applied will be required to holdsell the investment for a period of time sufficientsecurity prior to allow for any anticipated recovery in fair market value. Generally, the contractual terms of the investments do not permit settlement at prices less than the amortized cost of the investments. While Applied cannot predict future market conditions or market liquidity, Applied believes that its


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investment policies provide an appropriate means to manage the risks in its investment portfolio. The following types of financial instruments may present additional risks arising from liquidityand/or credit concerns: structured investment vehicles, auction rate securities,sub-prime and “Alt-A” mortgage-backed securities, and collateralized debt obligations. At October 26, 2008,25, 2009, Applied’s holdings in these categories of investments totaled $30$6 million, or less than 1% of total cash, cash equivalents and investments, which Applied does not consider to be material. In the event that these categories of investments become illiquid, Applied does not believe that this will materially affect the Company’sits liquidity or results of operations.
During fiscal 2009, Applied recorded a bad debt provision of $63 million as a result of certain customers’ deteriorating financial condition. While Applied believes that its allowance for doubtful accounts at October 25, 2009 is adequate, it will continue to closely monitor customer liquidity and other economic conditions.
On November 11, 2009, Applied announced that it will implement a restructuring program beginning in the first quarter of fiscal 2010. As part of this program, Applied plans to reduce its global workforce as of October 25, 2009 by approximately 1,300 to 1,500 positions, or 10 to 12 percent, over a period of 18 months, consistent with local legal requirements and in consultation with employee works councils and other representatives, as applicable. The Company anticipates cash outlays of between $100 million and $125 million for this plan.
On November 16, 2009, Applied entered into an agreement to acquire all of the outstanding shares of Semitool, a public company based in the state of Montana, for $11 per share in an all-cash tender offer. Under the terms of the agreement approved by the Boards of Directors of both companies, Applied will pay an aggregate purchase price of approximately $364 million based on the fully-diluted capitalization of Semitool. The acquisition will be conducted through a tender offer for all of the outstanding shares of Semitool and is conditioned on the occurrence or absence of certain events, including the tender of at least 66.67% of Semitool’s outstanding stock on a fully-diluted basis, as well as regulatory approvals and other customary closing conditions.
 
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. In November 2008, Applied announced that it had temporarily suspended stock repurchases in order to maintain financial flexibility in light of the deteriorating global economic and market conditions. For further details regarding Applied’s operating, investing and financing activities for each of the three years in the period ended October 26, 2008,25, 2009, see the Consolidated Statements of Cash Flows in this report.
 
Off-Balance Sheet Arrangements
 
During the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated either by Applied or its subsidiaries. As of October 26, 2008,25, 2009, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $167$83 million. Applied has not recorded any liability in connection with these guarantee arrangements belowbeyond that required Applied 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 arrangements.
 
Applied also has operating leases for various facilities. Total rental expense for operating leases was $64 million for fiscal 2009, $68 million for fiscal 2008, and $62 million for fiscal 2007, and $70 million for fiscal 2006.2007.


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Contractual Obligations
 
The following table summarizes Applied’s contractual obligations as of October 26, 2008:25, 2009:
 
                                        
 Payments Due by Period  Payments Due by Period 
   Less Than
 1-3
 3-5
 More Than
    Less Than
 1-3
 3-5
 More Than
 
Contractual Obligations
 Total 1 Year Years Years 5 Years  Total 1 Year Years Years 5 Years 
 (In millions)  (In millions) 
Long-term debt obligations $203  $1  $2  $—  $200  $202  $1  $1  $—  $200 
Interest expense associated with long-term debt obligations  129   14   29   29   57   115   14   29   29   43 
Operating lease obligations  118   58   44   13   3   143   43   49   19   32 
Purchase obligations*  1,756   1,683   72   1   —   1,083   1,069   11   3   — 
Other long-term liabilities  185   7   98   20   60   271   16   31   32   192 
                      
 $2,391  $1,763  $245  $ 63  $320  $1,814  $1,143  $121  $83  $467 
                      
 
 
*Represents Applied’s agreements to purchase goods and services consisting of Applied’s (a) outstanding purchase orders for goods and services; and (b) contractual requirements to make specified minimum payments even if Applied does not take delivery of the contracted goods.


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In addition to the contractual obligations disclosed above, the Company has certain tax obligations. During the first quarter of fiscal 2008, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The Company historically has classified interest and penalties and unrecognized tax benefits as current liabilities. Upon adoption of FIN 48, the Company reclassified grossGross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year have been reported as non-current liabilities on the Consolidated Balance Sheet. As of October 26, 2008,25, 2009, the Company recorded gross liability for unrecognized tax benefits was $325 million, exclusive of $63 millioninterest and grosspenalties. Increases or decreases to interest and penalties on uncertain tax positions are included in provision for income taxes in the Consolidated Statement of Operations. Interest and penalties related to uncertain tax positions were $8 million. Of the $8million as of October 26, 2008 and $5 million as of October 25, 2009. All $5 million in interest and penalties $5 million is classified as long-term payable and $3 million is classified as current payable onin the Consolidated Balance Sheet.Sheets. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes and, accordingly, such amounts are not included in the above contractual obligation table.
As discussed above, on November 16, 2009, Applied entered into an agreement to acquire all of the outstanding shares of Semitool, a public company based in the state of Montana, for $11 per share in an all-cash tender offer. Under the terms of the agreement approved by the Boards of Directors of both companies, Applied will pay an aggregate purchase price of approximately $364 million based on the fully-diluted capitalization of Semitool. The acquisition will be conducted through a tender offer for all of the outstanding shares of Semitool and is conditioned on the occurrence or absence of certain events, including the tender of at least 66.67% of Semitool’s outstanding stock on a fully-diluted basis, as well as regulatory approvals and other customary closing conditions.
 
Critical Accounting Policies and Estimates
 
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the 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 describes 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 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


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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 are discussed in the section above entitled “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 in the 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:
 
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.


43

Allowance for Doubtful Accounts
Applied maintains an allowance for doubtful accounts 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 market, with cost determined on afirst-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market 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 inventory adjustments for excess or obsolete inventory mightmay 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 whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also annually reviews goodwill and intangibles with indefinite lives annually for impairment. 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 write downreduce the assetcarrying value of the reporting unit to its realizable value. The fair value of a


44

reporting unit is estimated using both the income approach and the market multiples approach taking into account such factors as future anticipated operating results and is dependent on market valuesestimated cost of capital. Management uses significant judgment when assessing goodwill for companiespotential impairment, especially in a similar industry.new emerging markets. A severe decline in market value could result in an unexpected impairment charge for impaired goodwill, which could have a material adverse effect on Applied’s business, financial condition and results of operations.
 
Income Taxes
Applied accounts for income taxes by recognizing deferred tax assets and liabilities using statutory tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that its future taxable income will be sufficient to realize its deferred tax assets.
 
The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses incurred in connection with acquisitions and availability of tax credits. Management carefully monitors the changes in many factors and adjusts the effective income tax rate as required. If actual results differ from these estimates, Applied could be required to record a valuation allowance on deferred tax assets or adjust its effective income tax rate, which could have a material adverse effect on Applied’s business, financial condition and results of operations.
 
Applied accounts for income taxes by recognizing deferred tax assets and liabilities using statutory tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that Applied’s future taxable income will be sufficient to realize its deferred tax assets.
The calculation of tax liabilities 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 a material impact on Applied’s results of operations and financial condition.
 
Equity-Based Compensation — Employee Stock Option Plans and Employee Stock Purchase Plans
Effective on October 31, 2005, Applied began accounting for stock options and Employee Stock Purchase Plan (ESPP) shares under the provisions of Statement of Financial Accounting Standards No. 123(R),“Share-Based Payment” (SFAS 123(R)), which requires recognition of the fair value of equity-based compensation. The fair value of stock options and ESPP shares is estimated using a Black-Scholes option valuation model. This methodology requires the use of subjective assumptions including expected stock price volatility and the estimated life of each award. The fair value of equity-based compensation awards less the estimated forfeitures is amortized over the service period of the award, and Applied has elected to use the straight-line method. The fair value of restricted stock units is calculated based upon the fair market value of Applied’s common stock at the date of grant (see Note 1 of Notes to Consolidated Financial Statements).


44

Item 7A:  Quantitative and Qualitative Disclosures About Market Risk
 
Interest Rate Risk
 
At October 26, 2008,25, 2009, Applied’s investment portfolio included fixed-income securities with a fair value of approximately $2.2$2.6 billion. Applied’s primary objective for investing in fixed-income securities is to preserve principal while maximizing returns and minimizing risk. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio at October 26, 2008 and October 28, 2007,25, 2009, an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately $31 million and $31 million, respectively.$21 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses in the Consolidated Statement of Operations unless the individual fixed-income securities are sold prior to recovery or the lossinvestment is determined to beother-than-temporarily impaired.
 
All of Applied’s debt bears interest at fixed rates. Therefore, an immediate 100 basis point increase in interest rates would not be expected to have a material effect on Applied’s near-term financial condition or results of operations.
 
Foreign Currency Exchange Rate Risk
 
Certain operations of Applied are conducted in foreign currencies, such as Japanese yen, euro, Israeli shekel and Swiss francs. Applied enters into forward exchange and currency option contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur typically within 24 months. Gains and losses on these contracts are generally recognized in the Consolidated Statements of Operations at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on forward exchange and currency option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Applied does not use derivative financial instruments for trading or speculative purposes. Net foreign currency gains and losses did not have a material effect on Applied’s results of operations for fiscal 2008, 2007 or 2006.
 
Forward exchange contracts are denominated in the same currency as the underlying transactions (primarily Japanese yen, euro, Israeli shekel and Swiss francs), and the terms of the forward exchange contracts generally match the terms of the underlying transactions. Applied’s outstanding forward exchange contracts aremarked-to-market (see Note 2 of Notes to Consolidated Financial Statements), as are the majority of the related underlying transactions being hedged; therefore, the effect of exchange rate changes on forward exchange contracts is expected to be substantially offset by the effect of these changes on the underlying


45

transactions. The effect of an immediate 10 percent change in exchange rates on forward exchange contracts and the underlying hedged transactions is not expected to be material to Applied’s near-term financial condition or results of operations. Applied’s risk with respect to currency option contracts is limited to the premium paid for the right to exercise the option. Premiums paid for options outstanding at October 26, 200825, 2009 were not material. For further details, see Note 3 and Note 9 of Notes to Consolidated Condensed Financial Statements.
 
Item 8:  Financial Statements and Supplementary Data
 
The consolidated financial statements required by this Item are set forth on the pages indicated at Item 15(a).
 
Item 9:  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.


45

 
Item 9A:  Controls and Procedures
 
Disclosure Controls and Procedures
 
As of the end of the period covered by this report, management of Applied conducted an evaluation, under the supervision and with the participation of Applied’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Applied’s disclosure controls and procedures, as such term is defined inRule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, Applied’s Chief Executive Officer and Chief Financial Officer concluded that Applied’s disclosure controls and procedures were effective as of the end of the period covered by this report in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Applied in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control over Financial Reporting
 
Applied’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of Applied’s Chief Executive Officer and Chief Financial Officer, management of Applied conducted an evaluation of the effectiveness of Applied’s internal control over financial reporting based upon the framework in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, Applied’s management concluded that Applied’s internal control over financial reporting was effective as of October 26, 2008.25, 2009.
 
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in thisForm 10-K and, as part of the audit, has issued a report, included herein, on the effectiveness of Applied’s internal control over financial reporting as of October 26, 2008.25, 2009.
 
Changes in Internal Control over Financial Reporting
 
During the fourth quarter of fiscal 2008,2009, there were no changes in the internal control over financial reporting that materially affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting.
 
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting
 
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
 
Item 9B:  Other Information
 
None.None


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Stockholders and Board of Directors and Stockholders
Applied Materials, Inc.:
 
We have audited Applied Materials, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of October 26, 2008,25, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Applied Materials, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 26, 2008,25, 2009, based on criteria established in InternalInternal Control — Integrated Frameworkissued by COSO.the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Applied Materials Inc. and subsidiaries as of October 26, 200825, 2009 and October 28, 2007,26, 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 26, 2008.25, 2009. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as of and for each of the years in the three-year period ended October 26, 2008.II. Our report dated December 12, 200811, 2009 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
 
/s/  KPMG LLP
KPMG LLP
 
Mountain View, California
December 12, 200811, 2009


47

 
PART III
 
Pursuant to Paragraph G(3) of the General Instructions toForm 10-K, portions of the information required by Part III ofForm 10-K are incorporated by reference from Applied’s Proxy Statement to be filed with the SEC in connection with the 20092010 Annual Meeting of Stockholders (the Proxy Statement).
 
Item 10:  Directors, Executive Officers and Corporate Governance
 
(1) Information concerning directors, including director nominations, and Applied’s audit committee and audit committee financial expert, appears in the Proxy Statement under “Election of Directors,” and is incorporated herein by reference.
 
(2) For information with respect to Executive Officers, see Part I, Item 1 of this Annual Report onForm 10-K, under “Executive Officers of the Registrant.”
 
(3) Information concerning Section 16(a) beneficial ownership reporting compliance appears in the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting Compliance,” and is incorporated herein by reference.
 
Applied has implemented the Standards of Business Conduct, a code of ethics with which every person who works for Applied and every member of the Board of Directors is expected to comply. If any substantive amendments are made to the Standards of Business Conduct or any waiver is granted, including any implicit waiver, from a provision of the code to Applied’s Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, Applied will disclose the nature of such amendment or waiver on its website or in a report onForm 8-K. The above information, including the Standards of Business Conduct, is available on Applied’s website under the Investors section athttp://www.appliedmaterials.com/investors/index.html.This website address is intended to be an inactive, textual reference only. None of the material on this website is part of this report or is incorporated by reference herein.
 
Item 11:  Executive Compensation
 
Information concerning executive compensation appears in the Proxy Statement under “Executive Compensation and Related Information” and is incorporated herein by reference.
 
Information concerning compensation committee interlocks and insider participation appears in the Proxy Statement under “Compensation Committee Interlocks and Insider Participation” and is incorporated herein by reference.
 
Information concerning the compensation committee report appears in the Proxy Statement under “Human Resources and Compensation Committee Report” and is incorporated herein by reference.
 
Item 12:  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Information concerning the security ownership of certain beneficial owners and management appears in the Proxy Statement, under “Principal Stockholders,” and is incorporated herein by reference.


48

The following table summarizes information with respect to options and other equity awards under Applied’s equity compensation plans as of October 26, 2008:25, 2009:
 
Equity Compensation Plan Information
 
                        
     (c)
      (c)
 
 (a)
   Number of Securities
  (a)
   Number of Securities
 
 Number of
 (b)
 Available for Future
  Number of
 (b)
 Available for Future
 
 Securities to be
 Weighted Average
 Issuance Under Equity
  Securities to be
 Weighted Average
 Issuance Under Equity
 
 Issued Upon Exercise
 Exercise Price of
 Compensation Plans
  Issued Upon Exercise
 Exercise Price of
 Compensation Plans
 
 of Outstanding Options,
 Outstanding Options,
 (Excluding Securities
  of Outstanding Options,
 Outstanding Options,
 (Excluding Securities
 
 Warrants and
 Warrants and
 Reflected in
  Warrants and
 Warrants and
 Reflected in
 
Plan Category
 Rights(1) Rights(2) Column(a))  Rights(1) Rights(2) Column(a)) 
 (In thousands, except prices)  (In thousands, except prices) 
Equity compensation plans approved by security holders  30,081  $18.86   197,281(3)  46,418  $11.86   166,578(3)
Equity compensation plans not approved by security holders  47,069(4) $17.38   41,750(5)  38,631(4) $17.27   50,187(5)
          
Total  77,150  $17.71   239,031   85,049  $14.72   216,765 
          
 
 
(1)Includes only options and restricted stock units (referred(also referred to as “performance shares” under the Applied Materials, Inc. Employee Stock Incentive Plan) outstanding under Applied’s equity compensation plans, as no stock warrants or other rights were outstanding as of October 26, 2008.25, 2009.
 
(2)The weighted average exercise price calculation does not take into account any restricted stock units as they have a de minimis purchase price.
 
(3)Includes 70,53262,789 shares of Applied common stock available for future issuance under the Applied Materials, Inc. Employees’ Stock Purchase Plan. Of these 70,53262,789 shares, 1,4671,495 are subject to purchase during the purchase period in effect as of October 26, 2008.25, 2009.
 
(4)Includes options to purchase 1,8231,452 shares of Applied common stock assumed through various mergers and acquisitions, after giving effect to the applicable exchange ratios. The assumed options had a weighted average exercise price of $13.70$13.97 per share. No further shares are available for issuance under the plans under which these assumed awards were granted.
 
(5)Includes 1,2102,033 shares of Applied common stock available for future issuance under the Applied Materials, Inc. Stock Purchase Plan for Offshore Employees. Of these 1,2102,033 shares, 700769 are subject to purchase during the purchase period in effect as of October 26, 2008.25, 2009.
 
Applied has the following equity compensation plans that have not been approved by stockholders:
 
2000 Global Equity Incentive PlanThe 2000 Global Equity Incentive Plan (the 2000 Plan) was adopted effective as of June 21, 2000. The 2000 Plan provides for the grant of non-qualified stock options to employees other than officers and directors. The administrator of the 2000 Plan (either the Board of Directors of Applied or a committee appointed by the Board) determines the terms and conditions of all stock options granted; provided, however, that (1) the exercise price generally may not be less than 100 percent of the fair market value (on the date of grant) of the stock covered by the option, and (2) the term of options can be no longer than 10 years (or 13 years in the event of death). A total of 147,000,000 shares have been authorized for issuance under the 2000 Plan, and 40,540,00047,955 shares remain available for issuance as of October 26, 2008.25, 2009.
 
Stock Purchase Plan for Offshore EmployeesThe Stock Purchase Plan for Offshore Employees (the Offshore ESPP) was adopted effective as of October 16, 1995 for the benefit of employees of Applied’s participating affiliates (other than United States citizens or residents). The Offshore ESPP provides for the grant of options to purchase shares of Applied common stock through payroll deductions pursuant to one or more offerings. The administrator of the Offshore ESPP (the Board of Directors of Applied or a committee appointed by the Board) determines the terms and conditions of all options prior to the start of an offering, including the purchase price of shares, the number of shares covered by the option and when the option may be exercised. All options granted as part of an offering must be granted on the same date. A total ofPrior to June 8, 2009, a


49

total of 12,800,000 shares had been authorized for issuance under the Offshore ESPP. Effective June 8, 2009, Applied amended the Offshore ESPP to increase the number of shares available for issuance under such plan by 3,000,000 shares and correspondingly amended the stockholder-approved Applied Materials, Inc. Employees’ Stock Purchase Plan (the U.S. ESPP) to reduce the number of shares available for issuance under such plan by 3,000,000 shares. Accordingly, as of October 25, 2009 a total of 15,800,000 shares have been authorized for issuance under the Offshore ESPP, and 1,210,0002,033,000 shares remain available for issuance. These plan amendments did not result in any increase in the total aggregate number of shares authorized for issuance as of October 26, 2008.under the Offshore ESPP and the U.S. ESPP.
 
Nonemployee Director Share Purchase PlanThe Applied Materials, Inc. Nonemployee Director Share Purchase Plan was adopted effective March 22, 2005. The Nonemployee Director Share Purchase Plan provides a method by which non-employee directors may purchase Applied common stock at 100% of fair market value on the purchase date by foregoing cash they have earned as retainer fees or meeting fees. The shares generally are purchased at the same time the directors otherwise would have been paid the fees in cash. Since the directors pay full fair market value for the shares, there is no reserved amount of shares under this plan and, accordingly, the table above does not include any set number of shares available for future issuance under the plan.
 
Applied Materials Profit Sharing SchemeThe Applied Materials Profit Sharing Scheme was adopted effective July 3, 1996 to enable employees of Applied Materials Ireland Limited and its participating subsidiaries to purchase Applied common stock at 100% of fair market value on the purchase date. Under this plan, eligible employees may elect to forego a certain portion of their base salary and certain bonuses they have earned and that otherwise would be payable in cash to purchase shares of Applied common stock at full fair market value. Since the eligible employees pay full fair market value for the shares, there is no reserved amount of shares under this plan and, accordingly, the table above does not include any set number of shares available for future issuance under the plan.
 
Item 13:  Certain Relationships and Related Transactions, and Director Independence
 
The information appearing in the Proxy Statement under the heading “Certain Relationships and Related Transactions” is incorporated herein by reference.
 
The information appearing in the Proxy Statement under the heading “Director Independence” is incorporated herein by reference.
 
Item 14:  Principal Accounting Fees and Services
 
Information concerning principal accounting fees and services and the audit committee’s preapproval policies and procedures appears in the Proxy Statement under the headings “Fees Paid to KPMG LLP” and “Policy on Audit Committee’s Pre-Approval of Audit and Permisssible Non-audit Services of Independent Registered Public Accounting Firm,” is incorporated herein by reference.


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PART IV
 
Item 15:  Exhibits and Financial Statement Schedules
 
(a) The following documents are filed as part of this Annual Report onForm 10-K:
 
         
    Page
    Number
 
 (1)  Financial Statements:    
    Consolidated Statements of Operations for each of the three years in the period ended October 26, 200825, 2009  52 
   Consolidated Balance Sheets at October 26, 200825, 2009 and October 28, 200726, 2008  53 
    Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each of the three years in the period ended October 26, 200825, 2009  54 
    Consolidated Statements of Cash Flows for each of the three years in the period ended October 26, 200825, 2009  55 
    Notes to Consolidated Financial Statements  56 
    Report of KPMG LLP, Independent Registered Public Accounting Firm  9092 
 (2)  Exhibits:    
    The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report onForm 10-K  9193 
 (3)  Financial Statement Schedule:    
    Schedule II — Valuation and Qualifying Accounts for each of the three years in the period ended October 26, 200825, 2009  97100 
 
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.


51

APPLIED MATERIALS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                        
 October 26,
 October 28,
 October 29,
  October 25
 October 26,
 October 28,
 
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Net sales $8,129,240  $9,734,856  $9,167,014  $5,013,607  $8,129,240  $9,734,856 
Cost of products sold  4,686,412   5,242,413   4,875,212   3,582,802   4,686,412   5,242,413 
              
Gross margin  3,442,828   4,492,443   4,291,802   1,430,805   3,442,828   4,492,443 
Operating expenses:                        
Research, development and engineering  1,104,122   1,142,073   1,152,326   934,115   1,104,122   1,142,073 
General and administrative  406,946   505,762   501,185 
Marketing and selling  459,402   451,258   438,654   327,572   459,402   451,258 
General and administrative  505,762   501,185   468,088 
Restructuring and asset impairments  39,948   26,421   212,113   155,788   39,948   26,421 
Gain on sale of facility  21,837   —   —   —   21,837   — 
              
Income from operations  1,355,431   2,371,506   2,020,621 
Income (loss) from operations  (393,616)  1,355,431   2,371,506 
Pretax loss of equity-method investment  35,527   29,371   2,849   34,983   35,527   29,371 
Impairment of investments  84,480   —   — 
Interest expense  20,506   38,631   36,096   21,304   20,506   38,631 
Interest and other income  109,320   136,149   185,295 
Interest income  48,580   109,320   136,149 
              
Income before income taxes  1,408,718   2,439,653   2,166,971 
Provision for income taxes  447,972   729,457   650,308 
Income (loss) before income taxes  (485,803)  1,408,718   2,439,653 
Provision (benefit) for income taxes  (180,476)  447,972   729,457 
              
Net income $960,746  $1,710,196  $1,516,663 
Net income (loss) $(305,327) $960,746  $1,710,196 
              
Earnings per share:            
Earnings (loss) per share:            
Basic $0.71  $1.22  $0.98  $(0.23) $0.71  $1.22 
Diluted $0.70  $1.20  $0.97  $(0.23) $0.70  $1.20 
Weighted average number of shares:                        
Basic  1,354,176   1,406,685   1,551,339   1,333,091   1,354,176   1,406,685 
Diluted  1,374,507   1,427,002   1,565,072   1,333,091   1,374,507��  1,427,002 
 
See accompanying Notes to Consolidated Financial Statements.


52

APPLIED MATERIALS, INC.


CONSOLIDATED BALANCE SHEETS
 
                
 October 26,
 October 28,
  October 25,
 October 26,
 
 2008 2007  2009 2008 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
ASSETS
ASSETS
ASSETS
Current assets:                
Cash and cash equivalents $1,411,624  $1,202,722  $1,576,381  $1,411,624 
Short-term investments  689,044   1,166,857   638,349   689,044 
Accounts receivable, less allowance for doubtful accounts of $5,275 and $4,136 at 2008 and 2007, respectively  1,691,027   2,049,427 
Accounts receivable, less allowance for doubtful accounts of $67,313 and $5,275 at 2009 and 2008, respectively  1,041,495   1,691,027 
Inventories  1,987,017   1,313,237   1,627,457   1,987,017 
Deferred income taxes, net  388,807   426,471   356,336   388,807 
Income taxes receivable  125,605   —   184,760   125,605 
Other current assets  371,033   448,879   264,169   371,033 
          
Total current assets  6,664,157   6,607,593   5,688,947   6,664,157 
Long-term investments  1,367,056   1,362,425   1,052,165   1,367,056 
Property, plant and equipment  2,831,952   2,782,204   2,906,957   2,831,952 
Less: accumulated depreciation and amortization  (1,737,752)  (1,730,962)  (1,816,524)  (1,737,752)
          
Net property, plant and equipment  1,094,200   1,051,242   1,090,433   1,094,200 
Goodwill, net  1,174,673   1,006,410   1,170,932   1,174,673 
Purchased technology and other intangible assets, net  388,429   373,178   306,416   388,429 
Equity-method investment  79,533   115,060   —   79,533 
Deferred income taxes and other assets  238,270   146,370   265,350   238,270 
          
Total assets $11,006,318  $10,662,278  $9,574,243  $11,006,318 
          
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:                
Current portion of long-term debt $1,068  $2,561  $1,240  $1,068 
Accounts payable and accrued expenses  2,771,090   2,221,516   1,061,502   1,545,355 
Customer deposits and deferred revenue  864,280   1,225,735 
Income taxes payable  173,394   157,549   12,435   173,394 
          
Total current liabilities  2,945,552   2,381,626   1,939,457   2,945,552 
Long-term debt  201,576   202,281   200,654   201,576 
Other liabilities  310,232   256,962   339,524   310,232 
          
Total liabilities  3,457,360   2,840,869   2,479,635   3,457,360 
          
Commitments and contingencies (Note 11)         
Commitments and contingencies (Note 13)        
Stockholders’ equity:                
Preferred stock: $.01 par value per share; 1,000 shares authorized; no shares issued  —   —   —   — 
Common stock: $.01 par value per share; 2,500,000 shares authorized; 1,330,761 and 1,385,711 shares outstanding at 2008 and 2007, respectively  13,308   13,857 
Common stock: $.01 par value per share; 2,500,000 shares authorized; 1,340,917 and 1,330,761 shares outstanding at 2009 and 2008, respectively  13,409   13,308 
Additional paid-in capital  5,095,894   4,658,832   5,195,437   5,095,894 
Retained earnings  11,601,288   10,863,291   10,934,004   11,601,288 
Treasury stock: 513,232 and 434,686 shares at 2008 and 2007, respectively, net  (9,134,962)  (7,725,924)
Accumulated other comprehensive income (loss)  (26,570)  11,353 
Treasury stock: 508,254 and 513,232 shares at 2009 and 2008, respectively, net  (9,046,562)  (9,134,962)
Accumulated other comprehensive loss  (1,680)  (26,570)
          
Total stockholders’ equity  7,548,958   7,821,409   7,094,608   7,548,958 
          
Total liabilities and stockholders’ equity $11,006,318  $10,662,278  $9,574,243  $11,006,318 
          
 
See accompanying Notes to Consolidated Financial Statements.


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APPLIED MATERIALS, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
 
                                                        
           Accumulated
              Accumulated
   
     Additional
     Other
        Additional
     Other
   
 Common Stock Paid-In
 Retained
 Treasury
 Comprehensive
    Common Stock Paid-In
 Retained
 Treasury
 Comprehensive
   
 Shares Amount Capital Earnings Stock Income/(Loss) Total  Shares Amount Capital Earnings Stock Income (Loss) Total 
Balance at October 30, 2005  1,606,694  $16,067  $3,161,053  $8,227,793  $(2,439,116) $(37,248) $8,928,549 
Components of comprehensive income:                            
Net income  —   —   —   1,516,663   —   —   1,516,663 
Change in unrealized net gain on investments  —   —   —   —   —   16,486   16,486 
Change in unrealized net gain on derivative instruments  —   —   —   —   —   (4,888)  (4,888)
Change in minimum pension liability  —   —   —   —   —   (117)  (117)
Translation adjustments  —   —   —   —   —   6,757   6,757 
   
Comprehensive income                      —   1,534,901 
Dividends  —   —   —   (272,153)  —   —   (272,153)
Equity-based compensation  —   —   216,269   —   —   —   216,269 
Issuance under stock plans, including tax benefits of $23,664 and other  23,433   234   282,587   —   77,958   —   360,779 
Assumption of Applied Films equity plans  —   —   18,293   —   —   —   18,293 
Treasury stock repurchases  (238,397)  (2,384)  —   —   (4,132,854)  —   (4,135,238)
               
Balance at October 29, 2006  1,391,730  $13,917  $3,678,202  $9,472,303  $(6,494,012) $(19,010) $6,651,400   1,391,730  $13,917  $3,678,202  $9,472,303  $(6,494,012) $(19,010) $6,651,400 
Components of comprehensive income:                                                        
Net income  —   —   —   1,710,196   —   —   1,710,196   —   —   —   1,710,196   —   —   1,710,196 
Change in unrealized net loss on investments  —   —   —   —   —   21,887   21,887   —   —   —   —   —   21,887   21,887 
Change in unrealized net gain on derivative instruments  —   —   —   —   —   (5,728)  (5,728)  —   —   —   —   —   (5,728)  (5,728)
Change in minimum pension liability  —   —   —   —   —   3,462   3,462   —   —   —   —   —   3,462   3,462 
Change in retiree medical benefit  —   —   —   —   —   (1,132)  (1,132)  —   —   —   —   —   (1,132)  (1,132)
Translation adjustments  —   —   —   —   —   9,583   9,583   —   —   —   —   —   9,583   9,583 
      
Comprehensive income                      —   1,738,268                           1,738,268 
Adjustment to initially apply SFAS 158, net of tax of $959  —   —   —   —   —   2,291   2,291 
Adjustment to initially apply authoritative guidance on defined benefit pension plans, net of tax of $959  —   —   —   —   —   2,291   2,291 
Dividends  —   —   —   (319,208)  —   —   (319,208)  —   —   —   (319,208)  —   —   (319,208)
Equity-based compensation  —   —   161,196   —   —   —   161,196   —   —   161,196   —   —   —   161,196 
Issuance under stock plans, including tax benefits of $48,870 and other  54,391   544   819,434   —   99,481   —   919,459   54,391   544   819,434   —   99,481   —   919,459 
Treasury stock repurchases  (60,410)  (604)  —   —   (1,331,393)  —   (1,331,997)  (60,410)  (604)  —   —   (1,331,393)  —   (1,331,997)
                              
Balance at October 28, 2007  1,385,711  $13,857  $4,658,832  $10,863,291  $(7,725,924) $11,353  $7,821,409   1,385,711  $13,857  $4,658,832  $10,863,291  $(7,725,924) $11,353  $7,821,409 
Components of comprehensive income:                                                        
Net income  —   —   —   960,746   —   —   960,746   —   —   —   960,746   —   —   960,746 
Change in unrealized net loss on investments  —   —   —   —   —   (41,739)  (41,739)  —   —   —   —   —   (41,739)  (41,739)
Change in unrealized net gain on derivative instruments  —   —   —   —   —   9,448   9,448   —   —   —   —   —   9,448   9,448 
Change in minimum pension liability  —   —   —   —   —   (7,440)  (7,440)  —   —   —   —   —   (7,440)  (7,440)
Change in retiree medical benefit  —   —   —   —   —   1,866   1,866   —   —   —   —   —   1,866   1,866 
Translation adjustments  —   —   —   —   —   (58)  (58)  —   —   —   —   —   (58)  (58)
      
Comprehensive income                      —   922,823                           922,823 
Cumulative effect of adoption of FIN 48  —   —   —   100,000   —   —   100,000 
Cumulative effect of adoption of interpretative tax guidance on uncertainties in income taxes  —   —   —   100,000   —   —   100,000 
Dividends  —   —   —   (322,749)  —   —   (322,749)  —   —   —   (322,749)  —   —   (322,749)
Equity-based compensation  —   —   178,943   —   —   —   178,943   —   —   178,943   —   —   —   178,943 
Issuance under stock plans, including a tax detriment of $11,519 and other  28,213   283   258,119   —   90,114   —   348,516   28,213   283   258,119   —   90,114   —   348,516 
Treasury stock repurchases  (83,163)  (832)  —   —   (1,499,152)  —   (1,499,984)  (83,163)  (832)  —   —   (1,499,152)  —   (1,499,984)
                              
Balance at October 26, 2008  1,330,761  $13,308  $5,095,894  $11,601,288  $(9,134,962) $(26,570) $7,548,958   1,330,761  $13,308  $5,095,894  $11,601,288  $(9,134,962) $(26,570) $7,548,958 
Components of comprehensive loss:                            
Net loss  —   —   —   (305,327)  —   —   (305,327)
Change in unrealized net gain on investments  —   —   —   —   —   44,956   44,956 
Change in unrealized net gain on derivative instruments  —   —   —   —   —   (7,729)  (7,729)
Change in minimum pension liability  —   —   —   —   —   (12,492)  (12,492)
Change in retiree medical benefit  —   —   —   —   —   (719)  (719)
Translation adjustments  —   —   —   —   —   874   874 
                  
Comprehensive loss                          (280,437)
Change in measurement date to apply authoritative guidance on defined benefit plans  —   —   —   (1,942)  —   —   (1,942)
Dividends  —   —   —   (320,117)  —   —   (320,117)
Equity-based compensation  —   —   147,160   —   —   —   147,160 
Issuance under stock plans, including a tax detriment of $13,409 and other  12,098   121   (47,617)  (39,898)  111,286   —   23,892 
Treasury stock repurchases  (1,942)  (20)  —   —   (22,886)  —   (22,906)
               
Balance at October 25, 2009  1,340,917  $13,409  $5,195,437  $10,934,004  $(9,046,562) $(1,680) $7,094,608 
               
 
See accompanying Notes to Consolidated Financial Statements.


54

APPLIED MATERIALS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                        
 October 26,
 October 28,
 October 29,
  October 25,
 October 26,
 October 28,
 
Fiscal Year
 2008 2007 2006  2009 2008 2007 
 (In thousands)    (In thousands)   
Cash flows from operating activities:                        
Net income $960,746  $1,710,196  $1,516,663 
Adjustments required to reconcile net income to cash provided by operating activities:            
Net income (loss) $(305,327) $960,746  $1,710,196 
Adjustments required to reconcile net income (loss) to cash provided by operating activities:            
Depreciation and amortization  320,051   268,334   270,413   291,203   320,051   268,334 
Loss on sale and retirements of property, plant, and equipment, net  6,826   21,401   28,365 
Loss on fixed asset retirements  24,017   6,826   21,401 
Provision for bad debts  62,539   2,456   858 
Restructuring and asset impairments  39,948   26,421   212,113   155,788   39,948   26,421 
Acquired in-process research and development expense  —   4,900   14,000   —   —   4,900 
Pretax loss of equity-method investment  35,527   29,371   2,849   34,983   35,527   29,371 
Impairment of investments  84,480   —   — 
Net recognized loss on investments  4,392   5,460   41,391   10,231   4,392   5,460 
Deferred income taxes  (58,259)  31,642   25,323   18,863   (58,259)  31,642 
Excess tax benefits from equity-based compensation plans  (7,491)  (49,794)  (23,664)  —   (7,491)  (49,793)
Equity-based compensation  178,943   161,197   216,269   147,160   178,943   161,196 
Changes in operating assets and liabilities, net of amounts acquired:                        
Accounts receivable, net  424,290   34,259   (393,022)
Accounts receivable  586,993   421,834   33,401 
Inventories  (638,256)  140,933   (222,335)  359,560   (638,256)  140,933 
Other current assets  94,247   (164,289)  25,224   94,740   94,247   (164,289)
Other assets  (394)  3,359   17,088   (6,530)  (394)  3,359 
Accounts payable and accrued expenses  362,604   (12,473)  237,952   (660,006)  (260,041)  (107,220)
Customer deposits and deferred revenue  (361,455)  622,645   94,747 
Income taxes payable  8,126   (23,968)  100,020   (288,283)  8,126   (23,968)
Other liabilities  (20,832)  22,347   (91,531)  83,709   (20,832)  22,347 
              
Cash provided by operating activities  1,710,468   2,209,296   1,977,118   332,665   1,710,468   2,209,296 
              
Cash flows from investing activities:                        
Capital expenditures  (287,906)  (264,784)  (179,482)  (248,427)  (287,906)  (264,784)
Cash paid for acquisitions, net of cash acquired  (235,324)  (599,653)  (339,093)  —   (235,324)  (599,653)
Proceeds from sale of facility  42,210   —   —   —   42,210   — 
Investment in equity-method investment  —   —   (147,280)
Proceeds from disposition of assets  —   —   1,863 
Proceeds from disposition of assets held for sale  —   37,611   16,206   —   —   37,611 
Proceeds from sales and maturities of investments  5,939,509   3,053,640   6,071,156   1,317,365   5,939,509   3,053,640 
Purchases of investments  (5,534,475)  (3,203,427)  (3,474,384)  (956,249)  (5,534,475)  (3,203,427)
              
Cash (used in)/provided by investing activities  (75,986)  (976,613)  1,948,986 
Cash provided by (used in) investing activities  112,689   (75,986)  (976,613)
              
Cash flows used for financing activities:                        
Short-term debt repayments  (2,117)  (99)  (7,710)  (750)  (2,117)  (99)
Long-term debt repayments  —   (202,040)  —   —   —   (202,040)
Proceeds from common stock issuances  393,978   898,025   337,106   61,824   393,978   898,025 
Common stock repurchases  (1,499,984)  (1,331,997)  (4,157,725)  (22,906)  (1,499,984)  (1,331,997)
Excess tax benefit from equity-based compensation plans  7,491   49,794   23,664   —   7,491   49,794 
Payments of dividends to stockholders  (325,405)  (305,672)  (250,782)  (319,507)  (325,405)  (305,672)
              
Cash used in financing activities  (1,426,037)  (891,989)  (4,055,447)  (281,339)  (1,426,037)  (891,989)
              
Effect of exchange rate changes on cash and cash equivalents  457   565   464   742   457   565 
              
Increase/(decrease) in cash and cash equivalents  208,902   341,259   (128,879)
Increase in cash and cash equivalents  164,757   208,902   341,259 
Cash and cash equivalents — beginning of year  1,202,722   861,463   990,342   1,411,624   1,202,722   861,463 
              
Cash and cash equivalents — end of year $1,411,624  $1,202,722  $861,463  $1,576,381  $1,411,624  $1,202,722 
              
Supplemental cash flow information:                        
Cash payments for income taxes, net $368,459  $845,756  $549,531  $134,240  $368,459  $845,756 
Cash payments for interest $14,580  $29,104  $28,195  $14,372  $14,580  $29,104 
 
See accompanying Notes to Consolidated Financial Statements.


55

APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1  Summary of Significant Accounting Policies
 
Principles of Consolidation and Basis of Presentation
 
The consolidated financial statements include the accounts of Applied Materials, Inc. and its subsidiaries (Applied or the Company) after elimination of intercompany balances and transactions. All references to a fiscal year apply to Applied’s fiscal year which ends on the last Sunday in October. Fiscal 2009, 2008 2007 and 20062007 contained 52 weeks each. Each fiscal quarter of 2009, 2008 2007 and 20062007 contained 13 weeks.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
 
Prior year amounts for customer deposits and deferred revenue have been reclassified to conform to the current year presentation.
During fiscal 2009, Applied implemented authoritative guidance and changed the measurement date for its defined and postretirement benefit plan assets and obligations from an interim date to Applied’s fiscal year end. Accordingly, Applied recorded a $2 million (after tax) adjustment to the fiscal 2009 beginning balance of retained earnings.
Cash Equivalents and Investments
 
All highly-liquid investments with a remaining maturity of three months or less at the time of purchase are considered to be cash equivalents. Cash equivalents consists primarily of investments in institutional money market funds.
Investments
All of Applied’s investments are classified asavailable-for-sale at the respective balance sheet dates. Investments classified asavailable-for-sale are recorded at fair value based upon quoted market prices, and any temporary difference between the cost and fair value of an investment is presented as a separate component of accumulated other comprehensive income/income (loss). The specific identification method is used to determine the gains and losses on investments.
 
Inventories
 
Inventories are stated at the lower of cost or market, with cost determined on afirst-in, first-out (FIFO) basis.
 
Property, Plant and Equipment
 
Property, plant and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings and improvements, 3 to 30 years; demonstration and manufacturing equipment, 3 to 5 years; software, 3 to 5 years; and furniture, fixtures and other equipment, 3 to 15 years. Land improvements are amortized over the shorter of 15 years or the estimated useful life. Leasehold improvements are amortized over the shorter of five years or the lease term.
 
Intangible Assets
 
Goodwill and indefinite-lived assets are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year. Purchased technology and other intangible assets are presented at cost, net of


56

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accumulated amortization, and are amortized over their estimated useful lives of 1 to 15 years using the straight-line method.
 
Long-Lived Assets
 
Applied reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Applied assesses these assets for impairment based on estimated future cash flows from these assets.
 
Research, Development and Engineering Costs
 
Research, development and engineering costs are expensed as incurred.


56

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Advertising Costs
 
Advertising costs are expensed as incurred. Advertising costs were not material for all periods presented.
 
Sales and Value Added Taxes
 
Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying Consolidated Statements of Operations.
 
Income Taxes
 
Income tax expense is based on pretax earnings. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards.
 
Revenue Recognition
 
Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is reasonably assured. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment, Applied recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred based on the estimated fair value, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment, revenue is recognized when legal title passes to the customer, which is typicallygenerally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred at their estimated relative fair values until delivery of the deferred elements. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. The completed contract method is used for SunFabtm thin film lines.Thin Film Lines. Certain SunFab Thin Film contracts have provisions for additional amounts to become due to Applied if the line achieves certain output criteria subsequent to factory acceptance. Any additional amounts earned under these contracts are recognized upon achievement. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.


57

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Derivative Financial Instruments
 
Applied uses financial instruments, such as forward exchange and currency option contracts, to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions typically expected to occur within 24 months. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. All of Applied’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income/income (loss) in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial instrument is recorded promptly in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.


57

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Foreign Currency Translation
 
As of October 26, 2008,25, 2009, primarily all of Applied’s subsidiaries use the United States dollar as their functional currency. Accordingly, assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period, except for non-monetary assets, such as inventories and property, plant and equipment, which are translated using historical exchange rates. Revenues and costs are translated using average exchange rates for the period, except for costs related to those balance sheet items that are translated using historical exchange rates. The resulting translation gains and losses are included in the Consolidated Statements of Operations as incurred.
 
Concentrations of Credit Risk
 
Financial instruments that potentially subject Applied to significant concentrations of credit risk consist principally of cash equivalents, investments, trade accounts receivable and derivative financial instruments used in hedging activities. Applied invests in a variety of financial instruments, such as, but not limited to, certificates of deposit, corporate and municipal bonds, United States Treasury and agency securities, and asset-backed and mortgage-backed securities, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. Applied’s customers consist principally of semiconductor and LCD manufacturers located throughout the world. Applied performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. Applied maintains an allowance reserve for potentially uncollectible accounts receivable based on its assessment of the collectibility of accounts receivable. Applied regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. In addition, Applied utilizes letters of credit to mitigate credit risk when considered appropriate. Applied is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but does not expect any counterparties to fail to meet their obligations.
 
Earnings Per Share
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, ESPP shares and amounts due under the agreements associated with the accelerated stock buyback program) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share.
For purposes of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair market value of Applied common stock for the period, as the effect would be anti-dilutive. Accordingly, options to purchase 36,423,000, 51,094,000 and 123,317,000 shares of common stock for the fiscal years ended October 26, 2008, October 28, 2007 and October 29, 2006, respectively, were excluded from the computation.
Equity-Based Compensation
 
Applied has adopted stock plans that permit grants to employees of equity-based awards, including stock options, restricted stock and restricted stock units (also referred to as “performance shares” under the Applied Materials, Inc. Employee Stock Incentive Plan). In addition, the Employee Stock Incentive Plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of equity-based awards to consultants. Applied also has an Employee Stock Purchase Plan (ESPP) for United States employees, and a second ESPP for international employees, which enable eligible employees to purchase Applied common stock.
Effective October 31, 2005, Applied adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123(R)), using the modified


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
prospective transition method.Employee Stock Purchase Plan for international employees (collectively, ESPP), which enable eligible employees to purchase Applied has included stock-based compensation costs in its results of operations for fiscal years 2008, 2007 and 2006. The estimated fair value of Applied’s equity-based awards, less expected forfeitures, is amortized over the awards’ service period on a straight-line basis.common stock.
 
During fiscal 2009, 2008 2007 and 2006,2007, Applied recognized total equity-based compensation expense related to stock options, ESPP shares, restricted stock units and restricted stock of $147 million (or $0.08 per diluted share), $179 million (or $0.09 per diluted share), and $161 million (of(or $0.08 per diluted share) and $216 million (or $0.11 per diluted share), respectively. During fiscal 2009, 2008 2007 and 2006,2007, Applied recognized income tax benefits related to equity-based compensation of $41 million, $50 million $45 million and $46$45 million, respectively. The equity-based compensation expense related to restricted stock units and restricted stock for fiscal 2009, 2008 and 2007 and 2006 was $115 million, $137 million and $104 million, respectively. The cost associated with Applied’s stock options and $30 million, respectively.restricted stock units less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with Applied’s performance-based equity awards are recognized over the service for each tranche.
 
Stock Options
 
The exercise price of each stock option equals the fair market value of Applied common stock on the date of grant. Most options are scheduled to vest over four years and expire no later than seven years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Applied’s employee stock options have characteristics significantly different from those of publicly traded options. The weighted average assumptions used in the model are outlined in the following table:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
Stock Options:
                        
Dividend yield  1.24%  1.12%  0.73%  2.8%  1.24%  1.12%
Expected volatility  32.1%  31.5%  36.7%  49.9%  32.1%  31.5%
Risk-free interest rate  2.92%  4.66%  4.48%  1.26%  2.92%  4.66%
Expected life (in years)  3.9   3.9   3.8   3.0   3.9   3.9 
 
The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on a combination of historical and implied volatilities. When establishing the expected life assumption, Applied periodically reviews historical employee exercise behavior with respect to option grants with similar vesting periods.
 
Options outstanding had an aggregate intrinsic value of $109 million, $0.6 million $190 million and $165$190 million at October 25, 2009, October 26, 2008 and October 28, 2007, and October 29, 2006, respectively. The total grant date fair value of options granted during fiscal 2009, 2008 and 2007 was $62 million, $34,000 and 2006 was $34,000, $2 million and $54 million, respectively. The total intrinsic value of options exercised during fiscal 2009, 2008 and 2007 and 2006 was $1 million, $54 million $141 million and $57$141 million, respectively. The total fair value of options that vested during fiscal 2009, 2008 and 2007 and 2006 was $14 million, $55 million $124 million and $256$124 million, respectively. At October 26, 2008,25, 2009, Applied had $13$42 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over the weighted average period of 0.61.3 years. Cash received from stock option exercises was $9 million, $328 million $837 million and $284$837 million, respectively, during fiscal 2009, 2008 2007 and 2006.2007. The actual tax benefit realized for the tax deductions from options exercised for fiscal 2009, 2008 and 2007 and 2006 totaled $22 million, $57 million and $50 million, and $24 million, respectively. During fiscal 2006, as part of the acquisition of Applied Films Corporation (Applied Films), Applied assumed outstanding options to purchase Applied Films common stock that, at the acquisition date, had a fair value of $26 million, including $6 million of total unrecognized compensation expense, net of $2 million of estimated forfeitures (see Note 12). The Applied Films stock options assumed by Applied were converted into options to purchase 3 million shares of Applied common stock.
 
Employee Stock Purchase Plans
 
Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning of the applicable offering period or at the end of each applicable purchase period. Effective March 2, 2009, the length of offering periods under the ESPP was reduced to 6 months from a maximum of 24 months in duration. The


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
offering period or at the end of each applicable purchase period.incremental compensation cost associated with this modification was insignificant. The number of shares issued under the ESPP during fiscal 2009, 2008 and 2007 and 2006 was 6,920,000 shares, 4,617,000 shares 4,310,000 shares and 4,065,0004,310,000 shares, respectively. Based on the Black-Scholes option pricing model, the weighted average estimated fair value of purchase rights under the ESPP was $3.19 per share for the year ended October 25, 2009, $4.97 per share for the year ended October 26, 2008 and $4.83 per share for the year ended October 28, 2007 and $5.21 per share for the year ended October 29, 2006.2007. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model are outlined in the following table:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
ESPP:
                        
Dividend yield  1.21%  1.18%  0.32%  2.37%  1.21%  1.18%
Expected volatility  29.9%  28.5%  31.1%  58.8%  29.9%  28.5%
Risk-free interest rate  4.16%  4.93%  2.81%  0.33%  4.16%  4.93%
Expected life (in years)  1.25   1.25   1.25   0.5   1.25   1.25 
 
Restricted Stock Units and Restricted Stock
 
Restricted stock units are converted into shares of Applied common stock upon vesting on aone-for-one basis. Restricted stock units typically vest over three to four years. Vesting of restricted stock units usually is subject to the grantee’s continued service with Applied. The compensation expense related to these awards is determined using the fair value of Applied common stock on the date of the grant, and compensation is recognized over the vesting period.
At October 26, 2008,25, 2009, Applied had $224$136 million total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock unit grants, which will be recognized over the weighted average period of 1.31.2 years (see Note 8)10). During fiscal 2006, as part of the acquisition of Applied Films, Applied assumed Applied Films’ outstanding restricted stock units that, at the acquisition date, had a fair value of $298,000, including $130,000 of total unrecognized equity-based compensation expense, net of estimated forfeitures. The Applied Films restricted stock units assumed were expected to convert into 19,000 shares of Applied common stock upon vesting.
 
Beginning in fiscal 2007, Applied initiated a performance-based equity award program for named executive officers and other key employees. TheThese awards vest only if specific performance goals set by the Human Resources and Compensation Committee of Applied’s Board of Directors (the Committee) are achieved and if the grantee remains employed by Applied through the applicable vesting date. The performance goals require the achievement of targeted relative annual operating profit margin levels as compared to Applied’s peer companies in at least one of the four fiscal years beginning with the fiscal year of the grant. There were no performance-based awards granted in fiscal 2009. The Committee approved grants of 1,565,000 and 1,950,000 performance-based restricted stock units under this program for fiscal 2008 and fiscal 2007, respectively. The Committee also approved the issuance to Applied’s President and Chief Executive Officer of performance-based restricted stock in the amounts of 100,000 and 150,000 shares for fiscal 2008 and fiscal 2007, respectively, at $0.01 per share. These awards vest only if specific performance goals set by the Committee are achieved. The goals require the achievement of specified levels of Applied’s annual operating profit as compared to Applied’s peer companies and also that the officer or key employee remain an employee of Applied through the vesting date. The fair value of the performance-based restricted stock awardsunits and restricted stock is estimated using the fair market value of Applied common stock on the date of the grant and assumes that the applicable performance goals will be achieved. If achieved, the award vests over a specified remaining service period. If suchthe performance goals are not met, no compensation costexpense is recognized and any previously recognized compensation costexpense is reversed. The expected cost of theeach award is reflected over the service period and is reduced for estimated forfeitures. TheAs of October 25, 2009, 70% of the performance goals associated with the fiscal 2008 awards were achieved. The performance goals associated with the remaining 30% may still be achieved, at 70%.depending on future performance, during fiscal 2010. The performance goals associated with the fiscal 2007 awards were achieved.achieved prior to fiscal 2009. Fiscal 2009 equity-based compensation expense included $13 million attributable to the performance-based awards granted in fiscal 2008 and fiscal 2007. Fiscal 2008 equity-based compensation expense included $21 million attributable to the performance-based awards granted in fiscal 2008 and fiscal 2007. Fiscal 2007 equity-based compensation expense included $13 million attributable to the performance-based awards granted in fiscal 2007.


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Defined Benefit Pension Plans of Foreign SubsidiariesEarnings Per Share
 
OnBasic earnings (loss) per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and ESPP shares) outstanding during the period. Applied’s net income (loss) has not been adjusted for any period presented for purposes of computing basic or diluted earnings (loss) per share due to the Company’s non-complex capital structure.
For purposes of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair market value of Applied common stock for the period, as the effect would be anti-dilutive. Accordingly, options to purchase 36,423,000 and 51,094,000 shares of common stock for the fiscal years ended October 26, 2008 and October 28, 2007, Applied implementedrespectively, were excluded from the recognition and disclosure provisionscomputation. Potential common shares have not been included in the calculation of Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accountingdiluted net loss per share for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158 required Applied to recognize the funded status (the difference betweenyear ended October 25, 2009, as the fair value of plan assetseffect would be anti-dilutive. As such, the numerator and the projected benefit obligations)denominator used in computing both basic and diluted net loss per share for fiscal 2009 are the same. The number of potential common shares that were excluded from the defined benefit plan in the Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, netcomputation of tax, to measure the fair value of plan benefit obligations as of itsdiluted earnings per share was 85,049,000 for fiscal year ending October 28, 2007 and to provide additional disclosures. The implementation of SFAS 158 did not have a material impact on Applied’s financial statements. For additional information on Applied’s employee benefit plans, see Note 8.2009.
 
Recent Accounting Pronouncements
 
In April 2008, Financial Accounting Standards Board (FASB)October 2009, the FASB issued authoritative guidance for revenue recognition with multiple deliverables. This authoritative guidance impacts the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, this guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. Applied will adopt this authoritative guidance prospectively commencing in its first quarter of fiscal 2010. The implementation is not expected to have a material impact on Applied’s financial position or results of operations.
In October 2009, the FASB Staff Position (FSP)No. 142-3, “Determination ofissued authoritative guidance for the Useful Life of Intangible Assets”(FSP 142-3).FSP 142-3accounting for certain revenue arrangements that include software elements. This authoritative guidance amends the factors an entity should considerscope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. Applied will adopt this authoritative guidance prospectively commencing in developing renewalits first quarter of fiscal 2010. The implementation is not expected to have a material impact on Applied’s financial position or extension assumptions used in determiningresults of operations.
In June 2009, the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwillissued authoritative guidance on variable interest entities, which becomes effective the first annual reporting period after November 15, 2009 and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions.FSP 142-3 iswill be effective for financial statements issuedApplied in fiscal 2011. This authoritative guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited.variable interests. Applied is evaluating the potential impact of the implementation ofFSP 142-3 this authoritative guidance on its consolidated financial position and results of operations.statements.
 
In March 2008,April 2009, the FASB issued Statement No. 161, “Disclosures about Derivative Instrumentsauthoritative guidance on accounting for assets acquired and Hedging Activities, an amendmentliabilities assumed in a business combination that arise from contingencies, which amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of FASB Statement No. 133” (SFAS 161). SFAS 161assets and liabilities arising from contingencies in a business combination under previously issued guidance. The authoritative guidance requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period. This authoritative guidance will be effective for Applied in fiscal 2010, with early adoption permitted.2010. Applied is evaluatingexpects that this authoritative guidance will have an impact on its consolidated financial statements, but the potential impactnature and magnitude of the implementationspecific effects will depend upon the nature, term and size of SFAS 161the acquired contingencies.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In December 2008, the FASB issued authoritative guidance on its financial position and resultsemployer’s disclosures about plan assets of operations.a defined benefit pension or other postretirement plan. Applied will comply with this authoritative guidance in fiscal 2010.
 
In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations” (SFAS 141(R)). The standard changesrevised the accounting forauthoritative guidance on business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition relatedacquisition-related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R)This authoritative guidance will be effective for Applied in fiscal 2010, with early adoption prohibited. Applied is evaluatingexpects that this authoritative guidance will have an impact on its consolidated financial statements, but the potential impactnature and magnitude of the implementationspecific effects will depend upon the nature, terms and size of SFAS 141(R) on its financial position and results of operations.the acquisitions it consummates after the effective date.
 
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). The standardauthoritative guidance on noncontrolling interests, which changes the accounting for noncontrolling (minority) interests in consolidated financial statements, including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS 160this authoritative guidance revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS 160This authoritative guidance will be effective for Applied in fiscal 2010, with early adoption prohibited. Applied is evaluating the potential impact of the implementation of SFAS 160this authoritative guidance on its financial position and results of operations.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (SFAS 159), which permits entities to


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. SFAS 159 will be effective for Applied in fiscal 2009. Management does not believe the effect of implementing SFAS 159 will have a material impact on Applied’s financial position or results of operations.
 
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issuedFSP 157-1, “Application authoritative guidance on fair value measurements for purposes of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13”(FSP 157-1) andFSP 157-2, “Effective Date of FASB Statement No. 157”(FSP 157-2).FSP 157-1lease classification, which amends SFAS 157previously issued guidance on fair value measurements to remove certain leasing transactions from its scope.FSP 157-2 The FASB also issued authoritative guidance on the effective date of fair value measurements, which delays the effective date of SFAS 157for Applied for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the beginning of Applied’s first quarter of fiscal 2010. The measurement and disclosure requirements related to financial assets and financial liabilities arewere effective for Applied beginning in the first quarter of fiscal 2009. In October 2008, the FASB issuedFSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”(FSP 157-3).FSP 157-3 authoritative guidance that clarifies the application of SFAS 157fair value measurements in a market that is not active, and provideprovides guidance on the key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Applied will continue to evaluateadopted the applicationeffective portions of SFAS 157. Management does not believefair value measurements beginning in the effectfirst quarter of implementing SFAS 157 will have a material impact onfiscal 2009. See Note 3 for information and related disclosures regarding Applied’s financial position or results of operations.fair value measurements.
 
Note 2  Financial InstrumentsTreasury Stock
 
Applied records treasury stock purchases under the cost method using theInvestmentsfirst-in,
Investments by security type first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury stock at October 26, 2008an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings. During fiscal 2009, shares of treasury stock were as follows:
                 
     Gross
  Gross
    
     Unrealized
  Unrealized
  Estimated
 
  Cost  Gains  Losses  Fair Value 
     (In thousands)    
 
Obligations of states and political subdivisions $749,225  $1,993  $2,824  $748,394 
U.S. Treasury and agency securities  583,979   5,839   1,257   588,561 
U.S. commercial paper, corporate bonds and medium-term notes  382,054   141   14,903   367,292 
Other debt securities  255,777   535   11,507   244,805 
Bank certificate of deposit  342   —   2   340 
                 
Total fixed income securities  1,971,377   8,508   30,493   1,949,392 
Publicly traded equity securities  29,165   —   17,205   11,960 
Equity securities carried at cost  94,748   —   —   94,748 
                 
Total $2,095,290  $8,508  $47,698  $2,056,100 
                 
issued in connection with Applied’s ESPP at an aggregate value that was less than the treasury stock’s acquisition price, resulting in $40 million being recorded against retained earnings.


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Note 3  Financial Instruments and Fair Value
Investments
Investments by security type at October 28, 200725, 2009 were as follows:
 
                                
   Gross
 Gross
      Gross
 Gross
   
   Unrealized
 Unrealized
 Estimated
    Unrealized
 Unrealized
 Estimated
 
 Cost Gains Losses Fair Value  Cost Gains Losses Fair Value 
   (In thousands)      (In thousands)   
U.S. Treasury and agency securities $653,627  $8,013  $170  $661,470 
Obligations of states and political subdivisions $1,083,637  $1,817  $333  $1,085,121   419,640   7,597   —   427,237 
U.S. Treasury and agency securities  517,805   3,616   308   521,113 
U.S. commercial paper, corporate bonds and medium-term notes  490,066   1,219   1,680   489,605   382,550   5,676   281   387,945 
Other debt securities  341,650   1,683   1,898   341,435   103,193   1,430   391   104,232 
Bank certificate of deposit  2,000   —   —   2,000 
                  
Total fixed income securities  2,435,158   8,335   4,219   2,439,274   1,559,010   22,716   842   1,580,884 
Publicly traded equity securities  27,651   25,846   3,730   49,767   9,572   9,439   —   19,011 
Equity securities carried at cost  40,241   —   —   40,241 
Equity investments in privately-held companies  90,619   —   —   90,619 
                  
Total $2,503,050  $34,181  $7,949  $2,529,282  $1,659,201  $32,155  $842  $1,690,514 
                  
Investments by security type at October 26, 2008 were as follows:
                 
     Gross
  Gross
    
     Unrealized
  Unrealized
  Estimated
 
  Cost  Gains  Losses  Fair Value 
     (In thousands)    
 
U.S. Treasury and agency securities $583,979  $5,839  $1,257  $588,561 
Obligations of states and political subdivisions  749,225   1,993   2,824   748,394 
U.S. commercial paper, corporate bonds and medium-term notes  382,054   141   14,903   367,292 
Other debt securities  255,777   535   11,507   244,805 
Bank certificate of deposit  342   —   2   340 
                 
Total fixed income securities  1,971,377   8,508   30,493   1,949,392 
Publicly traded equity securities  29,165   —   17,205   11,960 
Equity investments in privately-held companies  94,748   —   —   94,748 
                 
Total $2,095,290  $8,508  $47,698  $2,056,100 
                 
 
Cash and cash equivalents included investments in debt and other securities of $228 million at October 25, 2009 and $224 million at October 26, 2008 and $159 million at October 28, 2007.2008. Other debt securities consist primarily of investment grade assetasset-backed and mortgage backedmortgage-backed securities.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Contractual maturities of investments at October 26, 200825, 2009 were as follows:
 
                
   Estimated
    Estimated
 
 Cost Fair Value  Cost Fair Value 
 (In thousands)  (In thousands) 
Due in one year or less $580,756  $580,004  $613,452  $617,153 
Due after one through three years  695,103   689,591 
Due after three years  441,407   436,616 
Due after one through five years  834,091   850,631 
Due after five years  8,274   8,868 
No single maturity date*  378,024   349,889   203,384   213,862 
          
 $2,095,290  $2,056,100  $1,659,201  $1,690,514 
          
 
 
*Securities with no single maturity date include publicly traded and privately held equity securities, mortgage-asset and asset-backedmortgage-backed securities.
 
The following table provides the gross unrealized losses and the fair market value of Applied’s investments with unrealized losses that are not deemed to beother-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 25, 2009.
                         
  In Loss Position for
  In Loss Position for
    
  Less Than 12 Months  12 Months or Greater  Total 
     Gross
     Gross
     Gross
 
     Unrealized
     Unrealized
     Unrealized
 
  Fair Value  Losses  Fair Value  Losses  Fair Value  Losses 
        (In thousands)       
 
U.S. Treasury and agency securities $140,553  $170  $2,587  $—  $143,140  $170 
Obligations of states and political subdivisions  4,019   —   —   —   4,019   — 
U.S. commercial paper, corporate bonds and medium-term notes  111,211   195   14,909   86   126,120   281 
Other debt securities  13,730   73   14,114   318   27,844   391 
                         
Total $269,513  $438  $31,610  $404  $301,123  $842 
                         
At October 26, 2008,25, 2009, Applied had a gross unrealized loss of $48$1 million due to a decrease in the fair market value of certain fixed-rate debt and equity securities as a result of the recent turmoil in the global financial markets.fixed income securities. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include: the length of time and extent to which fair market value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and Applied’s abilitywhether it is more likely than not that Applied will be required to holdsell the investment for a period of time sufficientsecurity prior to allow for any anticipated recovery in fair market value.recovery. Generally, the contractual terms of the investments do not permit settlement at prices less than the amortized cost of the investments. In fiscal 2009, Applied recognized an impairment of its marketable securities in the amount of $2 million. Applied has determined that the gross unrealized losses on its investments at October 26, 200825, 2009 are temporary in nature. Accordingly, Applied does not consider the investments to beother-than-temporarily impaired at October 26, 2008, as it has the ability and intent to hold the investments for a period of time that may be sufficient for an anticipated recovery in fair market value. During fiscal 2008, Applied recorded an immaterial amount of impairment charges on its investment portfolio.


63

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides the gross unrealized losses and the fair market value of Applied’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 26, 2008.
                         
  In Loss Position for
  In Loss Position for
    
  Less Than 12 Months  12 Months or Greater  Total 
     Gross
     Gross
     Gross
 
     Unrealized
     Unrealized
     Unrealized
 
  Fair Value  Losses  Fair Value  Losses  Fair Value  Losses 
        (In thousands)       
 
Obligations of states and political subdivisions $284,476  $2,824  $—  $—  $284,476  $2,824 
U.S. Treasury and agency securities  168,649   1,256   2,655   1   171,304   1,257 
U.S. commercial paper, corporate bonds and medium-term notes  243,438   12,511   43,945   2,392   287,383   14,903 
Other debt securities  169,509   7,815   35,206   3,692   204,715   11,507 
Bank certificate of deposit  340   2   —   —   340   2 
Publicly traded equity securities  6,810   8,607   5,150   8,598   11,960   17,205 
                         
  $873,222  $33,015  $86,956  $14,683  $960,178  $47,698 
                         
25, 2009.
 
Applied manages its cash equivalents and investments, excluding strategic investments, as a single portfolio of highly marketable securities that is intended to be available to meet Applied’s current cash requirements. For fiscal 2009, gross realized gains on sales of investments were $9 million, and gross realized losses were $10 million. For fiscal 2008, gross realized gains on sales of investments were $13 million, and gross realized losses were $15 million. For fiscal 2007, gross realized gains on sales of investments were $2 million, and gross realized losses were $2 million. For


64

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On October 27, 2008, Applied adopted authoritative guidance for fair value measurements and the fair value option for financial assets and liabilities. This authoritative guidance defines fair value, establishes a framework for measuring fair value and enhances disclosure requirements for fair value measurements. Fair value is defined under this authoritative guidance as the exchange price that would be received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under this guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. This authoritative guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, which may be used to measure fair value:
• Level 1 — Quoted prices in active markets for identical assets or liabilities;
• Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Applied’s investments are comprised primarily of debt securities that are classified asavailable-for-sale and recorded at their fair value. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.
In general, investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of October 25, 2009, a substantial majority of Applied’savailable-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.
Unrealized gains and temporary losses on investments classified asavailable-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.


65

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Assets/Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of October 25, 2009:
                 
  Level 1  Level 2  Level 3  Total 
     (In thousands)    
 
Assets                
Money market funds $1,235,254  $—  $—  $1,235,254 
U.S. Treasury and agency securities  145,166   516,304   —   661,470 
Obligations of states and political subdivisions  —   427,237   —   427,237 
U.S. commercial paper, corporate bonds and medium-term notes  —   387,945   —   387,945 
Other debt securities  —   104,232   —   104,232 
Publicly traded equity securities  19,011   —   —   19,011 
Foreign exchange derivative assets  —   2,173   —   2,173 
                 
Total $1,399,431  $1,437,891  $—  $2,837,322 
                 
Liabilities                
Foreign exchange derivative liabilities $—  $(1,678) $—  $(1,678)
                 
Total $—  $(1,678) $—  $(1,678)
                 
During fiscal 2006, gross realized gains2009, Level 3 assets consisted of asset-backed and mortgage-backed securities, which values were based on salesnon-binding, broker-provided price quotes and may not have been corroborated by observable market data. The following table presents the changes in Level 3 instruments for the fiscal year ended October 25, 2009:
     
  Level 3 
  (In thousands) 
 
Balance, October 26, 2008 $13,100 
Total realized and unrealized losses:    
Included in earnings  (1,856)
Included in other comprehensive loss  (1,152)
Purchases, sales, and maturities  (9,606)
Transfers out of Level 3, net  (486)
     
Balance, October 25, 2009 $— 
     
Financial Assets/Liabilities Measured at Fair Value on a Non-recurring Basis
Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed forother-than-temporary impairment when an event or circumstance indicates that another-than-temporary decline in value may have occurred. If Applied determines that another-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled $91 million at October 25, 2009, of which $52 million of investments were $5accounted for under the cost method of accounting and $39 million of investments had been measured at fair value on a non-recurring basis during fiscal 2009 due to another-than-temporary decline in value. The following table presents the balance of equity securities at October 25, 2009 that had been measured at fair value on a non-recurring


66

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
basis, using the process described above, and the impairment charges recorded during the twelve months then ended:
                 
           Total
 
           Impairment
 
  Level 1  Level 2  Level 3  for 2009 
     (In thousands)    
 
Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2009 $—  $—  $39,250  $17,529 
                 
Impairments associated with financial assets for fiscal 2009 totaled $84 million and gross realized losses were $28 million, principally attributable toconsisted of the salefollowing: equity method investment in Sokudo Co., Ltd., a Japanese joint venture company, $45 million; publicly traded equity securities, $20 million; equity investments in privately-held companies, $17 million; and marketable securities of investments to fund the accelerated stock buyback program discussed in Note 7.$2 million.
 
Derivative Financial Instruments
 
Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or accounts payable and accrued expenses.
 
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel and Swiss francs. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.
 
Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income/(loss)income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. AmountsThe majority of the after-tax net income or loss related to derivative instruments included in accumulated


64

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other comprehensive income/(loss)AOCI at October 26, 2008 will generally25, 2009 is expected to be reclassified into earnings within 2412 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness and are recognized promptly in cost of products sold and general and administrative expenses. The change in option and forward time value was not material for fiscal 2008, 2007 or 2006.earnings. If the transaction being hedged failsis no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in general and administrative expenses. The amountsamount recognized due to anticipated transactions failingdiscontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was $25 million for the fiscal 2009. The amount recognized due to discontinuance of cash flow hedges that were probable not materialto occur by the end of the originally specified time period was not significant for all periods presented.fiscal 2008 or 2007.
 
Forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged.


67

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair values of derivative instruments were as follows:
             
  October 25, 2009 
  Asset Derivatives  Liability Derivatives 
  Balance Sheet
    Balance Sheet
   
  Location Fair Value  Location Fair Value 
  (In thousands) 
 
Derivatives Designated as Hedging Instruments 
            
Foreign exchange contracts Other current
assets		 $1,811  Accounts payable
and accrued
expenses		 $1,225 
             
Derivatives Not Designated as Hedging Instruments 
            
Foreign exchange contracts Other current
assets		 $362  Accounts payable
and accrued
expenses		 $453 
             
Total derivatives   $2,173    $1,678 
             
The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the fiscal year ended October 25, 2009 was as follows:
                 
  2009 
  Effective Portion  Ineffective Portion and Amount Excluded from Effectiveness Testing 
     Location of Gain
 Gain or (Loss)
  Location of Gain
   
  Gain or (Loss)
  or (Loss)
 Reclassified from
  or (Loss)
 Gain or (Loss)
 
  Recognized in
  Reclassified from
 AOCI into
  Recognized in
 Recognized in
 
  AOCI  AOCI into Income Income  Income Income 
  (In thousands) 
 
Derivatives in Cash Flow Hedging Relationships 
                
Foreign exchange contracts $(3,467) Cost of products
sold		 $(11,676) Cost of products
sold		 $(3,352)
Foreign exchange contracts  —  General and
administrative		  (5,511) General and
administrative		  23,582 
Foreign exchange contracts  —  Research,
development and
engineering		  (327) Research,
development and
engineering		  — 
                 
Total $(3,467)   $(17,514)   $20,230 
                 
       
  2009 
  Location of Gain or
 Amount of Gain or
 
  (Loss) Recognized
 (Loss) Recognized
 
  in Income in Income 
 
Derivatives Not Designated as Hedging Instruments 
      
Foreign exchange contracts General and
administrative		 $(9,848)
       
Total   $(9,848)
       


68

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Derivative-related activity in accumulated other comprehensive income/(loss),loss, net of taxes, was as follows:
 
         
  2008  2007 
  (In thousands) 
 
Unrealized gain/(loss) on derivative instruments at beginning of period $(1,409) $4,318 
Increase/(decrease) in fair value of derivative instruments  11,899   (6,012)
(Gain)/loss reclassified into earnings, net  (2,451)  285 
         
Unrealized gain/(loss), net, on derivative instruments at end of period $8,039  $(1,409)
         
         
  2009  2008 
  (In thousands) 
 
Unrealized gain (loss) on derivative instruments at beginning of period $8,039  $(1,409)
Increase (decrease) in fair value of derivative instruments  (10,591)  11,899 
(Gain) loss reclassified into earnings, net  2,862   (2,451)
         
Unrealized gain, net, on derivative instruments at end of period $310  $8,039 
         
The $25 million recognized in fiscal 2009, due to discontinuance of cash flow hedges, has been presented on a net basis in the accumulated other comprehensive loss activity above.
Credit Risk Contingent Features
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position was immaterial as of October 25, 2009.
Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.
For further details, see Note 9 of Notes to Consolidated Condensed Financial Statements.
 
Fair Value of Financial Instruments
 
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. At October 25, 2009, the carrying amount of long-term debt was $202 million and the estimated fair value was $216 million. At October 26, 2008, the carrying amount of long-term debt was $203 million and the estimated fair value was $198 million. At October 28, 2007, the carrying amount of long-term debt was $205 million and the estimated fair value was $226 million. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues.


6569

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Note 34  Balance Sheet Detail
 
                
 2008 2007  2009 2008 
 (In thousands)  (In thousands) 
Inventories
                
Customer service spares $526,825  $500,173  $263,688  $526,825 
Raw materials  381,457   201,055   351,824   381,457 
Work-in-process  665,123   230,244   667,484   665,123 
Finished goods*  413,612   381,765   344,461   413,612 
          
 $1,987,017  $1,313,237  $1,627,457  $1,987,017 
          
Property, Plant and Equipment, Net
                
Land and improvements $226,906  $218,181  $228,057  $226,906 
Buildings and improvements  1,158,097   1,253,322   1,164,384   1,158,097 
Demonstration and manufacturing equipment  695,172   639,640   654,779   695,172 
Furniture, fixtures and other equipment  580,691   563,373   713,505   580,691 
Construction in progress  171,086   107,688   146,232   171,086 
          
Gross property, plant and equipment  2,831,952   2,782,204   2,906,957   2,831,952 
Accumulated depreciation  (1,737,752)  (1,730,962)  (1,816,524)  (1,737,752)
          
 $1,094,200  $1,051,242  $1,090,433  $1,094,200 
          
Accounts Payable and Accrued Expenses
                
Customer deposits $797,440  $225,632 
Accounts payable  588,255   455,894  $477,148  $588,255 
Deferred revenue  407,512   377,458 
Compensation and employee benefits  370,409   491,411   134,949   370,409 
Installation and warranty  163,629   184,271 
Warranty  117,537   142,846 
Dividends payable  80,455   79,846 
Other accrued taxes  121,620   67,962   36,954   121,620 
Dividends payable  79,846   83,142 
Restructuring reserve  20,447   23,193   31,581   20,447 
Other  221,932   312,553   182,878   221,932 
          
 $2,771,090  $2,221,516  $1,061,502  $1,545,355 
          
Customer Deposits and Deferred Revenue
        
Customer deposits $564,412  $797,440 
Deferred revenue  299,868   428,295 
     
 $864,280  $1,225,735 
     
 
 
*Included in finished goods inventory is $133 million at October 25, 2009 and $165 million at October 26, 2008 and $168 million at October 28, 2007 of newly- introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria, as set forth in Note 1.
Note 5  Goodwill, Purchased Technology and Other Intangible Assets
Goodwill and Purchased Intangible Assets
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed 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. For goodwill, Applied performs a two-step


6670

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Goodwill, Purchased Technologyimpairment test. In the first step, Applied compares the estimated fair value of each reporting unit to its carrying value. Applied’s reporting units are consistent with the reportable segments identified in Note 12, based on the manner in which Applied operates its business and Other Intangible Assetsthe nature of those operations. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. Under the income approach, Applied calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, Applied estimates the fair value based on market multiples of revenue or earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, as if Applied had acquired the reporting unit in a business combination, with the fair value of the reporting unit being the “purchase price”. The excess of the “purchase price” over the carrying amounts assigned to assets and liabilities representing the implied fair value of goodwill. If Applied determined that the carrying value of a reporting unit’s goodwill exceeded its implied fair value, Applied would record an impairment loss equal to the difference.
 
Details of unamortized intangible assets were as follows:
                         
  2008  2007 
     Other
        Other
    
     Intangible
        Intangible
    
  Goodwill  Assets  Total  Goodwill  Assets  Total 
  (In thousands) 
 
Gross carrying amount $1,220,543  $17,860  $1,238,403  $1,052,280  $17,860  $1,070,140 
Accumulated amortization  (45,870)  —   (45,870)  (45,870)  —   (45,870)
                         
  $1,174,673  $17,860  $1,192,533  $1,006,410  $17,860  $1,024,270 
                         
Goodwill and unamortized intangible assets are not amortized but are subject to annual reviews for impairment, which Applied performs during the fourth quarter of each fiscal year. Applied conducted these impairment tests in the fourth quarter of fiscal 2008 and fiscal 2007,2009, and the results of these tests indicated that Applied’s goodwill and unamortizedpurchased intangible assets with indefinite useful lives were not impaired.
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to a reporting unit as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Details of indefinite-lived intangible assets were not impaired. Goodwill and unamortized intangible assets are also subject to review for impairment when circumstances or events occur during the year that indicate that the assets may be impaired. as follows:
                         
  2009  2008 
     Other
        Other
    
     Intangible
        Intangible
    
  Goodwill  Assets  Total  Goodwill  Assets  Total 
  (In thousands) 
 
Gross carrying amount $1,216,802  $17,860  $1,234,662  $1,220,543  $17,860  $1,238,403 
Accumulated amortization  (45,870)  —   (45,870)  (45,870)  —   (45,870)
                         
  $1,170,932  $17,860  $1,188,792  $1,174,673  $17,860  $1,192,533 
                         
From October 28, 2007 to October 26, 2008 the change into October 25, 2009, goodwill was $168decreased by $4 million primarily due to the acquisition of Baccini S.p.A. (Baccini), which was completedan adjustment in the second quarterpurchase price allocation of fiscal 2008, and thean acquisition as a result of certaina change in estimate of Applied’s ability to utilize tax net assets of Edwards Vacuum, Inc. (Edwards), which was completed in the first quarter of fiscal 2008 (see Note 12).operating loss carryforwards associated with this acquisition. Other intangible assets that are not subject to amortization consist primarily of a trade name associated with the Metron Technology N.V. acquisition reported in the Applied Global Services segment.name. As of October 26, 2008 goodwill and unamortized25, 2009, indefinite-lived intangible assets by reportable segment was:were: Energy and Environmental Solutions, $657$654 million; Silicon, $224 million; Applied Global Services, $196$195 million; and Display, $116 million.
Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.
Applied evaluates long-lived assets, such as property, plant and equipment, and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an asset


71

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
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. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.
 
Details of amortized intangible assets were as follows:
 
                                                
 2008 2007  2009 2008 
   Other
     Other
      Other
     Other
   
 Purchased
 Intangible
   Purchased
 Intangible
    Purchased
 Intangible
   Purchased
 Intangible
   
 Technology Assets Total Technology Assets Total  Technology Assets Total Technology Assets Total 
     (In thousands)      (In thousands) 
Gross carrying amount $548,029  $329,629  $877,658  $518,042  $224,253  $742,295  $554,920  $329,629  $884,549  $548,029  $329,629  $877,658 
Accumulated amortization  (369,183)  (137,906)  (507,089)  (340,527)  (46,450)  (386,977)  (400,093)  (195,900)  (595,993)  (369,183)  (137,906)  (507,089)
                          
 $178,846  $191,723  $370,569  $177,515  $177,803  $355,318  $154,827  $133,729  $288,556  $178,846  $191,723  $370,569 
                          
 
Purchased technology and other intangible assets are amortized over their estimated useful lives of 1 to 15 years using the straight-line method. AmortizationAggregate amortization expense was $89 million, $121 million $57 million and $31$57 million for fiscal 2009, 2008 2007 and 2006,2007, respectively. As of October 26, 2008,25, 2009, future estimated amortization expense is expected to be $87 million for fiscal 2009, $64$65 million for fiscal 2010, $50$52 million for fiscal 2011, $47 million for fiscal 2012, $43 million for fiscal 2013, $39 million for fiscal 2014, and $80$42 million thereafter. As of October 26, 2008,25, 2009, amortized intangible assets by reportable segment were: Energy and Environmental Solutions, $280$211 million; Applied Global Services, $49$42 million; Display, $37$29 million; and Silicon, $4$7 million.
 
Note 46  Borrowing Facilities
 
At October 26, 2008, Applied hadhas credit facilities for unsecured borrowings in various currencies of up to $1.2 billion, of which $1.0 billion is comprised of a5-year revolving credit agreement with a group of banks that is scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at October 26, 2008.25, 2009. In May 2009, Applied amended certain terms of this credit agreement, including (i) replacing the funded-debt-to-adjusted-earnings ratio financial covenant with a minimum liquidity covenant and a funded-debt-to-total-capital ratio covenant and (ii) increasing the facility fee and applicable interest rate margins on advances. Remaining credit facilities in the amount of approximately $165 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 this agreementany of the above credit facilities at October 26, 2008. Of the remaining credit facilities, $152 million are with Japanese banks at rates indexed to their25, 2009.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
prime reference rate denominated in Japanese yen. No amounts were outstanding under these credit facilities at October 26, 2008.
 
Note 57  Long-Term Debt
 
Long-term debt outstanding at the end of the fiscal year was as follows:
 
         
Fiscal Year
 2008  2007 
  (In thousands) 
 
1.61% installment note payable to Tokyo Electron Ltd., face amount $1,800, due September 2008, interest payable March 17, June 17, September 17 and December 17 $—  $1,649 
Japanese debt, 3.00%, maturing 2008 – 2011  2,644   3,193 
7.125% unsecured senior notes due 2017, interest payable April 15 and
October 15		  200,000   200,000 
         
   202,644   204,842 
Current portion  (1,068)  (2,561)
         
  $201,576  $202,281 
         
         
Fiscal Year
 2009  2008 
  (In thousands) 
 
Japanese debt, 3.00%, maturing through 2011 $1,894  $2,644 
7.125% unsecured senior notes due 2017, interest payable April 15 and October 15  200,000   200,000 
         
   201,894   202,644 
Current portion  (1,240)  (1,068)
         
  $200,654  $201,576 
         
 
Applied has debt agreements that contain financial and other covenants. These covenants require Applied to maintain certain minimum financial ratios. At October 26, 2008,25, 2009, Applied was in compliance with all such covenants. Aggregate debt maturities at October 26, 200825, 2009 were: $1 million in fiscal 2009,2010, $1 million in fiscal 2010, $0.5 million in fiscal 2011, and $200 million thereafter.
 
Note 68  Restructuring and Asset Impairments
 
During the first quarter of fiscal 2009, Applied announced a restructuring program to reduce its global workforce by approximately 1,800 positions. During the second quarter of fiscal 2009, Applied expanded the scope of the restructuring program by approximately 200 positions. During fiscal 2009, Applied recognized restructuring and asset impairment charges of $156 million, primarily consisting of $143 million in restructuring charges associated with this program and $15 million in asset impairments. The restructuring charges consisted of employee-related costs to reduce the Company’s workforce through a combination of attrition, voluntary separation and other workforce reduction programs. During fiscal 2008, Applied recognized restructuring charges of $40 million, of which $29 million was associated with a global cost reduction plan announced in fiscal 2008, and $11 million with a plan approvedannounced in fiscal 2007. During fiscal 2007, Applied recognized restructuring and asset impairment charges of $26 million, including $17million. The fiscal 2007 charge consisted of $21 million in restructuring charges and $9 million in asset impairments. Fiscal 2007 restructuring and asset impairment charges included $30 millionimpairments, associated with the decision to cease development of beamline implant products, offset by $3 million in adjustments associated with subsequent sales of properties held for sale. During fiscal 2006, Applied recognizedadjustment to restructuring and asset impairment charges of $212 million, including $128 million in asset impairments and $92 million in restructuring charges primarily associated with the closure of its Hayward, California facility, offset by $8 million in adjustments associated with realignment programs of prior years.
On January 15, 2008, Applied announced a global cost reduction plan (the Plan) that primarily affected its Silicon and Applied Global Services segments and related support organizations. As part of the Plan, Applied has made reductions to its global workforce through a combination of job elimination and attrition. In fiscal 2008, Applied recorded restructuring charges of $29 million, consisting primarily of employee termination costs to reduce its workforce. The affected employees were based in North America, Europe and Asia, and represented multiple functions.reserves.
 
Changes in restructuring reserves related to severance under the Plan forrestructuring program announced in the first quarter of fiscal 20082009 were as follows:
 
    
 Severance 
 (In thousands) 
    
Provision for restructuring reserves $38,481  $144,901 
Consumption of reserves  (24,795)  (116,471)
Adjustment of restructuring reserves  (9,335)  (2,190)
      
Balance, October 26, 2008 $4,351 
Balance, October 25, 2009 $26,240 
      
On February 9, 2007, the Board of Directors of Applied approved a plan (the Implant Plan) to cease development of beamline implant products for semiconductor manufacturing and curtail the operations of Applied’s Implant group based in Horsham, England. Under the Implant Plan, Applied closed its research and


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
development and manufacturing operations in Horsham in October 2007. The Implant group operated in the Silicon segment and the results of its operations were not material to the segment’s financial position or results of operations.
Changes in restructuring reserves for fiscal 2009, 2008, and 2007 related to the Implant Plan for fiscal 2007other restructuring plans and 2008facilities realignment programs initiated in prior periods were as follows:
 
                        
 Severance Facilities Total  Severance Facilities Total 
   (In thousands)    (In thousands) 
Balance, October 29, 2006 $—  $24,731  $24,731 
Provision for restructuring reserves $19,992  $1,105  $21,097   19,992   1,105   21,097 
Consumption of reserves  (10,902)  (285)  (11,187)  (10,902)  (8,653)  (19,555)
Adjustment of restructuring reserves  —   (3,732)  (3,732)
Foreign currency changes  649   2   651   649   3   652 
              
Balance, October 28, 2007  9,739   822   10,561   9,739   13,454   23,193 
       
Provision for fiscal 2008  189   11,399   11,588 
Provision for restructuring reserves  38,670   11,399   50,069 
Consumption of reserves  (32,174)  (8,428)  (40,602)
Adjustment of restructuring reserves  (398)  —   (398)  (9,733)  —   (9,733)
Consumption of reserves  (7,379)  (2,238)  (9,617)
Foreign currency changes  (800)  (1,680)  (2,480)  (800)  (1,680)  (2,480)
              
Balance, October 26, 2008 $1,351  $8,303  $9,654   5,702   14,745   20,447 
Provision for restructuring reserves  —   114   114 
Consumption of reserves  (4,794)  (6,074)  (10,868)
Adjustment of restructuring reserves  (613)  (3,469)  (4,082)
Foreign currency changes  (182)  (88)  (270)
              
Balance, October 25, 2009 $113  $5,228  $5,341 
       
 
During the first quarter of fiscal 2006, Applied’s Board of Directors approved a plan to disinvest a portion of Applied’s real estate and facilities portfolio (the Disinvestment Plan). Properties with an estimated fair value of $56 million were reported as assets held-for-sale and reclassified from property, plant and equipment on the Consolidated Balance Sheet. During fiscal 2006, Applied recorded an asset impairment charge of $124 million to write down the following properties to estimated fair value: (1) facilities in Narita, Japan, Chunan, Korea, Hillsboro, Oregon, and Danvers, Massachusetts; and (2) 26 acres of unimproved land in Hillsboro, Oregon. During fiscal 2006, Applied sold the Danvers facility for net proceeds of $16 million and recognized a gain of $4 million. During fiscal 2007, Applied sold the Hillsboro, Chunan, and Narita facilities and the Hillsboro land for total net proceeds of $38 million and recognized a gain of $3 million. Also in fiscal 2006, as part of the Disinvestment Plan, Applied recorded lease termination charges in the amount of $89 million, related to the closure of its leased Hayward, California facility.
Changes in restructuring reserves related to facilities realignment programs for fiscal 2006, 2007 and 2008 were as follows:
     
Balance, October 30, 2005 $69,482 
Provision for fiscal 2006  95,829 
Consumption of reserves  (128,490)
Adjustment of restructuring reserves  (12,090)
     
Balance, October 29, 2006  24,731 
     
Consumption of reserves  (8,368)
Adjustment of restructuring reserves  (3,732)
Foreign currency changes  1 
     
Balance, October 28, 2007  12,632 
     
Consumption of reserves  (6,190)
     
Balance, October 26, 2008 $6,442 
     


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 79  Stockholders’ Equity
 
Accumulated Other Comprehensive Income/(Loss)Loss
 
See the Consolidated Statements of Stockholders’ Equity for the components of comprehensive income/income (loss). Components of accumulated other comprehensive income/(loss), net of taxes,loss, on an after-tax basis where applicable, were as follows:
 
                
Fiscal Year
 2008 2007  2009 2008 
 (In thousands)  (In thousands) 
Unrealized gain/(loss) on investments $(24,984) $16,755 
Unrealized gain/(loss) on derivative instruments qualifying as cash flow hedges  8,039   (1,409)
Pension liability  (19,672)  (12,232) $(32,164) $(19,672)
Retiree medical benefits  734   (1,132)  15   734 
Unrealized gain (loss) on investments, net  19,972   (24,984)
Unrealized gain on derivative instruments qualifying as cash flow hedges  310   8,039 
Cumulative translation adjustments  9,313   9,371   10,187   9,313 
          
 $(26,570) $11,353  $(1,680) $(26,570)
          
For further details on derivative instruments, see Note 3 of the Notes to Consolidated Condensed Financial Statements.
 
Stock Repurchase Program
 
Since March 1996, Applied has systematically repurchased shares of its common stock in the open market. In MarchOn September 15, 2006, theApplied’s Board of Directors approved a stock repurchase program for up to $5.0 billion in repurchases over the next three years ending in March 2009. Pursuant to this authorization, on September 18, 2006, Applied entered into accelerated stock buyback agreements with Goldman, Sachs & Co. (Goldman Sachs), under which Applied agreed to purchase from Goldman Sachs outstanding shares of Applied common stock for an initial purchase price of $2.5 billion. Under the agreements, Applied purchased 145 million shares of Applied common stock on September 18, 2006 at a price per share of $17.20, and Goldman Sachs agreed to purchase an equivalent number of shares in the open market over the following four months. At the end of the four month period, Applied was entitled to or subject to a price adjustment based upon the volume weighted average price of Applied common stock during the purchase period that could be settled, at Applied’s option, in cash or shares of Applied common stock. On January 24, 2007, Applied settled the price adjustment by payment of $132 million in cash to Goldman Sachs, resulting in an adjusted price per share of $18.08. The repurchase was funded with Applied’s existing cash and investments and reported as treasury stock.
On September 15, 2006, the Board of Directors approved a new stock repurchase program for up to $5.0 billion in repurchases over the next three years ending in September 2009, of which authorization for $2.3 billion of repurchases remained as of October 26, 2008.2009. Under this authorization, Applied implemented a systematic stock repurchase program and may also makemade supplemental repurchases of its common stock repurchases from time to time in the open market, depending on market conditions, stock price and other factors.factors, for a total of $2.7 billion. In November 2008, Applied announced that it was suspending stock repurchases in light of uncertain


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
global economic and market conditions. In fiscal 2009, prior to such suspension, Applied repurchased 1,942,000 shares of its common stock at an average price of $11.80 per share for a total cash outlay of $23 million. In fiscal 2008, there wereApplied repurchased 83,163,000 shares of Appliedits common stock repurchased at an average price of $18.04 per share.share for a total cash outlay of $1.5 billion. In fiscal 2007, there wereApplied repurchased 60,561,000 shares repurchasedof its common stock at an average price of $19.81 per share.share for a total cash outlay of $1.3 billion.
 
Dividends
 
During fiscal 2009, Applied’s Board of Directors declared four quarterly cash dividends in the amount of $0.06 per share each quarter. The fourth quarterly cash dividend declared in fiscal 2009 was paid on December 3, 2009 to stockholders of record as of November 12, 2009. During fiscal 2008, Applied’s Board of Directors declared four quarterly cash dividends in the amount of $0.06 per share each. The fourth quarterly cash dividend declared in fiscal 2008 was paid on December 4, 2008, to stockholders of record as of November 13, 2008. During fiscal 2007, Applied’s Board of Directors declared one quarterly cash dividend in the amount of $0.05 per share and three quarterly cash dividends in the amount of $0.06 per share each. During fiscal 2006, Applied’s Board of DirectorsDividends declared one quarterly cash dividend in the amount of $0.03 per share and three quarterly cash dividends in the amount of $0.05 per share each. Dividends paid during fiscal 2009, 2008 2007 and 20062007 amounted to $320 million, $325 million $306 million and $251$306 million, respectively. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 that cash dividends are in the best interest of Applied’s stockholders.
 
Note 810  Employee Benefit Plans
 
Stock Options
 
Applied grants options to employees and consultants to purchase shares of its common stock to employees and consultants, at future dates, at the fair market value on the date of grant. Most options are scheduled to vest over four years, and expire no later than seven years from the grant date. There were 151,809,000 shares available for grant at October 25, 2009, 167,289,000 shares available for grant at October 26, 2008, and 156,322,624 shares available for grant at October 28, 2007, and 144,582,000 shares available for grant at October 29, 2006.2007. Stock option activity was as follows:
 
                                                
 2008 2007 2006  2009 2008 2007 
   Weighted
   Weighted
   Weighted
    Weighted
   Weighted
   Weighted
 
   Average
   Average
   Average
    Average
   Average
   Average
 
   Exercise
   Exercise
   Exercise
    Exercise
   Exercise
   Exercise
 
 Shares Price Shares Price Shares Price  Shares Price Shares Price Shares Price 
   (In thousands, except per share amounts)    (In thousands, except per share amounts) 
Outstanding, beginning of year  94,901  $17.81   163,214  $18.83   200,007  $18.67   60,757  $17.71   94,901  $17.81   163,214  $18.83 
Granted and assumed  7  $19.38   311  $17.98   12,174  $16.92   24,514  $8.58   7  $19.38   311  $17.98 
Exercised  (19,004) $17.27   (46,885) $17.86   (18,498) $15.34   (797) $11.44   (19,004) $17.27   (46,885) $17.86 
Canceled  (15,147) $18.86   (21,739) $25.29   (30,469) $19.14   (11,373) $17.73   (15,147) $18.86   (21,739) $25.29 
              
Outstanding, end of year  60,757  $17.71   94,901  $17.81   163,214  $18.83   73,101  $14.72   60,757  $17.71   94,901  $17.81 
              
Exercisable, end of year  57,671  $17.73   83,178  $17.84   130,065  $19.59   49,727  $17.53   57,671  $17.73   83,178  $17.84 


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table summarizes information with respect to options outstanding and exercisable at October 26, 2008:25, 2009:
 
                                                        
 Options Outstanding Options Exercisable  Options Outstanding Options Exercisable 
     Weighted
              Weighted
         
   Weighted
 Average
     Weighted
      Weighted
 Average
     Weighted
   
   Average
 Remaining
 Aggregate
   Average
 Aggregate
    Average
 Remaining
 Aggregate
   Average
 Aggregate
 
Range of
 Number of
 Exercise
 Contractual
 Intrinsic
 Number of
 Exercise
 Intrinsic
  Number of
 Exercise
 Contractual
 Intrinsic
 Number of
 Exercise
 Intrinsic
 
Exercise Prices
 Shares Price Life Value Shares Price Value  Shares Price Life Value Shares Price Value 
 (In thousands)   (In years) (In thousands) (In thousands)   (In thousands)  (In thousands)   (In years) (In thousands) (In thousands)   (In thousands) 
$0.01 — $4.99  8  $2.48   1.07  $73   8  $2.48  $73 
$5.00 — $9.99  58  $6.67   3.19   274   58  $6.67   274 
$0.01 — $9.99  23,171  $8.58   4.33  $101,311   241  $8.27  $1,125 
$10.00 — $19.99  41,635  $15.75   2.78   236   38,549  $15.61   235   35,123  $15.72   1.82   7,573   34,679  $15.71   7,516 
$20.00 — $29.99  19,047  $22.03   1.97   —   19,047  $22.03   —   14,798  $21.93   1.14   —   14,798  $21.93   — 
$30.00 — $59.99  9  $41.66   1.34   —   9  $41.66   —   9  $41.66   0.35   —   9  $41.66   — 
                  
  60,757  $17.71   2.53  $583   57,671  $17.73  $582   73,101  $14.72   2.48  $108,884   49,727  $17.53  $8,641 
                  
Options exercisable and expected to become exercisable  59,784  $17.71   2.47  $583               70,465  $14.93   2.41  $97,910             
 
Restricted Stock Units
 
Applied grants restricted stock units (referred(also referred to as performance shares“performance shares” under the Applied Materials, Inc. Employee Stock Incentive Plan). Restricted stock units typically vest over three to four years, subject to the grantee’s continued service to Applied on each vesting date.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of the changes in restricted stock units outstanding under Applied’s equity compensation plans during fiscal 20082009 is presented below:
 
                                
   Weighted
 Weighted
      Weighted
 Weighted
   
   Average
 Average
 Aggregate
    Average
 Average
 Aggregate
 
   Grant Date
 Remaining
 Intrinsic
    Grant Date
 Remaining
 Intrinsic
 
 Shares Fair Value Contractual Term Value  Shares Fair Value Contractual Term Value 
 (In thousands, except per share amounts)  (In thousands, except per share amounts) 
Non-vested restricted stock units at October 28, 2007  18,597  $18.51   2.9 Years  $350,746 
Non-vested restricted stock units at October 26, 2008  16,394  $18.50   2.5 Years  $186,887 
Granted  5,808   18.22           3,775   10.46         
Vested  (6,381)  18.26           (6,366)  18.26         
Canceled  (1,630)  18.52           (1,855)  18.40         
      
Non-vested restricted stock units at October 26, 2008  16,394   18.50   2.5  $186,887 
Non-vested restricted stock units at October 25, 2009  11,948   15.95   2.4  $153,880 
      
Non-vested restricted stock units expected to vest  14,434   18.50   2.6  $164,544   10,446   16.37   2.4  $135,281 
 
EmployeesEmployee Stock Purchase PlanPlans
 
Applied sponsors two Employee Stock Purchase Plans (collectively, ESPP) for the benefit of United States (U.S.) and international employees, respectively. The U.S. plan is qualified under Section 423 of the Internal Revenue Code. Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of theApplied common stock at the beginning of the applicable offering period or at the end of each applicable purchase period. The ESPP provides for consecutive and overlappingEffective March 2, 2009, the length of offering periods under the ESPP was reduced to 6 months, from a maximum of up to 24 months in duration,duration. The incremental compensation cost associated with each offering period composed of four consecutive six-month purchase periods.this modification was insignificant. ESPP contributions are limited to a maximum of 10 percent of an employee’s eligible compensation, up to a maximum of $6,500 per six-month purchase period. ESPP participants are also limited to purchasing a maximum of 1,000 shares per purchase period. Shares issued under the ESPP were 6,920,000 for fiscal 2009, 4,617,000 for fiscal 2008, and 4,310,000 for fiscal 2007, and 4,065,000 for fiscal 2006.2007. At October 26, 2008,25, 2009, there were 71,742,00064,822,000 shares available for future issuance under the ESPP.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Employee Bonus Plans
 
Applied has various employee bonus plans. A discretionary bonus plan provides for the distribution of a percentage of pre-tax profits to Applied employees who are not eligible for other performance-based incentive plans, up to a maximum percentage of eligible compensation. Other plans award annual bonuses to Applied’s executives and other key contributors based on the achievement of profitabilityand/or other specified performance criteria. Applied also has agreements with key technical employees that provideThere were no charges to expense under these plans for additional compensation related to the success of new product development and achievement of specified profitability criteria.fiscal 2009. Charges to expense under these plans were $150 million for fiscal 2008 and $271 million for fiscal 2007 and $262 million for fiscal 2006.2007.
 
Employee Savings and Retirement Plan
 
Applied’s Employee Savings and Retirement Plan (401(k) Plan) is qualified under Sections 401(a) and (k) of the Internal Revenue Code. Eligible employees may make salary deferral andcatch-up contributions under the 401(k) Plan on a pre-tax basis. Applied matches a percentage of each participant’s salary deferral contributions with cash contributions. In general, these matching contributions become 20 percent vested at the end of an employee’s second year of service with Applied, and vest 20 percent per year of service thereafter, becoming fully vested at the end of six years of service. Participants may direct that funds held in their 401(k) Plan accounts, including any Applied matching contributions, be invested in any of the diversified investment funds available under the 401(k) Plan or in the Applied Materials, Inc. Common Stock Fund (Stock Fund), which invests solely in shares of Applied common stock. Effective June 21, 2007, the Stock Fund was converted into a non-leveraged employee stock ownership plan (within the meaning of Section 4975(e)(7) of the Internal Revenue Code) and, as a result,


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
participants have the option of specifying that any future cash dividends paid on shares held in the Stock Fund be either reinvested in the Stock Fund or distributed directly to them in cash no later than 90 days after the calendar year for which the dividends were paid. Applied’s matching contributions under this plan were approximately $24 million, net of $1 million in forfeitures, for fiscal 2009; $29 million, net of $2 million in forfeitures, for fiscal 2008,2008; and $28 million, net of $1 million in forfeitures, for fiscal 2007 and $27 million, net of $2 million in forfeitures, for fiscal 2006.2007.
 
Defined Benefit Pension Plans of Foreign Subsidiaries and Other Post-Retirement Benefits
 
Several of Applied’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Benefits under these plans are typically based on years of service and final average compensation levels. Applied uses August 31 as a measurement date. The plans are managed in accordance with applicable local statutes and practices. Applied deposits funds for certain of these plans with insurance companies, pension trustees, government-managed accounts,and/or accrues the expense for the unfunded portion of the benefit obligation on its consolidated financial statements. Applied’s practice is to fund the various pension plans in amounts sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities. Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed qualified plan assets. The differences between the aggregate projected benefit obligations and aggregate plan assets of these plans have been recorded as liabilities by Applied and are included in accrued expenses and other liabilities in the Consolidated Balance Sheets. In fiscal 2009, Applied changed the measurement date for its defined and postretirement benefit plan assets and obligations from an interim date to Applied’s fiscal year end.
 
On October 28, 2007, Applied implemented the recognition and disclosure provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158authoritative guidance that required Applied to recognize the funded status (the difference between the fair value of plan assets and the projected benefit obligations) of the defined benefit plan in the Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax, to measure the fair value of plan benefit obligations as of its fiscal year ending October 28, 2007 and to provide additional disclosures.
 
On January 1, 1999, Applied implemented a post-retirement plan that provides certain medical and vision benefits to eligible retirees who are at least age 55 and who have at least 10 years of service at their date of retirement. An eligible retiree may elect coverage for an eligible spouse or domestic partner who is not eligible for Medicare. Coverage under the plan generally ends for both the retiree and spouse or domestic partner upon becoming eligible for Medicare. As of October 26, 2008, Applied’s liability under this post-retirement plan, was $9 million which was included in other long-term liabilities in the Consolidated Balance Sheets.Sheets, was $11 million at October 25, 2009 and $9 million at October 26, 2008.


7377

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of the changes in benefit obligations and plan assets, which includes post-retirement benefits, for fiscal 20082009 and 20072008 is presented below.
 
                
 2008 2007  2009 2008 
 (In thousands, except percentages)  (In thousands, except percentages) 
Change in projected benefit obligation
                
Beginning projected benefit obligation $258,754  $231,557  $230,754  $258,754 
Service cost  15,546   16,513   13,604   15,546 
Interest cost  13,411   11,201   12,095   13,411 
Plan participants’ contributions  1,336   1,331   1,174   1,336 
Actuarial (gain)/loss  (14,673)  (17,087)
Actuarial loss (gain)  11,316   (14,673)
Curtailments, settlements and special termination benefits  (1,445)  (5,970)  (5,842)  (1,445)
Foreign currency exchange rate changes  (32,915)  20,361   21,789   (32,915)
Benefits paid  (9,345)  (9,573)  (5,496)  (9,345)
Plan amendments and business combinations  85   10,421   —   85 
          
Ending projected benefit obligation $230,754  $258,754  $279,394  $230,754 
          
Ending accumulated benefit obligation
 $203,247  $225,000  $253,934  $203,247 
          
Range of assumptions to determine benefit obligations
                
Discount rate  2.3% - 6.7%   2.3% - 6.3%   2.0% - 6.7%   2.3% - 6.7% 
Rate of compensation increase  2.0% - 6.0%   2.0% - 6.0%   2.0% - 6.0%   2.0% - 6.0% 
Change in plan assets
                
Beginning fair value of plan assets $118,061  $92,424  $97,578  $118,061 
Return on plan assets  (4,785)  6,276   2,608   (4,785)
Employer contributions  14,400   12,016   14,996   14,400 
Plan participants’ contributions  1,336   1,331   1,174   1,336 
Foreign currency exchange rate changes  (20,925)  8,846   5,642   (20,925)
Divestitures, settlements and business combinations  (1,164)  6,741   (6,895)  (1,164)
Benefits paid  (9,345)  (9,573)  (5,496)  (9,345)
          
Ending fair value of plan assets $97,578  $118,061  $109,607  $97,578 
          
Funded status $(133,176) $(140,693) $(169,787) $(133,176)
Employer contributions after the measurement date  1,204   1,163   —   1,204 
          
Net amount recognized $(131,972) $(139,530) $(169,787) $(131,972)
          
Amounts recognized in the consolidated balance sheets
                
Noncurrent asset $456  $897  $30  $456 
Current liability  (2,548)  (2,569)  (2,048)  (2,548)
Noncurrent liability  (129,880)  (137,858)  (167,769)  (129,880)
          
Total $(131,972) $(139,530) $(169,787) $(131,972)
          
Amounts recognized in accumulated other comprehensive income
        
Estimated amortization from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year
        
Actuarial loss $1,145  $694 
Prior service credit  (251)  (280)
Transition obligation  54   74 
     
Total $948  $488 
     
Amounts recognized in accumulated other comprehensive loss
        
Net actuarial loss $14,023  $20,817  $27,580  $14,023 
Prior service credit  (2,478)  (1,877)  (1,943)  (2,478)
Transition obligation  248   343   157   248 
          
Total $11,793  $19,283  $25,794  $11,793 
          
Plans with projected benefit obligations in excess of plan assets
                
Projected benefit obligation $223,746  $250,223  $270,425  $223,746 
Fair value of plan assets $90,245   108,794  $100,608  $90,245 
Plans with accumulated benefit obligations in excess of plan assets
                
Accumulated benefit obligation $181,980  $209,090  $237,174  $181,980 
Fair value of plan assets $82,367  $108,794  $89,443  $82,367 


7478

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
            
 2008 2007  2009 2008 
Plan assets — allocation
                
Equity securities  45%  60%  47%  45%
Debt securities  34%  34%  40%  34%
Real Estate  3%  2%
Cash  7%  4%  1%  7%
Real Estate  2%  1%
Other  12%  1%  9%  12%
On February 9, 2007, the Board of Directors of Applied approved a plan to cease development of beamline implant products for semiconductor manufacturing and curtail the operations of its Implant group based in Horsham, England (see Note 6). A reduction in force led to a curtailment loss of $629,000, which is included in restructuring and asset impairment expenses on the Consolidated Statement of Operations.
 
Applied’s investment strategy for its defined benefit plans is to invest assets in a prudent manner, maintaining well-diversified portfolios with the long-term objective of meeting the obligations of the plans as they come due. Asset allocation decisions are typically made by plan fiduciaries with input from Applied’s pension committee. Applied’s asset allocation strategy incorporates a sufficient equity exposure in order for the plans to benefit from the expected long-term outperformance of equities relative to the plans’ liabilities. Applied retains investment managers, where appropriate, to manage the assets of the plans. Performance of investment managers is monitored by plan fiduciaries with the assistance of local investment consultants. The investment managers make investment decisions within the guidelines set forth by plan fiduciaries. Risk management practices include diversification across asset classes and investment styles, and periodic rebalancing toward target asset allocation ranges. Investment managers may use derivative instruments for efficient portfolio management purposes. Plan assets do not include any of Applied’s own equity or debt securities.
 
A summary of the components of net periodic benefit costs and the weighted average assumptions used for net periodic benefit cost and benefit obligation calculations for fiscal 2009, 2008 2007 and 20062007 is presented below.
 
                        
 2008 2007 2006  2009 2008 2007 
 (In thousands, except percentages)  (In thousands, except percentages) 
Components of net periodic benefit cost
                        
Service cost $15,546  $16,513  $15,429  $13,604  $15,546  $16,513 
Interest cost  13,409   11,202   8,938   12,095   13,409   11,202 
Expected return on plan assets  (8,583)  (6,050)  (4,362)  (7,187)  (8,583)  (6,050)
Amortization of actuarial loss  561   1,492   2,601   634   561   1,492 
Amortization of prior service costs  231   414   174 
Amortization of prior service costs (credit)  (294)  231   414 
Amortization of transition obligation  83   281   63   76   83   281 
Settlement loss/(gain) to be recognized  91   —   (5,569)
Curtailment loss  —   629   — 
Settlement loss to be recognized  807   91   — 
Curtailment loss (gain)  (1,379)  —   629 
              
Net periodic pension cost $21,338  $24,481  $17,274  $18,356  $21,338  $24,481 
              
Weighted average assumptions
                        
Discount rate  2.3% - 6.3%   2.3% - 5.8%   2.0% - 6.3%   2.3% - 6.7%   2.3% - 6.3%   2.3% - 5.8% 
Expected long-term return on assets  2.5% - 8.0%   2.5% - 8.0%   3.5% - 7.5%   2.5% - 8.3%   2.5% - 8.0%   2.5% - 8.0% 
Rate of compensation increase  2.0% - 6.0%   2.0% - 6.0%   2.0% - 5.0%   2.0% - 6.0%   2.0% - 6.0%   2.0% - 6.0% 
 
Asset return assumptions are derived based on actuarial and statistical methodologies, from analysis of long-term historical data relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount rate for each plan was derived by reference to appropriate benchmark yields on

75

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark yields.
 
Future expected benefit payments for the pension plans and the post-retirement plan over the next ten fiscal years are: $7 million in fiscal 2009, $8 million in fiscal 2010, $9 million in fiscal 2011, $10 million in fiscal 2012, $10 million in fiscal 2013,


79

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$15 million in fiscal 2014, and $60$83 million collectively for fiscal years 20142015 through 2018.2019. Company contributions to these plans for fiscal 20092010 are expected to be approximately $14$10 million.
 
Executive Deferred Compensation Plans
 
Applied sponsors two unfunded deferred compensation plans, the Executive Deferred Compensation Plan (Predecessor EDCP) and the 2005 Executive Deferred Compensation Plan (2005 EDCP), under which certain employees may elect to defer a portion of their following year’s eligible earnings. The Predecessor EDCP was frozen as of December 31, 2004 such that no new deferrals could be made under the plan after that date and the plan would qualify for “grandfather” relief under Section 409A of the Internal Revenue Code. The Predecessor EDCP participant accounts continue to be maintained under the plan and credited with deemed interest. The 2005 EDCP was implemented by Applied effective as of January 1, 2005 and is intended to comply with the requirements of Section 409A of the Internal Revenue Code. Amounts payable, including accrued deemed interest, totaled $77 million at October 25, 2009 and $80 million at October 26, 2008, and $82 million at October 28, 2007, which were included in other long-term liabilities in the Consolidated Balance Sheets.
 
Note 911  Income Taxes
 
The components of income (loss) from operations before income taxes were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
   (In thousands)    (In thousands) 
U.S.  $1,021,961  $2,047,318  $1,760,138  $(555,456) $1,021,961  $2,047,318 
Foreign  386,757   392,335   406,833   69,653   386,757   392,335 
              
 $1,408,718  $2,439,653  $2,166,971  $(485,803) $1,408,718  $2,439,653 
              
 
The components of the provision (benefit) for income taxes were as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
   (In thousands)    (In thousands) 
Current:                        
U.S.  $248,308  $590,289  $475,984  $(196,643) $248,308  $590,289 
Foreign  182,803   99,472   124,797   22,858   182,803   99,472 
State  5,314   8,054   24,302   (36,683)  5,314   8,054 
              
  436,425   697,815   625,083   (210,468)  436,425   697,815 
              
Deferred:                        
U.S.   61,469   (17,314)  63,837   25,351   61,469   (17,314)
Foreign  (43,505)  16,888   (33,298)  10,347   (43,505)  16,888 
State  (6,417)  32,068   (5,314)  (5,706)  (6,417)  32,068 
              
  11,547   31,642   25,225   29,992   11,547   31,642 
              
 $447,972  $729,457  $650,308  $(180,476) $447,972  $729,457 
              


7680

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A reconciliation between the statutory U.S. federal income tax rate of 35 percent and Applied’s actual effective income tax provision rate is as follows:
 
                        
Fiscal Year
 2008 2007 2006  2009 2008 2007 
Tax provision at U.S. statutory rate  35.0%  35.0%  35.0%  (35)%  35.0%  35.0%
Favorable resolutions from audits of prior years’ income tax filings  —   (1.0)  (2.1)  (2.9)  —   (1.0)
Effect of foreign operations taxed at various rates  (1.0)  (1.6)  (0.8)  —   (1.0)  (2.0)
State income taxes, net of federal benefit  0.7   1.1   0.6   (3.9)  0.7   1.1 
Research and other tax credits  (1.1)  (0.6)  (0.1)  (2.0)  (1.1)  (0.6)
Export sales/production benefit  (2.0)  (1.3)  (4.2)  —   (2.0)  (1.3)
Equity method investment loss/impairment  5.7   0.9   0.5 
Equity compensation  2.4   1.0   0.5 
Other  0.2   (1.7)  1.6   (1.5)  (1.7)  (2.3)
              
  31.8%  29.9%  30.0%  (37.2)%  31.8%  29.9%
              
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities are as follows:
 
                
 2008 2007  2009 2008 
 (In thousands)  (In thousands) 
Deferred tax assets:                
Inventory reserves and basis difference $103,428  $111,297  $102,180  $103,428 
Installation and warranty reserves  51,992   69,934   44,802   51,992 
Accrued liabilities  295,797   230,632   178,414   295,797 
Restructuring reserves  7,539   9,275   16,510   7,539 
Deferred revenue  13,499   65,597   24,631   13,499 
Capital loss carryforward  15,000   16,675   11,049   15,000 
Tax credits and net operating losses  33,536   11,020   84,075   33,536 
Deferred compensation  30,122   31,263   29,041   30,122 
Equity-based compensation  68,627   60,256   63,791   68,627 
Intangibles  34,096   40,145   28,415   34,096 
          
Gross deferred tax assets  653,636   646,094   582,908   653,636 
Valuation Allowance  (15,000)  — 
Valuation allowance  (11,049)  (15,000)
          
Total gross deferred tax assets  638,636   646,094 
Total deferred tax assets  571,859   638,636 
          
Deferred tax liabilities:                
Depreciation  (54,177)  (42,597)  (56,927)  (54,177)
Purchased technology  (109,840)  (87,823)  (98,717)  (109,840)
Other  (29,359)  (27,189)  (33,807)  (29,359)
          
Total gross deferred tax liabilities  (193,376)  (157,609)  (189,451)  (193,376)
          
Net deferred tax assets $445,260  $488,485  $382,408  $445,260 
          


7781

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table presents the breakdown between current and non-current net deferred tax assets and liabilities:
 
                
Deferred Income Taxes
 2008 2007  2009 2008 
 (In thousands)  (In thousands) 
Current deferred tax asset $388,807  $426,471  $356,336  $388,807 
Non-current deferred tax asset  113,727   120,654   98,271   113,727 
Current deferred tax liability  —   (5,326)  (3,487)  — 
Non-current deferred tax liability  (57,274)  (53,314)  (68,712)  (57,274)
          
 $445,260  $488,485  $382,408  $445,260 
          
 
Current deferred tax liabilities are included in accounts payable and accrued expenses on the Consolidated Balance Sheets and non-current deferred tax liabilities are included in other liabilities on the Consolidated Balance Sheets. The balance as of October 28, 2007 includes an additional $2 million of deferred taxes for a purchase accounting adjustment.
 
A valuation allowance is recorded to reflect the estimated amount of deferred tax assets that may not be realized. The valuation allowance has been established against capital loss carryforwards where it is believed that it is not more likely than not that sufficient capital gains will be realized within the remaining carryforward period.
 
For fiscal 2008,2009, U.S. income taxes have not been provided for approximately $395$412 million of cumulative undistributed earnings of severalnon-U.S. subsidiaries. Applied intends to reinvest these earnings indefinitely in operations outside of the U.S.
 
As ofAt October 26, 2008,25, 2009, Applied’s state R&Dnet operating loss carryforwards were $152 million. The carryforwards expire between fiscal 2014 and fiscal 2029. Applied has a California research and development tax credit carryforward was $32of $27 million which has an unlimited life. Applied has a foreign tax credit carryforward of $14 million which expires in fiscal 2019. Applied also has net operating loss carryforwards in foreign jurisdictions of $89 million. The carryforward has an indefinite life.carryforwards have lives ranging from five years to indefinite. Management believes it is more likely than not that theall loss and tax credit carryforwardcarryforwards at October 25, 2009 will be utilized in future periods.
 
Applied’s income taxes payable have been reduced by the tax benefits associated with employee stock option transactions. These benefits, credited directly to stockholders’ equity, amounted to $0.4 million for fiscal 2009, $7 million for fiscal 2008, and $50 million for fiscal 2007 with a corresponding reduction to taxes payable of $0.4 million in fiscal 2009, $7 million in fiscal 2008, and $50 million infor fiscal 2007.
 
In June 2006,Applied maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the FASB issued Interpretation No. 48, “Accountingbest information available. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
         
  2009  2008 
  (In thousands) 
 
Beginning balance of gross unrecognized tax benefits $363,400  $360,000 
Settlements with tax authorities  (37,400)  — 
Increases in tax positions for prior years  1,000   4,400 
Decreases in tax positions for prior years  (1,700)  (1,000)
         
Ending balance of gross unrecognized tax benefits $325,300  $363,400 
         
Applied implemented new authoritative guidance for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for uncertaintyuncertain tax positions in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurementfirst quarter of a tax position taken or expected to be taken in a tax return. Recognition of a tax position is determined when it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. Applied implemented FIN 48 effective October 29, 2007. Upon implementation of FIN 48 Applied did not identify any increase or decrease in its liability for unrecognized tax benefits.fiscal 2008. In the fourth quarter of fiscal 2008, Applied identified a tax position that met the more-likely-than-notmore likely than not recognition threshold. Applied determined that a tax benefit of $100 million existed upon implementation of FIN 48 and therefore made the correction to retained earnings. The impact of the correction was not considered material to the prior reporting periods. The beginning balance of the reconciliation of gross unrecognized tax benefits below reflects this tax position.


7882

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A reconciliationauthoritative guidance and therefore made the correction to retained earnings. The impact of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands):
     
Balance, October 29, 2007 $360,000 
Increases in tax positions for prior years  4,400 
Decreases in tax positions for prior years  (1,000)
     
Balance, October 26, 2008 $363,400 
     
correction was not considered material to prior reporting periods.
 
As of October 26, 2008,25, 2009, Applied had unrecognized tax benefits, net of federal deduction for state tax, of $350$325 million, all of which, if recognized, would result in a reduction of Applied’s effective tax rate.
 
Historically, unrecognized tax benefits have been classified as current income taxes payable. Under FIN 48, unrecognized tax benefits are classified as long-term income taxes payable except to the extent it is anticipated that cash payment will be made within the next year. As of October 26, 2008,25, 2009, the gross liability for unrecognized tax benefits was $63$325 million, exclusive of interest and penalties. Under FIN 48, increasesIncreases or decreases to interest and penalties on uncertain tax positions are included in provision for income taxes in the Consolidated Statement of Operations. Interest and penalties related to uncertain tax positions were $11 million as of October 28, 2007 and $8 million as of October 26, 2008. Of the $82008 and $5 million as of October 25, 2009. All $5 million in interest and penalties $5 million is classified as long-term payable and $3 million is classified as current payableliability in the Consolidated Balance Sheets. Long term income taxes payable has been reduced by certain unrecognized tax benefits.
During the second quarter of fiscal 2009, the Internal Revenue Service began an examination of Applied’s federal income tax returns for fiscal years 2007 and 2006. Applied believes it has adequately reserved for any income tax uncertainties that may arise as a result of this examination.
A number of Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. federal returns for fiscal 2005 and later years, California returns for fiscal 2006 and later years, tax returns for certain states for fiscal 2002 and later years, and tax returns in certain jurisdictions outside of the U.S. for fiscal 2003 and later years.
During fiscal 2009, Applied received notice from the State of California stating that its examination of Applied’s returns for fiscal years 2002 through 2005 had been settled. The settlement resulted in a decrease to net unrecognized tax benefits of $14 million and reduced the effective tax rate for fiscal 2009.
 
The timing of the resolution of income tax examinations is highly uncertain as well as the amounts and timing of various tax payments that may be part of the settlement process. This could cause large fluctuations in the balance sheet classification of current assets and non-current assets and liabilities. The Company believes that before the end of fiscal 2009, it is reasonably possible that the statute of limitations on certain income taxes will expire. Given the uncertainty as to ultimate settlement terms, the timing of payment and the impact of such settlements on other uncertain tax positions, the range of the estimated potential decreasedoes not expect a material change in underlying unrecognized tax benefits is between $0 and $10 million.in the next 12 months.
 
A number of Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. federal returns for 2005 and later years, tax returns for certain states for 2002 and later years, and tax returns in certain jurisdictions outside of the U.S. for 2003 and later years.
Note 1012  Industry Segment and Geographic Operations
 
Applied’s four reportable segments are: Silicon, Applied Global Services, Display, and Energy and Environmental Solutions. Prior to the first quarter of fiscal 2008, the Applied Global Services segment was named Fab Solutions, and the Energy and Environmental Solutions segment was named Adjacent Technologies. Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company.Company. Segment information is presented based upon Applied’s management organization structure as of October 26, 200825, 2009 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the Company’s reportable segments disclosed. Prior to the fourth quarter of fiscal 2006, Applied operated in one reportable segment.segments.
 
Each reportable segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker.
 
Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of,


79

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and to assign resources to, each of the reportable segments. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level, which include costs related to equity-based compensation and certain components of variable compensation, corporate marketing andthe global sales organization, corporate functions (certain management, finance, legal, human resources, marketing, and RD&E)research, development and engineering), and unabsorbed information technology and occupancy. In addition, Applied does not allocate to


83

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions. Segment operating income excludes interest income/expense and other financial charges and income taxes according to how a particular reportable segment’s management is measured. Management does not consider the unallocated costs in measuring the performance of the reportable segments.
 
Effective the first quarter of fiscal 2008, Applied changed the management reporting system for services to report all service results in the Applied Global Services segment. Applied has reclassified segment operating results for fiscal 2007 and 2006 to conform to the fiscal 2008 presentation.
The Silicon segment includes semiconductor capital equipment for etch, rapid thermal processing, (RTP), deposition, chemical mechanical planarization, (CMP), and metrology and inspection.
 
The Applied Global Services segment includes technically differentiated products and services to improve the operating efficiency, reduce operating costs and lessen the environmental impact of semiconductor, display and solar customers’ factories. Applied Global Services’ products consist of spares, services, certain earlier generation products, and remanufactured equipment. Customer demand for these products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
 
The Display segment encompasses products for manufacturing LCDs for TVs, personal computers and other video-enabled devices. The Display segment also includes the design and manufacture of differentiated stand-alone equipment for the Applied SunFabtm Thin Film Line.
 
The Energy and Environmental Solutions segment includes products for fabricating solar photovoltaic cells and modules, high throughputroll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Information for each reportable segment as of October 25, 2009, October 26, 2008 and October 28, 2007 and October 29, 2006 and for the years then ended, is as follows:
 
                     
     Operating
  Depreciation/
  Capital
  Segment
 
  Net Sales  Income/(Loss)  Amortization  Expenditures  Assets 
  (In thousands) 
 
2008:                    
Silicon $4,005,141  $1,242,574  $104,130  $61,518  $1,773,348 
Applied Global Services  2,328,930   574,772   34,831   19,694   1,306,158 
Display  975,582   309,803   8,397   11,478   658,744 
Energy and Environmental Solutions  819,587   (183,173)  106,663   7,544   2,075,516 
                     
Total Segment $8,129,240  $1,943,976  $254,021  $100,234  $5,813,766 
                     
2007:                    
Silicon $6,511,722  $2,378,771  $137,943  $83,388  $2,608,980 
Applied Global Services  2,353,167   630,140   28,692   39,526   1,229,584 
Display  705,056   159,212   9,122   3,216   431,789 
Energy and Environmental Solutions  164,911   (89,364)  19,637   670   1,037,872 
                     
Total Segment $9,734,856  $3,078,759  $195,394  $126,800  $5,308,225 
                     
2006:                    
Silicon $5,971,483  $2,000,342  $159,695  $75,315  $2,769,127 
Applied Global Services  2,351,841   685,319   30,605   15,158   1,067,249 
Display  823,957   256,738   8,270   5,265   584,740 
Energy and Environmental Solutions  19,733   (8,008)  3,495   348   293,691 
                     
Total Segment $9,167,014  $2,934,391  $202,065  $96,086  $4,714,807 
                     
Reconciliations of segment operating results to Applied consolidated totals for the fiscal years ending October 26, 2008, October 28, 2007 and October 29, 2006 are as follows:
             
  2008  2007  2006 
     (In thousands)    
 
Total segment operating income $1,943,976  $3,078,759  $2,934,391 
Corporate and unallocated costs  (570,434)  (680,832)  (701,657)
Restructuring and asset impairment charges  (39,948)  (26,421)  (212,113)
Gain on sale of facility  21,837   —   — 
             
Income from operations $1,355,431  $2,371,506  $2,020,621 
             
                     
     Operating
  Depreciation/
  Capital
  Segment
 
  Net Sales  Income (Loss)  Amortization  Expenditures  Assets 
  (In thousands) 
 
2009:                    
Silicon $1,960,225  $152,343  $53,504  $23,167  $1,194,929 
Applied Global Services  1,396,643   112,570   33,641   14,952   1,043,022 
Display  501,692   64,705   11,924   14,428   444,619 
Energy and Environmental Solutions  1,155,047   (241,516)  80,095   51,320   1,853,283 
                     
Total Segment $5,013,607  $88,102  $179,164  $103,867  $4,535,853 
                     
2008:                    
Silicon $4,005,141  $1,242,574  $104,130  $61,518  $1,773,348 
Applied Global Services  2,328,930   574,772   34,831   19,694   1,306,158 
Display  975,582   309,803   8,397   11,478   658,744 
Energy and Environmental Solutions  819,587   (183,173)  106,663   7,544   2,075,516 
                     
Total Segment $8,129,240  $1,943,976  $254,021  $100,234  $5,813,766 
                     
2007:                    
Silicon $6,511,722  $2,378,771  $137,943  $83,388  $2,608,980 
Applied Global Services  2,353,167   630,140   28,692   39,526   1,229,584 
Display  705,056   159,212   9,122   3,216   431,789 
Energy and Environmental Solutions  164,911   (89,364)  19,637   670   1,037,872 
                     
Total Segment $9,734,856  $3,078,759  $195,394  $126,800  $5,308,225 
                     


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Reconciliations of segment operating results to Applied consolidated totals for the fiscal years ending October 25, 2009, October 26, 2008 and October 28, 2007 are as follows:
             
  2009  2008  2007 
  (In thousands) 
 
Total segment operating income $88,102  $1,943,976  $3,078,759 
Corporate and unallocated costs  (325,930)  (570,434)  (680,832)
Restructuring and asset impairment charges  (155,788)  (39,948)  (26,421)
Gain on sale of facility  —   21,837   — 
             
Income (loss) from operations $(393,616) $1,355,431  $2,371,506 
             
Reconciliations of depreciation and amortization expense to Applied consolidated totals for the fiscal years ending October 25, 2009, October 26, 2008 and October 28, 2007 and October 29, 2006 are as follows:
 
                        
 2008 2007 2006  2009 2008 2007 
 (In thousands)  (In thousands) 
Total segment depreciation and amortization $254,021  $195,394  $202,065  $179,164  $254,021  $195,394 
Depreciation on shared facilities  35,849   37,179   42,988   58,192   35,849   37,179 
Depreciation on information technology assets  29,777   34,986   23,528   46,347   29,777   34,986 
Other  404   775   1,832   7,500   404   775 
              
Consolidated depreciation and amortization $320,051  $268,334  $270,413  $291,203  $320,051  $268,334 
              
 
Reconciliations of capital expenditures to Applied consolidated totals for the fiscal years ending October 25, 2009, October 26, 2008 and October 28, 2007 and October 29, 2006 are as follows:
 
                        
 2008 2007 2006  2009 2008 2007 
 (In thousands)  (In thousands) 
Total segment capital expenditures $100,234  $126,800  $96,086  $103,867  $100,234  $126,800 
Shared facilities  40,577   49,128   37,329   83,647   40,577   49,128 
Information technology assets  94,700   76,604   36,083   26,981   94,700   76,604 
Other  52,395   12,252   9,984   33,932   52,395   12,252 
              
Consolidated capital expenditures $287,906  $264,784  $179,482  $248,427  $287,906  $264,784 
              
 
Reconciliations of segment assets to Applied consolidated totals as of October 25, 2009, October 26, 2008 and October 28, 2007 and October 29, 2006 are as follows:
 
                        
 October 26,
 October 28,
 October 29,
  October 25,
 October 26,
 October 28,
 
 2008 2007 2006  2009 2008 2007 
 (In thousands)  (In thousands) 
Total segment assets $5,813,766  $5,308,225  $4,714,807  $4,535,853  $5,813,766  $5,308,225 
Cash and investments  3,467,724   3,732,004   3,212,199   3,266,895   3,467,724   3,732,004 
Allowance for bad debts  (5,275)  (4,136)  (3,342)  (67,313)  (5,275)  (4,136)
Assets held for sale  —   —   37,211 
Deferred income taxes  502,534   547,125   569,308   454,607   502,534   547,125 
Other current assets  382,912   337,974   217,433   337,015   382,912   337,974 
Common property, plant and equipment  644,578   603,453   551,064   820,959   644,578   603,453 
Equity-method investment  79,533   115,060   144,431   —   79,533   115,060 
Other assets  120,546   22,573   37,726   226,227   120,546   22,573 
              
Consolidated total assets $11,006,318  $10,662,278  $9,480,837  $9,574,243  $11,006,318  $10,662,278 
              


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
For geographical reporting, revenue is attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant and equipment and equity-method investments, and are attributed to the geographic location in which they are located. Net sales and long-lived assets by geographic region were as follows:
 
                
   Long-lived
    Long-lived
 
 Net Sales Assets  Net Sales Assets 
 (In thousands)  (In thousands) 
2009:        
North America(1) $965,603  $803,071 
     
Taiwan  1,025,823   32,939 
Japan  718,573   7,611 
Europe  752,635   115,280 
Korea  663,813   4,624 
China  635,371   97,707 
Southeast Asia  251,789   57,121 
     
Total outside North America  4,048,004   315,282 
     
Consolidated total $5,013,607  $1,118,353 
     
2008:                
North America(1) $1,519,898  $895,723  $1,519,898  $895,723 
          
Taiwan  1,837,097   43,169   1,837,097   43,169 
Japan  1,217,635   89,782   1,217,635   89,782 
Europe  949,105   109,224   949,105   109,224 
Korea  1,309,491   6,258   1,309,490   6,258 
Asia-Pacific(2)  1,296,015   54,119 
China  779,853   37,166 
Southeast Asia  516,162   16,953 
          
Total outside North America  6,609,343   302,552   6,609,342   302,552 
          
Consolidated total $8,129,241  $1,198,275  $8,129,240  $1,198,275 
          
2007:                
North America(1) $1,554,643  $866,531  $1,554,643  $866,531 
          
Taiwan  2,678,815   42,622   2,678,815   42,622 
Japan  1,492,694   126,515   1,492,694   126,515 
Europe  955,747   90,879   955,747   90,879 
Korea  1,846,867   8,634   1,846,867   8,634 
Asia-Pacific(2)  1,206,090   56,836 
China  716,880   34,080 
Southeast Asia  489,210   22,756 
          
Total outside North America  8,180,213   325,486   8,180,213   325,486 
          
Consolidated total $9,734,856  $1,192,017  $9,734,856  $1,192,017 
          
2006:        
North America(1) $1,707,996  $894,598 
     
Taiwan  2,079,065   16,777 
Japan  1,518,294   154,432 
Europe  1,005,923   89,741 
Korea  1,698,673   5,513 
Asia-Pacific(2)  1,157,063   36,436 
     
Total outside North America  7,459,018   302,899 
     
Consolidated total $9,167,014  $1,197,497 
     
 
 
(1)Primarily the United States.
(2)Includes China.
Samsung Electronics Co., Ltd. accounted for 16 percent of Applied’s net sales in fiscal 2008, 12 percent of Applied’s net sales in fiscal 2007, and 11 percent of Applied’s net sales in fiscal 2006. These net sales were for products in multiple reportable segments.


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In fiscal 2009, Intel Corporation accounted for 12 percent of Applied’s net sales. Samsung Electronics Co., Ltd. accounted for 10 percent of net sales in fiscal 2009, 16 percent of net sales in fiscal 2008, and 12 percent of net sales in fiscal 2007. These net sales were for products in multiple reportable segments.
Note 1113  Commitments and Contingencies
 
Leases
 
Applied leases some of its facilities and equipment under non-cancelable operating leases and has options to renew most leases, with rentals to be negotiated. Total rent expense was $64 million for fiscal 2009, $68 million for fiscal 2008, and $62 million for fiscal 2007, and $70 million for fiscal 2006.2007. Future minimum lease payments at October 26, 200825, 2009 totaled $118$143 million and were: $58 million for fiscal 2009; $30$43 million for fiscal 2010; $14$29 million for fiscal 2011; $20 million for fiscal 2012; $11 million for fiscal 2013; $8 million for fiscal 2012; $5 million for fiscal 2013;2014; and $3$32 million collectively for all periods thereafter.
 
Discounted Letters of Credit
 
Applied discounts letters of credit through various financial institutions. Under these agreements, Applied discounted letters of credit in the amounts of $299 million for fiscal 2009, $167 million for fiscal 2008 and $431 million for fiscal 2007 and $237 million for fiscal 2006.2007. Discounting fees were not material for all periods presented. In fiscal 2009 and 2008, Applied factored accounts receivablesreceivable and discounted promissory notes totaling $125 million.$43 million and $138 million, respectively.
 
Warranty
 
Applied products are generally sold with a12-month warranty period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region.
 
Changes in the warranty reserves were as follows:
 
                
 2008 2007  2009 2008 
 (In thousands)  (In thousands) 
Beginning balance $184,271  $174,605  $142,846  $184,271 
Provisions for warranty  138,229   184,470   92,976   138,229 
Consumption of reserves  (179,654)  (174,804)  (118,285)  (179,654)
          
Ending balance $142,846  $184,271  $117,537  $142,846 
          
 
As noted above, Applied’s products are generally sold with a12-month warranty. Accordingly, current warranty provisions are related to the current year’s net sales, and warranty consumption is associated with current and prior year’s net sales.
 
Guarantees
 
During the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either Applied or its subsidiaries. As of October 26, 2008,25, 2009, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $167$83 million. Applied has not recorded any liability in connection with these guarantee arrangements below 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 arrangements.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of October 26, 2008,25, 2009, Applied Materials Inc. has provided parent guarantees to banks for approximately $168$179 million to cover these services.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Legal Matters
 
Jusung
 
On December 24,Applied has been engaged in a number of lawsuits and patent and administrative proceedings in Taiwan and South Korea since 2003 Applied filed a lawsuit againstwith Jusung Engineering Co., Ltd. (Jusung Engineering) andand/or Jusung Pacific Co., Ltd. (Jusung Pacific, referred to together with Jusung Engineering as Jusung) involving technology used in Tao-Yuan District Court in Taiwan, captionedmanufacturing LCDs. Applied Materials, Inc. v. Jusung Engineering Co., Ltd. The lawsuit allegesbelieves that Jusung is infringing an Applied patent related to chemical vapor deposition (CVD). In the lawsuit, Applied sought a provisional injunction prohibiting Jusung from importing, using, manufacturing, servicing or selling in Taiwan certain flat panel display manufacturing equipment. On January 14, 2004, the Tao-Yuan District Court issued a provisional injunction orderit has meritorious claims and defenses against Jusung Pacific. Jusung Pacific’s appeal of the order was denied. Jusung Pacific requested permissionthat it intends to post a counterbond to have the Jusung Pacific injunction lifted, which was granted, and on March 30, 2004, the provisional injunction order was lifted. At Applied’s request, on December 11, 2004, the District Court issued a provisional injunction order against Jusung Engineering. Jusung Engineering’s appeal of the order was denied. Jusung Engineering requested permission to post a counterbond to have the Jusung Engineering injunction lifted, which was granted, and on April 25, 2005, the provisional injunction order against Jusung Engineering was lifted. On June 30,pursue vigorously.
In 2004, Applied filed a “main action”complaint for patent infringement complaint against Jusung in the Hsinchu District Court in Taiwan captioned Applied Materials, Inc. v. Jusung Engineering Co., Ltd. In the lawsuit, Applied seeksseeking damages and a permanent injunction for infringement of the samea patent related to chemical vapor deposition (CVD) equipment, and this case remains pending. Jusung Pacific unsuccessfully sought invalidation of Applied’s CVD patent. The decisions regarding the provisional injunction and counterbond have no effect on the main action patent infringement lawsuit filed by Applied. In August 2006, the Hsinchu Court set the litigation fee and the litigation security payment, and the main action is now proceeding on its merits. This same patent is also the subject of an invalidity proceeding filed in the Taiwanese Intellectual Property Office (TIPO) by Jusung Pacific in June 2004. In July 2007, the TIPO allowed Applied to amend its patent and dismissed Jusung Pacific’s invalidation action.. Jusung Pacific’s initial appeal of the TIPO’s decision was denied, and it has filed a further appeal to the Taipei High Supreme Administrative Court. Applied believes that it has meritorious claims and defenses that it intends to pursue vigorously.
On April 10, 2004, the Taiwan Fair Trade Commission (TFTC) notified Applied’s subsidiary, AKT America, Inc. (AKT America), that, following a complaint filed by Jusung, the TFTC had begun an investigation into whether AKT America had violated the Taiwan Fair Trade Act, and specifically whether AKT America violated the Taiwan Guidelines for the Review of Cases Involving Enterprises Issuing Warning Letters for Infringement on Copyright, Trademark and Patent Rights by allegedly notifying customers about AKT America patent rights and the infringement of those rights by Jusung. On June 15, 2004, the TFTC notified Applied that Applied also was the subject of the investigation. The TFTC subsequently notified Applied and AKT America that there was insufficient evidence to support a claim against either company. Jusung appealed the TFTC’s decision, and the appeals court affirmed the decision of the TFTC. Jusung appealed the appeals court’s affirmation of the decision of the TFTC, and in January 2007, the Taipei High Administrative Court dismissed Jusung’s appeal. In February 2007, Jusung appealed the dismissal to the Supreme Administrative Court of Taiwan. Applied believes that Jusung’s complaint is without merit.
On June 13, 2006, Applied filed an action in the TIPO challenging the validity of a patent owned by Jusung Engineering related to severability of the transfer chamber. On June 20, 2006,chamber on a CVD tool. Jusung Engineering filed a lawsuit against Applied and AKT America in Hsinchu District Court in Taiwan captioned Jusung Engineering, Co. Ltd. v. AKT America, Inc. and Applied Materials, Inc., alleging infringement of thisthe same patent. The TIPO granted Applied’s request for invalidation and revoked Jusung Engineering’s patent. In March 2009, the Hsinchu District Court dismissed Jusung Engineering’s lawsuit, seeks damages, costs and attorneys’ fees. Applied believes that itin April 2009, the Ministry of Economic Affairs overruled Jusung Engineering’s administrative appeal of the decision revoking its patent. Jusung has meritorious defenses that it intends to pursue vigorously.
On January 31, 2007, Applied received notice thatappealed both decisions. In 2006, Jusung Engineering filed a complaint of private prosecution in the Taipei District Court of Taiwan dated November 10, 2006, entitled Jusung Engineering Co., Ltd. v. M. Splinter, Y. Lin, C. Lai and J. Lin. The complaint allegesalleging that Applied’s outside counsel received from the Court and used a copy of an expert report that Jusung had filed in the ongoing patent infringement lawsuits and that Jusung had intended to remain confidential. The complaint names as defendants Applied’s outside counsel in Taiwan, as well as Michael R. Splinter, Applied’s President and Chief Executive Officer, as the statutory representative of


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Applied. On April 27, 2007, theThe Taipei District Court dismissed the private prosecution complaint. Jusung Engineering filed an appeal of the dismissal to the High Court. The High Court affirmed the District Court’s rejection of the private prosecution complaint, on June 25, 2007. After the dismissal of the private prosecution complaint,and the matter was transferred to the Taipei District Attorney’s Office. The Taipei District Attorney’s Office whichhas issued a rulingthree successive rulings not to prosecute. This ruling was reviewed byprosecute, each of which Jusung Engineering has appealed to the Taiwan High Court District Attorney. In each instance, the Taiwan High Court District Attorney which in October 2007has returned the matter to the Taipei District Attorney’s Office for further consideration. On March 7, 2008, the Taipei District Attorney’s Office issued a second ruling not to prosecute, which Jusung Engineering appealed. The Taiwan High Court District Attorney returned the matter to the Taipei District Attorney’s Office for further investigation and the Taipei District Attorney’s office decided not to pursue the matter. Applied believes thatconsideration, where it has meritorious defenses that it intends to pursue vigorously.remains pending.
 
On April 3,In 2007, Jusung Engineering filed a complaint against AKT America and one of its suppliers in Seoul Central District Court in Seoul, Korea, captioned Jusung Engineering, Co. Ltd. v. AKT America, Inc. The complaint allegesalleging infringement of a Jusung patent involving the showerhead assembly of plasma enhanced chemical vapor deposition (PECVD) equipment for liquid crystal displays (LCDs) and seeks injunctive relief. On June 9, 2007, AKT America and its supplier filed a patent invalidation action withequipment. After the Korean Intellectual Property Office (KIPO). On November 30, 2007, the KIPO ruled that the JusungJusung’s patent was invalid, and Jusung Engineering has appealed the KIPO’s ruling. Also on November 30, 2007, KIPO dismissed the confirmation of scope action and Jusung appealed the decision. On December 4, 2008, the Patent Court remanded the case back to KIPO for further consideration. On April 3, 2008, the Seoul District Court dismissed the complaint forJusung Engineering’s infringement andaction, which Jusung Engineering has appealed this decision. Applied believesappealed. In July 2009, the Korean Supreme Court dismissed Jusung’s appeal of the KIPO’s determination that it has meritorious defenses that it intends to pursue vigorously.the showerhead assembly patent is invalid, and Jusung’s relatedconfirmation-of-scope action was also dismissed. On September 10, 2009, Jusung Engineering withdrew its appeal of the dismissal of its infringement action, and all proceedings regarding Jusung’s invalidated Korean showerhead assembly patent are now concluded.
 
On August 13,Also in 2007, Applied filed a complaint against Jusung Engineering in the Seoul Central District Court in Seoul, Korea, captioned Applied Materials, Inc. v. Jusung Engineering Ltd. The complaint allegesfor infringement of an Applied patent involving a substrate support orthe housing for a substrate supporting pin used in PECVD equipment for LCDs and seeks both monetary damages and injunctive relief. On October 29, 2007, Jusung filed an action withequipment. After the KIPO seeking to invalidate Applied���s substrate patent. Applied initiatedruled that Applied’s patent was invalid, the District Court dismissed Applied’s infringement action. Applied’s appeals of the dismissals of the infringement action, as well as a related confirmation of scope action withcase, were dismissed. On September 10, 2009, the KIPO based onKorean Supreme Court affirmed the sameKIPO’s determination that the pin patent which the KIPO dismissed on January 30, 2008. Applied has appealed this decision to the Patent Court. Applied believes that it has meritorious claims in this action that it intends to pursue vigorously.
Silicon Services Consortium
On January 19, 2006, five companies that sold refurbished Applied tools (Silicon Services Consortium Inc., Semiconductor Support Services Co., OEM Surplus, Inc., Precision Technician Inc.,was invalid, and Semiconductor Equipment Specialist, Inc.) filed a lawsuit against Applied in the United States District Court for the Western District of Texas, captioned Silicon Services Consortium, Inc., et al. v. Applied Materials, Inc. The plaintiffs claimed that a policy that Applied announced in January 2005 of limiting the sale of certain parts to them constituted an unlawful attempt to monopolize the refurbishment business, an interference with existing contracts, and an interference with prospective business relationships. The suit sought injunctive relief, damages, costs and attorneys’ fees. On January 17, 2007, Applied filed a counterclaim asserting claims forall proceedings regarding Applied’s invalidated Korean substrate supporting pin patent infringement, trademark infringement, trademark dilution, unfair competition, and misuse and misappropriation of trade secrets against each of the five plaintiffs/counter defendants, seeking damages as well as injunctive relief. All claims between Applied and Precision Technician were dismissed in September 2007 pursuant to a settlement, with no payment by either party. In December 2007, Applied reached a settlement with Semiconductor Equipment Specialist of all pending claims between them for an amount that was not material to Applied. In May 2008, Applied reached a settlement with Semiconductor Support Services of all pending claims between them in an amount that was not material to Applied. In July 2008, Applied reached a settlement with the remaining plaintiffs/counter defendants, Silicon Services Consortium and OEM Surplus, of all pending claims between them in an amount that was not material to Applied, and the lawsuit has been dismissed.are now concluded.


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APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business.
 
Although the outcome of the above-described matters or these claims and proceedings cannot be predicted with certainty, Applied does not believe that any of these proceedings or other claims will have a material adverse effect on its consolidated financial condition or results of operations.
 
Note 1214  Business Combinations and Equity-Method Investment
 
On January 31, 2008, Applied acquired all of the outstanding shares of Baccini, a privately-held company based in Italy, for a purchase price of $215 million in cash, net of cash and marketable securities acquired. The acquired business is a leading supplier of automated metallization and test systems for manufacturing c-Si photovoltaic cells. In connection with this acquisition, Applied recorded goodwill of $158 million and intangible assets of $130 million. Of the $130 million of acquired intangible assets, $61 million was assigned to acquired backlog (to be amortized over 2 years), $34 million was assigned to customer relationships (to be amortized over 9 years), $27 million was assigned to purchased technology (to be amortized over 7 years), $6 million was assigned to covenants not to compete (to be amortized over 2 years), and $3 million was assigned to trademarks and tradenames (to be amortized over 7 years). The allocation of the purchase price was based on estimates of the fair value of the assets acquired and is subject to adjustment upon finalization of the purchase price allocation. The acquired business is reported under the Energy and Environmental Solutions segment.
 
On November 9, 2007, Applied purchased from Edwards Vacuum, Inc. certain assets of its Kachina semiconductor equipment parts cleaning and refurbishment business for $19 million. The acquisition expanded Applied’s existing Chamber Performance Services network of facilities that provide customers worldwide with technology and support for maintaining their chamber components. In connection with this acquisition, Applied recorded goodwill of $13 million and an intangible asset of $3 million (customer relationships, which willto be amortized over 13 years). The acquired business is reported under the Applied Global Services segment.
 
On August 23, 2007, Applied acquired all of the outstanding shares of Switzerland-based HCT for $463 million in cash, net of cash acquired. The acquired business is a leading supplier of precision wafering systems used principally in manufacturing c-Si substrates for the solar industry. In connection with this acquisition, Applied recorded goodwill of $354 million and other intangible assets of $180 million. Of the $180 million of acquired intangible assets, $59 million was assigned to purchased technology (to be amortized over 11 years), $59 million was assigned to customer relationships (to be amortized over 7 years), $47 million was assigned to acquired backlog (to be amortized over 1 year), $8 million was assigned to trademarks and tradenames (to be amortized over 13 years), and $7 million was assigned to covenants not to compete (to be amortized over 3 years). The acquired business is reported under the Energy and Environmental Solutions segment.
 
On March 30, 2007, Applied purchased Brooks Software, a division of Brooks Automation, Inc., for $137 million in cash. The acquired business is a leading provider of factory management and control software to the semiconductor and flat panel display industries. The products complement Applied’s existing software applications and enable Applied to offer customers a comprehensive computer integrated manufacturing (CIM) solution for optimizing fab operations. Applied recorded an in-process research and development (IPR&D) expense of $5 million, reported as research, development and engineering expense, goodwill of $77 million, and other intangible assets of $47 million. Of the $47 million of acquired intangible assets, $21 million was assigned to purchased technology (to be amortized over 4 to 11 years), $21 million was assigned to maintenance contracts (to be amortized over 7 years), $2 million was assigned to acquired backlog (to be amortized over 1 year), $2 million was assigned to trademarks and tradenames (to be amortized over 7 years), and $1 million was assigned to customer


8789

 
APPLIED MATERIALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
relationships (to be amortized over 4 years). The acquired business is reported under the Applied Global Services segment.
 
The acquired IPR&D expense was determined by identifying research projects for which technological feasibility had not been established and no alternative future use existed. The value of the projects identified as in-process was determined by estimating the future cash flows from the projects once commercially feasible, discounting the net cash flows back to their present value at a rate commensurate with the level of risk and maturity of the projects, and then applying a percentage of completion to the calculated value.
 
On August 14, 2006, Applied’s wholly-owned subsidiary, Metron Technology, Inc. (Metron), purchased certain assets of UMS Solutions’ parts cleaning and recycling business in Singapore for $10 million. The acquisition enhances Metron’s capabilities in Southeast Asia with advanced, high-quality parts cleaning services to support its customers’ semiconductor manufacturing requirements. In connection with this acquisition, Applied recorded goodwill of $7 million and other intangible assets of $1 million.
On July 20, 2006, Applied and Dainippon Screen Mfg. Co., Ltd. (Screen) completed the formation of Sokudo Co. Ltd. (Sokudo), a Japanese joint venture company, to deliver advanced track solutions for customers’ critical semiconductor manufacturing requirements. Screen owns 52 percent and holds the controlling interest in Sokudo, and Applied owns 48 percent. Screen transferred into Sokudo its existing track business and related intellectual property, including employees, products and its installed base of systems. Applied paid $147 million for its investment in Sokudo. Additionally, Applied contributed to Sokudo certain technology and related intellectual property and has provided key development employees. Screen performs manufacturing for Sokudo under an outsourcing agreement. Applied accounts for its interest in Sokudo under the equity method of accounting. Under this accounting method, Applied’s exposure to loss from ongoing operations is limited to $80 million as of October 26, 2008, which represents Applied’s carrying value of its investment in Sokudo. Applied’s investment in Sokudo is classified as an equity-method investment on the Consolidated Balance Sheet. Applied’s investment in Sokudo includes the unamortized excess of Applied’s investment over its equity in the joint venture’s net assets. This excess $28 million at October 26, 2008 is being amortized on a straight-line basis over its estimated useful life of 7 years.
On July 7, 2006, Applied completed its acquisition of Applied Films Corporation, a Colorado corporation (Applied Films) and leading supplier of thin film deposition equipment used in manufacturing LCDs, solar cells, flexible electronics and energy-efficient glass. Applied paid $28.50 per share in cash for each outstanding share of Applied Films. The total purchase price was approximately $484 million, or $328 million net of Applied Films’ existing cash and marketable securities. As part of the acquisition, Applied assumed Applied Films’ outstanding stock options and restricted stock awards that, at the acquisition date, had a total fair value of $26 million, of which $18 million was allocated to the purchase price and the remainder to unearned compensation. Upon the acquisition and subject to vesting, Applied Films stock options became exercisable for shares of Applied common stock and Applied Films restricted stock awards became payable in shares of Applied common stock totaling, in the aggregate, 3 million shares of Applied common stock. The fair value of Applied Films’ stock options assumed was determined using a Black-Scholes model. The use of the Black-Scholes model and method of determining the variables is consistent with Applied’s valuation of equity-based compensation awards in accordance with SFAS 123(R) (see Note 1). Applied recorded an in-process research and development expense of $14 million, reported as research, development and engineering expense in the Consolidated Statements of Operations; goodwill of $226 million; and other intangible assets of $140 million. The acquired in-process research and development expense was determined by identifying research projects for which technological feasibility had not been established and no alternative future use existed. The value of the projects identified as in-process was determined by estimating the future cash flows from the projects once commercially feasible, discounting the net cash flows back to their present value at a rate commensurate with the level of risk and maturity of the projects, and then applying a percentage of completion to the calculated value.


88

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On December 23, 2005, Applied acquired all of the outstanding shares of ChemTrace Corporation and ChemTrace Precision Cleaning, Inc. for approximately $22 million in cash, net of cash acquired, of which $18 million was paid upon closing. This business provides customers with precision parts cleaning and materials testing solutions. In connection with this acquisition, Applied recorded goodwill of $12 million and other intangible assets of $8 million.
For all of the purchase business combinations discussed above, the results of operations prior to the acquisition dates were not material in relation to those of Applied for any of the periods presented herein. Goodwill is not amortized but is reviewed periodically for impairment and purchased technology is amortized over its useful life of 1 to 15 years.
 
Note 1315  Subsequent Events Through December 11, 2009
 
On November 12, 2008,11, 2009, Applied announced that it will implement a restructuring program beginning in the first quarter of fiscal 2009.2010. As part of this program, Applied plans to reduce its global workforce as of October 25, 2009 by approximately 1,8001,300 to 1,500 positions, or 12% by the end10 to 12 percent, over a period of fiscal 2009 through a combination of attrition, voluntary separation and other workforce reduction programs18 months, consistent with local legal requirements and in consultation with employee representatives.works councils and other employee representatives, as applicable. The Company anticipates the pre-tax cost of the plan to be between $100 million and $125 million.
 
On November 16, 2009, Applied entered into an agreement to acquire all of the outstanding shares of Semitool, Inc. (Semitool), a public company based in the state of Montana, for $11 per share in an all-cash tender offer (the Offer). Semitool is a leading supplier of electrochemical plating and wafer surface preparation equipment used by semiconductor packaging and manufacturing companies globally. Under the terms of the agreement approved by the Boards of Directors of both companies, Applied will pay an aggregate purchase price of approximately $364 million based on the fully-diluted capitalization of Semitool upon closing the acquisition (the Merger). The acquisition will be conducted through a tender offer for all of the outstanding shares of Semitool and is conditioned on the occurrence or absence of certain events, including the tender of at least 66.67% of Semitool’s outstanding stock on a fully-diluted basis, as well as regulatory approvals and other customary closing conditions.
Subsequent to announcement of the Offer, three purported class action lawsuits were filed in state court in the County of Flathead, State of Montana, against Semitool, Semitool’s directors, Applied and Applied’s acquisition subsidiary. The actions seek certification of a class of all holders of Semitool common stock (except the defendants and their affiliates). The complaints allege, among other things, that Semitool’s directors breached their fiduciary duties by failing to maximize shareholder value, securing benefits for certain defendants at the expense or to the detriment of Semitool’s public shareholders, discouragingand/or inhibiting alternative offers, and failing to disclose material nonpublic information, and that Applied aided and abetted such alleged breaches. The actions seek injunctive relief enjoining the defendants from consummating the Offer and the Merger, damages, and attorneys’ fees. Applied believes the claims alleged against it are without merit and intends to defend against them vigorously.


90

APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 1416  Unaudited Quarterly Consolidated Financial Data
 
                                        
 Fiscal Quarter    Fiscal Quarter   
 First Second Third Fourth Fiscal Year  First Second Third Fourth Fiscal Year 
   (In thousands, except per share amounts)    (In thousands, except per share amounts) 
2009:                    
Net sales $1,333,396  $1,020,077  $1,133,740  $1,526,394  $5,013,607 
Gross margin $391,576  $155,519  $324,874  $558,836  $1,430,805 
Net income (loss) $(132,934) $(255,390) $(54,865) $137,862  $(305,327)
Earnings (loss) per diluted share  (0.10) $(0.19) $(0.04) $0.10  $(0.23)
2008:                                        
Net sales $2,087,397  $2,149,998  $1,848,168  $2,043,677  $8,129,240  $2,087,397  $2,149,998  $1,848,168  $2,043,677  $8,129,240 
Gross margin $934,981  $966,828  $742,314  $798,705  $3,442,828  $934,981  $966,828  $742,314  $798,705  $3,442,828 
Net income $262,376  $302,507  $164,768  $231,095  $960,746  $262,376  $302,507  $164,768  $231,095  $960,746 
Earnings per diluted share $0.19  $0.22  $0.12  $0.17  $0.70  $0.19  $0.22  $0.12  $0.17  $0.70 
2007:                    
Net sales $2,277,267  $2,529,561  $2,560,984  $2,367,044  $9,734,856 
Gross margin $1,062,538  $1,136,610  $1,216,390  $1,076,905  $4,492,443 
Net income $403,476  $411,444  $473,515  $421,761  $1,710,196 
Earnings per diluted share $0.29  $0.29  $0.34  $0.30  $1.20 


8991

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Stockholders and Board of Directors and Stockholders
Applied Materials, Inc.:
 
We have audited the accompanying consolidated balance sheets of Applied Materials, Inc. and subsidiaries (the Company) as of October 26, 200825, 2009 and October 28, 2007,26, 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 26, 2008.25, 2009. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as of and for each of the years in the three-year period ended October 26, 2008, as set forth under Item 15(a)(2).II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Materials, Inc. and subsidiaries as of October 26, 200825, 2009 and October 28, 2007,26, 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended October 26, 2008,25, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, as of and for each of the years in the three-year period ended October 26, 2008, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in note 9Note 11 to the consolidated financial statements, effective October 29, 2007, the Company adoptedchanged its method of accounting for uncertainty in income taxes at the provisionsbeginning of Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes.fiscal year 2008.
 
As discussed in note 1Note 10 to the consolidated financial statements, effective October 28, 2007, the Company adoptedchanged its method of accounting for defined benefit pension and other postretirement plans at the provisionsbeginning of Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statement No. 87, 88, 106, and 132(R).
As discussed in note 1 to the consolidated financial statements, effective October 31, 2005, the Company adopted the provisions of SFAS 123(R), Share-Based Payment.fiscal year 2009.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Applied Materials, Inc. and subsidiaries’ internal control over financial reporting as of October 26, 2008,25, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 12, 200811, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  KPMG LLP
KPMG LLP
 
Mountain View, California
December 12, 200811, 2009


9092

INDEX TO EXHIBITS
 
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 ofRegulation S-K:
 
     
Exhibit No.
 
Description
 
 2.1 Agreement and Plan of Merger, dated May 4, 2006, among Applied Materials, Inc., Applied Films Corporation and Blue Acquisition, Inc., incorporated by reference to Applied’sForm 10-Q for the quarter ended July 30, 2006 (fileno. 000-06920) filed August 31, 2006.
 3.1 Certificate of Incorporation of Applied Materials, Inc., as amended and restated through March 31, 2000, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 30, 2000 (fileno. 002-45028) filed June 8, 2000.
 3.2 Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock dated as of July 9, 1999, incorporated by reference to Applied’sForm 10-Q for the quarter ended August 1, 1999 (fileno. 000-06920) filed September 14, 1999.
 3.3 Bylaws of Applied Materials, Inc., as amended and restated through September 16, 2008, incorporated by reference to Applied’sForm 8-K (fileno. 000-06920) filed September 19, 2008.
 4.1 Form of Indenture (including form of debt security) between Applied Materials, Inc. and Harris Trust Company of California, as Trustee, incorporated by reference to Applied’sForm 8-K (fileno. 000-06920) filed August 17, 1994.
 4.2 Rights Agreement, dated as of July 7, 1999, between Applied Materials, Inc. and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Applied’s Registration Statement onForm 8-A (fileno. 000-06920) dated July 13, 1999.
 4.3 First Amendment to Rights Agreement, dated as of November 6, 2002, between Applied Materials, Inc. and Computershare Investor Services, LLC, as Rights Agent, incorporated by reference to Applied’s Registration Statement onForm 8-A/A (fileno. 000-06920) dated November 25, 2002.
 10.1 License Agreement dated January 1, 1992, between Applied Materials and Varian Associates, Inc., incorporated by reference to Applied’sForm 10-K for fiscal year 1992 (fileno. 000-06920) filed December 16, 1992.
 10.2* Applied Materials, Inc. Executive Deferred Compensation Plan, as amended and restated on April 1, 1995, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 30, 1995 (fileno. 000-06920) filed June 7, 1995.
 10.3* Amendment No. 1 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 26, 1998 (fileno. 000-06920) filed September 9, 1998.
 10.4* Amendment No. 2 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 26, 1998 (fileno. 000-06920) filed September 9, 1998.
 10.5* Applied Materials, Inc. Nonqualified Stock Option Agreement related to the Employee Stock Incentive Plan, as amended (formerly named the “Applied Materials, Inc. 1995 Equity Incentive Plan”), incorporated by reference to Applied’sForm 10-Q for the quarter ended May 2, 1999 (fileno. 000-06920) filed June 15, 1999.
 10.6 Form of Indemnification Agreement between Applied Materials, Inc. and Non-Employee Directors, dated June 11, 1999, incorporated by reference to Applied’sForm 10-K for fiscal year 1999 (fileno. 333-88777) filed January 31, 2000.
 10.7 Form of Indemnification Agreement between Applied Materials, Inc. and James C. Morgan and Dan Maydan, dated June 11, 1999, incorporated by reference to Applied’sForm 10-K for fiscal year 1999 (fileno. 333-88777) filed January 31, 2000.
 10.8 Form of Indemnification Agreement between Applied Materials, Inc. and certain of its officers, incorporated by reference to Applied’sForm 10-K for fiscal year 1999 (fileno. 333-88777) filed January 31, 2000.
 10.9* Form of Applied Materials, Inc. Nonqualified Stock Option Grant Agreement for use under the Employee Stock Incentive Plan, as amended (formerly named the “Applied Materials Inc. 1995 Equity Incentive Plan”) incorporated by reference to Applied’sForm 10-Q for the quarter ended April 29, 2001 (fileno. 002-45028) filed June 7, 2001.


91

     
Exhibit No.
 
Description
 
 10.10* Applied Materials, Inc. amended and restated 2000 Global Equity Incentive Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2002 (fileno. 000-06920) filed January 23, 2003.
 10.11 Applied Materials Profit Sharing Scheme, incorporated by reference to Applied’sS-8 (fileno. 333-45011) filed January 27, 1998.
 10.12* Term Sheet for employment of Michael R. Splinter, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2003 (fileno. 000-06920) filed June 11, 2003.
 10.13 Binding Memorandum of Understanding between Applied Materials, Inc. and Novellus Systems, Inc. dated September 20, 2004, incorporated by reference to Applied’sForm 8-K (fileno. 000-06920) filed September 24, 2004. (Confidential treatment has been granted for the redacted portions of the agreement.)
 10.14* Applied Materials, Inc. Nonemployee Director Share Purchase Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended May 1, 2005 (fileno. 000-06920) filed May 31, 2005.
 10.15* Election Form to Receive Shares in lieu of Retainer and/or Meeting Fees for use under the Applied Materials, Inc. Nonemployee Director Share Purchase Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended May 1, 2005 (fileno. 000-06920) filed May 31, 2005.
 10.16* Applied Materials, Inc. amended and restated Relocation Policy, incorporated by reference to Applied’sForm 8-K (fileno. 000-06920) filed October 31, 2005.
 10.17* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2005 (fileno. 000-06920) filed December 14, 2005.
 10.18* Form of Performance Share Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2005 (fileno. 000-06920) filed December 14, 2005.
 10.19* Amendment No. 3 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2005 (fileno. 000-06920) filed December 14, 2005.
 10.20* Amendment No. 4 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2005 (fileno. 000-06920) filed December 14, 2005.
 10.21* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 30, 2006 (fileno. 000-06920) filed August 31, 2006.
 10.22* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 30, 2006 (fileno. 000-06920) filed August 31, 2006.
 10.23* Form of Performance Shares Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 30, 2006 (fileno. 000-06920) filed August 31, 2006.
 10.24* Applied Materials, Inc. amended and restated Employee Financial Assistance Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2006 (fileno. 000-06920) filed December 14, 2006.
 10.25* Amendment No. 1 to the Applied Materials, Inc. Employee Financial Assistance Plan, incorporated by reference to Applied’sForm 10-K for fiscal year 2006 (fileno. 000-06920) filed December 14, 2006.
 10.26 $100,000,000364-Day Credit Agreement dated as of September 14, 2006 between Applied Materials, Inc., as borrower, and Citicorp USA, Inc., as lender, incorporated by reference to Applied’sForm 10-K for fiscal year 2006 (fileno. 000-06920) filed December 14, 2006. (Confidential treatment has been granted for redacted portions of the agreement.)**
 10.27 Master Confirmation dated September 18, 2006 between Goldman, Sachs & Co. and Applied Materials, Inc., incorporated by reference to Applied’sForm 10-K for fiscal year 2006(file no. 000-06920) filed December 14, 2006. (Confidential treatment has been granted for redacted portions of the agreement.)


92

     
Exhibit No.
 
Description
 
 10.28 Supplemental Confirmation dated September 18, 2006 between Goldman, Sachs & Co. and Applied Materials, Inc., incorporated by reference to Applied’sForm 10-K for fiscal year 2006(file no. 000-06920) filed December 14, 2006. (Confidential treatment has been granted for redacted portions of the agreement.)
 10.29* Separation Agreement and Release between Applied Materials, Inc. and Nancy H. Handel dated December 15, 2006, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 28, 2007 (fileno. 000-06920) filed February 28, 2007.
 10.30 $1,000,000,000 Credit Agreement dated as of January 26, 2007 among Applied Materials, Inc., as borrower, several lenders named therein and Citicorp USA, Inc., as agent for the lenders, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 28, 2007 (fileno. 000-06920) filed February 28, 2007. (Confidential treatment has been granted for redacted portions of the agreement.)**
 10.31* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 29, 2007 (fileno. 000-06920) filed May 30, 2007.
 10.32* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 29, 2007 (fileno. 000-06920) filed May 30, 2007.
 10.33* Form of Performance Share Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 29, 2007 (fileno. 000-06920) filed May 30, 2007.
 10.34* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 29, 2007 (fileno. 000-06920) filed May 30, 2007.
 10.35* Applied Materials, Inc. amended and restated 2005 Executive Deferred Compensation Plan, incorporated by reference to Applied’sForm 8-K (fileno. 000-06920) filed July 13, 2007.
 10.36 Share Purchase Agreement among Applied Materials, Inc., the Shareholders of HCT Shaping Systems SA and Sellers’ Representative dated June 25, 2007, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 29, 2007 (fileno. 000-06920) filed August 30, 2007.
 10.37* Separation Agreement and Release between Applied Materials, Inc. and Farhad Moghadam dated July 19, 2007, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 29, 2007 (fileno. 000-06920) filed August 30, 2007.
 10.38* Form of Performance Shares Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2007 (fileno. 000-06920) filed December 14, 2007.
 10.39* Form of Performance Shares Agreement for Nonemployee Directors for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2007 (fileno. 000-06920) filed December 14, 2007.
 10.40* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2007 (fileno. 000-06920) filed December 14, 2007.
 10.41* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2007(file no. 000-06920) filed December 14, 2007.
 10.42* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-K for fiscal year 2007 (fileno. 000-06920) filed December 14, 2007.
 10.43 Share Purchase Agreement among Applied Materials, Inc. and the Shareholders of Baccini S.p.A. dated November 18, 2007, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 27, 2008 (fileno. 000-06920) filed March 3, 2008.
 10.44* Adjustments to Executive Officer Salaries, effective December 17, 2007, incorporated by reference to Applied’sForm 10-Q for the quarter ended January 27, 2008 (fileno. 000-06920) filed March 3, 2008.
     
Exhibit No.
 
Description
 
 2.1 Agreement and Plan of Merger, dated May 4, 2006, among Applied Materials, Inc., Applied Films Corporation and Blue Acquisition, Inc., incorporated by reference to Applied’s Form 10-Q for the quarter ended July 30, 2006 (file no. 000-06920) filed August 31, 2006.
 3.1 Certificate of Incorporation of Applied Materials, Inc., as amended and restated through March 10, 2009, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 26, 2009 (file no. 000-06920) filed June 3, 2009.
 3.2 Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock dated as of July 9, 1999, incorporated by reference to Applied’s Form 10-Q for the quarter ended August 1, 1999 (file no. 000-06920) filed September 14, 1999.
 3.3 Bylaws of Applied Materials, Inc., as amended and restated through December 8, 2008, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed December 10, 2008.
 4.1 Form of Indenture (including form of debt security) between Applied Materials, Inc. and Harris Trust Company of California, as Trustee, incorporated by reference to Applied’s Form 8-K(file no. 000-06920) filed August 17, 1994.
 4.2 Rights Agreement, dated as of July 7, 1999, between Applied Materials, Inc. and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Applied’s Registration Statement on Form 8-A (file no. 000-06920) dated July 13, 1999.
 4.3 First Amendment to Rights Agreement, dated as of November 6, 2002, between Applied Materials, Inc. and Computershare Investor Services, LLC, as Rights Agent, incorporated by reference to Applied’s Registration Statement on Form 8-A/A (file no. 000-06920) dated November 25, 2002.
 10.1 License Agreement dated January 1, 1992, between Applied Materials and Varian Associates, Inc., incorporated by reference to Applied’s Form 10-K for fiscal year 1992 (file no. 000-06920) filed December 16, 1992.
 10.2* Applied Materials, Inc. Executive Deferred Compensation Plan, as amended and restated on April 1, 1995, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 30, 1995 (file no. 000-06920) filed June 7, 1995.
 10.3* Amendment No. 1 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 26, 1998 (file no. 000-06920) filed September 9, 1998.
 10.4* Amendment No. 2 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 26, 1998 (file no. 000-06920) filed September 9, 1998.
 10.5* Applied Materials, Inc. Nonqualified Stock Option Agreement related to the Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended May 2, 1999 (file no. 000-06920) filed June 15, 1999.
 10.6 Form of Indemnification Agreement between Applied Materials, Inc. and Non-Employee Directors, dated June 11, 1999, incorporated by reference to Applied’s Form 10-K for fiscal year 1999 (file no. 333-88777) filed January 31, 2000.
 10.7 Form of Indemnification Agreement between Applied Materials, Inc. and James C. Morgan and Dan Maydan, dated June 11, 1999, incorporated by reference to Applied’s Form 10-K for fiscal year 1999 (file no. 333-88777) filed January 31, 2000.
 10.8 Form of Indemnification Agreement between Applied Materials, Inc. and certain of its officers, incorporated by reference to Applied’s Form 10-K for fiscal year 1999 (file no. 333-88777) filed January 31, 2000.
 10.9* Form of Applied Materials, Inc. Nonqualified Stock Option Grant Agreement for use under the Employee Stock Incentive Plan, as amended (formerly named the “Applied Materials Inc. 1995 Equity Incentive Plan”) incorporated by reference to Applied’s Form 10-Q for the quarter ended April 29, 2001 (file no. 002-45028) filed June 7, 2001.


93

     
Exhibit No.
 
Description
 
 10.45* Applied Materials, Inc. amended and restated Employees’ Stock Purchase Plan, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2008 (fileno. 000-06920) filed June 4, 2008.
 10.46* Applied Materials, Inc. amended and restated Stock Purchase Plan for Offshore Employees, incorporated by reference to Applied’sForm 10-Q for the quarter ended April 27, 2008 (fileno. 000-06920) filed June 4, 2008.
 10.47* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’sForm 10-Q for the quarter ended July 27, 2008 (fileno. 000-06920) filed August 29, 2008.
 10.48 Deed of Amendment to Applied Materials Profit Sharing Scheme, dated February 7, 2006, to amend Clause 20 of the Trust Deed thereunder.
 10.49 Deed of Amendment to Applied Materials Profit Sharing Scheme, dated February 7, 2006, to amend the definition of Eligible Employee in the First Schedule to the Trust Deed thereunder.
 10.50* Amendment No. 5 to the Applied Materials, Inc. Executive Deferred Compensation Plan.
 10.51* Amendment No. 1 to the Applied Materials, Inc. 2005 Executive Deferred Compensation Plan.
 10.52* Compensation of Non-Employee Directors.
 10.53* Applied Materials, Inc. amended and restated Senior Executive Bonus Plan.
 10.54* Applied Materials, Inc. amended and restated Global Executive Incentive Plan.
 10.55* Applied Materials, Inc. amended and restated Employee Stock Incentive Plan.
 10.56* Form of Performance Shares Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended.
 21  Subsidiaries of Applied Materials, Inc.
 23  Consent of Independent Registered Public Accounting Firm, KPMG LLP.
 24  Power of Attorney.
 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
Exhibit No.
 
Description
 
 10.10* Applied Materials, Inc. amended and restated 2000 Global Equity Incentive Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2002 (file no. 000-06920) filed January 23, 2003.
 10.11 Applied Materials Profit Sharing Scheme, incorporated by reference to Applied’s S-8 (file no. 333-45011) filed January 27, 1998.
 10.12* Term Sheet for employment of Michael R. Splinter, as amended and restated December 8, 2008, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.13 Binding Memorandum of Understanding between Applied Materials, Inc. and Novellus Systems, Inc. dated September 20, 2004, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed September 24, 2004. (Confidential treatment has been granted for the redacted portions of the agreement.)
 10.14* Applied Materials, Inc. Nonemployee Director Share Purchase Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended May 1, 2005 (file no. 000-06920) filed May 31, 2005.
 10.15* Election Form to Receive Shares in lieu of Retainer and/or Meeting Fees for use under the Applied Materials, Inc. Nonemployee Director Share Purchase Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended May 1, 2005 (file no. 000-06920) filed May 31, 2005.
 10.16* Applied Materials, Inc. amended and restated Relocation Policy, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed October 31, 2005.
 10.17* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2005 (file no. 000-06920) filed December 14, 2005.
 10.18* Form of Performance Share Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2005 (file no. 000-06920) filed December 14, 2005.
 10.19* Amendment No. 3 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2005 (file no. 000-06920) filed December 14, 2005.
 10.20* Amendment No. 4 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2005 (file no. 000-06920) filed December 14, 2005.
 10.21* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 30, 2006 (file no. 000-06920) filed August 31, 2006.
 10.22* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 30, 2006 (file no. 000-06920) filed August 31, 2006.
 10.23* Form of Performance Shares Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 30, 2006 (file no. 000-06920) filed August 31, 2006.
 10.24* Applied Materials, Inc. amended and restated Employee Financial Assistance Plan (as of December 18, 2008), incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.25 $100,000,000 364-Day Credit Agreement dated as of September 14, 2006 between Applied Materials, Inc., as borrower, and Citicorp USA, Inc., as lender, incorporated by reference to Applied’s Form 10-K for fiscal year 2006 (file no. 000-06920) filed December 14, 2006. (Confidential treatment has been granted for redacted portions of the agreement.)**
 10.26 Master Confirmation dated September 18, 2006 between Goldman, Sachs & Co. and Applied Materials, Inc., incorporated by reference to Applied’s Form 10-K for fiscal year 2006 (file no. 000-06920) filed December 14, 2006. (Confidential treatment has been granted for redacted portions of the agreement.)
 10.27 Supplemental Confirmation dated September 18, 2006 between Goldman, Sachs & Co. and Applied Materials, Inc., incorporated by reference to Applied’s Form 10-K for fiscal year 2006 (file no. 000-06920) filed December 14, 2006. (Confidential treatment has been granted for redacted portions of the agreement.)


94

     
Exhibit No.
 
Description
 
 10.28* Separation Agreement and Release between Applied Materials, Inc. and Nancy H. Handel dated December 15, 2006, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 28, 2007 (file no. 000-06920) filed February 28, 2007.
 10.29 $1,000,000,000 Credit Agreement dated as of January 26, 2007 among Applied Materials, Inc., as borrower, several lenders named therein and Citicorp USA, Inc., as agent for the lenders, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 28, 2007 (file no. 000-06920) filed February 28, 2007. (Confidential treatment has been granted for redacted portions of the agreement.)**
 10.30* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 29, 2007 (file no. 000-06920) filed May 30, 2007.
 10.31* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 29, 2007 (file no. 000-06920) filed May 30, 2007.
 10.32* Form of Performance Share Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 29, 2007 (file no. 000-06920) filed May 30, 2007.
 10.33* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 29, 2007 (file no. 000-06920) filed May 30, 2007.
 10.34* Applied Materials, Inc. amended and restated 2005 Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed July 13, 2007.
 10.35 Share Purchase Agreement among Applied Materials, Inc., the Shareholders of HCT Shaping Systems SA and Sellers’ Representative dated June 25, 2007, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 29, 2007 (file no. 000-06920) filed August 30, 2007.
 10.36* Separation Agreement and Release between Applied Materials, Inc. and Farhad Moghadam dated July 19, 2007, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 29, 2007 (file no. 000-06920) filed August 30, 2007.
 10.37* Form of Performance Shares Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2007 (file no. 000-06920) filed December 14, 2007.
 10.38* Form of Performance Shares Agreement for Nonemployee Directors for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2007 (file no. 000-06920) filed December 14, 2007.
 10.39* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2007 (file no. 000-06920) filed December 14, 2007.
 10.40* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2007 (file no. 000-06920) filed December 14, 2007.
 10.41* Form of Non-Qualified Stock Option Grant Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2007 (file no. 000-06920) filed December 14, 2007.
 10.42 Share Purchase Agreement among Applied Materials, Inc. and the Shareholders of Baccini S.p.A. dated November 18, 2007, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 27, 2008 (file no. 000-06920) filed March 3, 2008.
 10.43* Applied Materials, Inc. Employees’ Stock Purchase Plan, amended and restated effective as of September 1, 2009, incorporated by reference to Applied’s Post-Effective Amendment No. 1 to Registration Statement on Form S-8 (file no. 333-143377) filed July 27, 2009.
 10.44* Applied Materials, Inc. Stock Purchase Plan for Offshore Employees, amended and restated effective as of June 8, 2009, incorporated by reference to Applied’s Registration Statement on Form S-8 (file no. 333-160819) filed July 27, 2009.


95

     
Exhibit No.
 
Description
 
 10.45* Form of Restricted Stock Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 27, 2008 (file no. 000-06920) filed August 29, 2008.
 10.46 Deed of Amendment to Applied Materials Profit Sharing Scheme, dated February 7, 2006, to amend Clause 20 of the Trust Deed thereunder, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.47 Deed of Amendment to Applied Materials Profit Sharing Scheme, dated February 7, 2006, to amend the definition of Eligible Employee in the First Schedule to the Trust Deed thereunder, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.48* Amendment No. 5 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.49* Amendment No. 6 to the Applied Materials, Inc. Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009, incorporated by reference to Applied’s Form 10-K for fiscal year 2008(file no. 000-06920) filed December 12, 2008.
 10.50* Amendment No. 1 to the Applied Materials, Inc. 2005 Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.51* Amendment No. 2 to the Applied Materials, Inc. 2005 Executive Deferred Compensation Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.52* Applied Materials, Inc. amended and restated Senior Executive Bonus Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.53* Applied Materials, Inc. amended and restated Global Executive Incentive Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.54* Applied Materials, Inc. amended and restated Employee Stock Incentive Plan, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.55* Form of Performance Shares Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-K for fiscal year 2008 (file no. 000-06920) filed December 12, 2008.
 10.56 Amendment No. 1 to the U.S. $1,000,000,000 Credit Agreement dated as of May 22, 2009 among Applied Materials, Inc., as borrower, several lenders named therein and Citicorp USA, Inc., as agent for the lenders, incorporated by reference to Applied’s Form 10-Q for the quarter ended July 26, 2009. (Confidential treatment has been granted for redacted portions of the agreement.)
 10.57* Applied Materials, Inc. Applied Incentive Plan, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.58* Form of Performance Shares Agreement for Nonemployee Directors for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.59* Form of Non-Qualified Stock Option Agreement for Employees for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.60* Form of Non-Qualified Stock Option Agreement for use under the Applied Materials, Inc. 2000 Global Equity Incentive Plan, as amended, incorporated by reference to Applied’s Form 10-Q for the quarter ended January 25, 2009 (file no. 000-06920) filed March 3, 2009.
 10.61* Reduction in Named Executive Officer Salaries and Foregoing of Bonuses, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 26, 2009 (file no. 000-06920) filed June 3, 2009.
 10.62* Reduction in Non-Employee Director Cash Retainers, incorporated by reference to Applied’s Form 10-Q for the quarter ended April 26, 2009 (file no. 000-06920) filed June 3, 2009.
 10.63* Termination of Reduction in Named Executive Officer Salaries.


96

     
Exhibit No.
 
Description
 
 10.64* Separation Agreement and Release between Applied Materials, Inc. and Thomas M. St. Dennis dated October 5, 2009.
 21  Subsidiaries of Applied Materials, Inc.
 23  Consent of Independent Registered Public Accounting Firm, KPMG LLP.
 24  Power of Attorney.
 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.
 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.
 101.INS XBRL Instance Document
 101.SCH XBRL Taxonomy Extension Schema Document
 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 101.LAB XBRL Taxonomy Extension Definition Linkbase Document
 101.PRE XBRL Taxonomy Extension Label Linkbase Document
 101.DEF XBRL Taxonomy Extension Presentation Linkbase Document
 
 
*Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)3.
 
**Certain schedules and exhibits to this agreement, as set forth in the Table of Contents of the agreement, have been omitted. Applied Materials, Inc. hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.


9497

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
APPLIED MATERIALS, INC.
 
 By: By: 
/s/  MICHAEL R. SPLINTER
Michael R. Splinter
President, Chief Executive Officer
 
Dated: December 12, 200811, 2009
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
       
    
Title
 
Date
 
     
/s/  MICHAEL R. SPLINTER

Michael R. Splinter		 President, Chief Executive
Officer and Director (Principal
Executive Officer)		 December 12, 200811, 2009
     
/s/  GEORGE S. DAVIS

George S. Davis		 Senior Vice President, Chief
Financial Officer
(Principal Financial Officer)		 December 12, 200811, 2009
     
/s/  YVONNE WEATHERFORD

Yvonne Weatherford		 Corporate Vice President, Corporate Controller
(Principal Accounting Officer)		 December 12, 200811, 2009
       
Directors:      
     
*/s/  Michael R. Splinter

James C. MorganMichael R. Splinter		 Chairman of the Board December 12, 2008
*

Deborah A. Coleman		DirectorDecember 12, 200811, 2009
     
*

Aart J. de Geus		 Director December 12, 200811, 2009
     
*

Stephen R. Forrest		 Director December 12, 200811, 2009
     
*

Philip V. Gerdine		 Director December 12, 200811, 2009
     
*

Thomas J. Iannotti		 Director December 12, 200811, 2009

Susan M. James		Director
*

Alexander A. Karsner		DirectorDecember 11, 2009


9598

       
    
Title
 
Date
 
     
*

Alexander A. Karsner
Gerhard H. Parker		 Director December 12, 200811, 2009
     
*

Charles Y.S. Liu
Dennis D. Powell		 Director December 12, 200811, 2009
     
*

Gerhard H. Parker
Willem P. Roelandts		 Director December 12, 200811, 2009
     
*

Dennis D. Powell
James E. Rogers		 Director December 12, 200811, 2009
     
*

Willem P. Roelandts
Robert H. Swan		 Director December 12, 2008

James E. Rogers
Director11, 2009
 
Representing a majority of the members of the Board of
Directors.
 
* By 
/s/  MICHAEL R. SPLINTER
 
Michael R. Splinter
Attorney-in-Fact**
 
 
**By authority of the power of attorney filed herewith.


9699

 
SCHEDULE II
 
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
                                        
 Balance at
 Additions —
 Additions —
   Balance at
  Balance at
 Additions —
 Additions —
   Balance at
 
Fiscal Year
 Beginning of Year Charged to Income Business Combinations Deductions End of Year  Beginning of Year Charged to Income Business Combinations Deductions End of Year 
 (In thousands)  (In thousands) 
2009 $5,275  $62,539  $—  $(501) $67,313 
2008 $4,136  $2,456  $501  $(1,818) $5,275  $4,136  $2,456  $501  $(1,818) $5,275 
2007 $3,342  $858  $342  $(406) $4,136  $3,342  $858  $342  $(406) $4,136 
2006 $3,649  $582  $—  $(889) $3,342 


97100