20
1 8
annual report
FOLLOW US ONLINE AT:
WEBSITE:
APPLIEDMATERIALS.COM
BLOG:
BLOG.APPLIEDMATERIALS.COM
APPLIED VENTURES, LLC:
APPLIEDVENTURES.COM
Dear Fellow Share hol ders,
Fiscal 2018 marked Applied Materials’ third consecutive
year of record financial performance. We delivered
double-digit revenue growth across all of our segments:
Semiconductor Systems, Applied Global Services and
Display and Adjacent Markets, despite challenging market
conditions in the second half of the year. While we are
experiencing some market headwinds as customers
make adjustments to their investment plans, especially
in memory, we are not seeing the large fluctuations
that characterized the semiconductor and display
equipment industries in the past. At the same time, we are
demonstrating that we have built a more resilient company
with diversified revenue streams that can execute well
in a range of market conditions. Looking further ahead,
we are confident that longer-term growth drivers in both
semiconductor and display remain firmly in place and will
continue to create great opportunities for Applied Materials.
We are in the early stages of a new growth era fueled by
Artificial Intelligence and Big Data. We strongly believe
that over the next decade, A.I. and Big Data will transform
almost every sector of the economy – from transportation
and healthcare to retail and entertainment. Underlying this
transformation is a massive increase in data generation.
In fact, 2018 marked the first year when data generated
by machines surpassed that of humans. Turning all of this
raw data into actionable insights has the potential to create
trillions of dollars of economic value over the coming years.
The race for A.I. leadership demands rapid innovation in
semiconductor technology, and at the foundation is
Applied Materials.
HARDWARE RENAISSANCE
Enabling the A.I.-Big Data era will require new types of
computing at the edge and in the cloud, lower cost and
lower power chips, and abundant storage. We are seeing a
renaissance in hardware development as traditional leaders
in compute race with cloud service providers and startups
to be the first to market with winning A.I. chips. Although
great progress is being made, our customers tell us that
the new era of computing will require order-of-magnitude
improvements in chip performance per watt.
While the need for semiconductor innovation has never
been greater, classic Moore’s Law scaling – the main
driver of semiconductor improvements for the past 50
years – is challenged. Shrinking transistors is becoming
increasingly expensive and no longer delivers simultaneous
improvements in power, performance and cost. Improving
chips in the A.I.-Big Data era calls for innovations in chip
architecture, 3D techniques, novel materials, new ways to
continue shrinking transistors, and advanced packaging
techniques that connect chips together in new ways. All
five of these areas require major advances in materials
engineering and create tremendous opportunities for
Applied Materials.
COMBINING OUR STRENGTHS IN NEW WAYS
To accelerate innovation for our customers, we are evolving
our strategy to deliver entirely new combinations of our
technologies. The breadth of Applied’s portfolio gives us
a unique ability to understand the interaction between
materials creation, materials removal and materials
modification to address our customers’ increasingly
complex integration challenges. We are developing
Integrated Materials Solutions that combine multiple
process technologies, often within a single system.
We launched our first Integrated Materials Platform in 2018
and are experiencing strong customer pull for earlier and
deeper technology engagements.
We are also expanding our role in the broader technology
ecosystem, identifying new ways to deliver value with
our technology. For example, we announced a collaboration
with Arm to pioneer a new type of electronic switch
for A.I. that mimics the way the human brain works to
enable dramatic improvements in performance and
power efficiency.
a p p l i e d m at e r i a l s 2 0 1 8
a n n u a l r e p o r t
ACCELERATING INNOVATION FROM
MATERIALS TO SYSTEMS
As we expand our engagements across the ecosystem, one
thing is clear: accelerating innovation – from materials to
systems – is critical. To support new types of collaboration,
we announced plans for our Materials Engineering
Technology Accelerator – the META Center – which we
plan to open in 2019. Located in Albany, New York, the
META Center will extend the capabilities of our Maydan
Technology Center in Silicon Valley to help speed availability
of new chipmaking materials and process technologies.
POSITIONED FOR GROWTH
As more industries become increasingly dependent on
technology and data to define their futures, Applied’s core
wafer fab equipment market is poised to be structurally
larger and less volatile than it was in the past. This is
due to a more diverse set of market drivers spanning
consumer, enterprise and industrial applications. We have
also expanded our product portfolio to better address
major technology inflections. For example, we significantly
improved our position in memory, adding nearly 10 points
of market share over the past five years. At the same time,
we grew our Services business at a 15 percent compound
annual growth rate over the past four years and see
headroom for further expansion. Our Display business has
achieved 25 percent compound annual growth over the
past six years.
As we enter 2019, Applied Materials is focused on
expanding our role in the A.I.-Big Data era. Across the
company, we are taking a long-term perspective and will
continue to prioritize our spending towards R&D to enable
major technology inflections for our customers and drive
growth and shareholder value.
Sincerely,
Thomas J. Iannotti
Chairman of the Board
December 31, 2018
Gary E. Dickerson
President and
Chief Executive Officer
This Annual Report contains forward-looking statements, including those regarding anticipated growth and trends in our businesses and
markets, industry outlooks, technology transitions, our business, strategies and financial performance, our development of new products,
technologies and capabilities, 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 2018 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.
a p p l i e d m at e r i a l s 2 0 1 8
a n n u a l r e p o r t
S H A R E 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 SHAREHOLDERS
2,854 (as of December 7, 2018)
STOCK LISTING
Applied Materials, Inc. is traded on
The NASDAQ Global Select Market®
Nasdaq Symbol: AMAT
TRANSFER AGENT
Mail correspondence to:
Computershare Trust Company, N.A.
Stockholder Services
P.O. Box 505000
Louisville, KY 40233-5000
Send overnight correspondence to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
Online inquiries:
www-us.computershare.com/investor/Contact
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) 986–2862
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 8
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 28, 2018
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 every Interactive Data File required to be submitted
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). 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, a smaller
reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 29, 2018, based upon the closing
sale price reported by the NASDAQ Global Select Market on that date: $49,674,881,854
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of December 7, 2018: 958,606,093
Portions of Part III will be provided in accordance with Instruction G(3) to Form 10-K no later than February 25, 2019.
DOCUMENTS INCORPORATED BY REFERENCE:
Caution Regarding Forward-Looking Statements
This Annual Report on Form 10-K of Applied Materials, Inc. and its subsidiaries, including “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements that involve a number
of risks and uncertainties.
Examples of forward-looking statements include those regarding Applied’s future financial or operating results, customer
demand and spending, end-use demand, market and industry trends and outlooks, 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, 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 28, 2018
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
27
28
29
48
48
48
49
49
50
50
51
52
52
Item 15: Exhibits, Financial Statement Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16:
Form 10-K Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
53
102
PART IV
3
Item 1:
Business
PART I
Incorporated in 1967, Applied Materials, Inc. (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 semiconductor,
display 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 organic light-
emitting diode (OLED) displays, 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 three reportable segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent
Markets. A summary of financial information for each reportable segment is found in Note 15 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.
Semiconductor Systems
Applied’s Semiconductor 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 Semiconductor Systems segment includes
semiconductor capital equipment used for many steps of the chip making process including the transfer of patterns into device
structures, transistor and interconnect fabrication, metrology, inspection and review, and packaging technologies for connecting
finished IC die. Applied’s patterning systems and technologies address challenges resulting from shrinking pattern dimensions
and the growing complexity in vertical stacking found in today’s most advanced semiconductor devices. Applied’s transistor and
interconnect products and technologies enable continued device scaling of 3D transistors. Applied’s metrology, inspection and
review 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 new 3D architectures. Applied’s packaging technologies address challenges resulting from the
increasing integration of multiple IC dies in a single package. 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.
The majority of Applied’s new equipment sales are to leading integrated device manufacturers and foundries worldwide.
4
Technologies
Epitaxy
Epitaxy (or epi) is a technique for growing silicon (e.g. silicon with another element) as a uniform
crystalline structure on a wafer to form high quality material for the device circuity. Epi technology
is used in device transistors to enhance chip 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 can change the electrical properties of the exposed semiconductor material.
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. 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)
Endura, Centura and
Producer Systems
Reflexion Systems
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 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.
Atomic Layer Deposition (ALD)
ALD technology enables ultra thin film growth of either a conducting or insulating material with
uniform coverage in nanometer-sized structures.
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.
Selective Removal
Selective removal is a new etch technology intended to remove a material of a particular
composition without damaging materials of different composition that coexist on the wafer.
Metrology and Inspection
Metrology and inspection tools are used to locate, measure, and analyze 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.
Raider and Nokota
Platforms
Olympia System
Centris and Producer
Systems
Producer Systems
SEMVision G7
Defect Analysis
PROVision eBeam
Inspection
UVision 8 Inspection
VeritySEM 5i
Metrology
Aera4 Mask
Inspection
5
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 other products. Customer demand for products and services is fulfilled through a global distribution
system with 93 locations and trained service engineers located in close proximity to customer sites in more than a dozen countries
to support over 40,000 installed Applied semiconductor, display and other manufacturing systems worldwide. Applied offers the
following general types of services and products under the Applied Global Services segment.
AGS Solutions and Technology
Technology-enabled 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.
Supply Chain Assurance Programs
Spare parts product portfolio offers options to balance inventory, cost and risk to efficiently meet 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 200mm equipment supports market inflections and new technology for a broad variety of devices
including analog, power, and MEMS.
Automation Software
Applied SmartFactory automation software portfolio coordinates and streamlines every aspect of a factory-the processes,
equipment and people-to provide competitive advantage to customers.
6
Display and Adjacent Markets
The Display and Adjacent Markets segment is comprised of products for manufacturing liquid crystal displays (LCDs),
organic light-emitting diodes (OLEDs), and other display technologies for TVs, monitors, laptops, personal computers (PCs),
electronic tablets, smart phones, and other consumer-oriented devices as well as equipment for processing flexible substrates.
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 and other devices are typically
glass, although newer flexible materials are entering the market. Display and Adjacent Markets industry growth depends primarily
on consumer demand for increasingly larger and more advanced TVs and high resolution displays for mobile devices as well as
new form factors, including thin, light and curved displays, and new applications such as virtual reality. The Display and Adjacent
Markets segment offers a variety of technologies and products, including:
Display and Adjacent Markets 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.
Defect Review
Defects are identified during inspection steps and reviewed by a scanning electron microscope
and other analyses to determine defect root cause and composition.
Chemical Vapor Deposition (CVD)
During CVD processing, gases containing 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 TFT-LCD and OLED display backplanes, as well as for transparent
electrodes in color filters and touch panels.
Flexible Technologies
Flexible coating systems utilize physical vapor deposition, thermal evaporation, chemical vapor
deposition, and e-beam technology to deposit thin layers of metal onto flexible substrates.
Product(s)
Electron Beam Array
Tester
Electron Beam Review
(EBR)
AKT PECVD Systems
AKT Aristo and PiVot
Systems
TopBeam, TopMet and
SmartWeb Systems
7
Backlog
Applied manufactures systems to meet demand represented by order backlog and customer commitments. Backlog as of
October 29, 2017 consisted 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 29, 2017 was as follows:
2017
(In millions, except percentages)
Semiconductor Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Display and Adjacent Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,991
1,130
1,847
63
6,031
49%
19%
31%
1%
100%
In anticipation of the adoption of the new revenue recognition standard in the first quarter of fiscal 2019, Applied has
removed the 12 month threshold in relation to backlog in order to more closely align backlog to performance obligations as
defined under the new revenue recognition standard. As such, backlog as of October 28, 2018 consists of: (1) orders for which
written authorizations have been accepted, or shipment has occurred but revenue has not been recognized; and (2) contractual
service revenue and maintenance fees.
Backlog by reportable segment as of October 28, 2018 was as follows:
2018
(In millions, except percentages)
Semiconductor Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Display and Adjacent Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,479
1,751
1,836
26
6,092
41%
29%
30%
—%
100%
Of the total backlog as of October 28, 2018, approximately 15% is not reasonably expected to be filled within the next 12
months.
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.
8
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.
Research, Development and Engineering
Applied’s long-term growth strategy requires continued development of new materials engineering capabilities, including
products and platforms that enable expansion into new and adjacent 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 and ecosystem partners to design systems and processes
that meet planned technical and production requirements.
Applied’s product development and engineering organizations are located primarily in the United States, as well as 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.
Marketing and Sales
Because of the highly technical nature of its products, Applied markets and sells products worldwide almost entirely through
a direct sales force.
Applied has operations in many countries, with some of its business activities concentrated in certain geographic areas, and
global and regional economic conditions can impact the company’s business and financial results. Applied’s business is based on
capital equipment investments by major semiconductor, display and other manufacturers, and is subject to significant variability
in customer demand for Applied’s products. Customers’ expenditures depend on many factors, including: general economic
conditions; anticipated market demand and pricing for semiconductors, display technologies and other electronic devices; the
development of new technologies; customers’ factory utilization; capital resources and financing; and government policies and
incentives. 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 15 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 and services in multiple reportable segments.
Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan Semiconductor Manufacturing Company Limited. . . . . . . . . . . . . . . . . .
Micron Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intel Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
13%
11%
*
11%
2017
23%
15%
*
*
2016
13%
16%
11%
11%
______________________________
* Less than 10%
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 commercialize its technology in a timely manner, 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 is driven by demand for advanced electronic products, including smartphones and other mobile
devices, servers, personal computers, automotive devices, storage, and other products. The growth of data and emerging end-
market drivers such as artificial intelligence, augmented and virtual reality, the Internet of Things and smart vehicles are also
creating new opportunities for the industry. As a result, products within the Semiconductor Systems segment are subject to
significant changes in customer requirements, including transitions to smaller dimensions, increasingly complex chip architectures,
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 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.
Products and services within the Applied Global Services segment complement Semiconductor Systems and Display and
Adjacent Markets 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 yields and productivity of customers’ fab operations. Significant competitive factors
include productivity, cost-effectiveness, and the level of technical service and support. The importance of these factors varies
according to customers’ needs and the type of products or services offered.
Products in the Display and Adjacent Markets 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. Important factors affecting the competitive position of
Applied’s Display and Adjacent Markets 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.
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 12,500 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 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/news/citizenship_report.html. 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 28, 2018, Applied employed approximately 21,000 regular 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)
Daniel J. Durn(3)
Steve Ghanayem(4)
Thomas F. Larkins(5)
Omkaram Nalamasu(6)
Prabu Raja(7)
Ali Salehpour(8)
Charles Read(9)
Position
President, Chief Executive Officer
Senior Vice President, Engineering, Operations and Quality
Senior Vice President, Chief Financial Officer
Senior Vice President, New Markets and Alliances Group
Senior Vice President, General Counsel
Senior Vice President, Chief Technology Officer
Senior Vice President, Semiconductor Products Group
Senior Vice President, Services, Display and Flexible Technology
Corporate Vice President, Corporate Controller and Chief Accounting Officer
(1) Mr. Dickerson, age 61, 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 59, has been Senior Vice President, Engineering, Operations and Quality since June 2015. He served
as Senior Vice President, Engineering from March 2014 to June 2015. He previously was with Applied from 1996 to
2005, leading various product groups as well as global organizations, including Global Operations, Facilities and Real
Estate, 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 public company listed on NASDAQ and 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 of Corporate Global
Operations responsible for Central Engineering, Facilities, Real Estate, Human Resources and Information Technology,
and Chief Administrative Officer.
(3) Mr. Durn, age 52, has been Senior Vice President and Chief Financial Officer of Applied since August 2017. Previously,
Mr. Durn was Executive Vice President and Chief Financial Officer of NXP Semiconductors N.V., a semiconductor
manufacturer (NXP), from December 2015 to August 2017. Mr. Durn served as Senior Vice President of Finance and
Chief Financial Officer of Freescale Semiconductor, Inc., from June 2014 until its merger with NXP in December 2015.
Prior to Freescale, Mr. Durn was Chief Financial Officer and Executive Vice President of Finance and Administration at
GlobalFoundries, a semiconductor foundry, which he joined in December 2011.
(4) Mr. Ghanayem, age 53, has been Senior Vice President, New Markets and Alliances Group of Applied since November
2017. He has served in various senior management, product development and operational roles since joining Applied in
1989, including Group Vice President and General Manager of the Transistor and Interconnect Group.
(5) Mr. Larkins, age 57, has been Senior Vice President, General Counsel of Applied since November 2012 and was Corporate
Secretary from November 2012 to March 2018. 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.
(6) Dr. Nalamasu, age 60, 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.
12
(7) Dr. Raja, age 56, has been Senior Vice President, Semiconductor Products Group of Applied since November 2017. He
previously served in various senior management, product development and operational roles since joining Applied in
1995, including Group Vice President and General Manager of the Patterning and Packaging Group.
(8) Mr. Salehpour, age 57, has been Senior Vice President, Services, Display and Flexible Technology 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 and worked for 10 years in senior management
positions at Schlumberger Test Systems.
(9) Mr. Read, age 52, 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.
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 risk factors could materially and adversely affect Applied’s business, financial condition or results of operations
and cause reputational harm, and should be carefully considered in evaluating the Company and its business, in addition to other
information presented elsewhere in this report.
The industries that Applied serves can be volatile and difficult to predict.
As a supplier to the global semiconductor and display and related industries, Applied is subject to variable industry conditions,
as demand for manufacturing equipment and services can change depending on several factors, including the nature and timing
of technology inflections and advances in fabrication processes, the timing and requirements of new and emerging technologies
and market drivers, production capacity relative to demand for chips and display technologies, end-user demand, customers’
capacity utilization, production volumes, access to affordable capital, consumer buying patterns and general economic conditions.
Applied’s industries historically have been cyclical, and are subject to volatility and sudden changes in customer requirements for
new manufacturing capacity and advanced technology. These changes can affect the timing and amounts of customer investments
in technology and manufacturing equipment, and can have a significant impact on Applied’s net sales, operating expenses, gross
margins and net income. The amount and mix of capital equipment spending between different products and technologies can
have a significant impact on the Company’s results of operations.
To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage
its resources and production capacity across its businesses, 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 these challenges during periods of changing demand, its business performance and results
of operations may be adversely impacted. Even with effective allocation of resources and management of costs, during periods
of decreasing demand, Applied’s gross margins and earnings may be adversely impacted.
Applied is exposed to risks associated with an uncertain global economy.
Uncertain global economic and business conditions, along with uncertainties and volatility in the financial markets, national
debt and fiscal concerns in various regions, pose challenges to the industries in which Applied operates. Markets for semiconductors
and displays depend largely on business and consumer spending and demand for electronic products. 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 purchasing for equipment or services, which may have an adverse impact on Applied’s revenues, results
of operations and financial condition. 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, additional inventory or bad debt expense for
Applied. Economic and industry uncertainty may similarly affect suppliers, which could impair their ability to deliver parts and
negatively affect Applied’s ability to manage operations and deliver its products. These conditions may also lead to consolidation
or strategic alliances among other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.
Uncertain economic and industry conditions also make 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. If Applied does not appropriately manage its business operations in response to changing economic and
industry conditions, it could have a significant negative impact on its business performance and financial condition. Applied may
be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect Applied’s
ability to capitalize on opportunities. Even during periods of economic uncertainty or lower revenues, Applied must continue to
invest in research and development and maintain a global business infrastructure to compete effectively and support its customers,
which can have a negative impact on its operating margins and earnings.
Applied maintains an investment portfolio that is subject to general credit, liquidity, 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, which could affect
its ability to manage its operations.
14
Applied is exposed to the risks of operating a global business.
Applied has product development, engineering, manufacturing, sales and other operations distributed throughout many
countries, and some of its business activities are concentrated in certain geographic areas. Moreover, in fiscal 2018, approximately
91 percent of Applied’s net sales were to customers in regions outside the United States. As a result of the global nature of its
operations, Applied’s business performance and results of operations may be adversely affected by a number of factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
uncertain global economic and political 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;
global trade issues and changes in and uncertainties with respect to trade policies, including the ability to obtain required
import and export licenses, trade sanctions, tariffs, and international trade disputes;
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 contract,
intellectual property, cybersecurity, data privacy, labor, tax, and import/export laws, and the interpretation and application
of such laws and regulations;
ineffective or inadequate legal protection of intellectual property rights in certain countries;
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;
delays or restrictions in shipping materials or finished products between countries;
geographically diverse operations and projects, and our ability to maintain appropriate business processes, procedures
and internal controls, and comply with environmental, health and safety, anti-corruption and other regulatory requirements;
supply chain interruptions, and service interruptions from utilities, transportation, data hosting or telecommunications
providers, or other events beyond our control;
a diverse workforce with different experience levels, languages, cultures, customs, business practices and worker
expectations, and differing employment practices and labor issues;
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, Chinese yuan or Singapore dollar;
the need to provide sufficient levels of technical support in different locations around the world;
performance of third party providers of outsourced functions, including certain engineering, software development,
manufacturing, information technology and other activities;
political instability, natural disasters, 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;
challenges in hiring and integration of an increasing number of workers in new countries;
the increasing need for a mobile workforce to work in or travel to different regions; and
uncertainties with respect to economic growth rates in various countries, including for the manufacture and sale of
semiconductors and displays in the developing economies of certain countries.
International trade disputes could result in increases in tariffs and other trade restrictions and protectionist measures that
could have an adverse impact on our operations.
We sell a significant majority of our products into countries outside of the United States and we purchase a significant portion
of equipment and supplies from suppliers outside of the United States. The United States and other countries have levied tariffs
and taxes on certain goods. Increases in tariffs, additional taxes or other trade restrictions and retaliatory measures may impact
end-user demand and customer investment in manufacturing equipment, increase our manufacturing costs, decrease margins,
reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary equipment and supplies,
which could have a material adverse effect on our business, results of operations, or financial condition.
15
Certain international sales depend on our ability to obtain export licenses, and our inability to obtain such licenses could
potentially limit our markets and impact our business. In addition, government authorities may impose conditions that require the
use of local suppliers or partnerships with local companies, require the license or other transfer of intellectual property, or engage
in other efforts to promote local businesses and local competitors, which could have a significant adverse impact on Applied’s
business. Many of these challenges are present in China and Korea, markets that represent significant long-term growth
opportunities for Applied businesses.
Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.
The global semiconductor, display and related industries in which Applied operates are characterized by ongoing changes
affecting some or all of these industries that impact demand for and the profitability of Applied’s products and its consolidated
results of operations, 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 customers’ businesses and on demand for Applied’s products;
increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the
necessary capital;
trade, regulatory or tax policies impacting the timing of customers’ investment in new or expanded fabrication plants;
differences in growth rates among the semiconductor, display and other industries in which Applied operates;
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 for customers 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 which can reduce demand for new equipment;
•
•
•
•
•
•
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 and displays, 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 is derived from sales of manufacturing equipment
in the Semiconductor Systems segment to the global semiconductor industry. In addition, a majority of the revenues of Applied
Global Services is from sales to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes
particular to this industry that impact demand for and the profitability of Applied’s semiconductor equipment and service products,
including:
•
•
•
•
the increasing frequency and complexity of technology transitions and inflections, and Applied’s ability to timely and
effectively anticipate and adapt to these changes;
the increasing cost of research and development due to many factors, including shrinking geometries, 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;
16
•
•
•
•
•
•
•
•
•
•
•
the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and
smaller geometries 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 segments with growing demand;
semiconductor manufacturer’s ability to reconfigure and re-use equipment, and the resulting effect on their need to
purchase new equipment and services;
shorter cycle times between order placements by customers and product shipment require greater reliance on forecasting
of customer investment, 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;
investment in semiconductor manufacturing capabilities in China, which may be affected by changes in economic
conditions and governmental policies in China; and
the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost
of a new fabrication plant, while others require less technologically advanced products.
If Applied does not accurately forecast, and allocate appropriate resources and investment towards addressing, key technology
changes and inflections, successfully develop and commercialize products to meet demand for new technologies, and effectively
address industry trends, its business and results of operations may be adversely impacted.
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 depends primarily on consumer demand for increasingly
larger and more advanced TVs, and on demand for advanced smartphones and mobile device displays, 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 the profitability of Applied’s display products and services, including:
•
•
•
•
•
•
the importance of new types of display technologies, such as organic light-emitting diode (OLED), low temperature
polysilicon (LTPS), flexible displays and metal oxide, and new touch panel films;
the increasing cost of research and development, and complexity of technology transitions and inflections, and Applied’s
ability to timely and effectively anticipate and adapt to these changes;
the timing and extent of an expansion of manufacturing facilities in China, which may be affected by changes in economic
conditions and governmental policies in China;
the importance of increasing market positions in products and technologies with growing demand;
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; and
the variability in demand for display manufacturing equipment, concentration of display manufacturer customers and
their ability to successfully commercialize new products and technologies, and uncertainty with respect to future display
technology end-use applications and growth drivers.
If Applied does not successfully develop and commercialize products to meet demand for new and emerging display
technologies, or if industry demand for display manufacturing equipment and technologies slows, Applied’s business and its results
of operations may be adversely impacted.
17
The industries in which Applied operates are highly competitive and subject to rapid technological and market changes.
Applied operates in a highly competitive environment in which innovation is critical, and its future success depends on
many factors, including the development of new technologies and effective commercialization and customer acceptance of its
equipment, services and related products, and its ability to increase its position in its current markets, expand into adjacent and
new markets, and optimize operational performance. The development, introduction and support of a broadening set of products
in a geographically diverse and competitive environment, and that may require greater collaboration with customers and other
industry participants, have grown more complex and expensive over time. Furthermore, new or improved products may entail
higher costs and lower profits. To compete successfully, Applied must:
•
•
•
identify and address technology inflections, market changes, new applications, customer requirements and end-use
demand;
develop new products and disruptive technologies, improve and develop new applications for existing products, and adapt
products for use by customers in different applications and markets with varying technical requirements;
differentiate its products from those of competitors, meet customers’ performance specifications, appropriately price
products, and achieve market acceptance;
• maintain operating flexibility to enable responses to changing markets, applications, customers and customer
requirements;
•
•
•
•
•
•
•
•
•
enhance its worldwide operations across its businesses 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
strengthen customer relationships;
effectively allocate resources between its existing products and markets, the development of new products, and expanding
into new and adjacent markets;
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 volume manufacturing with its customers; and
implement changes in its design engineering methodology to reduce material costs and cycle time, increase commonality
of platforms and types of parts used in different systems, and improve product life cycle management.
If Applied does not successfully anticipate technology inflections, develop and commercialize new products and technologies,
and respond to changes in customer requirements and market trends, its business performance and results of operations may be
adversely impacted.
Applied is exposed to risks associated with a highly concentrated customer base.
Applied’s customer base is highly concentrated, and has become increasingly concentrated as a result of continued
consolidation. Applied’s customer base is also geographically concentrated. A relatively limited number of manufacturers account
for a substantial portion of Applied’s business. As a result, the actions of even a single customer can expose Applied’s business
and results of operations to greater volatility. The mix and type of customers, and sales to any single customer, including as a result
of changes in government policy, may vary significantly from quarter to quarter and from year to year, and have a significant
impact on Applied’s net sales, gross margins and net income. Applied’s products are configured to customer specifications, and
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 may have a significant
adverse impact on its results of operations and financial condition. The concentration of Applied’s customer base increases its
risks related to the financial condition of its customers, and the deterioration in financial condition of a single customer or the
failure of a single customer to perform its obligations could have a material adverse effect on Applied’s results of operations and
cash flow. To the extent its customers experience liquidity constraints, Applied may incur additional bad debt expense, which may
have a significant impact on its results of operations. Major customers may also seek pricing, payment, intellectual property-
related, or other commercial terms that are less favorable to Applied, which may have a negative impact on Applied’s business,
cash flow, revenue and gross margins.
18
Applied is exposed to risks associated with business combinations, acquisitions and strategic investments.
Applied engages in 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 to Applied’s business, financial condition
and operating results, including but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
diversion of management’s attention and disruption of ongoing businesses;
contractual restrictions on the conduct of Applied’s business during the pendency of a proposed transaction;
inability to complete proposed transactions due to the failure to obtain regulatory or other approvals, litigation or other
disputes, and any ensuing obligation to pay a termination fee;
the failure to realize expected returns from acquired businesses;
requirements imposed by government regulators in connection with their review of a transaction, which may include,
among other things, divestitures and 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;
failure to commercialize technologies from acquired businesses or developed through strategic investments;
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 retain and motivate key employees of acquired businesses;
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 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, including share repurchases and dividends;
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,
cybersecurity, privacy policies and procedures, 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 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 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. In addition, new legislation or additional regulations may affect or impair our ability to invest in certain countries or
require us to obtain regulatory approvals to do so. 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.
19
Applied’s indebtedness and debt covenants could adversely affect its financial condition and business.
Applied has $5.4 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 28, 2018, 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 subject to 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.
Applied is exposed to risks associated with expanding into new and related markets and industries.
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 those developed in collaboration with third parties, or obtained
through acquisitions. Applied’s ability to successfully expand its business into new and related markets and industries may be
adversely affected by a number of factors, including:
•
•
•
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;
•
•
•
•
•
•
•
•
•
•
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;
the complexity of entering into and effectively managing strategic alliances or partnering opportunities;
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 or limited
funding, evolving business models 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 established
customer relationships;
entry into new industries and countries, with differing levels of government involvement, laws and regulations, and
business, employment and safety practices;
third parties’ intellectual property rights; and
the need to comply with, or work to establish, industry standards and practices.
In addition, Applied 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.
20
Manufacturing interruptions or delays, or the failure to accurately forecast customer demand, could affect Applied’s
ability to meet customer demand, lead to higher costs, or 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, including components
and subassemblies, from suppliers, including contract manufacturers. The inability to timely obtain sufficient quantities of parts
can have an adverse impact on Applied’s manufacturing operations and ability to meet customer demand for equipment, spares
and services. Some key parts are subject to long lead-times 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. Variable 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. 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:
•
•
•
•
•
•
the failure or inability to accurately forecast demand and obtain sufficient quantities of quality parts on a cost-effective
basis;
volatility in the availability and cost of materials;
difficulties or delays in obtaining required import or export approvals;
shipment delays due to transportation interruptions or capacity constraints;
information technology or infrastructure failures, including those of a third party supplier or service provider; 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, protection of intellectual property, 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. If Applied is unable to meet its customers’ demand for a prolonged
period due to its inability to obtain certain parts or components, it could affect its ability to manage its operations, and have an
adverse impact on Applied’s business, results of operations and customer relationships. 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.
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 employees with key skills and experience. Achieving this objective may
be difficult due to many factors, including fluctuations in global economic and industry conditions, management changes, Applied’s
organizational structure, increasing global competition for talent, the availability of qualified employees, 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 attractiveness of Applied’s
compensation and benefit programs, including its share-based programs. The loss or retirement of employees 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.
21
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 patents, trade secrets, copyrights and other intellectual
property 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 ability to enforce its intellectual property rights is subject to litigation risks, as well as uncertainty as to the protection
and enforceability of those rights in some countries. If Applied seeks to enforce its intellectual property rights, it may be subject
to claims that those rights are invalid or unenforceable, and others may seek counterclaims against Applied, which could have a
negative impact on its business. If Applied is unable to enforce and protect intellectual property rights, or if they are circumvented,
invalidated, rendered obsolete by the rapid pace of technological change, it could have an adverse impact on its competitive position
and business. 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.
Third parties may also assert claims against Applied and its products. Claims that Applied’s products infringe the rights of
others, whether or not meritorious, can be expensive and time-consuming to defend and resolve, and may divert the efforts and
attention of management and personnel. The inability to obtain rights to use third party intellectual property on commercially
reasonable terms could have an adverse impact on Applied’s business. In addition, Applied may face claims based on the theft or
unauthorized use or disclosure of third-party trade secrets and other confidential business information. Any such incidents and
claims could severely harm Applied’s business and reputation, result in significant expenses, harm its competitive position, and
prevent Applied from selling certain products, all of which could have a significant adverse impact on Applied’s business and
results of operations.
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, including
systems owned and maintained by Applied or third party providers. These data include confidential information and intellectual
property belonging to Applied or its customers or other business partners, as well as personally-identifiable information of
individuals. All information systems are subject to disruption, breach or failure. 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 these 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 of intellectual property, and 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. Compliance with, and changes to, laws and regulations concerning
privacy and information security could result in significant expense, and any failure to comply could result in proceedings against
Applied by regulatory authorities or other third parties.
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 be time-consuming
and expensive to prosecute, defend or conduct; divert management’s attention and other Applied resources; inhibit Applied’s ability
to sell its products; result in adverse judgments for damages, injunctive relief, penalties and fines; and 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 enterprise resource planning and other information systems changes could adversely
impact Applied’s business and results of operations.
Applied periodically implements new or enhanced enterprise resource planning and related information systems in order to
better manage its business operations, align its global organizations and enable future growth. Implementation of new business
processes and information systems requires the commitment of significant personnel, training and financial resources, and entails
risks to Applied’s business operations. If Applied does not successfully implement enterprise resource planning and related
information systems improvements, or if there are delays or difficulties in implementing these systems, Applied may not realize
anticipated productivity improvements or cost efficiencies, and may experience interruptions in service and operational difficulties,
such as its ability to track orders, timely manufacture and ship products, project inventory requirements, effectively manage its
supply chain and allocate human resources, aggregate financial data and report operating results, and otherwise effectively manage
its business, all of which could result in quality issues, reputational harm, lost market and revenue opportunities, and otherwise
adversely affect Applied’s business, financial condition and results of operations.
Applied may incur impairment charges to goodwill or long-lived assets.
Applied has a significant amount of goodwill and other acquired intangible assets related to acquisitions. Goodwill and
purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the
fourth quarter of each fiscal year, and more frequently when events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. The review compares the fair value for each of Applied’s reporting units to its associated
carrying value, including goodwill. Factors that could lead to impairment of goodwill and intangible assets include adverse industry
or economic trends, reduced estimates of future cash flows, declines in the market price of Applied common stock, changes in
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.
Applied is exposed to risks associated with operating in jurisdictions with complex and changing tax laws.
Applied is subject to income taxes in the United States and foreign jurisdictions. Significant judgment is required to determine
and estimate worldwide tax liabilities. Applied’s provision for income taxes and effective tax rates could be affected by numerous
factors, including changes in applicable tax laws, interpretations of applicable tax laws, amount and composition of pre-tax income
in jurisdictions with differing tax rates, and valuation of deferred tax assets. An increase in Applied’s provision for income taxes
and effective tax rate could have a material adverse impact on Applied’s results of operations and financial condition.
On December 22, 2017, the U.S. government enacted tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The U.S. government may issue regulations that significantly affect how the Tax Act is interpreted. The U.S. Securities and
Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for income
tax effects of the Tax Act. SAB 118 provides a measurement period for companies to complete this accounting, which will not
extend beyond one year from the Tax Act enactment date. Pursuant to SAB 118, provisional adjustments were recorded when
reasonable estimates could be determined. No adjustments were recorded when reasonable estimates could not be determined.
These provisional estimates will be revised as information becomes available and guidance is issued by the Internal Revenue
Service, and changes in Applied’s provision for income taxes and effective tax rates could have a material impact on Applied’s
results of operations and financial condition.
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. In certain foreign jurisdictions,
conditional reduced income tax rates have been granted to Applied. 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 in these jurisdictions.
In addition, Applied is subject to examination by the Internal Revenue Service and other tax authorities, and from time to
time amends 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 effective tax rates.
23
Applied is subject to risks associated 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; handling, discharge, recycling and
disposal of hazardous materials used in its products or in producing its products; the operation of its facilities; and the use of its
real property. The failure or inability to comply with existing or future environmental and safety regulations could result in:
significant remediation or other legal liabilities; the imposition of penalties and fines; restrictions on the development, manufacture,
sale or use of certain of its products; limitations on the operation of its facilities or ability to use its real property; and a decrease
in the value of its real property. Applied could be required to alter its manufacturing and operations and incur substantial expense
in order to comply with environmental and safety regulations. Any failure to comply with environmental and safety regulations
could subject Applied to significant costs and liabilities that could adversely affect Applied’s business, financial condition and
results of operations.
Applied is exposed to various risks related to the global regulatory environment.
As a public company with global operations, Applied is subject to the laws of the United States and multiple foreign
jurisdictions and the rules and regulations of various governing bodies, which may differ among jurisdictions, including those
related to financial and other disclosures, accounting standards, corporate governance, intellectual property, tax, trade, antitrust,
employment, immigration and travel regulations, privacy, and anti-corruption. Changing, inconsistent or conflicting laws, rules
and regulations, and ambiguities in their interpretation and application create uncertainty and challenges, and compliance with
laws, rules and regulations may be onerous and expensive, divert management time and attention from revenue-generating activities,
and otherwise adversely impact Applied’s business operations. Violations of law, rules and regulations could result in fines, criminal
sanctions, restrictions on Applied’s business, and damage to its reputation, and could have an adverse impact on its business
operations, financial condition and results of operations.
Item 1B: Unresolved Staff Comments
None.
24
Item 2:
Properties
Information concerning Applied’s properties is set forth below:
(Square feet in thousands)
Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States
4,530
1,037
5,567
Other Countries
2,417
1,341
3,758
Total
6,947
2,378
9,325
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 Semiconductor Systems are
manufactured in Santa Clara, California; Austin, Texas; Gloucester, Massachusetts; Kalispell, Montana; Rehovot, Israel; and
Singapore. Remanufactured equipment products in the Applied Global Services segment are produced primarily in Austin, Texas.
Products in the Display and Adjacent Markets segment are manufactured in Alzenau, Germany and Tainan, Taiwan. Other products
are manufactured in 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 269 acres of buildable land in Montana, 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.
25
Item 3:
Legal Proceedings
The information set forth under “Legal Matters” in Note 14 of Notes to Consolidated Financial Statements is incorporated
herein by reference.
Item 4:
Mine Safety Disclosures
None.
26
PART II
Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of December 7,
2018, there were 2,854 registered holders of Applied common stock.
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the
period from October 27, 2013 through October 28, 2018. 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 27, 2013 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
$400
$350
$300
$250
$200
$150
$100
$50
$0
10/27/13
10/26/14
10/25/15
10/30/16
10/29/17
10/28/18
Applied Materials, Inc.
S&P 500
RDG Semiconductor Composite
*Assumes $100 invested on 10/27/13 in stock or 10/31/13 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright© 2018 Standard & Poor’s, a division of S&P global. All rights reserved.
10/27/2013
10/26/2014
10/25/2015
10/30/2016
10/29/2017
10/28/2018
Applied Materials
S&P 500 Index
RDG Semiconductor Composite Index
100.00
100.00
100.00
96.67
123.37
126.26
171.69
128.93
154.41
343.16
159.40
232.29
198.27
171.11
221.61
121.04
117.27
128.42
27
Issuer Purchases of Equity Securities
The following table provides information as of October 28, 2018 with respect to the shares of common stock repurchased
by Applied during the fourth quarter of fiscal 2018 pursuant to a publicly announced stock repurchase program approved by the
Board of Directors in February 2018, which authorized up to an aggregate of $6.0 billion in repurchases.
Period
Month #1
Purchased
Total Number of
Average
Price Paid
per Share
Aggregate
Price Paid
Shares
Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
*
Maximum Dollar
Value of Shares
That May Yet be
Purchased Under
the Programs
(In millions, except per share amounts)
(July 30, 2018 to August 26, 2018)
Month #2
(August 27, 2018 to September 23, 2018)
Month #3
(September 24, 2018 to October 28, 2018)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.9
3.7
6.5
18.1
$
$
$
$
46.69
$
369
40.13
35.78
41.43
$
148
234
751
$
$
$
7.9
3.7
6.5
18.1
4,709
4,561
4,327
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)
2018
2017
2016
2015
2014
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,253
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,817
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 . . . . . . . . . . . . $
0.70
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,773
3,313
5,309
2,019
4,796
4,694
3.23
45.3%
27.8%
(In millions, except percentages and per share amounts)
$
$ 10,825
$ 14,537
9,659
$
$
$
$
$
$
$
$
$
6,532
44.9%
1,774
3,868
26.6%
3,731
3,434
3.17
5,304
0.40
$
$
$
$
$
$
$
$
4,511
41.7%
1,540
2,152
19.9%
2,013
1,721
1.54
3,143
0.40
$
$
$
$
$
$
$
$
3,952
40.9%
1,451
1,693
17.5%
1,598
1,377
1.12
3,342
0.40
$
$
$
$
$
$
$
$
9,072
3,843
42.4%
1,428
1,520
16.8%
1,448
1,072
0.87
1,947
0.40
$ 19,419
$ 14,588
$ 15,308
$ 13,174
(1) Each fiscal year ended on the last Sunday in October. Fiscal 2018, 2017, 2015, and 2014 each contained 52 weeks, and fiscal 2016 contained
53 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
• 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 semiconductor, display, and related industries.
Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and organic light-emitting diode
(OLED) displays, 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. Each of Applied’s businesses is subject to variable industry
conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display
technologies, 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.
Applied operates in three reportable segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent
Markets. A summary of financial information for each reportable segment is found in Note 15 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 customer spending on capital equipment and services to support key technology
transitions or to increase production volume in response to worldwide demand for semiconductors and displays. Spending by
semiconductor customers, which include companies that operate in the foundry, memory and logic markets, is driven by demand
for advanced electronic products, including smartphones and other mobile devices, servers, personal computers, automotive
devices, storage, and other products. The growth of data and emerging end-market drivers such as artificial intelligence, augmented
and virtual reality, the Internet of Things and smart vehicles are also creating new opportunities for the industry. As a result, products
within the Semiconductor Systems segment are subject to significant changes in customer requirements, including transitions to
smaller dimensions, increasingly complex chip architectures, new materials and an increasing number of applications. Demand
for display manufacturing equipment spending depends primarily on consumer demand for increasingly larger and more advanced
TVs as well as larger and higher resolution displays for next-generation mobile devices, and investments in new types of display
technologies. While certain existing technologies may be adapted to new requirements, some applications create the need for an
entirely different technological approach. The timing of customer investment in manufacturing equipment is also affected by the
timing of next-generation process development and the timing of capacity expansion to meet end-market demand. In light of these
conditions, Applied’s results can vary significantly year-over-year, as well as quarter-over-quarter.
29
Applied’s strategic priorities 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. Applied’s
long-term growth strategy requires continued development of new materials engineering capabilities, including products and
platforms that enable expansion into new and adjacent markets. Applied’s significant investments in research, development and
engineering 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.
The following table presents certain significant measurements for the past three fiscal years:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . $
Operating margin . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share. . . . . . . . . . . . . . . . $
17,253
(In millions, except per share amounts and percentages)
2,716
$
14,537
10,825
$
$
45.3%
4,796
27.8%
3,313
3.23
$
$
$
44.9%
3,868
26.6%
3,434
3.17
$
$
$
41.7% 0.4 points
2,152
$
928
$
$
3,712
3.2 points
1,716
19.9% 1.2 points
6.7 points
1,721
1.54
$
$
(121) $
$
0.06
1,713
1.63
Fiscal 2018 and 2017 contained 52 weeks, and fiscal 2016 contained 53 weeks.
Fiscal 2018 included a one-time expense related to the enactment of recent U.S. tax legislation that reduced diluted earnings
per share by $1.08.
Investment in semiconductor and display manufacturing equipment and services continued to be a strong driver of revenue
during fiscal 2018. Semiconductor equipment customers made investments in new capacity and technology transitions, and
Applied’s overall semiconductor systems revenue increased as compared to the prior year. Demand for dynamic random-access
memory (DRAM) and NAND increased in fiscal 2018 although overall spending by memory customers was lower towards the
second half of the year. Logic customers’ spending remained strong while foundry customers’ spending decreased compared to
the prior year and Applied continues to see these customers optimize existing capacity and re-prioritize their capital spending plans
on longer lead-time equipment not in Applied’s product portfolio. Display equipment spending during fiscal 2018 reflected
continued investment in new technology and manufacturing equipment for producing larger LCD TVs and in new equipment for
mobile devices. Applied also continued to see strong growth in demand for spares and services from customers as compared to
the prior year.
While Applied anticipates major technology trends to continue driving long-term growth in the semiconductor industry, the
trends characterizing the second half of 2018 are likely to continue into early fiscal 2019, with lower spending by memory customers,
and foundry customers prioritizing spending on longer lead-time equipment not in Applied’s product portfolio. Applied also expects
lower spending for display manufacturing equipment in fiscal 2019, although long-term demand drivers remain in place. Applied
anticipates continued growth in semiconductor spares and services spending in fiscal 2019.
30
Results of Operations
Net Sales
Net sales for the periods indicated were as follows:
2018
2017
2016
(In millions, except percentages)
Change
2018 over
2017
2017 over
2016
Semiconductor Systems . $ 10,903
Applied Global Services.
3,754
Display and Adjacent
Markets. . . . . . . . . . . . . .
2,498
Corporate and Other . . . .
98
Total . . . . . . . . . . . . . . . . $ 17,253
63%
22%
14%
1%
$
9,517
3,017
1,900
103
65%
21%
13%
1%
$
6,873
2,589
1,206
157
64%
24%
11%
1%
100%
$ 14,537
100%
$ 10,825
100%
15%
24%
31%
(5)%
19%
38%
17%
58%
(34)%
34%
Net sales in fiscal 2018 compared to fiscal 2017 increased due to increased customer investments across all segments. The
Semiconductor Systems segment continued to represent the largest contributor of net sales and to the increase in net sales.
Net sales in fiscal 2017 compared to fiscal 2016 increased due to increased customer investments in all segments, with the
majority of the increases resulting from investments in semiconductor equipment.
Net sales by geographic region, determined by the location of customers’ facilities to which products were shipped, were as
follows:
2018
2017
2016
China . . . . . . . . . . . . . . . . $
Korea . . . . . . . . . . . . . . . .
Taiwan . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . .
Southeast Asia . . . . . . . . .
Asia Pacific . . . . . . . . . .
United States . . . . . . . . . .
Europe . . . . . . . . . . . . . . .
5,113
3,603
2,732
2,405
802
14,655
1,532
1,066
Total . . . . . . . . . . . . . $ 17,253
30%
21%
16%
14%
4%
85%
9%
6%
100%
$
2,746
4,052
3,291
1,518
640
12,247
1,474
816
$ 14,537
$
(In millions, except percentages)
2,259
1,883
2,843
1,279
803
9,067
1,143
615
$ 10,825
19%
28%
23%
10%
4%
84%
10%
6%
100%
Change
2018 over
2017
2017 over
2016
86%
(11)%
(17)%
58%
25%
20%
4%
31%
19%
22%
115%
16%
19%
(20)%
35%
29%
33%
34%
21%
17%
26%
12%
7%
83%
11%
6%
100%
The changes in net sales in all regions other than Korea for fiscal 2018 compared to fiscal 2017 primarily reflected changes
in semiconductor equipment spending, including product and customer mix, and increased spending in semiconductor spares and
services. The increase in net sales to customers in China also reflected increased investments in display manufacturing equipment.
The decrease in net sales to customers in Korea primarily reflected decreased investments in display manufacturing equipment.
The changes in net sales from customers in all regions for fiscal 2017 compared to fiscal 2016 primarily reflected increased
investments in semiconductor equipment and changes in semiconductor equipment customer mix. In addition, the increase in net
sales from customers in China also reflected increased investments from display manufacturing equipment customers.
31
Gross Margin
Gross margins for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Gross margin . . . . . . . . . . . . . . . . . . . . . . . .
45.3%
44.9%
41.7%
0.4 points
3.2 points
Gross margin in fiscal 2018 increased slightly compared to fiscal 2017, primarily due to higher net sales and materials cost
savings. Gross margin in fiscal 2017 increased compared to fiscal 2016, primarily due to higher net sales, favorable product mix
and materials cost savings.
Gross margin during fiscal 2018, 2017 and 2016 included $87 million, $69 million and $62 million, respectively, of share-
based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Research, development and engineering . . . . . . $
2,019
$
1,774
$
(In millions)
$
1,540
245
$
234
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 2018, Applied increased its RD&E investments across Semiconductor Systems and Display and Adjacent Markets,
including etch, e-beam inspection and other materials engineering solutions to improve chip performance and enable advanced
displays. Applied’s investments in etch were focused on supporting the adoption of precision etch technology for enabling continued
scaling of 3D logic and memory chips. The investment in e-beam inspection was in support of strengthening our e-beam portfolio,
which helps achieve higher yields at advanced nodes by detecting the most challenging defects and monitoring and controlling
process marginality. Applied also invested in materials engineering solutions to support patterning applications as well as to improve
transistor performance and device power efficiency. In Display and Adjacent Markets, RD&E investments were focused on
expanding the company’s market opportunity with new display technologies.
RD&E expenses increased in fiscal 2018 compared to the prior year and also in fiscal 2017 compared to fiscal 2016, primarily
due to additional headcount and increased research and development spending in Semiconductor Systems and Display and Adjacent
Market segments. These increases reflect Applied’s ongoing investments in product development initiatives, consistent with the
Company’s growth strategy. Applied continued to prioritize existing RD&E investments in technical capabilities and critical
research and development programs in current and new markets, with a focus on semiconductor technologies.
RD&E expense during fiscal 2018, 2017 and 2016 included $96 million, $83 million and $76 million, respectively, of share-
based compensation expense.
32
Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Marketing and selling. . . . . . . . . . . . . . . . . . $
521
$
456
$
(In millions)
$
429
65
$
27
Marketing and selling expenses increased in fiscal 2018 compared to fiscal 2017 primarily due to additional headcount.
Marketing and selling expenses increased in fiscal 2017 compared to fiscal 2016, primarily due to additional headcount, partially
offset by the reduction in bad debt provision recorded during fiscal 2017.
Marketing and selling expenses for fiscal years 2018, 2017 and 2016 included $31 million, $28 million and $26 million,
respectively, of share-based compensation expense.
General and Administrative
General and administrative (G&A) expenses for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
General and administrative. . . . . . . . . . . . . . $
481
$
434
$
(In millions)
$
390
47
$
44
General and administrative expenses in fiscal 2018 increased compared to fiscal 2017 primarily due to additional headcount
and unfavorable impact from foreign exchange fluctuation, partially offset by lower variable compensation expense. General and
administrative expenses in fiscal 2017 increased compared to fiscal 2016, primarily due to higher variable compensation and
additional headcount.
G&A expenses during fiscal 2018, 2017 and 2016 included $44 million, $40 million and $37 million, respectively, of share-
based compensation expense.
Interest Expense and Interest and Other Income (loss), net
Interest expense and interest and other income (loss), net for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Interest expense . . . . . . . . . . . . . . . . . . . . . . $
Interest and other income, net. . . . . . . . . . . . $
234
132
$
$
198
61
$
$
(In millions)
$
155
$
16
36
71
$
$
43
45
Interest expenses incurred were primarily associated with the senior unsecured notes issued in June 2011, September 2015,
and March 2017. Interest expense increased in fiscal 2018 compared to the prior year and also in fiscal 2017 compared to fiscal
2016 due to the issuance of senior unsecured notes in March 2017.
Interest and other income, net primarily includes interest earned on cash and investments, realized gains or losses on sales
of securities and impairment of strategic investments. Interest and other income, net in fiscal 2018 increased compared to fiscal
2017 primarily driven by realized gains on sales of securities and higher interest income from investments. Interest and other
income, net in fiscal 2017 increased compared to the prior year primarily due to higher interest income from investments, partially
offset by higher impairment of strategic investments in fiscal 2017.
33
Income Taxes
Provision for income taxes and effective tax rates for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
(In millions, except percentages)
Provision for income taxes . . . . . . . . . . . . . . $
Effective income tax rate . . . . . . . . . . . . . . .
1,381
$
29.4%
$
297
8.0%
$
292
14.5%
1,084
$
5
21.4 points
(6.5) points
Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income
which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected
by events that are not consistent from period to period, such as changes in income tax laws and the resolution of prior years’ income
tax filings.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes a
reduction to the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent and requires a one-time transition tax on certain
unrepatriated earnings of foreign subsidiaries payable over eight years. U.S. deferred tax assets and liabilities were subject to
remeasurement due to the reduction of the U.S. federal corporate tax rate. Applied has a blended U.S. federal corporate tax rate
of 23.4 percent for fiscal 2018 based on the number of days before and after the effective date of the Tax Act.
The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance
on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period for companies to complete this
accounting. Pursuant to SAB 118, provisional adjustments were recorded when reasonable estimates could be determined. These
provisional estimates will be revised as information becomes available and as guidance is issued by the Internal Revenue Service.
The accounting for the income tax effects of the Tax Act will be completed during the measurement period, which will not extend
beyond one year from the Tax Act enactment date. Applied continues to evaluate certain unrepatriated earnings of foreign
subsidiaries used to calculate the transition tax. The remeasurement of U.S. deferred tax assets and liabilities is complete.
The effective tax rate for fiscal 2018 was higher than fiscal 2017 primarily due to tax expense of $1.1 billion for the transition
tax and remeasurement of deferred tax assets as a result of the Tax Act, partially offset by changes in the geographical composition
of income, tax benefits from the lower U.S. federal corporate tax rate, adoption of authoritative guidance for share-based
compensation, and the resolution of tax liabilities for uncertain tax positions. In addition, fiscal 2017 included tax benefits from
the recognition of previously unrecognized foreign tax credits.
The effective tax rate for fiscal 2017 was lower than fiscal 2016 primarily due to the recognition of previously unrecognized
foreign tax credits and changes in the geographical composition of income. In addition, fiscal 2016 included unfavorable resolutions
and changes related to income tax liabilities for uncertain tax positions as well as the reinstatement of the U.S. federal R&D tax
credit retroactive to its expiration in December of 2015 which did not reoccur in fiscal 2017.
34
Segment Information
Applied reports financial results in three segments: Semiconductor Systems, Applied Global Services, and Display and
Adjacent Markets. A description of the products and services, as well as financial data, for each reportable segment can be found
in Note 15 of Notes to Consolidated Financial Statements.
The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar
photovoltaic cells and modules and certain operating expenses that are not allocated to its reportable segments and are managed
separately at the corporate level. These operating expenses 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.
Semiconductor Systems Segment
The Semiconductor Systems segment is comprised primarily of capital equipment used to fabricate semiconductor chips.
Semiconductor industry spending on capital equipment is driven by demand for advanced electronic products, including
smartphones and other mobile devices, servers, personal computers, automotive devices, storage, and other products, and the
nature and timing of technological advances in fabrication processes, and as a result is subject to variable industry conditions.
Development efforts are focused on solving customers’ key technical challenges in transistor, interconnect, patterning and
packaging performance as devices scale to advanced technology nodes.
Investment in semiconductor manufacturing equipment continued to be a strong driver of revenue during fiscal
2018. Semiconductor equipment customers made investments in new capacity and technology transitions, and overall
semiconductor systems revenue increased. Demand for logic, DRAM, and NAND increased during fiscal 2018. Foundry customers’
spending decreased compared to the prior year and Applied continues to see these customers optimize existing capacity and re-
prioritize their capital spending plans on longer lead-time equipment not in Applied’s product portfolio.
Certain significant measures for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Net sales . . . . . . . . . . . . . . . . . . . . $ 10,903
Operating income . . . . . . . . . . . . . $
3,634
Operating margin . . . . . . . . . . . . .
33.3%
$
$
9,517
3,173
(In millions, except percentages and ratios)
$ 1,386
$
6,873
15%
$
1,807
$
461
15%
$ 2,644
$ 1,366
38%
76%
33.3%
26.3%
—% points
7.0 points
Net sales for Semiconductor Systems by end use application for the periods indicated were as follows:
Foundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dynamic random-access memory (DRAM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flash memory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Logic and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
24%
27%
36%
13%
41%
16%
34%
9%
40%
16%
31%
13%
100%
100%
100%
Net sales for fiscal 2018 increased compared to fiscal 2017 primarily due to higher spending from memory and logic customers,
offset by lower spending from foundry customers. Although operating margin remained flat, operating income for fiscal 2018
increased compared to fiscal 2017 primarily due to favorable changes in product mix and higher net sales, partially offset by higher
RD&E expenses. Six customers represented at least 10 percent of this segment’s net sales, and together they accounted for
approximately 76 percent of this segment’s net sales for fiscal 2018.
Net sales for fiscal 2017 increased compared to fiscal 2016 primarily due to higher spending from foundry and memory
customers. Operating income and operating margin for fiscal 2017 increased compared to prior year primarily due to favorable
changes in product mix and higher net sales, partially offset by higher RD&E expenses.
35
The following regions accounted for at least 30 percent of total net sales for the Semiconductor Systems segment for one
or more of past three fiscal years:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Korea . . . . $
Taiwan . . . $
2,886
1,895
26% $
17% $
2,962
2,638
31% $
28% $
1,177
2,165
17% $
32% $
(76)
(743)
(3)%
(28)%
$
$
1,785
473
152%
22%
(In millions, except percentages)
Applied Global Services Segment
The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and
productivity, including spares, upgrades, services, certain 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.
Demand for Applied Global Services’ service solutions are driven by Applied’s large and growing installed base of
manufacturing systems, and customers’ needs to shorten ramp times, improve device performance and yield, and optimize factory
output and operating costs. Industry conditions that affect Applied Global Services’ sales of spares and services are primarily
characterized by increases in semiconductor manufacturers’ wafer starts and continued strong utilization rates, growth of the
installed base of equipment, growing service intensity of newer tools, and the company’s ability to sell more comprehensive service
agreements.
Certain significant measures for the periods indicated were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Net sales . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . $
Operating margin . . . . . . . . . . . . .
$
$
3,754
1,102
29.4%
3,017
817
27.1%
2,589
682
26.3%
(In millions, except percentages and ratios)
$
$
737
285
$
$
24%
35%
2.3 points
$
$
428
135
17 %
20 %
0.8 points
There was no single region 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.
Net sales increased in fiscal 2018 compared to the prior year and also in fiscal 2017 compared to fiscal 2016 primarily due
to higher customer spending for spares and services. Two customers represented at least 10 percent of this segment’s net sales,
and together they accounted for approximately 23 percent of this segment’s net sales for fiscal 2018.
Operating income and operating margin for fiscal 2018 increased compared to the prior year and also in fiscal 2017 compared
to fiscal 2016, reflecting higher net sales partially offset by increased headcount to support business growth.
36
Display and Adjacent Markets Segment
The Display and Adjacent Markets segment encompasses products for manufacturing liquid crystal and OLED displays, and
other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-
oriented devices, equipment upgrades and flexible coating systems. The segment is focused on expanding its presence through
technologically-differentiated equipment for manufacturing large-scale LCD TVs, OLEDs, low temperature polysilicon (LTPS),
metal oxide, and touch panel sectors; and development of products that provide customers with improved performance and yields.
Display industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs as well as larger
and higher resolution displays for next-generation mobile devices.
The market environment for Applied's Display and Adjacent Markets segment in fiscal 2018 was characterized by increased
demand for manufacturing equipment for TV and mobile devices. Uneven demand patterns in the Display and Adjacent Markets
segment can cause significant fluctuations quarter-over-quarter, as well as year-over-year.
Certain significant measures for the periods presented were as follows:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
Net sales . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . $
Operating margin . . . . . . . . . . . . .
$
$
2,498
679
27.2%
1,900
502
26.4%
1,206
245
20.3%
(In millions, except percentages and ratios)
$
$
598
177
$
$
31%
35%
0.8 points
$
$
694
257
58%
105%
6.1 points
Net sales for fiscal 2018 increased compared to fiscal 2017 primarily due to higher customer investments in TV display
manufacturing equipment. Operating income and operating margin for fiscal 2018 increased compared fiscal 2017, reflecting
higher net sales and favorable product mix, partially offset by higher RD&E spending. Three customers, that represented at least
10 percent of this segment’s net sales, accounted for approximately 58 percent of net sales for this segment in fiscal 2018, with
one customer accounting for approximately 33 percent of net sales.
Net sales for fiscal 2017 increased compared to prior year primarily due to higher customer investments in mobile and TV
display manufacturing equipment. Operating income and operating margin for fiscal 2017 increased compared to the prior year,
reflecting higher net sales and favorable product mix, partially offset by increased RD&E spending.
The following regions accounted for at least 30 percent of total net sales for the Display and Adjacent Markets segment for
one or more of the periods presented:
2018
2017
2016
2018 over 2017
2017 over 2016
Change
China. . . . . $
Korea. . . . . $
2,004
211
80% $
8% $
961
750
51% $
39% $
449
492
37% $
41% $
1,043
(539)
109%
(72)%
$
$
512
258
114%
52%
(In millions, except percentages)
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.
37
Financial Condition, Liquidity and Capital Resources
Applied’s cash, cash equivalents and investments consist of the following:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash, cash-equivalents and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
October 28,
2018
October 29,
2017
(In millions)
3,440
590
1,568
5,598
$
$
5,010
2,266
1,143
8,419
Sources and Uses of Cash
A summary of cash provided by (used in) operating, investing, and financing activities is as follows:
2018
2017
2016
(In millions)
Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
3,787
$
571
(5,928) $
$
3,789
(2,526) $
$
341
2,566
(425)
(3,532)
In March 2016, the Financial Accounting Standards Board issued authoritative guidance that simplifies several aspects of
the accounting for share-based payment transactions, including forfeitures, income tax, and classification on the statement of cash
flows. Applied adopted this guidance in the first quarter of fiscal 2018. Upon adoption, Applied elected to apply the presentation
requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares retrospectively. Adopting
this guidance increased cash provided by operating activities by $180 million and $100 million with corresponding net decreases
in cash provided by financing activities for fiscal 2017 and 2016, respectively. See Note 1 of Notes to Consolidated Financial
Statements for additional discussion of this adoption.
Operating Activities
Cash from operating activities for fiscal 2018 was $3.8 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 and deferred income taxes. Cash provided from operating activities remained flat from fiscal 2017 to fiscal 2018
due to the increase in income taxes payable, offset by lower deferred revenue and higher increase in accounts receivable. Cash
provided by operating activities increased from fiscal 2016 to fiscal 2017 primarily due to higher net income, offset by a smaller
increase in customer deposits and a greater increase in inventory in fiscal 2017.
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 sold
$1.6 billion, $746 million and $75 million of accounts receivable during fiscal 2018, 2017 and 2016, respectively. Applied
discounted letters of credit issued by customers of $37 million in fiscal 2018. There was no discounting of promissory notes in
fiscal 2018. Applied did not discount letters of credit issued by customers or discount promissory notes during fiscal 2017 or 2016.
Applied’s working capital was $6.7 billion at October 28, 2018 and $8.8 billion at October 29, 2017.
Days sales outstanding at the end of fiscal 2018, 2017 and 2016 was 58 days, 54 days, and 63 days, respectively. Days sales
outstanding varies due to the timing of shipments and payment terms, and the increase from fiscal 2017 to fiscal 2018 was primarily
due to better revenue linearity in fiscal 2017. Days sales outstanding decreased from fiscal 2016 to fiscal 2017 primarily due to
better collections performance and increase in factoring of accounts receivable.
38
Investing Activities
Applied generated $571 million in cash from investing activities in fiscal 2018. Applied used $2.5 billion of cash in investing
activities in fiscal 2017 and $425 million in fiscal 2016. Capital expenditures in fiscal 2018, 2017 and 2016 were $622 million,
$345 million and $253 million, respectively. Capital expenditures in fiscal 2018 were primarily for real property acquisitions and
improvements in North America and Taiwan, as well as investments in demonstration, testing and laboratory tools. Capital
expenditures in fiscal 2017 and fiscal 2016 were primarily for demonstration and test equipment and laboratory tools in North
America. Proceeds from sales and maturities of investments, net of purchase of investments was $1.2 billion for fiscal 2018.
Purchases of investments, net of proceeds from sales and maturities of investments were $2.1 billion and $156 million for fiscal
2017 and 2016, 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 used $5.9 billion of cash in financing activities in fiscal 2018, consisting primarily of repurchases of common stock
of $5.3 billion, cash dividends to stockholders of $605 million and tax withholding payments for vested equity awards of $164
million, offset by proceeds from common stock issuances of $124 million.
Applied generated $341 million of cash from financing activities in fiscal 2017, consisting primarily of net proceeds received
from the issuance of senior unsecured notes of $2.2 billion, proceeds from common stock issuances of $97 million, partially offset
by cash used for repurchases of common stock of $1.2 billion, cash dividends to stockholders of $430 million and debt repayments
of $205 million.
Applied used $3.5 billion of cash in financing activities in fiscal 2016, consisting primarily $1.2 billion in debt repayments,
$1.9 billion in repurchases of its common stock, and $444 million in cash dividends to stockholders, offset by proceeds from
common stock issuances of $88 million.
In September 2017, Applied’s Board of Directors approved a common stock repurchase program authorizing up to $3.0
billion in repurchases. In February 2018, the Board of Directors approved a new common stock repurchase program authorizing
up to an additional $6.0 billion in repurchases. At October 28, 2018, $4.3 billion remained available for future stock repurchases
under this repurchase program.
During fiscal 2018, Applied's Board of Directors declared three quarterly cash dividends of $0.20 per share and one quarterly
cash dividend of $0.10 per share. During each of fiscal 2017 and 2016, Applied’s Board of Directors declared four quarterly cash
dividends in the amount of $0.10 per share. Applied currently anticipates that cash dividends will continue to be paid on a quarterly
basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s
financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination
by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is
comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2021. This
agreement provides for borrowings in United States dollars at interest rates keyed to one of two rates selected by Applied for each
advance and includes financial and other covenants with which Applied was in compliance at October 28, 2018. Remaining credit
facilities in the amount of approximately $71 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 28, 2018
and October 29, 2017, 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 28, 2018 and
October 29, 2017, Applied did not have any commercial paper outstanding, but may issue commercial paper notes under this
program from time to time in the future.
39
In March 2017, Applied issued senior unsecured notes in the aggregate principal amount of $2.2 billion. Applied had senior
unsecured notes in the aggregate principal amount of $5.4 billion outstanding as of October 28, 2018. The indentures governing
these notes include covenants with which Applied was in compliance at October 28, 2018. In May 2017, Applied completed the
redemption of the entire outstanding $200 million in principal amount of senior notes due in October 2017. See Note 10 of Notes
to Consolidated Financial Statements for additional discussion of existing debt. Applied may seek to refinance its existing debt
and may incur additional indebtedness depending on Applied’s capital requirements and the availability of financing.
Others
During 2018 and 2017, Applied reduced $1 million and $17 million, respectively, of its allowance for doubtful accounts as
a result of an overall lower risk profile of Applied’s customers. Applied recorded a bad debt provision of $3 million in fiscal 2016.
While Applied believes that its allowance for doubtful accounts at October 28, 2018 is adequate, it will continue to closely monitor
customer liquidity and economic conditions.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act. The Tax Act requires a one-time transition
tax on certain unrepatriated earnings of foreign subsidiaries payable over eight years, with eight percent due in each of the first
five years starting with fiscal 2018. For fiscal 2018, Applied realized tax expense of $1.1 billion associated with the Tax Act,
primarily due to the transition tax. The transition tax eliminated the requirement that cash, cash equivalents and marketable securities
held by certain foreign subsidiaries be subject to U.S income taxes if repatriated for U.S. operations. Accordingly, cash, cash
equivalents and marketable securities held by all foreign subsidiaries may be repatriated for U.S. operation without being subject
to further U.S. income taxes.
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.
40
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 28, 2018, 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 28, 2018, Applied has provided parent guarantees
to banks for approximately $149 million to cover these arrangements.
Applied also has operating leases for various facilities. Total rent expense for fiscal 2018, 2017 and 2016 was $50 million,
$34 million and $38 million, respectively.
Contractual Obligations
The following table summarizes Applied’s contractual obligations as of October 28, 2018:
Contractual Obligations
Debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense associated with debt obligations . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . .
Income tax from change in U.S. tax laws1. . . . . . . . .
Purchase obligations2 . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities3,4 . . . . . . . . . . . . . . . . . . .
Total
$
Payments Due by Period
Total
Less Than
1 Year
1-3
Years
3-5
Years
More Than
5 Years
$
5,350
3,137
173
1,001
2,044
20
(In millions)
1,350
422
68
— $
219
50
$
80
1,914
—
160
115
2
— $
342
33
160
15
2
4,000
2,154
22
601
—
16
11,725
$
2,263
$
2,117
$
552
$
6,793
______________________
1 Represents an estimate of a provisional tax amount for the transition tax liability associated with the deemed repatriation of
accumulated foreign earnings as a result from the enactment of the Tax Cuts and Jobs Act into law on December 22, 2017.
2 Represents Applied’s agreements to purchase goods and services consisting of Applied’s outstanding purchase orders for goods
and services.
3 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 12, Employee Benefit Plans, of the consolidated financial statements.
4 Applied’s other long-term liabilities in the Consolidated Balance Sheets include deferred tax liabilities, gross unrecognized
tax benefits and related gross interest and penalties. As of October 28, 2018, the gross liability for unrecognized tax benefits
that was not expected to result in payment of cash within one year was $374 million. Interest and penalties related to uncertain
tax positions that were not expected to result in payment of cash within one year of October 28, 2018 was $26 million. At this
time, Applied is unable to make a reasonably reliable estimate of the timing of payments due to uncertainties in the timing of
tax audit outcomes; therefore, such amounts are not included in the above contractual obligation table.
41
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.
42
Inventory Valuation
Inventories are generally stated at the lower of cost or net realizable value, 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 net
realizable 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.
43
Income Taxes
Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income
which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected
by events that are not consistent from period to period, such as changes to income tax laws and the resolution of prior years’ income
tax filings.
Applied recognizes a current tax liability for the estimated amount of income tax payable on tax returns for the current fiscal
year. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the
book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryforwards.
Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be
realized.
Applied recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be
sustained upon examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized
from such positions are estimated based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Any changes in judgment related to uncertain tax positions are recognized in Applied’s provision for income taxes in
the quarter in which such change occurs. Interest and penalties related to uncertain tax positions are recognized in Applied’s
provision for income taxes.
The calculation of Applied’s provision for income taxes and effective tax rate 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 an adverse material impact on Applied’s results of operations and financial condition.
Non-GAAP Adjusted Financial Results
Management uses non-GAAP adjusted financial measures to evaluate the Company’s operating and financial performance
and for planning purposes, and as performance measures in its executive compensation program. Applied believes these measures
enhance an overall understanding of its performance and investors’ ability to review the Company’s business from the same
perspective as the Company’s management and facilitate comparisons of this period’s results with prior periods on a consistent
basis by excluding items that management does not believe are indicative of Applied's ongoing operating performance.
The non-GAAP adjusted financial measures presented below are adjusted to exclude the impact of certain costs, expenses,
gains and losses, including certain items related to mergers and acquisitions; restructuring charges and any associated adjustments;
impairments of assets, or investments; gain or loss on sale of strategic investments; certain income tax items and other discrete
adjustments. Additionally, fiscal 2018 non-GAAP results exclude estimated discrete income tax expense items associated with
recent U.S. tax legislation. Reconciliations of these non-GAAP measures to the most directly comparable financial measures
calculated and presented in accordance with GAAP are provided in the financial tables presented below. There are limitations in
using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with generally
accepted accounting principles, may be different from non-GAAP financial measures used by other companies, and may exclude
certain items that may have a material impact upon our reported financial results. The presentation of this additional information
is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance
with GAAP.
44
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)
Non-GAAP Adjusted Gross Profit
2018
2017
2016
Reported gross profit - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reversals related to restructuring2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,817
$
6,532
$
4,511
179
—
172
—
167
(2)
$
7,996
$
6,704
$
4,676
Non-GAAP adjusted gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46.3%
46.1%
43.2%
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration and deal costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversals related to restructuring, net2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other gains, losses or charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,796
$
3,868
$
2,152
197
5
—
—
191
3
—
(12)
188
2
(3)
8
Non-GAAP adjusted operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,998
$
4,050
$
2,347
Non-GAAP adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29.0%
27.9%
21.7%
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration and deal costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversals related to restructuring, net2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment (gain on sale) of strategic investments, net . . . . . . . . . . . . . . . . . . . . . . . . .
Other gains, losses or charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect of changes in applicable U.S. tax laws3 . . . . . . . . . . . . . . . . . . . . . . .
Resolution of prior years’ income tax filings, reinstatement of federal R&D tax credit
and other tax items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect of non-GAAP adjustments5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,313
$
3,434
$
1,721
197
5
—
—
(25)
—
1,112
(26)
(7)
191
3
—
5
(3)
(12)
—
(79)
(14)
188
2
(3)
5
3
8
—
45
(19)
$
4,569
$
3,525
$
1,950
1
2
3
4
5
These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
Results for fiscal 2016 included adjustments associated with the cost reductions in the solar business.
Charges to income tax provision related to a one-time transition tax and a decrease in U.S. deferred tax assets as a result of the recent U.S. tax legislation.
Amounts for fiscal 2017 included the recognition of the previously unrecognized foreign tax credits.
Adjustment to provision for income taxes related to non-GAAP adjustments reflected in income before income taxes.
45
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
(In millions, except per share amounts)
2018
2017
2016
$
3.23
$
3.17
$
0.18
(0.02)
1.08
—
(0.02)
4.45
1,026
$
0.16
—
—
(0.01)
(0.07)
3.25
1,084
$
1.54
0.16
—
—
0.01
0.04
1.75
1,116
Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment (gain on sale) of strategic investments, net . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect of change in applicable U.S. tax laws . . . . . . . . . . . . . . . . . . . . . . . . .
Other gains, losses or charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolution of prior years’ income tax filings and other tax items . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average number of diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
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)
2018
2017
2016
Semiconductor Systems 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,634
183
3,817
$
$
3,173
$ 1,807
184
184
3,357
$ 1,991
35.0%
35.3%
29.0 %
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-GAAP adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,102
$
817
$
682
—
2
1
3
1
—
1,104
$
821
$
683
29.4%
27.2%
26.4 %
Display and Adjacent Markets Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain items associated with acquisitions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition integration costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP adjusted operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
679
$
502
$
245
14
1
5
—
—
—
694
$
507
$
245
27.8%
26.7%
20.3 %
1
These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
Note: The reconciliation of GAAP and non-GAAP adjusted segment results above does not include certain revenues, costs of
products sold and operating expenses that are reported within corporate and other and included in consolidated operating income.
47
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 $2.0 billion at October 28, 2018. 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 28, 2018,
an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately
$26 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 28, 2018, the aggregate principal and estimated fair values amounts of long-
term debt issued by Applied were both $5.4 billion. A hypothetical decrease in interest rates of 100 basis points would result in
an increase in the fair value of Applied’s long-term debt issuances of approximately $497 million at October 28, 2018.
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.
48
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 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 28, 2018.
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 28, 2018.
Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2018, 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
49
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 25, 2019.
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 Corporate Governance section at http://www.appliedmaterials.com/company/investor-
relations/governance. 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 25, 2019.
50
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 25, 2019.
The following table summarizes information with respect to equity awards under Applied’s equity compensation plans as
of October 28, 2018:
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))
20
— (4)
20
$
$
$
15.06
7.27
15.02
94 (3)
4 (5)
98
(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 28, 2018.
(2) The weighted average exercise price calculation does not take into account any restricted stock units or performance
shares.
(3) Includes 13 million shares of Applied common stock available for future issuance under the Applied Materials, Inc.
Employees’ Stock Purchase Plan. Of these 13 million shares, 1 million are subject to purchase during the purchase period
in effect as of October 28, 2018.
(4) Includes options to purchase 5 thousand 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 $7.27 per share. No further shares are available for issuance under the plans under which these assumed awards
were granted.
(5) Includes 4 million shares of Applied common stock available for future issuance under the Applied Materials, Inc. Stock
Purchase Plan for Offshore Employees. Of these 4 million shares, 1 million are subject to purchase during the purchase
period in effect as of October 28, 2018.
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 28, 2018, a total of 36 million shares have been authorized for issuance under the Offshore
ESPP, and 4 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.
51
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 25, 2019.
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 25, 2019.
52
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
54
56
57
58
59
60
61
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
Item 16:
Form 10-K Summary
None.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Applied Materials, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Applied Materials, Inc. and subsidiaries (the Company)
as of October 28, 2018 and October 29, 2017, 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 28, 2018, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of October 28, 2018 and October 29, 2017, and the results of its
operations and its cash flows for each of the years in the three-year period ended October 28, 2018, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of October 28, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated December 13, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Basis for Opinion
These consolidated 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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
We have served as the Company’s auditor since 2004.
Santa Clara, California
December 13, 2018
/S/ KPMG LLP
KPMG LLP
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Applied Materials, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Applied Materials, Inc. and subsidiaries (the Company) internal control over financial reporting as of
October 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of October 28, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of October 28, 2018 and October 29, 2017, 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 28, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated
December 13, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Santa Clara, California
December 13, 2018
/s/ KPMG LLP
KPMG LLP
55
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: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research, development and engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
17,253
$
14,537
$
10,825
9,436
7,817
2,019
521
481
3,021
4,796
234
132
4,694
1,381
3,313
3.27
3.23
1,013
1,026
$
$
$
8,005
6,532
1,774
456
434
2,664
3,868
198
61
3,731
297
3,434
3.20
3.17
1,073
1,084
$
$
$
6,314
4,511
1,540
429
390
2,359
2,152
155
16
2,013
292
1,721
1.56
1.54
1,107
1,116
See accompanying Notes to Consolidated Financial Statements.
56
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. . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
3,313
$
3,434
$
1,721
(51)
4
(17)
(64)
3,249
23
7
21
51
$
3,485
$
16
(3)
(36)
(23)
1,698
See accompanying Notes to Consolidated Financial Statements.
57
APPLIED MATERIALS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
October 28,
2018
October 29,
2017
ASSETS
Current assets: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,440
$
590
2,565
3,722
430
5,010
2,266
2,338
2,930
374
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,747
12,918
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased technology and other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,568
1,407
3,368
213
470
1,143
1,066
3,368
412
512
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,773
$
19,419
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer deposits and deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,721
$
1,347
4,068
5,309
1,254
303
2,450
1,665
4,115
5,304
392
259
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,934
10,070
Commitments and contingencies (Note 14)
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; 967 and 1,060 shares
outstanding at 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock: 1,019 and 917 shares at 2018 and 2017, respectively
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
10
7,274
20,874
(21,194)
(125)
6,839
—
11
7,056
18,258
(15,912)
(64)
9,349
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,773
$
19,419
See accompanying Notes to Consolidated Financial Statements.
58
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 25, 2015 . . . . . . . .
1,160
$
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . .
Issuance under stock plans, net of a
tax benefit of $23 and other . . . . . . . .
Common stock repurchases . . . . . . . .
Balance at October 30, 2016
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . .
Issuance under stock plans, net of a
tax benefit of $55 and other . . . . . . . .
—
—
—
—
14
(96)
1,078
$
—
—
—
—
10
Common stock repurchases . . . . . . . .
(28)
Balance at October 29, 2017 . . . . . . . .
1,060
$
Adoption of new accounting standard
(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax .
Dividends . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . .
Issuance under stock plans . . . . . . . . .
—
—
—
—
—
9
11
—
—
—
—
—
—
11
—
—
—
—
—
—
11
—
—
—
—
—
—
Common stock repurchases . . . . . . . .
(102)
(1)
$
6,575
$
13,967
793
$ (12,848) $
(92) $
—
—
—
201
33
—
1,721
—
(436)
—
—
—
—
—
—
—
—
96
—
—
—
—
—
(1,892)
—
(23)
—
—
—
—
$
6,809
$
15,252
889
$ (14,740) $
(115) $
—
—
—
220
27
—
3,434
—
(428)
—
—
—
—
—
—
—
—
28
—
—
—
—
—
(1,172)
—
51
—
—
—
—
7,613
1,721
(23)
(436)
201
33
(1,892)
7,217
3,434
51
(428)
220
27
(1,172)
$
7,056
$
18,258
917
$ (15,912) $
(64) $
9,349
—
—
—
—
258
(40)
—
(3)
3,313
—
(694)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
102
(5,282)
3
—
(64)
—
—
—
—
—
3,313
(64)
(694)
258
(40)
(5,283)
Balance at October 28, 2018 . . . . . . . .
967
$
10
$
7,274
$
20,874
1,019
$ (21,194) $
(125) $
6,839
(a) - Represents the reclassification adjustment related to the early adoption of Accounting Standards Update (ASU) 2018-02 Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. See Note 1.
See accompanying Notes to Consolidated Financial Statements.
59
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Fiscal Year
2018
2017
2016
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments required to reconcile net income to cash provided by operating activities:. . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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:
3,313
$
3,434
$
1,721
457
94
4
258
(226)
(792)
(93)
179
(318)
886
25
407
(11)
(9)
220
(37)
(879)
(157)
370
289
121
41
389
21
38
201
(542)
(216)
30
184
611
173
(44)
3,787
3,789
2,566
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions, net of cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from common stock issuances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax withholding payments for vested equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of dividends to stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents — beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents — end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental cash flow information:
(622)
(6)
3,276
(2,077)
571
—
—
124
(5,283)
(164)
(605)
(5,928)
(1,570)
5,010
3,440
Cash payments for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash refunds from income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash payments for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
300
63
219
$
$
$
$
(345)
(68)
2,743
(4,856)
(2,526)
2,176
(205)
97
(1,172)
(125)
(430)
341
1,604
3,406
5,010
194
61
186
$
$
$
$
(253)
(16)
1,234
(1,390)
(425)
—
(1,207)
88
(1,892)
(77)
(444)
(3,532)
(1,391)
4,797
3,406
157
113
151
See accompanying Notes to Consolidated Financial Statements.
60
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 2018, 2017 and 2016 contained 52, 52, and 53 weeks, respectively. Each
fiscal quarter of 2018 and 2017 contained 13 weeks. The first fiscal quarter of 2016 contained 14 weeks, while the second, third
and fourth quarters of fiscal 2016 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 and other income, net 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 expenses in the Consolidated Statement of Operations.
Inventories
Inventories are stated at the lower of cost or net realizable value, 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 net realizable 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.
61
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 5 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
Applied recognizes a current tax liability for the estimated amount of income tax payable on tax returns for the current fiscal
year. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the
book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryovers.
Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be
realized.
Applied recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be
sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized
from such positions are estimated based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Any changes in judgment related to uncertain tax positions are recognized in Applied’s provision for income taxes in
the quarter in which such change occurs. Interest and penalties related to uncertain tax positions are recognized in Applied’s
provision for income taxes.
62
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. In certain cases, Applied also uses interest rate swap or lock agreements to
hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. 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 28, 2018, 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.
63
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, commercial paper, 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
Accounting Standards Adopted
Inventory Measurement. In July 2015, the Financial Accounting Standard 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. Applied adopted this authoritative
guidance in the first quarter of fiscal 2018 prospectively to the measurement of inventory after the effective date. The adoption of
this guidance did not have a material impact on Applied’s consolidated financial statements.
Share-Based Compensation. In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the
accounting for share-based payment transactions, including forfeitures, income tax, and classification on the statement of cash
flows. Applied adopted this guidance in the first quarter of fiscal 2018. Upon adoption, Applied elected to continue to estimate
forfeitures expected to occur to determine the amount of compensation costs to be recognized in each period. The new standard
also required recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital prospectively.
In fiscal 2018, Applied recognized an excess tax benefit of $51 million in the Consolidated Condensed Statements of Operations.
Additionally, Applied elected to apply the presentation requirements for cash flows related to excess tax benefits and employee
taxes paid for withheld shares retrospectively. Adopting this guidance increased cash provided by operating activities by $180
million and $100 million with corresponding net decreases in cash provided by financing activities for fiscal 2017 and 2016,
respectively.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued
authoritative guidance that allows stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) to be reclassified from
accumulated other comprehensive income to retained earnings. Applied adopted this guidance at the beginning of the third quarter
of fiscal 2018. The stranded income tax effects related to the Tax Act were reclassified from accumulated other comprehensive
income to retained earnings in the consolidated statements of stockholders' equity as of October 28, 2018.
Share-Based Compensation: Modification Accounting. In May 2017, the FASB issued an update to clarify when to account
for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification
accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the
change in terms or conditions. Applied adopted this guidance in the third quarter of fiscal 2018 on a prospective basis. The impact
of the adoption of this guidance will depend on whether the Company makes any future modifications of share-based payment
awards.
64
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting Standards Not Yet Adopted
Retirement Benefits: Changes to the Disclosure Requirements for Defined Benefit and other Postretirement Plans. In August
2018, the FASB issued authoritative guidance that adds, removes, and clarifies disclosure requirements for defined benefit and
other postretirement plans. This authoritative guidance will be effective for Applied in fiscal 2021 on a retrospective basis, with
early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial
statements.
Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB
issued authoritative guidance that eliminates, amends, and adds disclosure requirements for fair value measurements. While the
amended and new disclosure requirements primarily relate to Level 3 fair value measurements, the authoritative guidance also
eliminates disclosure requirements related to the amount and reasons for transfer between Level 1 and Level 2 of fair value hierarchy,
policy for timing of transfer between levels, and the valuation processes for Level 3 fair value measurements. The authoritative
guidance will be effective for Applied in the first quarter of fiscal 2020. Early adoption is permitted only for the removal and
amendment of certain disclosures, while the new disclosures requirements are to be applied prospectively. Applied is currently
evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Derivatives and Hedging. In August 2017, the FASB issued authoritative guidance that modifies the recognition and
presentation of hedge accounting to better align an entity’s risk management strategies and financial reporting for hedging
relationships. The authoritative guidance expands the application of hedge accounting for non-financial and financial risk
components and eases certain hedge effectiveness assessment requirements. The authoritative guidance will be effective for Applied
in the first quarter of fiscal 2020, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on
Applied’s consolidated financial statements.
Receivables: Nonrefundable Fees and Other Costs. In March 2017, the FASB issued authoritative guidance that will shorten
the amortization period for certain callable debt securities held at a premium to the earliest call date to more closely align with
expectations incorporated in market pricing. This authoritative guidance will be effective for Applied in the first quarter of fiscal
2020 on a modified retrospective basis, with early adoption permitted. Applied is currently evaluating the impact of adopting this
new accounting guidance on Applied’s consolidated financial statements.
Retirement Benefits. In March 2017, the FASB issued authoritative guidance which requires companies to present the service
cost component of net benefit cost in the same line items in which they report compensation cost. The other components of net
benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal
of income from operations, if one is presented. The authoritative guidance will be effective for Applied in the first quarter of fiscal
2019 on a retrospective basis. The adoption of this guidance is only expected to result in reclassification of other components of
net benefit costs outside of income from operations and is not expected to have a significant impact on Applied’s consolidated
financial statements.
Goodwill Impairment. In January 2017, the FASB issued authoritative guidance that simplifies the process required to test
goodwill for impairment. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption
is permitted. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial
statements.
Business Combinations. In January 2017, the FASB issued authoritative guidance that clarifies the definition of a business
to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses.
The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019 on a prospective basis. The impact of
the adoption depends on the facts and circumstances of future acquisition or disposal transactions.
Income Taxes: Intra-Entity Asset Transfers. In October 2016, the FASB issued authoritative guidance that requires entities
to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. Applied
will adopt this standard in the first quarter of fiscal 2019 using a modified-retrospective approach resulting in a cumulative-effect
adjustment to retained earnings. Applied estimates an increase in deferred tax assets of approximately $1.6 billion with a
corresponding increase in retained earnings related to the recognition of income tax effects of intra-entity asset transfers that
occurred prior to the adoption date.
Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued authoritative guidance which
addresses classification of certain cash receipts and cash payments related to the statement of cash flows. The authoritative guidance
will be effective for Applied in the first quarter of fiscal 2019. The adoption of this guidance is not expected to have a significant
impact on Applied’s consolidated financial statements.
65
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments: Credit Losses. In June 2016, the FASB issued authoritative guidance that modifies the impairment
model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition
of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted
beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated
financial statements.
Leases. In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize
lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the
previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first
quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is
currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Financial Instruments: Classification and Measurement. In January 2016, the FASB issued authoritative guidance that
requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured
at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability
exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit
risk will be required to be presented separately in other comprehensive income. Applied will adopt this standard in the first quarter
of fiscal year 2019. Applied will make elections on whether to apply fair value or the measurement alternative for equity investments
without readily determinable fair value on an investment-by-investment basis. For the equity securities without readily determinable
fair values, fair value will be applied prospectively to all equity investments that exist as of adoption. Upon adoption, Applied will
record a cumulative-effect adjustment to retained earnings for the unrealized gains and losses associated with equity investments
with readily determinable fair values. Applied currently estimates a net increase to retained earnings of approximately $21 million
with the corresponding net decrease in accumulated other comprehensive income.
Revenue Recognition. 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 and requires certain additional disclosures. 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. 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, which is the Company’s planned adoption date. Applied
currently anticipates adopting this new guidance using the full retrospective approach.
In fiscal 2016, Applied established a project steering committee and cross-functional implementation team that has identified
potential differences that would result from applying the requirements of the new standard to Applied’s revenue contracts. In
addition, the implementation team has identified and is now implementing changes to business processes, systems and controls
to support recognition and disclosure under the new standard.
While the Company’s evaluation of the impact of this new guidance is not complete, Applied currently expects that the new
standard will have the following impacts:
• Revenue related to the sale of equipment and spares will generally continue to be recognized at a point in time upon the
transfer of control. Under this new guidance, the point of time at which revenue is recognized for certain of these products
is expected to be earlier than under current revenue recognition guidance as there will be fewer constraints related to
customer acceptance.
• Revenue related to the sale of services will generally continue to be recognized over time as the services are performed.
• Disclosures related to revenue recognition, including contract balances and revenue disaggregation, will be expanded.
• Applied continues to evaluate the effect that this new guidance will have on the financial position and results of operations
for fiscal 2018. However, for fiscal 2017, Applied expects an increase of our net sales between $140 million and $180
million, or approximately 1%.
Applied is nearing completion of retrospectively adjusting financial information and will continue to evaluate the effect
that the standard will have on its consolidated financial statements, including disclosures, and its preliminary assessments are
subject to change.
66
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:
2018
2017
2016
(In millions, except per share amounts)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,313
$
3,434
$
1,721
Denominator:
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,013
1,073
1,107
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
1,026
3.27
3.23
—
$
$
11
1,084
3.20
3.17
—
$
$
9
1,116
1.56
1.54
—
Potentially dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the
calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than
the average market price of Applied common stock, and therefore their inclusion would be anti-dilutive. Prior to the adoption of
Accounting Standards Update (ASU) 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting in the first quarter of fiscal 2018, the assumed tax benefits upon the exercise of options and vesting
of restricted stock units were also included in this calculation.
67
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 28, 2018
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash equivalents:
Money market funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . $
_________________________
* Includes agency debt securities guaranteed by Canada.
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
1,489
$
(In millions)
— $
— $
1,489
1,599
352
1,951
3,440
335
10
399
705
595
2,044
17
89
2,150
5,590
$
$
$
$
—
—
—
— $
— $
—
—
—
—
—
25
—
25
25
$
$
—
—
—
— $
2
—
4
3
4
13
4
—
17
17
$
$
$
1,599
352
1,951
3,440
333
10
395
702
591
2,031
38
89
2,158
5,598
68
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
October 29, 2017
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash equivalents:
1,346
$
Money market funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury and agency securities. . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . $
2,658
15
55
341
595
3,664
5,010
667
161
1,007
1,024
379
3,238
22
74
3,334
8,344
$
$
$
$
(In millions)
— $
— $
1,346
—
—
—
—
—
—
— $
— $
—
—
1
—
1
78
—
79
79
$
$
—
—
—
—
—
—
— $
1
—
—
1
1
3
1
—
4
4
$
$
$
2,658
15
55
341
595
3,664
5,010
666
161
1,007
1,024
378
3,236
99
74
3,409
8,419
________________________
* 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 28, 2018:
Cost
Estimated
Fair Value
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No single maturity date**. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
_________________________
$
(In millions)
503
946
701
2,150
$
502
938
718
2,158
** Securities with no single maturity date include publicly-traded and privately-held equity securities, and asset-backed and
mortgage-backed securities.
69
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
(In millions)
14
$
1
$
$
$
29
3
10
2
At October 28, 2018, 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 fixed income
securities at October 28, 2018, October 29, 2017 and October 30, 2016 were temporary in nature and therefore it did not recognize
any impairment of its marketable fixed income securities for fiscal 2018, 2017 or 2016. During fiscal 2018, 2017 and 2016, Applied
determined that certain of its equity investments were other-than-temporarily impaired and, accordingly, recognized impairment
charges of $5 million, $10 million and $8 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.
70
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 whenever events or changes in circumstances indicate that the carrying value of an asset may not be
recoverable.
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 28, 2018, 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.
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 28, 2018
October 29, 2017
Level 1
Level 2
Total
Level 1
Level 2
Total
(In millions)
Assets:
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,599
U.S. Treasury and agency securities . . . . . . . . . . . . . . . . . .
297
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 . . . . . . . . . . . . . . . . . . . . .
38
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,934
$
— $ 1,599
$ 2,658
$
— $ 2,658
36
10
395
333
10
395
1,054
1,054
591
—
591
38
192
—
—
—
—
99
489
216
681
216
1,348
1,348
1,619
1,619
378
—
378
99
$ 2,086
$ 4,020
$ 2,949
$ 4,050
$ 6,999
There were no transfers between Level 1 and Level 2 fair value measurements during fiscal 2018 and 2017, 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 28,
2018 or October 29, 2017.
71
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $89 million at October 28, 2018, of which $72 million of investments
were accounted for under the cost method of accounting and $17 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 $74 million at October 29, 2017, of which $65 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 2018, 2017 and 2016, Applied determined that certain of its equity investments were other-than-temporarily
impaired and, accordingly, recognized impairment charges of $5 million, $10 million and $8 million, respectively.
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 28,
2018, the aggregate principal and estimated fair value amounts of long-term debt were both $5.4 billion. At October 29, 2017, the
aggregate principal amount of long-term debt was $5.4 billion, and the estimated fair value was $5.8 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. See Note 10 of the Notes to the Consolidated Financial Statements for further detail of existing debt.
72
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 2017, Applied entered into and settled interest rate lock agreements, with a total notional amount of $700
million to hedge against the variability of benchmark interest rates prior to the issuance of the debt. These instruments were
designated as cash flow hedges at inception and settled in conjunction with the issuance of debt in March 2017. The $14 million
loss from the settlement of the interest rate lock agreement, which was included in AOCI in stockholders’ equity, is being amortized
to interest expense over the term of the senior unsecured 10-year notes issued in March 2017.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging
activities, including foreign currency exchange and interest rate contracts, are recognized on the balance sheet at fair value. Changes
in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized
currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or 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 28, 2018 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 were not significant for fiscal years 2018 and 2017 and was a loss of $8 million for fiscal 2016.
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.
The fair values of foreign exchange derivative instruments at October 28, 2018 and October 29, 2017 were not material.
73
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effects of derivative instruments and hedging activities on the Consolidated Statements of Operations were as follows:
Derivatives in Cash Flow Hedging Relationships
Location of Gain or
(Loss)
Gain or
(Loss)
Gain or (Loss)
Reclassified
from AOCI into
Income
(In millions)
Effective Portion
Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing
Gain or (Loss)
Recognized in
Income
2018
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
AOCI
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
AOCI
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
AOCI
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
AOCI
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . .
Cost of products sold
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives Not Designated as Hedging Instruments
Location of Gain or
(Loss) Recognized
in Income
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . General and administrative
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Risk Contingent Features
$
$
$
$
$
$
$
$
3
—
—
—
3
35
—
—
(14)
—
21
$
$
$
$
— $
4
(3)
(3)
(2) $
— $
7
7
—
(3)
11
$
(53) $
— $
—
—
—
(46)
—
(2)
(53) $
(48) $
Amount of Gain or (Loss)
Recognized in Income
—
19
(7)
—
12
—
(3)
(2)
—
—
(5)
—
2
(11)
—
(9)
2018
2017
2016
(In millions)
(5) $
(5) $
39
39
$
$
(75)
(75)
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 28, 2018 and October 29, 2017.
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.
74
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 sold $1.6 billion, $746 million and $75 million of accounts receivable during fiscal 2018, 2017 and 2016, respectively.
Applied discounted letters of credit issued by customers of $37 million in fiscal 2018. There was no discounting of promissory
notes in fiscal 2018. Applied did not discount letters of credit issued by customers or discount promissory notes during fiscal 2017
or 2016. 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 $33 million and $34 million at October 28,
2018 and October 29, 2017, respectively. Changes in allowance for doubtful accounts in each fiscal year were as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
(In millions)
51
$
—
(17)
34
$
$
$
34
—
(1)
33
49
3
(1)
51
_____________________________
1 Fiscal 2018, 2017 and 2016 deductions primarily represent releases of allowance for doubtful accounts credited to expense as a result of an
overall lower risk profile of Applied’s customers and cash collections.
Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied
believes that its allowance for doubtful accounts is adequate and represents its best estimate as of October 28, 2018, it continues
to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.
75
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 28,
2018
October 29,
2017
(In millions)
989
1,020
505
1,208
3,722
$
$
595
603
468
1,264
2,930
Included in finished goods inventory is $19 million at October 28, 2018 and $331 million at October 29, 2017, 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 $350 million and $281 million of evaluation inventory at October 28, 2018 and
October 29, 2017, respectively.
Other Current Assets
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
3-5
$
$
$
October 28,
2018
October 29,
2017
(In millions)
40
390
430
$
$
57
317
374
October 28,
2018
October 29,
2017
(In millions)
245
1,448
1,282
634
203
3,812
(2,405)
1,407
$
$
160
1,315
1,129
572
135
3,311
(2,245)
1,066
Depreciation expense was $258 million, $214 million and $200 million for fiscal 2018, 2017 and 2016 respectively.
76
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Payable and Accrued Expenses
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Customer Deposits and Deferred Revenue
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 28,
2018
October 29,
2017
(In millions)
996
639
209
193
136
112
38
398
2,721
$
$
945
666
199
106
112
70
38
314
2,450
October 28,
2018
October 29,
2017
(In millions)
444
903
1,347
$
$
381
1,284
1,665
Applied typically receives deposits on future deliverables from customers in the Display and Adjacent Markets segment and,
in certain instances, may also receive deposits from customers in the Applied Global Services segment.
Other Liabilities
Defined and postretirement benefit plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 28,
2018
October 29,
2017
(In millions)
177
126
303
$
$
160
99
259
77
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 8
Business Combinations
During fiscal 2017, Applied completed three acquisitions to complement Applied’s existing product offerings and to provide
opportunities for future growth within Applied’s Display and Adjacent Markets and Applied Global Services segments.
Pro forma results of operations for these acquisitions have not been presented because they are not material to Applied’s
consolidated results of operations. The acquired businesses are included in the results for the Display and Adjacent Markets and
Applied Global Services segments.
The following table represents the final aggregated purchase price allocation for acquisitions completed in fiscal year 2017:
Fair value of net assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase price allocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
23
55
31
109
Intangible assets are being amortized on a straight-line basis over an estimated weighted-average useful life of 3.5 years.
Total transaction costs related to these acquisitions were not material and were expensed as incurred in general and administrative
expenses in the Consolidated Statement of Operations.
Estimated Fair Values
(In millions)
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.
As of October 28, 2018, Applied’s reporting units include Semiconductor Product Group and Imaging and Process Control
Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent
Markets.
In the fourth quarter of fiscal 2018, 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.
78
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 were as follows:
October 28,
2018
October 29,
2017
(In millions)
2,151
$
1,018
199
3,368
$
2,151
1,018
199
3,368
October 28,
2018
October 29,
2017
$
(In millions)
109
104
213
$
288
124
412
Semiconductor Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Display and Adjacent Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
A summary of Applied’s purchased technology and intangible assets is set forth below:
Purchased technology, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Intangible assets - finite-lived, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
79
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 28, 2018
Purchased
Technology
Other
Intangible
Assets
October 29, 2017
Other
Intangible
Assets
Total
Total
Purchased
Technology
(In millions)
Gross carrying amount:
Semiconductor Systems . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . .
Display and Adjacent Markets . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . .
Gross carrying amount . . . . . . . . . . . . . . . . . $
Accumulated amortization:
Semiconductor Systems . . . . . . . . . . . . . . . . $
Applied Global Services . . . . . . . . . . . . . . . .
Display and Adjacent Markets . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . $
Carrying amount . . . . . . . . . . . . . . . . . . . . . . $
1,449
$
252
$
1,701
$
1,449
$
252
$
1,701
33
163
—
44
38
9
77
201
9
33
163
—
44
38
9
77
201
9
1,645
$
343
$
1,988
$
1,645
$
343
$
1,988
(1,375) $
(29)
(132)
—
(1,536) $
109
$
(150) $
(44)
(36)
(9)
(239) $
$
104
(1,525) $
(73)
(168)
(9)
(1,775) $
$
213
(1,210) $
(28)
(119)
—
(1,357) $
$
288
(131) $
(44)
(35)
(9)
(219) $
$
124
(1,341)
(72)
(154)
(9)
(1,576)
412
80
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Details of amortization expense for each fiscal year by segment were as follows:
2018
2017
2016
(In millions)
Semiconductor Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Applied Global Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Display and Adjacent Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortization expense for each fiscal year was charged to the following categories:
2018
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Research, development and engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketing and selling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
184
1
14
—
199
180
1
18
199
$
$
$
$
185
1
7
—
193
2017
(In millions)
173
1
19
193
$
$
$
$
2016
As of October 28, 2018, future estimated amortization expense is expected to be as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amortization
Expense
(In millions)
185
1
—
3
189
167
2
20
189
57
52
39
65
213
81
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 10
Borrowing Facilities and Debt
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is
comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2021. This
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.
Remaining credit facilities in the amount of approximately $71 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 28, 2018 and October 29, 2017, 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 28, 2018 and October 29, 2017, Applied did not have any
commercial paper outstanding.
In March 2017, Applied issued senior unsecured notes in the aggregate principal amount of $2.2 billion and in May 2017,
used a portion of the net proceeds to redeem the outstanding $200 million in principal amount of its 7.125% senior notes due in
October 2017.
Debt outstanding as of October 28, 2018 and October 29, 2017 was as follows:
Principal Amount
October 28,
2018
October 29,
2017
Effective
Interest Rate
Interest
Pay Dates
Long-term debt:
2.625% Senior Notes Due 2020 . . . . . . . . . . . . . . $
4.300% Senior Notes Due 2021 . . . . . . . . . . . . . .
3.900% Senior Notes Due 2025 . . . . . . . . . . . . . .
3.300% Senior Notes Due 2027 . . . . . . . . . . . . . .
5.100% Senior Notes Due 2035 . . . . . . . . . . . . . .
5.850% Senior Notes Due 2041 . . . . . . . . . . . . . .
4.350% Senior Notes Due 2047
Total unamortized discount . . . . . . . . . . . . . . . . .
Total unamortized debt issuance costs . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . $
(In millions)
600
750
700
1,200
500
600
1,000
5,350
(11)
(30)
5,309
$
$
600
750
700
1,200
500
600
1,000
5,350
(12)
(34)
5,304
2.640%
4.326%
3.944%
3.342%
5.127%
5.879%
4.361%
April 1, October 1
June 15, December 15
April 1, October 1
April 1, October 1
April 1, October 1
June 15, December 15
April 1, October 1
82
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 11
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income (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
Postretireme
nt Benefit
Plans
(In millions)
Cumulative
Translation
Adjustments
Total
Balance at October 25, 2015
$
Other comprehensive income (loss) before reclassifications
Amounts reclassified out of AOCI
Other comprehensive income (loss), net of tax. . . . . . . . . . . . .
Balance at October 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) before reclassifications . .
Amounts reclassified out of AOCI . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income, net of tax . . . . . . . . . . . . . . . . .
Balance at October 29, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adoption of new accounting standards (a) . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before reclassifications . .
Amounts reclassified out of AOCI . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax. . . . . . . . . . . . .
Balance at October 28, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14
14
2
16
30
24
(1)
23
53
5
(66)
15
(51)
7
$
$
$
$
(15) $
(33)
30
(3)
(18) $
13
(6)
7
(11) $
(2)
5
(1)
4
(9) $
(105) $
(42)
6
(36)
(141) $
29
(8)
21
(120) $
—
(23)
6
(17)
(137) $
14
—
—
—
14
—
—
—
14
—
—
—
—
14
$
$
$
(92)
(61)
38
(23)
(115)
66
(15)
51
(64)
3
(84)
20
(64)
(125)
(a) - Represents the reclassification adjustment related to the early adoption of Accounting Standards Update (ASU) 2018-02 Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. See Note 1.
The tax effects on net income of amounts reclassified from AOCI for fiscal 2016 was $22 million. The tax effects on net
income of amounts reclassified from AOCI for the fiscal years 2018 and 2017, were not material.
Stock Repurchase Programs
In September 2017, Applied’s Board of Directors approved a common stock repurchase program authorizing up to $3.0
billion in repurchases. In February 2018, the Board of Directors approved a new common stock repurchase program authorizing
up to an additional $6.0 billion in repurchases. At October 28, 2018, $4.3 billion remained available for future stock repurchases
under this repurchase program.
The following table summarizes Applied’s stock repurchases for each fiscal year:
Shares of common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average price paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
(In millions, except per share amounts)
102
5,283
51.55
$
$
28
1,172
42.08
$
$
96
1,892
19.82
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.
83
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Dividends
During fiscal 2018, Applied's Board of Directors declared three quarterly cash dividends of $0.20 per share and one quarterly
cash dividend of $0.10 per share. During each of fiscal 2017 and 2016, Applied’s Board of Directors declared four quarterly cash
dividends in the amount of $0.10 per share. Dividends paid during fiscal 2018, 2017 and 2016 amounted to $605 million, $430
million and $444 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 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 for employees of international subsidiaries
(collectively, ESPP), which enable eligible employees to purchase Applied common stock.
Applied recognized 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
258
45
$
$
220
60
$
$
The effect of share-based compensation on the results of operations for each fiscal year was as follows:
2018
2017
2016
(In millions)
2018
2017
2016
(In millions)
Cost of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Research, development, and engineering . . . . . . . . . . . . . . . . . . .
Marketing and selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . $
87
96
31
44
258
$
$
69
83
28
40
220
$
$
201
63
62
76
26
37
201
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 28, 2018, Applied had $368 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 28, 2018, there were 81 million shares available for grants of share-based awards under the Employee
Stock Incentive Plan, and an additional 17 million shares available for issuance under the ESPP.
84
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options
Stock options are rights to purchase, at future dates, shares of Applied common stock. 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. There were no stock options granted during fiscal 2018, 2017 and 2016. Outstanding stock options at the end of fiscal
2018 were not material to the consolidated financial statements.
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 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.
Certain executive officers were granted awards that are subject to the achievement of specified performance goals
(performance-based awards). These awards become eligible to vest only if performance goals are achieved and will vest only if
the grantee remains employed by Applied through each applicable vesting date. The fair value of these awards is estimated on the
date of grant. If the goals are achieved, the awards will vest, 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 is based on the awards that are
probable to vest and is reflected over the service period and reduced for estimated forfeitures.
For performance-based awards granted in fiscal 2018 and 2017, certain awards require the achievement of positive adjusted
operating profit and vest ratably over three years. Other awards require the achievement of targeted levels of adjusted operating
profit margin and wafer fabrication equipment market share, and the number of shares that may vest in full after three years ranges
from 0% to 200% of the target amount. Performance-based awards granted in fiscal 2016 require the achievement of targeted
levels of adjusted annual operating profit margin, and additional shares become eligible for time-based vesting if Applied achieves
certain levels of total shareholder return 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.
85
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 25, 2015 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 30, 2016 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 29, 2017 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-vested restricted stock units, restricted stock, performance
shares and performance units at October 28, 2018 . . . . . . . . . . . . . . .
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)
27
$
11
$
(11) $
(2) $
25
$
8
$
(10) $
(1) $
22
$
$
6
(9) $
(1) $
18
16
$
$
16.41
18.54
14.25
17.57
18.28
31.79
16.50
21.25
23.96
50.62
22.15
30.19
32.64
31.11
2.2 years $
440
2.3 years $
718
2.2 years $
1,239
2.0 years $
1.9 years $
600
523
At October 28, 2018, 1 million additional performance-based awards could be earned based upon achievement of certain
levels of specified performance goals.
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. Applied issued 3 million shares in each of fiscal 2018 and 2017, and 6 million shares during fiscal
2016, under the ESPP. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-
Scholes model. Underlying assumptions used in the model are outlined in the following table:
ESPP:
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average estimated fair value . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
1.68%
34.4%
2.09%
0.5
$12.02
0.99%
26.3%
0.92%
0.5
$9.14
1.76%
29.3%
0.47%
0.5
$5.48
86
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 12
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 2018, 2017 and 2016
were $382 million, $449 million and $312 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 $45 million for fiscal 2018 and
$38 million for each of fiscal 2017 and 2016.
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 the 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.
Through December 31, 2017, Applied also sponsored a U.S. post-retirement plan that provided covered medical and vision
benefits to certain eligible retirees. An eligible retiree also could elect coverage for an eligible spouse or domestic partner who
was not eligible for Medicare. Coverage ended entirely for all participants when the plan terminated on December 31, 2017. 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, were immaterial at each of
October 28, 2018 and October 29, 2017.
87
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 credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
88
2018
2017
2016
(In millions, except percentages)
506
12
11
1
24
(1)
(16)
(12)
(1)
524
490
$
$
$
495
13
10
2
(35)
(1)
34
(12)
—
506
472
$
$
$
471
13
13
1
77
(6)
(42)
(10)
(22)
495
460
0.6% - 3.1%
2.4% - 3.5%
0.5% - 3.4%
2.2% - 3.5%
0.5% - 3.1%
1.6% - 3.6%
$
361
17
11
1
(12)
(1)
(12)
365
$
(159) $
$
19
(1)
(177)
(159) $
8
(1)
7
161
(2)
159
365
186
331
186
$
$
$
$
$
$
$
$
$
310
18
16
2
28
(1)
(12)
361
$
(145) $
$
17
(1)
(161)
(145) $
6
(4)
2
141
(4)
137
326
142
293
142
$
$
$
$
$
$
$
$
281
37
50
1
(45)
(4)
(10)
310
(185)
11
(2)
(194)
(185)
6
(16)
(10)
186
(21)
165
341
145
307
145
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Plan assets — allocation
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
47%
32%
10%
10%
1%
47%
39%
11%
3%
—%
The following table presents a summary of the ending fair value of the plan assets:
October 28, 2018
October 29, 2017
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
(In millions)
Equity securities. . . . . . . . . . . . . . . . . $
Debt securities . . . . . . . . . . . . . . . . . .
Insurance contracts. . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets at fair value. . . . . . . . . . . $
Assets measured at net asset value. . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
86
19
—
—
2
107
$ — $ — $
—
—
14
—
14
$
—
36
—
—
36
$
$
86
19
36
14
2
157
208
365
$
$
83
16
—
—
2
101
$ — $ — $
—
—
13
—
13
$
—
38
—
—
38
$
$
The following table presents the activity in Level 3 instruments for each fiscal year:
2018
2017
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)
38
$
(1)
—
(1)
36
$
83
16
38
13
2
152
209
361
38
(3)
1
2
38
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.
89
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the components of net periodic benefit costs and the weighted average assumptions used for net periodic
benefit cost calculations for each fiscal year is presented below:
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 (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average assumptions
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
(In millions, except percentages)
12
11
(20)
3
—
6
$
$
13
10
(18)
(10)
—
(5)
$
$
2.16%
5.41%
2.66%
1.88%
5.38%
2.69%
13
13
(14)
3
(5)
10
2.82%
5.38%
2.71%
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:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024-2028. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Company contributions to these plans for fiscal 2019 are expected to be approximately $15 million.
Benefit Payments
(In millions)
12
12
13
13
12
77
139
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 $92 million and $63 million at October 28,
2018 and October 29, 2017, respectively, which were included in other liabilities in the Consolidated Balance Sheets.
90
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 13
Income Taxes
The components of income before income taxes for each fiscal year were as follows:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
2017
2016
(In millions)
439
4,255
4,694
$
$
514
3,217
3,731
$
$
199
1,814
2,013
The components of the provision for income taxes for each fiscal year were as follows:
Current:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
(In millions)
1,035
$
67
$
126
22
1,183
151
57
(10)
198
$
1,381
$
233
9
309
(11)
(7)
6
(12)
297
$
(36)
351
(2)
313
55
(89)
13
(21)
292
A reconciliation between the statutory U.S. federal income tax rate and Applied’s actual effective income tax rate for each
fiscal year is presented below:
Tax provision at U.S. statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in U.S. tax law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolutions of 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
23.4%
23.7
(0.7)
(15.6)
0.2
(0.7)
(0.1)
(0.7)
(0.1)
29.4%
35.0%
35.0%
—
(1.9)
(24.9)
0.3
(0.7)
(0.2)
0.4
—
8.0%
—
3.9
(24.1)
0.6
(1.3)
(0.2)
0.4
0.2
14.5%
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes a
reduction to the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent and requires a one-time transition tax on certain
unrepatriated earnings of foreign subsidiaries payable over eight years. U.S. deferred tax assets and liabilities were subject to
remeasurement due to the reduction of the U.S. federal corporate tax rate. Applied has a blended U.S. federal corporate tax rate
of 23.4 percent for fiscal 2018 based on the number of days before and after the effective date of the Tax Act.
91
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance
on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period for companies to complete this
accounting. Pursuant to SAB 118, provisional adjustments were recorded when reasonable estimates could be determined. These
provisional estimates will be revised as information becomes available and as guidance is issued by the Internal Revenue Service.
The accounting for the income tax effects of the Tax Act will be completed during the measurement period, which will not extend
beyond one year from the Tax Act enactment date. Applied continues to evaluate certain unrepatriated earnings of foreign
subsidiaries used to calculate the transition tax. The remeasurement of U.S. deferred tax assets and liabilities is complete.
The Tax Act also includes provisions that do not affect Applied in fiscal 2018, including a provision designed to tax global
intangible low-taxed income (“GILTI”). Due to the complexity of the GILTI tax rules, this provision and related tax accounting
will continue to be evaluated. An accounting policy choice is allowed to either treat taxes due on future U.S. inclusions related to
GILTI in taxable income as a current-period expense when incurred (the “period cost method”) or factor such amounts into the
measurement of deferred taxes (the “deferred method”). The calculation of the deferred balance with respect to the new GILTI
tax provisions will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income are
expected related to GILTI and, if so, what the impact is expected to be. An accounting policy choice has not yet been made.
Before the Tax Act, U.S. income tax had not been provided for certain unrepatriated earnings that were considered indefinitely
reinvested. Income tax is now provided for all unrepatriated earnings.
The effective tax rate for fiscal 2018 was higher than fiscal 2017 primarily due to tax expense of $1.1 billion for the transition
tax and remeasurement of deferred tax assets as a result of the Tax Act, partially offset by changes in the geographical composition
of income, tax benefits from the lower U.S. federal corporate tax rate, adoption of authoritative guidance for share-based
compensation, and the resolution of tax liabilities for uncertain tax positions. In addition, fiscal 2017 included tax benefits from
the recognition of previously unrecognized foreign tax credits.
The effective tax rate for fiscal 2017 was lower than fiscal 2016 primarily due to the recognition of previously unrecognized
foreign tax credits and changes in the geographical composition of income. In addition, fiscal 2016 included unfavorable resolutions
and changes related to income tax liabilities for uncertain tax positions as well as the reinstatement of the U.S. federal R&D tax
credit retroactive to its expiration in December of 2015 which did not reoccur in fiscal 2017.
In the reconciliation between the statutory U.S. federal income tax rate and the effective income tax rate, 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 pre-tax income in jurisdictions with lower statutory
tax rates. The foreign operations with the most significant effective tax rate impact are in Singapore. The statutory tax rate for
fiscal 2018 for Singapore is 17%. Applied has been granted conditional reduced tax rates that expire in fiscal 2025, excluding
potential renewal and subject to certain conditions with which Applied expects to comply. The tax benefit arising from these tax
rates was $272 million for fiscal 2018 or $0.28 per diluted share.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the
book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit
carryovers. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not
expected to be realized. The components of deferred income tax assets and liabilities were as follows:
92
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Inventory reserves and basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installation and warranty reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
The following table presents a summary of non-current deferred tax assets and liabilities:
Non-current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-current deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
October 28,
2018
October 29,
2017
(In millions)
8
$
117
7
20
9
236
79
37
48
561
(230)
331
(48)
(38)
(32)
(3)
(121)
210
$
13
156
1
31
15
317
81
53
67
734
(227)
507
(36)
(76)
(11)
(4)
(127)
380
October 28,
2018
October 29,
2017
$
(In millions)
222
(12)
210
$
385
(5)
380
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
(In millions)
207
$
$
20
—
$
227
$
227
8
(5)
230
207
27
(27)
207
At October 28, 2018, Applied has state research and development tax credit carryforwards of $236 million, including $227
million of credits that are carried over until exhausted and $9 million that are carried over for 15 years and begin to expire in fiscal
2028. Management believes it is more likely than not that all tax credit carryforwards, net of valuation allowance, will be utilized.
93
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. Gross unrecognized tax benefits are classified
as non-current income taxes payable. A reconciliation of the beginning and ending balances of gross unrecognized tax benefits in
each fiscal year is as follows:
2018
2017
2016
(In millions)
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 . . . . . . . . . . . . . . . . . . . . . . $
391
(152)
(37)
91
83
(2)
374
$
$
320
(42)
(15)
95
33
—
391
$
$
177
(25)
(2)
62
109
(1)
320
Tax expense for interest and penalties on unrecognized tax benefits for fiscal 2018, 2017 and 2016 was $12 million, $17
million and $24 million, respectively. The income tax liability for interest and penalties for fiscal 2018, 2017 and 2016 was $26
million, $46 million and $33 million, respectively, and was classified as non-current income taxes payable.
Included in the balance of unrecognized tax benefits for fiscal 2018, 2017 and 2016 are $294 million, $284 million, and $302
million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.
In fiscal 2018, Applied paid $158 million, including interest and penalties, as a result of a settlement in Israel for fiscal
2011 through fiscal 2015 resulting in the recognition of a tax benefit of $6 million. In fiscal 2017, Applied paid $29 million,
including interest and penalties, as a result of a settlement in Italy for fiscal 2011 resulting in the recognition of a tax expense of
$6 million. In fiscal 2016, Applied paid $25 million, including interest and penalties, as a result of a settlement in Switzerland
for fiscal 2011 through fiscal 2015 resulting in the recognition of a tax expense of $19 million.
Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. returns for fiscal 2010 and
later years, and foreign tax returns 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 fluctuations in Applied’s financial condition and results
of operations. Applied continues to have ongoing negotiations with various taxing authorities throughout the year.
Note 14 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 2018, 2017 and 2016, was $50 million, $34 million and $38
million, respectively.
As of October 28, 2018, future minimum lease payments are expected to be as follows:
Fiscal
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Lease Payments
(In millions)
50
40
28
20
13
22
173
94
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Warranty
Changes in the warranty reserves during each fiscal year were as follows:
2018
2017
2016
(In millions)
Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provisions for warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in reserves related to preexisting warranty. . . . . . . . . . .
Consumption of reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
199
183
3
(176)
209
$
$
153
166
1
(121)
199
$
$
126
135
(12)
(96)
153
Applied products are generally sold with a warranty for a 12-month 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 28, 2018, 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 28, 2018, Applied has provided parent guarantees
to banks for approximately $149 million to cover these arrangements.
Legal 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.
95
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 15
Industry Segment Operations
Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent
Markets. 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. Segment information is presented based upon Applied’s management organization structure as of
October 28, 2018 and the distinctive nature of each segment. Future changes to this internal financial structure may result in
changes to Applied’s reportable segments.
The Semiconductor 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 provides integrated solutions to optimize equipment and fab performance and
productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation
software for semiconductor, display and other products.
The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic
light-emitting diodes (OLEDs), equipment upgrades and flexible coating systems and other display technologies for TVs, monitor,
laptops, personal computers, smart phones, and other consumer-oriented devices.
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. The
chief operating decision-maker does not evaluate operating segments using total asset information.
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.
The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar
photovoltaic cells and modules, and certain operating expenses that are not allocated to its reportable segments and are managed
separately at the corporate level. These operating expenses 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 also 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.
96
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information for each reportable segment for and as of the end of each fiscal year were as follows:
Net Sales
Operating
Income
(Loss)
Depreciation/
Amortization
Capital
Expenditures
Accounts
Receivable
Inventories
2018:
Semiconductor Systems. . . . . . . . . . . $
Applied Global Services . . . . . . . . . .
Display and Adjacent Markets. . . . . .
Corporate and Other . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $
2017:
Semiconductor Systems. . . . . . . . . . . $
Applied Global Services . . . . . . . . . .
Display and Adjacent Markets. . . . . .
Corporate and Other . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $
2016:
Semiconductor Systems. . . . . . . . . . . $
Applied Global Services . . . . . . . . . .
Display and Adjacent Markets. . . . . .
Corporate and Other . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $
10,903
3,754
2,498
98
17,253
9,517
3,017
1,900
103
14,537
6,873
2,589
1,206
157
10,825
$
$
$
$
$
$
3,634
1,102
679
(619)
4,796
3,173
817
502
(624)
3,868
1,807
682
245
(582)
2,152
$
$
$
$
$
$
The reconciling items included in Corporate and Other were as follows:
(In millions)
303
21
20
113
457
286
15
12
94
407
277
12
5
95
389
$
$
$
$
$
$
168
33
39
382
622
150
21
17
157
345
114
14
6
119
253
$
$
$
$
$
$
1,755
610
248
(48)
2,565
1,626
564
190
(42)
2,338
1,524
559
238
(42)
2,279
$
$
$
$
$
$
2,213
1,243
249
17
3,722
1,760
762
367
41
2,930
1,188
594
215
53
2,050
2018
2017
2016
(In millions)
Unallocated net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unallocated cost of products sold and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
98
(459)
(258)
(619) $
$
103
(507)
(220)
(624) $
157
(538)
(201)
(582)
97
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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:
2018
2017
2016
(In millions)
Net sales:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total outside United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,532
5,113
3,603
2,732
2,405
1,066
802
15,721
17,253
$
$
1,474
2,746
4,052
3,291
1,518
816
640
13,063
14,537
$
$
1,143
2,259
1,883
2,843
1,279
615
803
9,682
10,825
October 28,
2018
October 29,
2017
(In millions)
Long-lived assets:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
China. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Korea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southeast Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total outside United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,414
13
21
29
9
50
25
147
1,561
$
$
915
47
21
50
8
47
98
271
1,186
The following customers accounted for at least 10 percent of Applied’s net sales in each fiscal year, which were for products
and services in multiple reportable segments:
Samsung Electronics Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan Semiconductor Manufacturing Company Limited. . . . . . . . . . . . . . . . . .
Intel Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Micron Technology, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
13%
11%
11%
*
23%
15%
*
*
13%
16%
11%
11%
______________________________
* Less than 10%
98
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 16
Unaudited Quarterly Consolidated Financial Data
2018:
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . $
Net income. . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share . . . . . . . . . . . $
2017:
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . $
Net income. . . . . . . . . . . . . . . . . . . . . . . $
Earnings per diluted share . . . . . . . . . . . $
First
Second
Third
Fourth
Fiscal Year
Fiscal Quarter
(In millions, except per share amounts)
4,204
1,920
135
0.13
3,278
1,445
703
0.65
$
$
$
$
$
$
$
$
4,567
2,090
1,129
1.09
3,546
1,600
824
0.76
$
$
$
$
$
$
$
$
4,468
2,027
1,173
1.17
3,744
1,700
925
0.85
$
$
$
$
$
$
$
$
4,014
1,780
876
0.89
3,969
1,787
982
0.91
$
$
$
$
$
$
$
$
17,253
7,817
3,313
3.23
14,537
6,532
3,434
3.17
99
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
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
Amended and Restated Bylaws of Applied Materials, Inc.,
amended as of December 8, 2015
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
Third Supplemental Indenture, dated March 31, 2017, by and
between Applied Materials, Inc. and U.S. Bank National
Association, as Trustee
10.1
10.2
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)
10.4*
10.5*
10.6
10.7
10.8*
10.9*
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 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
10.10*
10.11*
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
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
3.1
4.1
4.2
12/11/2015
6/10/2011
6/10/2011
8-K
000-06920
4.1
9/24/2015
8-K
000-06920
4.1
3/31/2017
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
10.1
8/23/2018
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
10.12* Applied Materials, Inc. Employees’ Stock Purchase Plan,
amended and restated effective October 28, 2012
10-K
000-06920
10.54
12/5/2012
10.13* Offer Letter, dated August 14, 2013, between Applied
10-Q
000-06920
10.2
8/22/2013
Materials, Inc. and Gary E. Dickerson
10.14*
Form of Non-Qualified Stock Option Agreement for
Employees for use under the Applied Materials, Inc. Employee
Stock Incentive Plan, as amended
100
10-Q
000-06920
10.4
8/22/2013
Exhibit No.
10.15*
Description
Form of Performance Unit Agreement for use under the
Applied Materials, Inc. Employee Stock Incentive Plan, as
amended
10.16*
Form of Letter of Understanding for Long-Term Assignment
10.17* Applied Materials, Inc. Applied Incentive Plan, amended and
restated effective October 27, 2014
10.18*
10.19
10.20
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
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
Extension Agreement, dated as of September 3, 2017, to Credit
Agreement, dated as of September 3, 2015, among Applied
Materials, Inc., JPMorgan Chase Bank, N.A., as administrative
agent, and the lenders party thereto.
10.21* Applied Materials, Inc. Stock Purchase Plan for Offshore
Employees, amended and restated effective July 15, 2015
Incorporated by Reference
Form
10-Q
File No.
000-06920
Exhibit No.
10.2
Filing Date
2/20/2014
10-K
10-Q
000-06920
000-06920
10.49
10.4
12/17/2014
2/19/2015
10-Q
000-06920
10.5
2/19/2015
8-K
000-06920
10.1
9/9/2015
8-K
000-06920
10.1
9/5/2017
10-K
000-06920
10.32
12/9/2015
10.22* Applied Materials, Inc. 2016 Deferred Compensation Plan
10-K
000-06920
10.33
12/9/2015
10-Q
000-06920
10.1
5/25/2017
10-Q
000-06920
10.2
5/25/2017
10.23* Applied Materials, Inc. Employee Stock Incentive Plan, as
amended and restated effective March 9, 2017
10.24* Applied Materials, Inc. Senior Executive Bonus Plan, as
amended and restated effective March 9, 2017
Subsidiaries of Applied Materials, Inc.†
21
23
24
31.1
31.2
32.1
32.2
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.
101
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 13, 2018
102
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Gary E. Dickerson, Daniel J. Durn 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/ DANIEL J. DURN
Daniel J. Durn
/S/ CHARLES W. READ
Charles W. Read
/S/ THOMAS J. IANNOTTI
Thomas J. Iannotti
/S/ JUDY BRUNER
Judy Bruner
/S/ XUN CHEN
Xun Chen
/S/ AART J. DE GEUS
Aart J. de Geus
/S/ STEPHEN R. FORREST
Stephen R. Forrest
/S/ ALEXANDER A. KARSNER
Alexander A. Karsner
/S/ ADRIANNA C. MA
Adrianna C. Ma
/s/ SCOTT A. MCGREGOR
Scott A. McGregor
/S/ DENNIS D. POWELL
Dennis D. Powell
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date
December 13, 2018
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
December 13, 2018
Corporate Vice President,
Corporate Controller and
Chief Accounting Officer
(Principal Accounting Officer)
December 13, 2018
Chairman of the Board
December 13, 2018
December 13, 2018
December 13, 2018
December 13, 2018
December 13, 2018
December 13, 2018
December 13, 2018
December 13, 2018
December 13, 2018
Director
Director
Director
Director
Director
Director
Director
Director
103
[THIS PAGE INTENTIONALLY LEFT BLANK]
© 2019 Applied Materials, Inc. Applied Materials, the Applied Materials logo, and
product names so designated are trademarks of Applied Materials, Inc. and/or its
affiliates in the U.S. and other countries. Third party trademarks mentioned are the
property of their respective owners. All rights reserved. Printed in the U.S.A. 01/2019
W W W. A P P L I E D M AT E R I A L S . C O M
3 0 5 0 B O W E R S AV E N U E
P O B O X 5 8 0 3 9
S A N TA C L A R A , C A L I F O R N I A
9 5 0 5 2 - 8 0 3 9
T E L : ( 4 0 8 ) 7 2 7 - 5 5 5 5