UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | ||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 29, 2012
or
¨ |
| |
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, | 95052-8039 | |
P.O. Box 58039 Santa Clara, California (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(408) 727-5555
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 þNo 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 þNo o¨
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” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer | Non-accelerated filer | Smaller reporting company | |||
(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 Exchange Act). Yes o¨No þ
Number of shares outstanding of the issuer’s common stock as of July 31, 2011: 1,317,531,478
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 2011
JANUARY 29, 2012
Financial Statements
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Three Months | Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
Net sales | $ | 2,787 | $ | 2,518 | $ | 8,336 | $ | 6,662 | ||||||||
Cost of products sold | 1,603 | 1,658 | 4,827 | 4,164 | ||||||||||||
Gross margin | 1,184 | 860 | 3,509 | 2,498 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research, development and engineering | 282 | 290 | 850 | 865 | ||||||||||||
Selling, general and administrative | 240 | 252 | 679 | 700 | ||||||||||||
Restructuring charges and asset impairments (Note 11) | 3 | 135 | (30 | ) | 248 | |||||||||||
Gain on sale of facilities, net (Note 7) | (28 | ) | — | (27 | ) | — | ||||||||||
Total operating expenses | 497 | 677 | 1,472 | 1,813 | ||||||||||||
Income from operations | 687 | 183 | 2,037 | 685 | ||||||||||||
Impairment of strategic investments | — | 8 | — | 13 | ||||||||||||
Interest and other expense (Note 10) | 25 | 5 | 35 | 15 | ||||||||||||
Interest and other income, net | 7 | 8 | 33 | 27 | ||||||||||||
Income before income taxes | 669 | 178 | 2,035 | 684 | ||||||||||||
Provision for income taxes | 193 | 55 | 564 | 214 | ||||||||||||
Net income | $ | 476 | $ | 123 | $ | 1,471 | $ | 470 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.36 | $ | 0.09 | $ | 1.11 | $ | 0.35 | ||||||||
Diluted | $ | 0.36 | $ | 0.09 | $ | 1.10 | $ | 0.35 | ||||||||
Weighted average number of shares: | ||||||||||||||||
Basic | 1,318 | 1,340 | 1,321 | 1,342 | ||||||||||||
Diluted | 1,330 | 1,349 | 1,333 | 1,351 |
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(Unaudited) (In millions, except per share amounts) | ||||||||
Net sales | $ | 2,189 | $ | 2,686 | ||||
Cost of products sold | 1,403 | 1,550 | ||||||
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Gross margin | 786 | 1,136 | ||||||
Operating expenses: | ||||||||
Research, development and engineering | 304 | 270 | ||||||
Selling, general and administrative | 303 | 221 | ||||||
Restructuring charges and asset impairments (Note 11) | — | (29 | ) | |||||
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Total operating expenses | 607 | 462 | ||||||
Income from operations | 179 | 674 | ||||||
Interest and other expenses | 24 | 5 | ||||||
Interest and other income, net | 4 | 11 | ||||||
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Income before income taxes | 159 | 680 | ||||||
Provision for income taxes | 42 | 174 | ||||||
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Net income | $ | 117 | $ | 506 | ||||
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Earnings per share: | ||||||||
Basic and Diluted | $ | 0.09 | $ | 0.38 | ||||
Weighted average number of shares: | ||||||||
Basic | 1,299 | 1,324 | ||||||
Diluted | 1,310 | 1,335 |
See accompanying Notes to Consolidated Condensed Financial Statements.
2
July 31, | October 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (Notes 3 and 4) | $ | 5,018 | $ | 1,858 | ||||
Short-term investments (Notes 3 and 4) | 739 | 727 | ||||||
Accounts receivable, net (Note 6) | 1,812 | 1,831 | ||||||
Inventories (Note 7) | 1,849 | 1,547 | ||||||
Deferred income taxes, net | 541 | 513 | ||||||
Other current assets | 314 | 289 | ||||||
Total current assets | 10,273 | 6,765 | ||||||
Long-term investments (Notes 3 and 4) | 1,052 | 1,307 | ||||||
Property, plant and equipment, net (Note 7) | 854 | 963 | ||||||
Goodwill (Note 8) | 1,335 | 1,336 | ||||||
Purchased technology and other intangible assets, net (Note 8) | 223 | 287 | ||||||
Deferred income taxes and other assets | 366 | 285 | ||||||
Total assets | $ | 14,103 | $ | 10,943 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt (Note 10) | $ | — | $ | 1 | ||||
Accounts payable and accrued expenses (Note 7) | 1,653 | 1,766 | ||||||
Customer deposits and deferred revenue (Note 7) | 1,347 | 847 | ||||||
Income taxes payable | 278 | 274 | ||||||
Total current liabilities | 3,278 | 2,888 | ||||||
Long-term debt (Note 10) | 1,947 | 204 | ||||||
Employee benefits and other liabilities (Note 13) | 327 | 315 | ||||||
Total liabilities | 5,552 | 3,407 | ||||||
Commitments and contingencies (Note 15) | ||||||||
Stockholders’ equity (Note 12): | ||||||||
Common stock | 13 | 13 | ||||||
Additional paid-in capital | 5,553 | 5,406 | ||||||
Retained earnings | 12,678 | 11,511 | ||||||
Treasury stock | (9,689 | ) | (9,396 | ) | ||||
Accumulated other comprehensive income (loss) | (4 | ) | 2 | |||||
Total stockholders’ equity | 8,551 | 7,536 | ||||||
Total liabilities and stockholders’ equity | $ | 14,103 | $ | 10,943 | ||||
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(Unaudited) | ||||||||
(In millions) | ||||||||
Net income | $ | 117 | $ | 506 | ||||
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Other comprehensive income, net of tax: | ||||||||
Change in unrealized net gain on investments | 1 | (1 | ) | |||||
Change in unrealized net gain on derivative investments | — | (1 | ) | |||||
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Other comprehensive income (loss) | 1 | (2 | ) | |||||
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Comprehensive income | $ | 118 | $ | 504 | ||||
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See accompanying Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
BALANCE SHEETS*
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Additional | Comprehensive | |||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Treasury Stock | Income | ||||||||||||||||||||||||||||
Nine Months Ended July 31, 2011 | Shares | Amount | Capital | Earnings | Shares | Amount | (Loss) | Total | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Balance at October 31, 2010 | 1,328 | $ | 13 | $ | 5,406 | $ | 11,511 | 537 | $ | (9,396 | ) | $ | 2 | $ | 7,536 | |||||||||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
Net income | — | — | — | 1,471 | — | — | — | 1,471 | ||||||||||||||||||||||||
Change in unrealized net gain on investments | — | — | — | — | — | — | (2 | ) | (2 | ) | ||||||||||||||||||||||
Change in unrealized net gain on derivative instruments | — | — | — | — | — | — | (4 | ) | (4 | ) | ||||||||||||||||||||||
Change in defined benefit plan liability | — | — | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||
Comprehensive income | 1,465 | |||||||||||||||||||||||||||||||
Dividends | — | — | — | (304 | ) | — | — | — | (304 | ) | ||||||||||||||||||||||
Share-based compensation | — | — | 110 | — | — | — | — | 110 | ||||||||||||||||||||||||
Issuance under stock plans, net of a tax detriment of $5 and other | 10 | — | 37 | — | — | — | — | 37 | ||||||||||||||||||||||||
Common stock repurchases | (20 | ) | — | — | — | 20 | (293 | ) | — | (293 | ) | |||||||||||||||||||||
Balance at July 31, 2011 | 1,318 | $ | 13 | $ | 5,553 | $ | 12,678 | 557 | $ | (9,689 | ) | $ | (4 | ) | $ | 8,551 | ||||||||||||||||
January 29, 2012 | October 30, 2011 | |||||||
(In millions, except per share amounts) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (Notes 3 and 4) | $ | 1,681 | $ | 5,960 | ||||
Short-term investments (Notes 3 and 4) | 316 | 283 | ||||||
Accounts receivable, net (Note 6) | 1,576 | 1,532 | ||||||
Inventories (Note 7) | 1,772 | 1,701 | ||||||
Deferred income taxes, net | 572 | 580 | ||||||
Other current assets | 240 | 299 | ||||||
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Total current assets | 6,157 | 10,355 | ||||||
Long-term investments (Notes 3 and 4) | 955 | 931 | ||||||
Property, plant and equipment, net (Note 7) | 956 | 866 | ||||||
Goodwill (Notes 8 and 9) | 3,875 | 1,335 | ||||||
Purchased technology and other intangible assets, net (Notes 8 and 9) | 1,519 | 211 | ||||||
Deferred income taxes and other assets | 135 | 163 | ||||||
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Total assets | $ | 13,597 | $ | 13,861 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 2 | $ | — | ||||
Accounts payable and accrued expenses (Note 7) | 1,327 | 1,520 | ||||||
Customer deposits and deferred revenue (Note 7) | 1,014 | 1,116 | ||||||
Income taxes payable | 151 | 158 | ||||||
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Total current liabilities | 2,494 | 2,794 | ||||||
Long-term debt (Note 10) | 1,947 | 1,947 | ||||||
Employee benefits and other liabilities (Note 13) | 506 | 320 | ||||||
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Total liabilities | 4,947 | 5,061 | ||||||
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Stockholders’ equity (Note 12): | ||||||||
Common stock | 13 | 13 | ||||||
Additional paid-in capital | 5,651 | 5,616 | ||||||
Retained earnings | 13,043 | 13,029 | ||||||
Treasury stock | (10,064 | ) | (9,864 | ) | ||||
Accumulated other comprehensive income | 7 | 6 | ||||||
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Total stockholders’ equity | 8,650 | 8,800 | ||||||
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Total liabilities and stockholders’ equity | $ | 13,597 | $ | 13,861 | ||||
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* | Amounts as of January 29, 2012 are unaudited. Amounts as of October 30, 2011 are derived from the October 30, 2011 audited consolidated financial statements. |
See accompanying Notes to Consolidated Condensed Financial Statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
Nine Months Ended | ||||||||
July 31, | August 1, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
(In millions) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,471 | $ | 470 | ||||
Adjustments required to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | 187 | 236 | ||||||
Net loss (gain) on dispositions and fixed asset retirements | (24 | ) | 14 | |||||
Provision for bad debts | — | 7 | ||||||
Restructuring charges and asset impairments | (30 | ) | 248 | |||||
Deferred income taxes | (100 | ) | (215 | ) | ||||
Net recognized loss on investments | 13 | 15 | ||||||
Impairment of strategic investments | — | 13 | ||||||
Share-based compensation | 110 | 95 | ||||||
Changes in operating assets and liabilities, net of amounts acquired: | ||||||||
Accounts receivable | 17 | (648 | ) | |||||
Inventories | (310 | ) | 100 | |||||
Prepaid income taxes | — | 185 | ||||||
Other current assets | (36 | ) | (38 | ) | ||||
Other assets | 1 | (7 | ) | |||||
Accounts payable and accrued expenses | (92 | ) | 374 | |||||
Customer deposits and deferred revenue | 498 | 167 | ||||||
Income taxes payable | 4 | 192 | ||||||
Employee benefits and other liabilities | 19 | (10 | ) | |||||
Cash provided by operating activities | 1,728 | 1,198 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (136 | ) | (134 | ) | ||||
Proceeds from sale of facilities and dispositions, net of cash sold | 126 | — | ||||||
Cash paid for acquisition, net of cash acquired | — | (323 | ) | |||||
Proceeds from sales and maturities of investments | 1,173 | 967 | ||||||
Purchases of investments | (945 | ) | (1,357 | ) | ||||
Cash provided by (used in) investing activities | 218 | (847 | ) | |||||
Cash flows from financing activities: | ||||||||
Debt borrowings (repayments), net | 1,744 | (6 | ) | |||||
Payments of debt issuance costs | (14 | ) | — | |||||
Proceeds from common stock issuances | 64 | 99 | ||||||
Common stock repurchases | (293 | ) | (200 | ) | ||||
Payments of dividends to stockholders | (291 | ) | (255 | ) | ||||
Cash provided by (used in) financing activities | 1,210 | (362 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 4 | (1 | ) | |||||
Increase (decrease) in cash and cash equivalents | 3,160 | (12 | ) | |||||
Cash and cash equivalents — beginning of period | 1,858 | 1,576 | ||||||
Cash and cash equivalents — end of period | $ | 5,018 | $ | 1,564 | ||||
Supplemental cash flow information: | ||||||||
Cash payments for income taxes | $ | 661 | $ | 255 | ||||
Cash refunds for income taxes | $ | 4 | $ | 199 | ||||
Cash payments for interest | $ | 7 | $ | 7 |
(UNAUDITED)
(In millions)
Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance at October 30, 2011 | 1,306 | $ | 13 | $ | 5,616 | $ | 13,029 | 573 | $ | (9,864 | ) | $ | 6 | $ | 8,800 | |||||||||||||||||
Net income | — | — | — | 117 | — | — | — | 117 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||
Dividends | — | — | — | (103 | ) | — | — | — | (103 | ) | ||||||||||||||||||||||
Share-based compensation | — | — | 53 | — | — | — | — | 53 | ||||||||||||||||||||||||
Stock options assumed in connection with acquisition | — | — | 11 | — | — | — | — | 11 | ||||||||||||||||||||||||
Issuance under stock plans, net of tax detriment of $14 and other | 3 | — | (29 | ) | — | — | — | — | (29 | ) | ||||||||||||||||||||||
Common stock repurchases | (18 | ) | — | — | — | 18 | (200 | ) | — | (200 | ) | |||||||||||||||||||||
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Balance at January 29, 2012 | 1,291 | $ | 13 | $ | 5,651 | $ | 13,043 | 591 | $ | (10,064 | ) | $ | 7 | $ | 8,650 | |||||||||||||||||
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See accompanying Notes to Consolidated Condensed Financial Statements.
5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(Unaudited) (In millions) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 117 | $ | 506 | ||||
Adjustments required to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | 112 | 63 | ||||||
Net loss on dispositions and fixed asset retirements | 2 | 1 | ||||||
Provision for bad debts | 4 | — | ||||||
Restructuring charges and asset impairments | — | (29 | ) | |||||
Deferred income taxes | 28 | 10 | ||||||
Net recognized loss on investments | 5 | 4 | ||||||
Share-based compensation | 53 | 33 | ||||||
Changes in operating assets and liabilities, net of amounts acquired: | ||||||||
Accounts receivable | 147 | (115 | ) | |||||
Inventories | 179 | (100 | ) | |||||
Income taxes receivable | 6 | 1 | ||||||
Other current assets | 90 | (4 | ) | |||||
Accounts payable and accrued expenses | (390 | ) | (159 | ) | ||||
Customer deposits and deferred revenue | (154 | ) | 208 | |||||
Income taxes payable | (22 | ) | 1 | |||||
Employee benefits and other liabilities | 4 | 5 | ||||||
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Cash provided by operating activities | 181 | 425 | ||||||
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Cash flows from investing activities: | ||||||||
Capital expenditures | (37 | ) | (24 | ) | ||||
Cash paid for acquisition, net of cash acquired | (4,179 | ) | — | |||||
Proceeds from sale of facility | — | 39 | ||||||
Proceeds from sales and maturities of investments | 313 | 443 | ||||||
Purchases of investments | (254 | ) | (537 | ) | ||||
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Cash used in investing activities | (4,157 | ) | (79 | ) | ||||
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Cash flows from financing activities: | ||||||||
Proceeds from common stock issuances | 2 | 13 | ||||||
Common stock repurchases | (200 | ) | (150 | ) | ||||
Payment of dividends to stockholders | (104 | ) | (93 | ) | ||||
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Cash used in financing activities | (302 | ) | (230 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents | (1 | ) | — | |||||
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Increase (decrease) in cash and cash equivalents | (4,279 | ) | 116 | |||||
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Cash and cash equivalents — beginning of period | 5,960 | 1,858 | ||||||
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Cash and cash equivalents — end of period | $ | 1,681 | $ | 1,974 | ||||
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Supplemental cash flow information: | ||||||||
Cash payments for income taxes | $ | 33 | $ | 165 | ||||
Cash refunds from income taxes | $ | 3 | $ | 1 | ||||
Cash payments for interest | $ | 41 | $ | — |
See accompanying Notes to Consolidated Condensed Financial Statements.
(Unaudited)
Note 1 |
Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 31, 201030, 2011 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report onForm 10-K for the fiscal year ended October 31, 2010 (201030, 2011 (2011 Form 10-K). Applied’s results of operations for the three and nine months ended July 31, 2011January 29, 2012 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2012 and 2011 each contains 52 weeks, while fiscal 2010 contained 53 weeks, and the first nine monthsquarter of fiscal 2012 and 2011 each contained 39 weeks, while13 weeks.
In November 2011, Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian). Beginning in the first nine monthsquarter of fiscal 2010 contained 40 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
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 probable. 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, 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 generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. The completed contract method is used for SunFabtmtm thin film production lines. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.
6
Recent Accounting Pronouncements
In June 2011, the FASB issued authoritative guidance on the presentation of comprehensive income to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ThisThe authoritative guidance eliminatesalso required presentation of adjustments for items that are reclassified from other comprehensive income in the option to presentstatement where the components of net income and the components of other comprehensivecompressive income as part ofare presented, which was indefinitely deferred by the statement of equity. ThisFASB in December 2011. Applied early adopted this authoritative guidance is effective for Applied in the first quarter of fiscal 2012, with early adoption permitted, and should be applied retrospectively.2012. The implementation of this authoritative guidance will change the presentationdid not have an impact on Applied’s financial position or results of comprehensive income only.
In May 2011, the FASB issued authoritative guidance to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This authoritative guidance limits thehighest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured aton a net basis, and provides guidance on the applicability of premiums and discounts. This authoritative guidance also expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for Applied in the first quarter of fiscal 2012.2013. The implementation of this authoritative guidance is not expected to have a material impact on Applied’s financial position or results of operations.
7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Note 2 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, and employee stock purchase plans shares) 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 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.
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 476 | $ | 123 | $ | 1,471 | $ | 470 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding | 1,318 | 1,340 | 1,321 | 1,342 | ||||||||||||
Effect of dilutive stock options, restricted stock units and employee stock purchase plans shares | 12 | 9 | 12 | 9 | ||||||||||||
Denominator for diluted earnings per share | 1,330 | 1,349 | 1,333 | 1,351 | ||||||||||||
Basic earnings per share | $ | 0.36 | $ | 0.09 | $ | 1.11 | $ | 0.35 | ||||||||
Diluted earnings per share | $ | 0.36 | $ | 0.09 | $ | 1.10 | $ | 0.35 | ||||||||
Potentially dilutive securities | 17 | 34 | 17 | 34 |
8
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions, except per share amounts) | ||||||||
Numerator: | ||||||||
Net income | $ | 117 | $ | 506 | ||||
Denominator: | ||||||||
Weighted average common shares outstanding | 1,299 | 1,324 | ||||||
Effect of dilutive stock options, restricted stock units and employee stock purchase plans shares | 11 | 11 | ||||||
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|
|
| |||||
Denominator for diluted earnings per share | 1,310 | 1,335 | ||||||
|
|
|
| |||||
Basic and diluted earnings per share | $ | 0.09 | $ | 0.38 | ||||
Potentially dilutive securities | 18 | 19 |
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Note 3 Cash, Cash Equivalents and Investments
|
The following tables summarizes Applied’s cash, cash equivalents and investments by security type:
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Estimated | ||||||||||||||
July 31, 2011 | Cost | Gains | Losses | Fair Value | ||||||||||||
(In millions) | ||||||||||||||||
Cash | $ | 918 | $ | — | $ | — | $ | 918 | ||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | 3,895 | — | — | 3,895 | ||||||||||||
U.S. commercial paper, corporate bonds and medium-term notes | 190 | — | — | 190 | ||||||||||||
Obligations of states and political subdivisions | 15 | — | — | 15 | ||||||||||||
Total Cash equivalents | 4,100 | — | — | 4,100 | ||||||||||||
Total Cash and Cash equivalents | $ | 5,018 | $ | — | $ | — | $ | 5,018 | ||||||||
Short-term and long-term investments: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 483 | $ | 3 | $ | — | $ | 486 | ||||||||
Obligations of states and political subdivisions | 452 | 3 | — | 455 | ||||||||||||
U.S. commercial paper, corporate bonds and medium-term notes | 390 | 5 | — | 395 | ||||||||||||
Other debt securities* | 363 | 3 | 1 | 365 | ||||||||||||
Total fixed income securities | 1,688 | 14 | 1 | 1,701 | ||||||||||||
Publicly traded equity securities | 8 | 21 | — | 29 | ||||||||||||
Equity investments in privately-held companies | 61 | — | — | 61 | ||||||||||||
Total short-term and long-term investments | $ | 1,757 | $ | 35 | $ | 1 | $ | 1,791 | ||||||||
Total Cash, Cash equivalents and Investments | $ | 6,775 | $ | 35 | $ | 1 | $ | 6,809 | ||||||||
9
January 29, 2012 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
(In millions) | ||||||||||||||||
Cash | $ | 855 | $ | — | $ | — | $ | 855 | ||||||||
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Cash equivalents: | ||||||||||||||||
Money market funds | 819 | — | — | 819 | ||||||||||||
Municipal securities | 7 | — | — | 7 | ||||||||||||
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|
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|
|
|
| |||||||||
Total Cash equivalents | 826 | — | — | 826 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total Cash and Cash equivalents | $ | 1,681 | $ | — | $ | — | $ | 1,681 | ||||||||
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|
|
|
|
|
|
| |||||||||
Short-term and long-term investments: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 198 | $ | 1 | $ | — | $ | 199 | ||||||||
Non-U.S. government securities* | 44 | — | — | 44 | ||||||||||||
Municipal securities | 367 | 2 | — | 369 | ||||||||||||
Commercial paper, corporate bonds and medium-term notes | 218 | 3 | — | 221 | ||||||||||||
Asset-backed and mortgage-backed securities | 303 | 3 | 1 | 305 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | 1,130 | 9 | 1 | 1,138 | ||||||||||||
Publicly traded equity securities | 40 | 20 | — | 60 | ||||||||||||
Equity investments in privately-held companies | 73 | — | — | 73 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total short-term and long-term investments | $ | 1,243 | $ | 29 | $ | 1 | $ | 1,271 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Cash, Cash equivalents and Investments | $ | 2,924 | $ | 29 | $ | 1 | $ | 2,952 | ||||||||
|
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Estimated | ||||||||||||||
October 31, 2010 | Cost | Gains | Losses | Fair Value | ||||||||||||
(In millions) | ||||||||||||||||
Cash | $ | 701 | $ | — | $ | — | $ | 701 | ||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | 1,139 | — | — | 1,139 | ||||||||||||
Obligations of states and political subdivisions | 18 | — | — | 18 | ||||||||||||
Total Cash equivalents | 1,157 | — | — | 1,157 | ||||||||||||
Total Cash and Cash equivalents | $ | 1,858 | $ | — | $ | — | $ | 1,858 | ||||||||
Short-term and long-term investments: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 665 | $ | 8 | $ | — | $ | 673 | ||||||||
Obligations of states and political subdivisions | 500 | 5 | — | 505 | ||||||||||||
U.S. commercial paper, corporate bonds and medium-term notes | 502 | 7 | — | 509 | ||||||||||||
Other debt securities* | 261 | 3 | 1 | 263 | ||||||||||||
Total fixed income securities | 1,928 | 23 | 1 | 1,950 | ||||||||||||
Publicly traded equity securities | 9 | 16 | — | 25 | ||||||||||||
Equity investments in privately-held companies | 59 | — | — | 59 | ||||||||||||
Total short-term and long-term investments | $ | 1,996 | $ | 39 | $ | 1 | $ | 2,034 | ||||||||
Total Cash, Cash equivalents and Investments | $ | 3,854 | $ | 39 | $ | 1 | $ | 3,892 | ||||||||
October 30, 2011 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
(In millions) | ||||||||||||||||
Cash | $ | 297 | $ | — | $ | — | $ | 297 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | 5,663 | — | — | 5,663 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Cash equivalents | 5,663 | — | — | 5,663 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Cash and Cash equivalents | $ | 5,960 | $ | — | $ | — | $ | 5,960 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Short-term and long-term investments: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 184 | $ | 1 | $ | — | $ | 185 | ||||||||
Non-U.S. government securities* | 40 | — | — | 40 | ||||||||||||
Municipal securities | 371 | 2 | — | 373 | ||||||||||||
Commercial paper, corporate bonds and medium-term notes | 216 | 3 | 1 | 218 | ||||||||||||
Asset-backed and mortgage-backed securities | 307 | 3 | 1 | 309 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | 1,118 | 9 | 2 | 1,125 | ||||||||||||
Publicly traded equity securities | 8 | 19 | — | 27 | ||||||||||||
Equity investments in privately-held companies | 62 | — | — | 62 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total short-term and long-term investments | $ | 1,188 | $ | 28 | $ | 2 | $ | 1,214 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Total Cash, Cash equivalents and Investments | $ | 7,148 | $ | 28 | $ | 2 | $ | 7,174 | ||||||||
|
|
|
|
|
|
|
|
* | Includes agency and corporate debt securities guaranteed by non-U.S. governments, which consist |
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at July 31, 2011:
Estimated | ||||||||
Cost | Fair Value | |||||||
(In millions) | ||||||||
Due in one year or less | $ | 704 | $ | 707 | ||||
Due after one through five years | 618 | 626 | ||||||
Due after five years | 3 | 3 | ||||||
No single maturity date | 432 | 455 | ||||||
$ | 1,757 | $ | 1,791 | |||||
10
Cost | Estimated Fair Value | |||||||
(In millions) | ||||||||
Due in one year or less | $ | 285 | $ | 286 | ||||
Due after one through five years | 537 | 541 | ||||||
Due after five years | 5 | 6 | ||||||
No single maturity date** | 416 | 438 | ||||||
|
|
|
| |||||
$ | 1,243 | $ | 1,271 | |||||
|
|
|
|
** | Securities with no single maturity date include publicly-traded and privately-held equity securities, and asset-backed and mortgage-backed securities. |
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Gains and Losses on Investments
Gross realized gains and losses on sales of investments during the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Gross realized gains | $ | 1 | $ | 1 | $ | 14 | $ | 3 | ||||||||
Gross realized losses | $ | 1 | $ | 1 | $ | 2 | $ | 1 |
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Gross realized gains | $ | 2 | $ | 5 | ||||
Gross realized losses | $ | 1 | $ | 1 |
At July 31, 2011,January 29, 2012, Applied had a gross unrealized loss of $1 million related to its investment portfolio due to a decrease in the fair value of certain 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 an unrealized loss was considered to be temporary, orother-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied has determined that the gross unrealized losses on its marketable securities at July 31, 2011January 29, 2012 are temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three and nine months ended July 31, 2011.January 29, 2012. For the three months ended January 30, 2011, Applied determined that the gross unrealized losses on its marketable securities at August 1, 2010, were temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three and nine months ended August 1, 2010.
The following table provides the fair market value of Applied’s investments with unrealized losses that are not deemed to beother-than-temporarily impaired as of July 31,January 29, 2012.
In Loss Position for Less Than 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||
(In millions) | ||||||||||||||||
Asset-backed and mortgage-backed securities | $ | 57 | $ | 1 | $ | 57 | $ | 1 | ||||||||
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|
|
|
|
|
|
| |||||||||
Total | $ | 57 | $ | 1 | $ | 57 | $ | 1 | ||||||||
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|
|
|
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|
|
The following table provides the fair market value of Applied’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of October 30, 2011.
In Loss Position for | ||||||||||||||||
Less Than 12 Months | Total | |||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Fair Value | Losses | Fair Value | Losses | |||||||||||||
(In millions) | ||||||||||||||||
Other debt securities | $ | 71 | $ | 1 | $ | 71 | $ | 1 | ||||||||
In Loss Position for Less Than 12 Months | Total | |||||||||||||||
Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | |||||||||||||
(In millions) | ||||||||||||||||
Commercial paper, corporate bonds and medium-term notes | $ | 32 | $ | 1 | $ | 32 | $ | 1 | ||||||||
Asset-backed and mortgage-backed securities | 77 | 1 | 77 | 1 | ||||||||||||
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|
|
|
|
|
| |||||||||
Total | $ | 109 | $ | 2 | $ | 109 | $ | 2 | ||||||||
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|
|
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|
|
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.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Note 4 Fair Value Measurements
Applied’s financial assets are measured and recorded at fair value, except for equity investments held in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed forother-than-temporary impairment when events or circumstances indicate that another-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that another-than-temporary decline in value may have occurred.
11
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — 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 values. 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.
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 July 31, 2011,January 29, 2012, substantially all of Applied’savailable-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.
12
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Assets and 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 July 31, 2011January 29, 2012 and October 31, 2010:
July 31, 2011 | October 31, 2010 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 3,895 | $ | — | $ | — | $ | 3,895 | $ | 1,139 | $ | — | $ | — | $ | 1,139 | ||||||||||||||||
U.S. Treasury and agency securities | 116 | 370 | — | 486 | 153 | 520 | — | 673 | ||||||||||||||||||||||||
U.S. commercial paper, corporate bonds and medium-term notes | — | 585 | — | 585 | — | 509 | — | 509 | ||||||||||||||||||||||||
Obligations of states and political subdivisions | — | 470 | — | 470 | — | 523 | — | 523 | ||||||||||||||||||||||||
Other debt securities | — | 365 | — | 365 | — | 263 | — | 263 | ||||||||||||||||||||||||
Publicly traded equity securities | 29 | — | — | 29 | 25 | — | — | 25 | ||||||||||||||||||||||||
Foreign exchange derivative assets | — | 2 | — | 2 | — | 6 | — | 6 | ||||||||||||||||||||||||
Total | $ | 4,040 | $ | 1,792 | $ | — | $ | 5,832 | $ | 1,317 | $ | 1,821 | $ | — | $ | 3,138 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Foreign exchange derivative liabilities | $ | — | $ | (4 | ) | $ | — | $ | (4 | ) | $ | — | $ | (1 | ) | $ | — | $ | (1 | ) | ||||||||||||
Total | $ | — | $ | (4 | ) | $ | — | $ | (4 | ) | $ | — | $ | (1 | ) | $ | — | $ | (1 | ) | ||||||||||||
January 29, 2012 | October 30, 2011 | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Money market funds | $ | 819 | $ | — | $ | — | $ | 819 | $ | 5,663 | $ | — | $ | — | $ | 5,663 | ||||||||||||||||
U.S. Treasury and agency securities | 102 | 97 | — | 199 | 109 | 76 | — | 185 | ||||||||||||||||||||||||
Non-U.S. government securities | — | 44 | — | 44 | — | 40 | — | 40 | ||||||||||||||||||||||||
Municipal securities | — | 376 | — | 376 | — | 373 | — | 373 | ||||||||||||||||||||||||
Commercial paper, corporate bonds and medium-term notes | — | 221 | — | 221 | — | 218 | — | 218 | ||||||||||||||||||||||||
Asset-backed and mortgage-backed securities | — | 305 | — | 305 | — | 309 | — | 309 | ||||||||||||||||||||||||
Publicly traded equity securities | 60 | — | — | 60 | 27 | — | — | 27 | ||||||||||||||||||||||||
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|
|
|
|
| |||||||||||||||||
Total | $ | 981 | $ | 1,043 | $ | — | $ | 2,024 | $ | 5,799 | $ | 1,016 | $ | — | $ | 6,815 | ||||||||||||||||
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| |||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Deferred compensation | $ | (6 | ) | $ | — | $ | — | $ | (6 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
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| |||||||||||||||||
Total | $ | (6 | ) | $ | — | $ | — | $ | (6 | ) | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
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The deferred compensation liability represents our obligation to pay benefits under a non-qualified deferred compensation plan. The related investments, held in a rabbi trust, consist of equity securities, primarily mutual funds, and are classified as Level 1 in the valuation hierarchy.
There were no significant transfers in and out of Level 1 and Level 2 fair value measurements and there were no Level 3 investments during eitherboth the three and nine months ended July 31, 2011 or the threeJanuary 29, 2012 and nine months ended August 1, 2010.January 30, 2011. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements during both the three and nine months ended July 31, 2011January 29, 2012 and August 1, 2010.
Assets and 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 $61$73 million at July 31, 2011,January 29, 2012, of which $39$51 million of investments were accounted for under the cost method of accounting and $22 million of Level 3 investments had been measured at fair value on a non-recurring basis due to another-than-temporary decline in value. At August 1, 2010,October 30, 2011, equity investments in privately-held companies totaled $62 million, of which $39$40 million of investments were accounted for under the cost method of accounting and $23$22 million of Level 3 investments had been measured at fair value on a non-recurring basis due to another-than-temporary decline in value.
13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Total | Total | |||||||||||||||||||
Impairment for | Impairment for | |||||||||||||||||||
the Three | the Nine | |||||||||||||||||||
Months Ended | Months Ended | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | July 31, 2011 | July 31, 2011 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2011 | $ | — | $ | — | $ | 22 | $ | — | $ | — | ||||||||||
Total | Total | |||||||||||||||||||
Impairment for | Impairment for | |||||||||||||||||||
the Three | the Nine | |||||||||||||||||||
Months Ended | Months Ended | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | August 1, 2010 | August 1, 2010 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2010 | $ | — | $ | — | $ | 23 | $ | 8 | $ | 13 | ||||||||||
other-than-temporaryOther decline in value.
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. TheAt January 29, 2012, the carrying amount of Applied’s long-term debt at July 31, 2011 was $1.9 billion and the estimated fair value was $2.1$2.2 billion. At October 31, 2010, the carrying amount of long-term debt was $205 million and the estimated fair value was $238 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.
Note 5 Derivative Instruments and Hedging Activities
|
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. 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. 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.
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
14
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 or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at July 31, 2011January 29, 2012 is expected to be reclassified into earnings within 12 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 are recognized promptly in earnings. If the transaction being hedged is 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 amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and nine months ended July 31, 2011January 29, 2012 and August 1, 2010.
Additionally, 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.
The fair values of derivative instruments at January 29, 2012 and October 30, 2011 were as follows:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||
Balance Sheet | July 31, | Balance Sheet | July 31, | |||||||||||||||||
Location | 2011 | October 31, 2010 | Location | 2011 | October 31, 2010 | |||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||
Derivatives Designated as Hedging Instruments | ||||||||||||||||||||
Foreign exchange contracts | Other current assets | $ | 1 | $ | 5 | Accrued expenses | $ | 4 | $ | 1 | ||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||
Foreign exchange contracts | Other current assets | $ | 1 | $ | 1 | Accrued expenses | $ | — | $ | — | ||||||||||
Total derivatives | $ | 2 | $ | 6 | $ | 4 | $ | 1 | ||||||||||||
15
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 was as follows:
Three Months Ended July 31, 2011 | Three Months Ended August 1, 2010 | |||||||||||||||||||||||||
Ineffective Portion | Ineffective Portion | |||||||||||||||||||||||||
and Amount | and Amount | |||||||||||||||||||||||||
Location of Gain | Excluded from | Excluded from | ||||||||||||||||||||||||
or (Loss) | Effectiveness | Effectiveness | ||||||||||||||||||||||||
Reclassified from | Effective Portion | Testing | Effective Portion | Testing | ||||||||||||||||||||||
AOCI into Income | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | ||||||||||||||||||||
or Recognized in | Recognized in | Reclassified from | Recognized in | Recognized in | Reclassified from | Recognized in | ||||||||||||||||||||
Income | AOCI | AOCI into Income | Income | AOCI | AOCI into Income | Income | ||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||||||
Foreign exchange contracts | Cost of products sold | $ | (7 | ) | $ | 1 | $ | (2 | ) | $ | (3 | ) | $ | (1 | ) | $ | (2 | ) | ||||||||
Foreign exchange contracts | General and administrative | — | 2 | — | — | (3 | ) | — | ||||||||||||||||||
Total | $ | (7 | ) | $ | 3 | $ | (2 | ) | $ | (3 | ) | $ | (4 | ) | $ | (2 | ) | |||||||||
Nine Months Ended July 31, 2011 | Nine Months Ended August 1, 2010 | |||||||||||||||||||||||||
Ineffective Portion | Ineffective Portion | |||||||||||||||||||||||||
and Amount | and Amount | |||||||||||||||||||||||||
Location of Gain | Excluded from | Excluded from | ||||||||||||||||||||||||
or (Loss) | Effectiveness | Effectiveness | ||||||||||||||||||||||||
Reclassified from | Effective Portion | Testing | Effective Portion | Testing | ||||||||||||||||||||||
AOCI into Income | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | Gain or (Loss) | ||||||||||||||||||||
or Recognized in | Recognized in | Reclassified from | Recognized in | Recognized in | Reclassified from | Recognized in | ||||||||||||||||||||
Income | AOCI | AOCI into Income | Income | AOCI | AOCI into Income | Income | ||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||||||
Foreign exchange contracts | Cost of products sold | $ | 5 | $ | 6 | $ | (5 | ) | $ | (5 | ) | $ | (3 | ) | $ | (2 | ) | |||||||||
Foreign exchange contracts | General and administrative | — | 5 | (1 | ) | — | (4 | ) | (1 | ) | ||||||||||||||||
Total | $ | 5 | $ | 11 | $ | (6 | ) | $ | (5 | ) | $ | (7 | ) | $ | (3 | ) | ||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||
Location of Gain | ||||||||||||||||||
or (Loss) | Amount of Gain or | Amount of Gain or | ||||||||||||||||
Recognized in | (Loss) | (Loss) | ||||||||||||||||
Income | Recognized in Income | Recognized in Income | ||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||
Foreign exchange contracts | General and administrative | $ | (5 | ) | $ | (8 | ) | $ | (2 | ) | $ | (12 | ) | |||||
Total | $ | (5 | ) | $ | (8 | ) | $ | (2 | ) | $ | (12 | ) | ||||||
Three Months Ended January 29, 2012 | Three Months Ended January 30, 2011 | |||||||||||||||||||||||||
Effective Portion | Ineffective Portion Excluded from Effectiveness Testing | Effective Portion | Ineffective Portion Excluded from Effectiveness Testing | |||||||||||||||||||||||
Location of Gain or | Gain or (Loss) Recognized in AOCI | Gain or (Loss) Reclassified from AOCI into Income | Gain or (Loss) Recognized in Income | Gain or (Loss) Recognized in AOCI | Gain or (Loss) Reclassified from AOCI into Income | Gain or (Loss) Recognized in Income | ||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||||||
Foreign exchange contracts | Cost of products sold | $ | — | $ | 1 | $ | — | $ | 4 | $ | 4 | $ | (2 | ) | ||||||||||||
Foreign exchange contracts | General and administrative | — | (2 | ) | — | — | 2 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | — | $ | (1 | ) | $ | — | $ | 4 | $ | 6 | $ | (2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) Recognized in Income | ||||||||||
Location of Gain or (Loss) Recognized in Income | Three Months Ended January 29, 2012 | Three Months Ended January 30, 2011 | ||||||||
(In millions) | ||||||||||
Derivatives Not Designated as Hedging Instruments | ||||||||||
Foreign exchange contracts | General and administrative | $ | 6 | $ | 2 | |||||
|
|
|
| |||||||
Total | $ | 6 | $ | 2 | ||||||
|
|
|
|
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 of the derivative instruments discussed above, 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 net liability position was not materialimmaterial as of July 31, 2011.
16
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Note 6 Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied also discounts letters of credit through various financial institutions. Applied sells its accounts receivable without recourse. Details of discounted letters of credit, factored accounts receivable and discounted promissory notes for the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Discounted letters of credit | $ | 38 | $ | 81 | $ | 211 | $ | 134 | ||||||||
Factored accounts receivable and discounted promissory notes | 25 | 56 | 80 | 106 | ||||||||||||
Total | $ | 63 | $ | 137 | $ | 291 | $ | 240 | ||||||||
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Discounted letters of credit | $ | — | $ | 123 | ||||
Factored accounts receivable and discounted promissory notes | 70 | 36 | ||||||
|
|
|
| |||||
Total | $ | 70 | $ | 159 | ||||
|
|
|
|
Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for allboth periods presented.
Accounts receivable are presented net of allowance for doubtful accounts of $74$77 million at both July 31, 2011January 29, 2012 and $73 million at October 31, 2010.30, 2011. Applied sells principally to manufacturers within the semiconductor, display and solar industries. As a result of challenging economic and industry conditions, certain of these manufacturers may experience difficulties in meeting their obligations in a timely manner. While Applied believes that its allowance for doubtful accounts is adequate and represents Applied’s best estimate as of July 31, 2011,January 29, 2012, Applied will continue to closely monitor customer liquidity and other economic conditions, which may result in changes to Applied’s estimates regarding collectability.
Note 7 Balance Sheet Detail
January 29, 2012 | October 31, 2011 | |||||||
(In millions) | ||||||||
Inventories | ||||||||
Customer service spares | $ | 319 | $ | 328 | ||||
Raw materials | 447 | 407 | ||||||
Work-in-process | 319 | 336 | ||||||
Finished goods* | 687 | 630 | ||||||
|
|
|
| |||||
$ | 1,772 | $ | 1,701 | |||||
|
|
|
|
* | |
Included in finished goods inventory is $192 million at January 29, 2012, and $224 million at October 30, 2011, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note |
July 31, | October 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Inventories | ||||||||
Customer service spares | $ | 328 | $ | 324 | ||||
Raw materials | 408 | 260 | ||||||
Work-in-process | 457 | 500 | ||||||
Finished goods | 656 | 463 | ||||||
$ | 1,849 | $ | 1,547 | |||||
17
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
July 31, | October 31, | |||||||||||
Useful Life | 2011 | 2010 | ||||||||||
(In years) | (In millions) | |||||||||||
Property, Plant and Equipment, Net | ||||||||||||
Land and improvements | $ | 169 | $ | 227 | ||||||||
Buildings and improvements | 3-30 | 1,170 | 1,234 | |||||||||
Demonstration and manufacturing equipment | 3-5 | 679 | 670 | |||||||||
Furniture, fixtures and other equipment | 3-15 | 715 | 719 | |||||||||
Construction in progress | 24 | 19 | ||||||||||
Gross property, plant and equipment | 2,757 | 2,869 | ||||||||||
Accumulated depreciation | (1,903 | ) | (1,906 | ) | ||||||||
$ | 854 | $ | 963 | |||||||||
Useful Life | January 29, 2012 | October 30, 2011 | ||||||||
(In years) | (In millions) | |||||||||
Property, Plant and Equipment, Net | ||||||||||
Land and improvements | $ | 170 | $ | 163 | ||||||
Buildings and improvements | 3-30 | 1,188 | 1,155 | |||||||
Demonstration and manufacturing equipment | 3-5 | 727 | 686 | |||||||
Furniture, fixtures and other equipment | 3-15 | 730 | 722 | |||||||
Construction in progress | 34 | 12 | ||||||||
|
|
|
| |||||||
Gross property, plant and equipment | 2,849 | 2,738 | ||||||||
Accumulated depreciation | (1,893 | ) | (1,872 | ) | ||||||
|
|
|
| |||||||
$ | 956 | $ | 866 | |||||||
|
|
|
|
In the first quarter of fiscal 2011, Applied received $39 million in proceeds from the sale of a property located in North America and incurred a loss of $1 million on the transaction. In the third quarter
January 29, 2012 | October 30, 2011 | |||||||
(In millions) | ||||||||
Accounts Payable and Accrued Expenses | ||||||||
Accounts payable | $ | 484 | $ | 484 | ||||
Compensation and employee benefits | 268 | 455 | ||||||
Warranty | 161 | 168 | ||||||
Dividends payable | 103 | 104 | ||||||
Other accrued taxes | 54 | 81 | ||||||
Interest payable | 14 | 31 | ||||||
Restructuring reserve | 9 | 11 | ||||||
Other | 234 | 186 | ||||||
|
|
|
| |||||
$ | 1,327 | $ | 1,520 | |||||
|
|
|
|
As of fiscal 2011, Applied received $60 million in proceeds from the sale of a property located in North America and incurred a gain of $28 million on the transaction. In the third quarter of fiscal 2011, Applied completed the divestiture of certain assets held for sale for proceeds of $27 million, net of cash sold.
July 31, | October 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Accounts Payable and Accrued Expenses | ||||||||
Accounts payable | $ | 656 | $ | 658 | ||||
Compensation and employee benefits | 405 | 435 | ||||||
Warranty | 188 | 155 | ||||||
Dividends payable | 105 | 93 | ||||||
Other accrued taxes | 76 | 99 | ||||||
Restructuring reserve | 16 | 104 | ||||||
Interest payable | 15 | 1 | ||||||
Other | 192 | 221 | ||||||
$ | 1,653 | $ | 1,766 | |||||
July 31, | October 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Customer Deposits and Deferred Revenue | ||||||||
Customer deposits | $ | 442 | $ | 407 | ||||
Deferred revenue | 905 | 440 | ||||||
$ | 1,347 | $ | 847 | |||||
January 29, 2012 | October 30, 2011 | |||||||
(In millions) | ||||||||
Customer Deposits and Deferred Revenue | ||||||||
Customer deposits | $ | 198 | $ | 249 | ||||
Deferred revenue | 816 | 867 | ||||||
|
|
|
| |||||
$ | 1,014 | $ | 1,116 | |||||
|
|
|
|
Applied typically receives deposits on future deliverables from customers in theits Energy and Environmental Solutions and Display segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.
18
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
GoodwillNote 8 Business Combination
On November 10, 2011, Applied completed the acquisition of Varian, a public company manufacturer of semiconductor processing equipment and Purchased Intangible Assets
Applied allocated 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 thethis 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 one or more reporting units as ofbased on their estimated fair values. Applied recorded $2.5 billion in goodwill, which represented 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 partexcess of the purchase price allocation process.
The following table summarizes the preliminary allocation of this transfer, Applied reallocated $17 million of goodwill from its Energythe assets acquired and Environmental Solutions segment to its Applied Global Services segment.
19
Estimated Fair Values | Acquisition 2012 | |||
(In millions) | ||||
Cash and cash equivalents | $ | 632 | ||
Short-term investments | 56 | |||
Accounts receivable, net | 194 | |||
Inventories | 250 | |||
Deferred income taxes and other current assets | 66 | |||
Long-term investments | 62 | |||
Property and equipment, net | 104 | |||
Goodwill | 2,540 | |||
Purchased intangible assets | 1,365 | |||
Other assets | 10 | |||
|
| |||
Total assets acquired | 5,279 | |||
|
| |||
Accounts payable and accrued expenses | (134 | ) | ||
Customer deposits and deferred revenue | (52 | ) | ||
Income taxes payable | (60 | ) | ||
Deferred income taxes | (147 | ) | ||
Other liabilities | (25 | ) | ||
|
| |||
Total liabilities assumed | (418 | ) | ||
|
| |||
Purchase price allocated | $ | 4,861 | ||
|
|
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
The following table presents detail of goodwill and other indefinite-lived intangible assets were as follows:
July 31, 2011 | October 31, 2010 | |||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||
Intangible | Intangible | |||||||||||||||||||||||
Goodwill | Assets | Total | Goodwill | Assets | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Silicon Systems Group | $ | 381 | $ | — | $ | 381 | $ | 381 | $ | — | $ | 381 | ||||||||||||
Applied Global Services | 193 | — | 193 | 177 | 18 | 195 | ||||||||||||||||||
Display | 116 | — | 116 | 116 | — | 116 | ||||||||||||||||||
Energy and Environmental Solutions | 645 | — | 645 | 662 | — | 662 | ||||||||||||||||||
Carrying amount | $ | 1,335 | $ | — | $ | 1,335 | $ | 1,336 | $ | 18 | $ | 1,354 | ||||||||||||
Useful Life | Purchased Intangible Assets 2012 | |||||||
(In years) | (In millions) | |||||||
Developed technology | 1-7 | $ | 987 | |||||
Customer relationships | 15 | 150 | ||||||
In-process technology | 142 | |||||||
Patents and trademarks | 10 | 69 | ||||||
Backlog | 1 | 7 | ||||||
Covenant not to compete | 2 | 10 | ||||||
|
| |||||||
Total purchased intangible assets | $ | 1,365 | ||||||
|
|
The results of operations of Varian are included in Applied’s consolidated results of operations, primarily in the results for the Silicon Systems Group and Applied Global Services segments, beginning in the first quarter of fiscal 2012. For the three months ended January 29, 2012, net sales of Varian products of approximately $200 million and an operating loss of approximately $130 million were included in the consolidated results of operations. Results of operations included charges of $153 million attributable to inventory fair value adjustments on products sold, amortization of purchased intangible assets, share-based compensation associated with finite lives usingaccelerated vesting, deal costs and other integration costs associated with the straight-line method overacquisition. Of this amount, deal costs and other acquisition-related costs of $36 million were not allocated to the estimated economic livessegments.
The following unaudited pro forma consolidated results of operations assume the acquisition was completed as of the beginning of the fiscal reporting periods presented. The pro forma consolidated results of operations for the three months ended January 30, 2011 combine the results of Applied for the three months ended January 30, 2011, with the results of Varian for the three months ended December 31, 2010.
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions, except per share amounts) | ||||||||
Net sales | $ | 2,189 | $ | 2,969 | ||||
Net income | $ | 196 | $ | 449 | ||||
Basic and diluted earnings per share | $ | 0.15 | $ | 0.34 |
The pro forma results above include adjustments related to the purchase price allocation and financing of the acquisition, primarily to increase depreciation and amortization with the higher values of property, plant and equipment and identifiable intangible assets, ranging from 1 to 15 years.
20
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
July 31, 2011 | October 31, 2010 | |||||||||||||||||||||||
Other | Other | |||||||||||||||||||||||
Purchased | Intangible | Purchased | Intangible | |||||||||||||||||||||
Technology | Assets | Total | Technology | Assets | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Silicon Systems Group | $ | 310 | $ | 20 | $ | 330 | $ | 310 | $ | 20 | $ | 330 | ||||||||||||
Applied Global Services | 28 | 40 | 68 | 32 | 61 | 93 | ||||||||||||||||||
Display | 110 | 33 | 143 | 110 | 33 | 143 | ||||||||||||||||||
Energy and Environmental Solutions | 105 | 232 | 337 | 105 | 232 | 337 | ||||||||||||||||||
Gross carrying amount | $ | 553 | $ | 325 | $ | 878 | $ | 557 | $ | 346 | $ | 903 | ||||||||||||
Silicon Systems Group | $ | (255 | ) | $ | (8 | ) | $ | (263 | ) | $ | (247 | ) | $ | (6 | ) | $ | (253 | ) | ||||||
Applied Global Services | (19 | ) | (31 | ) | (50 | ) | (19 | ) | (43 | ) | (62 | ) | ||||||||||||
Display | (100 | ) | (24 | ) | (124 | ) | (96 | ) | (23 | ) | (119 | ) | ||||||||||||
Energy and Environmental Solutions | (45 | ) | (173 | ) | (218 | ) | (37 | ) | (163 | ) | (200 | ) | ||||||||||||
Accumulated amortization | $ | (419 | ) | $ | (236 | ) | $ | (655 | ) | $ | (399 | ) | $ | (235 | ) | $ | (634 | ) | ||||||
Carrying amount | $ | 134 | $ | 89 | $ | 223 | $ | 158 | $ | 111 | $ | 269 | ||||||||||||
Amortization Expense | ||||
(In millions) | ||||
2011 | $ | 12 | ||
2012 | 50 | |||
2013 | 48 | |||
2014 | 40 | |||
2015 | 25 | |||
Thereafter | 48 | |||
$ | 223 | |||
Note 9 Goodwill, Purchased Technology and Other Intangible Assets
Goodwill and Purchased Intangible Assets
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 one or more reporting units 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.
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. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
In fiscal 2011, Applied and Varian Semiconductor Equipment Associates, Inc. (Varian) announcedadopted authoritative guidance which allows entities to use a qualitative approach to test goodwill for impairment. This authoritative guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the signingfair value of a definitive merger agreement (the Merger Agreement) underreporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare 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 16, based on the manner in which Applied agreed to acquire Varianoperates its business and the 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. Estimated future cash flows will be impacted by a number of factors including anticipated future operating results, estimated cost of capital and/or discount rates. Under the market approach, Applied estimates the fair value based on market multiples of revenue or earnings for $63 per share in cash. The total consideration is approximately $4.9 billion, which includes certain post-closing equity based compensation. Varian designs, manufactures, markets and services semiconductor processing equipment and iscomparable companies, as appropriate. If the leading supplier of ion implantation equipment used by chip makers around the world. Varian stockholders approved the Merger Agreement at a special meeting held on August 11, 2011. Consummationfair value of the proposed merger remains subjectreporting unit exceeds the carrying value of the net assets assigned to variousthat 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 represents 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 charge equal to the difference.
Applied performed a qualitative assessment to test goodwill for impairment in the fourth quarter of fiscal 2011, and determined that it was more likely than not that each of its reporting units’ fair value exceeded its carrying value and that it was not necessary to perform the two-step goodwill impairment test.
During the first quarter of fiscal 2012, goodwill and other customary closing conditions, including receiptindefinite-lived intangible assets increased by $2.7 billion due to the acquisition of certain domestic and foreign antitrust approvals (including under theU.S. Hart-Scott-Rodino Antitrust Improvements Act
21
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Details of 1976,indefinite-lived intangible assets were as amended (the HSR Act). Upon completionfollows:
January 29, 2012 | October 30, 2011 | |||||||||||||||||||||||
Goodwill | Other Intangible Assets | Total | Goodwill | Other Intangible Assets | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Silicon Systems Group | $ | 2,108 | $ | 142 | $ | 2,250 | $ | 381 | $ | — | $ | 381 | ||||||||||||
Applied Global Services | 1,006 | — | 1,006 | 193 | — | 193 | ||||||||||||||||||
Display | 116 | — | 116 | 116 | — | 116 | ||||||||||||||||||
Energy and Environmental Solutions | 645 | — | 645 | 645 | — | 645 | ||||||||||||||||||
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Carrying amount | $ | 3,875 | $ | 142 | $ | 4,017 | $ | 1,335 | $ | — | $ | 1,335 | ||||||||||||
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Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.
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 merger, Varian will operate within Applied’s Silicon Systems Group and will continueassets, ranging from 1 to 15 years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be based in Gloucester, Massachusetts.
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 including, among others, by Varian to accept a superior offerrequire revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or by Applied upon achanges 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.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Details of finite-lived intangible assets were as follows:
January 29, 2012 | October 30, 2011 | |||||||||||||||||||||||
Purchased Technology | Other Intangible Assets | Total | Purchased Technology | Other Intangible Assets | Total | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Gross carrying amount: | ||||||||||||||||||||||||
Silicon Systems Group | $ | 1,300 | $ | 252 | $ | 1,552 | $ | 310 | $ | 20 | $ | 330 | ||||||||||||
Applied Global Services | 28 | 44 | 72 | 28 | 40 | 68 | ||||||||||||||||||
Display | 110 | 33 | 143 | 110 | 33 | 143 | ||||||||||||||||||
Energy and Environmental Solutions | 106 | 232 | 338 | 105 | 232 | 337 | ||||||||||||||||||
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Gross carrying amount | $ | 1,544 | $ | 561 | $ | 2,105 | $ | 553 | $ | 325 | $ | 878 | ||||||||||||
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Accumulated amortization: | ||||||||||||||||||||||||
Silicon Systems Group | $ | (295 | ) | $ | (17 | ) | $ | (312 | ) | $ | (256 | ) | $ | (8 | ) | $ | (264 | ) | ||||||
Applied Global Services | (20 | ) | (36 | ) | (56 | ) | (20 | ) | (31 | ) | (51 | ) | ||||||||||||
Display | (103 | ) | (25 | ) | (128 | ) | (102 | ) | (25 | ) | (127 | ) | ||||||||||||
Energy and Environmental Solutions | (51 | ) | (181 | ) | (232 | ) | (48 | ) | (177 | ) | (225 | ) | ||||||||||||
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Accumulated amortization | $ | (469 | ) | $ | (259 | ) | $ | (728 | ) | $ | (426 | ) | $ | (241 | ) | $ | (667 | ) | ||||||
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Carrying amount | $ | 1,075 | $ | 302 | $ | 1,377 | $ | 127 | $ | 84 | $ | 211 | ||||||||||||
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During the first quarter of fiscal 2012, the change in the recommendation of Varian’s board of directors, Varian will owe Applied a cash termination fee of $147 million; and (ii) upon terminationgross carrying amount of the Merger Agreementamortized intangible assets was approximately $1.2 billion, due to the failure to obtain certain antitrust approvals, Applied will oweacquisition of Varian a cash termination feeas discussed in Note 8.
Details of $200 million.
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Silicon Systems Group | $ | 48 | $ | 4 | ||||
Applied Global Services | 5 | 2 | ||||||
Display | 2 | 2 | ||||||
Energy and Environmental Solutions | 6 | 6 | ||||||
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Total | $ | 61 | 14 | |||||
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For the transaction with a combination of existing cash balancesthree months ended January 29, 2012 and debt. On June 8,January 30, 2011, Applied issued senior unsecured notes (the Notes) in the aggregate principal amount of $1.75 billion with the intent of using the net proceeds of the Notes to fund a portion of the consideration and certain costs associated with the proposed merger. In the event that the Merger Agreement is terminated or Applied does not consummate the merger on or before May 31, 2012, Applied will be required to redeem the Notes at a redemption price of 101% of the aggregate principal amount of the accrued and unpaid interest. The indenture governing the Notes includes certain covenants with which Appliedamortization expense was in compliance at July 31, 2011. See Note 10 for additional discussion of long-term debt.
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Cost of products sold | $ | 52 | $ | 9 | ||||
Selling, general and administrative | 9 | 5 | ||||||
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Total amortization expense | $ | 61 | $ | 14 | ||||
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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
As of January 29, 2012, future estimated amortization expense is expected to work cooperatively with the DOJbe as the DOJ conducts its review. The effect of the DOJ’s request is to extend the waiting period imposed by the HSR Act until 30 days after Applied has substantially complied with the request and Varian has substantially complied with the request that it received.
Amortization Expense | ||||
(In millions) | ||||
2012 | $ | 164 | ||
2013 | 210 | |||
2014 | 199 | |||
2015 | 182 | |||
2016 | 174 | |||
Thereafter | 448 | |||
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| |||
$ | 1,377 | |||
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Note 10 Borrowing Facilities and Long-Term Debt
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed four-year revolving credit agreement with a group of banks that is scheduled to expire in May 2015. 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 July 31, 2011.January 29, 2012. Remaining credit facilities in the amount of approximately $103 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both July 31, 2011January 29, 2012 and October 31, 2010.
Long-term debt outstanding as of July 31,January 29, 2012 and October 30, 2011 was as follows:
Principal | Stated | Effective | Interest | Interest | ||||||||||||
Due Date | Amount | Interest Rate | Interest Rate | Pay Date | Pay Date | |||||||||||
(In millions) | ||||||||||||||||
June 15, 2016 | $ | 400 | 2.650 | % | 2.666 | % | June 15 | December 15 | ||||||||
October 15, 2017 | 200 | 7.125 | % | 7.190 | % | April 15 | October 15 | |||||||||
June 15, 2021 | 750 | 4.300 | % | 4.326 | % | June 15 | December 15 | |||||||||
June 15, 2041 | 600 | 5.850 | % | 5.879 | % | June 15 | December 15 | |||||||||
Other debt | 1 | |||||||||||||||
1,951 | ||||||||||||||||
Total unamortized discount | (4 | ) | ||||||||||||||
Current portion | — | |||||||||||||||
Total long-term debt | $ | 1,947 | ||||||||||||||
22
Due Date | Principal Amount | Stated Interest Rate | Effective Interest Rate | Interest Payment Dates | ||||||||||
(In millions) | ||||||||||||||
June 15, 2016 | $ | 400 | 2.650 | % | 2.666 | % | June 15, December 15 | |||||||
October 15, 2017 | 200 | 7.125 | % | 7.190 | % | April 15, October 15 | ||||||||
June 15, 2021 | 750 | 4.300 | % | 4.326 | % | June 15, December 15 | ||||||||
June 15, 2041 | 600 | 5.850 | % | 5.879 | % | June 15, December 15 | ||||||||
Other debt | 1 | |||||||||||||
|
| |||||||||||||
1,951 | ||||||||||||||
Total unamortized discount | (4 | ) | ||||||||||||
|
| |||||||||||||
Total long-term debt | $ | 1,947 | ||||||||||||
|
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Principal | Stated | Effective | Interest | Interest | ||||||||||||||||
Due Date | Amount | Interest Rate | Interest Rate | Pay Date | Pay Date | |||||||||||||||
(In millions) | ||||||||||||||||||||
October 15, 2017 | $ | 200 | 7.125 | % | 7.190 | % | April 15 | October 15 | ||||||||||||
Other debt | 5 | |||||||||||||||||||
205 | ||||||||||||||||||||
Total unamortized discount | — | |||||||||||||||||||
Current portion | (1 | ) | ||||||||||||||||||
Total long-term debt | $ | 204 | ||||||||||||||||||
Form S-3Note 11 Restructuring Charges and related preliminary prospectus supplement filed with the Securities and Exchange Commission (SEC) on June 1, 2011, and a related final prospectus supplement filed with the SEC on June 2, 2011. Applied intends to use the net proceeds of the Notes to fund a portion of the consideration payable in, and certain costs associated with, Applied’s proposed merger with Varian. In the event that the Merger Agreement is terminated or Applied does not consummate the merger on or before May 31, 2012, Applied will be required to redeem the Notes at a redemption price equal to 101% of the aggregate principal amount of the Notes plus any accrued and unpaid interest.
On July 21, 2010, Applied announced a plan to restructure its Energy and Environmental Solutions segment, which was expected to impact between 400 to 500 positions globally. During the third quarter of fiscal 2010, Applied incurred employee severance charges of $45 million associated with this program. During the first quarter of fiscal 2011, as a result of changes in Applied’s operating environment and business requirements, Applied
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
revised its workforce reduction under this program to approximately 200 positions and recorded a favorable adjustment of $28 million. The improved economic environment continued in the second quarter of fiscal 2011, and as a result Applied recorded an additional favorable adjustment of $8 million. As of July 31, 2011,January 29, 2012, the remaining severance accrual associated with restructuring reserves under this program was $1 million.
On November 11, 2009, Applied announced a restructuring program 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. During the first quarter of fiscal 2010, Applied recorded restructuring charges of $104 million associated with this program. During the third quarter of fiscal 2010, as a result of changes in business requirements, Applied revised its global workforce reduction under this program to approximately 1,000 positions and recorded a favorable adjustment of $20 million. The improved economic environment continued in the second quarter ofpositions. In fiscal 2011, and as a result2010, Applied recorded an additional favorable adjustmentrestructuring charges of $19 million.$84 million associated with this program. As of July 31, 2011,January 29, 2012, the remaining severance accrual associated with restructuring reserves under this program was $10$3 million.
During the first and second quartersquarter of fiscal 2011, Applied favorably adjusted the remaining severance accrual associated with a global restructuring program announced in the first quarter of fiscal 2009 by $4 million and $1 million, respectively.million. As of July 31, 2011,January 29, 2012, no severance accrual remained under this program.
23
Severance | ||||
(In millions) | ||||
Balance, October 31, 2010 | $ | 99 | ||
Consumption of reserves | (14 | ) | ||
Adjustment of restructuring reserves | (32 | ) | ||
Balance, January 30, 2011 | 53 | |||
Consumption of reserves | (7 | ) | ||
Adjustment of restructuring reserves | (28 | ) | ||
Balance, May 1, 2011 | 18 | |||
Consumption of reserves | (7 | ) | ||
Balance, July 31, 2011 | $ | 11 | ||
Severance | ||||
(In millions) | ||||
Balance, October 30, 2011 | $ | 6 | ||
Consumption of reserves | (2 | ) | ||
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| |||
Balance, January 29, 2012 | $ | 4 | ||
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In addition, as of July 31, 2011,January 29, 2012, Applied had $5 million in restructuring reserves associated with facilities.
Note 12 | Stockholders’ Equity, |
Accumulated Other Comprehensive Income
Components of accumulated other comprehensive income, on an after-tax basis where applicable, were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Net income | $ | 476 | $ | 123 | $ | 1,471 | $ | 470 | ||||||||
Change in unrealized net gain on investments | (1 | ) | 5 | (2 | ) | 7 | ||||||||||
Change in unrealized net gain on derivative instruments | ||||||||||||||||
qualifying as cash flow hedges | (6 | ) | 1 | (4 | ) | 1 | ||||||||||
Change in defined benefit plan liability | — | — | (1 | ) | — | |||||||||||
Foreign currency translation adjustments | 1 | 1 | 1 | — | ||||||||||||
Comprehensive income | $ | 470 | $ | 130 | $ | 1,465 | $ | 478 | ||||||||
24
January 29, 2012 | October 30, 2011 | |||||||
(In millions) | ||||||||
Pension liability | $ | (25 | ) | $ | (25 | ) | ||
Unrealized gain on investments, net | 18 | 17 | ||||||
Cumulative translation adjustments | 14 | 14 | ||||||
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| |||||
$ | 7 | $ | 6 | |||||
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|
July 31, | October 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Pension liability | $ | (40 | ) | $ | (39 | ) | ||
Unrealized gain on investments, net | 23 | 25 | ||||||
Unrealized gain on derivative instruments qualifying as cash flow hedges | — | 4 | ||||||
Cumulative translation adjustments | 13 | 12 | ||||||
Accumulated other comprehensive income (loss) | $ | (4 | ) | $ | 2 | |||
On March 8, 2010, Applied’s Board of Directors approved a new stock repurchase program authorizing up to $2.0 billion in repurchases over the next three years ending in March 2013. Under this authorization, Applied renewed its systematic stock repurchase program and may also make supplemental stock repurchases from time to time, depending on market conditions, stock price and other factors.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
The following table summarizes Applied’s stock repurchases duringfor the threefirst quarters of fiscal 2012 and nine months ended July 31,2011:
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions, except per share amounts) | ||||||||
Shares of common stock repurchased | 18 | 11 | ||||||
Cost of stock repurchased | $ | 200 | $ | 150 | ||||
Average price paid per share | $ | 10.95 | $ | 13.74 |
Dividends
In December 2011, and August 1, 2010:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
Shares of common stock repurchased | 2 | 8 | 20 | 16 | ||||||||||||
Cost of stock repurchased | $ | 25 | $ | 100 | $ | 293 | $ | 200 | ||||||||
Average price paid per share | $ | 12.77 | $ | 12.65 | $ | 14.31 | $ | 12.87 |
Date Declared | Record Date | Payable Date | Amount per Share | |||||
December 7, 2010 | March 2, 2011 | March 23, 2011 | $ | 0.07 | ||||
March 8, 2011 | June 1, 2011 | June 22, 2011 | $ | 0.08 | ||||
June 6, 2011 | August 31, 2011 | September 21, 2011 | $ | 0.08 |
Share-Based Compensation
Applied has adopted stock plans that permit grants to employees of share-based awards, including stock options, restricted stock, and restricted stock units (also referred to as “performance shares” under Applied’s principal equity compensation plan, the Employee Stock Incentive Plan). and performance units. 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
25
During the three and nine months ended July 31,January 29, 2012 and January 30, 2011, and August 1, 2010, Applied recognized equity-basedshare-based compensation expense related to stock options, ESPP shares, restricted stock units, restricted stock and restricted stock.performance units. Total share-based compensation and related tax benefits were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Share-based compensation | $ | 38 | $ | 32 | $ | 110 | $ | 95 | ||||||||
Tax benefit recognized | $ | 11 | $ | 10 | $ | 33 | $ | 28 |
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Share-based compensation | $ | 53 | $ | 33 | ||||
Tax benefit recognized | $ | 15 | $ | 10 |
The effect of share-based compensation on the results of operations for the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Cost of products sold | $ | 13 | $ | 10 | $ | 36 | $ | 23 | ||||||||
Research, development, and engineering | 12 | 11 | 35 | 33 | ||||||||||||
General and administrative | 9 | 8 | 27 | 24 | ||||||||||||
Marketing and selling | 4 | 3 | 12 | 15 | ||||||||||||
Total share-based compensation | $ | 38 | $ | 32 | $ | 110 | $ | 95 | ||||||||
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Cost of products sold | $ | 13 | $ | 11 | ||||
Research, development, and engineering | 13 | 10 | ||||||
Selling, general and administrative | 27 | 12 | ||||||
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| |||||
Total share-based compensation | $ | 53 | $ | 33 | ||||
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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.
At July 31, 2011,January 29, 2012, Applied had $243$313 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of stock options, restricted stock units, and restricted stock, performance units and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of 2.82.9 years. At July 31, 2011,January 29, 2012, there were 155150 million shares available for grants of stock option,options, restricted stock unit, andunits, restricted stock, grantsperformance units and other share-based awards, and an additional 5654 million shares available for issuance under the ESPP.
Stock Options
Applied grants options to purchase, at future dates, shares of its common stock to employees and consultants. The exercise price of each stock option equals the fair market value of Applied common stock on the date of grant. Options typically vest over three to four years, subject to the grantee’s continued service with Applied through the scheduled vesting date, 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. There were no stock options granted in the ninethree months ended July 31,January 29, 2012 and January 30, 2011.
26
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
(In millions, except per share amounts) | ||||||||
Outstanding, at October 31, 2010 | 51 | $ | 15.04 | |||||
Granted | — | $ | — | |||||
Exercised | (4 | ) | $ | 9.29 | ||||
Canceled and forfeited | (15 | ) | $ | 20.76 | ||||
Outstanding at July 31, 2011 | 32 | $ | 13.10 | |||||
Exercisable at July 31, 2011 | 26 | $ | 14.22 |
Shares | Weighted Average Exercise Price | |||||||
(In millions, except per share amounts) | ||||||||
Outstanding, at October 30, 2011 | 30 | $ | 13.05 | |||||
Assumed in Varian acquisition | 5 | $ | 4.85 | |||||
Exercised | — | $ | — | |||||
Canceled and forfeited | (8 | ) | $ | 16.77 | ||||
|
| |||||||
Outstanding at January 29, 2012 | 27 | $ | 10.50 | |||||
|
| |||||||
Exercisable at January 29, 2012 | 19 | $ | 11.61 |
Restricted Stock Units, and Restricted Stock and Performance Units
Restricted stock units are converted into shares of Applied common stock upon vesting on aone-for-one basis. Restricted stock has the same rights as other issued and outstanding shares of Applied common stock except these shares have no right to dividends and are held in escrow until the award vests. Performance units are awards that result in a payment to a grantee in shares of Applied common stock on a one-for-one basis if performance goals and/or other vesting criteria established by the Human Resources and Compensation Committee of Applied’s Board of Directors (the Committee) are achieved or the awards otherwise vest. Restricted stock units, and awards of restricted stock and performance units typically vest over three to four years. Vesting of restricted stock unitsyears and restricted stockvesting usually is subject to the grantee’s continued service with Applied and, in some cases, achievement of specified performance goals. The compensation expense related to thesethe service-based awards is determined using the fair market value of Applied common stock on the date of the grant, and the compensation expense is recognized over the vesting period. Beginning in fiscal 2007, Applied initiated a performance-based equity award program for named
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Restricted stock units, restricted stock and performance units granted to certain executive officers and other key employees. Awardsemployees are also subject to the achievement of restricted stock units or restricted stock granted under this programspecified performance goals (performance-based awards). These performance-based awards become eligible to 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 then actually will vest only if the grantee remains employed by Applied through theeach applicable vesting date. The
For performance-based awards granted during fiscal 2011, 2010 and 2008, the performance goals require (i) the achievement of targeted annual, adjusted annual operating profit margin levels compared to Applied’s peer companies in at least one of the four fiscal years beginning with the fiscal year of the grant.grant, and (ii) that Applied’s annual adjusted operating profit margin is positive in such year. An award that has become eligible for time-based vesting based on achievement of the performance goals will vest over approximately four years from the date of grant, provided that the grantee remains employed by Applied through each scheduled vesting date. Performance-based awards that do not become eligible for time-based vesting in a particular year may become eligible for time-based vesting in subsequent years up until the fourth fiscal year after grant, after which they are forfeited if the required performance goals have not been achieved. During the three months ended January 29, 2012, the Committee granted performance-based awards that require the achievement of positive and relative annual, adjusted operating profit margin goals in a manner similar to the previously granted performance-based awards, with additional shares becoming eligible for time-based vesting depending on certain levels of achievement of Applied’s total shareholder return (TSR) relative to a peer group comprised of companies in the Standard & Poor’s 500 Technology Sector measured at the end of a two-year period beginning fiscal 2012. The fair value of these performance-based awards is estimated using the fair market value of Applied common stock on the date of the grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period.period as described above. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures. The Committee approved
As of January 29, 2012, 100 percent of the grantperformance-based awards granted in fiscal 2011 had been earned based on performance and became subject to the additional time-based vesting requirements. As of 2 million performance-based restricted stock units and 0.1 million performance-based sharesJanuary 29, 2012, 82 percent of restricted stock under this program in the nine months ended July 31, 2011. With respect to the performance-based awards granted in fiscal 2010 as of July 31, 2011, 40 percent of the awards had been earned based on performance and became subject to the additional time-based vesting requirements. The remaining 6018 percent of the awards may still be earned, depending on future performance in one or moreboth of fiscal years 2011 through2012 and 2013. With respect to mostAs of January 29, 2012, 90 percent of the performance-based awards granted in fiscal 2008 as of July 31, 2011, 78had been earned. The remaining 10 percent of the awards had been earned, subject towere forfeited as specified performance goals were not fully achieved. No performance-based awards were granted in fiscal 2009.
Restricted stock unit, restricted stock and performance share unit activity for the three months ended January 29, 2012 was as follows:
Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | ||||||||||
(In millions, except per share amounts) | ||||||||||||
Non-vested restricted stock units, restricted stock and performance units at October 30, 2011 | 28 | $ | 12.64 | 2.8 Years | ||||||||
Granted | 14 | $ | 10.64 | |||||||||
Vested | (5 | ) | $ | 13.08 | ||||||||
Canceled | (1 | ) | $ | 13.55 | ||||||||
|
| |||||||||||
Non-vested restricted stock units, restricted stock and performance units at January 29, 2012 | 36 | $ | 11.79 | 3.1 Years | ||||||||
|
|
At January 29, 2012, 1 million additional time-based vesting requirements. The remaining 22 percent of theperformance-based awards may stillcould be earned depending on performance during fiscal 2011.
27
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Grant Date | Remaining | |||||||||||
Shares | Fair Value | Contractual Term | ||||||||||
(In millions, except per share amounts) | ||||||||||||
Non-vested restricted stock units and restricted stock at October 31, 2010 | 18 | $ | 13.33 | 2.8 Years | ||||||||
Granted | 17 | $ | 12.65 | |||||||||
Vested | (4 | ) | $ | 13.59 | ||||||||
Canceled | (2 | ) | $ | 13.18 | ||||||||
Non-vested restricted stock units and restricted stock at July 31, 2011 | 29 | $ | 12.90 | 2.9 Years | ||||||||
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 or end of each6-month purchase period, subject to certain limits. Based on the Black-Scholes option pricing model, the weighted average estimated fair value of purchase rights under the ESPP was $3.61 and $3.00 for the nine months ended July 31, 2011 and August 1, 2010, respectively. No shares were issued under the ESPP during the three months ended July 31, 2011January 29, 2012 or August 1, 2010. The number of shares issued underJanuary 30, 2011. Compensation expense associated with the ESPP during the nine months ended July 31, 2011 and August 1, 2010 was 3 million and 2 million, respectively. 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:
Nine Months Ended | ||||||||
July 31, | August 1, | |||||||
2011 | 2010 | |||||||
ESPP: | ||||||||
Dividend yield | 1.98 | % | 2.24 | % | ||||
Expected volatility | 27 | % | 33 | % | ||||
Risk-free interest rate | 0.17 | % | 0.18 | % | ||||
Expected life (in years) | 0.5 | 0.5 |
28
Note 13 Employee Benefit Plans
Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain medical and vision benefits to eligible retirees. A summary of the components of net periodic benefit costs of these defined and postretirement benefit plans for the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 is presented below:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Service cost | $ | 4 | $ | 3 | $ | 11 | $ | 10 | ||||||||
Interest cost | 3 | 4 | 10 | 10 | ||||||||||||
Expected return on plan assets | (3 | ) | (2 | ) | (8 | ) | (6 | ) | ||||||||
Amortization of actuarial loss | 1 | — | 2 | 1 | ||||||||||||
Net periodic benefit cost | $ | 5 | $ | 5 | $ | 15 | $ | 15 | ||||||||
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Service cost | $ | 4 | $ | 4 | ||||
Interest cost | 4 | 4 | ||||||
Expected return on plan assets | (3 | ) | (3 | ) | ||||
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| |||||
Net periodic benefit cost | $ | 5 | $ | 5 | ||||
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Note 14 Income Taxes
Applied’s effective income tax rate slightly increased to 26.4% for the thirdfirst quarter of fiscal 2012 from 25.6% for the first quarter of fiscal 2011. The rate for the first quarter of fiscal 2011 and fiscal 2010 was a provision of 28.8 percent and 30.8 percent, respectively. Applied’s effective income tax rate for the first nine months of fiscal 2011 and fiscal 2010 was a provision of 27.7 percent and 31.3 percent, respectively. The rates for the three and nine months ended July 31, 2011 were both lower than the rates for the comparable periods in the prior year primarily due to an increase in income in jurisdictions outside the U.S. with lower tax rates. The tax rates for the three and nine months ended July 31, 2011 further benefited from tax incentives offered in several jurisdictions. The tax rates for the nine months ended July 31, 2011 and for the three and nine months ended August 1, 2010 included the impact of restructuring charges.legislation restoring the U.S. federal research and development tax credit, which favorably affected the effective tax rate by approximately 2 percentage points. 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 the tax rate on equity compensation. Management carefully monitors these factors and timely adjusts the interim income tax rate accordingly.
A number of Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. federal returns for fiscal 20052008 and later years, California returns for fiscal 2006 and later years, tax returns for certain other states for fiscal 20052006 and later years, and tax returns in certain jurisdictions outside of the United States for fiscal 20032004 and later years.
The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that may be made as part of the resolution process, is highly uncertain.uncertain and could cause an impact to Applied’s consolidated results of operations. This could also cause large fluctuations in the balance sheet classification of current assets and non-current assets and liabilities.
29
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Note 15 Warranty, Guarantees and Contingencies
|
Changes in the warranty reserves during the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Beginning balance | $ | 184 | $ | 140 | $ | 155 | $ | 117 | ||||||||
Provisions for warranty | 43 | 37 | 142 | 103 | ||||||||||||
Consumption of reserves | (39 | ) | (30 | ) | (109 | ) | (73 | ) | ||||||||
Ending balance | $ | 188 | $ | 147 | $ | 188 | $ | 147 | ||||||||
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Beginning balance | $ | 168 | $ | 155 | ||||
Provisions for warranty | 30 | 51 | ||||||
Consumption of reserves | (37 | ) | (33 | ) | ||||
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Ending balance | $ | 161 | $ | 173 | ||||
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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. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.
Guarantees
In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of July 31, 2011,January 29, 2012, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $52$51 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.
Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of July 31, 2011,January 29, 2012, Applied Materials, Inc. has provided parent guarantees to banks for approximately $200$186 million to cover these services.
Legal Matters
30
In 2004, Applied filed a complaint for patent infringement against Jusung in the Hsinchu District Court in Taiwan seeking damages and a permanent injunction for infringement of a patent related to chemical vapor deposition (CVD) equipment. Jusung filed a counterclaim against Applied. On December 31, 2010, the Hsinchu District Court announced that it had ruled against Applieddismissed both actions, and dismissedappeals by both parties remain pending at the lawsuit and Jusung’s counterclaim. Applied appealed the dismissal of its lawsuit and Jusung appealed the dismissal of its counterclaim.Taiwan Intellectual Property Court. Jusung unsuccessfully sought invalidation of Applied’s CVD patent in the Taiwanese Intellectual
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Property Office (TIPO). In September 2010, the Taipei Supreme Administrative Court dismissed Jusung’s appeal of the TIPO’s decision. In 2009, Jusung filed a second action with the TIPO seeking invalidation of Applied’s CVD patent, which action remains pending.
31
In 2006, Jusung filed a complaint of private prosecution in the Taipei District Court of Taiwan alleging 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 that Jusung had intended to remain confidential. The complaint namesnamed as defendants Applied’s outside counsel in Taiwan, as well as Michael R. Splinter, Applied’s Chairman, President and Chief Executive Officer, as the statutory representative of Applied. The Taipei District Court dismissed the private prosecution complaint, and the matter was transferred to the Taipei District Attorney’s Office. The Taipei District Attorney’s Office issued fivesix separate rulings not to prosecute, each of which Jusung appealed. In each instance,the first five instances, the Taiwan High Court District Attorney returned the matter to the Taipei District Attorney’s Office for further consideration, whereconsideration. Following the sixth ruling not to prosecute, the Taiwan High Court District Attorney dismissed Jusung’s appeal. Jusung then petitioned to the Taipei District Court for a trial, and the Court announced on February 7, 2012 that it is now pending.
Korea Criminal Proceedings
In February 2010, the Seoul Prosecutor’s Office for the Eastern District of Korea (the Prosecutor’s Office) indicted employees of several companies for the alleged improper receipt and use of confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. The Prosecutor’s Office did not name Applied or any of its subsidiaries as a party to the criminal action. The individuals charged included the former head of Applied Materials Korea (AMK), who at the time of the indictment was a vice president of Applied Materials, Inc., and certain other AMK employees. Hearings on these matters are ongoing in the Seoul Eastern District Court. Applied and Samsung entered into a settlement agreement effective as of November 1, 2010, which resolves potential civil claims related to this matter, which is separate from and does not affect the criminal proceedings.
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 or misusing 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.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
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.
Environmental Matters
Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and costs can be reasonably estimated. Environmental liabilities classified as current are included in accounts payable and accrued expenses with the non-current portion included in other liabilities. Generally, the timing of these accruals is based on the completion of a feasibility study or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable undiscounted future costs based on currently available information. Should new information become available, the liability would be adjusted.
In connection with the acquisition of Varian, Applied assumed certain environmental liabilities, including environmental investigation and remediation costs. Environmental remediation costs incurred were not material for the three months ended January 29, 2012. At January 29, 2012, Applied’s environmental liability was $9 million, of which $8 million was classified as non-current and included in other liabilities. As part of accounting for the acquisition of Varian, Applied performed a review and assessment of the assumed environmental liabilities. Management believes that the liability arising from environmental-related matters is not material to Applied’s consolidated financial position.
Prior to the acquisition, Varian had entered into a settlement agreement with an insurance company to pay a portion of the past and future environmental-related expenditures. Accordingly, as part of the acquisition, Applied recorded a receivable of $2 million as of January 29, 2012, which is included in other assets.
Note 16 Industry Segment Operations
Applied’s four reportable segments are: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. 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
32
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, 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 share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these charges or adjustments pertain to a specific reportable segment. Segment operating income excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
In fiscal 2010, as partNovember 2011, Applied completed its acquisition of the restructuring of the Energy and Environmental Solutions segment, Applied discontinued marketing of its fully-integrated SunFab production lines but continued to offer individual tools for thin film solar manufacturing. Applied is supporting existing SunFab customers with services, upgrades and capacity increases through its Applied Global Services segment as these products are considered to have reached a particular stage in the product lifecycle. EffectiveVarian. Beginning in the first quarter of fiscal 2011, Applied accounts2012, the acquired business is primarily included in the results for thin film products under itsthe Silicon Systems Group and Applied Global Services segment.
The Silicon Systems Group segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and wafer packaging.
The Applied Global Services segment includes technically differentiated products and services to improve 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, remanufactured equipment, and products that have reached a particular stage in the product lifecycle. 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 includes products for manufacturing LCDs for TVs, personal computers and other video-enabled devices and touch panel applications.
The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) 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.
33
Three Months Ended | Nine Months Ended | |||||||||||||||
Operating | Operating | |||||||||||||||
Net Sales | Income (Loss) | Net Sales | Income (Loss) | |||||||||||||
(In millions) | ||||||||||||||||
July 31, 2011: | ||||||||||||||||
Silicon Systems Group | $ | 1,398 | $ | 452 | $ | 4,348 | $ | 1,486 | ||||||||
Applied Global Services | 603 | 146 | 1,784 | 322 | ||||||||||||
Display | 223 | 58 | 528 | 116 | ||||||||||||
Energy and Environmental Solutions | 563 | 123 | 1,676 | 436 | ||||||||||||
Total Segment | $ | 2,787 | $ | 779 | $ | 8,336 | $ | 2,360 | ||||||||
August 1, 2010: | ||||||||||||||||
Silicon Systems Group | $ | 1,447 | $ | 525 | $ | 3,821 | $ | 1,328 | ||||||||
Applied Global Services | 468 | 84 | 1,349 | 237 | ||||||||||||
Display | 216 | 64 | 618 | 179 | ||||||||||||
Energy and Environmental Solutions | 387 | (371 | ) | 874 | (552 | ) | ||||||||||
Total Segment | $ | 2,518 | $ | 302 | $ | 6,662 | $ | 1,192 | ||||||||
Net Sales | Operating Income (loss) | |||||||
(In millions) | ||||||||
2012: | ||||||||
Silicon Systems Group | $ | 1,344 | $ | 271 | ||||
Applied Global Services | 534 | 107 | ||||||
Display | 104 | 5 | ||||||
Energy and Environmental Solutions | 207 | (23 | ) | |||||
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Total Segment | $ | 2,189 | $ | 360 | ||||
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2011: | ||||||||
Silicon Systems Group | $ | 1,496 | $ | 543 | ||||
Applied Global Services | 567 | 85 | ||||||
Display | 147 | 28 | ||||||
Energy and Environmental Solutions | 476 | 144 | ||||||
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Total Segment | $ | 2,686 | $ | 800 | ||||
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In the nine months ended July 31,first quarter of fiscal 2011, includedApplied recorded a favorable adjustmentsadjustment of $36$28 million related to a restructuring program announced in fiscal 2010 whichthat was reported in the Energy and Environmental Solutions segment.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
Reconciliations of total segment operating income to Applied’s consolidated operating income for the three and nine months ended July 31,January 29, 2012 and January 30, 2011 and August 1, 2010 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Total segment operating income | $ | 779 | $ | 302 | $ | 2,360 | $ | 1,192 | ||||||||
Corporate and unallocated costs | (120 | ) | (139 | ) | (371 | ) | (414 | ) | ||||||||
Restructuring and asset impairment benefit (charges), net | — | 20 | 21 | (93 | ) | |||||||||||
Gain on sale of facilities, net | 28 | — | 27 | — | ||||||||||||
Income from operations | $ | 687 | $ | 183 | $ | 2,037 | $ | 685 | ||||||||
Three Months Ended | ||||||||
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Total segment operating income | $ | 360 | $ | 800 | ||||
Corporate and unallocated costs | (181 | ) | (127 | ) | ||||
Restructuring and asset impairment benefit, net | — | 1 | ||||||
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Income from operations | $ | 179 | $ | 674 | ||||
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Corporate and unallocated costs included $36 million of deal costs and other acquisition-related costs related to the Varian acquisition.
The following companies accounted for at least 10 percent of Applied’s net sales for the ninethree months ended July 31, 2011,January 29, 2012, which were for products in multiple reportable segments.
January 29, 2012 | ||||
Samsung Electronics Co., Ltd . | % | |||
Taiwan Semiconductor Manufacturing Company Limited | 12 | % | ||
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Overview
Applied provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal displays (LCDs), solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 16 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Item 1A of Part II of this report, which is incorporated herein by reference. 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 historically 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 highly 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.
The following table presents certain significant measurements for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
New orders | $ | 2,390 | $ | 2,725 | $ | (335 | ) | $ | 8,547 | $ | 7,723 | $ | 824 | |||||||||||
Net sales | $ | 2,787 | $ | 2,518 | $ | 269 | $ | 8,336 | $ | 6,662 | $ | 1,674 | ||||||||||||
Gross margin | $ | 1,184 | $ | 860 | $ | 324 | $ | 3,509 | $ | 2,498 | $ | 1,011 | ||||||||||||
Gross margin percentage | 42 | % | 34 | % | 8 points | 42 | % | 37 | % | 5 points | ||||||||||||||
Operating income | $ | 687 | $ | 183 | $ | 504 | $ | 2,037 | $ | 685 | $ | 1,352 | ||||||||||||
Operating margin percentage | 25 | % | 7 | % | 18 points | 24 | % | 10 | % | 14 points | ||||||||||||||
Net income | $ | 476 | $ | 123 | $ | 353 | $ | 1,471 | $ | 470 | $ | 1,001 | ||||||||||||
Earnings per share | $ | 0.36 | $ | 0.09 | $ | 0.27 | $ | 1.10 | $ | 0.35 | $ | 0.75 |
36
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions, except per share amounts and percentages) | ||||||||||||||||||||
New orders | $ | 2,008 | $ | 1,595 | $ | 2,971 | $ | 413 | $ | (963 | ) | |||||||||
Net sales | $ | 2,189 | $ | 2,182 | $ | 2,686 | $ | 7 | $ | (497 | ) | |||||||||
Gross margin | $ | 786 | $ | 852 | $ | 1,136 | $ | (66 | ) | $ | (350 | ) | ||||||||
Gross margin percent | 36 | % | 39 | % | 42 | % | (3) points | (6) points | ||||||||||||
Operating income | $ | 179 | $ | 361 | $ | 674 | $ | (182 | ) | $ | (495 | ) | ||||||||
Operating margin percent | 8 | % | 17 | % | 25 | % | (9) points | (17) points | ||||||||||||
Net income | $ | 117 | $ | 456 | $ | 506 | $ | (339 | ) | $ | (389 | ) | ||||||||
Diluted earnings per share | $ | 0.09 | $ | 0.34 | $ | 0.38 | $ | (0.25 | ) | $ | (0.29 | ) | ||||||||
Non-GAAP Results | ||||||||||||||||||||
Gross margin | $ | 890 | $ | 862 | $ | 1,145 | $ | 28 | $ | (255 | ) | |||||||||
Gross margin percent | 41 | % | 40 | % | 43 | % | 1 point | (2) points | ||||||||||||
Operating income | $ | 344 | $ | 384 | $ | 659 | $ | (40 | ) | $ | (315 | ) | ||||||||
Operating margin percent | 16 | % | 18 | % | 25 | % | (2) points | (9) points | ||||||||||||
Net income | $ | 240 | $ | 271 | $ | 484 | $ | (31 | ) | $ | (244 | ) | ||||||||
Diluted earnings per share | $ | 0.18 | $ | 0.21 | $ | 0.36 | $ | (0.03 | ) | $ | (0.18 | ) |
Reconciliations of non-GAAP measures are presented under “Non-GAAP Results” below.
The first quarter of fiscal 2012, fourth quarter of fiscal 2011, and first quarter of fiscal 2011 each contained 13 weeks.
Financial results for the thirdfirst quarter of fiscal 2012 as compared to the fourth quarter of fiscal 2011 reflected a decreasean increase in total new orders,year-over-year while net sales remained essentially flat. The increase in new orders reflected increased demand for semiconductor equipment, partially offset by softness in spares demand and neta weak industry environment for display and solar equipment. Operating income increasedyear-over-year. New orders were down in the thirdfirst quarter of fiscal 2012 included $153 million of charges attributable to the acquisition of Varian consisting of inventory fair value adjustments on products sold, amortization of purchased intangible assets, share-based compensation associated with accelerated vesting, deal costs and other integration costs. Of this amount, $96 million was recorded under cost of products sold and $57 million was included in operating expenses. Operating expenses included $36 million of deal costs and other acquisition-related costs, which were not allocated to the segments.
Financial results for the first quarter of fiscal 2012 as compared to the first quarter of fiscal 2011 reflected decreased demand across all segments due to uncertain global economic and industry conditions. Total new orders and net sales in the quarter decreased year-over-year, primarily due to decreased demand for semiconductor equipment, crystalline silicon (c-Si) solar PV equipment and LCD equipment. The decline of total new orders for the third quarter of fiscal 2011 compared to the third quarter fiscal of 2010 reflected a softening in the macroeconomic environment and industry conditions. Net sales increased for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010, primarily due to increased industry investment in c-SiTV equipment. Operating income forin the thirdfirst quarter of fiscal 2011 included a net gain on salefavorable adjustment to restructuring reserves of facilities of $28$32 million, offset by asset impairment charges of $3 million. Operating income for the third quarter of fiscal 2010 included inventory-related charges of $250 million, asset impairment charges of $110 million and restructuring charges of $45 million associated with the Energy and Environmental Solutions restructuring plan announced in July 2010, offset by a $20 million favorable adjustment to the restructuring plan announced in November 2009. Net income increased for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 primarily due to the absence of charges associated with the Energy and Environmental Solutions restructuring plan.
Results of Operations
New Orders
New orders by geographic region, determined by the product shipment destination specified by the customer,location of customers’ facilities, for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | ($) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
China | 534 | 22 | 29 | 415 | 15 | 1,855 | 22 | 57 | 1,181 | 16 | ||||||||||||||||||||||||||||||
Taiwan | 425 | 18 | (42 | ) | 733 | 27 | 1,952 | 23 | (5 | ) | 2,047 | 28 | ||||||||||||||||||||||||||||
Japan | 372 | 15 | 60 | 233 | 8 | 828 | 10 | 46 | 568 | 8 | ||||||||||||||||||||||||||||||
Korea | 362 | 15 | (30 | ) | 519 | 19 | 956 | 11 | (35 | ) | 1,467 | 20 | ||||||||||||||||||||||||||||
Southeast Asia | 87 | 4 | (64 | ) | 245 | 9 | 365 | 4 | (30 | ) | 522 | 7 | ||||||||||||||||||||||||||||
Asia Pacific | 1,780 | 74 | (17 | ) | 2,145 | 78 | 5,956 | 70 | 3 | 5,785 | 79 | |||||||||||||||||||||||||||||
North America(*) | 356 | 15 | 4 | 342 | 13 | 1,745 | 20 | 94 | 898 | 13 | ||||||||||||||||||||||||||||||
Europe | 254 | 11 | 7 | 238 | 9 | 846 | 10 | 57 | 540 | 8 | ||||||||||||||||||||||||||||||
Total | 2,390 | 100 | (12 | ) | 2,725 | 100 | 8,547 | 100 | 18 | 7,223 | 100 | |||||||||||||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
Korea | 666 | 33 | 330 | 21 | 225 | 8 | 102 | 196 | ||||||||||||||||||||||||
Taiwan | 367 | 18 | 283 | 18 | 745 | 25 | 30 | (51 | ) | |||||||||||||||||||||||
Japan | 167 | 8 | 173 | 11 | 187 | 6 | (3 | ) | (11 | ) | ||||||||||||||||||||||
China | 82 | 4 | 211 | 13 | 654 | 22 | (61 | ) | (87 | ) | ||||||||||||||||||||||
Southeast Asia | 50 | 3 | 98 | 6 | 135 | 4 | (49 | ) | (63 | ) | ||||||||||||||||||||||
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Asia Pacific | 1,332 | 66 | 1,095 | 69 | 1,946 | 65 | 22 | (32 | ) | |||||||||||||||||||||||
North America(*) | 467 | 23 | 324 | 20 | 679 | 23 | 44 | (31 | ) | |||||||||||||||||||||||
Europe | 209 | �� | 11 | 176 | 11 | 346 | 12 | 19 | (40 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total | 2,008 | 100 | 1,595 | 100 | 2,971 | 100 | 26 | (32 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(*) | ||
Primarily the United States. |
New orders of $2.4$2.0 billion for the thirdfirst quarter of fiscal 20112012, including approximately $270 million in new orders for Varian products, were down 12up 26 percent from the thirdfourth quarter of fiscal 2010.2011. The increase was primarily attributable to increased demand for semiconductor equipment from foundry customers, partially offset by decreased demand from solar equipment customers
New orders for the first quarter of fiscal 2012 were down 32 percent from the first quarter of fiscal 2011. The decrease was primarily attributable to reducedsharp decreases in demand for semiconductor equipment from memory and foundry customers, c-Si equipment,solar products and LCD TV equipment.
For the first quarter of fiscal 2012, orders to customers in Korea had the largest increase as compared to the fourth quarter of fiscal 2011, the majority of which were for semiconductor equipment. New orders of $8.5 billionOrders to customers in Korea for the first nine monthsquarter of
37
New orders by reportable segment for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | ($) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
Silicon Systems Group | 1,239 | 52 | (19 | ) | 1,535 | 56 | 4,563 | 53 | 12 | 4,086 | 57 | |||||||||||||||||||||||||||||
Applied Global Services | 613 | 26 | 3 | 595 | 22 | 1,769 | 21 | 14 | 1,552 | 21 | ||||||||||||||||||||||||||||||
Display | 220 | 9 | (9 | ) | 242 | 9 | 617 | 7 | (1 | ) | 624 | 9 | ||||||||||||||||||||||||||||
Energy and Environmental Solutions | 318 | 13 | (10 | ) | 353 | 13 | 1,598 | 19 | 66 | 961 | 13 | |||||||||||||||||||||||||||||
Total | 2,390 | 100 | (12 | ) | 2,725 | 100 | 8,547 | 100 | 18 | 7,223 | 100 | |||||||||||||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
Silicon Systems Group | 1,418 | 70 | 925 | 58 | 1,610 | 54 | 53 | (12 | ) | |||||||||||||||||||||||
Applied Global Services | 517 | 26 | 564 | 35 | 552 | 19 | (8 | ) | (6 | ) | ||||||||||||||||||||||
Display | 40 | 2 | 20 | 1 | 142 | 5 | 100 | (72 | ) | |||||||||||||||||||||||
Energy and Environmental Solutions | 33 | 2 | 86 | 6 | 668 | 22 | (62 | ) | (95 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total | 2,008 | 100 | 1,595 | 100 | 2,971 | 100 | 26 | (32 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended July 31, 2011 compared to the three months ended August 1, 2010, while the relative share of new orders in the Applied Global Services segment increased. For the nine months ended July 31, 2011, the relative share of totalJanuary 29, 2012, combined new orders for the Silicon Systems Group and Display decreasedApplied Global Services as a percentage of total new orders slightly increased compared to the ninethree months ended August 1, 2010,October 30, 2011, while the relative share ofcombined new orders infor Display and Energy and Environmental Solutions increased. The increase in Energy and Environmental Solutions’ relative shareas a percentage of total new orders was dueslightly decreased.
New orders for the first quarter of fiscal 2012 as compared to the first quarter of fiscal 2011 reflected decreased demand across all segments. For the three months ended January 29, 2012, combined new orders for the Silicon Systems Group and Applied Global Services as a percentage of total new orders increased demandcompared to the three months ended January 30, 2011, while combined new orders for c-Si equipment.
Applied’s backlog for the most recent three fiscal quarters was as follows: $2.2 billion at January 29, 2012, $2.4 billion at October 30, 2011, and $3.2 billion at July 31, 2011, $3.9 billion at May 1, 2011, and $3.5 billion at January 30, 2011. Backlog adjustments were negative for the quarter ended July 31, 2011January 29, 2012 were negative and included $248totaled $52 million. Negative backlog adjustments of $146 million consisting primarilyconsisted of financial debookings. Backlog decreaseddebookings, cancellations and foreign exchange effects primarily related to solar customers. Negative adjustments were offset in the third quarterpart by $94 million of fiscal 2011 from the second quarter of fiscal 2011 primarily due to decreases in new orders for the Silicon Systems Group and Energy and Environmental Solutions reflecting decreased demand for semiconductor equipment and c-Si equipment, respectively.acquired Varian backlog. Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; (2) contractual service revenue and maintenance fees to be earned within the next 12 months; and (3) orders for SunFabSunFab™ thin film solar lines that are anticipated to be recognized as revenue within the next 12 months. Applied’s backlog at any particular time is not necessarily indicative of actual sales for any future periods, due to the potential for customer changes in delivery schedules or cancellation of orders. In the thirdfirst quarter of fiscal 2011,2012, approximately 49 percent67% of the net sales in the Silicon Systems Group, Applied’s largest business segment, were forfrom orders received and shipped withinin the same quarter.
38
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
Silicon Systems Group | 1,044 | 48 | 913 | 38 | 1,202 | 34 | 14 | (13 | ) | |||||||||||||||||||||||
Applied Global Services | 649 | 30 | 662 | 28 | 807 | 23 | (2 | ) | (20 | ) | ||||||||||||||||||||||
Display | 267 | 12 | 337 | 14 | 499 | 14 | (21 | ) | (46 | ) | ||||||||||||||||||||||
Energy and Environmental Solutions | 202 | 10 | 480 | 20 | 1,028 | 29 | (58 | ) | (80 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total | 2,162 | 100 | 2,392 | 100 | 3,536 | 100 | (10 | ) | (39 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by geographic region, determined by the location of customers’ facilities, to which products were shipped, for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | ($) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
China | 751 | 27 | 60 | 469 | 19 | 2,166 | 26 | 157 | 843 | 13 | ||||||||||||||||||||||||||||||
Taiwan | 454 | 16 | (36 | ) | 707 | 28 | 1,740 | 21 | (9 | ) | 1,921 | 29 | ||||||||||||||||||||||||||||
Korea | 432 | 16 | 9 | 398 | 16 | 900 | 11 | (34 | ) | 1,361 | 20 | |||||||||||||||||||||||||||||
Japan | 284 | 10 | 40 | 203 | 8 | 658 | 8 | 8 | 610 | 9 | ||||||||||||||||||||||||||||||
Southeast Asia | 156 | 6 | (4 | ) | 162 | 6 | 495 | 6 | 23 | 403 | 6 | |||||||||||||||||||||||||||||
Asia Pacific | 2,077 | 75 | 7 | 1,939 | 77 | 5,959 | 72 | 16 | 5,138 | 77 | ||||||||||||||||||||||||||||||
North America(*) | 451 | 16 | 53 | 294 | 12 | 1,528 | 18 | 100 | 765 | 12 | ||||||||||||||||||||||||||||||
Europe | 259 | 9 | (9 | ) | 285 | 11 | 849 | 10 | 12 | 759 | 11 | |||||||||||||||||||||||||||||
Total | 2,787 | 100 | 11 | 2,518 | 100 | 8,336 | 100 | 25 | 6,662 | 100 | ||||||||||||||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||
Korea | 628 | 29 | 363 | 17 | 169 | 6 | 73 | 272 | ||||||||||||||||||||
Taiwan | 489 | 22 | 353 | 16 | 635 | 24 | 39 | (23) | ||||||||||||||||||||
Japan | 217 | 10 | 255 | 12 | 166 | 6 | (15) | 31 | ||||||||||||||||||||
China | 180 | 8 | 408 | 19 | 674 | 25 | (56) | (73) | ||||||||||||||||||||
Southeast Asia | 79 | 4 | 98 | 4 | 154 | 6 | (19) | (49) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Asia Pacific | 1,593 | 73 | 1,477 | 68 | 1,798 | 67 | 8 | (11) | ||||||||||||||||||||
North America(*) | 417 | 19 | 434 | 20 | 610 | 23 | (4) | (32) | ||||||||||||||||||||
Europe | 179 | 8 | 271 | 12 | 278 | 10 | (34) | (36) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 2,189 | 100 | 2,182 | 100 | 2,686 | 100 | — | (19) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(*) | ||
Primarily the United States. |
Net sales of $2.8$2.2 billion for the thirdfirst quarter of fiscal 2012 as compared to the fourth quarter of fiscal 2011 remained essentially flat, and were up 11 percent from the third quarter of fiscal 2010. For the three months ended July 31, 2011, customers in China, Taiwan, Korea and North America combined represented 75 percent of total net sales. For the nine months ended July 31, 2011, customers in China, Taiwan, and North America combined represented 65 percent of total net sales. Net sales of $8.3 billion for the first nine months of fiscal 2011 were up 25down 19 percent from the first nine monthsquarter of fiscal 2010. 2011. Net sales for the first quarter of fiscal 2012 included sales of Varian products of approximately $200 million. The decrease in net sales compared to the first quarter of fiscal 2011 reflected decreased demand for c-Si solar products and LCD TV equipment.
For the threefirst quarter of fiscal 2012, net sales to customers in Korea, the majority of which were for semiconductor equipment, had the largest increase compared to the fourth quarter of fiscal 2011 and nine months ended July 31, 2011,the first quarter of fiscal 2011. In the first quarter of fiscal 2012, the majority of net sales in ChinaKorea, Taiwan and North America reflected purchases of c-Si equipment by solar PV manufacturers.
Net sales by reportable segment for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | ($) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
Silicon Systems Group | 1,398 | 50 | (3 | ) | 1,447 | 57 | 4,348 | 52 | 14 | 3,821 | 58 | |||||||||||||||||||||||||||||
Applied Global Services | 603 | 22 | 29 | 468 | 19 | 1,784 | 22 | 32 | 1,349 | 20 | ||||||||||||||||||||||||||||||
Display | 223 | 8 | 3 | 216 | 9 | 528 | 6 | (15 | ) | 618 | 9 | |||||||||||||||||||||||||||||
Energy and Environmental Solutions | 563 | 20 | 45 | 387 | 15 | 1,676 | 20 | 92 | 874 | 13 | ||||||||||||||||||||||||||||||
Total | 2,787 | 100 | 11 | 2,518 | 100 | 8,336 | 100 | 25 | 6,662 | 100 | ||||||||||||||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||
Silicon Systems Group | 1,344 | 61 | 1,067 | 49 | 1,496 | 56 | 26 | (10) | ||||||||||||||||||||
Applied Global Services | 534 | 24 | 629 | 29 | 567 | 21 | (15) | (6) | ||||||||||||||||||||
Display | 104 | 5 | 171 | 8 | 147 | 5 | (39) | (29) | ||||||||||||||||||||
Energy and Environmental Solutions | 207 | 10 | 315 | 14 | 476 | 18 | (34) | (57) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total | 2,189 | 100 | 2,182 | 100 | 2,686 | 100 | — | (19) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Net sales for the first quarter of fiscal 2012 as compared to the fourth quarter of fiscal 2011 increased for the Silicon Systems Group’s relative shareGroup and decreased in all other segments. Net sales for the first quarter of fiscal 2012 decreased across all segments compared to the first quarter of fiscal 2011. For the three months ended January 29, 2012, combined net sales for the Silicon Systems Group and Applied Global Services as a percentage of net sales increased compared to the three months ended October 30, 2011 and January 30, 2011, while combined net sales in Display and Energy and Environmental Solutions as a percentage of total net sales decreased for the three and nine months ended July 31, 2011 compared to the three and nine months ended August 1, 2010, while net sales in the Energy and Environmental Solutions segment increased significantly. The increase in Energy and Environmental Solutions’ relative share of total net sales during the three and nine months ended July 31, 2011 was due to increased demand for c-Si equipment.
39
Gross margins for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Gross margin | $ | 1,184 | $ | 860 | $ | 324 | $ | 3,509 | $ | 2,498 | $ | 1,011 | ||||||||||||
Gross margin (% of net sales) | 42 | % | 34 | % | 8 points | 42 | % | 37 | % | 5 points |
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Gross margin | $ | 786 | $ | 852 | $ | 1,136 | $ | (66 | ) | $ | (350 | ) | ||||||||
Gross margin (% of net sales) | 36 | % | 39 | % | 42 | % | (3 | ) points | (6 | ) points | ||||||||||
Non-GAAP Results | ||||||||||||||||||||
Gross margin | $ | 890 | $ | 862 | $ | 1,145 | $ | 28 | $ | (255 | ) | |||||||||
Gross margin (% of net sales) | 41 | % | 40 | % | 43 | % | 1 | point | (2 | ) points |
The decrease in the third quarter of fiscal 2010 in connection with the restructuring of the Energy and Environmental Solutions segment lowered gross margin for the third quarter of fiscal 2010 by approximately 10 percentage points. Inventory-related charges of $330 million associated with SunFab thin film solar equipment lowered gross margin for the first nine monthsquarter of fiscal 2010 by approximately 5 percentage points.2012 as compared to each of the fourth and first quarters of fiscal 2011 was principally attributable to changes in segment product mix, the amortization of acquired Varian inventory step-up and additional inventory charges. Gross margin during the thirdfirst quarters of fiscal 20112012 and 20102011 included $13 million and $10$11 million of share-based compensation expense, respectively. GrossNon-GAAP gross margin duringfor the first nine monthsquarter of fiscal 2012 was $890 million, up 1.2 points from the fourth quarter of fiscal 2011 and 2010 included $36 million and $23 milliondown from $1.1 billion for the first quarter of share-based compensation expense, respectively.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Research, development and engineering | $ | 282 | $ | 290 | $ | (8 | ) | $ | 850 | $ | 865 | $ | (15 | ) |
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Research, development and engineering | $ | 304 | $ | 269 | $ | 270 | $ | 35 | $ | 34 |
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. The reductionincrease in RD&E expense for the three and nine months ended July 31, 2011first quarter of fiscal 2012 as compared to each of the comparable 2010 periods was principally due to a reduction of thin film solar development activities. RD&E expense during the thirdfourth and first quarters of fiscal 2011 and 2010 included $12 million and $11 millionwas primarily due to RD&E expenses incurred by Varian of share-based compensation expense, respectively.approximately $37 million. RD&E expense during the first nine monthsquarters of fiscal 2012 and 2011 and 2010 included $35$13 million and $33$10 million of share-based compensation expense, respectively. 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. From time to time,In certain instances, Applied also acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.
40
Marketing, selling, general and administrative (SG&A) expenses for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
�� | ||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Selling, general and administrative | $ | 240 | $ | 252 | $ | (12 | ) | $ | 679 | $ | 700 | $ | (21 | ) |
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Marketing, selling, general and administrative | $ | 303 | $ | 222 | $ | 221 | $ | 81 | $ | 82 |
The decreaseincrease in SG&Amarketing, selling, general and administrative expenses for both the three and nine months ended July 31, 2011first quarter of fiscal 2012 as compared to the same periods in 2010 reflected lower expenses as a result of the restructuring of the Energyfourth and Environmental Solutions segment that occurred in the third quarter of fiscal 2010. SG&A expenses for the three and nine months ended July 31, 2011 included $9 million in deal costs associated with the proposed merger with Varian Semiconductor Equipment Associates, Inc. (Varian). SG&A expenses for the nine months ended August 1, 2010 included $10 million in deal costs associated with the acquisition of Semitool, Inc. SG&A expenses during the thirdfirst quarters of fiscal 2011 was primarily due to the addition of Varian and 2010acquisition-related costs incurred in connection with the Varian acquisition aggregating $86 million. Marketing, selling and general and administrative expenses during the first quarters of fiscal 2012 and 2011 included $13$27 million and $12 million of share-based compensation expense, respectively. SG&A expenses during the first nine months of fiscal 2011 and 2010 each included $39 million of share-based compensation expense. Foreign currency fluctuation, generally resulting from balance sheet remeasurement related activity and foreign exchange hedging activity, was a gain of $8 million in the third quarter of fiscal 2011 compared to a loss of $9 million in the third quarter of fiscal 2010. Foreign currency fluctuation gain in the nine months ended July 31, 2011 amounted to $21 million compared to a loss of $12 million in the nine months ended August 1, 2010.
Restructuring Charges and Asset Impairments
Restructuring charges and asset impairment expenses for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Restructuring and asset impairments | $ | 3 | $ | 135 | $ | (132 | ) | $ | (30 | ) | $ | 248 | $ | (278 | ) |
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Restructuring charges and asset impairments | $ | — | $ | — | $ | (29 | ) | $ | — | $ | 29 |
During the first quarter of fiscal 2011, as a result of changes in Applied’s operating environment and business requirements, Applied revised its workforce reduction under thisassociated with a restructuring program to approximately 200 positionsin its Energy and Environmental Solutions segment announced in the third quarter of fiscal 2010, and recorded a favorable adjustment of $28 million. The improved economic environment continued in the second quarter of fiscal 2011, and as a result Applied recorded an additional favorable adjustment of $8 million. As of July 31, 2011, the remaining severance accrual associated with restructuring reserves under this program was $1 million.
41
For further details, see Note 11 of Notes to Consolidated Condensed Financial Statements.
Interest and Other ExpenseExpenses
Interest and other expenseexpenses for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Interest and other expense | $ | 25 | $ | 5 | $ | 20 | $ | 35 | $ | 15 | $ | 20 |
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Interest and other expenses | $ | 24 | $ | 24 | $ | 5 | $ | — | $ | 19 |
Interest and other expenses for the first quarter of fiscal 2012 remained flat as compared to the fourth quarter of fiscal 2011. The increasesincrease in interest and other expense for three and nine months ended July 31,expenses in the first quarter of fiscal 2012 from the first quarter of fiscal 2011 werewas primarily due to interest accrued of $11$23 million related toon senior unsecured notes issued in the third fiscal quarter of 2011.
Interest and Other Income, Net
Interest and other income, net, for the three months ended January 29, 2012, October 30, 2011 and January 30, 2011 were as follows:
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Interest and other income, net | $ | 4 | $ | 10 | $ | 11 | $ | (6 | ) | $ | (7 | ) |
The decrease in interest and other income, net in the first quarter of fiscal 2012 from the fourth quarter of fiscal 2011 was primarily due to a decrease in gains realized on sale of investment securities. The decrease in interest and other income, net in the first quarter of fiscal 2012 from the first quarter of fiscal 2011 was primarily due to a decrease in gains realized on sale of investment securities and lower interest rates.
Income Taxes
Income tax expenses (benefit) for the three months ended January 29, 2012, October 30, 2011 and January 30, 2011 were as follows:
Three Months Ended | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Provision (benefit) for income taxes | $ | 42 | $ | (112 | ) | $ | 174 | $ | 154 | $ | (132 | ) | ||||||||
Effective income tax rate | 26.4 | % | (32.6 | )% | 25.6 | % | 59.0 points | 0.8 point |
Applied’s effective income tax rate increased to 26.4% for the first quarter of fiscal 2012 from a benefit of 32.6% for the fourth quarter of fiscal 2011 and to fees of $8 million associated with a bridge loan facility that was entered into and terminated duringslightly increased from 25.6% for the thirdfirst quarter of fiscal 2011.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Provision for income taxes | $ | 193 | $ | 55 | $ | 138 | $ | 564 | $ | 214 | $ | 350 | ||||||||||||
Effective income tax rate | 29 | % | 31 | % | (2) points | 28 | % | 31 | % | (3) points |
Segment Information
Applied reports financial results in four segments: Silicon Systems Group, 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 16 of Notes to Consolidated Condensed Financial Statements. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level. These unallocated costs include costs for share-based compensation; certain management, finance, legal, human resources, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and
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The results for each reportable segment are discussed below.
Silicon Systems Group Segment
The Silicon Systems Group segment includes semiconductor capital equipment for deposition, etch, rapid thermal processing, chemical mechanical planarization, metrology and inspection, wafer packaging and, wafer packaging.with the addition of Varian, ion implantation. Development efforts are focused on solving customers’ key technical challenges, including transistor performance and nanoscale patterning, and improving chip manufacturing productivity to reduce costs.
The competitive environment for the Silicon Systems Group in the first quarter of fiscal 2012 reflected continued investment in the semiconductor industry driven by capacity demand for mobile computing. Foundry customers led capacity additions for leading edge technology nodes, constituting the primary driver for net sales of the Silicon Systems Group for the first quarter of fiscal 2012. DRAM investment remained low in the period due to lack of profitability and oversupply in the DRAM memory market.
Certain significant measures for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
New orders | $ | 1,239 | $ | 1,535 | $ | (296 | ) | (19) | % | $ | 4,563 | $ | 4,086 | $ | 477 | 12 | % | |||||||||||||||
Net sales | 1,398 | 1,447 | (49 | ) | (3) | % | 4,348 | 3,821 | 527 | 14 | % | |||||||||||||||||||||
Operating income | 452 | 525 | (73 | ) | (14) | % | 1,486 | 1,328 | 158 | 12 | % | |||||||||||||||||||||
Operating margin | 32 | % | 36 | % | (4) points | 34 | % | 35 | % | (1) point |
January 29, 2012 | October 30, 2011 | January 30, 2011 | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||
New orders | $ | 1,418 | $ | 925 | $ | 1,610 | $ | 493 | 53% | $ | (192 | ) | (12)% | |||||||||||||||
Net sales | 1,344 | 1,067 | 1,496 | 277 | 26% | (152 | ) | (10)% | ||||||||||||||||||||
Operating income | 271 | 278 | 543 | (7 | ) | (3)% | (272 | ) | (50)% | |||||||||||||||||||
Operating margin | 20 | % | 26 | % | 36 | % | (6) points | (16) points | ||||||||||||||||||||
Non-GAAP Results | ||||||||||||||||||||||||||||
Operating income | 386 | 284 | 546 | 102 | 36% | (160 | ) | (29)% | ||||||||||||||||||||
Operating margin | 29 | % | 27 | % | 36 | % | 2 points | (7) points |
New orders for the first quarter of fiscal 2012 increased by $493 million as compared to the fourth quarter of fiscal 2011, reflecting increased demand from foundry customers and the addition of Varian’s business. New
orders included approximately $210 million for Varian products. New orders decreased by $296$192 million to $1.2$1.4 billion for the thirdfirst quarter of fiscal 2012 compared to the first quarter of fiscal 2011, comparedprimarily due to the third quarter of fiscal 2010. The decrease in new orders for the three months ended July 31, 2011 was primarily attributable to memory and foundry customers. New orders increased by $477 million to $4.6 billion for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. The increase in new orders for the nine months ended July 31, 2011 was primarilydecreased demand from logic and foundry customers, while orders from memory customers declined.
New orders for the Silicon Systems Group by end use application for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Foundry | 37 | % | 37 | % | 47 | % | 39 | % | ||||||||
Memory | 38 | % | 45 | % | 29 | % | 48 | % | ||||||||
Logic and other | 25 | % | 18 | % | 24 | % | 13 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % | |||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | ||||||||||
Foundry | 57 | % | 46 | % | 54 | % | ||||||
Memory | 29 | % | 22 | % | 23 | % | ||||||
Logic and other | 14 | % | 32 | % | 23 | % |
Net sales for the first quarter of fiscal 2012 increased by $277 million as compared to the fourth quarter of fiscal 2011 due to increased investment by foundry customers. Net sales included approximately $150 million for Varian products. Net sales decreased by $49$152 million to $1.4$1.3 billion for the thirdfirst quarter of fiscal 2012 compared to the first quarter of fiscal 2011, comparedprimarily due to the third quarter of fiscal 2010. The decrease in net sales for the three months ended July 31, 2011 was attributable to memory and foundrydecreased investment by logic customers. Net sales increased by $527 million to $4.3 billion for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. The increase in net sales for the nine months ended July 31, 2011 was from logic and foundry customers, while investment from memory customers declined. Three customers accounted for 5269 percent of net sales in this segment infor the first nine monthsquarter of fiscal 2011.2012. Approximately 4967 percent of net sales in the thirdfirst quarter of fiscal 20112012 were for orders received and shipped within the quarter.
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | (%) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
Taiwan | 262 | 19 | (51 | ) | 535 | 37 | 1,128 | 26 | (19 | ) | 1,395 | 36 |
Three Months Ended | ||||||||||||||||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||||||
($) | (%) | ($) | (%) | (%) | (%) | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
Korea | 552 | 41 | 258 | 24 | 118 | 8 | 114 | 368 | ||||||||||||||||||||||||
North America | 280 | 21 | 312 | 29 | 487 | 33 | (10 | ) | (43 | ) |
In the thirdfirst quarter of fiscal 2012, customers in Korea and North America accounted for 62 percent of total net sales for this segment. In the first quarter of fiscal 2011, customers in North America and Taiwan accounted for 1960 percent of total net sales for the Silicon Systems Group segment compared to 37 percent in the third quarter of fiscal 2010. For the first nine months of fiscal 2011, customers in Taiwan accounted for 26 percent of total net sales for the Silicon Systems Group segment compared to 36 percent for the first nine months of fiscal 2010.
year-over-year demand. The book to bill ratio decreased to 1.0 for the first nine months of fiscal 2011 compared to 1.1 for the first nine months of fiscal 2010 reflecting a higheryear-over-year increase in net sales relative to new orders.
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.
Industry conditions that affected Applied Global Services segment as these products are considered to have reached a particular stage in the product lifecycle. EffectiveServices’ sales of spares and services in the first quarter of fiscal 2011, Applied accounts for SunFab thin film products under its Applied Global Services segment.
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
New orders | $ | 613 | $ | 595 | $ | 18 | 3 | % | $ | 1,769 | $ | 1,552 | $ | 217 | 14 | % | ||||||||||||||||
Net sales | 603 | 468 | 135 | 29 | % | 1,784 | 1,349 | 435 | 32 | % | ||||||||||||||||||||||
Operating income | 146 | 84 | 62 | 74 | % | 322 | 237 | 85 | 36 | % | ||||||||||||||||||||||
Operating margin | 24 | % | 18 | % | 6 points | 18 | % | 18 | % | — |
January 29, 2012 | October 30, 2011 | January 30, 2011 | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||
New orders | $ | 517 | $ | 564 | $ | 552 | $ | (47 | ) | (8)% | $ | (35 | ) | (6)% | ||||||||||||||
Net sales | 534 | 629 | 567 | (95 | ) | (15)% | (33 | ) | (6)% | |||||||||||||||||||
Operating income | 107 | 160 | 85 | (53 | ) | (33)% | 22 | 26% | ||||||||||||||||||||
Operating margin | 20 | % | 25 | % | 15 | % | (5) points | 5 points | ||||||||||||||||||||
Non-GAAP Results | ||||||||||||||||||||||||||||
Operating income | 113 | 162 | 87 | (49 | ) | (30)% | 26 | 30% | ||||||||||||||||||||
Operating margin | 21 | % | 26 | % | 15 | % | (5) points | 6 points |
New orders increased by $18 million to $613 million for the thirdfirst quarter of fiscal 2012 decreased by $47 million as compared to the fourth quarter of fiscal 2011, compared toand net sales decreased by $95 million, reflecting lower wafer starts, partially offset by the thirdaddition of Varian’s business. New orders included approximately $60 million for Varian products and services. Net sales for the fourth quarter of fiscal 2010, and also increased by $2172011 included $71 million to $1.8 billionin sales for two thin film solar projects.
New orders for the first nine monthsquarter of fiscal 20112012 decreased by $35 million to $517 million for the first quarter of fiscal 2012 compared to the first nine monthsquarter of fiscal 2010.2011, and net sales decreased by $33 million. The increasesdecreases in new orders for the three and nine months ended July 31, 2011net sales were primarily due to higherlower demand for spare parts and refurbished equipment, reflecting customers’ higher factory utilization rates.
Operating income and non-GAAP operating income for the first quarter of fiscal 2012 both decreased as compared to the fourth quarter of fiscal 2011, compared to 1.3 for the third quarter of fiscal 2010reflecting decreased to 1.0 for the first nine months of fiscal 2011 compared to 1.2 for the first nine months of fiscal 2010 reflecting a higheryear-over-year increase in net sales relative to demand.
Display Segment
The Display segment encompasses products for manufacturing LCDs for TVs, personal computers, video-enabled devicestablet PCs, smart phones, and touch panel applications.other consumer-oriented devices. The segment is focused on expanding market share by differentiation with larger-scale substrates for TVs, entry into new markets such as the low temperature polysilicon (LTPS) and touch panel sectors, and development of products to enable cost reductions through productivity and uniformity.
The competitive environment for Applied’s Display segment in the first quarter of fiscal 2012 was characterized by decreased capacity requirements for larger flat panel televisions and growing demand for touch screen devices compared to the prior year. The display industry remains in a down-cycle.
Certain significant measures for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010January 30, 2011 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
New orders | $ | 220 | $ | 242 | $ | (22 | ) | (9) | % | $ | 617 | $ | 624 | $ | (7 | ) | (1) | % | ||||||||||||||
Net sales | 223 | 216 | 7 | 3 | % | 528 | 618 | (90 | ) | (15) | % | |||||||||||||||||||||
Operating income | 58 | 64 | (6 | ) | (9) | % | 116 | 179 | (63 | ) | (35) | % | ||||||||||||||||||||
Operating margin | 26 | % | 30 | % | (4) points | 22 | % | 29 | % | (7) points |
January 29, 2012 | October 30, 2011 | January 30, 2011 | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||
New orders | $ | 40 | $ | 20 | $ | 142 | $ | 20 | 100% | $ | (102 | ) | (72)% | |||||||||||||||
Net sales | 104 | 171 | 147 | (67 | ) | (39)% | (43 | ) | (29)% | |||||||||||||||||||
Operating income | 5 | 31 | 28 | (26 | ) | (84)% | (23 | ) | (82)% | |||||||||||||||||||
Operating margin | 5 | % | 18 | % | 19 | % | (13) points | (14) points | ||||||||||||||||||||
Non-GAAP Results | ||||||||||||||||||||||||||||
Operating income | 7 | 33 | 30 | (26 | ) | (79)% | (23 | ) | (77)% | |||||||||||||||||||
Operating margin | 7 | % | 19 | % | 20 | % | (12) points | (13) points |
New orders for the first quarter of fiscal 2012 increased by $20 million to $40 million as compared to the fourth quarter of fiscal 2011, while net sales decreased by $67 million to $104 million, reflecting ongoing weakness in LCD TV equipment demand. New orders decreased by $22 million to $220$102 million for the thirdfirst quarter of fiscal 2012 compared to the first quarter of fiscal 2011 compared to the third quarter of fiscal 2010, and net sales decreased by $7$43 million to $617 million for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010.$104 million. The decrease in new orders and net sales year over year reflected weakness in demand for the three months ended July 31, 2011 was due to booking timing and investment delayLCD TV equipment, offset in part by increased demand for touch panel tools and Low-Temperature
45
The following regions accounted for at least 30 percent of total net sales for the Display Group segment for eitherone or more of the three or nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | ($) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
China | 111 | 50 | 41 | 79 | 37 | 255 | 48 | 73 | 147 | 24 | ||||||||||||||||||||||||||||||
Taiwan | 58 | 26 | (17 | ) | 70 | 33 | 156 | 30 | (23 | ) | 203 | 33 |
Three Months Ended | ||||||||||||||||||||||||||||||||
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
Taiwan | 45 | 43 | 60 | 35 | 80 | 54 | (25 | ) | (44 | ) | ||||||||||||||||||||||
China | 18 | 17 | 75 | 44 | 62 | 42 | (76 | ) | (71 | ) |
Four customers accounted for 64 percent of net sales in the Display segment for the first quarter of fiscal 2012. Customers in Taiwan and China accountedcontinued to account for 50 percentthe majority of net sales in this segment for the thirdfirst quarter of fiscal 2011. In the third quarter of fiscal 2010, customers in China and Taiwan accounted for 70 percent of total net sales for the Display segment. For the first nine months of fiscal 2011, customers in China and Taiwan accounted for 78 percent of total net sales in this segment compared to 57% for the first nine months of fiscal 2010.
year-over-year net sales relative toyear-over-year new orders. The book to bill ratio increased to 1.2 for the first nine months of fiscal 2011 compared to 1.0 for the first nine months of fiscal 2010. The increase for the nine months ended July 31, 2011 reflected loweryear-over-year net sales relative toyear-over-year new orders.
The Energy and Environmental Solutions segment includes products for fabricating c — c–Si solar PVs, high throughputroll-to-roll coating systems for flexible electronics and web products.products, and systems used in the manufacture of energy-efficient glass. 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. Until
Certain significant measures for the three months ended January 29, 2012, October 30, 2011 and January 30, 2011 were as follows:
January 29, 2012 | October 30, 2011 | January 30, 2011 | Change January 29, 2012 Compared to October 30, 2011 | Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||
New orders | $ | 33 | $ | 86 | $ | 668 | $ | (53 | ) | (62)% | $ | (635 | ) | (95)% | ||||||||||||||
Net sales | 207 | 315 | 476 | (108 | ) | (34)% | (269 | ) | (57)% | |||||||||||||||||||
Operating income (loss) | (23 | ) | 17 | 144 | (40 | ) | (235)% | (167 | ) | (116)% | ||||||||||||||||||
Operating margin | (11 | )% | 5 | % | 30 | % | (16) points | (41) points | ||||||||||||||||||||
Non-GAAP Results | ||||||||||||||||||||||||||||
Operating income | (17 | ) | 23 | 122 | (40 | ) | (174)% | (139 | ) | (114)% | ||||||||||||||||||
Operating margin | (8 | )% | 7 | % | 26 | % | (15) points | (34) points |
New orders for the first quarter of fiscal 2012 decreased by $53 million to $33 million as compared to the fourth quarter of fiscal 2011, and net sales decreased by $108 million to $207 million, reflecting solar industry overcapacity. For the first quarter of fiscal 2012, new orders decreased by $635 million and net sales decreased by $269 million. The year over year decreases in new orders and net sales were also due to excess manufacturing capacity. For the first quarter of fiscal 2012, 73 percent of the segment’s net sales were from products shipped prior to fiscal 2012 and reported as deferred revenue at October 30, 2011.
The book to bill ratio decreased to 0.2 for the first quarter of fiscal 2012, reflecting decreased demand, compared to 0.3 for the fourth quarter of fiscal 2011 and 1.4 for the first quarter of fiscal 2011. The Energy and Environmental Solutions segment reported an operating loss of $23 million for the first quarter of fiscal 2012 compared to operating income of $17 million for the fourth quarter of fiscal 2011 and $144 million for the first quarter of fiscal 2011, the Energyprimarily attributable to lower net sales of c-Si solar products and Environmental Solutions segment included the fully-integrated SunFab production lineinventory charges of $31 million. Non-GAAP operating loss for manufacturing thin film solar panels. During the third quarter of fiscal 2010, Applied announced a plan to restructure its Energy and Environmental Solutions segment in response to adverse market conditions for thin film solar and as a result, Applied discontinued marketing of its fully-integrated SunFab lines, but is offering individual tools for thin film solar manufacturing. Applied is supporting existing SunFab line customers with services, upgrades and capacity increases through its Applied Global Services segment, and effective in the first quarter of fiscal 2011, Applied accounts for thin film products under its Applied Global Services segment rather than its Energy and Environmental Solutions segment.
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
July 31, | August 1, | Change | July 31, | August 1, | Change | |||||||||||||||||||||||||||
2011 | 2010 | 2011 over 2010 | 2011 | 2010 | 2011 over 2010 | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
New orders | $ | 318 | $ | 353 | $ | (35 | ) | (10 | )% | $ | 1,598 | $ | 961 | $ | 637 | 66 | % | |||||||||||||||
Net sales | 563 | 387 | 176 | 45 | % | 1,676 | 874 | 802 | 92 | % | ||||||||||||||||||||||
Operating income (loss) | 123 | (371 | ) | 494 | 133 | % | 436 | (552 | ) | 988 | 179 | % | ||||||||||||||||||||
Operating margin | 22 | % | (96 | )% | 118 points | 26 | % | (63 | )% | 89 points |
The following regions accounted for at least 30 percent of total net sales for the Energy and Environmental Solutions segment for eitherone or more of the three or nine months ended July 31,January 29, 2012, October 30, 2011 and August 1, 2010:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
July 31, | Change | August 1, | July 31, | Change | August 1, | |||||||||||||||||||||||||||||||||||
2011 | 2011 over 2010 | 2010 | 2011 | 2011 over 2010 | 2010 | |||||||||||||||||||||||||||||||||||
($) | (%) | (%) | ($) | (%) | ($) | (%) | (%) | ($) | (%) | |||||||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||||||||||
China | 485 | 86 | 106 | 236 | 61 | 1,360 | 81 | 237 | 403 | 46 | ||||||||||||||||||||||||||||||
Europe | 7 | 1 | (94 | ) | 122 | 31 | 49 | 3 | (87 | ) | 372 | 43 |
January 29, 2012 | October 30, 2011 | January 30, 2011 | % Change January 29, 2012 Compared to October 30, 2011 | % Change January 29, 2012 Compared to January 30, 2011 | ||||||||||||||||||||||||||||
($) | (%) | ($) | (%) | ($) | (%) | |||||||||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||||||||||
Taiwan | 92 | 44 | 39 | 12 | 44 | 9 | 136 | 109 | ||||||||||||||||||||||||
China | 85 | 41 | 224 | 71 | 389 | 82 | (62 | ) | (78 | ) |
For the thirdfirst quarter of fiscal 2011,2012, customers in Taiwan and China accountedcontinued to account for 76 percent of new orders and 86 percent of net sales in the Energy and Environmental Solutions segment. For the first nine months of fiscal 2011, customers in China accounted for 78 percent of new orders and 81 percentmajority of net sales in this segment. In the third quarter of fiscal 2010, customers in China and Europe accounted for 92 percent of total net sales for the Energy and Environmental Solutions segment. For the first nine months of fiscal 2010, customers in China and Europe accounted for 89 percent of total net sales in this segment.
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Applied’s cash, cash equivalents and investments increaseddecreased to $6.8$3.0 billion at July 31, 2011January 29, 2012 from $3.9$7.2 billion at October 31, 2010,30, 2011, primarily due primarily to the receiptcompletion of the acquisition of Varian.
Cash, cash equivalents and investments consist of the following:
January 29, 2012 | October 30, 2011 | |||||||
(In millions) | ||||||||
Cash and cash equivalents | $ | 1,681 | $ | 5,960 | ||||
Short-term investments | 316 | 283 | ||||||
Long-term investments | 955 | 931 | ||||||
|
|
|
| |||||
Total cash, cash-equivalents and investments | $ | 2,952 | $ | 7,174 | ||||
|
|
|
|
Total cash, cash equivalents and investments decreased by $4.2 billion from October 30, 2011. The decrease in cash was the result of cash paid for the Varian acquisition, stock repurchases and dividends, which were offset in part by cash generated from operations. Cash, cash equivalents and investments at October 30, 2011 included net proceeds from the issuance of $1.75 billion of senior unsecured notes discussed below and cash provided by operating activities of $1.73 billion.
July 31, | October 31, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Cash and cash equivalents | $ | 5,018 | $ | 1,858 | ||||
Short-term investments | 739 | 727 | ||||||
Long-term investments | 1,052 | 1,307 | ||||||
Total cash, cash-equivalents and investments | $ | 6,809 | $ | 3,892 | ||||
A summary of cash provided by (used in) operating, investing, and financing activities is as follows:
July 31, | August 1, | |||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Cash provided by operating activities | $ | 1,728 | $ | 1,198 | ||||
Cash provided by (used in) investing activities | $ | 218 | $ | (847 | ) | |||
Cash provided by (used in) financing activities | $ | 1,210 | $ | (362 | ) |
January 29, 2012 | January 30, 2011 | |||||||
(In millions) | ||||||||
Cash provided by operating activities | $ | 181 | $ | 425 | ||||
Cash used in investing activities | $ | (4,157 | ) | $ | (79 | ) | ||
Cash used in financing activities | $ | (302 | ) | $ | (230 | ) |
Applied generated $1.7 billion$181 million of cash from operating activities for the ninethree months ended July 31, 2011.January 29, 2012. The primary sources of cash from operating activities for the ninethree months ended July 31, 2011January 29, 2012 were net income, as adjusted to exclude the effect of non-cash charges including depreciation, amortization, share-based compensation, restructuring and asset impairments, and changes in components of working capital. Applied’sThe change in working capital for the first quarter of fiscal 2012 was $7.0 billion at July 31, 2011negatively impacted by increased payments for variable compensation and $3.9 billion at October 31, 2010.interest. Applied did not utilize programs to discount letters of credit issued by customers for the three months ended January 29, 2012. Applied utilized programs to discount letters of credit issued by customers of $211 million and $134$123 million for the ninethree months ended July 31, 2011 and August 1, 2010, respectively.January 30, 2011. 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. For the ninethree months ended July 31,January 29, 2012 and January 30, 2011, and August 1, 2010, Applied factored accounts receivable and discounted promissory notes totaling $80$70 million and $106$36 million, respectively. Days sales outstanding for the thirdfirst quarter of fiscal 2011 decreased2012 increased to 5966 days, compared to 6164 days inat the second quarterend of fiscal 2011, primarily due to strong collections performance offset in part by higher extended terms in ending accounts receivable from the secondfourth quarter of fiscal 2011. Days sales outstanding varies due to the timing of shipments and the payment terms. During the first nine months of fiscal 2010, Applied’s working capital was $3.7 billion at January 29, 2012 and $7.6 billion at October 30, 2011.
Applied received a U.S. federal income tax refund of approximately $130 million for the carryback of Applied’s net operating loss from fiscal 2009 to fiscal 2005.
Applied to access new market opportunities or emerging technologies. During the nine months ended August 1, 2010, Applied acquired Semitool Inc., a public company based in the state of Montana, for $323used $302 million net of cash acquired.
48
Date Declared | Record Date | Payable Date | Amount Per Share | |||||
December 7, 2010 | March 2, 2011 | March 23, 2011 | $ | 0.07 | ||||
March 8, 2011 | June 1, 2011 | June 22, 2011 | $ | 0.08 | ||||
June 6, 2011 | August 31, 2011 | September 21, 2011 | $ | 0.08 |
In December 2011, Applied’s Board of Directors declared a quarterly cash dividend in the amount of $0.08 per share that will be paid on March 15, 2012 to stockholders of record as of February 23, 2012. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed four-year revolving credit agreement with a group of banks that is scheduled to expire in May 2015. 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 July 31, 2011.January 29, 2012. Remaining credit facilities in the amount of approximately $103 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both July 31, 2011January 29, 2012 and October 31, 2010.
Applied has substantially complied with the requestdebt agreements that contain financial and Varian has substantially complied with the request that it received.
49
Effective | ||||||||||||||||||||
Principal | Stated | Interest | Interest | Interest | ||||||||||||||||
Due Date | Amount | Interest Rate | Rate | Pay Date | Pay Date | |||||||||||||||
(In millions) | ||||||||||||||||||||
June 15, 2016 | $ | 400 | 2.650 | % | 2.666 | % | June 15 | December 15 | ||||||||||||
June 15, 2021 | 750 | 4.300 | % | 4.326 | % | June 15 | December 15 | |||||||||||||
June 15, 2041 | 600 | 5.850 | % | 5.879 | % | June 15 | December 15 | |||||||||||||
$ | 1,750 |
In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of July 31, 2011,January 29, 2012, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $52$51 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.
Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of July 31, 2011,January 29, 2012, Applied Materials, Inc. has provided parent guarantees to banks for approximately $200$186 million to cover these services.
Applied’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies.
For the three months ended January 30, 2012, Applied did not recognize any impairment on its investments. At January 30, 2012, Applied had a gross unrealized loss in its investment portfolio of $1 million due to a decrease in the fair value of certain fixed income securities.
During the three months ended January 29, 2012, Applied recorded a bad debt provision of $4 million as a result of certain customers’ financial condition. Applied did not record a bad debt provision during the three months ended January 30, 2011. While Applied believes that its allowance for doubtful accounts at January 29, 2012 is adequate, it will continue to closely monitor customer liquidity and economic conditions.
At January 29, 2012, approximately $300 million of cash, cash equivalents and marketable securities held by foreign subsidiaries of Applied may be subject to U.S. taxes if repatriated for U.S. operations. Applied’s intent is to permanently reinvest these funds outside of the U.S. and its current plans do not demonstrate a need to repatriate these funds to the U.S.
Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied’s management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied’s liquidity requirements for the next 12 months. For further details regarding Applied’s operating, investing and financing activities, see the Consolidated Condensed Statements of Cash Flows in this report.
50
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 in our Annual Report on Form 10-K and Note 1 to Notes to Consolidated Condensed Financial Statements describesin this report describe the significant accounting policies used in the preparation of the consolidated condensed financial statements. Certain of these significant accounting policies are considered to be critical accounting policies.
A critical accounting policy is defined as one that is both material to the presentation of Applied’s consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on Applied’s financial condition or results of operations. Specifically, these
policies have the following attributes: (1) Applied is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Applied could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Applied’s financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. Applied bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Applied’s operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties include those discussed in Part II, Item 1A, “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted 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:
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 probable. Each sale arrangement may contain commercial terms that differ from other arrangements. In addition, Applied frequently enters into contracts that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could have a material effect on Applied’s financial condition and results of operations.
51
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.
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 adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.
Goodwill and Intangible Assets
Applied reviews goodwill and intangible assets for impairment 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 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 reduce the carrying value of the reporting unit to its realizable value. The fair value of a reporting unit is estimated using both the income approach and the market approach taking into account such factors as future anticipated operating results and estimated cost of capital. Management uses significant judgment when assessing goodwill for potential impairment, especially in 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
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
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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.
Non-GAAP Results
Management uses non-GAAP results to evaluate the Company’s operating and financial performance in light of business objectives and for planning purposes. Applied Materials believes these measures enhance investors’ ability to review the Company’s business from the same perspective as the Company’s management and facilitate comparisons of this period’s results with prior periods. The non-GAAP results presented below and elsewhere in this report exclude the impact of the following, where applicable: restructuring and asset impairment charges and any associated adjustment related to restructuring actions, certain discrete tax items, certain acquisition-related
costs, investment impairments, and gain or loss on sale of facilities. These non-GAAP measures are not in accordance with GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. The presentation of this additional information should not be considered a substitute for results prepared in accordance with GAAP.
Non-GAAP operating income for the three and nine months ended July 31,January 29, 2012, October 30, 2011 and January 30, 2011 was $683$344 million, $384 million and $2.0 billion, respectively, compared to non-GAAP operating income of $339$659 million, and $1.0 billion for the three and nine months ended August 1, 2010, respectively.
Non-GAAP net income for the third quarter of fiscalthree months ended January 29, 2012, October 30, 2011 and January 30, 2011 was $467$240 million or $0.35$0.18 per share, compared to a non-GAAP net income of $234$271 million or $0.17$0.21 per share for the third quarter of fiscal 2010. Non-GAAP net income for the nine months ended July 31, 2011 was $1.5 billion,and $484 million or $1.09$0.36 per share, compared to a non-GAAP net income of $705 million or $0.52 per share for the nine months ended August 1, 2010.
53respectively.
APPLIED MATERIALS, INC.
RECONCILIATION OF GAAP TO NON-GAAP RESULTS
Three Months Ended | Nine Months Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
Non-GAAP Operating Income | ||||||||||||||||
Reported operating income (GAAP basis) | $ | 687 | $ | 183 | $ | 2,037 | $ | 685 | ||||||||
Certain items associated with acquisitions1 | 12 | 21 | 37 | 77 | ||||||||||||
Varian and Semitool deal cost | 9 | — | 9 | 10 | ||||||||||||
Restructuring charges and asset impairments2,3,4,5 | 3 | 135 | (30 | ) | 248 | |||||||||||
Gain on sale of facilities, net | (28 | ) | — | (27 | ) | — | ||||||||||
Non-GAAP operating income | $ | 683 | $ | 339 | $ | 2,026 | $ | 1,020 | ||||||||
Non-GAAP Net Income | ||||||||||||||||
Reported net income (GAAP basis) | $ | 476 | $ | 123 | $ | 1,471 | $ | 470 | ||||||||
Certain items associated with acquisitions1 | 12 | 21 | 37 | 77 | ||||||||||||
Varian and Semitool deal cost | 9 | — | 9 | 10 | ||||||||||||
Restructuring charges and asset impairments2,3,4,5 | 3 | 135 | (30 | ) | 248 | |||||||||||
Impairment of strategic investments | — | 8 | — | 13 | ||||||||||||
Gain on sale of facilities, net | (28 | ) | — | (27 | ) | — | ||||||||||
Reinstatement of federal R&D tax credit | — | — | (13 | ) | — | |||||||||||
Income tax effect of non-GAAP adjustments | (5 | ) | (53 | ) | 5 | (113 | ) | |||||||||
Non-GAAP net income | $ | 467 | $ | 234 | $ | 1,452 | $ | 705 | ||||||||
Non-GAAP Earnings Per Diluted Share | ||||||||||||||||
Reported earnings per diluted share (GAAP basis) | $ | 0.36 | $ | 0.09 | $ | 1.10 | $ | 0.35 | ||||||||
Certain items associated with acquisitions | 0.01 | 0.01 | 0.02 | 0.04 | ||||||||||||
Varian and Semitool deal cost | — | — | 0.01 | 0.01 | ||||||||||||
Restructuring charges and asset impairments | — | 0.07 | (0.01 | ) | 0.12 | |||||||||||
Impairment of strategic investments | — | — | — | — | ||||||||||||
Gain on sale of facilities, net | (0.02 | ) | — | (0.02 | ) | — | ||||||||||
Reinstatement of federal R&D tax credit | — | — | (0.01 | ) | — | |||||||||||
Non-GAAP earnings per diluted share | $ | 0.35 | $ | 0.17 | $ | 1.09 | $ | 0.52 | ||||||||
Weighted average number of diluted shares | 1,330 | 1,349 | 1,333 | 1,351 |
Three Months Ended | ||||||||||||
(In millions, except per share amounts) | January 29, 2012 | October 30, 2011 | January 30, 2011 | |||||||||
Non-GAAP Gross Margin | ||||||||||||
Reported gross margin (GAAP basis) | $ | 786 | $ | 852 | $ | 1,136 | ||||||
Certain items associated with acquisitions1 | 104 | 10 | 9 | |||||||||
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Non-GAAP gross margin | $ | 890 | $ | 862 | $ | 1,145 | ||||||
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Non-GAAP gross margin percent (% of net sales) | 41 | % | 40 | % | 43 | % | ||||||
Non-GAAP Operating Income | ||||||||||||
Reported operating income (GAAP basis) | $ | 179 | $ | 361 | $ | 674 | ||||||
Certain items associated with acquisitions1 | 142 | 13 | 13 | |||||||||
Varian deal cost | 23 | 10 | — | |||||||||
Restructuring charges and asset impairments2 | — | — | (29 | ) | ||||||||
Loss on sale of facility | — | — | 1 | |||||||||
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Non-GAAP operating income | $ | 344 | $ | 384 | $ | 659 | ||||||
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Non-GAAP operating margin percent (% of net sales) | 16 | % | 18 | % | 25 | % | ||||||
Non-GAAP Net Income | ||||||||||||
Reported net income (GAAP basis) | $ | 117 | $ | 456 | $ | 506 | ||||||
Certain items associated with acquisitions1 | 142 | 13 | 13 | |||||||||
Varian deal cost | 23 | 10 | — | |||||||||
Restructuring charges and asset impairments2 | — | — | (29 | ) | ||||||||
Impairment of strategic investments | — | 3 | — | |||||||||
Loss on sale of facility | — | — | 1 | |||||||||
Reinstatement of federal R&D tax credit | — | — | (13 | ) | ||||||||
Resolution of audits of prior years’ income tax filings | — | (203 | ) | — | ||||||||
Income tax effect of non-GAAP adjustments | (42) | (8) | 6 | |||||||||
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Non-GAAP net income | $ | 240 | $ | 271 | $ | 484 | ||||||
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Non-GAAP Earnings Per Diluted Share | ||||||||||||
Reported earnings per diluted share (GAAP basis) | $ | 0.09 | $ | 0.34 | $ | 0.38 | ||||||
Certain items associated with acquisitions | 0.08 | 0.01 | 0.01 | |||||||||
Varian deal cost | 0.01 | 0.01 | — | |||||||||
Restructuring charges and asset impairments | — | — | (0.01 | ) | ||||||||
Reinstatement of federal R&D tax credit and resolution of audits of prior years’ income tax filings | — | (0.15 | ) | (0.01 | ) | |||||||
Non-GAAP earnings per diluted share | $ | 0.18 | $ | 0.21 | $ | 0.36 | ||||||
Weighted average number of diluted shares | 1,310 | 1,321 | 1,335 |
1 | ||
These items are incremental charges attributable to acquisitions, consisting of inventory fair value adjustments on products sold, |
2 | Results for the three months ended | |
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The following table presents a reconciliation of the GAAP and non-GAAP segment results for the three months ended January 29, 2012, October 30, 2011 and January 30, 2011:
APPLIED MATERIALS, INC.
RECONCILIATION OF GAAP TO NON-GAAP RESULTS
Three Months Ended | ||||||||||||
(In millions, except percentages) | January 29, 2012 | October 30, 2011 | January 30, 2011 | |||||||||
Non-GAAP SSG Operating Income | ||||||||||||
Reported operating income (GAAP basis) | $ | 271 | $ | 278 | $ | 543 | ||||||
Certain items associated with acquisitions1 | 115 | 3 | 3 | |||||||||
Varian deal cost | — | 3 | — | |||||||||
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Non-GAAP operating income | $ | 386 | $ | 284 | $ | 546 | ||||||
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Non-GAAP operating margin percent (% of net sales) | 29 | % | 27 | % | 36 | % | ||||||
Non-GAAP AGS Operating Income | ||||||||||||
Reported operating income (GAAP basis) | $ | 107 | $ | 160 | $ | 85 | ||||||
Certain items associated with acquisitions1 | 6 | 2 | 2 | |||||||||
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Non-GAAP operating income | $ | 113 | $ | 162 | $ | 87 | ||||||
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Non-GAAP operating margin percent (% of net sales) | 21 | % | 26 | % | 15 | % | ||||||
Non-GAAP Display Operating Income | ||||||||||||
Reported operating income (GAAP basis) | $ | 5 | $ | 31 | $ | 28 | ||||||
Certain items associated with acquisitions1 | 2 | 2 | 2 | |||||||||
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Non-GAAP operating income | $ | 7 | $33 | $30 | ||||||||
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Non-GAAP operating margin percent (% of net sales) | 7 | % | 19 | % | 20 | % | ||||||
Non-GAAP EES Operating Income (Loss) | ||||||||||||
Reported operating income (loss) (GAAP basis) | $ | (23 | ) | $ | 17 | $ | 144 | |||||
Certain items associated with acquisitions1 | 6 | 6 | 6 | |||||||||
Restructuring charges and asset impairments2 | — | — | (28) | |||||||||
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Non-GAAP operating income (loss) | $ | (17 | ) | $ | 23 | $ | 122 | |||||
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Non-GAAP operating margin percent (% of net sales) | (8 | )% | 7 | % | 26 | % |
1 | These items are incremental charges attributable to acquisitions, consisting of inventory fair value adjustments on products sold, amortization of purchased intangible assets, share-based compensation associated with accelerated vesting and other integration costs. |
Results for the |
Note: Segment non-GAAP operating income does not include deal costs and other acquisition-related costs, which are reported within corporate and unallocated costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Applied is exposed to interest rate risk related to its investment portfolio and debt issuances. Applied’s investment portfolio includes fixed-income securities with a fair value of approximately $1.7$1.2 billion at July 31, 2011.January 29, 2012. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio at July 31, 2011,January 29, 2012, an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately $22$18 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses in the consolidated condensed statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to beother-than-temporary.
Certain operations of Applied are conducted in foreign currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied enters into currency forward exchange and option contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur within 24 months. Gains and losses on these contracts are generally recognized in income at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on currency forward exchange and 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 were not material for the three and nine months ended July 31, 2011January 29, 2012 and August 1, 2010.
Item 4. Controls and Procedures
As required byRule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act), Applied’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of Applied’s disclosure controls and procedures as defined in Exchange ActRule 13a-15(e). Based on that evaluation, the 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 in Applied’s SEC reports is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to Applied’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required byRule 13a-15(d), Applied’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of Applied’s internal control over financial reporting to determine whether any changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting. Based on that evaluation, there has been no such change during the fiscal quarter.
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.
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Item 1. Legal |
The information set forth above under the caption “Legal Matters” in Note 15 contained in Notes to Consolidated Condensed Financial Statements is incorporated herein by reference.
Item 1A. Risk |
The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Item 1A of Applied’s 20102011 Form 10-K.
The industries that Applied serves are volatile and 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’ requirements for new manufacturing capacity and advanced technology, requirements and spending, which depend in part on customers’ capacity utilization, production volumes, access to affordable capital, end-use demand, and inventory levels relative to demand, as well as the rate of technology transitions.transitions and general economic conditions. 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 the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity for each of its segments as well as across multiple segments. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. 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 employees; and continue to control costs. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. If Applied does not accurately forecast and timely and appropriately adapt to changes in its business environment, Applied’s business, financial condition and results of operations may be materially and adversely affected.
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 customers’ ability to raise the necessary capital, particularly when financial market conditions are difficult;
differences in growth rates among the semiconductor, display and solar industries;
the increasing importance of establishing, improving and maintaining strong relationships with customers; changes in end demand for electronic products over time and the effect of these changes on customers’ businesses and, in turn, on demand for Applied’s products; the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate of new manufacturing technology; the need to continually reduce the total cost of manufacturing system ownership, due in part to greater demand for lower-cost consumer electronics compared 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; |
56
the increasing importance of, and difficulties in, developing 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 to maximize the time that customers’ systems are available for production;
the increasing role for and complexity of software in Applied products; and
the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations.
If Applied does not successfully manage the risks resulting from the ongoing changes in the semiconductor, flat panel display, solar and related industries, 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 semiconductor industry.
The greatest portionlargest proportion of Applied’s consolidated net sales and profitability historically has been and continues to be derived from sales of manufacturing equipment by the Silicon Systems Group to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales of service products to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to that industry in addition to the general industry changes described in the preceding risk factor, including:
the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip; the use of new materials such as cobalt and yttrium; new and more complex device structures; more applications and process steps; increasing chip design costs; and the increasing cost and complexity of integrated manufacturing processes;
the cost, technical complexity and timing of a proposed industry transition from 300mm to 450mm wafers, and the resulting effect on demand for manufacturing equipment and services;
the need to reduce product development time, despite the increasing difficulty of technical challenges; the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes; the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller linewidths to volume manufacturing, and the resulting impact on the rates of technology transition and investment in capital equipment; challenges associated with generating organic growth in light of semiconductor manufacturers’ decreasing rate of capital expenditures as a percentage of revenue, and manufacturers’ increasing allocation of capital investment to markets that Applied does not serve, such as lithography; the increasing frequency and complexity of technology transitions and inflections, such as ALD, 3-D transistors, advanced interconnect, wafer-level packaging, and extreme ultraviolet lithography (EUV); shorter cycle times between customers’ order placement and product shipment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin; technology developments in related markets, such as lithography, to which Applied may need to adapt; competitive factors that make it difficult to enhance | ||
the importance of increasing market positions in under-penetrated segments, such as etch and inspection; |
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the concentration of wafer starts in Korea, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions; and
the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost of a new fabrication plant, while others require less technologically advanced products.
In addition, changes in market growth rates for different electronic products, such as tablets, smartphones, and personal computers, have led to changes in demand for different devices, such as NAND flash, DRAM, logic, foundry and MRAM, impacting customers’ capital spending patterns. For example, industry investment in NAND flash memory, which uses fewer Applied products in manufacturing compared to DRAM, has increased relative to DRAM spending.
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, industryapplications, and excess production capacity relative to end-use demand. Industry growth has depended to a considerable extentprimarily on consumer demand for increasingly larger and more advanced TVs.LCD TVs, which demand is slowing, and more recently on demand for smartphones and other mobile devices, which demand is highly sensitive to cost and improvements in technologies and features. In addition to the general industry changes described above in the second risk factor, the display industry is characterized by ongoing changes particular to that industry, including:
the planned expansion of manufacturing facilities in China by Chinese display manufacturers and manufacturers from other countries, and the ability of non-Chinese manufacturers to obtain government approvals on a timely basis;
the slowing rate of transition to larger substrate sizes for LCD TVs and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and return on investment;
the increasing importance of new types of display technologies, such as low temperature polysilicon (LTPS), organic light-emitting diode (OLED) and metal oxide, and new touch panel films, such as anti-reflective and anti-fingerprint; 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.
Applied is exposed to risks as a result of ongoing changes specific to the solar industry.
Investment levels in capital equipment for the emergingglobal solar market, which,industry have experienced considerable volatility. Current global solar PV production capacity exceeds anticipated near-term, end-use demand, causing customers to delay or reduce investments in manufacturing capacity and new technology. In addition to the general industry changes described above in the second risk factor, the global solar market is characterized by ongoing changes specific to this industry that impact demand for and/or the profitability of Applied’s solar products, including:
the need to continually decrease the cost-per-watt of electricity produced by solar PV products to at or below grid parity by, among other things, reducing operating costs and increasing throughputs for solar PV manufacturing, and improving the conversion efficiency of solar PVs;
the varying energy policies of governments around the world and their effect in influencing the rate of growth of the solar industry, including:PV market, including the availability and amount of government incentives for solar
power such as tax credits, feed-in tariffs, 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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the | ||
the filing of regulatory unfair trade proceedings against solar PVs from China, where most of Applied’s solar equipment sales are concentrated, which is heavily dependentcould result in the assessment of duties on installedcost-per-watt, government policiessolar cells and incentives,modules imported from China or other outcomes;
the varying levels of operating and industry experience among solar PV manufacturers and the availabilityresulting differences in the nature and extent of affordable capital. An oversupplycustomer support services requested from Applied;
challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer base;
the growth of market segments in which Applied does not participate, such as passivation and furnaces;
the increasing number of government-affiliated entities in China that are becoming customers;
the cost of polysilicon and other materials; and
the financial condition of solar PVs may leadPV customers and their access to delay or reduce investments in manufacturing capacityaffordable financing and new technology, and adversely impact the sales growth ratesand/or profitability of Applied’s products. capital.
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 is exposed to risks associated with the difficult financial markets and uncertain global economy.
Continuing difficulties in the financial markets, national debt concerns in various regions, and uncertainty regarding the global economy are posing challenges, whileand some governments may implement policies to control economic growth. The markets for semiconductors and flat panel displays in particular depend largely on consumer spending.spending, while the solar market depends in part on government incentives and the availability of financing for PV installations. Economic uncertainty and related factors, including unemployment, inflation and fuel prices, exacerbate negative trends in business and consumer spending and may cause certain Applied customers to push out, cancel, or refrain from placing orders for equipment or services, which may reduce net sales, reduce backlog, and affect Applied’s ability to convert backlog to sales. Difficulties in obtaining capital, uncertain market conditions, or reduced profitability may also cause some customers to scale back operations, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations, leading to customers’ reducedreducing research and development fundingand/or capital expenditures and, in turn, lower salesand/or additional inventory or bad debt expense for Applied. These conditions may also similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for Applied’s products or added costs. 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.
Uncertainty about future economic and industry conditions also makes it more challenging for Applied to forecast its operating results, make business decisions, and identify and prioritize 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. The risks to Applied’s investment portfolio may be exacerbated if financial market conditions deteriorate and, as a result, the value and liquidity of the investment portfolio, and returnas well as returns on pension assets could be negatively impacted and lead to impairment charges. Applied also maintains cash balances in various bank accounts globally in order to fund normal operations. If one or more of these financial institutions become insolvent or are taken over by a government, it could limit Applied’s ability to access cash in the affected accounts.
If Applied does not timely and appropriately adapt to changes resulting from the uncertain macroeconomic environment and industry conditions, or to difficulties in the financial markets. Applied’s business, financial condition or results of operations may be materially and adversely affected.
Applied must continually innovate and adapt its business and product offerings to respond to competition and rapid technological changes.
As Applied operates in a highly competitive environmentin which innovation is critical,, its future success depends on many factors, including the effective commercialization and customer acceptance of its equipment, services 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 collaborative, geographically diverse, open and varied competitive environments have grown increasingly complex
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identify and address technology inflections, market changes, new applications, customer requirements and end-use demand;
develop new products (including disruptive technologies), improve and/or develop new applications for existing products, and adapt similar products for use by customers in different applications and/or markets with varying technical requirements;
appropriately price and achieve market acceptance of its products;
differentiate its products from those of competitors and any disruptive technologies, and meet customers’ performance specifications;
maintain operating flexibility to enable different responses to different markets, customers and applications;
enhance its worldwide operations across all business segments to reduce cycle time, enable continuous quality improvement, reduce costs, and enhance design for manufacturability and serviceability;
focus on sales and marketing strategies that foster strong customer relationships;
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, as most appropriate and effective for future growth;
reduce the cost, and improve the productivity of capital invested in R&D activities;
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 evaluation and, in turn, volume manufacturing with its customers; and
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.
If Applied does not successfully manage these challenges, its business, financial condition and results of operations could be materially and adversely affected.
Operating in multiple industries, and the entry into new markets and industries, entail additional challenges.
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Applied’s semiconductor and flat panel display customer basesbase historically havehas been, and areis becoming even more, highly concentrated as a result of economic and industry conditions. For example, in the first nine monthsquarter of fiscal 2011,2012, three semiconductor manufacturers accounted for 5269 percent of Silicon Systems Group net sales, and three LCD manufacturerstwo customers accounted for 5739 percent of DisplayApplied’s consolidated net sales. Applied’s flat panel display customer base is also highly concentrated, while concentration within Applied’s solar customer base varies depending on the product line. Certain customers have experienced significant ownership or management changes, consolidated with other manufacturers, outsourced manufacturing activities, or engaged in collaboration or cooperation arrangements with other manufacturers. In addition, 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. Also, certain semiconductor and display customers are making an increasingly greater percentage of their respective industry’s capital equipment
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In this environment, contracts or orders from a relatively limited number of manufacturers have accounted for, and are expected to continue to account for, a substantial portion of Applied’s business, which may result in added complexities in managing customer relationships and transactions.transactions and make it more challenging for Applied’s business units to generate organic growth. 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. These factors could have a material adverse effect on Applied’s business, financial condition and results of operations.
Operating in multiple industries, and the entry into new markets and industries, entail additional challenges and obligations.
As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing 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;
the need to develop new sales and marketing strategies and cultivate relationships with new customers;
differing rates of profitability and growth among 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;
the need to undertake activities to grow demand for end-products;
the need to develop and successfully implement adequate new business processes and systems;
Applied’s ability to rapidly expand or reduce its operations to meet increased or decreased demand, respectively, and the associated effect on 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, uncertain and/or limited funding, evolving business models and/or locations in regions where Applied does not have, or has limited, operations;
different customer service requirements;
new or different competitors with potentially more financial or other resources, industry experience and/or established customer relationships;
entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices;
third parties’ intellectual property rights; and
the need to comply with, or work to establish, industry standards and practices.
In addition, Applied has begun applying for and receiving funding from United States and other government agencies for certain strategic development programs to increase its R&D resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharing and/or other obligations.
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 the first fiscal quarter of 2012, approximately 81 percent of Applied’s net sales were to customers in regions outside the United States. Certain of Applied’s R&D and manufacturing facilities, as well as suppliers to Applied, are also located outside the United States, including in Singapore, Taiwan, China, Korea, Israel, Germany, Italy and Switzerland. Applied is also expanding its business and operations in new 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;
political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;
customer- or government-supported efforts to influence Applied to conduct more of its operations in a particular country, such as Korea and China;
variations among, and changes in, local, regional, national or international laws and regulations (including intellectual property, labor, tax, and import /export laws), 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, as well as international trade disputes;
positions taken by governmental agencies regarding possible national commercial and/or security issues posed by international business operations;
fluctuating raw material, commodity and energy costs;
challenges associated with managing more geographically diverse operations and projects, which requires an effective organizational structure and appropriate business processes, procedures and controls;
a more diverse workforce with different experience levels, cultures, customs, business practices and worker expectations;
variations in the ability to develop relationships with local customers, suppliers and governments;
fluctuations in interest rates and currency exchange rates, including the relative strength or weakness of the U.S. dollar against the Japanese yen, euro, Taiwanese dollar, Israeli shekel or Chinese yuan;
the need to provide sufficient levels of technical support in different locations around the world;
political instability, natural disasters (such as earthquakes, floods or storms), pandemics, social unrest, terrorism or acts of war in locations where Applied has operations, suppliers or sales, or that may influence the value chain of the industries that Applied serves;
reliance on various information systems, data centers and software applications to conduct many aspects of the Company’s business, which may be vulnerable to cyberattacks by third parties or breached due to employee error, misuse or other causes that could result in business disruptions, loss of confidential information, or other adverse consequences in the event that Applied’s firewalls and security processes and practices are ineffective;
the need for an effective business continuity plan if a disaster or other event occurs that could disrupt business operations;
the need to regularly reassess the size, capability and location of the Company’s global infrastructure and make appropriate changes;
cultural and language differences;
shipping costs or delays;
the need to continually improve the Company’s operating cost structure;
difficulties and uncertainties associated with the entry into new countries;
hiring and integration of an increasing number of new workers, including in countries such as India and China;
the increasing need for the workforce to be more mobile and work in or travel to different regions;
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 PVs in the developing economies of certain countries.
Many of these challenges are present in China and Korea, which are experiencing significant growth of customers, suppliers and competitors to Applied. Applied further believes that China and Korea present large potential markets for its products and opportunity for growth over the long term, although at lower projected levels of profitability and margins for certain products than historically have been achieved in other regions. These challenges may materially and adversely affect Applied’s business, financial condition and results of operations.
Manufacturing interruptions or delays could affect Applied’s ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
Applied’s business depends on its timely supply of 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, and timely performance byincluding contract manufacturers. Some key parts may beare 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,countries where Applied conducts its manufacturing, including China and Korea. Cyclical industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for companies throughout Applied’s supply chain. Further, the adverse conditions in the credit and financial
markets and industry slowdowns in recent periods 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 quality parts on a timely basis.operations. Applied may also 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 sufficient quantities of quality parts on a cost-effective basis;
volatility in the availability and cost of materials, including rare earth elements;
difficulties or delays in obtaining required import or export approvals;
information technology or infrastructure failures; and
natural disasters or other events (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war).
If a supplier fails to meet Applied’s requirements concerning quality, cost, socially-responsible business practices, or other performance factors, Applied may transfer its business to alternative sourcing,sources, which could entail manufacturing delays, additional costs, or other difficulties. In addition, Applied’s needif Applied needs to rapidly increase its business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this 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. If Applied purchases inventory in anticipation of customer demand that does not materialize, or if customers reduce or delay orders, Applied may incur excess inventory charges. Any or all of these factors could materially and adversely affect Applied’s business, financial condition and results of operations.
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Applied has made, and in the future intends to make, acquisitions of andor investments in, companies, technologies or products in existing, related or new markets for Applied. Most recently,In November 2011, Applied announced that it had signed a definitive merger agreement to acquirecompleted its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian), which is subjectwas the Company’s largest acquisition to various customary closing conditions, including receipt of certain domestic and foreign antitrust approvals.date. Acquisitions involve numerous risks that vary depending on the scale and nature of the acquisition, including but not limited to:
diversion of management’s attention from other operational matters;
inability to complete acquisitions as anticipated or at all;
requirements imposed by government regulators in connection with their review of a transaction, which may include, among other things, divestitures and/or restrictions on the conduct of Applied’s existing business or the acquired business;
ineffective integration of operations, systems, technologies, products or employees of an acquired business;
inability to realize anticipated synergies or other benefits;
failure to commercialize purchased technologies;
initial dependence on unfamiliar supply chains or relatively small supply partners;
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 and customer relationships;
failure to attract, retain and motivate key employees from the acquired business;
reductions in cash balances and/or increases in debt obligations to finance the acquisition, which reduce the availability of cash flow for general corporate or other purposes;
exposure to new operational risks, rules, regulations, worker expectations, customs and practices to the extent acquired businesses are located in regions where Applied has not historically conducted business;
challenges associated with managing new, more diverse and more widespread operations, projects and people;
inability to obtain and protect intellectual property rights in key technologies;
inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, and/or environmental, health and safety, anti-corruption, human resource, or other policies or practices;
impairment of acquired intangible assets and goodwill as a result of changing business conditions, technological advancements or worse-than-expected performance of the segment;
the risk of litigation or claims associated with a proposed or completed transaction;
unknown, underestimated and/or undisclosed commitments or liabilities; and
the inappropriate scale of acquired entities’ critical resources or facilities for business needs.
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 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.risks. 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.
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Applied’s success, competitiveness and ability to execute on its global strategies and maintain a culture of innovation depend in large part on its ability to attract, retain and motivate key employees.employees, especially in critical positions and in growing markets. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, Applied’s organizational structure, competitors’ hiring practices, cost reduction activities (including workforce reductions)reductions and unpaid shutdowns), availability of career development opportunities, and the effectiveness of Applied’s compensation and benefit programs, including its share-based programs. If Applied does not successfully attract, retain and motivate key employees, Applied may be unable to capitalize on its opportunities and its business, financial condition and operating results may be materially and adversely affected.
The failure to successfully implement and conduct outsourcing activities and other operational initiatives could adversely affect results of operations.
To better align its costs with market conditions, locate closer to customers, enhance productivity, and improve efficiencies, Applied conducts certain engineering, software development, manufacturing, sourcing and other operations in regions outside the United States, including India, Taiwan, China, and Korea. Applied is implementinghas implemented a more distributed manufacturing model, under which includes transitioning certain manufacturing and supply chain activities fromare conducted in various countries, including the United States, and Europe, toIsrael, Singapore, Taiwan and other countries in Asia, and completing assembly of some systems is completed at customer sites. In addition, Applied outsources certain functions to third parties, including companies in the United States, India, China, Korea, Malaysia and other countries. Outsourced functions include contract manufacturing, engineering, 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 the intellectual property of Applied and its customers, suppliers and other partners. If Applied does not accurately forecast the amount, timing and mix of demand for products, or if contract manufacturers or other outsource providers fail to perform in a timely manner or at satisfactory quality levels, Applied’s ability to meet customer requirements could suffer, particularly during a market upturn.
In addition, Applied is implementing amust regularly implement or update comprehensive programprograms and processes to better align its global organizations, and processes, including initiatives to enhance the Asia supply chain integrate its sales teams into the business units, and improve back office and information technology infrastructure for more efficient transaction processing. Applied also is implementing a multi-year, company-wide program to transform certain business processes or extend established processes, including the transition to a single enterprise resource planning (ERP) software system to perform various functions. The implementation of additional functionality to the ERP system entails certain risks, including difficulties with changes in business processes that could disrupt Applied’s operations, such as its ability to track orders and timely ship products, project inventory requirements, manage its supply chain and aggregate financial and operational data. TheDuring transitions Applied must continue to rely on legacy information systems, which may be costly or inefficient, while 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.
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Applied may incur impairment charges to goodwill or long-lived assets.
Applied has a significant amount of goodwill and other acquired intangible assets related to acquisitions. 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 more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The review compares the fair value for each of Applied’s reporting units to its associated carrying value, including goodwill. Factors that could lead to impairment of goodwill and intangible assets include adverse industry or economic trends, reduced estimates of future cash flows, declines in the market price of Applied common stock, changes in the Applied’s strategies or product portfolio, and restructuring activities. Applied’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. Applied may be required to record a charge to earnings during the period in which an impairment of goodwill or amortizable intangible assets is determined to exist, which could materially and adversely affect Applied’s 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 performance, product liability, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other matters. Applied also 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.
In February 2010, the Seoul Prosecutor’s Office for the Eastern District in Korea indicted certain employees of Applied Materials Korea (AMK), including the former head of AMK who at the time of indictment was a vice president of Applied Materials, Inc., along with employees of several other companies, alleging the improper
receipt and use of the confidential information of Samsung Electronics Co., Ltd. (Samsung), a major customer. Hearings on these matters are ongoing in the Seoul Eastern District Court. Applied and Samsung entered into a settlement agreement effective as of November 1, 2010, which resolvesresolved potential civil claims related to this matter and which is separate from and does not affect the criminal proceedings.
Legal proceedings and claims, whether with or without merit, and associated internal investigations, may (1) be time-consuming and expensive to prosecute, defend or conduct; (2) divert management’s attention and other Applied resources; (3) inhibit Applied’s ability to sell its products; (4) result in adverse judgments for damages, injunctive relief, penalties and fines;and/or (5) negatively affect Applied’s business. There can be no assurance regarding the outcome of current or future legal proceedings, claims or investigations. If Applied is not able to favorably resolve or settle legal proceedings or claims, or in the event of any adverse findings against Applied or any of its employees, Applied’s business, financial condition and results of operations could be materially and adversely affected and Applied may suffer harm to its reputation.
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.
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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; (3) plans of the Company to permanently reinvest certain funds held outside of the U.S.; or (3)(4) valuation of Applied’s deferred tax assets and liabilities.
To better align with the increasingly international nature of its business, Applied is transitioning certain manufacturing, supply chain, and other operations into Asia, bringing these activities closer to customers. These changes are expected to result in a reduction of future operating costs. In Singapore, Applied has received authorization to use tax incentives that provide that certain income earned in Singaporecertain countries outside the U.S. will be subject to tax holidays or reduced income tax rates. To obtain the benefit of these tax provisions, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these provisions could be materially affected if, among other things, applicable requirements are not met, or if Applied incurs net losses for which it cannot claim a deduction.
In addition, Applied is subject to regular examination by the Internal Revenue Service and other tax 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, which requires estimates and judgments. 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 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, such as those related to climate change, 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 executive order, 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
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information as of July 31, 2011January 29, 2012 with respect to the shares of common stock repurchased by Applied during the thirdfirst quarter of fiscal 2011.
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* | ||||||||||||
(In millions, except per share amounts) | ||||||||||||||||
Month #1 | ||||||||||||||||
(May 2, 2011 to May 29, 2011) | — | $ | — | — | $ | 1,382 | ||||||||||
Month #2 | ||||||||||||||||
(May 30, 2011 to June 26, 2011) | 0.4 | $ | 12.58 | 0.4 | $ | 1,377 | ||||||||||
Month #3 | ||||||||||||||||
(June 27, 2011 to July 31, 2011) | 1.6 | $ | 12.81 | 1.6 | $ | 1,357 | ||||||||||
Total | 2.0 | $ | 12.77 | 2.0 | ||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program* | Maximum Dollar Value of Shares That May Yet be Purchased Under the Program* | ||||||||||||
( In millions, except per share amounts) | ||||||||||||||||
Month #1 | ||||||||||||||||
(October 31, 2011 to November 27, 2011) | 2.5 | $ | 10.94 | 2.5 | $ | 1,155 | ||||||||||
Month #2 | ||||||||||||||||
(November 28, 2011 to December 25, 2011) | 8.8 | $ | 10.66 | 8.8 | $ | 1,061 | ||||||||||
Month #3 | ||||||||||||||||
(December 26, 2011 to January 29, 2012) | 7.0 | $ | 11.33 | 7.0 | $ | 982 | ||||||||||
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Total | 18.3 | $ | 10.95 | 18.3 | ||||||||||||
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* | On March 8, 2010, the Board of Directors approved a stock repurchase program for up to $2.0 billion in repurchases over the next three years, ending March 2013. |
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Exhibit | ||||
No | Description | |||
4 | .2 | Indenture, dated June 8, 2011, by and between Applied Materials, Inc. and U.S. Bank National Association, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed June 10, 2011. | ||
4 | .3 | First Supplemental Indenture, dated June 8, 2011, by and between Applied Materials, Inc. and U.S. Bank National Association, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed June 10, 2011. | ||
10 | .63 | Bridge Loan Agreement, dated as of May 25, 2011, among Applied Materials, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and other lenders named therein, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed May 31, 2011. (Confidential treatment has been requested for redacted portions of the agreement.) | ||
10 | .64 | Credit Agreement, dated as of May 25, 2011, among Applied Materials, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and other lenders named therein, incorporated by reference to Applied’s Form 8-K (file no. 000-06920) filed May 31, 2011. (Confidential treatment has been requested for redacted portions of the agreement.) | ||
31 | .1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31 | .2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | .1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32 | .2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-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 |
69
Incorporated by Reference | ||||||||||
Exhibit No. | Description | Form | File No. | Exhibit No. | Filing Date | |||||
3.1 | Amended and Restated Bylaws of Applied Materials, Inc., effective December 6, 2011 | 8-K | 000-06920 | 3.1 | 12/7/2011 | |||||
10.1 | Form of Performance Unit Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended† | |||||||||
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002† | |||||||||
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002† | |||||||||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡ | |||||||||
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-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.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
† | Filed herewith. |
‡ | Furnished herewith. |
APPLIED MATERIALS, INC. | ||
By: | /s/ GEORGE S. DAVIS | |
George S. Davis Executive Vice President, Chief Financial Officer (Principal Financial Officer) |
February 27, 2012
By: | /s/ THOMAS S. TIMKO | |
Thomas S. Timko Corporate Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) |
February 27, 2012
70