~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
Fair Value Hierarchy
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 1 — Quoted prices in active markets for identical assets or liabilities;~~
• Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
• ~~Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.~~
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

APPLIED MATERIALS, INC.

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, 2011~~January 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 )

30, 2011:


	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

Total	$	981		$	1,043	$	—	$	2,024		$	5,799	$	1,016	$	—	$	6,815

Liabilities:
Deferred compensation	$	(6	)	$	—	$	—	$	(6	)	$	—	$	—	$	—	$	—

Total	$	(6	)	$	—	$	—	$	(6	)	$	—	$	—	$	—	$	—

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 ~~either~~both the three ~~and nine~~ months ended ~~July 31, 2011 or the three~~January 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, 2011~~January 29, 2012 and ~~August 1, 2010.~~

January 30, 2011.

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.

Applied did not recognize any impairment on its equity method investments in privately-held companies for both the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012 and January 30, 2011. ~~During the first nine months of fiscal 2010, Applied determined that certain of its equity investments in privately-held companies wereother-than-temporarily~~ ~~impaired and, accordingly, recognized impairment charges in the amounts of $8 million and $13 million for the three and nine months ended August 1, 2010, respectively.~~

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The following tables present the balances of equity securities at July 31, 2011 and August 1, 2010 that had been measured at fair value on a non-recurring basis, using the process described above, and the impairment charges recorded during the three and nine months then ended:

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

At October 31, 2010, equity investments in privately-held companies totaled $59 million, of which $40 million of investments were accounted for under the cost method of accounting and $19 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an

~~other-than-temporary~~Other ~~decline in value.~~

~~Other~~

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. ~~The~~At 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 ~~Note 5~~	~~Derivative Instruments and Hedging Activities~~

Derivative Financial Instruments

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

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.

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, 2011~~January 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, 2011~~January 29, 2012 and ~~August 1, 2010.~~

January 30, 2011.

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.

~~Fair~~

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

not material.

APPLIED MATERIALS, INC.

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 (Loss) Reclassified from AOCI into Income	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 material~~immaterial as of ~~July 31, 2011.~~

January 29, 2012.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, ~~Applied does~~Applied’s exposure is not ~~consider its exposure to be~~considered significant.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


~~Note 6~~	~~Accounts Receivable, Net~~

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 ~~all~~both periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of ~~$74~~$77 million at ~~both July 31, 2011~~January 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 7	~~Balance Sheet Detail~~1. Finished goods inventory includes $195 million and $140 million of evaluation inventory at January 29, 2012 and October 30, 2011, respectively.

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

Included in finished goods inventory is $281 million at July 31, 2011, and $148 million at October 31, 2010, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1. Finished goods inventory includes $145 million and $117 million of evaluation inventory at July 31, 2011 and October 31, 2010, respectively.

APPLIED MATERIALS, INC.

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

~~Other~~January 29, 2012, other accrued expenses included ~~contractual termination~~a $23 million acquisition obligation ~~charges of $10 million and $40 million as of July 31, 2011 and October 31, 2010, respectively.~~

July 31,
October 31,

2011 2010
(In millions)

Customer Deposits and Deferred Revenue

Customer deposits $ 442 $ 407
Deferred revenue 905 440

$ 1,347 $ 847

for untendered Varian shares.


	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 ~~the~~its Energy and Environmental Solutions and Display segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


~~Note 8~~	~~Goodwill, Purchased Technology and Other Intangible Assets~~

~~Goodwill~~Note 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~~

the leading supplier of ion implantation equipment used by chip makers around the world, for an aggregate purchase price of $4.2 billion in cash, net of cash acquired and assumed earned equity awards of $27 million, pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated as of May 3, 2011. Applied’s ~~methodology~~primary reasons for ~~allocating~~this acquisition were to complement existing product offerings and to provide opportunities for future growth. Varian designs, markets, manufactures and services ion implantation systems. These systems are primarily used in the manufacture of transistors, which are a basic building block of integrated circuits (ICs) or microchips. Ion implantation systems create a beam of electrically charged particles called ions, which are implanted into transistor structures at precise locations and depths, changing the electrical properties of the semiconductor device. These implantation systems may also be used in other areas of IC manufacture for modifying the material properties of the semiconductor devices, as well as in manufacturing crystalline-silicon solar cells and light-emitting diodes (LEDs).

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 the~~this 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~~based 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.~~

~~Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during~~over 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. For goodwill, Applied performs a two-step impairment test. In the first step, Applied compares theaggregate 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 operates 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 comparable companies, as appropriate. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to allvalues of the assets acquired and liabilities assumed in the acquisition. Of this amount, $1.7 billion 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~~was allocated to the ~~difference.~~

~~Applied conducted impairment tests in the fourth quarter of fiscal 2010,~~Silicon Systems Group segment, and the results of the first step of the impairment test indicated that Applied’s goodwill and purchased intangible assets with indefinite useful lives for each of its reporting units were not impaired. The purchased intangible assets with indefinite lives consisted primarily of a trade name. In the second quarter of fiscal 2011, Applied negotiated the divestiture of certain assets and determined the trade name included in assets held for sale to be impaired, and recorded $18 million of impairment charges.

~~Effective in the first quarter of fiscal 2011, Applied transferred its SunFab thin film solar product from the Energy and Environmental Solutions segment~~remainder was allocated to the Applied Global Services segment. ~~As a result~~Goodwill is not deductible for tax purposes. The estimated fair value assigned to identifiable intangible assets acquired and liabilities assumed was based upon preliminary estimates. Valuations and assumptions pertaining to income taxes are subject to change as additional information is obtained during the measurement period.

The following table summarizes the preliminary allocation of ~~this transfer, Applied reallocated $17 million of goodwill from its Energy~~the assets acquired and ~~Environmental Solutions segment to its Applied Global Services segment.~~

liabilities assumed at the acquisition date:


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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

~~Details~~

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

~~Finite-Lived Purchased Intangible Assets~~

~~Applied amortizes~~the purchase price allocated to purchased intangible assets of Varian at the acquisition date:


	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 using~~accelerated vesting, deal costs and other integration costs associated with the ~~straight-line method over~~acquisition. Of this amount, deal costs and other acquisition-related costs of $36 million were not allocated to the ~~estimated economic lives~~segments.

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.~~

~~Applied evaluates long-lived assets~~increase interest expense for ~~impairment whenever events or changes in circumstances indicate~~ the ~~carrying value~~additional debt incurred to complete the acquisition, and to reflect the related income tax effect. The pro forma results for the three months ended January 30, 2011 include costs of ~~an asset group may not be recoverable. Applied assesses the~~$102 million, which reduced net income due to inventory fair value adjustments on products sold, share-based compensation associated with accelerated vesting and acquisition-related costs, which are not expected to occur in future quarters. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the ~~assets based on the amount~~fiscal reporting period indicated nor is it necessarily indicative of ~~the undiscounted~~ future ~~cash flow~~operating results. The pro forma information does not include any (i) potential revenue enhancements, cost synergies or other operating efficiencies that ~~the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to~~could result from the ~~use of~~acquisition or (ii) transaction or integration costs relating to the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

~~Intangible assets, such as purchased technology, are generally recorded in connection with a business~~ acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

~~Details of amortized intangible assets were as follows:~~

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

Aggregate amortization expense was $13 million and $17 million for the three months ended July 31, 2011 and August 1, 2010, respectively, and $40 million and $71 million for the nine months ended July 31, 2011 and August 1, 2010, respectively. In the second quarter of fiscal 2011, Applied entered into an agreement to divest certain assets held in the Applied Global Services segment and determined certain identified purchased technology and finite-lived intangible assets included in assets held for sale to be impaired, and, accordingly, recorded $6 million of impairment charges.

~~As of July 31, 2011, future estimated amortization expense is expected to be as follows:~~

Amortization Expense
(In millions)

2011 $ 12
2012 50
2013 48
2014 40
2015 25
Thereafter 48

$ 223


~~Note 9~~	~~Business Combinations~~

~~On May 4,~~

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) announced~~adopted 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 ~~signing~~fair value of a ~~definitive merger agreement (the Merger Agreement) under~~reporting 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 Varian~~operates 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. Consummation~~fair value of the ~~proposed merger remains subject~~reporting unit exceeds the carrying value of the net assets assigned to ~~various~~that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, as if Applied had acquired the reporting unit in a business combination, with the fair value of the reporting unit being the “purchase price.” The excess of the “purchase price” over the carrying amounts assigned to assets and liabilities 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 receipt~~indefinite-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~~

Varian as discussed in Note 8.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Details of ~~1976,~~indefinite-lived intangible assets were as ~~amended (the HSR Act). Upon completion~~follows:


	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

Carrying amount	$	3,875	$	142	$	4,017	$	1,335	$	—	$	1,335

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 continue~~assets, 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.~~

~~The Merger Agreement contains certain termination rights and provides that (i) upon~~recoverable. Applied assesses the ~~termination~~fair value of the ~~Merger Agreement under specified~~assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances ~~including, among others, by Varian to accept a superior offer~~require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or ~~by Applied upon a~~changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.

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

Gross carrying amount	$	1,544		$	561		$	2,105		$	553		$	325		$	878

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	)

Accumulated amortization	$	(469	)	$	(259	)	$	(728	)	$	(426	)	$	(241	)	$	(667	)

Carrying amount	$	1,075		$	302		$	1,377		$	127		$	84		$	211

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 termination~~gross carrying amount of the ~~Merger Agreement~~amortized intangible assets was approximately $1.2 billion, due to the ~~failure to obtain certain antitrust approvals, Applied will owe~~acquisition of Varian ~~a cash termination fee~~as discussed in Note 8.

Details of ~~$200 million.~~

~~Applied expects to fund~~amortization expense were as follows:


	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

Total	$	61		14

For the ~~transaction with a combination of existing cash balances~~three 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.~~

On June 13, 2011, Applied received a request for additional information from the Antitrust Division of the U.S. Department of Justice (DOJ) in connection with the merger as part of the regulatory process under the HSR Act. Applied is respondingcharged to the ~~request and will continue~~following categories:


	Three Months Ended
	January 29, 2012		January 30, 2011
	(In millions)
Cost of products sold	$	52	$	9
Selling, general and administrative		9		5

Total amortization expense	$	61	$	14

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 DOJ~~be 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.

follows:


	Amortization Expense
	(In millions)
2012	$	164
2013		210
2014		199
2015		182
2016		174
Thereafter		448

	$	1,377


~~Note 10~~	~~Borrowing Facilities and Long-Term Debt~~

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, 2011~~January 29, 2012 and October ~~31, 2010.~~

30, 2011.

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


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

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

~~Long-term~~Applied has debt ~~outstanding as of October 31, 2010 was as follows:~~

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

~~In June 2011,~~agreements that contain financial and other covenants. These covenants require Applied ~~issued senior unsecured notes due 2016, 2021, and 2041 in the aggregate principal amount of $1.75 billion (collectively, the Notes) pursuant~~ to ~~the terms of an indenture and first supplemental indenture (collectively, the Indenture). The Indenture contains~~maintain certain ~~covenants with which~~minimum financial ratios. At January 29, 2012, Applied was in compliance ~~at July 31, 2011. The Notes were sold in a public offering pursuant to a registration statement on~~with all such covenants.

~~Form S-3~~Note 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.


~~Note 11~~	~~Restructuring and Asset Impairments~~

Asset Impairments

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 of~~positions. In fiscal ~~2011, and as a result~~2010, Applied recorded ~~an additional favorable adjustment~~restructuring 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 quarters~~quarter 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.

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~

Changes in severance accruals associated with restructuring reserves for the ~~nine months ended July 31, 2011~~first quarter of fiscal 2012 were as follows:

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	)

Balance, January 29, 2012	$	4

In addition, as of ~~July 31, 2011,~~January 29, 2012, Applied had $5 million in restructuring reserves associated with facilities.

In During the ~~second~~first quarter of fiscal 2011, Applied incurred impairment charges of $24 million associated with certain intangible assets and purchased technology. See Note 8 of the Notes to Consolidated Condensed Financial Statement. In the third quarter of fiscal 2011, Applied incurredrecorded asset impairment charges of $3 million related to ~~certain fixed assets.~~

~~In the second quarter of fiscal 2010, Applied recorded an asset impairment charge of $9 million to write down~~ a facility to its estimated fair value based on prices for comparable local properties. The facility was reclassified as an asset held for sale. In the first quarter of fiscal 2011, Applied recorded additional impairment charges of $3 million related to this facility.

held-for-sale.


Note 12	Stockholders’ Equity, ~~Comprehensive Income and Share-Based Compensation~~

Comprehensive Income and Share-Based Compensation
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


   $ 7    $ 6


~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
~~Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:~~

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

~~For further details on derivative instruments, see Note 5 of the Notes to Consolidated Condensed Financial Statements.~~
Stock Repurchase Program
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 ~~during~~for the ~~three~~first 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
~~Dividends~~
~~The following table summarizes the dividends declared by~~ Applied’s Board of Directors ~~during fiscal 2011:~~

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
declared a quarterly cash dividend in the amount of $0.08 per share, aggregating $103 million, that will be paid on March 15, 2012 to stockholders of record as of February 23, 2012. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration and amount of any future cash dividend are at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of ~~Applied’s~~Applied and its stockholders.
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
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
share-based awards to consultants. Applied also has two Employee Stock Purchase Plans, one ~~generally~~ for United States employees and a second for ~~employees of~~ international ~~subsidiaries~~employees (collectively, ESPP), which enable eligible employees to purchase Applied common stock.
During the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012 and January 30, 2011, ~~and August 1, 2010,~~ Applied recognized ~~equity-based~~share-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




Total share-based compensation
   $ 53       $ 33




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 ~~2.8~~2.9 years. At ~~July 31, 2011,~~January 29, 2012, there were ~~155~~150 million shares available for grants of stock ~~option,~~options, restricted stock ~~unit, and~~units, restricted stock, ~~grants~~performance 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 ~~nine~~three months ended ~~July 31,~~January 29, 2012 and January 30, 2011.

26
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
Stock option activity for the ~~nine~~three months ended ~~July 31, 2011~~January 29, 2012 was as follows:

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 units~~years and ~~restricted stock~~vesting 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 ~~these~~the 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. Awards~~employees are also subject to the achievement of ~~restricted stock units or restricted stock granted under this program~~specified 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 ~~the~~each 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 ~~grant~~performance-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 shares~~January 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 ~~more~~both of fiscal years ~~2011 through~~2012 and 2013. ~~With respect to most~~As of January 29, 2012, 90 percent of the performance-based awards granted in fiscal 2008 ~~as of July 31, 2011, 78~~had been earned. The remaining 10 percent of the awards ~~had been earned, subject to~~were 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 the~~performance-based awards ~~may still~~could be earned ~~depending on performance during fiscal 2011.~~

27
upon certain levels of achievement of Applied’s TSR relative to a peer group at a future date.
APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
~~Restricted stock unit and restricted stock activity for the nine months ended July 31, 2011 was as follows:~~

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, 2011~~January 29, 2012 or ~~August 1, 2010. The number of shares issued under~~January 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
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
~~Note 13~~   ~~Employee Benefit Plans~~
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

~~Note 14~~   ~~Income Taxes~~
   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 )


Net periodic benefit cost
   $ 5    $ 5


Note 14    Income Taxes
Applied’s effective income tax rate slightly increased to 26.4% for the ~~third~~first 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 ~~2005~~2008 and later years, California returns for fiscal 2006 and later years, tax returns for certain other states for fiscal ~~2005~~2006 and later years, and tax returns in certain jurisdictions outside of the United States for fiscal ~~2003~~2004 and later years.
Applied has requested a refund of federal income tax through an amended return for fiscal 2006 that has been under audit by the Internal Revenue Service along with the Company’s fiscal 2007 return. The Internal Revenue Service has recommended a refund in the amount of $240 million plus interest, which is subject to approval by the Joint Committee on Taxation of the U.S. Congress. The Joint Committee on Taxation may complete its review by the end of fiscal 2011, which may impact Applied’s unrecognized tax benefits. The refund will be recognized when notice of congressional approval is received.
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
Applied expects that unrecognized tax benefits will decrease by $9 million in the next 12 months.
APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Note 15    Warranty, Guarantees and Contingencies
~~Note 15~~
~~Commitments and Contingencies~~
Warranty
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 )


Ending balance
   $ 161    $ 173


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
~~Varian Shareholder Litigation~~
In connection with the proposed merger with Varian, on July 13, 2011, a lawsuit (the “Crane lawsuit”) was filed in the U.S. District Court for the District of Massachusetts by David Crane, individually and on behalf of a putative class of Varian stockholders, against Varian and its directors, as well as Applied and Applied’s acquisition subsidiary. The Crane lawsuit alleged that Varian’s directors breached their fiduciary duties by failing to maximize shareholder value, securing benefits for certain defendants, inhibiting alternative offers and failing to disclose material information, and that Applied aided and abetted such alleged breaches. The plaintiff in the Crane lawsuit filed a motion for expedited discovery that was denied on July 18, 2011, and his renewed discovery motion was denied on July 20, 2011. On July 21, 2011, plaintiff voluntarily dismissed his action without prejudice.
On July 23, 2011, the Louisiana Municipal Police Employees Retirement Systems filed a lawsuit (the “LMPERS lawsuit”), for itself and on behalf of a putative class of Varian stockholders, in the same court and against the same defendants as, and alleging claims similar to, the Crane lawsuit. The LMPERS lawsuit seeks, among other things, an order rescinding the Merger Agreement, an injunction preventing consummation of the transaction, a

30
Jusung
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
constructive trust in favor of the plaintiff class, and attorneys’ fees. On July 25, 2011, plaintiff in the LMPERS lawsuit filed motions for expedited discovery and for a preliminary injunction to prevent a shareholder vote on the merger. The Court denied plaintiff’s motion for expedited discovery on August 1, 2011 and denied plaintiff’s motion for a preliminary injunction on August 8, 2011.
~~Applied believes that the LMPERS lawsuit is without merit and that Applied has meritorious defenses that it intends to pursue vigorously.~~
~~Semitool Shareholder Litigation~~
On November 17, 2009, Applied announced that it was making a tender offer to acquire all of the outstanding shares of Semitool, Inc. (Semitool) in accordance with an Agreement and Plan of Merger entered into with Semitool. Following this announcement, three lawsuits were filed by Semitool shareholders in the District Court of the Eleventh Judicial District Court for the State of Montana, County of Flathead, against Semitool, Semitool’s directors, Applied Materials, Inc. and Applied’s acquisition subsidiary. The actions sought certification of a class of all holders of Semitool common stock, except the defendants and their affiliates. The complaints alleged that Semitool’s directors breached their fiduciary duties by, among other things, failing to maximize shareholder value and failing to disclose material information, and that Applied aided and abetted such alleged breaches. The actions sought injunctive relief, damages and attorneys’ fees.
On December 14, 2009, all parties in these cases reached an agreement in principle to settle the matters. Without admitting any wrongdoing or fault, Semitool disclosed certain additional information in its~~Schedule 14D-9~~ filed with the SEC on December 14, 2009. Following the tender of shares representing over 95 percent of the outstanding shares of Semitool common stock, the merger of Semitool into Applied’s acquisition subsidiary was completed on December 21, 2009. In November 2010, the parties filed their Stipulation and Agreement of Settlement, which provided, among other things, that plaintiffs agreed to release all known and unknown claims related to the tender offer and the merger (with certain exceptions), and defendants agreed not to object to an application by plaintiffs’ counsel for an award of attorneys’ fees and expenses in an amount up to $200,000. Under its order issued January 12, 2011, the Court preliminarily approved the stipulation and settlement and certified a class of Semitool’s public shareholders solely for purposes of settlement, comprised of all record and beneficial holders of Semitool common stock from November 17, 2009 through December 21, 2009 (subject to specified exclusions). The Court further approved, as to form and content, the notice to the class and set a settlement hearing for April 4, 2011. Following the hearing on April 4, 2011, the Court issued its order and final entry of judgment approving the settlement, which resulted in a complete and final discharge of all of plaintiffs’ claims in the third quarter of fiscal 2011.
~~Jusung~~
Applied has been engaged in several lawsuits and patent and administrative proceedings with Jusung Engineering Co., Ltd.and/or Jusung Pacific Co., Ltd. (Jusung) in Taiwan and South Korea since 2003, and more recently in China, involving technology used in manufacturing LCDs. Applied believes that it has meritorious claims and defenses against Jusung that it intends to pursue vigorously.
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 Applied~~dismissed both actions, and ~~dismissed~~appeals 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
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
In 2006, Applied filed an action in the TIPO challenging the validity of a Jusung patent related to separability of the transfer chamber on a CVD tool. Jusung sued Applied and AKT America in the Hsinchu District Court in Taiwan alleging infringement of the same patent. In March 2009, the Hsinchu District Court dismissed Jusung’s ~~lawsuit, and~~lawsuit; in October, 2010, the Taiwan Intellectual Property Court dismissed Jusung’s appeal; and on December 1, 2011, the Supreme Administrative Court dismissed Jusung’s further appeal. Separately, the TIPO granted ~~Applied’s request for invalidation~~requests by Applied and ~~also revoked~~another party to invalidate Jusung’s patent. In January 2010, the Taiwan Intellectual Property Court granted Jusung’s appeal of the TIPO decision revoking its patent and remanded the matter to the TIPO for reconsideration of validity. TIPO subsequently granted another party’s request for invalidation of Jusung’s patent. Jusung appealed to the Taiwan Intellectual Property Court and Applied intervened in the appeal. On May 12,Following intermediate court appeals, on December 15, 2011, the ~~Taiwan Intellectual Property~~Supreme Administrative Court dismissed Jusung’s ~~appeal. Jusung has appealed this decision to the Taipei Supreme Administrative Court.~~further appeal, irrevocably invalidating Jusung’s patent. In November 2009, Applied filed an action in China with the Patent Reexamination Board of the State Intellectual Property Office seeking to invalidate ~~this~~a Chinese counterpart to Jusung’s separable chamber patent. On June 18, 2010, the Patent Reexamination Board issued a decision invalidating Jusung’s patent in China. Jusung appealed to the Beijing No. 1 Intermediate People’s Court and on June 13, 2011, this Court dismissed Jusung’s appeal.
Jusung appealed this decision to the Beijing High People’s Court in July 2011, and Jusung’s appeal remains pending.
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 ~~names~~named 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 ~~five~~six 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, where~~consideration. 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.~~
will dismiss Jusung’s petition.
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~~
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
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
performance for the entire company. Segment information is presented based upon Applied’s management organization structure as of ~~July 31, 2011~~January 29, 2012, and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.
Each reportable segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker.
Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, 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 part~~November 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 accounts~~2012, the acquired business is primarily included in the results for ~~thin film products under its~~the Silicon Systems Group and Applied Global Services ~~segment.~~
segments, with certain corporate functions included in corporate and unallocated costs.
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.~~
ion implantation.
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.~~
devices.
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
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
Net sales and operating income (loss) for each reportable segment 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
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

~~Operating results for~~
   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 )




Total Segment
   $ 2,189       $ 360




2011:

Silicon Systems Group
   $ 1,496       $ 543
Applied Global Services
   567       85
Display
   147       28
Energy and Environmental Solutions
   476       144




Total Segment
   $ 2,686       $ 800




In the ~~nine months ended July 31,~~first quarter of fiscal 2011, ~~included~~Applied recorded a favorable ~~adjustments~~adjustment of ~~$36~~$28 million related to a restructuring program announced in fiscal 2010 ~~which~~that was reported in the Energy and Environmental Solutions segment.
In the second quarter of fiscal 2011, Applied entered into an agreement to divest certain assets held in the Applied Global Services segment and determined certain identified intangible assets and purchased technology included in assets held for sale to be impaired. Results for the nine months ended July 31, 2011 included impairment charges of $24 million, which were reported in the Applied Global Services 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


Income from operations
   $ 179    $ 674


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 ~~nine~~three months ended ~~July 31, 2011,~~January 29, 2012, which were for products in multiple reportable segments.
   ~~July 31,~~
January 29, 2012
Samsung Electronics Co., Ltd .
   ~~2011~~27 %
~~Samsung Electronics Co., Ltd.~~
Taiwan Semiconductor Manufacturing Company Limited
   12 %
~~Taiwan Semiconductor Manufacturing Company Limited~~ 11 %

34
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~APPLIED MATERIALS, INC.~~
~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)~~
As of July 31, 2011, accounts receivable for those customers that accounted for at least 10 percent of Applied’s net sales for the nine months ended July 31, 2011, as a percentage of total accounts receivable, were as follows:
~~July 31,~~
~~2011~~
~~Samsung Electronics Co., Ltd.~~ 5 %
~~Taiwan Semiconductor Manufacturing Company Limited~~ 9 %
~~Note 17~~   ~~Subsequent Event~~
~~On August 11, 2011 the stockholders of Varian approved the Merger Agreement with Applied, which is one of the conditions to the closing of the proposed merger.~~

35
~~Item 2.~~ ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
All statements in this Quarterly Report onForm 10-Q and those made by the management of Applied, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customers, working capital, liquidity, ~~financing plans,~~ investment portfolio and policies, and legal proceedings and claims, as well as industry trends and outlooks. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. Other risks and uncertainties may be disclosed in Applied’s prior Securities and Exchange Commission (SEC) filings. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.

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.
In light of this cyclicality, Applied’s results can vary significantly year over year, as well as quarter over quarter.
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
January 30, 2011:
   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.
~~Fiscal year~~In November 2011, ~~is a 52-week year with 39 weeks~~Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian). Beginning in the first ~~nine months, while~~quarter of fiscal ~~year 2010 was a 53-week year with 40 weeks~~2012, the acquired business is included in Applied’s consolidated results of operations and in the ~~first nine months.~~
results for the Silicon Systems Group and Applied Global Services segments. For the three months ended January 29, 2012, net sales of Varian products were approximately $200 million.
Financial results for the ~~third~~first quarter of fiscal 2012 as compared to the fourth quarter of fiscal 2011 reflected ~~a decrease~~an 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 ~~net~~a weak industry environment for display and solar equipment. Operating income ~~increasedyear-over-year.~~ ~~New orders were down~~ in the ~~third~~first 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 ~~for~~in the ~~third~~first quarter of fiscal 2011 included a ~~net gain on sale~~favorable 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.
Financial results for the first nine months of fiscal 2011 reflected increased demand across all segments except for Display due to more favorable global economic and industry conditions in the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. Total new orders, net sales and net income for the first nine months of fiscal 2011 increased~~year-over-year,~~ due to increased demand for semiconductor equipment and services and c-Si equipment. Operating income for the first nine months of fiscal 2011 included favorable adjustments to restructuring reserves of $60 million, offset by asset impairment charges of $30 million, and a net gain on sale of facilities of $27 million. Net income for the first nine months of 2010 included restructuring charges of $129 million and asset impairment charges of $119 million.
~~The current macroeconomic environment and industry conditions are causing certain customers to delay capital spending.~~

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, 2010~~January 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 )













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 ~~third~~first quarter of fiscal ~~2011~~2012, including approximately $270 million in new orders for Varian products, were ~~down 12~~up 26 percent from the ~~third~~fourth 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 ~~reduced~~sharp 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 billion~~Orders to customers in Korea for the first ~~nine months~~quarter of

37
fiscal 2012 as compared to the first quarter of fiscal 2011 ~~were up 18 percent from the first nine months of fiscal 2010. The increase was primarily attributable~~increased, while orders to ~~an increase~~customers in demand during the first half of the fiscal year for semiconductor equipment and services from logic and foundry customers, as well as increased demand for c-Si equipment from solar manufacturers. Customers in China and Taiwan together represented 40 percent of total new orders for the three months ended July 31, 2011 and 45 percent of total new orders for the nine months ended July 31, 2011.
all other regions decreased.
New orders by reportable segment for the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012, October 30, 2011 and ~~August 1, 2010~~January 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

~~The Silicon Systems Group’s relative share of total new orders decreased in~~
   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 decreased~~Applied Global Services as a percentage of total new orders slightly increased compared to the ~~nine~~three months ended ~~August 1, 2010,~~October 30, 2011, while ~~the relative share of~~combined new orders infor Display and Energy and Environmental Solutions ~~increased. The increase in Energy and Environmental Solutions’ relative share~~as a percentage of total new orders ~~was due~~slightly 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 ~~demand~~compared to the three months ended January 30, 2011, while combined new orders for ~~c-Si equipment.~~
Display and Energy and Environmental Solutions as a percentage of total new orders decreased.
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, 2011~~January 29, 2012 were negative and ~~included $248~~totaled $52 million. Negative backlog adjustments of $146 million ~~consisting primarily~~consisted of financial ~~debookings. Backlog decreased~~debookings, cancellations and foreign exchange effects primarily related to solar customers. Negative adjustments were offset in ~~the third quarter~~part 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 ~~SunFab~~SunFab™ 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 ~~third~~first quarter of fiscal ~~2011,~~2012, approximately ~~49 percent~~67% of the net sales in the Silicon Systems Group, Applied’s largest business segment, were ~~for~~from orders received and shipped ~~within~~in the same quarter.

38
Backlog by reportable segment as of January 29, 2012, October 30, 2011 and January 30, 2011 was 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)
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
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, 2010~~January 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 ~~third~~first 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 months~~quarter 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 ~~three~~first 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 ~~China~~Korea, Taiwan and North America reflected purchases of ~~c-Si equipment by solar PV manufacturers.~~
semiconductor products.
Net sales by reportable segment for the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012, October 30, 2011 and ~~August 1, 2010~~January 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

~~The~~
   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 share~~Group 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
decreased.
Gross Margin
Gross margins for the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012, October 30, 2011 and ~~August 1, 2010~~January 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
~~Inventory-related charges of $247 million related to SunFab thin film solar equipment taken during~~
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 months~~quarter 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 ~~third~~first quarters of fiscal ~~2011~~2012 and ~~2010~~2011 included $13 million and ~~$10~~$11 million of share-based compensation expense, respectively. ~~Gross~~Non-GAAP gross margin ~~during~~for the first ~~nine months~~quarter of fiscal 2012 was $890 million, up 1.2 points from the fourth quarter of fiscal 2011 and ~~2010 included $36 million and $23 million~~down from $1.1 billion for the first quarter of ~~share-based compensation expense, respectively.~~
fiscal 2011. Reconciliations of non-GAAP measures are presented under “Non-GAAP Results” below.
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, 2010~~January 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 ~~reduction~~increase in RD&E expense for the ~~three and nine months ended July 31, 2011~~first 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 third~~fourth and first quarters of fiscal 2011 ~~and 2010 included $12 million and $11 million~~was 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 months~~quarters 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
~~Selling,~~
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, 2010~~January 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 ~~decrease~~increase in ~~SG&A~~marketing, selling, general and administrative expenses for ~~both~~ the ~~three and nine months ended July 31, 2011~~first quarter of fiscal 2012 as compared to the ~~same periods in 2010 reflected lower expenses as a result of the restructuring of the Energy~~fourth 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 ~~2010~~acquisition-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, 2010~~January 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 )
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.
   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 this~~associated with a restructuring program ~~to approximately 200 positions~~in 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.
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 of fiscal 2011, and as a result Applied recorded an additional favorable adjustment of $19 million. As of July 31, 2011, the remaining severance accrual associated with restructuring reserves under this program was $10 million.
~~During the first and second quarters of fiscal 2011,~~In addition, 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. As of July 31, 2011, no severance accrual remained under this program.~~

41
~~As of July 31, 2011, Applied had $5 million in restructuring reserves associated with facilities.~~
In the second quarter of fiscal 2011, Applied incurred impairment charges of $24 million associated with certain intangible assets and purchased technology. See Note 8 of the Notes to Consolidated Condensed Financial Statement. In the third quarter of fiscal 2011, Applied incurred asset impairment charges of $3 million related to certain fixed assets.
In the second quarter of fiscal 2010, Applied recorded an asset impairment charge of $9 million to write down a facility to its estimated fair value based on prices for comparable local properties. The facility was reclassified as an asset held for sale. Inmillion. Also, during the first quarter of fiscal 2011, Applied recorded ~~additional~~an asset impairment ~~charges~~charge of $3 million related to ~~this facility.~~
a facility held for sale.
For further details, see Note 11 of Notes to Consolidated Condensed Financial Statements.
Interest and Other ~~Expense~~Expenses
Interest and other ~~expense~~expenses for the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012, October 30, 2011 and ~~August 1, 2010~~January 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 ~~increases~~increase 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 ~~were~~was primarily due to interest ~~accrued~~ of ~~$11~~$23 million ~~related to~~on 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 during~~slightly increased from 25.6% for the ~~third~~first quarter of fiscal 2011.
~~Income Taxes~~
~~Income tax expenses~~ The rate for the ~~three and nine months ended July 31,~~fourth quarter of fiscal 2011 ~~and August 1, 2010 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)

Provision for income taxes $ 193 $ 55 $ 138 $ 564 $ 214 $ 350
Effective income tax rate 29 % 31 % (2) points 28 % 31 % (3) points
included a favorable U.S. Internal Revenue Service audit settlement of $203 million. The ~~rates~~rate for the ~~three and nine months ended July 31,~~first quarter of fiscal 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 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 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.
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

42
asset impairment charges and any associated adjustments related to restructuring actions, unless these charges or adjustments pertain to a specific reportable segment.
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, 2010~~January 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 ~~third~~first quarter of fiscal 2012 compared to the first quarter of fiscal 2011, ~~compared~~primarily 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.~~
customers.
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, 2010~~January 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 ~~third~~first quarter of fiscal 2012 compared to the first quarter of fiscal 2011, ~~compared~~primarily 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 foundry~~decreased 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 months~~quarter of fiscal ~~2011.~~2012. Approximately 4967 percent of net sales in the ~~third~~first quarter of fiscal ~~2011~~2012 were for orders received and shipped within the quarter.

43
The segment’s book to bill ratio (new orders divided by net sales) for the first quarter of fiscal 2012 increased to 1.1 compared to 0.9 for the fourth quarter of fiscal 2011 and remained essentially flat at 1.1 compared to the first quarter of fiscal 2011. Operating income for the first quarter of fiscal 2012 remained essentially flat compared to the fourth quarter of fiscal 2011, while operating margin decreased from 26 percent in the fourth quarter of fiscal 2011 to 20 percent in the first quarter of fiscal 2012. The decrease in operating margin was primarily attributable to change in customer and product mix with the inclusion of Varian and incremental costs associated with Varian operations. Operating income decreased by $272 million to $271 million for the first quarter of fiscal 2012 compared to first quarter of fiscal 2011, reflecting the decrease in net sales, incremental costs associated with Varian operations, inventory fair value adjustments on products sold, amortization of purchased intangible assets, share-based compensation associated with accelerated vesting and other integration costs associated with the acquisition. Non-GAAP operating income for the first quarter of fiscal 2012 was $386 million or 29 percent of net sales, up from $284 million or 27 percent of net sales from the fourth quarter of fiscal 2011 and down from $546 million or 36 percent of net sales from the first quarter of fiscal 2011. Reconciliations of non-GAAP measures are presented under “Non-GAAP Results” below.
The following ~~region~~regions accounted for at least 30 percent of total net sales for the Silicon Systems Group segment for ~~either~~one 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)

Taiwan 262 19 (51 ) 535 37 1,128 26 (19 ) 1,395 36
or January 30, 2011:
   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 ~~third~~first 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.
~~The book to bill ratio (new orders divided by net sales) decreased to 0.9 for the third quarter of fiscal 2011 compared to 1.1 for the third quarter of fiscal 2010 reflecting lower~~segment.
~~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.~~
Operating income decreased by $73 million to $452 million for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. The decrease in operating income for the three months ended July 31, 2011 was primarily due to lower sales and an increase in RD&E expenses. Operating income increased by $158 million to $1.5 billion for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. Operating income for the nine months ended July 31, 2011 increased due to higher revenue from semiconductor equipment sales and reflected the recovery in the semiconductor equipment industry during the first nine months of fiscal 2011 and lower costs from continued transition of the manufacturing of certain products to Applied’s Singapore Operations Center.
Operating results of the Silicon Systems Group may be affected by an agreement between Applied and Samsung Electronics Co., Ltd (Samsung) that is generally effective for a three-year period from November 1, 2010, which provides in part for volume-based rebates and other incentives to Samsung. The financial impact of the rebates and incentives on the segment is highly variable and depends on the volume of semiconductor equipment purchases by Samsung.
Applied Global Services Segment
The Applied Global Services segment encompasses technically differentiated products, including spares, services, certain earlier generation equipment products, and remanufactured equipment, to improve operating efficiency, reduce operating costs, and lessen the environmental impact of semiconductor, display and solar customers’ factories. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
In fiscal 2010, as part of the restructuring of the Energy and Environmental Solutions segment, Applied discontinued sales to new customers of its fully-intergrated 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
Industry conditions that affected Applied Global ~~Services segment as these products are considered to have reached a particular stage in the product lifecycle. Effective~~Services’ 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.~~

44
2012 were principally semiconductor manufacturers’ wafer starts as well as foundry utilization rates.
Certain significant measures for the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012, October 30, 2011 and ~~August 1, 2010~~January 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 $ 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 ~~third~~first quarter of fiscal 2012 decreased by $47 million as compared to the fourth quarter of fiscal 2011, ~~compared to~~and net sales decreased by $95 million, reflecting lower wafer starts, partially offset by the ~~third~~addition 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 $217~~2011 included $71 million ~~to $1.8 billion~~in sales for two thin film solar projects.
New orders for the first ~~nine months~~quarter of fiscal ~~2011~~2012 decreased by $35 million to $517 million for the first quarter of fiscal 2012 compared to the first ~~nine months~~quarter of fiscal ~~2010.~~2011, and net sales decreased by $33 million. The ~~increases~~decreases in new orders ~~for the three~~ and ~~nine months ended July 31, 2011~~net sales were primarily due to ~~higher~~lower demand for ~~spare parts and~~ refurbished ~~equipment, reflecting customers’ higher factory utilization rates.~~
equipment. Net sales ~~increased by $135 million to $603~~included approximately $50 million for ~~the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010,~~Varian products and also increased by $435 million to $1.8 billion for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. The increases in net sales for the three and nine months ended July 31, 2011 were due primarily to higher sales of refurbished equipment.
services. The book to bill ratio ~~decreased to~~was 1.0 for the ~~third~~first quarters of both fiscal 2012 and 2011, and was 0.9 for the fourth quarter of fiscal 2011.
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 2010~~reflecting 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.~~
sales. Operating income increased by ~~$62~~$22 million to ~~$146 million for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. Operating income increased by $85 million to $322~~$107 million for the first ~~nine months~~quarter of fiscal ~~2011~~2012 compared to ~~the~~ first ~~nine months~~quarter of fiscal ~~2010.~~2011. The ~~increases~~increase in operating income for the ~~three~~first quarter of fiscal 2012 was a result of improved margins on spares and ~~nine months ended July 31, 2011 primarily reflected increased sales and improved gross margins of refurbished~~remanufactured equipment. ~~Operating results~~Non-GAAP operating income for the ~~nine months ended July 31, 2011 included impairment charges~~first quarter of ~~$24 million. The decreases in operating margin for~~fiscal 2012 was $113 million or 21 percent of net sales, up from $87 million or 15 percent of net sales from the ~~three and nine months ended July 31, 2011 were due to changes in product mix and impairment charges incurred.~~
first quarter of fiscal 2011. Reconciliations of non-GAAP measures are presented under “Non-GAAP Results” below.
Display Segment
The Display segment encompasses products for manufacturing LCDs for TVs, personal computers, ~~video-enabled devices~~tablet 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, 2010~~January 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 ~~third~~first 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 delay~~LCD TV equipment, offset in part by ~~increased~~ demand for touch panel ~~tools~~ and ~~Low-Temperature~~

45
LTPS systems to manufacture new mobile devices like smart phones and tablets.
~~Polycrystalline Silicon (LTPS) systems.~~ The ~~decrease in new orders~~book to bill ratio slightly increased to 0.4 for the ~~nine months ended July 31, 2011 reflected investment delay partially offset by orders for touch panel tools.~~
~~Net sales increased by $7 million~~first quarter of fiscal 2012 compared to ~~$223 million~~0.1 for the ~~third~~fourth quarter of fiscal 2011. The book to bill ratio, however, decreased compared to 1.0 for the first quarter of fiscal 2011, reflecting lower new orders and net sales. For the first quarter of fiscal 2012, operating income decreased by $26 million to $5 million as compared to the ~~third~~fourth quarter of fiscal ~~2010. The increase~~2011 and decreased by $23 million compared to first quarter of fiscal 2011 reflecting the decrease in net sales for the three months ended July 31, 2011 was driven by production capacity expansion for new mobile devices such as smart phones and tablets, while investment in LCD products declined. Net sales decreased by $90 million to $528 millionsales. Non-GAAP operating income for the first ~~nine months~~quarter of fiscal 2011 compared to the first nine months of fiscal 2010. The decrease in net sales for the nine months ended July 31, 2011 reflected decreased demand for LCD products. The Display segment experienced a cyclical downturn in LCD products, which2012 was ~~partially offset by demand for LTPS systems and touch panel systems. Three customers accounted for 57~~$7 million or 7 percent of net sales, indown from $33 million or 19 percent of net sales from the ~~Display segment in~~fourth quarter of fiscal 2011 and down from $30 million or 20 percent of net sales from the first ~~nine months~~quarter of fiscal 2011.
Reconciliations of non-GAAP measures are presented under “Non-GAAP Results” below.
The following regions accounted for at least 30 percent of total net sales for the Display ~~Group~~ segment for ~~either~~one 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
or January 30, 2011:
   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 ~~accounted~~continued to account for ~~50 percent~~the majority of net sales in this segment for the ~~third~~first 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.
The book to bill ratio decreased to 1.0 for the third quarter of fiscal 2011 compared to 1.1 for the third quarter of fiscal 2010. The decrease for the three months ended July 31, 2011 reflected higher2012.
~~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 lower~~year-over-year~~ ~~net sales relative toyear-over-year~~ ~~new orders.~~
Operating income decreased by $6 million to $58 million for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. The decrease in operating income for the three months ended July 31, 2011 primarily reflected a decrease in net sales. Operating income decreased by $63 million to $116 million for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. The decrease in operating income for the nine months ended July 31, 2011 reflected an unfavorable currency exchange rate and an unfavorable product mix. The decreases in operating margin for the three and nine months ended July 31, 2011 were due to changes in product mix.
Energy and Environmental Solutions Segment
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 Energy~~primarily attributable to lower net sales of c-Si solar products and ~~Environmental Solutions segment included the fully-integrated SunFab production line~~inventory 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.~~

46
~~Certain significant measures for the three and nine months ended July 31, 2011 and August 1, 2010 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 $ 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
~~New orders decreased by $35~~2012 was $17 million, ~~to $318~~while non-GAAP operating income was $23 million for the ~~third~~fourth quarter of fiscal 2011 ~~compared to~~and $122 million for the ~~third~~first quarter of fiscal ~~2010. The decrease in new orders for the three months ended July 31, 2011 reflected a tightening~~2011. Reconciliations of access to capital and excess manufacturing capacity for customers in China. New orders increased by $637 million to $1.6 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 reflected significantly increased demand for c-Si equipment, particularly wafering and metallization products. The increased demand was partially driven by government subsidies for solar panel manufacturers in China.
Net sales increased by $176 million to $563 million for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010, and also increased by $802 million to $1.7 billion for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. The increases in net sales for the three and nine months ended July 31, 2011 primarily reflected higher sales to c-Si customers. Net sales of SunFab thin film lines for the three and nine months ended August 1, 2010 were $79 million and $309 million, respectively.
non-GAAP measures are presented under “Non-GAAP Results” below.
The following regions accounted for at least 30 percent of total net sales for the Energy and Environmental Solutions segment for ~~either~~one 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
or January 30, 2011:
   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 ~~third~~first quarter of fiscal ~~2011,~~2012, customers in Taiwan and China ~~accounted~~continued 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 percent~~majority 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.
The book to bill ratio decreased to 0.6 for the third quarter of fiscal 2011 compared to 0.9 for the third quarter of fiscal 2010. 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. The decrease for both the three and nine months ended July 31, 2011 reflected a higher increase in net sales~~year-over-year~~ ~~relative to demand.~~
The Energy and Environmental Solutions segment reported operating income of $123 million for the third quarter of fiscal 2011 compared to an operating loss of $371 million for the third quarter of fiscal 2010. Operating loss for the three months ended August 1, 2010 included charges totaling $405 million associated with the Energy and Environmental Solutions restructuring plan announced in July 2010. The increase in operating income in the third quarter of fiscal 2011 was also attributable to higher net sales of c-Si equipment. The Energy and Environmental Solutions segment reported operating income of $436 million for the first nine months of fiscal 2011 compared to an operating loss of $552 million for the first nine months of fiscal 2010. Operating loss for the nine months ended August 1, 2010 included charges totaling $405 million associated with the Energy and Environmental Solutions restructuring plan announced in July 2010. The increase in operating income for the first

47
nine months of fiscal 2011 was also attributable to significantly higher net sales of c-Si equipment and included favorable adjustments of $36 million related to the restructuring program announced in the third quarter of fiscal 2010. The increases in operating margin for the three and nine months ended July 31, 2011 were due to higher manufacturing volume for c-Si equipment.
Financial Condition, Liquidity and Capital Resources
Applied’s cash, cash equivalents and investments ~~increased~~decreased to ~~$6.8~~$3.0 billion at ~~July 31, 2011~~January 29, 2012 from ~~$3.9~~$7.2 billion at October ~~31, 2010,~~30, 2011, primarily due ~~primarily~~ to the ~~receipt~~completion 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.~~
~~Cash, cash equivalents and investments consist of~~that were issued to assist in funding the ~~following:~~

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

Varian acquisition.
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 ~~nine~~three months ended ~~July 31, 2011.~~January 29, 2012. The primary sources of cash from operating activities for the ~~nine~~three months ended ~~July 31, 2011~~January 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’s~~The change in working capital for the first quarter of fiscal 2012 was ~~$7.0 billion at July 31, 2011~~negatively 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 ~~nine~~three 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 ~~nine~~three 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 ~~third~~first quarter of fiscal ~~2011 decreased~~2012 increased to 5966 days, compared to 6164 days inat the ~~second quarter~~end of ~~fiscal 2011, primarily due to strong collections performance offset in part by higher extended terms in ending accounts receivable from~~ the ~~second~~fourth 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 generated $218 million~~used $4.2 billion of cash ~~from~~for investing activities during the ~~nine~~three months ended ~~July 31, 2011. Capital expenditures~~January 29, 2012. In the first quarter of ~~$136 million~~fiscal 2012, Applied acquired Varian for the nine months ended July 31, 2011, which included construction in progress additions and purchases of equipment in North America, was offset by $99 million in proceeds received from the sale of properties located in North America and $27 million in proceeds received from completed divestiture of certain assets held for sale,$4.2 billion, net of cash ~~sold.~~acquired. Proceeds from sales and maturities of investments, net of purchases of investments, totaled ~~$227~~$59 million, and capital expenditures totaled $37 million for the ~~nine months ended July 31, 2011. Investing activities also include investments in technology and acquisitions~~first quarter of ~~companies to allow~~ fiscal 2012.
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 $323~~used $302 million ~~net~~ of cash ~~acquired.~~

48
~~Applied generated $1.2 billion of cash from~~for financing activities during the ~~nine~~three months ended ~~July 31, 2011,~~January 29, 2012, consisting primarily of ~~net proceeds received from the issuance of senior unsecured notes of $1.75 billion, as discussed further below, $64~~$200 million in common stock repurchases and $104 million in cash dividends paid to stockholders, offset by $2 million in proceeds from common stock issuances related to equity compensation ~~awards, offset in part by $293 million in common stock repurchases and $291 million in cash dividends.~~
~~The following table summarizes the dividends declared by~~awards. In March 2010, Applied’s Board of Directors ~~during fiscal 2011:~~

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
approved a new stock repurchase program authorizing up to $2.0 billion in repurchases over the next three years ending in March 2013.
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, 2011~~January 29, 2012 and October ~~31, 2010.~~
In the third quarter of fiscal 2011, Applied established a short-term debt financing program of up to $1.5 billion through the issuance of commercial paper notes. As of July 31, 2011, Applied did not have any commercial paper outstanding.
On May 4, 2011, Applied and Varian announced the signing of a definitive merger agreement (the Merger Agreement) under which Applied agreed to acquire Varian for $63 per share in cash. The total consideration amount is approximately $4.9 billion, which includes certain post-closing equity based compensation. Upon completion of the merger, the purchase price allocation will result in an increase in Applied’s goodwill and purchased intangible assets. Varian designs, manufactures, markets and services semiconductor processing equipment and is 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 11,30, 2011. ~~Consummation of the proposed merger remains subject to various other customary closing conditions, including receipt of certain domestic and foreign antitrust approvals (including under theU.S. Hart-Scott-Rodino~~ Antitrust Improvements Act of 1976, as amended (the HSR Act). Upon completion of the merger, Varian will operate within Applied’s Silicon Systems Group and will continue to be based in Gloucester, Massachusetts.
The Merger Agreement contains certain termination rights and provides that (i) upon the termination of the Merger Agreement under specified circumstances, including, among others, by Varian to accept a superior offer or by Applied upon a change in the recommendation of Varian’s board of directors, Varian will owe Applied a cash termination fee of $147 million; and (ii) upon termination of the Merger Agreement due to the failure to obtain certain antitrust approvals, Applied will owe Varian a cash termination fee of $200 million.
On June 13, 2011, Applied received a request for additional information from the Antitrust Division of the U.S. Department of Justice (DOJ) in connection with the merger as part of the regulatory process under the HSR Act. Applied is responding to the request and will continue to work cooperatively with the DOJ 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~~debt agreements that contain financial and ~~Varian has substantially complied with the request that it received.~~

49
other covenants. These covenants require Applied ~~expects~~ to fund the transaction with a combination of existing cash balances and debt. In May 2011, Applied put in place a $2.0 billion bridge loan facility, which was subsequently terminated upon issuance of senior unsecured notes, as discussed below.
~~In June 2011, Applied issued senior unsecured notes (collectively, the Notes) in the aggregate principal amount of $1.75 billion as follows:~~

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
~~Applied intends to use the net proceeds of the Notes to fund a portion of the consideration and~~maintain certain ~~costs associated with the 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,~~minimum financial ratios. At January 29, 2012, Applied will be required to redeem the Notes at a redemption price of 101% of the aggregate principal amount of the Notes plus any accrued and unpaid interest. The indenture governing the Notes include certain covenants with which Applied was in compliance ~~at July 31, 2011.~~with all such covenants. See Note 10 of Notes to Consolidated Condensed Financial Statements for additional discussion of borrowings and long-term debt.
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.
~~Long-term Contractual Obligations~~
~~Information concerning Applied’s long-term contractual obligations is contained on page 47 in the Company’sForm 10-K~~ for the fiscal year ended October 31, 2010, and is incorporated by herein by reference, with the exception of its long-term contractual obligations related to the $1.75 billion principal amount of Notes issued in June 2011 and the associated maturity dates. See Note 10 to the Consolidated Condensed Financial Statements for detailed information about the Notes.

50
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K and Note 1 to Notes to Consolidated Condensed Financial Statements ~~describes~~in 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.
In 2009, the Financial Accounting Standards Board issued amended revenue recognition guidance for arrangements with multiple deliverables and certain software sold with tangible products. This new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific evidence or third party evidence is unavailable. Applied implemented this guidance prospectively beginning in the first quarter of fiscal 2010 for transactions that were initiated or materially modified during fiscal 2010. The implementation of the new guidance had an insignificant impact on reported net sales compared to net sales under previous guidance, as the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of reported net sales.

51
Warranty Costs
Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. As Applied’s customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from Applied’s estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.
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

52
valuation allowance on deferred tax assets or adjust its effective income tax rate, which could have a material adverse effect on Applied’s business, financial condition and results of operations.
Applied accounts for income taxes by recognizing deferred tax assets and liabilities using statutory tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryforwards. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that Applied’s future taxable income will be sufficient to realize its deferred tax assets.
The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Applied’s expectations could have a material impact on Applied’s results of operations and financial condition.

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 fiscal~~three 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.
The following table presents a reconciliation of the GAAP and non-GAAP consolidated results for the three ~~and nine~~ months ended ~~July 31,~~January 29, 2012, October 30, 2011 and ~~August 1, 2010:~~
January 30, 2011:
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 impairments^2,3,4,5
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 impairments^2,3,4,5
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


Non-GAAP gross margin
   $ 890    $ 862    $ 1,145


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


Non-GAAP operating income
   $ 344    $ 384    $ 659


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


Non-GAAP net income
   $ 240    $ 271    $ 484


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
1
These items are incremental charges attributable to acquisitions, consisting of inventory fair value adjustments on products sold, ~~and~~ amortization of purchased intangible ~~assets.~~assets, shared-based compensation associated with accelerated vesting and other integration costs.
²
Results for the three months ended ~~July 31,~~January 30, 2011 included asset impairment charges of $3 million related to ~~certain fixed assets.~~
3 ~~Results for the three months ended August 1, 2010 included asset impairment charges~~a facility held-for-sale, offset by favorable adjustments of ~~$110 million and restructuring charges of $45~~$28 million related to a restructuring program announced on July 21, 2010, ~~offset by a $20 million favorable adjustment to a restructuring program announced on November 11, 2009.~~
4 Results for the nine months ended July 31, 2011 included asset impairment charges of $30 million primarily related to certain intangible assets, offset by favorable adjustments of $36 million related to a restructuring

54
~~program announced on July 21, 2010, $19 million related to a restructuring program announced on November 11, 2009,~~ and $5$4 million related to a restructuring program announced on November 12, 2008.
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    —


Non-GAAP operating income
   $ 386    $ 284    $ 546


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


Non-GAAP operating income
   $ 113    $ 162    $ 87


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


Non-GAAP operating income
   $ 7    $33    $30


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)


Non-GAAP operating income (loss)
   $ (17 ) $ 23    $ 122


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.
5²
Results for the ~~nine~~three months ended ~~August 1, 2010~~January 30, 2011 included asset impairment charges of ~~$110~~$3 million ~~and restructuring charges~~related to a facility held-for-sale, offset by favorable adjustments of ~~$45~~$28 million related to a restructuring program announced on July 21, 2010, ~~restructuring charges of $84~~and $4 million ~~associated with~~related to a restructuring program announced on November ~~11, 2009, and asset impairment charges of $9 million related to a facility held for sale.~~12, 2008.
~~Item 3.~~ ~~Quantitative and Qualitative Disclosures About Market Risk~~
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.
At January 29, 2012, the carrying amount of long-term debt was $1.9 billion with an estimated fair value of $2.2 billion. A hypothetical decrease in interest rates of 100 basis points would result in an increase in the fair value of Applied’s debt issuances of approximately $212 million at January 29, 2012.
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, 2011~~January 29, 2012 and ~~August 1, 2010.~~
~~Item 4.~~ ~~Controls and Procedures~~
January 30, 2011.
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.

55
PART II. OTHER INFORMATION
Item 1.    Legal ~~Legal~~ Proceedings
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 ~~Risk~~ Factors
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 ~~2010~~2011 Form 10-K.
These factors could materially affect Applied’s business, financial condition or results of operations and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.
The industries that Applied serves are volatile and 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;
• ~~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, demand for Applied’s products;~~
• ~~abrupt and unforeseen shifts in the nature and amount of customer and end-user demand;~~
• ~~the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate for new manufacturing technology;~~
• ~~the need to 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 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 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.~~
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 portion~~largest 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 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 growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes;~~
• differing market growth rates and capital requirements for different applications, such as NAND Flash, DRAM, logic and foundry, and the resulting effect on customers’ spending patterns and on Applied’s ability to compete in these market segments;
• 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;
• ~~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 decreasing rate of capital expenditures as a percentage of semiconductor manufacturers’ revenue, and manufacturers’ increasing allocation of capital investment to markets that Applied does not serve, such as lithography;
• ~~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;~~
•
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 ~~market position;~~
• ~~the importance of increasing market positions in larger~~ market position;
the importance of increasing market positions in under-penetrated segments, such as etch and inspection;

57
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.
• ~~the increasing concentration of wafer starts in one country, 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.
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the semiconductor industry, its business, financial condition and results of operations could be materially and adversely affected.
Applied is exposed to risks as a result of ongoing changes specific to the flat panel display industry.
The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of LCD manufacturers, ~~and~~ the concentrated nature of LCD end-use ~~applications. Recently, industry~~applications, and excess production capacity relative to end-use demand. Industry growth has depended ~~to a considerable extent~~primarily 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 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;
• ~~technical and financial difficulties associated with transitioning to larger substrate sizes for LCDs, which may slow or prevent substrate generation scaling;~~
• ~~the effect of a slowing rate of transition to larger substrate sizes on capital intensity and product differentiation;~~
• ~~the increasing importance of new types of displays, such as touch panels and OLEDs (organic light-emitting devices);~~
• ~~technical difficulties and costs associated with developing new technologies for use in LCD manufacturing, such as LEDs for backlighting; and~~
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.~~
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.
~~An increasing portion of Applied’s business is~~
Investment levels in capital equipment for the ~~emerging~~global 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
• ~~the need to continually decrease thecost-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 impact on demand for solar PV products arising from the cost of electricity generated by solar PVs compared to the cost of electricity from the existing grid or other energy sources;~~
• the varying energy policies of governments around the world and their effect in influencing the rate of growth of the solar 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;
• ~~the growing number of solar PV manufacturers and increasing global production capacity for solar PVs, primarily in China as a result of government policies and subsidies and lower manufacturing costs;~~

58
• the ~~varying levels of operating and industry experience among solar PV manufacturers and the resulting differences in the nature and extent of customer support services requested from Applied;~~
• ~~challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer base;~~
• ~~the increasing~~ number of ~~government-affiliated entities in China that are becoming customers;~~
• ~~the cost of polysilicon and other materials; and~~
• ~~access to affordable financing and capital by customers and end-users.~~
~~In addition, current projections for global~~ solar PV manufacturers and increasing global production ~~exceed anticipated near-term end-use demand,~~capacity for solar PVs, primarily in China;
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 dependent~~could result in the assessment of duties on ~~installedcost-per-watt,~~ ~~government policies~~solar cells and ~~incentives,~~modules imported from China or other outcomes;
the varying levels of operating and industry experience among solar PV manufacturers and the ~~availability~~resulting differences in the nature and extent of ~~affordable capital. An oversupply~~customer 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 lead~~PV customers and their access to ~~delay or reduce investments in manufacturing capacity~~affordable 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, ~~while~~and 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’ ~~reduced~~reducing 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 return~~as 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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and expensive over time. Furthermore, new or improved products may entail higher costs and reduced profits. Applied’s performance may be adversely affected if it does not timely, cost-effectively and successfully:
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;
• ~~identify and address technology inflections, market changes, new applications, customer requirements and end-use demand;~~
• ~~develop new products (including disruptive technologies), improveand/or~~ ~~develop new applications for existing products, and adapt similar products for use by customers in different applicationsand/or~~ ~~markets with varying technical requirements;~~
• ~~appropriately price and achieve market acceptance of its products;~~
• ~~differentiate its products from those of competitors and any disruptive technologies, meet customers’ performance specifications, and drive efficiencies and cost reductions;~~
• ~~maintain operating flexibility to enable different responses to different markets, customers and applications;~~
• ~~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;~~
• ~~enhance its worldwide operations to enable both continuous quality improvement and cost reductions across all business segments; 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.
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.~~
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 adequate new business processes and systems;~~

60
• ~~Applied’s ability to rapidly expand its operations to meet increased demand 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, uncertainand/or~~ ~~limited funding, evolving business modelsand/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 experienceand/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 third quarter fiscal 2011, approximately 84 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, 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;~~
• ~~positions taken by governmental agencies regarding possible national commercialand/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;

61
• ~~a more diverse workforce with different 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, 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;
• ~~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 costsand/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 percentage 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.
In addition, in March 2011, Japan experienced a significant earthquake, aftershocks and a tsunami that resulted in widespread damage and business interruptions throughout the country. Certain of Applied’s customers and suppliers are located in Japan and Applied also has sales and service centers in the country. While Applied has not experienced any material impact on its business or operations to date and has taken actions to enhance its ability to meet customers’ requirements, Applied cannot predict the extent of the impact the situation in Japan may have, if any, on its future business and operations.
Applied is exposed to risks associated with a highly concentrated customer base.
Applied’s semiconductor ~~and flat panel display~~ customer ~~bases~~base historically ~~have~~has been, and ~~are~~is becoming even more, highly concentrated as a result of economic and industry conditions. For example, in the first ~~nine months~~quarter of fiscal ~~2011,~~2012, three semiconductor manufacturers accounted for 5269 percent of Silicon Systems Group net sales, and ~~three LCD manufacturers~~two customers accounted for 5739 percent of ~~Display~~Applied’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

62
investments.
~~investments. Customer concentration within~~In addition, Applied’s ~~solar~~ customer base ~~varies depending on~~in each of Display and Energy and Environmental Solutions segments is also geographically-concentrated. In the ~~product line. For Precision Wafering Systems, five solar manufacturers~~first quarter of fiscal 2012, customers in China and Taiwan accounted for 59a total of 60 percent of net sales infor the ~~first nine months~~Display segment, and 85 percent of ~~fiscal 2011, while~~net sales for the ~~Baccini~~^tm ~~cell systems business has a more diffuse customer base.~~
Energy and Environmental Solutions segment.
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 by~~including contract manufacturers. Some key parts ~~may be~~are 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;
• ~~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;~~
• ~~natural disasters (such as earthquakes, floods or storms); or~~
• other causes (such as regional economic downturns, pandemics, political instability, terrorism, or acts of war) that could result in delayed deliveries, manufacturing inefficiencies, increased costs or order cancellations.
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 need~~if 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 is exposed to risks associated with acquisitions and strategic investments.
Applied has made, and in the future intends to make, acquisitions of ~~and~~or 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 acquire~~completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian), which ~~is subject~~was 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;
• ~~diversion of management’s attention from other operational matters;~~
• ~~inability to complete acquisitions as anticipated or at all, which in certain circumstances may require Applied to pay a termination fee to the target company;~~
• ~~requirements imposed by government regulators in connection with their review of a transaction, which may include, among other things, divestituresand/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;~~
• 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 orworse-than-expected~~ ~~performance of the segment;~~
• ~~the risk of litigation or claims associated with a proposed or completed transaction;~~
• ~~unknown, underestimatedand/or~~ ~~undisclosed commitments or liabilities; and~~
• ~~the inappropriate scale of acquired entities’ critical resources or facilities for business needs.~~
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 incurred debt obligations associated with the planned Varian merger that could affect its ability to respond to changes in business conditions or otherwise adversely affect its business.~~
Applied intends to finance the anticipated acquisition of Varian through a combination of existing cash balances and debt. In June 2011, Applied issued $1.75 billion in aggregate principal amount of senior unsecured notes. Applied also has in place a new four-year, $1.5 billion revolving credit facility, and has established a short-term commercial paper program of up to $1.5 billion. As of July 31, 2011, Applied did not have any debt outstanding under the new credit facility or commercial paper program, although it may incur indebtedness under one or both to fund a portion of the merger consideration. Applied will dedicate a portion of its cash flow from operations to payments on the indebtedness. The debt obligations will reduce the availability of cash flow for general corporate or other purposes, such as further mergers and acquisitions. This in turn may reduce Applied’s flexibility in responding to changes in its businesses and in the industries in which it operates.
The ability to attract, retain and motivate key employees is vital to Applied’s success.
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 implementing~~has implemented a ~~more~~ distributed manufacturing model, under which ~~includes transitioning~~ certain manufacturing and supply chain activities ~~from~~are 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 a~~must regularly implement or update comprehensive ~~program~~programs 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. ~~The~~During 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.

65
If Applied does not effectively develop and implement its outsourcing and relocation strategies, if required export and other governmental approvals are not timely obtained, if Applied’s third party providers do not perform as anticipated, or if there are delays or difficulties in enhancing business processes, Applied may not realize anticipated productivity improvements or cost efficiencies, and may experience operational difficulties, increased costs (including energy and transportation), manufacturing interruptions or delays, inefficiencies in the structureand/or operation of its supply chain, loss of its intellectual property rights, quality issues, increased producttime-to-market,and/or inefficient allocation of human resources, any or all of which could materially and adversely affect Applied’s business, financial condition and results of operations.
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 ~~resolves~~resolved 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.

66
Furthermore, the laws and practices of other countries, including China, India, Taiwan and Korea, permit the protection and enforcement of Applied’s rights to varying extents, which may not be sufficient to adequately protect Applied’s rights. Applied previously entered into an arrangement with one of its competitors to decrease the risk of patent infringement lawsuits in the future. There can be no assurance that the intended results of this arrangement will be achieved or that Applied will be able to adequately protect its intellectual property rights with the restrictions associated with the arrangement. If Applied is not able to favorably resolve or settle claims, obtain or enforce intellectual property rights, obtain necessary licenses on commercially reasonable terms,and/or successfully prosecute or defend its intellectual property position, Applied’s business, financial condition and results of operations could be materially and adversely affected and Applied may suffer harm to its reputation.
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 ~~Singapore~~certain 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

67
trade; and (3) the interpretation and application of laws, rules and regulations. For example, as a public company with global operations, Applied is subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, and anti-corruption. Changes in laws, regulations and standards may create uncertainty regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If Applied is found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, Applied could be subject to legal or regulatory sanctions, the public’s and customers’ perception of Applied could decline, and Applied’s business, financial condition and results of operations could be materially and adversely affected.
~~Item 2.~~ ~~Unregistered Sales of Equity Securities and Use of Proceeds~~
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information as of ~~July 31, 2011~~January 29, 2012 with respect to the shares of common stock repurchased by Applied during the ~~third~~first 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

2012.
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







Total
   18.3       $ 10.95       18.3







*
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.
~~Item 3.~~ ~~Defaults Upon Senior Securities~~
~~None.~~
~~Item 4.~~ ~~(Removed and Reserved)~~
~~Item 5.~~ ~~Other Information~~
~~None.~~

68
Item 6.    Exhibits
~~Item 6.~~ ~~Exhibits~~
Exhibits are numbered in accordance with the Exhibit Table of Item 601 ofRegulation S-K:

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.
SIGNATURES
~~SIGNATURES~~
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
~~APPLIED MATERIALS, INC.~~
APPLIED MATERIALS, INC.
By:
/s/    GEORGE S. DAVIS
George S. Davis
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
February 27, 2012
~~George S. Davis~~
~~Executive Vice President,~~
~~Chief Financial Officer~~
~~(Principal Financial Officer)~~
~~August 26, 2011~~
By:
/s/    THOMAS S. TIMKO
Thomas S. Timko
Corporate Vice President,
Corporate Controller
and Chief Accounting Officer
(Principal Accounting Officer)
~~Thomas S. Timko~~
~~Corporate Vice President,~~
~~Corporate Controller~~
~~and Chief Accounting Officer~~
~~(Principal Accounting Officer)~~
~~August 26, 2011~~

February 27, 2012
70

	þ
~~(Mark One)~~

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	¨	~~For the quarterly period ended July 31, 2011~~
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		~~For the transition period from to~~


Delaware		94-1655526
~~Delaware~~		~~94-1655526~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3050 Bowers Avenue,		95052-8039
~~3050 Bowers Avenue,~~ P.O. Box 58039 Santa Clara, California (Address of principal executive offices)		~~95052-8039~~ (Zip Code)


Large accelerated filer þ	Accelerated filer o¨	Non-accelerated filer o¨	Smaller reporting company o¨
(Do not check if a smaller reporting company)


				Page

		PART I. FINANCIAL INFORMATION
	Item 1:		Financial Statements (Unaudited)			~~Financial Statements (Unaudited)~~		23
				Consolidated Condensed Statements of Operations for the Three ~~and Nine~~ Months Ended ~~July 31,~~January 29, 2012 and January 30, 2011 ~~and August 1, 2010~~			2
				~~Consolidated Condensed Balance Sheets at July 31, 2011 and October 31, 2010~~			3
				Consolidated Condensed Statements of ~~Stockholders’ Equity and~~ Comprehensive Income ~~(Loss)~~ for the ~~Nine~~Three Months Ended ~~July 31,~~January 29, 2012 and January 30, 2011			4
		Consolidated Condensed Balance Sheets at January 29, 2012 and October 30, 2011			5
		Consolidated Condensed Statements of Stockholders’ Equity for the Three Months Ended January 29, 2012			6
		Consolidated Condensed Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~July 31,~~January 29, 2012 and January 30, 2011 ~~and August 1, 2010~~			57
				Notes to Consolidated Condensed Financial Statements			68
	Item 2:			Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
	Item 3:			Quantitative and Qualitative Disclosures About Market Risk			55
	Item 4:			Controls and Procedures			55

		PART II. OTHER INFORMATION
	~~Item 1:~~
Item 1:		Legal Proceedings			56
	Item 1A:			Risk Factors			56
	Item 2:			Unregistered Sales of Equity Securities and Use of Proceeds			68
	Item 3:6:			~~Defaults Upon Senior Securities~~			68
	~~Item 4:~~			~~Removed and Reserved~~			68
	~~Item 5:~~			~~Other Information~~			68
	~~Item 6:~~			Exhibits			69
				Signatures			70
~~EX-31.1~~
~~EX-31.2~~
~~EX-32.1~~
~~EX-32.2~~
~~EX-101 INSTANCE DOCUMENT~~
~~EX-101 SCHEMA DOCUMENT~~
~~EX-101 CALCULATION LINKBASE DOCUMENT~~
~~EX-101 LABELS LINKBASE DOCUMENT~~
~~EX-101 PRESENTATION LINKBASE DOCUMENT~~
~~EX-101 DEFINITION LINKBASE DOCUMENT~~


	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


	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


*		~~Amounts as of July 31, 2011 are unaudited. Amounts as of October 31, 2010 are derived from the October 31, 2010 audited consolidated financial statements.~~


																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


	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


	Common Stock					Additional Paid-In Capital			Retained Earnings			Treasury Stock					Accumulated Other Comprehensive Income		Total
	Shares			Amount		Additional Paid-In Capital			Retained Earnings			Shares		Amount			Accumulated Other Comprehensive Income		Total
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	)

Balance at January 29, 2012		1,291		$	13	$	5,651		$	13,043			591	$	(10,064	)	$	7	$	8,650


Note 3 Cash, Cash Equivalents and Investments ~~Note 3~~	~~Cash, Cash Equivalents and Investments~~


			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


January 29, 2012	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)
Cash	$	855	$	—	$	—	$	855

Cash equivalents:
Money market funds		819		—		—		819
Municipal securities		7		—		—		7

Total Cash equivalents		826		—		—		826

Total Cash and Cash equivalents	$	1,681	$	—	$	—	$	1,681

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


*		~~Other~~ Includes agency and corporate debt securities guaranteed by non-U.S. governments, which consist ~~primarily~~ of ~~investment grade asset-backed~~several Canadian provinces, Australia, Germany, the United Kingdom, and ~~mortgage-backed securities.~~the Netherlands.


Note 1	~~Basis of Presentation~~


~~Note 2~~	~~Earnings Per Share~~


~~Note 4~~	~~Fair Value Measurements~~


	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

Total	$	57	$	1	$	57	$	1


	•	~~Level 1 — Quoted prices in active markets for identical assets or liabilities;~~

	•	Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

	•	~~Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.~~


	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	)


							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	$	—	$	—


		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


		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	)


	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


	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


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


				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


	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


Note 15 Warranty, Guarantees and Contingencies ~~Note 15~~	~~Commitments and Contingencies~~


	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	)

Total Segment	$	2,189	$	360

2011:
Silicon Systems Group	$	1,496	$	543
Applied Global Services		567		85
Display		147		28
Energy and Environmental Solutions		476		144

Total Segment	$	2,686	$	800


	~~July 31,~~ January 29, 2012
Samsung Electronics Co., Ltd .		~~2011~~27	%

~~Samsung Electronics Co., Ltd.~~ Taiwan Semiconductor Manufacturing Company Limited		12	%
~~Taiwan Semiconductor Manufacturing Company Limited~~		11	%


	~~July 31,~~
	~~2011~~

~~Samsung Electronics Co., Ltd.~~		5	%
~~Taiwan Semiconductor Manufacturing Company Limited~~		9	%


~~Item 2.~~	*~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~*


	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			Change January 29, 2012 Compared to October 30, 2011			Change January 29, 2012 Compared to 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	)