20
1 5
annual report
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Dear Fellow Stockholders,
At Applied Materials, our innovations make possible
the technology shaping the future. From wearables to
the Internet of Things, autonomous cars to drones, the
world is becoming smarter and more connected at an
unprecedented pace. These incredible global technology
trends place ever greater demand on new capabilities
for semiconductors and displays. As our customers —
manufacturers of advanced chips and displays — race
to introduce new devices, they seek out partners who
they can rely on to deliver innovative and cost-effective
solutions to their most challenging technical problems.
Applied Materials is committed to being the most valuable
partner to our customers, and that commitment is paying
off. In fiscal 2015, Applied delivered another year of growth
in orders, revenues, and profitability. Across the Company,
we are driving profitable growth by targeting major
technology inflections, and introducing new differentiated,
enabling products and services for our customers. As a
result, we are winning market share in semiconductor
and display equipment, growing our service business, and
expanding our market opportunities.
The investments we have been making in R&D and
field technical capabilities are yielding results. We have
generated a strong pipeline of new products aimed at
key market inflections, while at the same time we are
increasing our profitability and providing attractive cash
returns to our shareholders.
Among our fiscal 2015 achievements, Applied Materials:
• Delivered our highest operating profit in four years
• Grew orders by 5% to $10.1 billion
• Posted our highest annual semiconductor equipment
revenue in eight years
•
Increased revenues in our Applied Global Services
business by 15%, representing an all-time record
• Grew revenues in our Display business by 27%, the
third consecutive year of growth
• Deployed $1.8 billion of cash to pay dividends and
repurchase 76 million shares, reducing our ending
share count by 5% during fiscal 2015
LEADING THE WORLD IN MATERIALS ENGINEERING
We have focused the Company on a mission to lead the
world with materials engineering solutions that enable
customers to transform possibilities into reality. Materials
engineering is what Applied Materials does better than
anyone else, and our foundational capabilities are the
broadest and deepest in the industry.
In semiconductor equipment, major changes in device
technology continue to expand our opportunities, and
provide a catalyst for market share gains. We have very
strong momentum in our largest growth businesses,
etch and chemical vapor deposition (CVD), and still
have significant room to grow. In fiscal 2015, our etch
and selective materials removal revenues exceeded $1.1
billion, an eight-year record, and we generated our highest
CVD revenue in four years. Combined, our etch and CVD
revenues were up 23% year-on-year, and we are seeing
very strong customer pull for our new products. This
year we released breakthrough new product platforms to
address rapidly growing opportunities in etch, atomic layer
deposition, and selective materials removal.
In our transistor and interconnect businesses, where we
maintain strong leadership positions, we secured new
application wins at 10 nanometer that will enable us to
increase our share of the available market as customers
build out this node. In addition, we are benefiting from new
epitaxy, thermal, chemical mechanical planarization (CMP)
and implant steps in memory that expand our market.
Process, diagnostics and control is another area where
we see strong pull from customers, and believe we are
on track for share gains in brightfield inspection this year.
We have also been developing a new e-beam inspection
platform, posting our first revenue from both foundry and
memory customers.
SUSTAINABLE INDUSTRY INVESTMENT
While major technology trends are fueling ongoing
investments by our semiconductor customers, we have
seen a significant shift within the customer spending mix.
2015 was a year of very strong memory investment, with
a p p l i e d m at e r i a l s 2 0 1 5
a n n u a l r e p o r t
the highest level of spending by these customers in seven
years. Applied introduced new products to strengthen our
position in the memory market. In the past two years, we
increased our share of total wafer fab equipment spending
in DRAM by about 5 points. We also expect to increase our
share of total NAND spending by approximately 5 points in
the transition from planar to second-generation 3D NAND.
Looking forward to 2016, we expect DRAM investments
to decline from the high levels seen in 2015, while we
believe next year’s NAND investments will be up, as all the
major memory customers ramp 3D NAND into volume
production. In foundry and logic, we anticipate investment
levels will remain strong, particularly as customers invest
in 10 nanometer technology. Overall, we expect a market
environment favorable to Applied’s plans to gain share and
deliver profitable growth.
OPPORTUNITIES IN SERVICE AND DISPLAY
In Applied Global Services (AGS), 2015 revenues
represented an all-time record for the Company. Our AGS
team has done a remarkable job to place this business on a
trajectory of profitable growth. Over the past two years, we
have aligned our service strategy to enable our customers’
success, while making significant enhancements to the
organization, processes, and operations that together are
enabling us to deliver and capture more value with our
service products.
In Display, 2015 was a third consecutive year of growth.
As the display industry introduces new technologies for
both TV and mobile applications, customers’ manufacturing
processes are becoming more complex, and our market
opportunity is expanding. As we look ahead to 2016 and
beyond, one of the key battlegrounds will be for OLED
leadership. As this inflection plays out, Applied is in a great
position to benefit with new enabling products, including
our thin-film encapsulation system.
DELIVERING ON OUR COMMITMENTS
To summarize, in fiscal 2015 Applied Materials delivered
solid growth, and made significant progress towards our
long-term strategic and financial goals. Our future depends
on creating products and services that solve our customers’
high-value problems faster and better than anyone else,
and this is where we are focusing our investments. At the
same time, we have made the Company more agile and
efficient by optimizing the organization, business processes
and product portfolio. These changes allow us to fuel our
growth programs while maintaining our operating expenses
at approximately the same run rate we had in 2012.
We thank our employees around the world for their
tremendous contributions over the past 12 months and
thank you for your support. Looking ahead, we feel very
good about our strategy, our customer positions, and our
product pipeline. As we apply our core capabilities to push
the boundaries of materials engineering, we can deliver
the enabling products our customers need to be successful
and enlarge the scope of the value we can create – while
delivering the superior financial performance that fuels
growth and generates compelling stockholder value.
Sincerely,
Willem P. Roelandts
Chairman of the Board
Gary E. Dickerson
President and
Chief Executive Officer
December 31, 2015
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a n n u a l r e p o r t
This Annual Report contains forward-looking statements, including those regarding anticipated growth and trends in our businesses
and markets, industry outlooks, technology transitions, and other statements that are not historical fact, and actual results could differ
materially. Risk factors that could cause actual results to differ are set forth in the “Risk Factors” section of, and elsewhere in, our
2015 Form 10-K included in this report. All forward-looking statements are based on management’s estimates, projections and
assumptions as of the date hereof, and Applied Materials undertakes no obligation to update any such statements.
S TO C K H O L D E R S ’ I N F O R M AT I O N
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
Santa Clara, California
NUMBER OF REGISTERED STOCKHOLDERS
3,247 (as of December 3, 2015)
STOCK LISTING
Applied Materials, Inc. is traded on The NASDAQ
Global Select Market®
NASDAQ Symbol: AMAT
TRANSFER AGENT
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Tel: (312) 360–5186 or (877) 388–5186
Fax: (312) 601–4348
INVESTOR CONTACT
Investor Relations
Applied Materials, Inc.
3050 Bowers Avenue
P.O. Box 58039, M/S 1261
Santa Clara, California 95052–8039
Tel: (408) 748–5227
Fax: (408) 563–4606
Email: investor_relations@amat.com
CORPORATE HEADQUARTERS
Applied Materials, Inc.
3050 Bowers Avenue
Santa Clara, California 95054–3299
MAILING ADDRESS AND TELEPHONE
Applied Materials, Inc.
3050 Bowers Avenue
P.O. Box 58039
Santa Clara, California 95052–8039
Tel: (408) 727–5555
CORPORATE WEB SITE
Additional information can be found at
www.appliedmaterials.com
a p p l i e d m at e r i a l s 2 0 1 5
a n n u a l r e p o r t
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 25, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-06920
Applied Materials, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3050 Bowers Avenue, P.O. Box 58039
Santa Clara, California
(Address of principal executive offices)
94-1655526
(I.R.S. Employer
Identification No.)
95052-8039
(Zip Code)
Registrant’s telephone number, including area code:
(408) 727-5555
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $.01 per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities registered pursuant to Section 12(g) of the Act: None
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Aggregate market value of the voting stock held by non-affiliates of the registrant as of April 26, 2015, based upon the closing
sale price reported by the NASDAQ Global Select Market on that date: $26,764,127,442
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of December 3, 2015: 1,149,133,389
Portions of Part III will be provided in accordance with Instruction G(3) to Form 10-K no later than February 22, 2016.
DOCUMENTS INCORPORATED BY REFERENCE:
Caution Regarding Forward-Looking Statements
This Annual Report on Form 10-K of Applied Materials, Inc. and its subsidiaries (Applied or the Company), including
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking
statements that involve risks and uncertainties.
Examples of forward-looking statements include those regarding Applied’s future financial or operating results, cash flows
and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost
controls, products, competitive positions, management's plans and objectives for future operations, research and development,
strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment
portfolio and policies, taxes, supply chain, manufacturing, properties, legal proceedings and claims, customer demand and
spending, end-use demand, market and industry trends and outlooks, general economic conditions, and other statements that are
not historical facts, as well as their underlying assumptions. 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. All forward-looking statements are subject to risks and uncertainties and other important
factors, including those discussed in Part I, Item 1A, “Risk Factors,” below and elsewhere in this report. 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. Forward-
looking statements are based on management’s estimates, projections and expectations as of the date hereof, and Applied undertakes
no obligation to revise or update any such statements.
The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying
Notes to Consolidated Financial Statements included in this report.
2
APPLIED MATERIALS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 25, 2015
TABLE OF CONTENTS
PART I
Item 1:
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A: Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B: Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2:
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3:
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4: Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6:
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . .
Item 7A: Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8:
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . .
Item 9A: Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B: Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10: Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11: Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
Item 13: Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . .
Item 14:
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
4
14
24
25
26
26
26
28
29
55
55
55
56
56
57
57
58
59
59
Item 15: Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
113
PART IV
3
Item 1:
Business
PART I
Incorporated in 1967, Applied is a Delaware corporation. A global company with a broad set of capabilities in materials
engineering, Applied provides manufacturing equipment, services and software to the global semiconductor, display, solar
photovoltaic (PV) and related industries. With its diverse technology capabilities, Applied delivers products and services that
improve device performance, yield and cost. Applied’s customers include manufacturers of semiconductor chips, liquid crystal
and other displays, solar PV cells, 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’s fiscal year ends on the last
Sunday in October.
Applied operates in four reportable segments: Silicon Systems, 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 Financial Statements. A discussion of factors that could affect operations is set forth under “Risk Factors” in Item 1A,
which is incorporated herein by reference.
Net sales by reportable segment for the past three fiscal years were as follows:
2015
2014
2013
(In millions, except percentages)
Silicon Systems . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,135
2,531
780
213
64%
26%
8%
2%
$
5,978
2,200
615
279
66%
24%
7%
3%
$
4,775
2,023
538
173
64%
27%
7%
2%
9,659
100%
$
9,072
100%
$
7,509
100%
Silicon Systems
Applied’s Silicon Systems segment develops, manufactures and sells a wide range of manufacturing equipment used to
fabricate semiconductor chips, also referred to as integrated circuits (ICs). The Silicon Systems segment includes semiconductor
capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology
and inspection, and wafer packaging. The majority of Applied's new equipment sales are to leading integrated device manufacturers
and foundries worldwide.
Transistor and Interconnect
Applied’s transistor and interconnect products and technologies have enabled multiple generations of device scaling from
planar transistors to today’s 3D multi-gate FinFET transistors. Applied offers products and technologies for transistor and
interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor
deposition, physical vapor deposition, chemical mechanical planarization and electrochemical deposition. Many of these process
steps are used multiple times throughout the semiconductor chip fabrication process.
4
Transistor and Interconnect Technologies
Epitaxy
Epitaxial silicon (epitaxy or epi) is a layer of pure silicon grown in a uniform crystalline structure
on the wafer to form a high quality base for the device circuity. Epi technology is used in an
increasing number of IC devices in both the wafer surface and transistor areas of a chip to
enhance speed.
Ion Implant
Ion implantation is a key technology for forming transistors and is used many times during chip
fabrication. During ion implantation, wafers are bombarded by a beam of electrically-charged
ions, called dopants, which change the electrical properties of the exposed surface films.
Oxidation/Nitridation
Applied’s systems provide critical oxidation steps - like memory gate oxide, shallow trench
isolation and liner oxide - for advanced device scaling.
Rapid Thermal Processing (RTP)
Product(s)
Centura RP Epi
VIISta Systems
Vantage, Radiance and
Centura Systems
Vantage Systems
RTP is used primarily for annealing, which modifies the properties of deposited films. Applied’s
single-wafer RTP systems are also used for growing high quality oxide and oxynitride films.
Physical Vapor Deposition (PVD)
Endura Systems
PVD is used to deposit high quality metal films with low resistivity for contact and interconnect
devices. Applications include metal gate, silicides, contact liner/barrier, interconnect copper
barrier seed and metal hard mask.
Chemical Vapor Deposition (CVD)
CVD is used to deposit dielectric and metal films on a wafer. During the CVD process, gases that
contain atoms of the material to be deposited react on the wafer surface, forming a thin film of
solid material.
Chemical Mechanical Planarization (CMP)
CMP is used to planarize a wafer surface, a process that allows subsequent photolithography
patterning and material deposition steps to occur with greater accuracy, resulting in more highly
uniform film layers with minimal thickness variations.
Electrochemical Deposition (ECD)
ECD is a process by which metal atoms from a chemical fluid (an electrolyte) are deposited on
the surface of an immersed object.
Endura and Centura
Systems
Reflexion Systems
Raider Platform
Patterning and Packaging
Applied offers patterning and packaging products and systems that enable the transfer of patterns onto device structures,
making it possible to etch masks used for photolithography, and perform deposition, etching, and related processes. These systems
and technologies address challenges resulting from shrinking pattern dimensions and the complexity in vertical stacking found in
today’s most advanced semiconductor devices.
Patterning and Packaging Technologies
Atomic Layer Deposition (ALD)
ALD technology enables customers to fabricate thin films of either conducting or insulating
material with uniform coverage in nanometer-sized structures.
Chemical Vapor Deposition (CVD)
CVD is used to deposit dielectric and metal films on a wafer. During the CVD process, gases that
contain atoms of the material to be deposited react on the wafer surface, forming a thin film of
solid material.
Etch
Etching is used many times throughout the IC manufacturing process to selectively remove
material from the surface of a wafer. Applied offers systems for etching dielectric, metal, and
silicon films to meet the requirements of advanced processing.
Product(s)
Olympia System
Producer Systems
Centris and Producer
Systems
5
Imaging and Process Control
Applied offers a suite of metrology, inspection and review systems for front- and back-end-of-line applications. These
systems’ imaging capabilities and algorithms employ optical and e-beam technologies to meet the most advanced technical
demands, such as self-aligned double and quad patterning, extreme ultraviolet layers, measurement-intensive optimal proximity
correction mask qualification, and emerging 3D architectures. Applied delivers leading-edge capabilities that enable chipmakers
to establish accurate statistical process control, ramp up production runs rapidly, and achieve consistently high production yields.
Imaging and Process Control Technologies
Metrology and Inspection
Metrology and inspection tools are used to locate, measure, and analyze critical defects and
features on the wafer during various stages of the fabrication processes. Applied enables
customers to characterize and control critical dimension (CD) and defect issues, especially at
advanced generation technology nodes.
Product(s)
SEMVision G6 Defect
Analysis
UVision 7 Inspection
VeritySEM 5i Metrology
Aera4 Mask Inspection
Applied Global Services
The Applied Global Services (AGS) segment provides integrated solutions to optimize equipment and fab performance and
productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software
for semiconductor, display and solar products. 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 more than a dozen countries to support
approximately 33,000 installed Applied semiconductor, display and solar manufacturing systems worldwide. Applied offers the
following general types of services and products under the Applied Global Services segment.
AGS Solutions and Technology
Certified Services
A comprehensive service product portfolio that combines service technology and tool specific
performance commitments in order to optimize customer factory productivity.
Fab Consulting
Experts using advanced analytical tools to solve production problems that have the greatest impact
on customer fab productivity.
Parts Programs
Spare parts portfolio targets key manufacturing challenges and balances inventory cost and risk to
efficiently meet customer fab requirements.
Subfab Equipment
Applied SubFab solutions lower costs, save energy, reduce environmental impact, and meet
Environmental Protection Agency reporting regulations for greenhouse gas emissions.
Legacy Equipment
Comprehensive 200mm equipment and upgrades portfolio to address a full spectrum of production
needs and extend tool lifetime. Applied legacy equipment supports new technology for a broad
variety of devices including analog, power, and MEMS.
Automation Software
Automation software coordinates and streamlines every aspect of a factory-the processes,
equipment and people-to provide competitive advantage to customers.
6
Display
The Display segment is comprised of products for manufacturing liquid crystal displays (LCDs), organic light-emitting
diodes (OLEDs), and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-
oriented devices. While similarities exist between the technologies utilized in semiconductor and display fabrication, the most
significant differences are in the size and composition of the substrate. Substrates used to manufacture display panels are typically
glass, although newer flexible materials are entering the market. Display industry growth depends primarily on consumer demand
for increasingly larger and more advanced TVs and high resolution displays for mobile devices. The Display segment offers a
variety of technologies and products, including:
Display Technologies
Array Test
LCD display substrates are inspected at many stages of production to maximize yield, minimize
scrap, optimize equipment utilization, and monitor manufacturing processes. At the completion
of the array stage, the performance of the millions of individual pixels on each display is tested.
Chemical Vapor Deposition (CVD)
During CVD processing, gases containing material atoms or molecules are introduced into the
process chamber. The gases form reactive radicals or ions, which undergo chemical reactions to
form thin films on the heated substrate.
Physical Vapor Deposition (PVD)
PVD is used to deposit high quality films of metals, alloys, transparent conductors and
semiconductors. In Display, these films are used for contact, interconnect, transparent electrodes
and transistor materials in display backplanes, as well as for transparent electrodes in color filters
and touch panels.
Product(s)
Electron Beam Array
Tester
AKT PECVD Systems
AKT Aristo and PiVot
Systems
Energy and Environmental Solutions
The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) solar PV cells,
as well as high throughput roll-to-roll deposition equipment for flexible electronics, packaging and other applications. The
technologies and products offered in the Energy and Environmental Solutions segment include:
Energy and Environmental Technologies
Solar:
Cell Manufacturing
Product(s)
Baccini Systems
C-Si cell manufacturing involves multiple steps, one of which is screen printing the solar cell
contact structures. Applied’s printers are the industry-leading systems for this process step.
Applied’s Fine Line Double Print process enables solar manufacturers to produce cells with less
paste, better quality and higher cell efficiencies than conventional single print cells.
Roll-to-Roll WEB Coating:
The Roll-to-Roll coating systems provide production solutions for packaging, flexible electronics
and security industries. WEB systems utilize physical vapor deposition, thermal evaporation,
chemical vapor deposition, and e-beam technology to deposit tiny layers of metal onto flexible
substrates.
TopBeam, TopMet and
SmartWeb Systems
7
Backlog
Applied manufactures systems to meet demand represented by order backlog and customer commitments. Backlog consists
of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or
shipment has occurred but revenue has not been recognized; and (2) contractual service revenue and maintenance fees to be earned
within the next 12 months.
Backlog by reportable segment as of October 25, 2015 and October 26, 2014 was as follows:
2015
2014
(In millions, except percentages)
Silicon Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,720
812
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
525
Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,142
$ 1,400
55%
775
26%
593
16%
3%
149
100% $ 2,917
48%
27%
20%
5%
100%
Applied’s backlog on any particular date is not necessarily indicative of actual sales for any future periods, due to the potential
for customer changes in delivery schedules or order cancellations. Customers may delay delivery of products or cancel orders
prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules or a reduction of backlog during any
particular period could have a material adverse effect on Applied’s business and results of operations.
Manufacturing, Raw Materials and Supplies
Applied’s manufacturing activities consist primarily of assembly, test and integration of various proprietary and commercial
parts, components and subassemblies that are used to manufacture systems. Applied has implemented a distributed manufacturing
model under which manufacturing and supply chain activities are conducted in various countries, including Germany, Israel, Italy,
Singapore, Taiwan, the United States and other countries in Asia. Applied uses numerous vendors, including contract manufacturers,
to supply parts and assembly services for the manufacture and support of its products, including some systems being completed
at customer sites.
Although Applied makes reasonable efforts to assure that parts are available from multiple qualified suppliers, this is not
always possible. Accordingly, some key parts may be obtained from only a single supplier or a limited group of suppliers. Applied
seeks to reduce costs and to lower the risks of manufacturing and service interruptions by selecting and qualifying alternate suppliers
for key parts; monitoring the financial condition of key suppliers; maintaining appropriate inventories of key parts; qualifying
new parts on a timely basis; and ensuring quality and performance of parts.
8
Research, Development and Engineering
Applied’s long-term growth strategy requires continued development of new products, including products that enable
expansion into new markets. Applied's significant investments in research, development and engineering (RD&E) must generally
enable it to deliver new products and technologies before the emergence of strong demand, thus allowing customers to incorporate
these products into their manufacturing plans during early-stage technology selection. Applied works closely with its global
customers to design systems and processes that meet their planned technical and production requirements.
Applied’s product development and engineering organizations are located primarily in the United States, as well as in in
Canada, China, Europe, India, Israel, Singapore and Taiwan. In addition, certain outsourced RD&E activities, process support and
customer demonstrations are performed in the United States, India, China, Singapore and Taiwan.
Applied's investments in RD&E for product development and engineering programs over the last three fiscal years were as
follows: $1.5 billion (15 percent of net sales) in fiscal 2015, $1.4 billion (16 percent of net sales) in fiscal 2014, and $1.3 billion
(18 percent of net sales) in fiscal 2013. Applied has spent an average of 14 percent of net sales in RD&E over the last five years.
In addition to RD&E for specific product technologies, Applied maintains ongoing programs for automation control systems,
materials research, and environmental control that are applicable to its products.
Marketing and Sales
Net sales by geographic region for the past three fiscal years, determined by the location of customers' facilities to which
products were shipped, were as follows:
2015
2014
2013
Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast Asia . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,600
1,623
1,654
1,078
432
7,387
1,630
642
9,659
27%
17%
17%
11%
4%
76%
17%
7%
100%
(In millions, except percentages)
$
2,702
1,608
965
817
356
6,448
1,966
658
9,072
30%
18%
10%
9%
4%
71%
22%
7%
100%
$
$
2,640
787
924
685
320
5,356
1,473
680
7,509
35%
11%
12%
9%
4%
71%
20%
9%
100%
$
Because of the highly technical nature of its products, Applied markets and sells products worldwide almost entirely through
a direct sales force.
General economic conditions can impact the company’s business and financial results. Applied’s business is based on capital
equipment investments by major semiconductor, display, solar PV and other manufacturers, and is subject to cyclical industry
conditions. Customers’ expenditures depend on many factors, including: anticipated market demand and pricing for
semiconductors, display technologies and solar cells, and other electronic devices; the development of new technologies; customers’
factory utilization; capital resources and financing; government policies and incentives; and global and regional economic
conditions. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer
products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and,
in turn, Applied’s business.
Information on net sales to unaffiliated customers and long-lived assets attributable to Applied’s geographic regions is
included in Note 16 of Notes to Consolidated Financial Statements. The following companies accounted for at least 10 percent of
Applied’s net sales in each fiscal year, which were for products in multiple reportable segments.
Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan Semiconductor Manufacturing Company Limited. . . . . . . . . . . . . . . . . .
2015
18%
15%
2014
12%
21%
2013
13%
27%
9
Competition
The industries in which Applied operates are highly competitive and characterized by rapid technological change. Applied’s
ability to compete generally depends on its ability to timely commercialize its technology, continually improve its products, and
develop new products that meet constantly evolving customer requirements. Significant competitive factors include technical
capability and differentiation, productivity, cost-effectiveness and the ability to support a global customer base. The importance
of these factors varies according to customers’ needs, including product mix and respective product requirements, applications,
and the timing and circumstances of purchasing decisions. Substantial competition exists in all areas of Applied’s business.
Competitors range from small companies that compete in a single region, which may benefit from policies and regulations that
favor domestic companies, to global, diversified companies. Applied’s ability to compete requires a high level of investment in
RD&E, marketing and sales, and global customer support activities. Management believes that many of Applied’s products have
strong competitive positions.
The competitive environment for each segment is described below.
The semiconductor industry has been increasingly driven by consumer demand for lower-cost electronic products with
increased capability, particularly mobility devices such as smartphones and tablets. As a result, products within the Silicon Systems
segment are subject to significant changes in customer requirements, including transitions to smaller dimensions, new materials
and an increasing number of applications. While certain existing technologies may be adapted to new requirements, some
applications create the need for an entirely different technological approach. The rapid pace of technological change can quickly
diminish the value of current technologies and products and create opportunities for existing and new competitors. Applied offers
a variety of technologically-differentiated products that must continuously evolve to satisfy customers’ requirements in order to
compete effectively in the marketplace. Applied allocates resources among its numerous product offerings and therefore may
decide not to invest in an individual product to the same degree as competitors who specialize in fewer products. There are a
number of competitors serving the semiconductor manufacturing equipment industry, which has experienced increasing
consolidation. Some of these competitors offer a single product line and others offer multiple product lines, and range from suppliers
serving a single region to global, diversified companies. The competitive environment for Silicon Systems in fiscal 2015 reflected
steady demand for semiconductor equipment, with increased investment in technology upgrades and additional capacity by memory
customers. Demand from foundry customers reflected investments in new technology at advanced nodes, driven by demand for
advanced mobile chips.
Products and services within the Applied Global Services segment complement Silicon Systems, Display, and Energy and
Environmental Solutions segments’ products in markets that are characterized by demanding worldwide service requirements and
a diverse group of numerous competitors. To compete effectively, Applied offers products and services to improve tool performance,
lower overall cost of ownership, and increase the productivity and energy efficiency of customers’ fab operations. Significant
competitive factors include productivity, cost-effectiveness, and the level of technical service and support. The importance of these
factors varies according to customers’ needs and the type of products or services offered. Industry conditions that affected Applied
Global Services’ sales of spares and services in fiscal 2015 were principally semiconductor manufacturers' wafer starts and factory
utilization rates.
Products in the Display segment are generally subject to strong competition from a number of major competitors primarily
in Asia. Applied holds established market positions with its technically-differentiated LCD and OLED manufacturing solutions
for PECVD, color filter PVD, PVD array, PVD touch panel, and TFT array testing, although its market position could change
quickly due to customers' evolving requirements. The competitive environment for the Display segment in fiscal 2015 was
characterized by continued demand for manufacturing equipment for TVs and high-end mobile devices, although this sector
remains susceptible to highly cyclical conditions. Important factors affecting the competitive position of Applied's Display products
include: industry trends, Applied's ability to innovate and develop new products, and the extent to which Applied's products are
technically-differentiated, as well as which customers within a highly concentrated customer base are making capital equipment
investments and Applied's existing position at these customers.
Applied's products within the Energy and Environmental Solutions segment compete in several diverse market areas,
including the c-Si solar equipment market. The solar equipment market has been characterized by significant pressure to reduce
customers' overall production costs and increase conversion efficiency. While end-market demand for solar PVs has been robust
over the last several years, investment levels in capital equipment remained low in fiscal 2015. With respect to its c-Si equipment
products, Applied competes with a number of other companies, some of which have significant experience with solar applications
and some of which are new entrants to the solar equipment market. The solar industry downturn has affected many of Applied's
competitors and customers adversely, with some companies going through extensive financial and organizational restructuring,
and in some instances ceasing operations.
10
Patents and Licenses
Applied’s competitive position significantly depends upon its research, development, engineering, manufacturing and
marketing capabilities, as well as its patent position. Protection of Applied's technology assets through enforcement of its intellectual
property rights, including patents, is important. Applied’s practice is to file patent applications in the United States and other
countries for inventions that it considers significant. Applied has approximately 10,200 patents in the United States and other
countries, and additional applications are pending for new inventions. Although Applied does not consider its business materially
dependent upon any one patent, the rights of Applied and the products made and sold under its patents, taken as a whole, are a
significant element of its business. In addition to its patents, Applied possesses other intellectual property, including trademarks,
know-how, trade secrets, and copyrights.
Applied enters into patent and technology licensing agreements with other companies when it is determined to be in its best
interest. Applied pays royalties under existing patent license agreements for the use, in several of its products, of certain patented
technologies. Applied also receives royalties from licenses granted to third parties. Royalties received from or paid to third parties
have not been, and are not expected to be, material to Applied’s consolidated results of operations.
In the normal course of business, Applied periodically receives and makes inquiries regarding possible patent infringement.
In responding to such inquiries, it may become necessary or useful for Applied to obtain or grant licenses or other rights. However,
there can be no assurance that such licenses or rights will be available to Applied on commercially reasonable terms, or at all. If
Applied is not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms, or successfully prosecute
or defend its position, Applied’s business, financial condition and results of operations could be materially and adversely affected.
Environmental Matters
Applied maintains a number of environmental, health, and safety programs that are primarily preventative in nature. As part
of these programs, Applied regularly monitors ongoing compliance with applicable laws and regulations. In addition, Applied has
trained personnel to conduct investigations of any environmental, health, or safety incidents, including, but not limited to, spills,
releases, or possible contamination.
Compliance with federal, state and local environmental, health and safety laws and regulations, including those regulating
the discharge of materials into the environment, remedial agreements, and other actions relating to the environment have not had,
and are not expected to have, a material effect on Applied’s capital expenditures, competitive position, financial condition, or
results of operations.
The most recent report on Applied’s environmental, health and safety activities can be found in Applied’s latest Citizenship
Report on its website at http://www.appliedmaterials.com/company/corporate-responsibility/reports. The Citizenship Report is
updated periodically. This website address is intended to be an inactive textual reference only. None of the information on, or
accessible through, Applied’s website is part of this Form 10-K or is incorporated by reference herein.
Employees
At October 25, 2015, Applied employed approximately 14,600 regular employees and 900 temporary employees. In the
high-technology industry, competition for highly-skilled employees is intense. Applied believes that its future success is highly
dependent upon its continued ability to attract, retain and motivate qualified employees.
11
Executive Officers of the Registrant
The following table and notes set forth information about Applied’s executive officers:
Name of Individual
Gary E. Dickerson(1)
Ginetto Addiego(2)
Robert J. Halliday(3)
Thomas F. Larkins(4)
Omkaram Nalamasu(5)
Ali Salehpour(6)
Charles Read(7)
Position
President, Chief Executive Officer
Senior Vice President, Engineering
Senior Vice President, Chief Financial Officer
Senior Vice President, General Counsel and Corporate Secretary
Senior Vice President, Chief Technology Officer
Senior Vice President, General Manager, New Markets and Service Group
Corporate Vice President, Corporate Controller and Chief Accounting Officer
(1) Mr. Dickerson, age 58, was named President of Applied in June 2012 and appointed Chief Executive Officer and a member
of the Board of Directors in September 2013. Before joining Applied, he served as Chief Executive Officer and a director
of Varian Semiconductor Equipment Associates, Inc. (Varian) from 2004 until its acquisition by Applied in November
2011. Prior to Varian, Mr. Dickerson served 18 years with KLA-Tencor Corporation (KLA-Tencor), a supplier of process
control and yield management solutions for the semiconductor and related industries, where he held a variety of operations
and product development roles, including President and Chief Operating Officer. Mr. Dickerson started his semiconductor
career in manufacturing and engineering management at General Motors' Delco Electronics Division and then AT&T
Technologies.
(2) Dr. Addiego, age 56, has been Senior Vice President, Engineering since rejoining Applied in March 2014. He previously
was with Applied from 1996 to 2005, leading various product groups as well as global organizations, including Global
Operations, Manufacturing, Foundation Engineering, and Information Technology. From March 2011 to March 2014,
Dr. Addiego was President and Chief Operating Officer of Ultra Clean Technology Corp., a supplier of critical subsystems
for the semiconductor capital equipment, medical device, energy, research, and flat panel industries. From February 2005
to March 2011, Dr. Addiego worked at Novellus Systems, Inc., a provider of advanced process equipment for the
semiconductor industry, where he served as Executive Vice President and Chief Administrative Officer and Executive
Vice President of Corporate Operations.
(3) Mr. Halliday, age 61, has been Senior Vice President, Chief Financial Officer of Applied since February 2013. He
previously served as a Group Vice President and General Manager in Applied’s Silicon Systems segment following the
completion of Applied’s acquisition of Varian in November 2011. Mr. Halliday had served as Chief Financial Officer of
Varian since 2001 and as an Executive Vice President of Varian since 2004. He was Varian's Treasurer from November
2002 to October 2006 and from February 2009 to February 2010.
(4) Mr. Larkins, age 54, has been Senior Vice President, General Counsel and Corporate Secretary of Applied since November
2012. Previously, Mr. Larkins was employed by Honeywell International Inc., a diversified global technology and
manufacturing company, where he was Vice President, Corporate Secretary and Deputy General Counsel from 2002 until
joining Applied. Mr. Larkins served in various other positions at Honeywell (formerly AlliedSignal) after joining the
company in 1997.
(5) Dr. Nalamasu, age 57, has been Senior Vice President, Chief Technology Officer since June 2013, and President of Applied
Ventures, LLC, Applied's venture capital arm, since November 2013. He had served as Group Vice President, Chief
Technology Officer from January 2012 to June 2013, and as Corporate Vice President, Chief Technology Officer from
January 2011 to January 2012. Upon joining Applied in June 2006 until January 2011, Dr. Nalamasu was an Appointed
Vice President of Research and served as Deputy Chief Technology Officer and General Manager for the Advanced
Technologies Group. From 2002 to 2006, Dr. Nalamasu was a NYSTAR distinguished professor of Materials Science
and Engineering at Rensselaer Polytechnic Institute, where he also served as Vice President of Research from 2005 to
2006. Prior to Rensselaer, Dr. Nalamasu served in several leadership roles at Bell Laboratories.
(6) Mr. Salehpour, age 54, has been Senior Vice President, General Manager, New Markets and Service Group since September
2013. He previously served as Group Vice President, General Manager Energy and Environmental Solutions and Display
Business Groups, since joining Applied in November 2012. Prior to Applied, Mr. Salehpour worked at KLA-Tencor for
16 years, where he served as a Senior Vice President and General Manager.
(7) Mr. Read, age 49, has been Corporate Vice President, Corporate Controller and Chief Accounting Officer of Applied
since joining the Company in September 2013. Prior to Applied, Mr. Read worked at Brocade Communications Systems,
Inc., a provider of semiconductor and software-based network solutions, since October 2002, where he most recently
served as Vice President, Corporate Controller. Prior to Brocade, Mr. Read worked at KPMG LLP, an audit, tax and
advisory firm, from 1996 to 2002.
12
Available Information
Applied’s website is http://www.appliedmaterials.com. Applied makes available free of charge, on or through its website,
its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically
filing such reports with, or furnishing them to, the SEC. The SEC’s website, www.sec.gov, contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. These website addresses are intended to
be an inactive textual references only. None of the information on, or accessible through, these websites is part of this Form 10-
K or is incorporated by reference herein.
13
Item 1A:
Risk Factors
The following factors could materially and adversely affect Applied’s business, financial condition or results of operations
and cause reputational harm, and they 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, display, and solar 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, which
depend in part on customers’ capacity utilization, production volumes, access to affordable capital, end-use demand, consumer
buying patterns, and inventory levels relative to demand, as well as the rate of technology 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. In particular, the amount and mix of capital
equipment spending between foundry, memory and logic customers can have a significant impact on the results of operations of
our Silicon Systems segment, which is the largest contributor to Applied’s consolidated net sales and total new orders.
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, and may incur unexpected or
additional costs to align its business operations. 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 effectively manage its costs during periods of decreasing demand, its gross margins and
earnings may be adversely impacted.
Applied is exposed to risks associated with the uncertain global economy.
Uncertain global economic conditions along with uncertainties in the financial markets, national debt and fiscal concerns
in various regions, and government austerity measures, are posing challenges to the industries in which Applied operates. The
markets for semiconductors and displays in particular depend largely on consumer spending. Economic uncertainty and related
factors 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 in turn reduce Applied's net sales, reduce backlog, and affect
Applied’s ability to convert backlog to sales. Uncertain market conditions, difficulties in obtaining capital, 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, which can also result in lower sales and/or additional inventory or bad debt expense
for Applied. These conditions may 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 businesses, sources and uses of cash,
financial condition and results of operations. Applied may be required to implement additional cost reduction efforts, including
restructuring activities, which may adversely affect Applied’s ability to capitalize on opportunities. 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, 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 any of these financial
institutions becomes insolvent, it could limit Applied’s ability to access cash in the affected accounts.
14
Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.
The global semiconductor, display, solar and related industries in which Applied operates are characterized by ongoing
changes affecting some or all of these industries that impact demand for and/or the profitability of Applied's products, including:
•
•
•
•
•
•
•
the nature, timing and degree of visibility of changes in end demand for electronic products, including those related to
fluctuations in consumer buying patterns tied to seasonality or the introduction of new products, and the effects of these
changes on foundry and other customers’ businesses and, in turn, on demand for Applied’s products;
increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the
necessary capital;
differences in growth rates among the semiconductor, display and solar industries;
the increasing importance of establishing, improving and maintaining strong relationships with customers;
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;
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;
• manufacturers’ ability to reconfigure and re-use fabrication systems;
•
•
•
•
•
•
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, displays 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.
Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.
The largest proportion of Applied’s consolidated net sales and profitability has been and continues to be derived from sales
of manufacturing equipment in the Silicon Systems segment 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 this industry that impact demand for and/or the profitability of Applied's
semiconductor equipment and service products, including:
•
•
•
•
•
•
•
•
the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip, the use
of new materials, 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 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 in generating organic growth given semiconductor manufacturers’ levels of capital expenditures and the
allocation of capital investment to market segments that Applied does not serve, such as lithography, or segments where
Applied's products have lower relative market presence;
the importance of increasing market positions in under-penetrated segments, such as etch and inspection;
semiconductor manufacturer's ability to reconfigure and re-use equipment, and the resulting effect on their need to purchase
new equipment and services;
the increasing frequency and complexity of technology transitions and inflections, such as 3-D transistors and advanced
interconnects, and Applied’s ability to timely and effectively anticipate and adapt to these changes;
15
•
•
•
•
•
•
•
shorter cycle times between order placements by customers (particularly foundries) and product shipment, which may
lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin;
competitive factors that make it difficult to enhance position, including challenges in securing development-tool-of-
record (DTOR) and production-tool-of-record (PTOR) positions with customers;
consolidation in the semiconductor industry, including among semiconductor manufacturers and among manufacturing
equipment suppliers;
shifts in sourcing strategies by computer and electronics companies that impact the equipment requirements of Applied's
foundry customers;
the concentration of new wafer starts in Korea and Taiwan, where Applied’s service penetration and service-revenue-
per-wafer-start have been lower than in other regions;
the potential increasing investment in semiconductor manufacturing capabilities in China, and its effect on the demand
for semiconductor manufacturing equipment; 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.
Applied must accurately forecast, and allocate appropriate resources and investment towards addressing, key technology
changes and inflections in order to enable opportunities for gains.
Applied is exposed to risks as a result of ongoing changes specific to the display industry.
The global display industry historically has experienced considerable volatility in capital equipment investment levels, due
in part to the limited number of display manufacturers, the concentrated nature of end-use applications, production capacity relative
to end-use demand, and panel manufacturer profitability. Industry growth has depended primarily on consumer demand for
increasingly larger and more advanced TVs and, more recently, on demand for smartphones and other mobile devices, which
demand is highly sensitive to cost and improvements in technologies and features. The display industry is characterized by ongoing
changes particular to this industry that impact demand for and/or the profitability of Applied's display products, including:
•
•
•
•
the timing and extent of an expansion of manufacturing facilities in China, which may be affected by changes in economic
conditions in China;
the rate of transition to larger substrate sizes for TVs and to new display technologies for TVs and mobile applications,
and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and
return on investment;
the importance of new types of display technologies, such as low temperature polysilicon (LTPS), organic light-emitting
diode (OLED), flexible displays and metal oxide, and new touch panel films; and
uncertainty with respect to future display technology end-use applications and growth drivers.
16
Applied is exposed to risks as a result of ongoing changes specific to the solar industry.
Investment levels in capital equipment for the global solar industry have experienced considerable volatility. In recent years,
global solar PV production capacity has exceeded end-use demand, causing customers to significantly reduce or delay investments
in manufacturing capacity and new technology, or to cease operations. Recently, Applied implemented cost reduction measures
in its solar business, and as a result incurred restructuring charges, asset impairments and inventory-related charges. 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
in more global regions by, among other things, reducing operating costs and increasing throughputs for solar PV
manufacturing, and improving the conversion efficiency of solar PVs;
the variability and uncertainty of government energy policies and their effect in influencing the rate of growth of the solar
PV market, including the availability and amount of 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 number of solar PV manufacturers and amount of global production capacity for solar PVs, primarily in China;
the assessment of duties on solar cells and modules imported from China, Taiwan and other countries;
challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer
base;
the availability and condition of used solar equipment, which impacts demand for new equipment;
the financial condition of solar PV customers and their access to affordable financing and capital; and
solar panel manufacturing overcapacity, which has led to weak industry operating performance and outlooks, deterioration
of the solar equipment market, and a worsening of the financial condition of certain customers.
Applied must continually innovate, commercialize its products, and adapt its business and product offerings to respond to
competition and rapid technological changes.
As Applied operates in a highly competitive environment in 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 its presence 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 more complex 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 and 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;
•
differentiate its products from those of competitors and any disruptive technologies, meet customers’ performance
specifications, appropriately price products, and achieve market acceptance;
• 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 product development and sales and marketing strategies that address customers' high value problems and foster
strong customer relationships;
17
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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.
Applied is exposed to risks associated with a highly concentrated customer base.
Applied’s semiconductor customer base historically has been, and is becoming even more, highly concentrated as a result
of economic and industry conditions. In fiscal 2015, two semiconductor manufacturers accounted for approximately 41 percent
of the Silicon Systems segment's net sales and two customers accounted for 33 percent of Applied’s consolidated net sales. Applied’s
display customer base is also highly concentrated. Applied’s customer base is also geographically-concentrated. See Item 2,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for tabular presentations of net sales
by geographic region.
In addition, 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. 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 customers are making an increasingly greater
percentage of their respective industry’s capital equipment investments. Further, claims or litigation involving key industry
participants have resulted and may continue to result in changes in their sourcing strategies and other outcomes. 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. The mix and type of customers, and sales to any single customer, may vary
significantly from quarter to quarter and from year to year. As Applied’s products are configured to customer specifications,
changing, rescheduling or canceling orders may result in significant, non-recoverable costs. If customers do not place orders, or
they substantially reduce, delay or cancel orders, Applied may not be able to replace the business, which could have a material
adverse effect on the Company’s results of operations. Major customers may also seek, and on occasion receive, pricing, payment,
intellectual property-related, or other commercial terms that are less favorable to Applied.
Applied is exposed to the risks of operating a global business.
In fiscal 2015, approximately 83 percent of Applied’s net sales were to customers in regions outside the United States.
Moreover, China now represents the largest market for various electronic products, such as TVs, PCs, and smartphones. 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 and Italy. Applied is also expanding its business and operations in new
countries. The global nature of Applied’s business and operations, combined with the need to continually improve the Company’s
operating cost structure, presents challenges, including but not limited to those arising from:
•
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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 and sourcing 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;
18
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positions taken by governmental agencies regarding possible national commercial and/or security issues posed by
international business operations;
fluctuating raw material, commodity, energy and shipping costs or shipping delays;
challenges associated with managing more geographically diverse operations and projects, which require 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;
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 global infrastructure and make appropriate changes;
cultural and language differences;
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 sale of semiconductors, displays 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.
Applied is exposed to risks associated with business combinations, acquisitions and strategic investments.
Applied has made, and in the future may make, acquisitions of or investments in companies, technologies or products in
existing, related or new markets for Applied. Business combinations, acquisitions and investments involve numerous risks that
vary depending on their scale and nature, including but not limited to:
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diversion of management’s attention from other operational matters;
contractual restrictions on the conduct of Applied’s business during the pendency of a proposed transaction;
inability to complete proposed transactions as anticipated or at all and any ensuing obligation to pay a termination fee;
the failure of acquired businesses to meet or exceed expected returns;
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, which can impact the ability to realize
anticipated synergies or other benefits;
19
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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;
the potential impact of the announcement or consummation of a proposed transaction on relationships with third parties;
potential changes in Applied’s credit rating, which could adversely impact the Company’s access to and cost of capital;
reductions in cash balances and/or increases in debt obligations to finance activities associated with a transaction, 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 value and/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.
Applied’s indebtedness and debt covenants could adversely affect its financial condition and business.
Applied has $3.35 billion in aggregate principal amount of senior unsecured notes outstanding. Under the indenture governing
the senior unsecured notes, it may be required to offer to repurchase the notes at a price equal to 101% of the principal amount,
plus accrued and unpaid interest, upon a change of control of Applied and a contemporaneous downgrade of the notes below
investment grade. Applied also has in place a $1.5 billion committed revolving credit agreement. While no amounts were outstanding
under this credit agreement at October 25, 2015, Applied may borrow amounts in the future under the agreement. Applied may
also enter into new financing arrangements. Applied’s ability to satisfy its debt obligations is dependent upon the results of its
business operations and other risks discussed in this section. Significant changes in Applied’s credit rating or changes in the interest
rate environment could have a material adverse consequence on Applied’s access to and cost of capital for future financings, and
financial condition. If Applied fails to satisfy its debt obligations, or comply with financial and other debt covenants, it may be in
default and any borrowings may become immediately due and payable, and such default may also constitute a default under other
of Applied’s obligations. There can be no assurance that Applied would have sufficient financial resources or be able to arrange
financing to repay any borrowings at such time.
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:
•
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the need to devote additional resources to develop new products for, and operate in, new markets;
the need to develop new sales and technical marketing strategies, cultivate relationships with new customers and meet
different customer service requirements;
differing rates of profitability and growth among multiple businesses;
• Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks;
20
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the complexity of managing multiple businesses with variations in production planning, execution, supply chain
management and logistics;
the adoption of new business models, 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;
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.
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In addition, Applied from time to time receives funding from United States and other government agencies for certain
strategic development programs to increase its research and development 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.
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, including contract manufacturers. Some key parts are subject to long lead-times
and/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 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 Applied and for companies throughout its supply chain. Further, these conditions may cause some suppliers to scale
back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease 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:
•
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the failure or inability of suppliers to timely deliver sufficient quantities of quality parts on a cost-effective basis;
volatility in the availability and cost of materials, including rare earth elements;
difficulties or delays in obtaining required import or export approvals;
information technology or infrastructure failures; and
natural disasters or other events beyond Applied's control (such as earthquakes, floods or storms, regional economic
downturns, pandemics, social unrest, political instability, terrorism, or acts of war), particularly where it conducts
manufacturing.
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 sources, which could entail manufacturing delays, additional
costs, or other difficulties. In addition, 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.
21
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, especially in critical positions. Achieving this objective
may be difficult due to many factors, including fluctuations in global economic and industry conditions, management changes,
Applied’s organizational structure, hiring practices of competitors and other companies, cost reduction activities (including
workforce reductions and unpaid shutdowns), availability of career development opportunities, the ability to obtain necessary
authorizations for workers to provide services outside their home countries, and the effectiveness of Applied’s compensation and
benefit programs, including its share-based programs. Restructuring programs present particular challenges to the extent they
involve the departure of knowledgeable and experienced employees and the resulting need to identify and train existing or new
workers to perform necessary functions, which may result in unexpected costs, reduced productivity, and/or difficulties with respect
to internal processes and controls.
Applied is exposed to various risks related to protection and enforcement of intellectual property rights.
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. Policing any unauthorized use of intellectual property is difficult
and costly and Applied cannot be certain that the measures it has implemented will prevent misuse. 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 or obtain necessary licenses on
commercially reasonable terms. 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. In addition, changes in intellectual property laws or their interpretation, such as recent changes in U.S. patent
laws, may impact Applied's ability to protect and assert its intellectual property rights, increase costs and uncertainties in the
prosecution of patent applications and enforcement or defense of issued patents, and diminish the value of Applied's intellectual
property.
Applied is exposed to risks related to cybersecurity threats and incidents.
In the conduct of its business, Applied collects, uses, transmits and stores data on information technology systems. This
data includes confidential information belonging to Applied or its customers or other business partners, as well as personally-
identifiable information of individuals. Applied has experienced, and expects to continue to be subject to, cybersecurity threats
and incidents, ranging from employee error or misuse to individual attempts to gain unauthorized access to information systems
to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company
to date. Applied devotes significant resources to network security, data encryption and other measures to protect its systems and
data from unauthorized access or misuse. However, depending on their nature and scope, cybersecurity incidents could result in
business disruption; the misappropriation, corruption or loss of confidential information and critical data (Applied's and that of
third parties); reputational damage; litigation with third parties; diminution in the value of Applied's investment in research,
development and engineering; data privacy issues; and increased cybersecurity protection and remediation costs.
Applied is exposed to various risks related to legal proceedings.
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.
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.
22
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 has implemented a distributed manufacturing model, under
which certain manufacturing and supply chain activities are conducted in various countries, including Germany, Israel, Italy,
Singapore, Taiwan, the United States and other countries in Asia, and 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 must regularly implement or update comprehensive programs and processes to better align its global
organizations, including initiatives to enhance its supply chain and improve back office and information technology infrastructure
for more efficient transaction processing. The implementation of new processes and additional functionality to the existing systems
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. 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, or have other unintended consequences.
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 structure and/or operation of its supply chain, loss of its intellectual property rights,
quality issues, reputational harm, increased product time-to-market, and/or inefficient allocation of human resources.
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
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 future charges to earnings during the period in which an impairment of goodwill
or intangible assets is determined to exist.
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Changes in tax rates or tax assets and liabilities could affect results of operations.
As a global company, Applied is subject to taxation in the United States and various other jurisdictions. Significant judgment
is required to determine and estimate worldwide tax liabilities. Applied’s future provision for income taxes and 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
jurisdictions with differing tax rates; (3) plans to indefinitely reinvest certain funds held outside of the U.S.; and (4) valuation of
deferred tax assets and liabilities.
Consistent with the international nature of its business, Applied conducts certain manufacturing, supply chain, and other
operations in Asia, bringing these activities closer to customers and reducing operating costs. Applied has received authorization
to use tax incentives that provide that income earned in certain countries outside the U.S. will be subject to tax holidays or reduced
income tax rates. To obtain the benefit of these tax incentives, Applied must meet requirements relating to various activities.
Applied’s ability to realize benefits from these incentives could be materially affected if, among other things, applicable
requirements are not met or 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.
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.
Applied is exposed to various risks related to the regulatory environment.
Applied is subject to various risks related to: (1) new, different, inconsistent or conflicting laws, rules and regulations that
may be enacted by executive order, legislative bodies or regulatory agencies in the countries in which Applied operates;
(2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the
interpretation and application of laws, rules and regulations. 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 and ambiguities in laws, regulations and
standards create uncertainty and challenges 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.
Item 1B: Unresolved Staff Comments
None.
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Item 2:
Properties
Information concerning Applied's properties at October 25, 2015 is set forth below:
(Square feet in thousands)
Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States
3,748
556
4,304
Other Countries
1,624
1,107
2,731
Total
5,372
1,663
7,035
Because of the interrelation of Applied's operations, properties within a country may be shared by the segments operating
within that country. The Company's headquarters offices are in Santa Clara, California. Products in Silicon Systems are
manufactured in Austin, Texas; Gloucester, Massachusetts; Rehovot, Israel; and Singapore. Remanufactured equipment products
in the Applied Global Services segment are produced primarily in Austin, Texas. Products in the Display segment are manufactured
in Tainan, Taiwan and Santa Clara, California. Products in the Energy and Environmental Solutions segment are primarily
manufactured in Alzenau, Germany and Treviso, Italy.
Applied also owns and leases offices, plants and warehouse locations in many locations throughout the world, including in
Europe, Japan, North America (principally the United States), Israel, China, India, Korea, Southeast Asia and Taiwan. These
facilities are principally used for manufacturing; research, development and engineering; and marketing, sales and customer
support.
Applied also owns a total of approximately 139 acres of buildable land in Texas, California, Israel and Italy that could
accommodate additional building space.
Applied considers the properties that it owns or leases as adequate to meet its current and future requirements. Applied
regularly assesses the size, capability and location of its global infrastructure and periodically makes adjustments based on these
assessments.
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Item 3:
Legal Proceedings
The information set forth under “Legal Matters” in Note 15 of Notes to Consolidated Financial Statements is incorporated
herein by reference.
Item 4:
Mine Safety Disclosures
None.
PART II
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The following table sets forth the high and low closing sale prices for the periods presented as reported on the NASDAQ
Global Select Market.
Fiscal 2015
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fiscal 2014
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Price Range
High
Low
25.40
25.63
20.38
17.62
18.01
20.84
23.27
23.11
$
$
$
$
$
$
$
$
21.04
21.49
17.37
14.37
16.50
16.72
18.67
18.92
Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of December 3,
2015, there were 3,247 registered holders of Applied common stock.
26
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the
period from October 31, 2010 through October 25, 2015. This is compared with the cumulative total return of the Standard &
Poor’s 500 Stock Index and the RDG Semiconductor Composite Index over the same period. The comparison assumes $100 was
invested on October 31, 2010 in Applied common stock and in each of the foregoing indices and assumes reinvestment of dividends,
if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past
performance and should not be considered an indication of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Applied Materials, Inc., the S&P 500 Index
and the RDG Semiconductor Composite Index
$250
$200
$150
$100
$50
188
186
172
195
170
150
158
155
136
110
108
105
125
104
91
$0
10/31/10
10/30/11
10/28/12
10/27/13
10/26/14
10/25/15
Applied Materials, Inc.
S&P 500
RDG Semiconductor Composite
*Assumes $100 invested on 10/31/10 in stock or index, including reinvestment of dividends.
Indexes calculated on month-end basis.
“S&P” is a registered trademark of Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc.
Applied Materials
S&P 500 Index
RDG Semiconductor Composite Index
100.00
100.00
100.00
104.54
108.09
110.04
90.88
124.52
104.07
155.43
158.36
136.15
188.13
185.71
172.41
150.26
195.37
170.40
10/31/2010
10/30/2011
10/28/2012
10/27/2013
10/26/2014
10/25/2015
Dividends
During each of fiscal 2015 and 2014, Applied's Board of Directors declared four quarterly cash dividends of $0.10 per share.
During fiscal 2013, Applied’s Board of Directors declared three quarterly cash dividends of $0.10 per share and one quarterly cash
dividend of $0.09 per share. Dividends paid during fiscal 2015, 2014 and 2013 amounted to $487 million, $485 million and $456
million, respectively. 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.
27
Issuer Purchases of Equity Securities
The following table provides information as of October 25, 2015 with respect to the shares of common stock repurchased
by Applied during the fourth quarter of fiscal 2015 pursuant to the publicly-announced stock repurchase program approved by the
Board of Directors on April 26, 2015, which authorized up to $3.0 billion in repurchases over the next three years ending April
2018.
Period
Month #1
Total Number of
Shares Purchased
Average
Price Paid
per Share
Aggregate
Price Paid
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)
(July 27, 2015 to August 23, 2015)
Month #2
(August 24, 2015 to September 20, 2015)
Month #3
(September 21, 2015 to October 25, 2015)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.5
14.8
20.1
44.4
$
$
$
$
16.89
$
160
15.69
15.32
15.78
$
233
307
700
$
$
$
9.5
14.8
20.1
44.4
2,215
1,982
1,675
Item 6:
Selected Financial Data
The following selected financial information has been derived from Applied’s historical audited consolidated financial
statements and should be read in conjunction with the consolidated financial statements and the accompanying notes for the
corresponding fiscal years:
Fiscal Year(1)
2015
2014
2013
2012
2011
(In millions, except percentages and per share amounts)
3,952
New orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,104
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
9,659
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research, development and engineering . . . . . . . . . . . . . . . $
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends declared per common share . . . . . . . . . . . . $
0.40
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,308
1,693
1,451
3,342
1,377
1,598
1.12
40.9%
17.5%
$
$
$
$
$
$
$
$
$
$
9,648
9,072
3,843
42.4%
1,428
1,520
16.8%
1,448
1,072
0.87
1,947
0.40
$
$
$
$
$
$
$
$
$
$
8,466
7,509
2,991
39.8%
1,320
432
5.8%
350
256
0.21
1,946
0.39
$
$
$
$
$
$
$
$
$
$
8,037
8,719
3,313
38.0%
1,237
411
4.7%
316
109
0.09
1,946
0.35
$ 10,142
$ 10,517
$
$
$
$
$
$
$
$
4,360
41.5%
1,118
2,398
22.8%
2,378
1,926
1.45
1,947
0.31
$ 13,174
$ 12,043
$ 12,102
$ 13,861
(1) Each fiscal year ended on the last Sunday in October. Fiscal 2015, 2014, 2013, 2012 and 2011 each contained 52 weeks.
28
Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to facilitate
an understanding of Applied’s business and results of operations. This MD&A should be read in conjunction with Applied’s
Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this
Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the
cautionary statement set forth at the beginning of this Form 10-K. MD&A consists of the following sections:
• Overview: a summary of Applied’s business and measurements
• Results of Operations: a discussion of operating results
•
Segment Information: a discussion of segment operating results
• Business Combinations: a summary of announced or completed business combinations and acquisitions
• Recent Accounting Pronouncements: a discussion of new accounting pronouncements and its impact to Applied's
consolidated financial statements
• Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash
• Off-Balance Sheet Arrangements and Contractual Obligations
• Critical Accounting Policies and Estimates: a discussion of critical accounting policies that require the exercise of
judgments and estimates
• Non-GAAP Adjusted Results: a presentation of results reconciling GAAP to non-GAAP adjusted measures
Overview
Applied provides manufacturing equipment, services and software to the global semiconductor, display, solar photovoltaic
(PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and other
displays, 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, 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 Financial Statements. A discussion of factors
that could affect Applied’s operations is set forth under “Risk Factors” in Part I, Item 1A, which is incorporated herein by reference.
Product development and manufacturing activities occur primarily in the United States, 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 are driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand
for electronic products. Each of Applied’s businesses is subject to cyclical industry conditions, as demand for manufacturing
equipment and services can change depending on supply and demand for chips, display technologies, solar PVs and other electronic
devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological
advances in fabrication processes. In addition, a significant driver in the semiconductor and display industries is end-demand for
mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing
equipment and, in turn, Applied's business. In light of these conditions, Applied's results can vary significantly year-over-year, as
well as quarter-over-quarter.
Applied's strategic priorities for fiscal 2016 include developing products that help solve customers’ challenges at technology
inflections; expanding its served market opportunities in the semiconductor and display industries; and growing its services business.
On April 26, 2015, Applied and Tokyo Electron Limited (TEL) announced that they had mutually agreed to terminate their
previously announced Business Combination Agreement, which was entered into on September 24, 2013 and intended to effect a
strategic combination of their respective business into a new combined company. No termination fee was payable by either Applied
or TEL.
29
Results of Operations
The following table presents certain significant measurements for the past three fiscal years:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
(In millions, except per share amounts and percentages)
456
$
8,466
9,648
$
$
New orders . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . $
Operating margin . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share. . . . . . . . . . . . . . . . $
Non-GAAP Adjusted Results . . . . . . . . . . . .
Non-GAAP adjusted gross profit . . . . . . . . . . $
Non-GAAP adjusted gross margin . . . . . . . . .
Non-GAAP adjusted operating income. . . . . . $
Non-GAAP adjusted operating margin. . . . . .
Non-GAAP adjusted net income. . . . . . . . . . . $
Non-GAAP adjusted earnings per diluted
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,104
9,659
3,952
40.9%
1,693
17.5%
1,377
1.12
4,147
42.9%
1,896
19.6%
1,457
1.19
$
$
$
$
$
$
$
$
$
9,072
3,843
42.4%
1,520
16.8%
1,072
0.87
4,002
44.1%
1,781
19.6%
1,314
1.07
$
$
$
$
$
$
$
$
$
7,509
2,991
$
$
587
109
39.8% (1.5) points
432
$
173
$
$
$
$
1,182
1,563
852
2.6 points
1,088
5.8% 0.7 points
11.0 points
256
0.21
$
$
305
0.25
$
145
3,160
42.1% (1.2) points
1,032
$
115
13.7% — points
718
0.59
$
$
143
0.12
$
$
$
$
$
$
816
0.66
842
2.0 points
749
5.9 points
596
0.48
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below. Fiscal 2015,
2014 and 2013 each contained 52 weeks.
30
Mobility, and the increasing technological functionality of mobile devices, continues to be the largest drivers of semiconductor
industry spending. Fiscal 2015 was characterized by steady demand for semiconductor equipment, with increased investment in
technology upgrades and additional capacity by memory customers. Demand from foundry customers reflected investments in
new technology at advanced nodes, driven by demand for advanced mobile chips. Mobility represented a significant driver of
display industry spending during fiscal 2015, which resulted in continued manufacturing capacity expansion for mobile applications.
Demand for larger TVs was also a factor for display industry investments, although demand for TV manufacturing equipment
remains susceptible to highly cyclical conditions. Investment in solar equipment remained low during fiscal 2015 due to ongoing
excess manufacturing capacity in the industry. Gross margin challenges are expected in the first half of fiscal 2016 primarily due
to higher demand for semiconductor equipment from memory customers and mobility display equipment.
Applied expects the mobility trend to remain the main growth driver for the semiconductor industry, and in turn for Silicon
Systems, in fiscal 2016. Demand in the semiconductor manufacturing equipment industry is expected to be driven by foundry and
memory spending. Applied also expects semiconductor spares and services, and display equipment investment to remain healthy
in fiscal 2016.
During fiscal 2014, demand for advanced mobile chips drove demand for semiconductor equipment by foundry customers.
In addition, demand for semiconductor equipment from memory customers improved as manufacturers invested in technology
upgrades. Mobility and demand for larger TVs drove investment in display equipment during fiscal 2014. Investment in solar
equipment remained low during fiscal 2014, despite continued end-market growth, due to excess manufacturing capacity in the
industry.
Fiscal 2013 was characterized by strong demand for semiconductor equipment from foundry customers driven by demand
for advanced mobile chips. In the second half of fiscal 2013, demand from foundry customers softened, while demand from memory
and logic customers improved. Display industry spending during fiscal 2013 reflected strong demand for mobile display equipment,
as well as a recovery in demand for TV manufacturing equipment compared to weak industry levels in fiscal 2012. Investment in
solar equipment remained low during fiscal 2013 due to continued excess manufacturing capacity in the industry.
31
New Orders
New orders by reportable segment for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Silicon Systems . . . . . . . $
Applied Global Services
Display . . . . . . . . . . . . . .
6,581
2,653
717
Energy and
Environmental Solutions
153
Total . . . . . . . . . . . . . . . . $ 10,104
$
6,132
(In millions, except percentages)
64%
5,507
65%
$
2,433
845
25%
9%
2,090
703
25%
8%
238
2%
166
2%
65%
26%
7%
2%
100% $
9,648
100% $
8,466
100%
7%
9%
(15)%
(36)%
5%
11%
16%
20%
43%
14%
New orders for fiscal 2015 slightly increased from fiscal 2014 due to higher demand for semiconductor equipment, and
semiconductor spares and services, partially offset by lower demand for display and solar equipment. New orders for Silicon
Systems and Applied Global Services continued to comprise the majority of Applied's consolidated total new orders.
New orders increased in fiscal 2014 from fiscal 2013 across all segments, primarily due to higher demand for semiconductor
equipment, semiconductor spares and services, and display equipment.
New orders by geographic region for each fiscal year, determined by the product shipment destination specified by the
customer, were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Taiwan . . . . . . . . . . . . . . $
China . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . .
Southeast Asia . . . . . . . .
Asia Pacific . . . . . . . . .
United States . . . . . . . . .
2,808
1,472
1,709
1,786
430
8,205
1,323
Europe . . . . . . . . . . . . . .
576
Total . . . . . . . . . . . . $ 10,104
$
2,740
1,517
1,086
1,031
412
6,786
2,200
662
(In millions, except percentages)
28%
16%
11%
11%
4%
70%
23%
7%
$
2,885
1,339
915
822
351
6,312
1,419
735
34%
16%
11%
10%
4%
75%
17%
8%
28%
14%
17%
18%
4%
81%
13%
6%
100%
$
9,648
100% $
8,466
100%
2%
(3)%
57%
73%
4%
21%
(40)%
(13)%
5%
(5)%
13%
19%
25%
17%
8%
55%
(10)%
14%
The changes in new orders from customers in Korea, Japan, the United States and Europe in fiscal 2015 compared to fiscal
2014, and changes in new orders from customers in the United States, Japan, Taiwan and Korea for fiscal 2014 compared to fiscal
2013, primarily reflected changes in customer mix for the Silicon Systems segment. The increase in new orders in fiscal 2014
compared to fiscal 2013 from China resulted from increased demand from display manufacturing equipment.
32
Changes in backlog during each fiscal year were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
New orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
(In millions)
2,917
$
10,104
(9,659)
(220)
3,142
$
2,372
9,648
(9,072)
(31)
2,917
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; and (2) contractual service revenue and
maintenance fees to be earned 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.
Approximately 70 percent of the backlog as of the end of fiscal 2015 is anticipated to be shipped within the first two quarters of
fiscal 2016.
Applied’s backlog was $3.1 billion at October 25, 2015 compared to $2.9 billion at October 26, 2014. Backlog adjustments
were negative for fiscal 2015 and totaled $220 million, primarily consisting of order cancellations, unfavorable foreign currency
impacts and other adjustments.
Backlog by reportable segment as of the end of each fiscal year was as follows:
2015
2014
Change
2015 over 2014
Silicon Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,720
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . . . . . . . . . . . . . . . . . . .
812
525
85
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,142
(In millions, except percentages)
$ 1,400
48%
55%
26%
16%
3%
100%
775
593
149
$ 2,917
27%
20%
5%
100%
23%
5%
(11)%
(43)%
8%
Total backlog increased in fiscal 2015 from fiscal 2014 primarily due to increases in demand from memory customers and
for semiconductor spares and services, which was partially offset by lower demand for display and solar manufacturing equipment.
In the fourth quarter of fiscal 2015 approximately 55 percent of net sales in Silicon Systems, Applied’s largest business segment,
were for orders received and shipped within the quarter, up from 44 percent in the fourth quarter of fiscal 2014.
33
Net Sales
Net sales by reportable segment for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Silicon Systems . . . . . . . . $
Applied Global Services .
Display. . . . . . . . . . . . . . .
Energy and
Environmental Solutions .
Total. . . . . . . . . . . . . . . . . $
(In millions, except percentages)
6,135
2,531
780
64%
26%
8%
$
5,978
2,200
615
66%
24%
7%
$
4,775
2,023
538
64%
27%
7%
213
2%
279
3%
173
2%
9,659
100% $
9,072
100% $
7,509
100%
3%
15%
27%
(24)%
6%
25%
9%
14%
61%
21%
Net sales increased in fiscal 2015 compared to fiscal 2014 primarily due to greater customer investments in semiconductor
equipment, semiconductor spares and services, 200mm equipment systems and display equipment. The Silicon Systems segment
remains the largest contributor of net sales.
Net sales for all segments increased in fiscal 2014 compared to fiscal 2013. The increase primarily reflected increased
customer investments in semiconductor and display equipment, as well as semiconductor spares and services.
Net sales by geographic region for each fiscal year, determined by the location of customers' facilities to which products
were shipped, were as follows:
2015(1)
2014
2013
2015 over 2014
2014 over 2013
Change
Taiwan. . . . . . . . . . . . . . . $
China . . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . .
Southeast Asia. . . . . . . . .
Asia Pacific. . . . . . . . . .
United States . . . . . . . . . .
Europe . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . $
2,600
1,623
1,654
1,078
432
7,387
1,630
642
9,659
$
27%
17%
17%
11%
4%
76%
17%
7%
100% $
(In millions, except percentages)
$
30%
18%
10%
9%
4%
71%
22%
7%
100% $
2,640
787
924
685
320
5,356
1,473
680
7,509
35%
11%
12%
9%
4%
71%
20%
9%
100%
2,702
1,608
965
817
356
6,448
1,966
658
9,072
(4)%
1%
71%
32%
21%
15%
(17)%
(2)%
6%
2%
104%
4%
19%
11%
20%
33%
(3)%
21%
(1) Amount of net sales attributed to each geographic region differ from those included in Applied’s press release issued on November 12,
2015. These reclassifications did not affect Applied’s previously announced financial results as total net sales remain unchanged.
The changes in net sales from customers in Korea, Japan and Taiwan in fiscal 2015 compared to fiscal 2014 primarily
reflected changes in customer mix for semiconductor equipment. The decrease in net sales from customers in the United States
was due to lower customer spending on semiconductor equipment, partially offset by increased spending on semiconductor spares
and services, and 200mm equipment.
Net sales from customers in China increased for fiscal 2014 compared to fiscal 2013 primarily due to greater investments
in semiconductor, display and solar manufacturing equipment, while net sales from customers in the United States increased due
to higher investments in semiconductor equipment.
34
Gross Margin
Gross profit and gross margin for each fiscal year were as follows:
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross margin . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP Adjusted Results. . . . . . . . . . .
Non-GAAP adjusted gross profit . . . . . . . . . $
Non-GAAP adjusted gross margin. . . . . . . .
2015
2014
2013
2015 over 2014
2014 over 2013
(In millions, except percentages)
3,952
$
3,843
$
2,991
$
109
$
852
40.9%
42.4%
39.8%
(1.5) points
2.6 points
Change
4,147
$
4,002
$
3,160
$
145
$
842
42.9%
44.1%
42.1%
(1.2) points
2.0 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
Gross profit and non-GAAP adjusted gross profit in fiscal 2015 increased compared to fiscal 2014, primarily due to higher
net sales, while gross margin and non-GAAP adjusted gross margin decreased primarily due to unfavorable changes in product
mix and the absence of a recovery of a regional customs duty assessment charge recorded in fiscal 2014.
Gross profit and gross margin and non-GAAP adjusted gross profit and non-GAAP adjusted gross margin increased in fiscal
2014 compared to fiscal 2013 primarily reflecting higher net sales, the recovery of a regional customs duty assessment charge
recorded in fiscal 2013, sales of display and solar tools that had been previously written down, lower manufacturing costs and
change in product mix. Gross profit and non-GAAP adjusted gross profit during fiscal 2015, 2014 and 2013 included $57 million,
$53 million and $50 million, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, development and engineering (RD&E) expenses for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Research, development and engineering . . . $
1,451
$
1,428
$
(In millions)
$
1,320
23
$
108
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. Development cycles range from 12 to 36 months depending on whether the product
is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has
a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations
involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new
product areas, to complement its existing technology capabilities and to reduce time to market.
Management 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 has
maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies.
In fiscal 2015, Applied increased its investments in new product growth in etch, chemical vapor deposition, high throughput
atomic layer deposition, and next generation inspection technology. Applied’s investments in etch and chemical vapor deposition
were focused on supporting the adoption of the etch Centris Sym 3 product and customer ramps of 3D NAND technology. Applied's
investment in atomic layer deposition is yielding products to address customer needs for future nodes, and investments in inspection
include a new e-beam inspection platform and improved brightfield capabilities.
RD&E expenses increased in fiscal 2015 compared to the prior year and also in fiscal 2014 compared to fiscal 2013, reflecting
the impact of ongoing product development initiatives. As part of its growth strategy, Applied continued to reprioritize existing
spend, to enable increased funding for investments in technical capabilities and critical RD&E programs in current and new markets,
with a focus on semiconductor technologies. RD&E expense during fiscal 2015, 2014 and 2013 included $69 million, $66 million
and $53 million, respectively, of share-based compensation expense.
35
Marketing and Selling
Marketing and selling expenses for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Marketing and selling. . . . . . . . . . . . . . . . . . $
428
$
423
$
(In millions)
$
433
5
$
(10)
Marketing and selling expenses remained relatively flat in fiscal 2015 compared to fiscal 2014 due to continued cost
management efforts. The decrease in marketing and selling expenses for fiscal 2014 compared to fiscal 2013 was mainly due to
headcount reductions. Marketing and selling expenses during fiscal 2015, 2014 and 2013 included $26 million, $23 million and
$20 million, respectively, of share-based compensation expense.
General and Administrative
General and administrative expenses for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
General and administrative. . . . . . . . . . . . . . $
455
$
497
$
(In millions)
$
458
(42) $
39
General and administrative (G&A) expenses for fiscal 2015 decreased compared to fiscal 2014 primarily due to lower
acquisition-related and integration costs related to the terminated business combination with TEL, which was terminated in April
2015, and continued cost management efforts. G&A expenses for fiscal 2014 increased compared to fiscal 2013 primarily due to
integration planning costs associated with the terminated business combination with TEL, partially offset by proceeds from a
favorable litigation outcome. G&A expenses during fiscal 2015, 2014 and 2013 included $35 million, $35 million and $34 million,
respectively, of share-based compensation expense.
Loss (Gain) on Derivatives Associated with Terminated Business Combination
2015
2014
2013
2015 over 2014
2014 over 2013
Change
(In millions)
Loss (gain) on derivatives associated with
terminated business combination . . . . . . . . . $
(89) $
(30) $
7
$
(59) $
(37)
Changes in gain or loss on derivatives associated with the terminated business combination with TEL resulted from the sale
of derivative contracts and exchange rate fluctuations. Due to the termination of the proposed business combination, the derivatives
were sold during the third quarter of fiscal 2015. For further details, see Note 5 of Notes to Consolidated Financial Statements.
Impairment of Goodwill and Intangible Assets
In the fourth quarter of fiscal 2015 and 2014, Applied performed a qualitative assessment to test goodwill for all of its
reporting units for impairment. Applied determined that it was more likely than not that each of its reporting units' fair values
exceeded its respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for any of
its reporting units.
During fiscal 2013, the solar industry faced continued deterioration in market conditions associated with manufacturing
overcapacity and weak operating performance and outlook, resulting in uncertainties regarding the timing and nature of a recovery
in solar capital equipment expenditures. Applied performed a two-step goodwill impairment test and, as a result, recorded $224
million of goodwill impairment charges in its Energy and Environmental Solutions segment in fiscal 2013. Applied also recorded
a $54 million impairment charge related to intangible assets in the Energy and Environmental Solutions segment in fiscal 2013.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event
of future changes in business conditions, Applied will reassess and update its forecasts and estimates used in future impairment
analyses. If the results of these analyses are lower than current estimates, a material impairment charge may result at that time.
For further details, see Note 9 of Notes to Consolidated Financial Statements.
36
Restructuring and Asset Impairments
Restructuring and asset impairment expenses for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Restructuring and asset impairments, net . . . $
14
$
5
$
(In millions)
$
63
9
$
(58)
The increase in restructuring and asset impairments, net for fiscal 2015 compared to fiscal 2014 was primarily due to the
cost reduction measures in the solar business taken during fiscal 2015 to achieve a lower break-even level and improve business
performance. The decrease in restructuring and asset impairments, net for fiscal 2014 compared to fiscal 2013 was due to completion
of the principal activities for the previously announced restructuring plans. Also in fiscal 2013, Applied incurred $2 million of
severance and other employee-related costs in connection with the integration of Varian Semiconductor Equipment Associates,
Inc.
On October 3, 2012, Applied announced a restructuring plan (the 2012 Global Restructuring Plan) to realign its global
workforce and enhance its ability to invest for growth. Under this plan, Applied implemented a voluntary retirement program and
other workforce reduction actions that affected approximately 1,300 positions. As of January 26, 2014, principal activities related
to this plan were complete. During fiscal 2014 and 2013, Applied recognized $5 million and $39 million, respectively, of employee-
related costs in connection with the 2012 Global Restructuring Plan. Total costs incurred in implementing this plan were $150
million, none of which were allocated to the operating segments.
On May 10, 2012, Applied announced a plan (the 2012 EES Restructuring Plan) to restructure its Energy and Environmental
Solutions segment in light of challenging industry conditions affecting the solar photovoltaic and light-emitting diode (LED)
equipment markets. Total costs incurred in implementing this plan were $87 million, of which $13 million were inventory-related
charges. During fiscal 2015, Applied recorded a favorable adjustment of $2 million associated with restructuring reserves under
this program. During fiscal 2013, Applied recognized $26 million, of restructuring and asset impairment charges in connection
with the 2012 EES Restructuring Plan. These costs were reported in the Energy and Environmental Solutions and Applied Global
Services segments.
For further details, see Note 11 of Notes to Consolidated Financial Statements.
Interest Expense and Interest and Other Income, net
Interest expense and interest and other income, net for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Interest expense . . . . . . . . . . . . . . . . . . . . . . $
Interest and other income, net. . . . . . . . . . . . $
103
8
$
$
95
23
$
$
(In millions)
$
95
$
13
$
8
(15) $
—
10
Interest expenses incurred during the past three fiscal years were primarily associated with senior unsecured notes that were
issued in June 2011 to fund a portion of the consideration and certain costs associated with the acquisition of Varian. Interest
expense for fiscal 2015 increased compared to fiscal 2014 due to the issuance of senior unsecured notes in the aggregate principal
amount of $1.8 billion in September 2015. Interest expense remained flat during fiscal 2014 compared to fiscal 2013.
Interest income primarily includes interest earned on cash and investments and realized gains on sale of securities. Interest
and other income, net, decreased in fiscal 2015 compared to fiscal 2014 primarily due to lower realized gains on sales of strategic
investments in fiscal 2015. Interest and other income, net, increased in fiscal 2014 compared to fiscal 2013 primarily due to an
increase in realized gains on sales of securities recorded during fiscal 2014, partially offset by increased impairments of strategic
investments.
37
Income Taxes
The provision for income taxes and effective tax rates for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
(In millions, except percentages)
Provision for income taxes . . . . . . . . . . . . . . $
Effective income tax rate . . . . . . . . . . . . . . .
$
221
13.8%
$
376
26.0%
94
$
(155) $
282
26.9% (12.2) points
(0.9) points
Applied’s effective tax rate is affected by the geographical composition of income, which includes jurisdictions with income
tax incentives and differing tax rates. It is also affected by events that are not consistent from period to period, such as changes in
income tax laws and regulations and the resolution of income tax filings.
The effective tax rate for fiscal 2015 was lower than the rate for fiscal 2014 primarily due to acquisition costs that became
deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, an
adjustment in the second quarter of fiscal 2015 to correct an error in the recognition of cost of sales in the U.S. related to intercompany
sales, reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was
retroactive to its expiration in December 2013, resolutions and changes related to income tax liabilities for prior years, and changes
in the geographical composition of income.
The effective tax rate for fiscal 2014 was lower than the rate for fiscal 2013 due primarily to nondeductible goodwill
impairment charges in fiscal 2013, offset by resolutions and changes related to prior years and expiration of the U.S. federal
research and development tax credit.
38
Segment Information
Applied reports financial results in four segments: Silicon Systems, 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 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 resource, 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 asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a
specific reportable segment.
The results for each reportable segment are discussed below.
Silicon Systems Segment
The Silicon Systems segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal
processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. Development efforts are focused
on solving customers' key technical challenges in transistor, patterning, interconnect and packaging performance as devices scale
to advanced technology nodes. The mobility trend remains the largest influence on industry spending, as it drives device
manufacturers to continually improve their ability to deliver high-performance, low-power processors and affordable solid-state
storage in a small form factor.
The competitive environment for Silicon Systems in fiscal 2015 reflected continued investment by semiconductor
manufacturers. Memory manufacturers increased investments in technology upgrades and additional capacity. Foundry investments
reflected demand for new technology as customers ramp wafer starts at advanced nodes to meet demand for advanced mobile
chips, but decreased primarily due to customers managing excess inventory, improving yields and re-using equipment.
Certain significant measures for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
New orders . . . . . . . . . . . . . . . . . . $
Net sales . . . . . . . . . . . . . . . . . . . .
Book to bill ratio. . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . .
Non-GAAP Adjusted Results
Non-GAAP adjusted operating
income. . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating
margin . . . . . . . . . . . . . . . . . . . . . .
6,581
6,135
1.1
1,410
$
6,132
5,978
1.0
1,391
(In millions, except percentages and ratios)
$
5,507
449
7%
$
4,775
1.2
876
157
19
3%
1%
$
625
1,203
11%
25%
515
59%
23.0%
23.3%
18.3%
(0.3) points
5.0 points
1,588
1,565
$
1,050
23
1%
515
49%
25.9%
26.2%
22.0%
(0.3) points
4.2 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
The composition of new orders for Silicon Systems by end use application for the past three fiscal years was as follows:
Foundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Memory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Logic and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
34%
53%
13%
100%
2014
52%
35%
13%
100%
2013
58%
27%
15%
100%
39
One region accounted for at least 30 percent of total net sales for the Silicon Systems segment for one or more of the past
three fiscal years:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
Taiwan. . . . . . . . . . . . . . . . . . . . . . $
1,982
$
2,186
$
(In millions, except percentages)
2,171
(204)
$
(9)%
$
15
1%
Customers in Taiwan accounted for 32 percent, 37 percent and 45 percent of total net sales for Silicon Systems in fiscal
2015, 2014 and 2013, respectively. Customers in the United States, China and Korea together contributed 47 percent, 47 percent
and 37 percent of the total net sales for this segment in fiscal 2015, 2014 and 2013, respectively.
Financial results in the Silicon Systems segment for fiscal 2015 reflected continued wafer fabrication equipment spending
in the semiconductor industry. The increase in new orders and net sales in fiscal 2015 compared to fiscal 2014 primarily reflected
increased demand and spending from memory customers, partially offset by lower demand and spending from foundry customers.
Two customers accounted for approximately 41 percent of net sales and three customers accounted for 53 percent of new orders
in this segment in fiscal 2015. Operating income and non-GAAP adjusted operating income for fiscal 2015 increased compared
to fiscal 2014, reflecting the increase in net sales, partially offset by changes in product mix and higher research and development
expenses.
The increase in new orders and net sales in fiscal 2014 compared to fiscal 2013 primarily reflected increased demand and
spending from memory customers, as well as continued demand from foundry customers. Three customers accounted for
approximately 54 percent of net sales and three customers accounted for 75 percent of new orders in this segment in fiscal 2014.
Operating income and non-GAAP adjusted operating income for fiscal 2014 increased compared to fiscal 2013, reflecting the
increase in net sales, partially offset by changes in product mix and higher research and development expenses.
Applied Global Services Segment
The Applied Global Services segment encompasses integrated solutions to optimize equipment and fab performance and
productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software
for semiconductor, display and solar products. Customer demand for products and services is fulfilled through a global distribution
system with trained service engineers located in close proximity to customer sites.
Industry conditions that affected Applied Global Services' sales of spares and services during fiscal 2015 were principally
semiconductor manufacturers' wafer starts, as well as utilization rates.
Certain significant measures for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
New orders . . . . . . . . . . . . . . . . . . $
Net sales . . . . . . . . . . . . . . . . . . . .
Book to bill ratio. . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . .
Non-GAAP Adjusted Results
Non-GAAP adjusted operating
income. . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating
margin . . . . . . . . . . . . . . . . . . . . . .
(In millions, except percentages and ratios)
$
$
220
331
9%
15%
$
2,653
2,531
1.0
664
26.2%
2,433
2,200
1.1
573
26.0%
2,090
2,023
1.0
436
21.6%
$
343
177
137
16%
9%
31%
4.4 points
91
16%
0.2 points
667
576
443
91
16%
133
30%
26.4%
26.2%
21.9%
0.2 points
4.3 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
There were no individual regions that accounted for at least 30 percent of total net sales for the Applied Global Services
segment for any of the past three fiscal years.
40
New orders and net sales for fiscal 2015 increased compared to fiscal 2014 mainly due to higher demand for semiconductor
spares and services, and 200mm equipment systems. Operating income, operating margin, non-GAAP adjusted operating income,
and non-GAAP adjusted operating margin increased in fiscal 2015 compared fiscal 2014, reflecting the increase in net sales, which
was partially offset by unfavorable product mix and the absence of a recovery of a regional customs duty assessment charge
recorded in fiscal 2014.
New orders and net sales for fiscal 2014 increased compared to fiscal 2013 mainly due to increased demand for semiconductor
spares and services, as well as 200mm equipment systems and equipment upgrades. Operating income and non-GAAP adjusted
operating income increased in fiscal 2014 compared to the prior year, reflecting the increase in net sales as well as the recovery
of a regional customs duty assessment charge recorded in fiscal 2013.
Display Segment
The Display segment encompasses products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes
(OLEDs), and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-oriented
devices. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing
large-scale TVs; new markets such as low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development
of products that enable cost reductions through productivity and uniformity. Display industry growth depends primarily on consumer
demand for increasingly larger and more advanced LCD TVs and high resolution displays for next generation mobile devices.
The market environment for Applied's Display segment in fiscal 2015 has been characterized by continued demand for
manufacturing equipment for TV and high-end mobile devices, although this sector remains susceptible to highly cyclical
conditions. Uneven order and revenue patterns in the Display segment can cause significant fluctuations quarter-over-quarter, as
well as year-over year.
Certain significant measures for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
New orders . . . . . . . . . . . . . . . . . . $
Net sales . . . . . . . . . . . . . . . . . . . .
Book to bill ratio. . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . .
Operating margin . . . . . . . . . . . . .
Non-GAAP Adjusted Results
Non-GAAP adjusted operating
income. . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating
margin . . . . . . . . . . . . . . . . . . . . . .
(In millions, except percentages and ratios)
$
$
(128)
165
(15)%
27%
$
717
780
0.9
156
20.0%
845
615
1.4
129
21.0%
703
538
1.3
74
13.8%
$
142
77
55
20%
14%
74%
7.2 points
27
21%
(1.0) points
158
131
$
80
27
21%
51
64%
20.3%
21.3%
14.9%
(1.0) points
6.4 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
41
The following regions accounted for at least 30 percent of total net sales for the Display segment for one or more of the
past three fiscal years:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
(In millions, except percentages)
China. . . . . . . . . . . . . . . . . . . . . . . $
Korea. . . . . . . . . . . . . . . . . . . . . . . $
587
140
$
$
491
99
$
$
260
175
$
$
96
41
20%
41%
$
$
231
(76)
89%
(43)%
In fiscal 2015, 2014 and 2013, customers in China accounted for 75 percent, 80 percent and 48 percent, respectively, of the
Display segment's total net sales. Customers in Korea accounted for 18 percent, 16 percent and 32 percent of total net sales for
the Display segment in fiscal 2015, 2014 and 2013, respectively. The increase in net sales from customers in China reflected TV
manufacturing capacity expansion, while the increase in net sales from customers in Korea increasingly related to sales of mobile
display manufacturing equipment.
New orders for fiscal 2015 decreased compared to fiscal 2014 primarily due to lower TV manufacturing equipment orders,
while net sales for fiscal 2015 were higher due to the timing of shipments. Operating income and non-GAAP adjusted operating
income increased for fiscal 2015 from fiscal 2014, reflecting higher net sales. Operating margin and non-GAAP adjusted operating
margin decreased, despite the increase in net sales, primarily due to unfavorable product mix, increased research and development
expenses and the sale of tools in fiscal 2014 for which inventory had been previously fully reserved. Four customers accounted
for approximately 65 percent of new orders for the Display segment in fiscal 2015, with two customers accounting for approximately
37 percent of new orders. Four customers accounted for approximately 79 percent of net sales for this segment in fiscal 2015, with
two customers accounting for approximately 46 percent of net sales.
New orders and net sales for fiscal 2014 increased compared to fiscal 2013, reflecting strong TV manufacturing capacity
expansions. Operating income and non-GAAP adjusted operating income increased over the prior year, due primarily to higher
net sales, sales of tools for which inventory had been written down previously, better installation and warranty performance, and
material and manufacturing cost reductions, partially offset by increased research and development expenses. Four customers
accounted for approximately 87 percent of new orders for the Display segment in fiscal 2014, with two customers accounting for
approximately 50 percent of new orders. Four customers accounted for approximately 77 percent of net sales for this segment in
fiscal 2014, with one customer accounting for approximately 40 percent of net sales.
42
Energy and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) solar PV wafers
and cells, as well as high throughput roll-to-roll deposition equipment for flexible electronics, packaging and other applications.
While end-demand for solar PVs has been robust over the last several years, investment in capital equipment has remained low
as global PV production capacity exceeds anticipated demand.
Certain significant measures for each fiscal year were as follows:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
New orders . . . . . . . . . . . . . . . . . . $
Net sales . . . . . . . . . . . . . . . . . . . .
Book to bill ratio . . . . . . . . . . . . .
Operating income (loss). . . . . . . .
Operating margin . . . . . . . . . . . . .
Non-GAAP Adjusted Results
Non-GAAP adjusted operating
income (loss) . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating
margin . . . . . . . . . . . . . . . . . . . . .
(In millions, except percentages and ratios)
$
(36)%
166
$
(85)
(66)
(24)%
$
72
106
43%
61%
$
153
213
0.7
(61)
238
279
0.9
15
173
1.0
(433)
(76)
(507)%
448
103%
(28.6)%
5.4% (250.3)%
(34.0) points
255.7 points
(10)
21
(115)
(31)
(148)%
136
118%
(4.7)%
7.5%
(66.5)%
(12.2) points
74.0 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
The following regions accounted for at least 30 percent of total net sales for the Energy and Environmental Solutions
segment for one or more of these recent fiscal periods:
2015
2014
2013
2015 over 2014
2014 over 2013
Change
(In millions, except percentages)
China. . . . . . . . . . . . . . . . . . . . . . . $
71
$
173
$
100
$
(102)
(59)% $
73
73%
In fiscal 2015, 2014 and 2013, customers in China accounted for 33 percent, 62 percent and 58 percent, respectively, of total
net sales for the Energy and Environmental Solutions segment.
Financial results during fiscal 2015 remained at low levels due to continued excess manufacturing capacity in the solar
industry, which resulted in low levels of new orders and net sales, and consequently an operating loss for the segment. Two
customers accounted for approximately 20 percent of net sales for this segment during fiscal 2015. Operating loss for fiscal 2015
included $17 million in restructuring charges and asset impairments and $32 million of inventory charges recorded in cost of
products sold, related to cost reduction measures taken in the third quarter of fiscal 2015. Details on restructuring charges and
asset impairments are included in Note 11 of the Notes to the Consolidated Financial Statements.
New orders and net sales for fiscal 2014 increased compared to fiscal 2013 but remained at low levels, reflecting excess
manufacturing capacity in the solar industry. One customer accounted for approximately 23 percent of net sales for this segment
during fiscal 2014. Operating margin and non-GAAP adjusted operating margin increased for fiscal 2014 compared to prior year,
reflecting increased net sales, lower inventory charges, sales of solar tools that were written down previously and continued cost
reduction measures, proceeds from a favorable litigation outcome, and spending controls.
43
Business Combinations
Tokyo Electron Limited
On September 24, 2013, Applied and TEL entered into a Business Combination Agreement, which was intended to effect
a strategic combination of their respective businesses into a new combined company, and was subject to regulatory approvals. On
April 26, 2015, Applied and TEL announced that they had mutually agreed to terminate the Business Combination Agreement.
No termination fee was payable by either Applied or TEL.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects, if
any, on Applied's consolidated financial statements, see Note 1, “Summary of Significant Accounting Policies,” of the Notes to
Consolidated Financial Statements.
44
Financial Condition, Liquidity and Capital Resources
Applied’s cash, cash equivalents and investments increased to $5.9 billion at October 25, 2015 from $4.1 billion at October 26,
2014.
Cash, cash equivalents and investments consisted of the following:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash-equivalents and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
October 25,
2015
October 26,
2014
(In millions)
4,797
168
946
5,911
$
$
3,002
160
935
4,097
Sources and Uses of Cash
A summary of cash provided by (used in) operating, investing, and financing activities was as follows:
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Activities
2015
2014
2013
(In millions)
1,163
$
(281) $
$
913
1,800
$
(161) $
(348) $
623
215
(519)
Cash from operating activities for fiscal 2015 was $1.2 billion, which reflects net income adjusted for the effect of non-cash
charges and changes in working capital components. Non-cash charges included depreciation, amortization, share-based
compensation, restructuring and asset impairments and deferred income taxes. The primary drivers of the decrease in cash from
operating activities from fiscal 2014 to fiscal 2015 were the increases in inventories and deferred income taxes and decreases in
accounts payable, accrued expenses, customer deposits, deferred revenue and income taxes payable, partially offset by higher net
income. The increase in cash from operating activities from fiscal 2013 to fiscal 2014 was primarily due to higher business volume
and improved working capital performance.
Applied did not utilize programs to discount letters of credit issued by customers in fiscal 2015 and 2013. Applied discounted
$29 million of letters of credit issued by customers in fiscal 2014. 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. Applied did
not factor accounts receivable nor discounted promissory notes in fiscal 2015 and 2013. Applied factored accounts receivable and
discounted promissory notes of $45 million in fiscal 2014.
Applied’s working capital was $5.5 billion at October 25, 2015 and $4.1 billion at October 26, 2014.
Days sales, inventory and payable outstanding at the end of each of the periods indicated were:
Days sales outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days inventory outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days payable outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
67
118
42
2014
67
109
43
2013
75
108
44
Days sales outstanding varies due to the timing of shipments and the payment terms. Days sales outstanding remained flat
at the end of fiscal 2015 compared to fiscal 2014. The decrease for fiscal 2014 compared to fiscal 2013 was primarily due to an
increase in revenue and better linearity. Days inventory outstanding increased at the end of fiscal 2015 reflecting higher inventory
near the end of the period due to increase in deferred inventory and more builds as compared to revenue turns. Days inventory
outstanding remained flat in fiscal 2014 and 2013. Days payable outstanding remained relatively flat in fiscal 2015, 2014 and
2013.
45
Investing Activities
Applied used $281 million of cash in investing activities in fiscal 2015 and $161 million in fiscal 2014. Applied generated
$215 million in cash from investing activities in fiscal 2013. Capital expenditures in fiscal 2015, 2014 and 2013 were $215 million,
$241 million and $197 million, respectively. Capital expenditures in fiscal 2015 were primarily for demonstration and test equipment
and laboratory tools in North America. Capital expenditures in fiscal 2014 were primarily for demonstration and test equipment
and infrastructure improvements in North America, including creation of a new pilot operation facility and distribution center.
Capital expenditures in fiscal 2013 were primarily for demonstration and test equipment as well as laboratory tools and equipment
upgrades in North America. Purchases of investments, net of proceeds from sales and maturities of investments was $62 million
for fiscal 2015 and proceeds from sales and maturities of investments, net of purchases of investments totaled $67 million and
$406 million in fiscal 2014 and 2013, respectively. Investing activities also included investments in technology to allow Applied
to access new market opportunities or emerging technologies.
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.
Financing Activities
Applied generated $913 million of cash from financing activities in fiscal 2015, consisting primarily of net proceeds received
from the issuance of senior unsecured notes of $1.8 billion and short-term borrowings by a wholly-owned foreign subsidiary of
$800 million, offset by cash used for repurchases of its common stock of $1.3 billion and payment of cash dividends of $487
million. Applied used cash in financing activities in fiscal 2014 and 2013 of $348 million and $519 million, respectively, which
included payment of cash dividends to stockholders and issuances of common stock. Applied made no repurchases of its common
stock in fiscal 2014 and used cash to repurchase shares of its common stock in fiscal 2013 of $245 million. On April 26, 2015,
Applied's Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion in repurchases over
the three years ending April 2018. At October 25, 2015, $1.7 billion remained available for future stock repurchases under this
repurchase program. Applied's prior stock repurchase program ended in March 2015. Proceeds from stock issuances under equity
compensation awards and related excess tax benefits in fiscal 2015, 2014 and 2013 were $144 million, $137 million and $182
million, respectively.
During each of fiscal 2015 and 2014, Applied’s Board of Directors declared four quarterly cash dividends of $0.10 per share.
During fiscal 2013, Applied’s Board of Directors declared three quarterly cash dividends of $0.10 per share and one quarterly cash
dividend of $0.09 per share. Cash paid in dividends during fiscal 2015, 2014 and fiscal 2013 amounted to $487 million, $485
million and $456 million, respectively. 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. In September 2015, Applied
entered into a $1.5 billion committed revolving credit agreement with a group of banks that is scheduled to expire in September
2020. This credit agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark
rates selected by Applied for each advance, plus a margin based on Applied's public debt rating, and includes financial and other
covenants with which Applied was in compliance at October 25, 2015. Remaining credit facilities in the amount of approximately
$67 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 October 25, 2015 and October 26, 2014, and Applied has not
utilized these credit facilities.
In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. At October 25, 2015 and
October 26, 2014, Applied did not have any commercial paper outstanding, but may issue commercial paper notes under this
program from time to time in the future.
In September 2015, Applied issued senior unsecured notes in the aggregate principal amount of $1.8 billion. The indenture
governing the notes includes certain covenants with which Applied was in compliance at October 25, 2015. In November 2015,
Applied completed the redemption of the entire outstanding $400 million in principal amount of senior notes due in 2016. The
redemption price was $405 million, and after adjusting for the carrying value of the debt issuance costs and discounts, Applied
recorded a $5 million loss on the prepayment of the $400 million debt, which will be included in non-operating loss in the
Consolidated Statement of Operations for the first quarter of fiscal 2016. See Note 10 of Notes to Consolidated Financial Statements
for additional discussion of long-term debt. In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-
term loan agreement, guaranteed by Applied, under which it borrowed $800 million to facilitate the return of capital to Applied.
46
Others
During fiscal 2015, 2014 and 2013, Applied did not record any additional bad debt provision but released $9 million, $16
million and $13 million, respectively, of its allowance for doubtful accounts as a result of an overall lower risk profile of Applied's
customers. While Applied believes that its allowance for doubtful accounts at October 25, 2015 is adequate, it will continue to
closely monitor customer liquidity and economic conditions.
As of October 25, 2015, approximately $2.7 billion of cash, cash equivalents, and marketable securities held by foreign
subsidiaries may be subject to U.S. taxes if repatriated for U.S. operations. Of this amount, Applied intends to indefinitely reinvest
approximately $2.3 billion of these funds outside of the U.S. and does not plan to repatriate these funds. For the remaining cash,
cash equivalents and marketable securities held by foreign subsidiaries, U.S. taxes have been provided for in the financial statements.
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 Statements of Cash Flows in this report.
For details on standby letters of credit and other agreements with banks, see Off-Balance Sheet Arrangements below.
47
Off-Balance Sheet Arrangements
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 October 25, 2015, the maximum potential
amount of future payments that Applied could be required to make under these guarantee agreements was approximately $58
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 October 25, 2015, Applied Materials Inc. has provided
parent guarantees to banks for approximately $100 million to cover these arrangements.
Applied also has operating leases for various facilities. Total rent expense for fiscal 2015, 2014 and 2013 was $32 million,
$37 million and $36 million, respectively.
Contractual Obligations
The following table summarizes Applied’s contractual obligations as of October 25, 2015:
Contractual Obligations
Debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense associated with debt obligations . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . .
Purchase obligations1 . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities2,3 . . . . . . . . . . . . . . . . . . .
Total
$
Payments Due by Period
Total
Less Than
1 Year
1-3
Years
3-5
Years
More Than
5 Years
$
4,550
2,010
61
1,275
20
1,200
164
25
1,235
—
$
(In millions)
200
286
24
$
40
5
$
600
272
8
—
2
2,550
1,288
4
—
13
7,916
$
2,624
$
555
$
882
$
3,855
______________________
1 Represents Applied’s agreements to purchase goods and services consisting of Applied’s outstanding purchase orders for goods
and services.
2 Other long-term liabilities in the table do not include pension, post-retirement and deferred compensation plans due to the
uncertainty in the timing of future payments. Applied evaluates the need to make contributions to its pension and post-retirement
benefit plans after considering the funded status of the plans, movements in the discount rate, performance of the plan assets
and related tax consequences. Payments to the plans would be dependent on these factors and could vary across a wide range
of amounts and time periods. Payments for deferred compensation plans are dependent on activity by participants, making the
timing of payments uncertain. Information on Applied’s pension, post-retirement benefit and deferred compensation plans is
presented in Note 13, Employee Benefit Plans, of the consolidated financial statements.
3 Other long-term liabilities in the table do not include noncurrent income taxes payable, noncurrent deferred income taxes
payable and certain tax-related liabilities classified as other noncurrent liabilities on the balance sheet, due to the uncertainty
in the timing and amount of future payments. As of October 25, 2015, the gross liability for unrecognized tax benefits that was
not expected to result in payment of cash within one year was $177 million. Interest and penalties related to uncertain tax
positions that were not expected to result in payment of cash within one year of October 25, 2015 and October 26, 2014 were
$14 million and $25 million, respectively.
48
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles
generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect
the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in
the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical
accounting policies.
A critical accounting policy is defined as one that is both material to the presentation of Applied’s consolidated financial
statements and 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 I,
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 and estimates:
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; sales price 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.
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.
49
Inventory Valuation
Inventories are generally stated at the lower of cost or market, with cost determined on a first-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 estimated fair
value.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs
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. If the carrying value of a reporting unit exceeds its estimated fair value, Applied would then perform the second step of the
impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying
value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the
difference.
Applied determines the fair value of each reporting unit based on a weighting of an income and a market approach. Applied
bases the fair value estimates on assumptions that it believes to be reasonable but that are unpredictable and inherently uncertain.
Under the income approach, Applied estimates the fair value based on discounted cash flow method.
The estimates used in the impairment testing are consistent with the discrete forecasts that Applied uses to manage its
business, and considers any significant developments during the period. Under the discounted cash flow method, cash flows beyond
the discrete forecasts are estimated using a terminal growth rate, which considers the long-term earnings growth rate specific to
the reporting units. The estimated future cash flows are discounted to present value using each reporting unit's weighted average
cost of capital. The weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the
percentage of debt and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital is
derived using both known and estimated market metrics, and is adjusted to reflect both the timing and risks associated with the
estimated cash flows. The tax rate used in the discounted cash flow method is the median tax rate of comparable companies and
reflects Applied's current international structure, which is consistent with the market participant perspective. Under the market
approach, Applied uses the guideline company method which applies market multiples to forecasted revenues and earnings before
interest, taxes, depreciation and amortization. Applied uses market multiples that are consistent with comparable publicly-traded
companies and considers each reporting unit's size, growth and profitability relative to its comparable companies.
Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets.
Indicators of potential impairment include, but are not limited to, challenging economic conditions, an unfavorable industry or
economic environment or other severe decline in market conditions. Such conditions could have the effect of changing one of the
critical assumptions or estimates used for the fair value calculation, resulting in an unexpected goodwill impairment charge, which
could have a material adverse effect on Applied’s business, financial condition and results of operations. See Note 9 of Notes to
Consolidated Financial Statements for additional discussion of goodwill impairment.
50
Income Taxes
Applied’s effective tax rate is affected by the geographical composition of income and income tax laws and regulations in
multiple jurisdictions.
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
carryovers. 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, net of existing valuation allowance.
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 Adjusted Results
Management uses non-GAAP adjusted results to evaluate operating and financial performance in light of business objectives
and for planning purposes. Applied believes these measures enhance investors’ ability to review the Company’s business from the
same perspective as management and facilitate comparisons of this period’s results with prior periods. The non-GAAP adjusted
results presented below exclude the impact of the following, where applicable: certain items related to acquisitions; restructuring
charges and any associated adjustments; impairments of assets, goodwill, or investments; gain or loss on sale of strategic investments
or facilities; and certain discrete adjustments and tax items. These non-GAAP adjusted 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.
51
The following tables present a reconciliation of the GAAP and non-GAAP adjusted consolidated results for the past three
fiscal years:
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
(In millions, except percentages)
2015
2014
2013
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory charges related to restructuring3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other significant gains, losses or charges, net7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on derivatives associated with terminated business combination, net . . . . .
Certain items associated with terminated business combination2 . . . . . . . . . . . . . . . . . .
Restructuring, inventory charges and asset impairments3,4 . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss due to functional currency change6 . . . . . . . . . . . . . . . . . . . . . . .
Other significant gains, losses or charges, net7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on derivatives associated with terminated business combination, net . . . . .
Certain items associated with terminated business combination2 . . . . . . . . . . . . . . . . . .
Restructuring, inventory charges and asset impairments3,4 . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss due to functional currency change6 . . . . . . . . . . . . . . . . . . . . . . .
Other significant gains, losses or charges, net7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment (gain on sale) of strategic investments, net . . . . . . . . . . . . . . . . . . . . . . . . .
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings
and other tax items5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect of non-GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
3,952
162
—
35
(2)
4,147
42.9%
1,693
185
2
(89)
50
49
—
19
(13)
1,896
19.6%
1,377
185
2
(89)
50
49
—
19
(13)
4
(110)
(17)
1,457
$
$
$
$
$
$
3,843
158
1
—
—
4,002
44.1%
1,520
183
34
(30)
73
5
—
—
(4)
1,781
19.6%
1,072
183
34
(30)
73
5
—
—
(4)
(9)
28
(38)
1,314
$
$
$
$
$
$
2,991
166
3
—
—
3,160
42.1%
432
201
38
7
17
63
278
—
(4)
1,032
13.7%
256
201
38
7
17
63
278
—
(4)
1
(37)
(102)
718
1
2
3
4
5
6
7
These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
These items are incremental charges related to the terminated business combination agreement with Tokyo Electron Limited, consisting of acquisition-
related and integration planning costs.
Results for fiscal 2015 primarily included $35 million of inventory charges, $17 million of restructuring charges and asset impairments related to cost
reductions in the solar business, and a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans.
Results for fiscal 2013 included $39 million of employee-related costs, net, related to the restructuring program announced on October 3, 2012, and
restructuring and asset impairment charges of $26 million related to the restructuring program announced on May 10, 2012, partially offset by a favorable
adjustment of $2 million related to other restructuring plans.
Amounts for fiscal 2015 included an adjustment to decrease the provision for income taxes by $28 million with a corresponding increase in net income,
resulting in an increase in diluted earnings per share of $0.02. The adjustment was excluded in Applied's non-GAAP adjusted results and was made
primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the
U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.
Results for fiscal 2015 included a $19 million foreign exchange loss due to an immaterial correction of an error related to functional currency change.
These items are significant gains, losses, or charges during a period that are the result of isolated events or transactions which have not occurred frequently
in the past and are not expected to occur regularly or be repeated in the future.
52
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
(In millions, except per share amounts)
2015
2014
2013
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on derivatives associated with terminated business combination, net . . . . . . . . . . . . . . . . . .
Certain items associated with terminated business combination . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Restructuring, inventory charges and asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss due to functional currency change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other significant gains, losses or charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other
tax items1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average number of diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.12
0.14
—
(0.05)
0.03
—
0.03
0.02
(0.01)
$
0.87
0.13
0.02
(0.02)
0.05
—
—
—
—
0.21
0.14
0.02
—
0.01
0.21
0.03
—
—
(0.09)
1.19
1,226
$
0.02
1.07
1,231
$
(0.03)
0.59
1,219
1
Amounts for fiscal 2015 included an adjustment to decrease the provision for income taxes by $28 million with a corresponding increase in net income,
resulting in an increase in diluted earnings per share of $0.02. The adjustment was excluded in Applied's non-GAAP adjusted results and was made
primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the
U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.
53
The following table presents a reconciliation of the GAAP and non-GAAP adjusted segment results for the past three fiscal
years:
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
(In millions, except percentages)
2015
2014
2013
Silicon Systems Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and asset impairments3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Non-GAAP adjusted operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,588
Non-GAAP adjusted operating margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,410
178
—
25.9 %
$
1,391
$
172
2
—
876
175
(2)
1
$
1,565
$ 1,050
26.2%
22.0 %
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring, inventory charges and asset impairments2, 3 . . . . . . . . . . . . . . . . . . . . . .
Other significant gains, losses or charges, net4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-GAAP adjusted operating margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
664
1
3
(1)
573
3
—
—
$
436
5
2
—
667
$
576
$
443
26.4 %
26.2%
21.9 %
Display Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
156
2
158
$
$
129
2
131
$
$
74
6
80
20.3 %
21.3%
14.9 %
EES Non-GAAP Adjusted Operating Income (Loss)
Reported operating income (loss) - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring, inventory charges and asset impairments2, 3 . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(61)
$
4
—
47
$
(10)
$
15
6
—
—
21
$
(433)
15
278
25
$
(115)
(4.7)%
7.5%
(66.5)%
1
These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2
3
4
Results for fiscal 2015 primarily included $35 million of inventory charges, $17 million of restructuring charges and asset impairments related to cost
reductions in the solar business, and a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans.
Results for fiscal 2013 included restructuring and asset impairment charges of $26 million related to the restructuring program announced announced
on May 10, 2012 and severance charges of $2 million related to the integration of Varian.
These items are significant gains, losses, or charges during a period that are the result of isolated events or transactions which have not occurred frequently
in the past and are not expected to occur regularly or be repeated in the future.
Note: The reconciliation of GAAP and non-GAAP adjusted segment results above does not include certain operating expenses
that are managed separately at the corporate level and certain expenses that are not absorbed by the segments, which are reported
within corporate and unallocated costs and included in consolidated operating income.
54
Item 7A: 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 $1.0 billion at October 25, 2015. These securities are subject
to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio at October 25, 2015,
an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately
$16 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses
in the consolidated statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is
determined to be other-than-temporary. At October 25, 2015, the carrying amount of long-term debt issued by Applied was $3.3
billion with an estimated fair value of $3.5 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 $303 million at October 25, 2015.
Certain operations of Applied are conducted in foreign currencies, such as Japanese yen, euro, Israeli shekel and Taiwanese
dollar. Applied enters into currency forward exchange and option contracts to hedge a portion of, but not all, existing and anticipated
foreign currency denominated transactions generally expected to occur within the next 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.
Item 8: Financial Statements and Supplementary Data
The consolidated financial statements required by this Item are set forth on the pages indicated at Item 15(a).
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
55
Item 9A:
Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management of Applied conducted an evaluation, under the supervision
and with the participation of Applied’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of Applied’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 (the Exchange Act). Based upon that evaluation, Applied’s Chief Executive Officer and Chief Financial Officer
concluded that Applied’s disclosure controls and procedures were effective as of the end of the period covered by this report in
ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Applied
in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Applied’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of Applied’s Chief
Executive Officer and Chief Financial Officer, management of Applied conducted an evaluation of the effectiveness of Applied’s
internal control over financial reporting based upon the framework in “Internal Control — Integrated Framework (2013)” issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, Applied’s management
concluded that Applied’s internal control over financial reporting was effective as of October 25, 2015.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included
in this Form 10-K and, as part of the audit, has issued a report, included herein, on the effectiveness of Applied’s internal control
over financial reporting as of October 25, 2015.
Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2015, there were no changes in the internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events.
Item 9B: Other Information
None
56
PART III
Item 10:
Directors, Executive Officers and Corporate Governance
Except for the information regarding executive officers required by Item 401 of Regulation S-K (which is included in Part I,
Item 1 of this Annual Report on Form 10-K, under “Executive Officers of the Registrant”) and code of ethics (which is set forth
below), the information required by this item will be provided in accordance with Instruction G(3) to Form 10-K no later than
February 22, 2016.
Applied has implemented the Standards of Business Conduct, a code of ethics with which every person who works for
Applied and every member of the Board of Directors is expected to comply. If any substantive amendments are made to the
Standards of Business Conduct or any waiver is granted, including any implicit waiver, from a provision of the code to Applied’s
Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, Applied will disclose the nature of such amendment
or waiver on its website or in a report on Form 8-K. The above information, including the Standards of Business Conduct, is
available on Applied’s website under the Governance section at http://www.appliedmaterials.com/investor-relations. This website
address is intended to be an inactive, textual reference only. None of the materials on, or accessible through, this website is part
of this report or is incorporated by reference herein.
Item 11:
Executive Compensation
The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than
February 22, 2016.
57
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except for the information regarding securities authorized for issuance under equity compensation plans (which is set forth
below), the information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than
February 22, 2016.
The following table summarizes information with respect to equity awards under Applied’s equity compensation plans as
of October 25, 2015:
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a)
Number of
Securities to be
Issued Upon Exercise
of Outstanding Options,
Warrants and
Rights(1)
(b)
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and
Rights(2)
(In millions, except prices)
(c)
Number of Securities
Available for Future
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in
Column(a))
28
— (4)
28
$
$
$
15.06
5.79
12.45
146 (3)
9 (5)
155
(1) Includes only options, restricted stock units and performance shares outstanding under Applied’s equity compensation
plans, as no stock warrants or other rights were outstanding as of October 25, 2015.
(2) The weighted average exercise price calculation does not take into account any restricted stock units or performance
shares as they have a de minimis purchase price.
(3) Includes 20 million shares of Applied common stock available for future issuance under the Applied Materials, Inc.
Employees’ Stock Purchase Plan. Of these 20 million shares, 2 million are subject to purchase during the purchase period
in effect as of October 25, 2015.
(4) Includes options to purchase 0.4 million shares of Applied common stock assumed through various mergers and
acquisitions, after giving effect to the applicable exchange ratios. The assumed options had a weighted average exercise
price of $5.79 per share. No further shares are available for issuance under the plans under which these assumed awards
were granted.
(5) Includes 9 million shares of Applied common stock available for future issuance under the Applied Materials, Inc. Stock
Purchase Plan for Offshore Employees. Of these 9 million shares, 1 million are subject to purchase during the purchase
period in effect as of October 25, 2015.
Applied has the following equity compensation plans that have not been approved by stockholders:
Stock Purchase Plan for Offshore Employees. The Stock Purchase Plan for Offshore Employees (the Offshore ESPP)
was adopted effective as of October 16, 1995 for the benefit of employees of Applied’s participating affiliates. The Offshore ESPP
provides for the grant of options to purchase shares of Applied common stock through payroll deductions pursuant to one or more
offerings. The administrator of the Offshore ESPP (the Board of Directors of Applied or a committee appointed by the Board)
determines the terms and conditions of all options prior to the start of an offering, including the purchase price of shares, the
number of shares covered by the option and when the option may be exercised. All options granted as part of an offering must be
granted on the same date. As of October 25, 2015, a total of 36 million shares have been authorized for issuance under the Offshore
ESPP, and 9 million shares remain available for issuance.
Applied Materials Profit Sharing Scheme. The Applied Materials Profit Sharing Scheme was adopted effective July 3,
1996 to enable employees of Applied Materials Ireland Limited and its participating subsidiaries to purchase Applied common
stock at 100% of fair market value on the purchase date. Under this plan, eligible employees may elect to forego a certain portion
of their base salary and certain bonuses they have earned and that otherwise would be payable in cash to purchase shares of Applied
common stock at full fair market value. Since the eligible employees pay full fair market value for the shares, there is no reserved
amount of shares under this plan and, accordingly, the table above does not include any set number of shares available for future
issuance under the plan.
58
Item 13:
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than
February 22, 2016.
Item 14:
Principal Accounting Fees and Services
The information required by this Item will be provided in accordance with Instruction G(3) to Form 10-K no later than
February 22, 2016.
59
Item 15:
Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
(1) Financial Statements:
Reports of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
Number
61
63
64
65
66
67
68
(2) Exhibits:
The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of
this Annual Report on Form 10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Applied Materials, Inc.:
We have audited the accompanying consolidated balance sheets of Applied Materials, Inc. and subsidiaries (the Company)
as of October 25, 2015 and October 26, 2014, and the related consolidated statements of operations, comprehensive income,
period ended October 25, 2015. These consolidated
stockholders’ equity, and cash flows for each of the years in the
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Applied Materials, Inc. and subsidiaries as of October 25, 2015 and October 26, 2014, and the results of their operations
period ended October 25, 2015, in conformity with U.S. generally
and their cash flows for each of the years in the
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Applied Materials, Inc.’s internal control over financial reporting as of October 25, 2015 based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated December 9, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
/S/ KPMG LLP
KPMG LLP
Santa Clara, California
December 9, 2015
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Applied Materials, Inc.:
We have audited Applied Materials, Inc.’s (the Company) internal control over financial reporting as of October 25, 2015,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Applied Materials, Inc. maintained, in all material respects, effective internal control over financial reporting
as of October 25, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Applied Materials, Inc. and subsidiaries as of October 25, 2015 and October 26, 2014, and the
related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years
in the three-year period ended October 25, 2015, and our report dated December 9, 2015 expressed an unqualified opinion on
those consolidated financial statements.
Santa Clara, California
December 9, 2015
/s/ KPMG LLP
KPMG LLP
62
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Fiscal Year
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
9,659
$
9,072
$
5,707
3,952
5,229
3,843
7,509
4,518
2,991
Research, development and engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,451
1,428
1,320
Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss (gain) on derivatives associated with terminated business combination. . . . .
Impairment of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average number of shares:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
428
455
(89)
—
14
2,259
1,693
103
8
1,598
221
1,377
1.13
1.12
1,214
1,226
$
$
$
423
497
(30)
—
5
2,323
1,520
95
23
1,448
376
1,072
0.88
0.87
1,215
1,231
$
$
$
433
458
7
278
63
2,559
432
95
13
350
94
256
0.21
0.21
1,202
1,219
See accompanying Notes to Consolidated Financial Statements.
63
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Fiscal Year
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss), net of tax: . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized net gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized net loss on derivative instruments . . . . . . . . . . . . . . . . . .
Change in defined and postretirement benefit plans. . . . . . . . . . . . . . . . . . . . . .
Change in cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
1,377
$
1,072
$
256
(10)
(15)
—
9
(16)
1,361
$
(1)
(2)
(33)
(2)
(38)
1,034
9
1
18
(5)
23
$
279
See accompanying Notes to Consolidated Financial Statements.
64
APPLIED MATERIALS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
October 25,
2015
October 26,
2014
ASSETS
Current assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased technology and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,797
$
168
1,739
1,833
724
9,261
946
892
3,302
762
145
3,002
160
1,670
1,567
568
6,967
935
861
3,304
951
156
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,308
$
13,174
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,200
$
1,833
765
3,798
3,342
555
7,695
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock: $.01 par value per share; 1 shares authorized; no shares issued . . . . . . . . . . . .
Common stock: $.01 par value per share; 2,500 shares authorized; 1,160 and 1,221 shares
outstanding at 2015 and 2014, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock: 793 and 717 shares at 2015 and 2014, respectively
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
11
6,575
13,967
(12,848)
(92)
7,613
—
1,883
940
2,823
1,947
536
5,306
—
12
6,384
13,072
(11,524)
(76)
7,868
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,308
$
13,174
See accompanying Notes to Consolidated Financial Statements.
65
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at October 28, 2012 . . . . . . . . .
1,197
$
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . .
Issuance under stock plans, net of a
tax benefit of $14 and other . . . . . . . .
—
—
—
—
25
Common stock repurchases . . . . . . . .
(18)
Balance at October 27, 2013 . . . . . . . . .
1,204
$
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . .
Issuance under stock plans, net of a
tax benefit of $27 and other . . . . . . . .
—
—
—
—
17
Balance at October 26, 2014 . . . . . . . . .
1,221
$
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . .
Issuance under stock plans, net of a
tax benefit of $55 and other . . . . . . . .
—
—
—
—
15
Common stock repurchases . . . . . . . .
(76)
12
—
—
—
—
—
—
12
—
—
—
—
—
12
—
—
—
—
—
(1)
$
5,863
$
12,700
699
$ (11,279) $
(61) $
7,235
—
—
—
162
126
—
256
—
(469)
—
—
—
—
—
—
—
—
18
—
—
—
—
—
(245)
—
23
—
—
—
—
$
6,151
$
12,487
717
$ (11,524) $
(38) $
—
—
—
177
56
1,072
—
(487)
—
—
—
—
—
—
—
—
—
—
—
—
—
(38)
—
—
—
$
6,384
$
13,072
717
$ (11,524) $
(76) $
—
—
—
187
4
—
1,377
—
(482)
—
—
—
—
—
—
—
—
76
—
—
—
—
—
(1,324)
—
(16)
—
—
—
—
256
23
(469)
162
126
(245)
7,088
1,072
(38)
(487)
177
56
7,868
1,377
(16)
(482)
187
4
(1,325)
Balance at October 25, 2015 . . . . . . . . .
1,160
$
11
$
6,575
$
13,967
793
$ (12,848) $
(92) $
7,613
See accompanying Notes to Consolidated Financial Statements.
66
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Fiscal Year
2015
2014
2013
1,377
$
1,072
$
256
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments required to reconcile net income to cash provided by operating activities:. . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and asset impairments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of amounts acquired: . . . . . . . . . . . . . . . . . . .
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current and non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
371
—
14
(56)
(134)
39
187
(61)
(266)
26
(133)
(175)
(24)
(2)
375
—
5
(30)
58
8
177
(21)
(154)
26
79
146
142
(83)
1,163
1,800
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions, net of cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Debt borrowings, net of issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from common stock issuances and others, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of dividends to stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents — beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents — end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental cash flow information:
(215)
(4)
—
1,100
(1,162)
(281)
2,581
88
(1,325)
(487)
56
913
1,795
3,002
4,797
Cash payments for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash refunds from income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash payments for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
407
12
92
$
$
$
$
(241)
(12)
25
878
(811)
(161)
—
107
—
(485)
30
(348)
1,291
1,711
3,002
195
111
92
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
67
410
278
63
(23)
(102)
34
162
(404)
(141)
(63)
21
39
57
36
623
(197)
(1)
7
1,013
(607)
215
—
159
(245)
(456)
23
(519)
319
1,392
1,711
196
102
92
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Applied Materials, Inc. and its subsidiaries (Applied or the
Company) after elimination of intercompany balances and transactions. All references to a fiscal year apply to Applied’s fiscal
year which ends on the last Sunday in October. Fiscal 2015, 2014 and 2013 each contained 52 weeks. Each fiscal quarter of 2015,
2014 and 2013 contained 13 weeks.
Certain prior year amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied
evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments,
inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based
awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets
and liabilities.
Cash Equivalents
All highly-liquid investments with a remaining maturity of three months or less at the time of purchase are considered to be
cash equivalents. Cash equivalents consist primarily of investments in institutional money market funds.
Investments
All of Applied’s investments, except equity investments held in privately-held companies, are classified as available-for-
sale at the respective balance sheet dates. Investments classified as available-for-sale are recorded at fair value based upon quoted
market prices, and any temporary difference between the cost and fair value of an investment is presented as a separate component
of accumulated other comprehensive income (loss). The specific identification method is used to determine the gains and losses
on investments. Interest earned on cash and investments, as well as realized gains and losses on sale of securities, are included in
interest income in the accompanying Consolidated Statements of Operations.
Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are
periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary
decline in value may have occurred.
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. Bad debt expense and any reversals are recorded in marketing and
selling expense in the Consolidated Statement of Operations.
68
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventories
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. Applied adjusts
inventory carrying value for estimated obsolescence equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. Applied fully writes down inventories and noncancelable
purchase orders for inventory deemed obsolete. Applied performs periodic reviews of inventory items to identify excess inventories
on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted
demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by
Applied, additional inventory adjustments may be required.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets using
the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings and improvements, 3 to
30 years; demonstration and manufacturing equipment, 3 to 5 years; software, 3 to 5 years; and furniture, fixtures and other
equipment, 3 to 15 years. Land improvements are amortized over the shorter of 15 years or the estimated useful life. Leasehold
improvements are amortized over the shorter of five years or the lease term.
Intangible Assets
Goodwill and indefinite-lived assets are not amortized, but are reviewed for impairment annually during the fourth quarter
of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable. Purchased technology and other intangible assets are presented at cost, net of accumulated amortization, and are
amortized over their estimated useful lives of 1 to 15 years using the straight-line method.
Long-Lived Assets
Applied reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of these assets or asset group may not be recoverable. Applied assesses these assets for impairment based on estimated
future cash flows from these assets.
Research, Development and Engineering Costs
Research, development and engineering costs are expensed as incurred.
Sales and Value Added Taxes
Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying
Consolidated Statements of Operations.
Warranty
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. If actual warranty costs differ substantially from Applied's estimates, revisions to the estimated warranty
liability would be required.
Income Taxes
Income tax expense is based on pretax earnings. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and
tax credit carryforwards.
Restructuring
From time to time, Applied initiates restructuring activities to appropriately align its cost structure relative to prevailing
economic and industry conditions and associated customer demand as well as in connection with certain acquisitions. Costs
associated with restructuring actions can include termination benefits and related charges in addition to facility closure, contract
termination and other related activities. Costs associated with restructuring activities are included in restructuring charges and
asset impairments in the Consolidated Statements of Operations.
69
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is
probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition
policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer
upon shipment or delivery, Applied recognizes revenue upon passage of title for all products that have been demonstrated to meet
product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and
that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to
meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where
legal title does not pass at shipment or delivery, revenue is recognized when legal title passes to the customer, which is generally
at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered
elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements.
Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery
of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where
Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at
the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized
upon shipment, and services revenue is generally recognized over the period that the services are provided.
When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied
allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor
specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price
(ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element
arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of
accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices
of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains
more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated
to each software deliverable using the guidance for recognizing software revenue.
Derivative Financial Instruments
Applied uses financial instruments, such as forward exchange and currency option contracts, to hedge a portion of, but not
all, existing and anticipated foreign currency denominated transactions typically expected to occur within 24 months. The 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 derivative financial instruments used for hedging purposes are
generally consistent with the timing of the transactions being hedged. All of Applied’s derivative financial instruments are recorded
at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying
as cash flow hedges, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other
comprehensive income (loss) in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings.
If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated
financial instrument is recorded promptly in earnings. For derivative instruments used to hedge existing foreign currency
denominated assets or liabilities, the gain or loss on these hedges is recorded promptly in earnings to offset the changes in the fair
value of the assets or liabilities being hedged. Applied does not use derivative financial instruments for trading or speculative
purposes.
Foreign Currencies
As of October 25, 2015, all of Applied’s subsidiaries use the United States dollar as their functional currency. Accordingly,
assets and liabilities of these subsidiaries are remeasured using exchange rates in effect at the end of the period, except for non-
monetary assets, such as inventories and property, plant and equipment, which are remeasured using historical exchange rates.
Foreign currency-denominated revenues and costs are remeasured using average exchange rates for the period, except for costs
related to those balance sheet items that are remeasured using historical exchange rates. The resulting remeasurement gains and
losses are included in general and administrative expenses in the Consolidated Statements of Operations as incurred.
70
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentrations of Credit Risk
Financial instruments that potentially subject Applied to significant concentrations of credit risk consist principally of cash
equivalents, investments, trade accounts receivable and derivative financial instruments used in hedging activities. Applied invests
in a variety of financial instruments, such as, but not limited to, certificates of deposit, corporate and municipal bonds, United
States Treasury and agency securities, and asset-backed and mortgage-backed securities, and, by policy, limits the amount of credit
exposure with any one financial institution or commercial issuer. Applied performs ongoing credit evaluations of its customers’
financial condition and generally requires no collateral to secure accounts receivable. Applied maintains an allowance reserve for
potentially uncollectible accounts receivable based on its assessment of the collectability of accounts receivable. Applied regularly
reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances,
and current economic conditions that may affect a customer’s ability to pay. In addition, Applied utilizes letters of credit to mitigate
credit risk when considered appropriate. Applied is exposed to credit-related losses in the event of nonperformance by counterparties
to derivative financial instruments, but does not expect any counterparties to fail to meet their obligations. In some instances,
Applied has entered into security arrangements which require the counterparties to post collateral to further mitigate credit exposure.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB) issued authoritative guidance that requires inventory to be
measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to
inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including
those measured using first-in, first-out (FIFO) or the average cost method. The authoritative guidance will be effective for Applied
in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of the beginning of an interim
or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial
statements.
In May 2015, the FASB issued authoritative guidance to remove the requirement to categorize within the fair value hierarchy
all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance also
removes the requirement of certain disclosures for all investments that are eligible to be measured at fair value using the net asset
value per share practical expedient. The guidance becomes effective retrospectively for Applied in the first quarter of fiscal 2017.
Early adoption is permitted. The adoption of this guidance will only impact disclosures in Applied's financial statements.
In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes
a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software
license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not
change accounting for service contracts. The guidance becomes effective for Applied in the first quarter of fiscal 2017 and may
be adopted either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2)
retrospectively. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied's financial
position, results of operations and its ongoing financial reporting, including the selection of a transition method.
In April 2015, the FASB issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet
as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The authoritative guidance
is effective for Applied in the first quarter of fiscal 2017 and should be applied retrospectively. Early adoption is permitted. The
adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised
goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. This new standard will supersede most current revenue recognition guidance, including industry-
specific guidance. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting
the guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance
with an adjustment to the opening balance of retained earnings in the period of adoption. In addition, the modified approach will
require additional disclosures. In August 2015, the FASB issued an amendment to defer the effective date by one year and allow
entities to early adopt no earlier than the original effective date. With this amendment, the guidance will be effective for Applied
in the first quarter of fiscal 2019. Applied is currently evaluating the effect of this new guidance on Applied's financial position,
results of operations and its ongoing financial reporting, including the selection of a transition method.
In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a
discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant
components that do not qualify as discontinued operations. The authoritative guidance becomes effective prospectively for Applied
in the first quarter of fiscal 2016. Early adoption is permitted, but only for disposals that have not been reported in financial
statements previously issued.
71
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2
Earnings Per Share
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period.
Diluted earnings per share is determined using the weighted average number of common shares and potential common shares
(representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding
during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted
earnings per share due to the Company’s non-complex capital structure.
Fiscal Year
Numerator:
2015
2014
2013
(In millions, except per share amounts)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,377
$
1,072
$
256
Denominator:
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,214
1,215
1,202
Effect of dilutive stock options, restricted stock units and employee stock purchase
plan shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Potentially dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
1,226
1.13
1.12
—
$
$
16
1,231
0.88
0.87
1
$
$
17
1,219
0.21
0.21
2
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the
calculation of diluted earnings per share because the combined exercise price, average unamortized fair value and assumed tax
benefits upon the exercise of options and the vesting of restricted stock units were greater than the average market price of Applied
common stock, and therefore their inclusion would have been anti-dilutive.
72
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3
Cash, Cash Equivalents and Investments
Summary of Cash, Cash Equivalents and Investments
The following tables summarize Applied’s cash, cash equivalents and investments by security type:
October 25, 2015
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. government securities* . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper, corporate bonds and medium-term
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cash and Cash equivalents. . . . . . . . . . . . . . . . . . . . . $
Short-term and long-term investments:
U.S. Treasury and agency securities . . . . . . . . . . . . . . . . . $
Non-U.S. government securities* . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper, corporate bonds and medium-term
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed and mortgage-backed securities . . . . . . . . .
Total fixed income securities. . . . . . . . . . . . . . . . . . . . . . . .
Publicly traded equity securities . . . . . . . . . . . . . . . . . . . .
Equity investments in privately-held companies . . . . . . .
Total short-term and long-term investments . . . . . . . . . . . . $
Total Cash, Cash equivalents and Investments . . . . . . . . . . $
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
1,010
$
(In millions)
— $
— $
1,010
3,272
60
73
382
3,787
4,797
84
9
384
250
262
989
28
78
1,095
5,892
$
$
$
$
—
—
—
—
—
— $
— $
—
2
—
—
2
17
—
19
19
$
$
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
— $
— $
3,272
60
73
382
3,787
4,797
84
9
386
250
262
991
45
78
1,114
5,911
_________________________
* Includes agency debt securities guaranteed by non-U.S. governments, which consist of Canada and Germany.
73
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
October 26, 2014
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash equivalents:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cash and Cash equivalents. . . . . . . . . . . . . . . . . . . . . $
Short-term and long-term investments:
U.S. Treasury and agency securities . . . . . . . . . . . . . . . . . $
Non-U.S. government securities* . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper, corporate bonds and medium-term
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed and mortgage-backed securities . . . . . . . . .
Total fixed income securities. . . . . . . . . . . . . . . . . . . . . . . .
Publicly traded equity securities . . . . . . . . . . . . . . . . . . . .
Equity investments in privately-held companies . . . . . . .
Total short-term and long-term investments . . . . . . . . . . . . $
Total Cash, Cash equivalents and Investments . . . . . . . . . . $
_________________________
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
508
$
(In millions)
— $
— $
508
2,494
2,494
3,002
62
14
391
223
287
977
19
66
1,062
4,064
$
$
$
$
—
—
— $
— $
—
2
1
1
4
31
—
35
35
$
$
—
—
— $
— $
—
—
—
2
2
—
—
2
2
$
$
2,494
2,494
3,002
62
14
393
224
286
979
50
66
1,095
4,097
* Includes agency debt securities guaranteed by non-U.S. governments, which consist of Canada and Germany.
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at October 25, 2015:
Cost
Estimated
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No single maturity date**. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
_________________________
$
(In millions)
155
572
368
1,095
$
156
573
385
1,114
** Securities with no single maturity date include publicly-traded and privately-held equity securities, and asset-backed and
mortgage-backed securities.
74
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Gains and Losses on Investments
Gross realized gains and losses on sales of investments for each fiscal year were as follows:
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross realized losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
(In millions)
27
$
2
$
9
3
$
$
7
2
At October 25, 2015, gross unrealized losses related to Applied's investment portfolio were not material. Applied regularly
reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors
considered in determining whether an unrealized loss is considered to be temporary, or other-than-temporary and therefore impaired,
include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality
and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security
prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less
than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable securities at
October 25, 2015, October 26, 2014 and October 27, 2013 were temporary in nature and therefore it did not recognize any
impairment of its marketable securities for fiscal 2015, 2014 or 2013. During fiscal 2015, 2014 and 2013, Applied determined
that certain of its equity investments in privately-held companies were other-than-temporarily impaired and, accordingly,
recognized impairment charges of $9 million, $15 million and $6 million, respectively. These impairment charges are included in
interest and other income, net in the Consolidated Statement of Operations.
Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other
comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated
other comprehensive income (loss) to results of operations.
75
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4
Fair Value Measurements
Applied’s financial assets are measured and recorded at fair value, except for equity investments in privately-held companies.
These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-
than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.
Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are
assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.
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 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 consist primarily of debt securities that are classified as available-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 October 25, 2015, substantially all of Applied’s available-for-sale, short-term and long-term
investments were recognized at fair value that was determined based upon observable inputs.
76
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets Measured at Fair Value on a Recurring Basis
Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:
October 25, 2015
October 26, 2014
Level 1
Level 2
Total
Level 1
Level 2
Total
(In millions)
Assets:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,272
U.S. Treasury and agency securities . . . . . . . . . . . . . . . . . .
72
Non-U.S. government securities . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper, corporate bonds and medium-term
notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed and mortgage-backed securities . . . . . . . . . .
—
—
—
—
Publicly traded equity securities . . . . . . . . . . . . . . . . . . . . .
45
Foreign exchange derivative assets . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,389
$
— $ 3,272
$ 2,494
$
— $ 2,494
12
69
459
632
262
—
2
84
69
459
632
262
45
2
43
—
—
—
—
50
—
19
14
393
224
286
—
52
62
14
393
224
286
50
52
$ 1,436
$ 4,825
$ 2,587
$
988
$ 3,575
There were no transfers between Level 1 and Level 2 fair value measurements during fiscal 2015 and 2014, and Applied did
not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of October 25,
2015 or October 26, 2014.
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 for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary
decline in value may have occurred. If Applied determines that an other-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 $78 million at October 25, 2015, of which $70 million of investments
were accounted for under the cost method of accounting and $8 million of investments had been measured at fair value on a non-
recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Equity investments in
privately-held companies totaled $66 million at October 26, 2014, of which $57 million of investments were accounted for under
the cost method of accounting and $9 million of investments had been measured at fair value on a non-recurring basis within Level
3 fair value measurements due to an other-than-temporary decline in value.
During fiscal 2015, 2014 and 2013, Applied determined that certain of its equity investments held in privately-held companies
were other-than-temporarily impaired and, accordingly, recognized impairment charges of $9 million, $15 million and $6 million,
respectively.
In fiscal 2013, Applied recorded goodwill and intangible asset impairment charges related to the Energy and Environmental
Solutions segment. The inputs used to measure the fair value of goodwill and intangible assets of the Energy and Environmental
Solutions segment are classified as a Level 3 fair value measurement due to the significance of unobservable inputs using company-
specific information. The valuation methodology used to estimate the fair value of goodwill and intangible assets is discussed in
Note 9, Goodwill, Purchased Technology and Other Intangible Assets.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes
payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At October 25,
2015, the carrying amount of long-term debt was $3.3 billion, and the estimated fair value was $3.5 billion. At October 26, 2014,
the carrying amount of long-term debt was $1.9 billion, and the estimated fair value was $2.2 billion. 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.
77
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 the Japanese yen, euro, Israeli shekel and Taiwanese dollar. 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.
During fiscal 2015, Applied entered into and settled a series of forward-starting interest rate swap agreements, with a total
notional amount of $600 million, to hedge against the variability of cash flows due to changes in the benchmark interest rate of
fixed rate debt. These instruments were designated as cash flow hedges at inception and settled in conjunction with the issuance
of debt in the fourth quarter of fiscal 2015. The loss from the settlement of the interest rate swap agreement was $20 million, which
was included in accumulated other comprehensive income (AOCI) in stockholders' equity and will be amortized to interest expense
over the term of the senior unsecured 10-year notes issued in September 2015.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging
activities, including foreign currency exchange contracts and interest rate swap agreements, are recognized on the balance sheet
at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of
any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value
in other current assets or 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 foreign exchange derivatives 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 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 foreign exchange derivative instruments included in AOCI at October 25, 2015 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 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 earnings. 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 fiscal 2015, 2014 or 2013.
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 in earnings to offset the changes in the fair value of the assets
or liabilities being hedged.
Following the announcement of the proposed business combination with Tokyo Electron Limited (TEL) in September 2013,
Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the proposed business
combination. The derivatives used to hedge currency exposure did not qualify for hedge accounting treatment. These derivatives
were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. During
fiscal 2014, the derivatives purchased in fiscal 2013 were sold, and the Company recorded gains of $42 million. Concurrently,
during the fourth quarter of fiscal 2014, the Company purchased new foreign exchange option contracts for the same purpose with
an extended maturity. At October 26, 2014, the fair value of these foreign exchange option contracts was approximately $52 million
and Applied recognized an unrealized loss of $12 million during fiscal 2014 related to these contracts. Due to the termination of
the proposed business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third
quarter of fiscal 2015. Applied recorded a gain of $89 million in fiscal 2015 related to these contracts. The cash flow impacts of
these derivatives have been classified as operating cash flows in the Consolidated Statements of Cash Flows. To further mitigate
credit exposure in connection with these foreign exchange option contracts, the Company entered into security arrangements with
certain counterparties, which require the counterparties to post collateral amounting to the approximate fair value of the derivative
contracts. The cash collateral was included in cash and cash equivalents in the Consolidated Balance Sheets, with the corresponding
liability included in accounts payable and accrued expenses as of October 26, 2014. The requirement to provide cash collateral
was canceled following the settlement of the foreign exchange option contracts during fiscal 2015.
Other than the foreign exchange option contracts discussed in the preceding paragraph, the fair values of other foreign
exchange derivative instruments at October 25, 2015 and October 26, 2014 were not material.
78
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effects of derivative instruments on the Consolidated Statements of Operations for each fiscal year were as follows:
Derivatives in Cash Flow Hedging Relationships
Effective Portion
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
Gain or
(Loss)
Recognized
in AOCI
Gain or (Loss)
Reclassified
from AOCI into
Income
(In millions)
Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing
Gain or (Loss)
Recognized in
Income
2015
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Location of Gain or
(Loss) Recognized
in Income
Gain (loss) on derivatives
associated with terminated
business combination
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Risk Contingent Features
$
$
$
$
$
$
$
$
$
15
$
6
—
(20)
(14) $
7
—
7
29
—
29
$
$
$
$
(6)
—
9
8
1
9
21
7
28
$
$
$
$
$
Amount of Gain or (Loss)
Recognized in Income
2015
2014
2013
(In millions)
$
89
21
110
$
30
19
49
$
$
(4)
(2)
—
(6)
(2)
(2)
(4)
(3)
(1)
(4)
(7)
26
19
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 immaterial as of October 25, 2015 and October 26, 2014.
Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’
nonperformance. However, Applied’s exposure is not considered significant.
79
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6
Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from
selected customers. Applied sells its accounts receivable without recourse. Applied, from time to time, also discounts letters of
credit issued by customers through various financial institutions. The 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.
Applied did not factor any accounts receivable or discount promissory notes during fiscal 2015 or 2013. Applied factored
accounts receivable of $45 million and discounted $29 million of letters of credit issued by customers during fiscal 2014. Financing
charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying
Consolidated Statements of Operations and were not material for all years presented.
Accounts receivable are presented net of allowance for doubtful accounts of $49 million and $58 million at October 25,
2015 and October 26, 2014, respectively. Changes in allowance for doubtful accounts for each fiscal year were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
(In millions)
74
$
—
(16)
58
$
$
$
58
—
(9)
49
87
—
(13)
74
_____________________________
1 Fiscal 2015, 2014 and 2013 deductions represent releases of allowance for doubtful accounts credited to expense as a result of an overall lower
risk profile of Applied's customers.
Applied sells its products principally to manufacturers within the semiconductor, display and solar industries. While Applied
believes that its allowance for doubtful accounts is adequate and represents its best estimate as of October 25, 2015, it continues
to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates
regarding collectability.
80
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 7
Balance Sheet Detail
Inventories
Customer service spares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 25,
2015
October 26,
2014
(In millions)
382
438
294
719
1,833
$
$
316
405
316
530
1,567
Included in finished goods inventory is $155 million and $104 million at October 25, 2015 and October 26, 2014, respectively,
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 $185 million and $164 million of evaluation inventory at October 25,
2015 and October 26, 2014, respectively.
Other Current Assets
Deferred income taxes, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prepaid income taxes and income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, Plant and Equipment, Net
Land and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demonstration and manufacturing equipment. . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, fixtures and other equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Useful Life
(In years)
3-30
3-5
3-15
$
$
$
October 25,
2015
October 26,
2014
(In millions)
403
127
194
724
$
$
232
79
257
568
October 25,
2015
October 26,
2014
(In millions)
157
1,247
920
574
48
2,946
(2,054)
892
$
$
156
1,227
829
575
61
2,848
(1,987)
861
Depreciation expense was $185 million, $191 million and $211 million for fiscal 2015, 2014 and 2013 respectively.
During fiscal 2015 and 2013, fixed asset impairment charges of $4 million and $12 million, respectively were recorded in
relation to the Energy and Environmental Solutions segment restructuring activities, as discussed in Note 11, Restructuring Charges
and Asset Impairments. There was no fixed asset impairment charge recorded during fiscal 2014.
81
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Payable and Accrued Expenses
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Customer Deposits and Deferred Revenue
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 25,
2015
October 26,
2014
(In millions)
658
509
126
60
116
58
36
270
1,833
$
$
613
524
113
142
122
51
30
288
1,883
October 25,
2015
October 26,
2014
(In millions)
132
633
765
$
$
286
654
940
Applied typically receives deposits on future deliverables from customers in the Energy and Environmental Solutions and
Display segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.
Other Liabilities
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined and postretirement benefit plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 25,
2015
October 26,
2014
(In millions)
56
227
187
85
555
$
$
32
225
208
71
536
82
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 8
Business Combinations
Tokyo Electron Limited
On September 24, 2013, Applied and Tokyo Electron Limited (TEL) entered into a Business Combination Agreement, which
was intended to effect a strategic combination of their respective businesses into a new combined company, and was subject to
regulatory approvals. On April 26, 2015, Applied and TEL announced that they had mutually agreed to terminate the Business
Combination Agreement. No termination fee was payable by either Applied or TEL.
Other
From time to time, Applied makes acquisitions of or investments in companies related to existing or new markets for Applied.
Applied completed acquisitions during fiscal 2015 and 2014, which were not significant to Applied's consolidated results of
operations and financial position. Substantially all of the consideration was allocated to acquisition-related intangible assets. See
Note 9 Goodwill, Purchased Technology and Other Intangible Assets for more information.
83
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 purchase price 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 considers
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.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs
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 determines the fair value of each of its reporting units based on a weighting of income and market approaches. If
the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in
order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting
unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.
During the third quarter of fiscal 2015, Applied implemented a new management structure, which resulted in changes in
Applied’s reporting units. Applied determined its reporting units by first identifying its operating segments, and then assessing
whether components of these operating segments constitute a business for which discrete financial information is available and
where segment management regularly reviews the operating results of that component. Applied aggregates reporting units within
an operating segment that have similar economic characteristics and are similar in nature of their products and services, production
processes, type or class of customers, distribution methods and operational environment. As a result of the change in management
structure, there were no changes in Applied’s reportable segments identified in Note 16, Industry Segment Operations. However,
Applied identified three reporting units, which include the Transistor and Interconnect Group, Patterning and Packaging Group,
and Imaging and Process Control Group, which combine to form the Silicon Systems reporting segment. The new management
structure did not affect Applied Global Services, Display and Energy and Environmental Solutions.
Based on these changes, Applied performed a goodwill impairment test for Silicon Systems immediately before the change
in reporting units, allocated goodwill to each reporting unit in Silicon Systems based on the estimated fair value of each reporting
unit and, then performed another goodwill impairment test for each of the new reporting units within the Silicon Systems segment.
In performing the goodwill impairment test, Applied utilized both the discounted cash flow method (weighted 75%) and the
guideline company method (weighted 25%) to estimate the fair value of the reporting units. The estimates used in the impairment
testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered any significant
developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecasts
were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the reporting units.
The estimated future cash flows were discounted to present value using each reporting unit's weighted average cost of capital. The
weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the percentage of debt
and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital was derived using both
known and estimated market metrics, and was adjusted to reflect both the timing and risks associated with the estimated cash
flows. The tax rate used in the discounted cash flow method was the median tax rate of comparable companies and reflected
Applied's current international structure, which is consistent with the market participant perspective. Under the guideline company
method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization.
The market multiples used were consistent with comparable publicly-traded companies and considered each reporting unit's size,
growth and profitability relative to its comparable companies. Based on Applied’s analysis, the estimated fair value exceeded the
carrying value for Silicon Systems as a single reporting unit and for each new reporting unit subsequent to the change, and therefore,
the second step of the goodwill impairment test was not required.
84
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the fourth quarter of fiscal 2015, Applied performed a qualitative assessment to test goodwill for all of its reporting units
for impairment. Applied determined that it was more likely than not that each of its reporting units' fair values exceeded their
respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for any of its reporting
units.
Since fiscal 2012, the solar industry has faced a deterioration in market conditions associated with manufacturing overcapacity
and weak operating performance and outlook, resulting in uncertainties regarding the timing and nature of a recovery in solar
capital equipment expenditures. In fiscal 2013, Applied performed a two-step goodwill impairment test and, as a result, recorded
$224 million of goodwill impairment charges in the Energy and Environmental Solutions segment. Applied also recorded a $54
million impairment charge related to the intangible assets in the Energy and Environmental Solutions segment in the same year.
As of 2015, accumulated goodwill impairment charges from fiscal 2013 and prior periods amounted to $645 million, all of which
were recorded in the Energy and Environmental Solutions segment.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event
of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future
impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may
result at that time.
Details of goodwill and other indefinite-lived intangible assets were as follows:
October 25, 2015
October 26, 2014
Other
Intangible
Assets
Goodwill
Other
Intangible
Assets
Total
Total
Goodwill
(In millions)
Silicon Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,151
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,027
Display. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124
Energy and Environmental Solutions . . . . . . . . . . . . . . . . . . . . . .
—
Carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,302
$
$ — $ 2,151
$ 2,151
$
103
$2,254
5
18
2
25
1,032
1,027
142
2
126
—
6
18
—
1,033
144
—
$ 3,327
$ 3,304
$
127
$3,431
Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject
to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income
approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood
of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired
technology attributable to the project will be written-off.
During fiscal 2015, goodwill and other indefinite lived intangible assets decreased by $104 million primarily due to
commercialization of in-process technology in the Silicon Systems segment.
A summary of Applied's purchased technology and intangible assets is set forth below:
October 25,
2015
October 26,
2014
Purchased technology, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Intangible assets - finite-lived, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets - indefinite-lived. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
85
$
(In millions)
575
162
25
762
$
636
188
127
951
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic
lives of the assets, ranging from 1 to 15 years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value
of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted
future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future
cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than
the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets
to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow
approach.
Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value
assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of
products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine
whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible
assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management
considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive
and economic environments, technological advances, and changes in cost structure.
Details of finite-lived intangible assets were as follows:
October 25, 2015
Purchased
Technology
Other
Intangible
Assets
October 26, 2014
Other
Intangible
Assets
Total
Total
Purchased
Technology
(In millions)
Gross carrying amount:
Silicon Systems. . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . . . . . .
Gross carrying amount . . . . . . . . . . . . . . . . . $
Accumulated amortization:
Silicon Systems. . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . . . . . .
Accumulated amortization . . . . . . . . . . . . . . $
Carrying amount . . . . . . . . . . . . . . . . . . . . . . $
1,449
$
252
$
1,701
$
1,346
$
252
$
1,598
28
110
4
44
33
12
72
143
16
28
110
5
44
33
17
72
143
22
1,591
$
341
$
1,932
$
1,489
$
346
$
1,835
(876) $
(26)
(110)
(4)
(1,016) $
575
$
(95) $
(44)
(33)
(7)
(179) $
$
162
(971) $
(70)
(143)
(11)
(1,195) $
$
737
(716) $
(24)
(110)
(3)
(853) $
$
636
(77) $
(44)
(31)
(6)
(158) $
$
188
(793)
(68)
(141)
(9)
(1,011)
824
86
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Details of amortization expense for each fiscal year by segment were as follows:
2015
2014
2013
(In millions)
Silicon Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortization expense for each fiscal year was charged to the following categories:
2015
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Research, development and engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
179
1
2
4
186
163
1
20
2
186
$
$
$
$
173
3
2
6
184
2014
(In millions)
159
1
21
3
184
$
$
$
$
2013
As of October 25, 2015, future estimated amortization expense is expected to be as follows:
Amortization
Expense
(In millions)
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
172
5
6
16
199
166
1
26
6
199
189
186
185
44
39
94
737
87
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10
Borrowing Facilities and Debt
In September 2015, Applied entered into a $1.5 billion committed revolving credit agreement with a group of banks that is
scheduled to expire in September 2020. This credit agreement provides for borrowings in United States dollars at interest rates
keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied’s public debt rating
and includes financial and other covenants. The September 2015 credit agreement replaces Applied's $1.5 billion credit agreement
entered into in May 2011. In addition, Applied has credit facilities in the amount of approximately $67 million 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 October 25, 2015 and October 26, 2014, and Applied has not utilized these credit facilities. In fiscal
2011, Applied established a short-term commercial paper program of up to $1.5 billion. At October 25, 2015 and October 26,
2014, Applied did not have any commercial paper outstanding.
In September 2015, Applied issued senior unsecured notes in the aggregate principal amount of $1.8 billion and used a
portion of the net proceeds to redeem $400 million in principal amount of its 2.650% senior notes due in 2016 at a redemption
price of $405 million in November 2015. After adjusting for the carrying value of debt issuance costs and discounts, Applied
recorded a $5 million loss on the prepayment of the $400 million debt, which will be included as a non-operating loss in the
Consolidated Statement of Operations for the first quarter of fiscal 2016.
In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-term loan agreement with multiple
lenders, under which it borrowed $800 million to facilitate the return of capital to Applied.
Debt outstanding as of October 25, 2015 and October 26, 2014 was as follows:
Principal Amount
October 25,
2015
October 26,
2014
Effective
Interest Rate
Interest
Pay Dates
(In millions)
Short-term debt:
2.650% Senior Notes Due 2016 . . . . . . . . . . . . . . $
Other debt
Total short-term debt . . . . . . . . . . . . . . . . . . . . . .
Long-term debt:
2.650% Senior Notes Due 2016 . . . . . . . . . . . . . .
7.125% Senior Notes Due 2017 . . . . . . . . . . . . . .
2.625% Senior Notes Due 2020 . . . . . . . . . . . . . .
4.300% Senior Notes Due 2021 . . . . . . . . . . . . . .
3.900% Senior Notes Due 2025 . . . . . . . . . . . . . .
5.100% Senior Notes Due 2035 . . . . . . . . . . . . . .
5.850% Senior Notes Due 2041 . . . . . . . . . . . . . .
Total unamortized discount . . . . . . . . . . . . . . . . .
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . .
$
$
400
800
1,200
2.666%
—
— 1.0% - 1.25%
—
June 15, December 15
2.666%
7.190%
2.640%
4.326%
3.944%
5.127%
5.879%
June 15, December 15
April 15, October 15
April 1, October 1
June 15, December 15
April 1, October 1
April 1, October 1
June 15, December 15
—
200
600
750
700
500
600
3,350
(8)
3,342
400
200
—
750
—
—
600
1,950
(3)
1,947
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,542
$
1,947
88
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11
Restructuring Charges and Asset Impairments
From time to time, Applied initiates restructuring activities to appropriately align its cost structure and product investments
relative to prevailing market conditions, competitive environment and customer demand. Costs associated with restructuring
actions can include termination benefits and related charges, in addition to facility closure, contract termination and other related
activities. Restructuring charges and asset impairments are included in general and administrative expenses in the Consolidated
Statements of Operations.
The following table summarizes major components of the restructuring and asset impairment charges during each fiscal
year:
2015
2014
2013
(In millions)
2012 Global Restructuring Plan
Severance and other employee-related costs . . . . . . . . . . . . . . . . . . . . . . . . $
(1) $
5
$
2012 EES Restructuring Plan
Severance and other employee-related costs . . . . . . . . . . . . . . . . . . . . . . . .
Contract cancellation and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Others
Severance and other employee-related costs . . . . . . . . . . . . . . . . . . . . . . . .
Contract cancellation and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(2)
—
9
1
7
14
$
—
—
—
—
—
—
5
$
$
Restructuring and asset impairment charges for each fiscal year were recorded as follows:
Silicon Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
15
(1)
14
$
— $
—
—
5
5
$
2015
2014
2013
(In millions)
39
8
6
12
2
(4)
—
63
1
2
25
35
63
89
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2012 Global Restructuring Plan
On October 3, 2012, Applied announced a restructuring plan (the 2012 Global Restructuring Plan) to realign its global
workforce and enhance its ability to invest for growth. Under this plan, Applied implemented a voluntary retirement program and
other workforce reduction actions. The voluntary retirement program was available to certain U.S. employees who met minimum
age and length of service requirements, as well as other business-specific criteria. Applied implemented other workforce reduction
actions globally across multiple business segments and functions, the extent of which depended on the number of employees who
participated in the voluntary retirement program and other considerations. A total of approximately 1,300 positions were affected
under this plan. As of January 26, 2014, principal activities related to this plan were complete.
During fiscal 2014 and 2013, Applied recognized $5 million and $39 million, respectively, of employee-related costs in
connection with the 2012 Global Restructuring Plan. Total costs incurred in implementing this plan were $150 million, none of
which were allocated to the operating segments.
2012 EES Restructuring Plan
On May 10, 2012, Applied announced a plan (the 2012 EES Restructuring Plan) to restructure its Energy and Environmental
Solutions segment in light of challenging industry conditions affecting the solar photovoltaic and light-emitting diode (LED)
equipment markets. As part of this plan, Applied relocated certain manufacturing, business operations and customer support
functions of its precision wafering systems business and ceased LED development activities. The 2012 EES Restructuring Plan
also impacted certain LED support activities in the Applied Global Services segment. The 2012 EES Restructuring Plan impacted
approximately 300 positions globally. As of October 27, 2013, principal activities related to this plan were complete. Total costs
incurred in implementing this plan were $87 million, of which $13 million were inventory-related charges.
During fiscal 2015, Applied recorded a favorable adjustment of $2 million associated with restructuring reserves under this
program. During fiscal 2013, Applied recognized $26 million, of restructuring and asset impairment charges in connection with
the 2012 EES Restructuring Plan. These costs were reported in the Energy and Environmental Solutions and Applied Global
Services segments.
Other
During fiscal 2015, Applied implemented cost reduction measures in its solar business to achieve a lower break-even level
and improve business performance and incurred $17 million in restructuring charges and asset impairments and $35 million of
inventory-related charges recorded in cost of products sold. These costs are reported in Applied Global Services and Energy and
Environmental Solutions segments. Total costs expected to be incurred in implementing these actions are in the range of $45
million to $55 million. Applied expects to complete the principal activities related to these actions by the second quarter of fiscal
2016. As of October 25, 2015, the restructuring accruals related to these actions were $4 million, of which $3 million is related
to severance and other employee cost accruals.
During fiscal 2013, Applied also recognized $2 million of severance and other employee-related costs in connection with
the integration of Varian. These costs were reported in the Silicon Systems and Applied Global Services segments. As of October
26, 2015, there were no remaining severance accrual associated with restructuring reserves under this program.
90
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in restructuring reserves were as follows:
2012 Global
Restructuring
Plan
2012 EES Restructuring Plan
Others
Severance and
Other
Employee-
Related Costs
Severance and
Other
Employee-
Related Costs
Contract
Cancellation
and Other
Costs
Severance
and Other
Employee-
Related
Costs
Contract
Cancellation
and Other
Costs
Total
Balance, October 28, 2012 . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for restructuring reserves . . . . . . . . . . . . . . . . .
Consumption of reserves . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment of restructuring reserves . . . . . . . . . . . . . . . .
Balance, October 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for restructuring reserves . . . . . . . . . . . . . . . . .
Consumption of reserves . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment of restructuring reserves . . . . . . . . . . . . . . . .
Balance, October 26, 2014 . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for restructuring reserves . . . . . . . . . . . . . . . . .
Consumption of reserves . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment of restructuring reserves . . . . . . . . . . . . . . . .
Balance, October 25, 2015 . . . . . . . . . . . . . . . . . . . . . . . . $
106
$
16
$
(In millions)
1
$
5
$
5
$
7
(18)
—
5
—
(5)
—
$
8
(2)
(2)
5
—
(1)
—
$
2
(5)
—
2
—
(2)
—
$
— $
4
$ — $
—
—
—
— $
—
(1)
(2)
1
8
(5)
—
—
—
(4)
1
—
—
—
1
1
(1)
—
$
$
133
52
(136)
(10)
39
7
(35)
(2)
9
9
(9)
(3)
6
$
3
$
1
$
35
(111)
(4)
26
7
(27)
(2)
4
—
(2)
(1)
1
$
$
$
91
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 12
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
Accumulated Other Comprehensive Income (Loss)
Changes in the components of AOCI, net of tax, were as follows:
Unrealized
Gain (Loss)
on
Investments,
Net
Unrealized
Gain (Loss) on
Derivative
Instruments
Qualifying as
Cash Flow
Hedges
Defined and
Postretirement
Benefit Plans
Cumulative
Translation
Adjustments
Total
Balance at October 27, 2013 . . . . . . . . . . . . . . . . . . . . . $
25
$
Other comprehensive income (loss) before
reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified out of AOCI . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . .
Balance at October 26, 2014 . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) before
reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified out of AOCI . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . .
Balance at October 25, 2015 . . . . . . . . . . . . . . . . . . . . . $
8
(9)
(1)
24
(11)
1
(10)
14
$
$
Stock Repurchase Program
(In millions)
$
(72) $
2
7
$
4
(6)
(2)
— $
(9)
(6)
(15)
(15) $
(36)
3
(33)
(105) $
(5)
5
—
(105) $
$
(2)
—
(2)
5
—
9
9
14
$
(38)
(26)
(12)
(38)
(76)
(25)
9
(16)
(92)
On April 26, 2015, Applied's Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion
in repurchases over the three years ending April 2018. At October 25, 2015, $1.7 billion remained available for future stock
repurchases under this repurchase program. Applied's prior stock repurchase program ended in March 2015.
The following table summarizes Applied’s stock repurchases for each fiscal year:
2015
2014
2013
(In millions, except per share amounts)
Shares of common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average price paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
76
1,325
17.33
—
— $
— $
18
245
13.60
Applied records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance
of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury
stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is
insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained
earnings.
92
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Dividends
During each of fiscal 2015 and 2014, Applied's Board of Directors declared four quarterly cash dividends of $0.10 per share.
During fiscal 2013, Applied’s Board of Directors declared three quarterly cash dividends of $0.10 per share and one quarterly cash
dividend of $0.09 per share. Dividends paid during fiscal 2015, 2014 and 2013 amounted to $487 million, $485 million and $456
million, respectively. 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.
Share-Based Compensation
Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of
share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In
addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of
share-based awards to non-employee directors and consultants. Share-based awards made beginning in March 2012 under the plan
may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has
two Employee Stock Purchase Plans, one generally for United States employees and a second generally for employees of
international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.
Applied recognized total share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted
stock units, performance shares and performance units, and related tax benefits for each fiscal year as follows:
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tax benefit recognized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
187
52
$
$
177
50
$
$
The effect of share-based compensation on the results of operations for each fiscal year was as follows:
2015
2014
2013
(In millions)
2015
2014
2013
(In millions)
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Research, development, and engineering . . . . . . . . . . . . . . . . . . .
Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
57
69
26
35
—
187
$
$
53
66
23
35
—
177
$
$
162
45
50
53
20
34
5
162
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 October 25, 2015, Applied had $262 million in total unrecognized compensation expense, net of estimated forfeitures,
related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average
period of 2.4 years. At October 25, 2015, there were 126 million shares available for grants of share-based awards under the
Employee Stock Incentive Plan, and an additional 29 million shares available for issuance under the ESPP.
93
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 during fiscal 2015 and 2014. The weighted average assumptions used
in the model for the stock options granted and assumed are outlined below:
Stock Options:
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
2.7%
29.5%
1.44%
4.5
Information with respect to stock options for each fiscal year is as follows:
Aggregate intrinsic value of outstanding stock options. . . . . . . . . . . . . . . . . . . . . . . . . $
Total intrinsic value of stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total fair value of stock options vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash received from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Actual tax benefit realized from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Stock option activity during each fiscal year was as follows:
2015
2014
2013
(In millions)
19
$
$
$
$
$
39
1
29
12
6
6
1
3
2
$
$
$
$
$
49
63
4
88
19
2015
2014
2013
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Shares
(In millions, except per share amounts)
Outstanding, beginning of year. . . . . . . . . . . . . . . . . . . .
Granted and assumed in Varian acquisition . . . . . . . . . .
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled and forfeited . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding, end of year. . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable, end of year . . . . . . . . . . . . . . . . . . . . . . . . .
2
$
— $
(1) $
— $
$
1
$
1
10.87
—
5.90
—
12.45
10.98
$
6
— $
(4) $
— $
$
2
$
1
9.12
—
7.85
—
10.87
7.97
$
21
1
$
(11) $
(5) $
$
6
$
5
10.53
15.06
8.16
17.62
9.12
7.90
94
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information with respect to options outstanding and exercisable at October 25, 2015:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(In years)
Number of
Shares
(In millions)
$3.36 — $9.99 . . . . . . . . . . . . . .
$10.00 — $15.06 . . . . . . . . . . . .
Options exercisable and
expected to become exercisable .
— $
1
1
1
$
$
$
5.58
15.03
12.45
12.45
1.12
4.80
3.79
3.79
Aggregate
Intrinsic
Value
(In millions)
4
$
2
6
6
$
$
Number of
Shares
(In millions)
— $
1
1
$
$
Weighted
Average
Exercise
Price
5.58
15.00
10.98
$
Aggregate
Intrinsic
Value
(In millions)
4
$
1
5
Option prices at the lower end of the range were principally attributable to stock options assumed in connection with the
Varian acquisition in fiscal 2012.
Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units
Restricted stock units are converted into shares of Applied common stock upon vesting on a one-for-one basis. Restricted
stock has the same rights as other issued and outstanding shares of Applied common stock except these shares generally have no
right to dividends and are held in escrow until the award vests. Performance shares and performance units are awards that result
in a payment to a grantee, generally 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, restricted stock, performance shares and performance units
typically vest over four years and vesting is usually subject to the grantee’s continued service with Applied and, in some cases,
achievement of specified performance goals. The compensation expense related to 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.
Restricted stock, performance shares and performance units granted to certain executive officers are subject to the achievement
of specified performance goals (performance-based awards). These performance-based awards become eligible to vest only if
performance goals are achieved and then actually will vest only if the grantee remains employed by Applied through each applicable
vesting date. These performance-based awards require the achievement of targeted levels of adjusted annual operating profit
margin. For performance-based awards granted in fiscal 2015 and 2013, additional shares become eligible for time-based vesting
if Applied achieves certain levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard
& Poor's 500 Information Technology Index, measured at the end of a two-year period.
The fair value of these performance-based awards is estimated on the date of 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 of generally three or
four years, provided that the grantee remains employed by Applied through each scheduled vesting date. If the performance goals
are not met as of the end of the performance period, 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.
95
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding
under Applied’s equity compensation plans is presented below:
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 28, 2012 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 27, 2013 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 26, 2014 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 25, 2015 . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units expected to vest . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
Shares
(In millions, except per share amounts)
36
$
19
$
(11) $
(6) $
38
$
11
$
(13) $
(3) $
33
$
10
$
(15) $
(1) $
27
24
$
$
11.53
10.55
11.44
11.28
11.11
16.58
11.13
11.72
12.59
22.60
12.04
14.98
16.41
15.93
2.6 years $
376
2.4 years $
662
2.3 years $
698
2.2 years $
2.0 years $
440
402
At October 25, 2015, 1 million additional performance-based awards could be earned upon certain levels of achievement of
Applied's TSR relative to a peer group at a future date.
The actual tax benefit realized for the tax deductions from vested restricted stock units during fiscal 2015, 2014 and 2013
totaled $103 million, $61 million and $42 million, respectively.
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 each 6-month purchase
period, subject to certain limits. The number of shares issued under the ESPP during fiscal 2015, 2014 and 2013 was 5 million, 6
million and 7 million, respectively. Compensation expense is calculated using the fair value of the employees’ purchase rights
under the Black-Scholes option pricing model. Underlying assumptions used in the model and the weighted average estimated
fair value of purchase rights under the ESPP for each fiscal year are outlined in the following table:
ESPP:
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average estimated fair value . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
2.20%
31.8%
0.19%
0.5
$4.55
1.96%
26.3%
0.06%
0.5
$4.56
2.80%
24.8%
0.09%
0.5
$3.08
96
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13
Employee Benefit Plans
Employee Bonus Plans
Applied has various employee bonus plans. A discretionary bonus plan provides for the distribution of a percentage of pre-
tax income to Applied employees who are not participants in other performance-based incentive plans, up to a maximum percentage
of eligible compensation. Other plans provide for bonuses to Applied’s executives and other key contributors based on the
achievement of profitability and/or other specified performance criteria. Charges under these plans for fiscal 2015, 2014 and 2013
were $307 million, $290 million and $269 million, respectively.
Employee Savings and Retirement Plan
Applied’s Employee Savings and Retirement Plan (the 401(k) Plan) is qualified under Sections 401(a) and (k) of the Internal
Revenue Code (the Code). Eligible employees may make salary deferral and catch-up contributions under the 401(k) Plan on a
pre-tax basis and on a Roth basis, subject to an annual dollar limit established by the Code. Applied matches 100% of participant
salary and/or Roth deferral contributions up to the first 3% of eligible contribution and then 50% of every dollar between 4% and
6% of eligible contribution. Applied does not make matching contributions on any catch-up contributions made by participants.
Plan participants who were employed by Applied or any of its affiliates became 100% vested in their Applied matching contribution
account balances. Applied’s matching contributions under the 401(k) Plan were approximately $35 million, net of $1 million in
forfeitures, for fiscal 2015 and $29 million, net of $1 million in forfeitures, for each of fiscal 2014 and 2013.
Defined Benefit Pension Plans of Foreign Subsidiaries and Other Post-Retirement Benefits
Several of Applied’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible
employees. Benefits under these plans are typically based on years of service and final average compensation levels. The plans
are managed in accordance with applicable local statutes and practices. Applied deposits funds for certain of these plans with
insurance companies, pension trustees, government-managed accounts, and/or accrues the expense for the unfunded portion of
the benefit obligation on its Consolidated Financial Statements. Applied’s practice is to fund the various pension plans in amounts
sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities.
Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed qualified plan
assets. The differences between the aggregate projected benefit obligations and aggregate plan assets of these plans have been
recorded as liabilities by Applied and are included in other liabilities and accrued expenses in the Consolidated Balance Sheets.
Applied also has a U.S. post-retirement plan that provides certain medical and vision benefits to eligible retirees who are at
least age 55 and whose years of service plus their age equals at least 65 at their date of retirement. An eligible retiree also may
elect coverage for an eligible spouse or domestic partner who is not eligible for Medicare. Coverage under the plan generally ends
for both the retiree and spouse or domestic partner upon becoming eligible for Medicare. In addition, Applied also has a post-
retirement benefit plan as a result of the acquisition of Varian. Applied’s liability under these post-retirement plans, which was
included in other liabilities in the Consolidated Balance Sheets, was $21 million at October 25, 2015 and $34 million at October 26,
2014.
97
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the changes in benefit obligations and plan assets, which includes post-retirement benefits, for each fiscal
year is presented below:
Change in projected benefit obligation
Beginning projected benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailments, settlements and special termination benefits . . . . . . . . . .
Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments and business combinations . . . . . . . . . . . . . . . . . . . .
Ending projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Ending accumulated benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . $
Range of assumptions to determine benefit obligations
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets
Beginning fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . .
Divestitures, settlements and business combinations . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Funded status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized in the consolidated balance sheets
Noncurrent asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Estimated amortization from accumulated other comprehensive
loss into net periodic benefit cost over the next fiscal period
Actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service cost credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Plans with projected benefit obligations in excess of plan assets
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Plans with accumulated benefit obligations in excess of plan assets
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
98
2015
2014
2013
(In millions, except percentages)
479
15
13
1
12
(1)
(39)
(9)
—
471
434
$
$
$
445
17
17
1
62
(26)
(22)
(12)
(3)
479
446
$
$
$
434
20
15
1
(16)
(8)
10
(10)
(1)
445
409
0.9% - 4.4%
1.9% - 3.6%
1.0% - 4.4%
2.0% - 4.0%
1.1% - 4.5%
2.0% - 4.7%
$
268
19
21
1
(18)
(1)
(9)
281
$
(190) $
$
19
(3)
(206)
(190) $
6
(1)
5
135
—
135
308
98
274
98
$
$
$
$
$
$
$
$
$
248
20
48
1
(11)
(26)
(12)
268
$
(211) $
$
17
(3)
(225)
(211) $
6
—
6
134
(1)
133
326
98
297
98
$
$
$
$
$
$
$
$
214
18
24
1
8
(7)
(10)
248
(197)
9
(4)
(202)
(197)
4
—
4
91
2
93
438
233
269
99
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Plan assets — allocation
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
39%
42%
14%
4%
1%
39%
38%
15%
5%
3%
The following table presents a summary of the ending fair value of the plan assets:
October 25, 2015
October 26, 2014
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Equity securities . . . . . . . $
Debt securities . . . . . . . . .
Insurance contracts . . . . .
Other investments . . . . . .
Cash . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . $
42
8
—
—
2
52
$
$
66
111
—
12
—
189
$
$
— $
—
40
—
—
40
$
$
(In millions)
108
119
40
12
2
281
$
38
8
—
—
9
55
$
$
66
94
—
12
—
172
$
$
— $
—
41
—
—
41
$
The following table presents the activity in Level 3 instruments for each fiscal year:
2015
2014
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Actual return on plan assets:
Relating to assets still held at reporting date . . . . . . . . . . . . . . . . . . . . .
Purchases, sales, settlements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(In millions)
41
$
2
1
(4)
40
$
104
102
41
12
9
268
47
—
(2)
(4)
41
Applied’s investment strategy for its defined benefit plans is to invest plan assets in a prudent manner, maintaining well-
diversified portfolios with the long-term objective of meeting the obligations of the plans as they come due. Asset allocation
decisions are typically made by plan fiduciaries with input from Applied’s international pension committee. Applied’s asset
allocation strategy incorporates a sufficient equity exposure in order for the plans to benefit from the expected better long-term
performance of equities relative to the plans’ liabilities. Applied retains investment managers, where appropriate, to manage the
assets of the plans. Performance of investment managers is monitored by plan fiduciaries with the assistance of local investment
consultants. The investment managers make investment decisions within the guidelines set forth by plan fiduciaries. Risk
management practices include diversification across asset classes and investment styles, and periodic rebalancing toward target
asset allocation ranges. Investment managers may use derivative instruments for efficient portfolio management purposes. Plan
assets do not include any of Applied’s own equity or debt securities.
A summary of the components of net periodic benefit costs and the weighted average assumptions used for net periodic
benefit cost and benefit obligation calculations for each fiscal year is presented below:
99
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Components of net periodic benefit cost
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss and prior service credit . . . . . . . . . . . . . . . . . . . . .
Settlement and curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average assumptions
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
(In millions, except percentages)
15
13
(15)
7
(1)
19
$
$
17
17
(14)
4
3
27
$
$
3.00%
5.62%
2.74%
3.68%
5.64%
3.29%
20
15
(12)
6
—
29
3.46%
5.38%
3.07%
Asset return assumptions are derived based on actuarial and statistical methodologies, from analysis of long-term historical
data relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount
rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the
approximate duration of both plan obligations and the relevant benchmark yields.
Future expected benefit payments for the pension plans and the post-retirement plan over the next ten fiscal years are as
follows:
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021-2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Company contributions to these plans for fiscal 2016 are expected to be approximately $14 million.
Benefit Payments
(In millions)
15
12
11
12
12
72
134
Executive Deferred Compensation Plans
Applied sponsors two unfunded deferred compensation plans, the Executive Deferred Compensation Plan (Predecessor
EDCP) and the 2016 Deferred Compensation Plan (2016 DCP) (formerly known as the 2005 Executive Deferred Compensation
Plan), under which certain employees may elect to defer a portion of their following year’s eligible earnings. The Predecessor
EDCP was frozen as of December 31, 2004 such that no new deferrals could be made under the plan after that date and the plan
would qualify for “grandfather” relief under Section 409A of the Code. The Predecessor EDCP participant accounts continue to
be maintained under the plan and credited with deemed interest. The 2016 DCP was originally implemented by Applied effective
as of January 1, 2005, and amended and restated as of October 12, 2015, and is intended to comply with the requirements of
Section 409A of the Code. In addition, Applied also sponsors a non-qualified deferred compensation plan as a result of the
acquisition of Varian. Amounts payable, including accrued deemed interest, totaled $38 million at October 25, 2015, which was
included in other liabilities in the Consolidated Balance Sheets. Amounts payable, including accrued deemed interest, totaled $40
million at October 26, 2014, of which $35 million was included in accounts payable and accrued expenses and $5 million was
included in other liabilities in the Consolidated Balance Sheets.
100
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 14
Income Taxes
The components of income before income taxes for each fiscal year were as follows:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2015
2014
2013
(In millions)
629
969
1,598
$
$
612
836
1,448
$
$
The components of the provision for income taxes for each fiscal year were as follows:
2015
2014
2013
Current:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134
199
18
351
Deferred:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(194)
69
(5)
(130)
221
$
$
(In millions)
$
270
$
97
27
394
(9)
(3)
(6)
(18)
376
$
194
156
350
3
72
2
77
34
(19)
2
17
94
A reconciliation between the statutory U.S. federal income tax rate of 35 percent and Applied’s actual effective income tax
rate for each fiscal year is presented below:
Tax provision at U.S. statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolutions from prior years’ income tax filings . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign operations taxed at various rates . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and other tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. domestic production deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
2013
35.0%
(4.9)
(16.3)
0.9
(0.2)
(0.6)
(1.1)
—
0.8
0.2
13.8%
35.0%
2.0
(10.9)
1.0
(0.3)
(1.3)
0.8
—
0.4
(0.7)
26.0%
35.0%
(4.7)
(21.1)
0.8
(5.4)
(1.0)
—
22.5
2.2
(1.4)
26.9%
The effective tax rate for fiscal 2015 was lower than the rate for fiscal 2014 due primarily to acquisition costs that became
deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, an
adjustment in the second quarter of fiscal 2015 to correct an error in the recognition of cost of sales in the U.S. related to intercompany
sales, reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was
retroactive to its expiration in December 2013, resolutions and changes related to income tax liabilities for prior years, and changes
in the geographical composition of income.
101
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effective tax rate for fiscal 2014 was lower than the rate for fiscal 2013 due primarily to nondeductible goodwill impairment
charges in fiscal 2013, offset by resolutions and changes related to prior years and expiration of the U.S. federal research and
development tax credit.
In the reconciliation between the statutory U.S. federal income tax rate and the actual effective income tax rate for fiscal
2015, the effect of foreign operations taxed at various rates represents the difference between an income tax provision at the U.S.
federal statutory income tax rate and the recorded income tax provision, with the difference expressed as a percentage of worldwide
income before income taxes. This effect is substantially related to the tax effect of foreign income before income taxes in jurisdictions
with lower statutory tax rates. The foreign operations with the most significant effective tax rate impact are Singapore and Israel.
The statutory tax rates for fiscal 2015 for Singapore and Israel are 17% and 26.5%, respectively. Applied has been granted tax
holidays for both jurisdictions that expire in fiscal 2026 and fiscal 2017, respectively, excluding potential renewals and subject to
certain conditions with which Applied expects to comply. The tax benefit arising from these tax holidays was $68 million for fiscal
2015 or $0.06 per diluted share.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets
and liabilities were as follows:
Deferred tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Inventory reserves and basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installation and warranty reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits and net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
October 25,
2015
October 26,
2014
(In millions)
20
$
155
11
106
17
196
79
53
—
150
787
(207)
580
(15)
(91)
(68)
(4)
(178)
402
$
26
128
18
123
32
160
44
57
16
27
631
(173)
458
—
(92)
(87)
(12)
(191)
267
The following table presents the breakdown between current and non-current net deferred tax assets and liabilities:
102
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-current deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 25,
2015
October 26,
2014
(In millions)
403
$
55
(56)
402
$
232
67
(32)
267
Current deferred tax liabilities are included in accounts payable and accrued expenses on the Consolidated Balance Sheets
and non-current deferred tax liabilities are included in other liabilities on the Consolidated Balance Sheets.
A valuation allowance is recorded to reflect the estimated amount of net deferred tax assets that may not be realized. Changes
in the valuation allowance in each fiscal year were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
(In millions)
116
$
60
(3)
173
$
$
$
173
40
(6)
207
46
70
—
116
For fiscal 2015, U.S. income taxes have not been provided for approximately $4.1 billion of cumulative undistributed earnings
of several foreign subsidiaries. Applied intends to reinvest these earnings indefinitely in operations outside of the U.S. If these
earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries
were sold or otherwise transferred, Applied would be subject to additional U.S. income taxes (subject to an adjustment for foreign
tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to
these earnings is not practicable.
At October 25, 2015, Applied has state research and development tax credit carryforwards of $179 million, including $143
million of credits that are carried over until exhausted and $36 million which are carried over for 15 years and begin to expire in
fiscal 2021. Applied has a net operating loss carryover in state jurisdictions of $34 million which begin to expire in fiscal 2018.
Management believes it is more likely than not that all loss and tax credit carryovers at October 25, 2015, net of valuation allowance,
will be utilized in future periods.
Applied’s income taxes payable have been reduced by the tax benefits associated with employee stock option transactions.
These benefits, credited directly to stockholders’ equity with a corresponding reduction to taxes payable, amounted to $56 million,
$27 million and $11 million for fiscal 2015, 2014 and 2013, respectively.
Applied maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and
are continuously monitored by management based on the best information available. A reconciliation of the beginning and ending
balances of the total amounts of gross unrecognized tax benefits in each fiscal year is as follows:
Beginning balance of gross unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . $
Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapses of statutes of limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in tax positions for current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance of gross unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
(In millions)
134
(16)
(1)
43
21
(4)
177
$
$
194
(143)
(2)
52
42
(9)
134
$
$
174
(15)
(15)
48
2
—
194
103
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the provision for income taxes in the Consolidated Statements of Operations, a tax benefit of $6 million, a tax expense of
$18 million, and a tax benefit of $1 million were realized in fiscal 2015, 2014 and 2013, respectively, related to interest and
penalties on unrecognized tax benefits. The liability for interest and penalties for fiscal 2015, 2014 and 2013 was $14 million, $25
million and $7 million, respectively, and was classified as a non-current liability in the Consolidated Balance Sheets.
Included in the ending balance of unrecognized tax benefits for fiscal 2015, 2014 and 2013 are $167 million, $124 million
and $183 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the ending
balance of unrecognized tax benefits for fiscal 2015, 2014 and 2013 are $9 million, $9 million and $10 million respectively, of
tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes.
In fiscal 2015, Applied paid $19 million, including interest and penalties, as a result of a settlement of fiscal 2009 through
fiscal 2011 in Italy and paid $2 million, including interest, as a result of a settlement of fiscal 2013 in Switzerland. These settlements
resulted in the recognition of a tax benefit of $10 million in the Consolidated Statements of Operations. In fiscal 2014, Applied
received a refund of $18 million, including interest, as a result of a settlement of fiscal 2008 through fiscal 2012 in Korea, and
received a refund of $17 million, including interest, as a result of a settlement with the Internal Revenue Service for fiscal 2010
related to Varian. These settlements resulted in the recognition of a tax benefit of $3 million in the Consolidated Statements of
Operations. In fiscal 2013, Applied received a refund of $31 million, including interest, as a result of a settlement with the Internal
Revenue Service for fiscal 2008 and fiscal 2009. This resulted in the recognition of a tax benefit of $12 million in the Consolidated
Statement of Operations. In fiscal 2013, Applied paid $14 million to the Internal Revenue Service as part of an ongoing audit of
Varian for fiscal 2010 through fiscal 2012. No tax expense or benefit was recognized.
A number of Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. federal and state
returns for fiscal 2010 and later years, and tax returns in certain jurisdictions outside of the United States for fiscal 2009 and later
years.
The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that
may be part of the settlement process, is highly uncertain. This could cause large fluctuations in the balance sheet classification
of current assets and non-current assets and liabilities. Applied continues to have ongoing negotiations with various taxing
authorities throughout the year.
Note 15 Warranty, Guarantees, Commitments and Contingencies
Leases
Applied leases some of its facilities and equipment under non-cancelable operating leases and has options to renew most
leases, with rentals to be negotiated. Total rent expense for fiscal 2015, 2014 and 2013, was $32 million, $37 million and $36
million, respectively.
As of October 25, 2015, future minimum lease payments are expected to be as follows:
Fiscal
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Lease Payments
(In millions)
25
16
8
5
3
4
61
104
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Warranty
Changes in the warranty reserves during each fiscal year were as follows:
Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provisions for warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumption of reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
113
117
(104)
126
$
$
(In millions)
102
115
(104)
113
$
$
119
103
(120)
102
Applied products are generally sold with a 12-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 October 25, 2015, the maximum potential
amount of future payments that Applied could be required to make under these guarantee agreements was approximately $58
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 October 25, 2015, Applied Materials Inc. has provided
parent guarantees to banks for approximately $100 million to cover these arrangements.
In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-term loan agreement, guaranteed by
Applied, under which it borrowed $800 million to facilitate the return of capital to Applied.
Legal Matters
Korea Criminal Proceedings
In 2010, the Seoul Eastern District Court began hearings on indictments brought by the Seoul Prosecutor's Office for the
Eastern District of Korea (the Prosecutor's Office) alleging that employees of several companies improperly received and used
confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. 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. Neither Applied nor any of its subsidiaries was named as
a party to the proceedings. Hearings on these matters concluded in November 2012 and the Court issued its decision on February
7, 2013. As part of the ruling, nine AMK employees (including the former head of AMK) were acquitted of all charges, while one
AMK employee was found guilty on some of the charges and received a suspended jail sentence. The Prosecutor's Office and
various individuals appealed the matter to the High Court. On June 20, 2014, the High Court rendered its decision, finding all
defendants not guilty, including all ten AMK employees. The prosecutor has appealed the High Court decision to the Korean
Supreme Court.
Other Matters
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.
Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, Applied
does not believe that any will have a material effect on its consolidated financial condition or results of operations.
105
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 16
Industry Segment Operations
Applied’s four reportable segments remain Silicon Systems, Applied Global Services, Display, and Energy and
Environmental Solutions. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified
as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and
assessing performance for the entire Company.
During the third quarter of fiscal 2015, Applied implemented a new management structure, which resulted in changes in
Applied’s reporting units. Applied determined its reporting units by first identifying its operating segments, and then assessing
whether components of these operating segments constitute a business for which discrete financial information is available and
where segment management regularly reviews the operating results of that component. Applied aggregates reporting units within
an operating segment that have similar economic characteristics and are similar in nature of their products and services, production
processes, type or class of customers, distribution methods and operational environment. Applied identified three reporting units,
which include the Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group,
which combine to form the Silicon Systems reporting segment. The new management structure did not affect Applied Global
Services, Display and Energy and Environmental Solutions reporting segments.
Each operating 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.
Future changes to this internal financial structure may result in changes to Applied’s reportable segments.
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 actions 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.
The Silicon Systems reportable segment includes semiconductor capital equipment for etch, rapid thermal processing,
deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and 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 liquid crystal displays (LCDs), organic light-emitting diodes
(OLEDs), and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices.
The Energy and Environmental Solutions segment includes products for fabricating solar photovoltaic cells and modules,
as well as high throughput roll-to-roll deposition equipment for flexible electronics and other applications.
106
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information for each reportable segment for and as of the end of each fiscal year is as follows:
2015:
Silicon Systems . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . .
Total Segment . . . . . . . . . . . . . . . . . . $
2014:
Silicon Systems . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . .
Total Segment . . . . . . . . . . . . . . . . . . $
2013:
Silicon Systems . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . .
Display . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and Environmental Solutions . .
Total Segment . . . . . . . . . . . . . . . . . . $
Net Sales
Operating
Income (Loss)
Depreciation/
Amortization
Capital
Expenditures
Segment
Assets
(In millions)
6,135
2,531
780
213
9,659
5,978
2,200
615
279
9,072
4,775
2,023
538
173
7,509
$
$
$
$
$
$
1,410
664
156
(61)
2,169
1,391
573
129
15
2,108
876
436
74
(433)
953
$
$
$
$
$
$
268
10
5
7
290
268
11
5
9
293
260
13
8
22
303
$
$
$
$
$
$
115
12
13
3
143
134
7
4
1
146
118
7
6
1
132
$
$
$
$
$
$
5,464
2,254
456
118
8,292
5,508
2,042
423
173
8,146
5,525
1,958
293
183
7,959
Operating results for fiscal 2015, 2014 and 2013 included restructuring charges and asset impairments as discussed in detail
in Note 11, Restructuring Charges and Asset Impairments.
Reconciliations of segment operating results to Applied consolidated totals for each fiscal year are as follows:
2015
2014
2013
(In millions)
Total segment operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate and unallocated costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges and asset impairments . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with terminated business combination . . . . . . . . .
Gain (loss) on derivatives associated with terminated business
combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
2,169
(515)
—
(50)
89
1,693
$
$
2,108
(540)
(5)
(73)
30
1,520
$
953
(462)
(35)
(17)
(7)
432
Reconciliations of depreciation and amortization expense to Applied consolidated totals for each fiscal year are as follows:
Total segment depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . $
Depreciation on shared facilities and information technology assets . . . . . .
Consolidated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
(In millions)
290
81
371
$
$
293
82
375
$
$
303
107
410
107
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reconciliations of capital expenditures to Applied consolidated totals for each fiscal year are as follows:
Total segment capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shared facilities and information technology assets . . . . . . . . . . . . . . . . . . . . . . .
Consolidated capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
143
72
215
$
$
146
95
241
$
$
132
65
197
Reconciliations of segment assets to Applied consolidated totals for each fiscal year are as follows:
2015
2014
2013
(In millions)
October 25,
2015
October 26,
2014
(In millions)
Total segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,292
5,911
(49)
458
148
514
34
15,308
$
$
8,146
4,060
(58)
299
147
522
58
13,174
For geographical reporting, revenue by geographic location is determined by the location of customers' facilities to which
products were shipped. Long-lived assets consist primarily of property, plant and equipment and equity-method investments, and
are attributed to the geographic location in which they are located. Net sales and long-lived assets by geographic region for and
as of each fiscal year were as follows:
2015
2014
2013
(In millions)
Net sales:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total outside United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,630
2,600
1,623
1,654
1,078
642
432
8,029
9,659
$
$
1,966
2,702
1,608
965
817
658
356
7,106
9,072
$
$
1,473
2,640
787
924
685
680
320
6,036
7,509
108
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
October 25,
2015
October 26,
2014
(In millions)
Long-lived assets:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Taiwan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total outside United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
705
39
46
12
6
75
73
251
956
$
$
636
34
61
12
5
99
77
288
924
The following customers accounted for at least 10 percent of Applied’s net sales in each fiscal year, which were for products
in multiple reportable segments:
Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan Semiconductor Manufacturing Company Limited. . . . . . . . . . . . . . . . . .
2015
2014
2013
18%
15%
12%
21%
13%
27%
Note 17
Unaudited Quarterly Consolidated Financial Data
2015:
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . $
Net income. . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share . . . . . . . . . . . $
2014:
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . $
Net income. . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share . . . . . . . . . . . $
First
Second
Third
Fourth
Fiscal Year
Fiscal Quarter
(In millions, except per share amounts)
2,359
959
348
0.28
2,190
891
253
0.21
$
$
$
$
$
$
$
$
2,442
1,016
364
0.29
2,353
1,001
262
0.21
$
$
$
$
$
$
$
$
2,490
1,018
329
0.27
2,265
992
301
0.24
$
$
$
$
$
$
$
$
2,368
959
336
0.28
2,264
959
256
0.21
$
$
$
$
$
$
$
$
9,659
3,952
1,377
1.12
9,072
3,843
1,072
0.87
109
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:
INDEX TO EXHIBITS
Exhibit No.
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1
10.2
Description
Certificate of Incorporation of Applied Materials, Inc., as
amended and restated through March 10, 2009
Certificate of Designation, Preferences and Rights of the Terms
of the Series A Junior Participating Preferred Stock dated as of
July 9, 1999
Bylaws of Applied Materials, Inc., amended and restated to
December 6, 2011
Form of Indenture (including form of debt security) between
Applied Materials, Inc. and Harris Trust Company of
California, as Trustee
Indenture, dated June 8, 2011, by and between Applied
Materials, Inc. and U.S. Bank National Association, as Trustee
First Supplemental Indenture, dated June 8, 2011, by and
between Applied Materials, Inc. and U.S. Bank National
Association, as Trustee
Second Supplemental Indenture, dated September 24, 2015, by
and between Applied Materials, Inc. and U.S. Bank National
Association, as Trustee
Form of Indemnification Agreement between Applied
Materials, Inc. and Non-Employee Directors
Form of Indemnification Agreement between Applied
Materials, Inc. and certain of its officers
10.3
Applied Materials, Inc. Profit Sharing Scheme (Ireland)
Applied Materials, Inc. amended and restated Relocation
Policy
Applied Materials Inc. Employee Financial Assistance Plan,
amended and restated as of December 18, 2008
Deed of Amendment to Applied Materials Profit Sharing
Scheme, dated February 7, 2006, to amend Clause 20 of the
Trust Deed thereunder
Deed of Amendment to Applied Materials Profit Sharing
Scheme, dated February 7, 2006, to amend the definition of
Eligible Employee in the First Schedule to the Trust Deed
thereunder.
Form of Non-Qualified Stock Option Agreement for
Employees for use under the Applied Materials, Inc. Employee
Stock Incentive Plan, as amended
Form of Performance Share Agreement for use under the
Applied Materials, Inc. Employee Stock Incentive Plan, as
amended
10.4*
10.5*
10.6
10.7
10.8*
10.9*
10.10*
10.11*
Incorporated by Reference
Form
10-Q
File No.
000-06920
Exhibit No.
3.1
Filing Date
6/3/2009
10-Q
000-06920
3(i)(a)
9/14/1999
8-K
000-06920
8-K
000-06920
8-K
000-06920
8-K
000-06920
3.1
4.1
4.1
4.2
12/7/2011
8/17/1994
6/10/2011
6/10/2011
8-K
000-06920
4.1
9/24/2015
10-K
000-06920
10.44
1/31/2000
10-K
000-06920
10.46
1/31/2000
S-8
8-K
333-45011
4.1
1/27/1998
000-06920
10.46
10/31/2005
10-Q
000-06920
10.58
3/3/2009
10-K
000-06920
10.48
12/12/2008
10-K
000-06920
10.49
12/12/2008
10-Q
000-06920
10.63
3/3/2009
10-Q
000-06920
10.71
6/9/2010
Form of Restricted Stock Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended
10-Q
000-06920
10.72
6/9/2010
Form of Performance Unit Agreement for use under the
Applied Materials, Inc. Employee Stock Incentive Plan, as
amended
10-Q
000-06920
10.1
2/27/2012
110
Exhibit No.
Description
10.12* Applied Materials, Inc. Employee Stock Incentive Plan,
amended and restated effective March 6, 2012
Incorporated by Reference
Form
8-K
File No.
000-06920
Exhibit No.
10.1
Filing Date
3/9/2012
10.13* Applied Materials, Inc. Senior Executive Bonus Plan, amended
8-K
000-06920
10.2
3/9/2012
10.14*
10.15*
10.16*
10.17*
and restated effective March 6, 2012
Form of Restricted Stock Unit Agreement for use under the
amended and restated Applied Materials, Inc. Employee Stock
Incentive Plan
Form of Restricted Stock Unit Agreement for Nonemployee
Directors for use under the amended and restated Applied
Materials, Inc. Employee Stock Incentive Plan
Form of Performance Shares Agreement for use under the
amended and restated Applied Materials, Inc. Employee Stock
Incentive Plan
Form of Restricted Stock Agreement for use under the
amended and restated Applied Materials, Inc. Employee Stock
Incentive Plan
10-Q
000-06920
10.3
5/24/2012
10-Q
000-06920
10.4
5/24/2012
10-Q
000-06920
10.5
5/24/2012
10-Q
000-06920
10.3
8/23/2012
10.18* Applied Materials, Inc. Employees' Stock Purchase Plan,
amended and restated effective October 28, 2012
10-K
000-06920
10.54
12/5/2012
10.19* Offer Letter, dated August 14, 2013, between Applied
10-Q
000-06920
10.2
8/22/2013
Materials, Inc. and Gary E. Dickerson
10.20* Offer Letter, dated August 15, 2013, between Applied
10-Q
000-06920
10.3
8/22/2013
Materials, Inc. and Michael R. Splinter
10.21*
10.22*
Form of Non-Qualified Stock Option Agreement for
Employees for use under the Applied Materials, Inc. Employee
Stock Incentive Plan, as amended
Form of Retention Bonus and Equity Award Amendment
Agreement entered into between Applied Materials, Inc. and
certain officers identified in the attached schedule
10-Q
000-06920
10.4
8/22/2013
10-K
000-06920
10.53
12/4/2013
10.23* Retention and Equity Award Amendment Agreement, dated
10-Q
000-06920
10.1
2/20/2014
December 20, 2013, between Applied Materials, Inc. and
Michael R. Splinter
10.24*
Form of Performance Unit Agreement for use under the
Applied Materials, Inc. Employee Stock Incentive Plan, as
amended
10.25*
Form of Letter of Understanding for Long-Term Assignment
10.26*
10.27*
Form of Amendment to Retention Bonus and Equity Award
Amendment Agreement entered into between Applied
Materials, Inc. and certain officers identified in the attached
schedule
Equity Award Amendment Agreement, dated December 11,
2014, between Applied Materials, Inc. and Charles Read
10-Q
000-06920
10.2
2/20/2014
10-K
10-Q
000-06920
000-06920
10.49
10.2
12/17/2014
2/19/2015
10-Q
000-06920
10.3
2/19/2015
10.28* Applied Materials, Inc. Applied Incentive Plan, amended and
10-Q
000-06920
10.4
2/19/2015
restated effective October 27, 2014
111
Incorporated by Reference
Form
10-Q
File No.
000-06920
Exhibit No.
10.5
Filing Date
2/19/2015
8-K
000-06920
10.1
9/9/2015
8-K
000-06920
10.1
8/10/2015
Exhibit No.
10.29*
Description
Form of Performance Shares Agreement for fiscal 2015
performance-based equity awards for certain executive officers
under the amended and restated Applied Materials, Inc.
Employee Stock Incentive Plan
10.30
10.31*
Credit Agreement, dated as of September 3, 2015, among
Applied Materials, Inc., JPMorgan Chase Bank, N.A., as
administrative agent, and other lenders named therein
Separation Agreement and Release, dated as of August 7, 2015,
by and between Randhir Thakur and Applied Materials, Inc.
10.32* Applied Materials, Inc. Stock Purchase Plan for Offshore
Employees, amended and restated effective July 15, 2015†
10.33* Applied Materials, Inc. 2016 Deferred Compensation Plan†
21
23
24
31.1
31.2
32.1
32.2
Subsidiaries of Applied Materials, Inc.†
Consent of Independent Registered Public Accounting Firm,
KPMG LLP†
Power of Attorney (included on the signature page of this
Annual Report on Form 10-K)†
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002†
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002†
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
Certification 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‡
*
†
‡
Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)(3).
Filed herewith.
Furnished herewith.
112
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
APPLIED MATERIALS, INC.
By:
/S/ GARY E. DICKERSON
Gary E. Dickerson
President, Chief Executive Officer
Dated: December 9, 2015
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Gary E. Dickerson, Robert J. Halliday and Thomas F. Larkins, jointly and severally, his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
******
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ GARY E. DICKERSON
Gary E. Dickerson
/S/ ROBERT J. HALLIDAY
Robert J. Halliday
/S/ CHARLES W. READ
Charles W. Read
/S/ WILLEM P. ROELANDTS
Willem P. Roelandts
/S/ XUN CHEN
Xun Chen
/S/ AART J. DE GEUS
Aart J. de Geus
/S/ STEPHEN R. FORREST
Stephen R. Forrest
/S/ THOMAS J. IANNOTTI
Thomas J. Iannotti
/S/ SUSAN M. JAMES
Susan M. James
Alexander A. Karsner
/S/ DENNIS D. POWELL
Dennis D. Powell
/S/ ROBERT H. SWAN
Robert H. Swan
Title
President, Chief Executive Officer (Principal
Executive Officer)
Senior Vice President, Chief
Financial Officer
(Principal Financial Officer)
Corporate Vice President, Corporate
Controller and Chief Accounting
Officer (Principal Accounting Officer)
Date
December 9, 2015
December 9, 2015
December 9, 2015
Chairman of the Board
December 9, 2015
December 9, 2015
December 9, 2015
December 9, 2015
December 9, 2015
December 9, 2015
December 9, 2015
December 9, 2015
Director
Director
Director
Director
Director
Director
Director
Director
113
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