e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
July 26,
2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
000-06920
Applied Materials,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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94-1655526
(I.R.S. Employer
Identification No.)
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3050 Bowers Avenue,
P.O. Box 58039
Santa Clara, California
(Address of principal
executive offices)
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95052-8039
(Zip
Code)
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(Registrants telephone number, including area code)
(408) 727-5555
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Number of shares outstanding of the issuers common stock
as of July 26, 2009: 1,333,714,002
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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APPLIED
MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
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Three Months Ended
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Nine Months Ended
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July 26,
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July 27,
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July 26,
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July 27,
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2009
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2008
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2009
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2008
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(Unaudited)
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(In thousands, except per share amounts)
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Net sales
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$
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1,133,740
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$
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1,848,168
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$
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3,487,213
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$
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6,085,563
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Cost of products sold
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808,866
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1,105,854
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2,615,244
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3,441,440
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Gross margin
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324,874
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742,314
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871,969
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2,644,123
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Operating expenses:
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Research, development and engineering
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234,052
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268,559
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699,927
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828,900
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General and administrative
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88,487
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129,341
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330,808
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367,352
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Marketing and selling
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79,518
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115,944
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248,311
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359,271
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Restructuring and asset impairments
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138
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159,481
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49,634
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Income (loss) from operations
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(77,183
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)
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228,332
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(566,558
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)
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1,038,966
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Pre-tax loss of equity method investment
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6,308
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34,983
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25,660
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Impairment of equity method investment and strategic investments
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2,341
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79,422
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Interest expense
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4,893
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4,859
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15,945
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15,660
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Interest income
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10,233
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25,399
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37,257
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88,383
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Income (loss) before income taxes
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(74,184
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242,564
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(659,651
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)
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1,086,029
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Provision (benefit) for income taxes
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(19,319
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)
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77,796
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(216,462
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356,378
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Net income (loss)
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$
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(54,865
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)
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$
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164,768
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$
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(443,189
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$
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729,651
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Earnings (loss) per share:
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Basic
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$
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(0.04
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$
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0.12
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$
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(0.33
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$
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0.54
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Diluted
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$
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(0.04
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$
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0.12
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$
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(0.33
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$
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0.53
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Weighted average number of shares:
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Basic
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1,333,278
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1,350,526
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1,331,410
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1,359,492
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Diluted
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1,333,278
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1,367,557
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1,331,410
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1,375,656
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See accompanying Notes to Consolidated Condensed Financial
Statements.
2
APPLIED
MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
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July 26,
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October 26,
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2009
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2008
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(In thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,555,470
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$
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1,411,624
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Short-term investments
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583,188
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689,044
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Accounts receivable, net
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842,169
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1,691,027
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Inventories
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1,748,507
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1,987,017
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Deferred income taxes, net
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304,706
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388,807
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Income taxes receivable
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421,935
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125,605
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Other current assets
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308,817
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371,033
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Total current assets
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5,764,792
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6,664,157
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Long-term investments
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990,167
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1,367,056
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Property, plant and equipment
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2,876,731
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2,831,952
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Less: accumulated depreciation and amortization
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(1,788,673
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(1,737,752
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Net property, plant and equipment
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1,088,058
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1,094,200
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Goodwill, net
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1,171,740
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1,174,673
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Purchased technology and other intangible assets, net
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327,351
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388,429
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Equity method investment
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79,533
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Deferred income taxes and other assets
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238,173
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238,270
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Total assets
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$
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9,580,281
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$
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11,006,318
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Current portion of long-term debt
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$
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1,203
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$
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1,068
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Accounts payable and accrued expenses
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1,056,532
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1,545,355
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Customer deposits and deferred revenue
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911,485
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1,225,735
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Income taxes payable
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69,763
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173,394
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Total current liabilities
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2,038,983
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2,945,552
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Long-term debt
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201,200
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201,576
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Other liabilities
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326,489
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310,232
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Total liabilities
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2,566,672
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3,457,360
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Stockholders equity:
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Common stock
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13,337
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13,308
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Additional paid-in capital
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5,198,613
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5,095,894
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Retained earnings
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10,896,826
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11,601,288
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Treasury stock
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(9,100,915
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)
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(9,134,962
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)
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Accumulated other comprehensive income (loss)
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5,748
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(26,570
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)
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Total stockholders equity
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7,013,609
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7,548,958
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Total liabilities and stockholders equity
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$
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9,580,281
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$
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11,006,318
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* |
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Amounts as of July 26, 2009 are unaudited. Amounts as of
October 26, 2008 are derived from the October 26, 2008
audited consolidated financial statements. |
See accompanying Notes to Consolidated Condensed Financial
Statements.
3
APPLIED
MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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Nine Months Ended
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July 26,
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July 27,
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2009
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|
2008
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(Unaudited)
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(In thousands)
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Cash flows from operating activities:
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Net income (loss)
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$
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(443,189
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)
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$
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729,651
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Adjustments required to reconcile net income (loss) to cash
provided by operating activities:
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Depreciation and amortization
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219,609
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240,039
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Loss on fixed asset retirements
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16,165
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27,880
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Provision for bad debts
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62,539
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Restructuring and asset impairments
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159,481
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|
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49,634
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Deferred income taxes
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|
|
96,117
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|
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(60,886
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)
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Excess tax benefits from equity-based compensation plans
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(5,406
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)
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Net recognized loss (gain) on investments
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13,083
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(1,244
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)
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Pretax loss of equity-method investment
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34,983
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25,660
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Impairment of equity-method investment and strategic investments
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79,422
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Equity-based compensation
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116,114
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135,165
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Changes in operating assets and liabilities, net of amounts
acquired:
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Accounts receivable
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786,319
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534,104
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Inventories
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238,510
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(504,555
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)
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Other current assets
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49,990
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77,593
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Other assets
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(7,134
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)
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(4,383
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)
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Accounts payable and accrued expenses
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(632,193
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)
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(127,423
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)
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Customer deposits and deferred revenue
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(314,250
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)
|
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|
530,347
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Income taxes
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(419,297
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)
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|
|
(66,603
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)
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Other liabilities
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|
36,527
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|
|
|
4,578
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|
|
|
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|
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Cash provided by operating activities
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|
92,796
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|
|
|
1,584,151
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|
|
|
|
|
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|
|
|
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Cash flows from investing activities:
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Capital expenditures
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(187,804
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)
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|
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(209,512
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)
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Cash paid for acquisition, net of cash acquired
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|
|
|
|
|
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(235,324
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)
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Proceeds from sales and maturities of investments
|
|
|
1,121,026
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|
|
|
4,514,648
|
|
Purchases of investments
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|
|
(649,417
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)
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(4,608,845
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)
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|
|
|
|
|
|
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Cash provided by (used in) investing activities
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|
|
283,805
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|
|
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(539,033
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)
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|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
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|
|
|
|
|
|
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Debt repayments
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|
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(241
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)
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|
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(1,854
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)
|
Proceeds from common stock issuances
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|
|
29,406
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|
|
|
334,575
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|
Common stock repurchases
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|
|
(22,906
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)
|
|
|
(1,199,984
|
)
|
Excess tax benefits from equity-based compensation plans
|
|
|
|
|
|
|
5,406
|
|
Payment of dividends to stockholders
|
|
|
(239,756
|
)
|
|
|
(245,559
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)
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(233,497
|
)
|
|
|
(1,107,416
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
742
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
143,846
|
|
|
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(62,190
|
)
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|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
1,411,624
|
|
|
|
1,202,722
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
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|
$
|
1,555,470
|
|
|
$
|
1,140,532
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash payments for income taxes
|
|
$
|
139,625
|
|
|
$
|
349,914
|
|
Cash payments for interest
|
|
$
|
7,212
|
|
|
$
|
7,243
|
|
See accompanying Notes to Consolidated Condensed Financial
Statements.
4
APPLIED
MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
|
|
Note 1
|
Basis of
Presentation and Equity-Based Compensation
|
Basis
of Presentation
In the opinion of management, the unaudited interim consolidated
condensed financial statements of Applied Materials, Inc. and
its subsidiaries (Applied or the Company) included herein have
been prepared on a basis consistent with the October 26,
2008 audited consolidated financial statements and include all
material adjustments, consisting of normal recurring
adjustments, necessary to fairly present the information set
forth therein. These unaudited interim consolidated condensed
financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto
included in Applieds Annual Report on
Form 10-K
for the fiscal year ended October 26, 2008 (2008
Form 10-K).
Applieds results of operations for the three and nine
months ended July 26, 2009 are not necessarily indicative
of future operating results.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (United States) 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.
Prior period amounts for customer deposits and deferred revenue
have been reclassified to conform to the current period
presentation.
During the first quarter of fiscal 2009, Applied elected to
implement Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106, and
132(R). As a result of this implementation, Applied
changed the measurement date for its defined and postretirement
benefit plan assets and obligations from an interim date to
Applieds fiscal year end. Accordingly, Applied recorded a
$2 million (after tax) adjustment to the fiscal 2009
beginning balance of retained earnings.
Equity-Based
Compensation
Applied has adopted stock plans that permit grants to employees
of equity-based awards, including stock options, restricted
stock and restricted stock units (also referred to as
performance shares under the Applied Materials, Inc.
Employee Stock Incentive Plan). In addition, the Employee Stock
Incentive Plan provides for the automatic grant of restricted
stock units to non-employee directors and permits the grant of
equity-based awards to consultants. Applied also has two
Employee Stock Purchase Plans (ESPP) for United States and
international employees, respectively, which enable eligible
employees to purchase Applied common stock.
During the three months ended July 26, 2009 and
July 27, 2008, Applied recognized equity-based compensation
expense related to stock options, ESPP shares, restricted stock
units and restricted stock of $43 million and
$46 million, respectively. During the three months ended
July 26, 2009 and July 27, 2008, Applied recognized
income tax benefits related to equity-based compensation of
$12 million and $13 million, respectively. During the
first nine months of fiscal 2009, Applied recognized total
equity-based compensation expense of $116 million and a tax
benefit of $33 million. During the first nine months of
fiscal 2008, Applied recognized total equity-based compensation
expense of $135 million and a tax benefit of
$38 million. The equity-based compensation expense related
to restricted stock units and restricted stock for the three
months ended July 26, 2009 and July 27, 2008 was
$31 million and $34 million, respectively, and for the
nine months ended July 26, 2009 and July 27, 2008 was
$94 million and $101 million, respectively. The
estimated fair value of Applieds equity-based awards, less
expected forfeitures, is amortized over the awards service
periods on a straight-line basis.
5
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Stock
Options
The exercise price of each stock option equals the fair market
value of Applied common stock on the date of grant. Most options
are scheduled to vest over three to four years and expire no
later than seven years from the grant date. The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. This model was developed for
use in estimating the value of publicly traded options that have
no vesting restrictions and are fully transferable.
Applieds stock options have characteristics significantly
different from those of publicly traded options. The weighted
average assumptions used in the model are outlined in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
2.25
|
%
|
|
|
1.24
|
%
|
|
|
2.80
|
%
|
|
|
1.24
|
%
|
Expected volatility
|
|
|
46
|
%
|
|
|
32
|
%
|
|
|
50
|
%
|
|
|
32
|
%
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
2.9
|
%
|
|
|
1.3
|
%
|
|
|
3.0
|
%
|
Expected life (in years)
|
|
|
3.0
|
|
|
|
3.9
|
|
|
|
3.0
|
|
|
|
3.9
|
|
The computation of the expected volatility assumption used in
the Black-Scholes calculations for new grants is based on a
combination of historical and implied volatilities. When
establishing the expected life assumption, Applied periodically
reviews historical employee exercise behavior with respect to
option grants.
Applied granted 13,000 and 24,514,000 stock options during the
three and nine months ended July 26, 2009, respectively.
Applied granted 6,000 and 7,000 stock options during the three
and nine months ended July 27, 2008, respectively. The
weighted average grant date fair value of options granted during
the three months ended July 26, 2009 and July 27, 2008
was $2.99 and $5.05, respectively, and for options granted
during the nine months ended July 26, 2009 and
July 27, 2008, the value was $2.52 and $5.05, respectively.
Employee
Stock Purchase Plans
Under the ESPP, substantially all employees may purchase Applied
common stock through payroll deductions at a price equal to
85 percent of the lower of the fair market value of Applied
common stock at the beginning of the applicable offering period
or at the end of each applicable purchase period. Effective
March 2, 2009, the length of offering periods under the
ESPP was reduced to 6 months, from a maximum of
24 months in duration. The incremental compensation cost
associated with this modification was insignificant. Based on
the Black-Scholes option pricing model, the weighted average
estimated fair value of purchase rights under the ESPP was $2.99
and $4.88 for the nine months ended July 26, 2009 and
July 27, 2008, respectively. No shares were issued under
the ESPP during the three months ended July 26, 2009 and
July 27, 2008, respectively. The number of shares issued
during the nine months ended July 26, 2009 and
July 27, 2008 was 3,536,000 and 2,294,000, respectively.
Compensation expense is calculated using the fair value of the
employees purchase rights under the Black-Scholes model.
Underlying assumptions used in the model are outlined in the
following table:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
2.71
|
%
|
|
|
1.19
|
%
|
Expected volatility
|
|
|
69
|
%
|
|
|
29
|
%
|
Risk-free interest rate
|
|
|
0.41
|
%
|
|
|
4.63
|
%
|
Expected life (in years)
|
|
|
0.5
|
|
|
|
1.25
|
|
6
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Units and Restricted Stock
Restricted stock units are converted into shares of Applied
common stock upon vesting on a
one-for-one
basis. Restricted stock units typically vest over three to four
years. Vesting of restricted stock units usually is subject to
the grantees continued service with Applied. The
compensation expense related to these 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. There were 2,811,000 and 1,603,000 restricted
stock units granted in the three months ended July 26, 2009
and July 27, 2008, respectively, and 3,383,000 and
3,752,000 restricted stock units granted in the nine months
ended July 26, 2009 and July 27, 2008, respectively.
Beginning in fiscal 2007, Applied initiated a performance-based
equity award program for named executive officers and other key
employees. These awards vest only if specific performance goals
set by the Human Resources and Compensation Committee of
Applieds Board of Directors (the Committee) are achieved
and if the grantee remains employed by Applied through the
applicable vesting date. The performance goals require the
achievement of targeted relative annual operating profit margin
levels as compared to Applieds peer companies in at least
one of the four fiscal years beginning with the fiscal year of
the grant. There were no performance-based awards granted in the
nine months ended July 26, 2009. The Committee approved the
award of 1,565,000 performance-based restricted stock units
under this program for fiscal year 2008. The Committee also
approved an award of 100,000 shares of performance-based
restricted stock for fiscal year 2008 to Applieds
President and Chief Executive Officer at a purchase price of
$0.01 per share. The fair value of the performance-based
restricted stock units and restricted stock is estimated using
the fair market value of Applied common stock on the date of the
grant and assumes that the performance goals will be achieved.
If achieved, the award vests over a specified remaining service
period. If the performance goals are not met, no compensation
expense is recognized and any previously recognized compensation
expense is reversed. The expected cost of each award is
reflected over the service period and is reduced for estimated
forfeitures. As of July 26, 2009, 70% of the performance
goals associated with the fiscal 2008 awards were achieved. The
performance goals associated with the remaining 30% may still be
achieved, depending on future performance, during the remaining
three fiscal years.
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. During the nine months ended July 26,
2009, shares of treasury stock were issued in connection with
Applieds ESPP at an aggregate value that was less than the
treasury stocks acquisition price, resulting in
$20 million being recorded against retained earnings.
|
|
Note 3
|
Earnings
(Loss) Per Share
|
Basic earnings (loss) per share is determined using the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is determined using the weighted
average number of common shares and potential common shares
(representing the dilutive effect of stock options, restricted
stock units, and ESPP shares) outstanding during the period.
Applieds net income (loss) has not been adjusted for any
period presented for purposes of computing basic or diluted
earnings (loss) per share due to the Companys non-complex
capital structure.
For purposes of computing diluted earnings per share, weighted
average potential common shares do not include stock options
with an exercise price greater than the average fair value of
Applied common stock for the period, as the effect would be
anti-dilutive. Accordingly, options to purchase
25,022,000 shares of common stock for the three months
ended July 27, 2008, and 27,512,000 shares of common
stock for the nine months ended
7
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
July 27, 2008, were excluded from the computation.
Potential common shares have not been included in the
calculation of diluted net loss per share, as the effect would
be anti-dilutive. As such, the numerator and the denominator
used in computing both basic and diluted net loss per share for
the three and nine months ended July 26, 2009 are the same.
The number of potential common shares that could dilute basic
earnings per share in the future was 91,655,000 for the three
and nine months ended July 26, 2009.
|
|
Note 4
|
Financial
Instruments and Fair Value
|
Investments
Investments by security type at July 26, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury and agency securities
|
|
$
|
635,068
|
|
|
$
|
10,115
|
|
|
$
|
160
|
|
|
$
|
645,023
|
|
Obligations of states and political subdivisions
|
|
|
404,995
|
|
|
|
8,013
|
|
|
|
351
|
|
|
|
412,657
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
304,959
|
|
|
|
3,961
|
|
|
|
1,043
|
|
|
|
307,877
|
|
Other debt securities
|
|
|
106,442
|
|
|
|
1,459
|
|
|
|
4,110
|
|
|
|
103,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,451,464
|
|
|
|
23,548
|
|
|
|
5,664
|
|
|
|
1,469,348
|
|
Publicly traded equity securities
|
|
|
9,572
|
|
|
|
4,555
|
|
|
|
|
|
|
|
14,127
|
|
Equity investments in privately-held companies
|
|
|
89,880
|
|
|
|
|
|
|
|
|
|
|
|
89,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,550,916
|
|
|
$
|
28,103
|
|
|
$
|
5,664
|
|
|
$
|
1,573,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments by security type at October 26, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury and agency securities
|
|
$
|
583,979
|
|
|
$
|
5,839
|
|
|
$
|
1,257
|
|
|
$
|
588,561
|
|
Obligations of states and political subdivisions
|
|
|
749,225
|
|
|
|
1,993
|
|
|
|
2,824
|
|
|
|
748,394
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
382,054
|
|
|
|
141
|
|
|
|
14,903
|
|
|
|
367,292
|
|
Other debt securities
|
|
|
255,777
|
|
|
|
535
|
|
|
|
11,507
|
|
|
|
244,805
|
|
Bank certificate of deposit
|
|
|
342
|
|
|
|
|
|
|
|
2
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,971,377
|
|
|
|
8,508
|
|
|
|
30,493
|
|
|
|
1,949,392
|
|
Publicly traded equity securities
|
|
|
29,165
|
|
|
|
|
|
|
|
17,205
|
|
|
|
11,960
|
|
Equity investments in privately-held companies
|
|
|
94,748
|
|
|
|
|
|
|
|
|
|
|
|
94,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,095,290
|
|
|
$
|
8,508
|
|
|
$
|
47,698
|
|
|
$
|
2,056,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents included investments in debt and other
securities of $189 million at July 26, 2009 and
$224 million at October 26, 2008. Other debt
securities consist primarily of investment grade asset-backed
and mortgage-backed securities.
8
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Contractual maturities of investments at July 26, 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
562,596
|
|
|
$
|
566,762
|
|
Due after one through five years
|
|
|
758,482
|
|
|
|
773,286
|
|
Due after five years
|
|
|
23,944
|
|
|
|
25,508
|
|
No single maturity date*
|
|
|
205,894
|
|
|
|
207,799
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,550,916
|
|
|
$
|
1,573,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Securities with no single maturity date include publicly traded
equity securities, asset and mortgage-backed securities. |
At July 26, 2009, Applied had a gross unrealized loss of
$6 million due to a decrease in the fair value of certain
fixed income securities primarily as a result of the continuing
turmoil in the global financial markets. Applied regularly
reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment.
Factors considered in determining whether a loss is temporary
include: the length of time and extent to which fair 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 the investments do not permit settlement at prices less than
the amortized cost of the investments. Applied has determined
that the gross unrealized losses on its investments at
July 26, 2009 are temporary in nature. Accordingly, Applied
does not consider the investments to be
other-than-temporarily
impaired at July 26, 2009.
The following table provides the gross unrealized losses and the
fair market value of Applieds investments with unrealized
losses that are not deemed to be
other-than-temporarily
impaired, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized
loss position as of July 26, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Loss Position for
|
|
|
In Loss Position for
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities
|
|
$
|
60,315
|
|
|
$
|
160
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,315
|
|
|
$
|
160
|
|
Obligations of states and political subdivisions
|
|
|
55,975
|
|
|
|
329
|
|
|
|
3,405
|
|
|
|
22
|
|
|
|
59,380
|
|
|
|
351
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
111,149
|
|
|
|
368
|
|
|
|
29,785
|
|
|
|
675
|
|
|
|
140,934
|
|
|
|
1,043
|
|
Other debt securities
|
|
|
1,572
|
|
|
|
108
|
|
|
|
34,705
|
|
|
|
4,002
|
|
|
|
36,277
|
|
|
|
4,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
229,011
|
|
|
$
|
965
|
|
|
$
|
67,895
|
|
|
$
|
4,699
|
|
|
$
|
296,906
|
|
|
$
|
5,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied manages its cash equivalents and investments, excluding
strategic investments, as a single portfolio of highly
marketable securities that is intended to be available to meet
Applieds current cash requirements. For the three months
ended July 26, 2009, gross realized gains on sales of
investments and gross realized losses were each $1 million.
For the three months ended July 27, 2008, gross realized
gains on sales of investments were $1 million and gross
realized losses were $2 million. For the nine months ended
July 26, 2009, gross realized gains on sales of investments
were $6 million and gross realized losses were
$10 million. For the nine months ended July 27, 2008,
9
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
gross realized gains on sales of investments were
$11 million and gross realized losses were $8 million.
There were no credit losses for the three and nine months ended
July 26, 2009.
On October 27, 2008, Applied adopted the provisions of
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157), with
respect to financial assets and liabilities. SFAS 157
defines fair value, establishes a framework for measuring fair
value and enhances disclosure requirements for fair value
measurements. Fair value is defined under SFAS 157 as the
exchange price that would be received for an asset, or paid to
transfer a liability (an exit price), in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under
SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs. The standard describes
a fair value hierarchy based on three levels of inputs, of which
the first two are considered observable and the last is
considered unobservable, which may be used to measure fair value:
|
|
|
|
|
Level 1 Quoted prices in active markets for
identical assets or liabilities;
|
|
|
|
Level 2 Observable inputs other than
Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities; and
|
|
|
|
Level 3 Unobservable inputs that are supported
by little or no market activity and that are significant to the
fair value of the assets or liabilities.
|
Applieds investments are comprised primarily of debt
securities that are classified as
available-for-sale
and recorded at their fair value. In determining the fair value
of investments, Applied uses pricing information from pricing
services that value securities based on quoted market prices and
models that utilize observable market inputs. In the event a
fair value estimate is unavailable from a pricing service,
Applied generally obtains non-binding price quotes from brokers.
Applied then reviews the information provided by the pricing
services or brokers to determine the fair value of its
short-term and long-term investments. In addition, to validate
pricing information obtained from pricing services, Applied
periodically performs supplemental analysis on a sample of
securities. Applied reviews any significant unanticipated
differences identified through this analysis to determine the
appropriate fair value.
In general, investments with remaining effective maturities of
12 months or less from the balance sheet date are
classified as short-term investments. Investments with remaining
effective maturities of more than 12 months from the
balance sheet date are classified as long-term investments. As
of July 26, 2009, a substantial majority of Applieds
available-for-sale,
short-term and long-term investments were recognized at fair
value that was determined based upon observable inputs.
Unrealized gains and temporary losses on investments classified
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.
10
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Financial
Assets/Liabilities Measured at Fair Value on a Recurring
Basis
Financial assets and liabilities (excluding cash balances)
measured at fair value on a recurring basis are summarized below
as of July 26, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,310,936
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,310,936
|
|
U.S. Treasury and agency securities
|
|
|
198,299
|
|
|
|
446,724
|
|
|
|
|
|
|
|
645,023
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
412,657
|
|
|
|
|
|
|
|
412,657
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
|
|
|
|
307,877
|
|
|
|
|
|
|
|
307,877
|
|
Other debt securities
|
|
|
|
|
|
|
102,183
|
|
|
|
1,608
|
|
|
|
103,791
|
|
Publicly traded equity securities
|
|
|
14,127
|
|
|
|
|
|
|
|
|
|
|
|
14,127
|
|
Foreign exchange derivative assets
|
|
|
|
|
|
|
2,183
|
|
|
|
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,523,362
|
|
|
$
|
1,271,624
|
|
|
$
|
1,608
|
|
|
$
|
2,796,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative liabilities
|
|
$
|
|
|
|
$
|
(1,914
|
)
|
|
$
|
|
|
|
$
|
(1,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(1,914
|
)
|
|
$
|
|
|
|
$
|
(1,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At July 26, 2009, the fair value of Level 3 assets
measured on a recurring basis was $2 million, representing
approximately 0.1% of the total fair value of Applieds
investment portfolio. Level 3 assets consisted of
asset-backed and mortgage-backed securities totaling
$2 million, which values were based on non-binding,
broker-provided price quotes and may not have been corroborated
by observable market data.
Financial
Assets/Liabilities Measured at Fair Value on a Non-recurring
Basis
Equity investments in privately-held companies are generally
accounted for under the cost method of accounting and are
periodically assessed 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 $90 million at
July 26, 2009, of which $48 million of investments
were accounted for under the cost method of accounting and
$42 million of investments had been measured at fair value
on a non-recurring basis during fiscal 2009 due to an
other-than-temporary
decline in value. The following table presents the balance of
equity securities at July 26, 2009 that had been measured
at fair value on a non-recurring
11
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
basis, using the process described above, and the impairment
charges recorded during the three and nine months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment for
|
|
|
Impairment for
|
|
|
|
|
|
|
|
|
|
|
|
|
the Three
|
|
|
the Nine
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
July 26, 2009
|
|
|
July 26, 2009
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Equity investments in privately-held companies measured at fair
value on a non-recurring basis during fiscal 2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,110
|
|
|
$
|
2,341
|
|
|
$
|
14,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments associated with financial assets for the nine months
ended July 26, 2009 totaled $79 million and consisted
of the following: equity method investment in Sokudo Co., Ltd.,
a Japanese joint venture company, $45 million; publicly
traded equity securities, $20 million; and equity
investments in privately-held companies, $14 million.
Derivative
Financial Instruments
Derivative instruments and hedging activities, including foreign
currency exchange contracts, are recognized on the balance sheet
at fair value. Changes in the fair value of derivatives that do
not qualify for hedge treatment, as well as the ineffective
portion of any hedges, are recognized currently in earnings. All
of Applieds derivative financial instruments are recorded
at their fair value in other current assets or accounts payable
and accrued expenses.
Applied conducts business in a number of foreign countries, with
certain transactions denominated in local currencies, such as
Japanese yen, euro, Israeli shekel and Swiss francs. The purpose
of Applieds foreign currency management is to mitigate the
effect of exchange rate fluctuations on certain foreign currency
denominated revenues, costs and eventual cash flows. The terms
of currency instruments used for hedging purposes are generally
consistent with the timing of the transactions being hedged.
Applied does not use derivative financial instruments for
trading or speculative purposes.
Applied uses derivative financial instruments, such as forward
exchange contracts and currency option contracts, to hedge
certain forecasted foreign currency denominated transactions
expected to occur typically within the next 24 months.
Hedges related to anticipated transactions are designated and
documented at the inception of the hedge as cash flow hedges and
are typically entered into once per month. Cash flow hedges are
evaluated for effectiveness quarterly. The effective portion of
the gain or loss on these hedges is reported as a component of
accumulated other comprehensive income or loss (AOCI) in
stockholders equity and is reclassified into earnings when
the hedged transaction affects earnings. The majority of the
after-tax net income or loss related to derivative instruments
included in accumulated other comprehensive income or loss at
July 26, 2009 is expected to be reclassified into earnings
within 12 months. Changes in the fair value of currency
forward exchange and option contracts due to changes in time
value are excluded from the assessment of effectiveness. Both
ineffective hedge amounts and hedge components excluded from the
assessment of effectiveness are recognized promptly in earnings.
If the transaction being hedged is no longer probable to occur,
or if a portion of any derivative is deemed to be ineffective,
Applied promptly recognizes the gain or loss on the associated
financial instrument in general and administrative expenses. The
amount recognized due to discontinuance of cash flow hedges that
were probable not to occur by the end of the originally
specified time period was not significant for the three months
ended July 26, 2009 and was $25 million for the nine
months ended July 26, 2009. The amount recognized due to
discontinuance of cash flow hedges that were probable not to
occur by the end of the originally specified time period was not
significant for the three and nine months ended July 27,
2008. Gains and losses on foreign exchange contracts designated
as cash flow hedges are presented in general and administrative
expenses.
12
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Forward exchange contracts are generally used to hedge certain
foreign currency denominated assets or liabilities. These
derivatives are typically entered into once per month and are
not designated for hedge accounting treatment. Accordingly,
changes in the fair value of these hedges are recorded promptly
in earnings to offset the changes in the fair value of the
assets or liabilities being hedged.
Fair values of derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 26, 2009
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Derivatives Designated as
Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current
assets
|
|
$
|
1,786
|
|
|
Accounts payable
and accrued
expenses
|
|
$
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current
assets
|
|
$
|
397
|
|
|
Accounts payable
and accrued
expenses
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
2,183
|
|
|
|
|
$
|
1,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments on the Consolidated
Condensed Statement of Operations for the three and nine months
ended July 26, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 26, 2009
|
|
|
|
Effective Portion
|
|
|
Ineffective Portion and Amount Excluded from
|
|
|
|
|
|
|
Location of Gain
|
|
|
|
|
Effectiveness Testing
|
|
|
|
Gain or (Loss)
|
|
|
or (Loss)
|
|
Gain or (Loss)
|
|
|
Location of Gain
|
|
Gain or (Loss)
|
|
|
|
Recognized in
|
|
|
Reclassified from
|
|
Reclassified from
|
|
|
or (Loss)
|
|
Recognized in
|
|
|
|
AOCI
|
|
|
AOCI into Income
|
|
AOCI into Income
|
|
|
Recognized in Income
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Derivatives in Cash Flow Hedging
Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
3,522
|
|
|
Cost of products
sold
|
|
$
|
(52
|
)
|
|
Cost of products
sold
|
|
$
|
(303
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
General and
administrative
|
|
|
2,859
|
|
|
General and
administrative
|
|
|
(203
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
Research,
development and
engineering
|
|
|
(82
|
)
|
|
Research,
development and
engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,522
|
|
|
|
|
$
|
2,725
|
|
|
|
|
$
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 26, 2009
|
|
|
|
Effective Portion
|
|
|
Ineffective Portion and Amount Excluded from
|
|
|
|
|
|
|
Location of Gain
|
|
|
|
|
Effectiveness Testing
|
|
|
|
Gain or (Loss)
|
|
|
or (Loss)
|
|
Gain or (Loss)
|
|
|
Location of Gain
|
|
Gain or (Loss)
|
|
|
|
Recognized in
|
|
|
Reclassified from
|
|
Reclassified from
|
|
|
or (Loss)
|
|
Recognized in
|
|
|
|
AOCI
|
|
|
AOCI into Income
|
|
AOCI into Income
|
|
|
Recognized in Income
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Derivatives in Cash Flow Hedging
Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(4,598
|
)
|
|
Cost of products
sold
|
|
$
|
(8,953
|
)
|
|
Cost of products
sold
|
|
$
|
(3,161
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
General and
administrative
|
|
|
(9,345
|
)
|
|
General and
administrative
|
|
|
24,039
|
|
Foreign exchange contracts
|
|
|
|
|
|
Research,
development and
engineering
|
|
|
(245
|
)
|
|
Research,
development and
engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(4,598
|
)
|
|
|
|
$
|
(18,543
|
)
|
|
|
|
$
|
20,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
July 26, 2009
|
|
|
July 26, 2009
|
|
|
|
Location of Gain or
|
|
Amount of Gain or
|
|
|
Amount of Gain or
|
|
|
|
(Loss) Recognized
|
|
(Loss) Recognized in
|
|
|
(Loss) Recognized in
|
|
|
|
in Income
|
|
Income
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Derivatives Not Designated as
Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
General and
administrative
|
|
$
|
(1,518
|
)
|
|
$
|
(11,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(1,518
|
)
|
|
$
|
(11,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Risk Contingent Features
If Applieds credit rating were to fall below investment
grade, it would be in violation of credit risk contingent
provisions, and certain counterparties to the derivative
instruments could request immediate payment on derivative
instruments in net liability positions. The aggregate fair value
of all derivative instruments with credit-risk related
contingent features that were in a liability position was
immaterial as of July 26, 2009.
Entering into foreign exchange contracts with banks exposes
Applied to credit-related losses in the event of the banks
nonperformance. However, Applieds exposure is not
considered significant.
For further details, see Note 11 of Notes to Consolidated
Condensed Financial Statements.
Fair
Value of Financial Instruments
The carrying amounts of Applieds financial instruments,
including cash and cash equivalents, accounts receivable, notes
payable, and accounts payable and accrued expenses, approximate
fair value due to the short maturities of these financial
instruments. At July 26, 2009, the carrying amount of
long-term debt was $202 million and the estimated fair
value was $217 million. At October 26, 2008, the
carrying amount of long-term debt was $203 million and the
estimated fair value was $198 million. The estimated fair
value of long-term debt is determined by Level 2 inputs and
is based primarily on quoted market prices for the same or
similar issues.
14
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
Note 5
|
Accounts
Receivable, Net
|
Applied has agreements with various financial institutions to
sell accounts receivable from selected customers. Applied also
discounts letters of credit through various financial
institutions. Under these agreements, Applied sold accounts
receivable and discounted letters of credit in the amounts of
$102 million and $20 million for the three months
ended July 26, 2009 and July 27, 2008, respectively,
and $179 million and $218 million for the nine months
ended July 26, 2009 and July 27, 2008, respectively.
Financing charges on the sale of receivables and discounting of
letters of credit are included in interest expense in the
accompanying Consolidated Condensed Statements of Operations and
were not material for all periods presented.
Accounts receivable are presented net of allowance for doubtful
accounts of $67 million at July 26, 2009 and
$5 million at October 26, 2008.
Applied sells principally to manufacturers within the
semiconductor, display and solar industries. As a result of
extremely challenging economic and industry conditions, certain
of these manufacturers may experience difficulties in meeting
their obligations in a timely manner. While Applied believes
that its allowance for doubtful accounts is adequate and
represents Applieds best estimate at July 26, 2009,
Applied will continue to closely monitor customer liquidity and
economic conditions, which may result in changes to
Applieds estimates regarding collectability.
Inventories are stated at the lower of cost or market, with cost
determined on a FIFO basis. Components of inventories were as
follows:
|
|
|
|
|
|
|
|
|
|
|
July 26,
|
|
|
October 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Customer service spares
|
|
$
|
275,011
|
|
|
$
|
526,825
|
|
Raw materials
|
|
|
376,430
|
|
|
|
381,457
|
|
Work-in-process
|
|
|
695,505
|
|
|
|
665,123
|
|
Finished goods
|
|
|
401,561
|
|
|
|
413,612
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,748,507
|
|
|
$
|
1,987,017
|
|
|
|
|
|
|
|
|
|
|
Included in finished goods inventory is $118 million at
July 26, 2009, and $165 million at October 26,
2008, of newly-introduced systems at customer locations where
the sales transaction did not meet Applieds revenue
recognition criteria, as set forth in Note 1 of Notes to
Consolidated Financial Statements in Applieds 2008
Form 10-K.
Applied adjusts inventory carrying value for estimated
obsolescence equal to the difference between the cost of
inventory and the estimated market value based upon assumptions
about future demand and market conditions. Applied fully
reserves for 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.
|
|
Note 7
|
Goodwill,
Purchased Technology and Other Intangible Assets
|
Goodwill
and Purchased Intangible Assets
Goodwill and purchased intangible assets with indefinite useful
lives are not amortized, but are reviewed for impairment
annually during the fourth quarter of each fiscal year and
whenever events or changes in circumstances
15
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
indicate that the carrying value of an asset may not be
recoverable. For goodwill, Applied performs a two-step
impairment test. In the first step, Applied compares the fair
value of each reporting unit to its carrying value.
Applieds reporting units are consistent with the
reportable segments identified in Note 15, based on the
manner in which Applied operates its business and the nature of
those operations. Applied determines the fair value of each of
its reporting units based on a weighting of income and market
approaches. Under the income approach, Applied calculates the
fair value of a reporting unit based on the present value of
estimated future cash flows. Under the market approach, Applied
estimates the fair value based on market multiples of revenue or
earnings for comparable companies. If the fair value of the
reporting unit exceeds the carrying value of the net assets
assigned to that unit, goodwill is not impaired and no further
testing is performed. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value of the
reporting unit, then Applied would perform the second step of
the impairment test in order to determine the implied fair value
of the reporting units goodwill. Applied would then
allocate the fair value of the reporting unit to all of the
assets and liabilities of that unit, as if Applied had acquired
the reporting unit in a business combination, with the fair
value of the reporting unit being the purchase
price. The excess of the purchase price over
the carrying amounts assigned to assets and liabilities
representing the implied fair value of goodwill. If Applied
determined that the carrying value of a reporting units
goodwill exceeded its implied fair value, Applied would record
an impairment loss equal to the difference.
Applied conducted these impairment tests in the fourth quarter
of fiscal 2008, and the results of these tests indicated that
Applieds goodwill and purchased intangible assets with
indefinite useful lives were not impaired.
Applieds methodology for allocating the purchase price
relating to purchase acquisitions is determined through
established and generally accepted valuation techniques.
Goodwill is measured as the excess of the cost of the
acquisition over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired less liabilities
assumed. Applied assigns assets acquired (including goodwill)
and liabilities assumed to a reporting unit as of the date of
acquisition. Typically, acquisitions relate to a single
reporting unit and thus do not require the allocation of
goodwill to multiple reporting units. If the products obtained
in an acquisition are assigned to multiple reporting units, the
goodwill is distributed to the respective reporting units as
part of the purchase price allocation process.
Details of indefinite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 26, 2009
|
|
|
October 26, 2008
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
1,217,610
|
|
|
$
|
17,860
|
|
|
$
|
1,235,470
|
|
|
$
|
1,220,543
|
|
|
$
|
17,860
|
|
|
$
|
1,238,403
|
|
Accumulated amortization
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,171,740
|
|
|
$
|
17,860
|
|
|
$
|
1,189,600
|
|
|
$
|
1,174,673
|
|
|
$
|
17,860
|
|
|
$
|
1,192,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From October 26, 2008 to July 26, 2009, goodwill
decreased by $3 million due to an adjustment in the
purchase price allocation of an acquisition as a result of a
change in estimate of Applieds ability to utilize tax net
operating loss carryforwards associated with this acquisition.
Other intangible assets that are not subject to amortization
consist primarily of a trade name. As of July 26, 2009,
indefinite-lived intangible assets by reportable segment were:
Energy and Environmental Solutions, $654 million; Silicon,
$224 million; Applied Global Services, $196 million;
and Display, $116 million.
Finite-Lived
Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives
using the straight-line method over the estimated economic lives
of the assets, ranging from 1 to 15 years.
16
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Applied evaluates long-lived assets, such as property, plant and
equipment, and purchased intangible assets with finite lives,
for impairment whenever events or changes in circumstances
indicate the carrying value of an asset group may not be
recoverable. Applied assesses the fair value of the assets based
on the amount of the undiscounted future cash flow that the
assets are expected to generate and recognizes an impairment
loss when estimated undiscounted future cash flow expected to
result from the use of the asset, plus net proceeds expected
from disposition of the asset, if any, are less than the
carrying value of the asset. When Applied identifies an
impairment, Applied reduces the carrying value of the group of
assets to comparable market values, when available and
appropriate, or to its estimated fair value based on a
discounted cash flow approach.
Intangible assets, such as purchased technology, are generally
recorded in connection with a business acquisition. The value
assigned to intangible assets is usually based on estimates and
judgments regarding expectations for the success and life cycle
of products and technology acquired. Applied evaluates the
useful lives of its intangible assets each reporting period to
determine whether events and circumstances require revising the
remaining period of amortization. In addition, Applied reviews
intangible assets for impairment when events or changes in
circumstances indicate their carrying value may not be
recoverable. Management considers such indicators as significant
differences in actual product acceptance from the estimates,
changes in the competitive and economic environment,
technological advances, and changes in cost structure.
Details of amortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 26, 2009
|
|
|
October 26, 2008
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross carrying amount
|
|
$
|
553,620
|
|
|
$
|
329,629
|
|
|
$
|
883,249
|
|
|
$
|
548,029
|
|
|
$
|
329,629
|
|
|
$
|
877,658
|
|
Accumulated amortization
|
|
|
(392,358
|
)
|
|
|
(181,400
|
)
|
|
|
(573,758
|
)
|
|
|
(369,183
|
)
|
|
|
(137,906
|
)
|
|
|
(507,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
161,262
|
|
|
$
|
148,229
|
|
|
$
|
309,491
|
|
|
$
|
178,846
|
|
|
$
|
191,723
|
|
|
$
|
370,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense was $22 million and
$37 million for the three months ended July 26, 2009
and July 27, 2008, respectively, and $67 million and
$90 million for the nine months ended July 26, 2009
and July 27, 2008, respectively. As of July 26, 2009,
future estimated amortization expense is expected to be
$22 million for the remainder of fiscal 2009,
$65 million for fiscal 2010, $51 million for fiscal
2011, $47 million for fiscal 2012, $43 million for
fiscal 2013, and $80 million thereafter. As of
July 26, 2009, amortized intangible assets by reportable
segment were: Energy and Environmental Solutions,
$229 million; Applied Global Services, $44 million;
Display, $30 million; and Silicon, $6 million.
17
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8
|
Accounts
Payable and Accrued Expenses
|
Components of accounts payable and accrued expenses were as
follows:
|
|
|
|
|
|
|
|
|
|
|
July 26,
|
|
|
October 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accounts payable
|
|
$
|
398,541
|
|
|
$
|
588,255
|
|
Compensation and employee benefits
|
|
|
188,309
|
|
|
|
370,409
|
|
Warranty
|
|
|
118,502
|
|
|
|
142,846
|
|
Dividends payable
|
|
|
80,023
|
|
|
|
79,846
|
|
Other accrued taxes
|
|
|
52,984
|
|
|
|
121,620
|
|
Restructuring reserve
|
|
|
48,168
|
|
|
|
20,447
|
|
Other
|
|
|
170,005
|
|
|
|
221,932
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,056,532
|
|
|
$
|
1,545,355
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9
|
Warranty,
Guarantees and Contingencies
|
Warranty
Changes in the warranty reserves during the three and nine
months ended July 26, 2009 and July 27, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
131,871
|
|
|
$
|
161,089
|
|
|
$
|
142,846
|
|
|
$
|
184,271
|
|
Provisions for warranty
|
|
|
19,052
|
|
|
|
27,081
|
|
|
|
64,771
|
|
|
|
93,613
|
|
Consumption of reserves
|
|
|
(32,421
|
)
|
|
|
(46,179
|
)
|
|
|
(89,115
|
)
|
|
|
(135,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
118,502
|
|
|
$
|
141,991
|
|
|
$
|
118,502
|
|
|
$
|
141,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied products are generally sold with a
12-month
warranty period following installation. The provision for the
estimated cost of warranty is recorded when revenue is
recognized. Parts and labor are covered under the terms of the
warranty agreement. The warranty provision is based on
historical experience by product, configuration and geographic
region. Quarterly warranty consumption is generally associated
with sales that occurred during the preceding four quarters, and
quarterly warranty provisions are generally related to the
current quarters sales.
Guarantees
During the ordinary course of business, Applied provides standby
letters of credit or other guarantee instruments to certain
parties as required for certain transactions initiated by either
Applied or its subsidiaries. As of July 26, 2009, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee arrangements was
$96 million. Applied has not recorded any liability in
connection with these guarantee arrangements beyond that
required to account for the underlying transaction being
guaranteed. Applied does not believe, based on historical
experience and information currently available, that it is
probable that any amounts will be required to be paid under
these guarantee arrangements.
Applied also has agreements with various global banks to
facilitate subsidiary banking operations world-wide, including
overdraft arrangements, bank guarantees and letters of credit.
As of July 26, 2009, Applied Materials, Inc. has provided
parent guarantees to banks for approximately $175 million
to cover these arrangements.
18
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Legal
matters
Jusung
Applied has been engaged in a number of lawsuits and patent and
administrative proceedings in Taiwan and South Korea since 2003
with Jusung Engineering Co., Ltd. (Jusung Engineering)
and/or
Jusung Pacific Co., Ltd. (Jusung Pacific, referred to together
with Jusung Engineering as Jusung) involving technology used in
manufacturing LCDs. Applied believes that it has meritorious
claims and defenses against Jusung that it intends to pursue
vigorously.
In 2004, Applied filed a complaint for patent infringement
against Jusung in the Hsinchu District Court in Taiwan seeking
damages and a permanent injunction for infringement of a patent
related to chemical vapor deposition (CVD) equipment, and
this case remains pending. Jusung Pacific unsuccessfully sought
invalidation of Applieds CVD patent in the Taiwanese
Intellectual Property Office (TIPO). Jusung Pacifics
initial appeal of the TIPOs decision was denied, and it
has filed a further appeal to the Taipei High Supreme
Administrative Court. In 2006, Applied filed an action in the
TIPO challenging the validity of a patent owned by Jusung
Engineering related to severability of the transfer chamber on a
CVD tool. Jusung Engineering filed a lawsuit against Applied and
AKT America in Hsinchu District Court in Taiwan alleging
infringement of the same patent. The TIPO granted Applieds
request for invalidation and revoked Jusung Engineerings
patent. In March 2009, the Hsinchu District Court dismissed
Jusung Engineerings lawsuit, and in April 2009, the
Ministry of Economic Affairs overruled Jusung Engineerings
administrative appeal of the decision revoking its patent.
Jusung has appealed both decisions. In 2006, Jusung Engineering
filed a complaint of private prosecution in the Taipei District
Court of Taiwan alleging that Applieds outside counsel
received from the Court and used a copy of an expert report that
Jusung had filed in the ongoing patent infringement lawsuits
that Jusung had intended to remain confidential. The complaint
names as defendants Applieds outside counsel in Taiwan, as
well as Michael R. Splinter, Applieds President and Chief
Executive Officer, as the statutory representative of Applied.
The Taipei District Court dismissed the private prosecution
complaint, and the matter was transferred to the Taipei District
Attorneys Office. The Taipei District Attorneys
Office has issued three successive rulings not to prosecute,
each of which Jusung Engineering has appealed to the Taiwan High
Court District Attorney. In each instance, the Taiwan High Court
District Attorney has returned the matter to the Taipei District
Attorneys Office for further consideration, where it
remains pending.
In 2007, Jusung Engineering filed a complaint against AKT
America in Seoul Central District Court in Seoul, Korea,
alleging infringement of a Jusung patent involving the
showerhead assembly of plasma enhanced chemical vapor deposition
(PECVD) equipment. After the Korean Intellectual Property Office
(KIPO) ruled that Jusungs patent was invalid, the District
Court dismissed Jusung Engineerings infringement action,
which Jusung Engineering has appealed. On July 9, 2009, the
Korean Supreme Court dismissed Jusungs appeal of the
KIPOs determination that the PECVD patent is invalid, and
Jusung has no further right of appeal in this matter. On
July 30, 2009, Jusung Engineerings related
confirmation-of-scope
action was dismissed based on the Supreme Courts
invalidation of the PECVD patent. Applied has submitted notice
of the Supreme Courts invalidity decision to the High
Court considering Jusungs appeal in the infringement
action. In 2007, Applied filed a complaint against Jusung
Engineering in the Seoul Central District Court for infringement
of an Applied patent involving the housing for a substrate
supporting pin used in PECVD equipment. The KIPO subsequently
ruled in favor of an action by Jusung to invalidate
Applieds substrate patent. The Patent Court dismissed
Applieds appeal and Applied has appealed to the Supreme
Court. The District Court has dismissed Applieds
complaint, and Applieds appeal was also dismissed.
Applieds related confirmation of scope case was dismissed,
and Applieds appeal of that ruling was also dismissed.
From time to time, Applied receives notification from third
parties, including customers and suppliers, seeking
indemnification, litigation support, payment of money or other
actions by Applied in connection with claims made against them.
In addition, from time to time, Applied receives notification
from third parties claiming that Applied may be or is infringing
their intellectual property or other rights. Applied also is
subject to various other legal proceedings and claims, both
asserted and unasserted, that arise in the ordinary course of
business.
19
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Although the outcome of the above-described matters cannot be
predicted with certainty, Applied does not believe that any of
these proceedings or other claims will have a material adverse
effect on its consolidated financial condition or results of
operations.
|
|
Note 10
|
Restructuring
and Asset Impairments
|
On November 12, 2008, Applied announced a restructuring
program to reduce its global workforce by approximately 1,800
positions. During the first quarter of fiscal 2009, Applied
recorded restructuring charges of $133 million associated
with this program. The restructuring charges consisted of
employee termination costs to reduce the Companys
workforce through a combination of attrition, voluntary
separation and other workforce reduction programs. During the
second quarter of fiscal 2009, Applied expanded the scope of the
restructuring program by approximately 200 positions, resulting
in an additional cost of $12 million, for an aggregate cost
of $145 million.
Changes in restructuring reserves related to severance under
this restructuring program for the nine months ended
July 26, 2009 were as follows:
|
|
|
|
|
|
|
Severance
|
|
|
|
(In thousands)
|
|
|
Provision for restructuring reserves
|
|
$
|
132,658
|
|
Consumption of reserves
|
|
|
(12,393
|
)
|
|
|
|
|
|
Balance, January 25, 2009
|
|
|
120,265
|
|
Provision for restructuring reserves
|
|
|
12,243
|
|
Consumption of reserves
|
|
|
(77,895
|
)
|
|
|
|
|
|
Balance, April 26, 2009
|
|
|
54,613
|
|
Consumption of reserves
|
|
|
(14,571
|
)
|
|
|
|
|
|
Balance, July 26, 2009
|
|
$
|
40,042
|
|
|
|
|
|
|
Changes in restructuring reserves for the nine months ended
July 26, 2009 related to other restructuring plans and
facilities realignment programs initiated in prior periods were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, October 26, 2008
|
|
$
|
5,702
|
|
|
$
|
14,745
|
|
|
$
|
20,447
|
|
Provision for restructuring reserves
|
|
|
|
|
|
|
114
|
|
|
|
114
|
|
Consumption of reserves
|
|
|
(2,830
|
)
|
|
|
(2,215
|
)
|
|
|
(5,045
|
)
|
Foreign currency changes
|
|
|
(182
|
)
|
|
|
(1,123
|
)
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 25, 2009
|
|
|
2,690
|
|
|
|
11,521
|
|
|
|
14,211
|
|
Consumption of reserves
|
|
|
(1,249
|
)
|
|
|
(1,639
|
)
|
|
|
(2,888
|
)
|
Adjustment of restructuring reserves
|
|
|
|
|
|
|
(2,169
|
)
|
|
|
(2,169
|
)
|
Foreign currency changes
|
|
|
|
|
|
|
276
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 26, 2009
|
|
|
1,441
|
|
|
|
7,989
|
|
|
|
9,430
|
|
Consumption of reserves
|
|
|
(644
|
)
|
|
|
(1,358
|
)
|
|
|
(2,002
|
)
|
Foreign currency changes
|
|
|
|
|
|
|
698
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 26, 2009
|
|
$
|
797
|
|
|
$
|
7,329
|
|
|
$
|
8,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
During the nine months ended July 26, 2009, Applied
determined that the carrying value of certain fixed assets to be
sold exceeded the estimated fair value and, as a result,
recorded a $15 million impairment charge. In addition,
Applied incurred expenses of $1.5 million in connection
with ceasing use of certain leased facilities.
|
|
Note 11
|
Stockholders
Equity
|
Comprehensive
Income
Components of comprehensive income (loss), on an after-tax basis
where applicable, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(54,865
|
)
|
|
$
|
164,768
|
|
|
$
|
(443,189
|
)
|
|
$
|
729,651
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
|
|
Change in unrealized net gain (loss) on investments
|
|
|
7,958
|
|
|
|
(8,133
|
)
|
|
|
39,294
|
|
|
|
(27,025
|
)
|
Change in unrealized net gain (loss) on derivative instruments
qualifying as cash flow hedges
|
|
|
508
|
|
|
|
(2,333
|
)
|
|
|
(7,795
|
)
|
|
|
5,049
|
|
Foreign currency translation adjustments
|
|
|
810
|
|
|
|
(520
|
)
|
|
|
707
|
|
|
|
2,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(45,589
|
)
|
|
$
|
153,782
|
|
|
$
|
(410,871
|
)
|
|
$
|
709,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive loss, on an
after-tax basis where applicable, were as follows:
|
|
|
|
|
|
|
|
|
|
|
July 26,
|
|
|
October 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Pension liability
|
|
$
|
(19,560
|
)
|
|
$
|
(19,672
|
)
|
Retiree medical benefits
|
|
|
734
|
|
|
|
734
|
|
Unrealized gain (loss) on investments, net
|
|
|
14,310
|
|
|
|
(24,984
|
)
|
Unrealized gain on derivative instruments qualifying as cash
flow hedges
|
|
|
244
|
|
|
|
8,039
|
|
Cumulative translation adjustments
|
|
|
10,020
|
|
|
|
9,313
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,748
|
|
|
$
|
(26,570
|
)
|
|
|
|
|
|
|
|
|
|
For further details on derivative instruments, see Note 4
of the Notes to Consolidated Condensed Financial Statements.
Stock
Repurchase Program
On September 15, 2006, Applieds Board of Directors
approved a stock repurchase program for up to $5.0 billion
in repurchases over the three years ending in September 2009, of
which authorization for $2.3 billion of repurchases
remained as of July 26, 2009. Under this authorization,
Applied implemented a systematic stock repurchase program and
also has made supplemental repurchases of its common stock from
time to time in the open market, depending on market conditions,
stock price and other factors. In November 2008, Applied
announced that it had temporarily suspended stock repurchases in
light of uncertain global economic and market conditions.
Applied did not repurchase any shares of its common stock during
the three months ended July 26, 2009. During the three
months ended July 27, 2008, Applied repurchased
15,611,000 shares of its common stock at an average price
of $19.22 per share for a total cash outlay of
$300 million. During the nine months ended July 26,
2009, Applied repurchased 1,942,000 shares of its common
stock at an average price of $11.80 per share for a total
21
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
cash outlay of $23 million. During the nine months ended
July 27, 2008, Applied repurchased 64,263,000 shares
of its common stock at an average price of $18.67 per share for
a total cash outlay of $1.2 billion.
Dividends
In June 2009, Applieds Board of Directors declared a
quarterly cash dividend in the amount of $0.06 per share payable
on September 3, 2009 to stockholders of record as of
August 13, 2009. In March 2009, Applieds Board of
Directors declared a quarterly cash dividend in the amount of
$0.06 per share that was paid on June 4, 2009 to
stockholders of record as of May 14, 2009. In December
2008, Applieds Board of Directors declared a quarterly
cash dividend in the amount of $0.06 per share that was paid on
March 5, 2009 to stockholders of record as of
February 12, 2009. The declaration of any future cash
dividend is at the discretion of the Board of Directors and will
depend on Applieds 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 interest of Applieds
stockholders.
|
|
Note 12
|
Employee
Benefit Plans
|
Applied sponsors a number of employee benefit plans, including
defined benefit plans of certain foreign subsidiaries, and a
plan that provides certain medical and vision benefits to
eligible retirees. A summary of the components of net periodic
benefit costs of these defined and postretirement benefit plans
for the three and nine months ended July 26, 2009 and
July 27, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Service cost
|
|
$
|
3,290
|
|
|
$
|
3,840
|
|
|
$
|
9,870
|
|
|
$
|
11,520
|
|
Interest cost
|
|
|
3,007
|
|
|
|
3,361
|
|
|
|
9,021
|
|
|
|
10,083
|
|
Expected return on plan assets
|
|
|
(1,863
|
)
|
|
|
(2,211
|
)
|
|
|
(5,589
|
)
|
|
|
(6,633
|
)
|
Amortization of actuarial loss
|
|
|
174
|
|
|
|
151
|
|
|
|
522
|
|
|
|
453
|
|
Amortization of prior service (credit) costs
|
|
|
(70
|
)
|
|
|
62
|
|
|
|
(210
|
)
|
|
|
186
|
|
Amortization of transition obligation
|
|
|
19
|
|
|
|
20
|
|
|
|
57
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
4,557
|
|
|
$
|
5,223
|
|
|
$
|
13,671
|
|
|
$
|
15,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13
|
Borrowing
Facilities
|
Applied has credit facilities for unsecured borrowings in
various currencies of up to $1.2 billion, of which
$1.0 billion is comprised of a
5-year
revolving credit agreement with a group of banks that is
scheduled to expire in January 2012. This agreement provides for
borrowings in United States dollars at interest rates keyed to
one of the two rates selected by Applied for each advance and
includes financial and other covenants with which Applied was in
compliance at July 26, 2009. In May 2009, Applied amended
certain terms of this credit agreement, including
(i) replacing the funded-debt-to-adjusted-earnings ratio
financial covenant with a minimum liquidity covenant and a
funded-debt-to-total-capital ratio covenant and
(ii) increasing the facility fee and applicable interest
rate margins on advances. Remaining credit facilities in the
amount of approximately $160 million are with Japanese
banks. Applieds 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
July 26, 2009.
22
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
Applieds effective income tax rate for the third quarter
of fiscal 2009 was a benefit of 26.0 percent, and the
income tax rate for the third quarter of fiscal 2008 was a
provision of 32.1 percent. The tax provision for the third
quarter of fiscal 2008 included $19 million of tax expense
for certain corrections pertaining to tax items prior to fiscal
2008. The impact of the corrections recognized during the third
quarter of fiscal 2008 was not considered material to the prior
reporting periods.
During the second quarter of fiscal 2009, the Internal Revenue
Service began an examination of Applieds federal income
tax returns for fiscal years 2007 and 2006. Applied believes it
has adequately reserved for any income tax uncertainties that
may arise as a result of this examination.
Applieds future effective income tax rate depends on
various factors, such as tax legislation, the geographic
composition of Applieds pre-tax income, and the tax rate
on equity compensation. Management carefully monitors these
factors and adjusts the interim effective income tax rate
accordingly.
|
|
Note 15
|
Industry
Segment Operations
|
Applieds four reportable segments are: Silicon, Applied
Global Services, Display, and Energy and Environmental
Solutions. Applieds 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 Applieds
management organization structure as of July 26, 2009 and
the distinctive nature of each segment. Future changes to this
internal financial structure may result in changes to the
Companys reportable segments.
Each reportable segment is separately managed and has separate
financial results that are reviewed by Applieds 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 Applieds chief
operating decision-maker.
Applied derives the segment results directly from its internal
management reporting system. The accounting policies Applied
uses to derive reportable segment results are substantially the
same as those used for external reporting purposes. Management
measures the performance of each reportable segment based upon
several metrics including orders, net sales and operating
income. Management uses these results to evaluate the
performance of, and to assign resources to, each of the
reportable segments. Applied does not allocate to its reportable
segments certain operating expenses that it manages separately
at the corporate level, which include costs related to
equity-based compensation and certain components of variable
compensation, the global sales organization, corporate functions
(certain management, finance, legal, human resources, marketing,
and research, development and engineering), 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. Segment operating income excludes
interest income/expense and other financial charges and income
taxes according to how a particular reportable segments
management is measured. Management does not consider the
unallocated costs in measuring the performance of the reportable
segments.
The Silicon segment includes semiconductor capital equipment for
etch, rapid thermal processing, deposition, chemical mechanical
planarization, and metrology and inspection.
The Applied Global Services segment includes technically
differentiated products and services to improve operating
efficiency, reduce operating costs and lessen the environmental
impact of semiconductor, display and solar customers
factories. Applied Global Services products consist of
spares, services, certain earlier generation products, and
remanufactured equipment. Customer demand for these products and
services is fulfilled through a global distribution system with
trained service engineers located in close proximity to customer
sites.
23
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
The Display segment encompasses products for manufacturing LCDs
for TVs, personal computers and other video-enabled devices. The
Display segment also includes the design and manufacture of
differentiated stand-alone equipment for the Applied
SunFabtm
Thin Film Line.
The Energy and Environmental Solutions segment includes products
for fabricating solar photovoltaic cells and modules, high
throughput
roll-to-roll
coating systems for flexible electronics and web products, and
systems used in the manufacture of energy-efficient glass.
Net sales and operating income (loss) for each reportable
segment for the three and nine months ended July 26, 2009
and July 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Operating
|
|
|
|
Net Sales
|
|
|
Income (Loss)
|
|
|
Net Sales
|
|
|
Income (Loss)
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon
|
|
$
|
497,679
|
|
|
$
|
56,061
|
|
|
$
|
1,303,921
|
|
|
$
|
(6,060
|
)
|
Applied Global Services
|
|
|
342,427
|
|
|
|
23,929
|
|
|
|
1,006,836
|
|
|
|
48,127
|
|
Display
|
|
|
69,161
|
|
|
|
(4,815
|
)
|
|
|
301,696
|
|
|
|
21,734
|
|
Energy and Environmental Solutions
|
|
|
224,473
|
|
|
|
(53,395
|
)
|
|
|
874,760
|
|
|
|
(211,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment
|
|
$
|
1,133,740
|
|
|
$
|
21,780
|
|
|
$
|
3,487,213
|
|
|
$
|
(147,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon
|
|
$
|
755,592
|
|
|
$
|
172,127
|
|
|
$
|
3,260,729
|
|
|
$
|
1,065,307
|
|
Applied Global Services
|
|
|
607,214
|
|
|
|
144,741
|
|
|
|
1,801,187
|
|
|
|
451,962
|
|
Display
|
|
|
310,944
|
|
|
|
103,049
|
|
|
|
641,707
|
|
|
|
196,745
|
|
Energy and Environmental Solutions
|
|
|
174,418
|
|
|
|
(85,152
|
)
|
|
|
381,940
|
|
|
|
(204,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment
|
|
$
|
1,848,168
|
|
|
$
|
334,765
|
|
|
$
|
6,085,563
|
|
|
$
|
1,509,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations of total segment operating income to
Applieds consolidated operating income (loss) for the
three and nine months ended July 26, 2009 and July 27,
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Total segment operating income (loss)
|
|
$
|
21,780
|
|
|
$
|
334,765
|
|
|
$
|
(147,690
|
)
|
|
$
|
1,509,846
|
|
Corporate and unallocated costs
|
|
|
(98,963
|
)
|
|
|
(106,295
|
)
|
|
|
(259,387
|
)
|
|
|
(421,246
|
)
|
Restructuring and asset impairment charges
|
|
|
|
|
|
|
(138
|
)
|
|
|
(159,481
|
)
|
|
|
(49,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(77,183
|
)
|
|
$
|
228,332
|
|
|
$
|
(566,558
|
)
|
|
$
|
1,038,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16
|
Recently
Issued Accounting Pronouncements
|
In June 2009, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS)
No. 168, The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162
(SFAS 168). This standard establishes the FASB Accounting
Standards Codification (Codification) as the single source of
authoritative U.S. GAAP. The Codification does not create
any new GAAP standards but incorporates existing accounting and
reporting standards into a new topical structure. The
Codification will be effective for Applied beginning in the
fourth quarter of fiscal
24
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
2009 and existing references to authoritative standards will be
replaced by new references set forth by the Codification.
In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS 167), which becomes effective the first annual
reporting period after November 15, 2009 and will be
effective for Applied in fiscal 2011. This Statement amends FASB
Interpretation No. 46(R), Consolidation of Variable
Interest Entities an interpretation of ARB
No. 51, to require revised evaluations of whether
entities represent variable interest entities, ongoing
assessments of control over such entities, and additional
disclosures for variable interests. Applied is evaluating the
potential impact of the implementation of SFAS 167 on its
consolidated financial statements.
In April 2009, the FASB issued FSP No. 141(R)-1
Accounting for Assets Acquired and Liabilities Assumed in
a Business Combination That Arise from Contingencies
(FSP 141(R)-1). FSP 141(R)-1 will amend the provisions
related to the initial recognition and measurement, subsequent
measurement and disclosure of assets and liabilities arising
from contingencies in a business combination under
SFAS No. 141(R), Business Combinations
(SFAS 141(R)). FSP 141(R)-1 will carry forward the
requirements in SFAS No. 141, Business
Combinations, for acquired contingencies, thereby
requiring that such contingencies be recognized at fair value on
the acquisition date if fair value can be reasonably estimated
during the allocation period. Otherwise, entities would
typically account for the acquired contingencies in accordance
with SFAS No. 5, Accounting for
Contingencies,. FSP 141(R)-1 will have the same
effective date as SFAS No. 141(R), and will therefore
be effective for Applied in fiscal 2010. Applied expects that
FSP 141(R)-1 will have an impact on its consolidated
financial statements, but the nature and magnitude of the
specific effects will depend upon the nature, term and size of
the acquired contingencies.
In December 2008, the FASB issued FSP
No. FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets
(FSP 132(R)-1). FSP 132(R)-1 amends FASB Statement
No. 132 (revised 2003), Employers Disclosures
about Pensions and Other Postretirement Benefits, to
provide guidance on an employers disclosures about plan
assets of a defined benefit pension or other postretirement
plan. The new disclosures are required to be included in
financial statements for fiscal years ending after
December 15, 2009. Applied is evaluating the impact of the
implementation of FSP 132(R)-1 on its consolidated
financial statements.
In December 2007, the FASB issued Statement No. 141
(revised), Business Combinations (SFAS 141(R)).
The standard changes the accounting for business combinations,
including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of
contingent consideration, the accounting for preacquisition gain
and loss contingencies, the recognition of capitalized
in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment
of acquisition-related transaction costs, and the recognition of
changes in the acquirers income tax valuation allowance.
SFAS 141(R) will be effective for Applied in fiscal 2010,
with early adoption prohibited. Applied expects that
SFAS 141(R) will have an impact on its consolidated
financial statements, but the nature and magnitude of the
specific effects will depend upon the nature, terms and size of
the acquisitions it consummates after the effective date.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial
statements, including the requirements to classify
noncontrolling interests as a component of consolidated
stockholders equity, and the elimination of minority
interest accounting in results of operations with earnings
attributable to noncontrolling interests reported as part of
consolidated earnings. Additionally, SFAS 160 revises the
accounting for both increases and decreases in a parents
controlling ownership interest. SFAS 160 will be effective
for Applied in fiscal 2010, with early adoption prohibited.
Applied is evaluating the potential impact of the implementation
of SFAS 160 on its financial position and results of
operations.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159), which permits entities to
25
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Continued)
elect to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. This election is irrevocable.
SFAS 159 became effective for Applied beginning with its
2009 fiscal year. Applied has not elected the fair value
measurement option for its financial assets or liabilities that
are not currently required to be measured at fair value.
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurements. In February 2008, the FASB issued
FSP 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1)
as well as
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-1
amends SFAS 157 to remove certain leasing transactions from
its scope.
FSP 157-2
delays the effective date for Applied of SFAS 157 for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of Applieds first quarter of fiscal
2010. The measurement and disclosure requirements related to
financial assets and financial liabilities are effective for
Applied beginning in the first quarter of fiscal 2009. In
October 2008, the FASB issued
FSP 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS 157 in a market that is
not active, and provides guidance on the key considerations in
determining the fair value of a financial asset when the market
for that financial asset is not active. Applied adopted the
effective portions of SFAS 157 beginning in the first
quarter of fiscal 2009. See Note 4 for information and
related disclosures regarding Applieds fair value
measurements.
|
|
Note 17
|
Subsequent
Events Through September 1, 2009
|
During the fourth quarter of fiscal 2009, Applied received
notice from the State of California stating that its examination
of Applieds returns for fiscal 2005 and 2004 had been
settled. The settlement will result in a decrease to net
unrecognized tax benefits of $9 million and reduce the
effective tax rate for the fourth quarter of fiscal 2009.
26
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
All statements in this Quarterly Report on
Form 10-Q
and those made by the management of Applied, other than
statements of historical fact, are forward-looking statements.
Examples of forward-looking statements include statements
regarding Applieds future financial or operating results,
cash flows and cash deployment strategies, declaration of
dividends, share repurchases, business strategies, projected
costs, products, competitive positions, managements plans
and objectives for future operations, research and development,
acquisitions and joint ventures, growth opportunities,
customers, working capital, liquidity, investment portfolio and
policies and legal proceedings, as well as industry trends and
outlooks. These forward-looking statements are based on
managements estimates, projections and assumptions as of
the date hereof and include the assumptions that underlie such
statements. Forward-looking statements may contain words such as
may, will, should,
could, would, expect,
plan, anticipate, believe,
estimate, predict, potential
and continue, the negative of these terms, or other
comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and
uncertainties and other important factors, including those
discussed in Part II, Item 1A, Risk
Factors, below and elsewhere in this report. Other risks
and uncertainties may be disclosed in Applieds prior
Securities and Exchange Commission (SEC) filings. These and many
other factors could affect Applieds future financial
condition and operating results and could cause actual results
to differ materially from expectations based on forward-looking
statements made in this document or elsewhere by Applied or on
its behalf. Applied undertakes no obligation to revise or update
any forward-looking statements.
Overview
Applied provides Nanomanufacturing
Technologytm
solutions for the global semiconductor, flat panel display,
solar and related industries, with a broad portfolio of
innovative equipment, service and software products.
Applieds customers are primarily manufacturers of
semiconductors, flat panel liquid crystal displays (LCDs), solar
photovoltaic cells and modules (solar PVs), flexible electronics
and energy-efficient glass. Applied operates in four reportable
segments: Silicon, Applied Global Services, Display, and Energy
and Environmental Solutions. Product development and
manufacturing activities occur primarily in North America,
Europe, Israel and Asia. Applieds broad range of equipment
and service products are highly technical and are sold primarily
through a direct sales force.
Applieds results historically have been driven primarily
by worldwide demand for semiconductors, which in turn depends on
end-user demand for electronic products. Each of Applieds
businesses is subject to cyclical industry conditions, as demand
for manufacturing equipment and services can change depending on
supply and demand for chips, LCDs, solar PVs and other
electronic devices, as well as other factors, such as global
economic and market conditions, and technological advances in
fabrication processes. Credit constraints in the financial
markets and the weak global economy are compounding the impact
of the highly cyclical markets in which Applied operates.
The following table presents certain significant measurements
for the three and nine months ended July 26, 2009 and
July 27, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(In millions, except per share amounts and percentages)
|
|
|
|
|
|
(In millions, except per share amounts and percentages)
|
|
|
|
|
|
New orders
|
|
$
|
1,072
|
|
|
$
|
2,030
|
|
|
|
(47
|
)%
|
|
$
|
2,624
|
|
|
$
|
6,943
|
|
|
|
(62
|
)%
|
Net sales
|
|
$
|
1,134
|
|
|
$
|
1,848
|
|
|
|
(39
|
)%
|
|
$
|
3,487
|
|
|
$
|
6,086
|
|
|
|
(43
|
)%
|
Gross margin
|
|
$
|
325
|
|
|
$
|
742
|
|
|
|
(56
|
)%
|
|
$
|
872
|
|
|
$
|
2,644
|
|
|
|
(67
|
)%
|
Gross margin percent
|
|
|
28.7
|
%
|
|
|
40.2
|
%
|
|
|
(12 points
|
)
|
|
|
25.0
|
%
|
|
|
43.4
|
%
|
|
|
(18 points
|
)
|
Net income (loss)
|
|
$
|
(55
|
)
|
|
$
|
165
|
|
|
|
(133
|
)%
|
|
$
|
(443
|
)
|
|
$
|
730
|
|
|
|
(161
|
)%
|
Earnings (loss) per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
|
(134
|
)%
|
|
$
|
(0.33
|
)
|
|
$
|
0.53
|
|
|
|
(163
|
)%
|
27
Applied incurred net losses for the three and nine months ended
July 26, 2009. Negative trends in consumer spending and
pervasive economic uncertainty led some customers to
significantly reduce factory operations and to reduce their
spending during the first half of fiscal 2009, which severely
impacted demand for manufacturing equipment and services. In the
third quarter of fiscal 2009, demand for semiconductor and
display equipment increased, but was still down significantly
from fiscal 2008 levels. Net sales remained relatively flat
across the first three quarters of fiscal 2009 and were also
down significantly from fiscal 2008 levels. While Applied began
to see positive trends in its business in the third quarter of
fiscal 2009, a meaningful improvement in the equipment sector
will depend on a sustainable recovery in customers end
markets to support factories running at higher utilization and
to encourage customers investments in new capacity, as
well as advanced technologies. In this uncertain macroeconomic
and industry climate, Applieds ability to forecast
customer demand and the Companys future performance is
limited. Applied currently anticipates that orders and net sales
will increase in the fourth quarter of fiscal 2009 from the
third quarter of fiscal 2009 but will be lower overall for the
full fiscal year as compared to fiscal 2008.
Results
of Operations
Applied received new orders of $1.1 billion for the third
quarter of fiscal 2009, down 47 percent from the third
quarter of fiscal 2008. The decrease in new orders was across
all segments and reflected the challenging economic and industry
conditions. New orders of $2.6 billion for the first nine
months of fiscal 2009 were down 62 percent from the first
nine months of fiscal 2008. The decrease was primarily
attributable to reduced demand for equipment and services from
semiconductor customers and decreased demand for LCD equipment.
New orders by geographic region (determined by the location of
customers facilities) for the three and nine months ended
July 26, 2009 and July 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
|
|
(In millions, except percentages)
|
|
|
Southeast Asia and China
|
|
|
269
|
|
|
|
25
|
|
|
|
338
|
|
|
|
17
|
|
|
|
435
|
|
|
|
17
|
|
|
|
1,047
|
|
|
|
15
|
|
Taiwan
|
|
|
261
|
|
|
|
24
|
|
|
|
203
|
|
|
|
10
|
|
|
|
407
|
|
|
|
15
|
|
|
|
1,536
|
|
|
|
22
|
|
Japan
|
|
|
151
|
|
|
|
14
|
|
|
|
425
|
|
|
|
21
|
|
|
|
407
|
|
|
|
15
|
|
|
|
1,022
|
|
|
|
15
|
|
North America(*)
|
|
|
147
|
|
|
|
14
|
|
|
|
393
|
|
|
|
19
|
|
|
|
511
|
|
|
|
20
|
|
|
|
1,189
|
|
|
|
17
|
|
Europe
|
|
|
130
|
|
|
|
12
|
|
|
|
319
|
|
|
|
16
|
|
|
|
601
|
|
|
|
23
|
|
|
|
897
|
|
|
|
13
|
|
Korea
|
|
|
114
|
|
|
|
11
|
|
|
|
352
|
|
|
|
17
|
|
|
|
263
|
|
|
|
10
|
|
|
|
1,252
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,072
|
|
|
|
100
|
|
|
|
2,030
|
|
|
|
100
|
|
|
|
2,624
|
|
|
|
100
|
|
|
|
6,943
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
Applieds backlog for the most recent three fiscal quarters
was as follows: $3.0 billion at July 26, 2009,
$3.2 billion at April 26, 2009, and $4.1 billion
at January 25, 2009. Backlog decreased 6 percent for
the third quarter of fiscal 2009 compared to the second quarter
of fiscal 2009, primarily due to customer cancellations which
totaled $146 million. Backlog consists of: (1) orders
for which written authorizations have been accepted and assigned
shipment dates are within the next 12 months, or shipment
has occurred but revenue has not been recognized;
(2) contractual service revenue and maintenance fees to be
earned within the next 12 months; and (3) orders for
SunFabtm
thin film solar production lines that are anticipated to be
recognized as revenue within the next 12 months. Due to the
potential for customer changes in delivery schedules and order
cancellations, Applieds backlog at any particular time is
not necessarily indicative of actual sales for any future
periods.
Net sales of $1.1 billion for the third quarter of fiscal
2009 decreased 39 percent from the third quarter of fiscal
2008 due to decreased demand for semiconductor equipment and
services, partially offset by increased sales of solar
manufacturing equipment. Net sales of $3.5 billion for the
first nine months of fiscal 2009 decreased 43 percent from
the first nine months of fiscal 2008. Net sales for the first
nine months of fiscal 2009 reflected
28
significantly lower sales of equipment and services to
semiconductor and display customers, partially offset by
increased sales of solar manufacturing equipment.
Net sales by geographic region (determined by the location of
customers facilities) for the three and nine months ended
July 26, 2009 and July 27, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
(%)
|
|
|
|
(In millions, except percentages)
|
|
|
Taiwan
|
|
|
393
|
|
|
|
35
|
|
|
|
316
|
|
|
|
17
|
|
|
|
699
|
|
|
|
20
|
|
|
|
1,451
|
|
|
|
24
|
|
Europe
|
|
|
174
|
|
|
|
15
|
|
|
|
204
|
|
|
|
11
|
|
|
|
603
|
|
|
|
17
|
|
|
|
585
|
|
|
|
10
|
|
Southeast Asia and China
|
|
|
169
|
|
|
|
15
|
|
|
|
442
|
|
|
|
24
|
|
|
|
539
|
|
|
|
16
|
|
|
|
1,020
|
|
|
|
17
|
|
North America(*)
|
|
|
139
|
|
|
|
12
|
|
|
|
276
|
|
|
|
15
|
|
|
|
733
|
|
|
|
21
|
|
|
|
1,106
|
|
|
|
18
|
|
Japan
|
|
|
130
|
|
|
|
12
|
|
|
|
262
|
|
|
|
14
|
|
|
|
501
|
|
|
|
14
|
|
|
|
943
|
|
|
|
15
|
|
Korea
|
|
|
129
|
|
|
|
11
|
|
|
|
348
|
|
|
|
19
|
|
|
|
412
|
|
|
|
12
|
|
|
|
981
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,134
|
|
|
|
100
|
|
|
|
1,848
|
|
|
|
100
|
|
|
|
3,487
|
|
|
|
100
|
|
|
|
6,086
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Primarily the United States. |
Gross margin was 28.7 percent for the third quarter of
fiscal 2009, down from 40.2 percent for the third quarter
of fiscal 2008. Gross margin was 25.0 percent for the first
nine months of fiscal 2009, down from 43.4 percent for the
first nine months of fiscal 2008. The decrease in the gross
margin percentage for the three and nine months ended
July 26, 2009 was due to lower net sales, lower-margin
product mix, and reduced factory absorption, offset in part by
cost control initiatives. The decrease in gross margin
percentage for the nine months ended July 26, 2009 was also
due to inventory-related charges of $67 million resulting
from lower than anticipated demand. Gross margin during the
third quarter of both fiscal 2009 and 2008 included
$9 million of equity-based compensation expense. Gross
margin during the first nine months of both fiscal 2009 and 2008
included $23 million of equity-based compensation expense.
Operating expenses included expenses related to research,
development and engineering (RD&E), marketing and selling
(M&S), and general and administrative (G&A). Expenses
related to RD&E, M&S and G&A totaled
$402 million for the third quarter of fiscal 2009, down
from $514 million for the third quarter of fiscal 2008.
RD&E and M&S expenses decreased 18 percent to
$314 million for the third quarter of fiscal 2009. G&A
expenses decreased 32 percent to $88 million for the
third quarter of fiscal 2009. The decrease in RD&E,
M&S and G&A for the third quarter of fiscal 2009 was
due to cost control initiatives, including headcount reductions,
multi-week shutdowns and lower controllable spending.
Expenses related to RD&E, M&S and G&A totaled
$1.3 billion for the first nine months of fiscal 2009
compared to $1.6 billion for the first nine months of
fiscal 2008. RD&E and M&S expenses decreased
20 percent to $948 million for the first nine months
of fiscal 2009 due to cost control initiatives. G&A
expenses decreased 10 percent to $331 million for the
first nine months of fiscal 2009, primarily due to cost control
initiatives, partially offset by a bad debt provision of
$63 million.
Operating expenses for the first nine months of fiscal 2009
included restructuring charges of $145 million, primarily
associated with the restructuring program announced on
November 12, 2008, and asset impairment charges of
$15 million related to certain fixed assets to be sold.
Operating expenses for the first nine months of fiscal 2008
included restructuring charges of $50 million, principally
associated with a global cost reduction plan and ceasing
development of beamline implant products. (See Note 10 of
Notes to Consolidated Condensed Financial Statements.)
During the three months ended July 26, 2009 Applied
recognized $2 million in impairment charges associated with
certain strategic investments. During the first nine months of
fiscal 2009, Applied recognized $79 million in impairment
charges, consisting of $45 million associated with its
equity method investment in Sokudo, a Japanese joint venture
company, and $34 million in impairment charges associated
with certain strategic investments.
29
Net interest income was $5 million for the third quarter of
fiscal 2009, down from $21 million for the third quarter of
fiscal 2008. Net interest income was $21 million for the
first nine months of fiscal 2009, down from $73 million for
the first nine months of fiscal 2008. Lower net interest income
for the three and nine months ended July 26, 2009 was
primarily due to a reduction in the average short term
investment balance, a decrease in interest rates, and an
increase in net realized losses.
Applieds effective income tax rate for the third quarter
of fiscal 2009 was a benefit of 26.0 percent as compared to
a provision of 32.1 percent for the third quarter of fiscal
2008. Applieds effective income tax rate for the first
nine months of fiscal 2009 was a benefit of 32.8 percent as
compared to a provision of 32.8 percent for the first nine
months of fiscal 2008. The change in the fiscal 2009 tax rate
from the fiscal 2008 rate was principally attributable to the
net loss before taxes incurred in fiscal 2009. Applieds
future effective income tax rate depends on various factors,
such as tax legislation, the geographic composition of
Applieds pre-tax income, and the tax rate on equity
compensation. Management carefully monitors these factors and
timely adjusts the interim effective income tax rate accordingly.
Segment
Information
Applied reports financial results in four segments: Silicon,
Applied Global Services, Display, and Energy and Environmental
Solutions. A description of the products and services, as well
as financial data, for each reportable segment can be found in
Note 15 of Notes to Consolidated Condensed Financial
Statements. Applied does not allocate to its reportable segments
certain operating expenses that it manages separately at the
corporate level. These unallocated costs include those for
equity-based compensation and certain components of variable
compensation, the global sales organization, corporate functions
(certain management, finance, legal, human resources, marketing,
and RD&E), and unabsorbed information technology and
occupancy. Applied also does not allocate to its reportable
segments restructuring and asset impairment charges or costs
related to restructuring actions.
The results for each reportable segment are discussed below.
Silicon
Segment
The Silicon segment includes semiconductor capital equipment for
deposition, etch, rapid thermal processing, chemical mechanical
planarization, and metrology and inspection. Development efforts
are focused on solving customers key technical challenges,
including transistor performance and nanoscale patterning, and
on improving chip manufacturing productivity to reduce costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
542
|
|
|
$
|
793
|
|
|
$
|
1,047
|
|
|
$
|
2,929
|
|
Net sales
|
|
|
498
|
|
|
|
756
|
|
|
|
1,304
|
|
|
|
3,261
|
|
Operating income (loss)
|
|
|
56
|
|
|
|
172
|
|
|
|
(6
|
)
|
|
|
1,065
|
|
New orders were down 32 percent to $542 million for
the third quarter of fiscal 2009 compared to the third quarter
of fiscal 2008, and decreased 64 percent to
$1.0 billion for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008. The decline in
orders for the three and nine months ended July 26, 2009
reflected lower demand, primarily from memory customers.
Net sales decreased 34 percent to $498 million for the
third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008, and decreased 60 percent to $1.3 billion
for the first nine months of fiscal 2009 compared to the first
nine months of fiscal 2008. The decrease in net sales for the
three and nine months ended July 26, 2009 was due to
decreased investments, primarily by memory customers.
Operating income decreased 67 percent to $56 million
for the third quarter of fiscal 2009 compared to the third
quarter of fiscal 2008. For the first nine months of fiscal
2009, the Silicon segment reported an operating loss of
$6 million compared to operating income of
$1.1 billion for the first nine months of fiscal 2008. The
decrease in operating income for the three and nine months ended
July 26, 2009 was due to significantly lower sales
resulting in
30
lower factory absorption, partially offset by lower operating
expenses from cost control initiatives. Operating income for the
first nine months of fiscal 2009 also included an increase in
bad debt expense.
Applied
Global Services Segment
The Applied Global Services segment encompasses technically
differentiated products, including spares, services, certain
earlier generation equipment products, and remanufactured
equipment, to improve operating efficiency, reduce operating
costs, and lessen the environmental impact of semiconductor,
display and solar customers factories. Customer demand for
products and services is fulfilled through a global distribution
system with trained service engineers located in close proximity
to customer sites.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
298
|
|
|
$
|
541
|
|
|
$
|
844
|
|
|
$
|
1,753
|
|
Net sales
|
|
|
343
|
|
|
|
607
|
|
|
|
1,007
|
|
|
|
1,801
|
|
Operating income
|
|
|
24
|
|
|
|
145
|
|
|
|
48
|
|
|
|
452
|
|
New orders decreased 45 percent to $298 million for
the third quarter of fiscal 2009 compared to the third quarter
of fiscal 2008, and decreased 52 percent to
$844 million for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008. The decline in
orders for the three and nine months ended July 26, 2009
was primarily due to decreased demand for spares and refurbished
equipment reflecting semiconductor manufacturers lower
wafer production volumes.
Net sales decreased 44 percent to $343 million for the
third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008, and similarly decreased 44 percent to
$1.0 billion for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008. The decrease
in net sales for the three and nine months ended July 26,
2009 reflected lower sales of spares and refurbished equipment.
Operating income decreased 83 percent to $24 million
for the third quarter of fiscal 2009 compared to the third
quarter of fiscal 2008. Operating income decreased
89 percent to $48 million for the first nine months of
fiscal 2009 compared to the first nine months of fiscal 2008.
The decrease in operating income for the three and nine months
ended July 26, 2009 reflected lower sales volumes resulting
in lower infrastructure cost absorption, partially offset by
lower operating expenses from cost control initiatives.
Operating income for the first nine months of fiscal 2009 also
included an increase in bad debt expense.
Display
Segment
The Display segment encompasses products for manufacturing LCDs
for TVs, personal computers and other video-enabled devices. The
business is focused on growth by differentiation with
larger-scale substrates, entry into new markets, and development
of products to enable cost reductions through productivity and
uniformity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
96
|
|
|
$
|
374
|
|
|
$
|
135
|
|
|
$
|
1,422
|
|
Net sales
|
|
|
69
|
|
|
|
311
|
|
|
|
302
|
|
|
|
642
|
|
Operating income (loss)
|
|
|
(5
|
)
|
|
|
103
|
|
|
|
22
|
|
|
|
197
|
|
New orders decreased 74 percent to $96 million for the
third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008, and decreased 91 percent to $135 million
for the first nine months of fiscal 2009 compared to the first
nine months of fiscal 2008. The decline in orders for the three
and nine months ended July 26, 2009 reflected the slowdown
in the display industry from comparable 2008 periods when
display manufacturers added capacity.
31
Net sales decreased 78 percent to $69 million for the
third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008, and decreased 53 percent to $302 million
for the first nine months of fiscal 2009 compared to the first
nine months of fiscal 2008. The decrease in net sales for the
three and nine months ended July 26, 2009 reflected lower
orders.
The Display segment reported an operating loss of
$5 million for the third quarter of fiscal 2009 compared to
operating income of $103 million for the third quarter of
fiscal 2008. Operating income decreased 89 percent to
$22 million for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008. The decrease
in operating income for the three and nine months ended
July 26, 2009 was due to significantly lower revenue,
partially offset by lower operating expenses due to cost control
initiatives.
Energy
and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes products
for fabricating thin film and crystalline silicon (c-Si) solar
PVs, high throughput
roll-to-roll
coating systems for flexible electronics and web products, and
systems used in the manufacture of energy-efficient glass. This
business is focused on delivering solutions to generate and
conserve energy, with an emphasis on lowering the cost to
produce solar power by providing equipment to enhance
manufacturing scale and efficiency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 26,
|
|
|
July 27,
|
|
|
July 26,
|
|
|
July 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
136
|
|
|
$
|
322
|
|
|
$
|
598
|
|
|
$
|
839
|
|
Net sales
|
|
|
224
|
|
|
|
174
|
|
|
|
874
|
|
|
|
382
|
|
Operating income (loss)
|
|
|
(53
|
)
|
|
|
(85
|
)
|
|
|
(211
|
)
|
|
|
(204
|
)
|
New orders decreased 58 percent to $136 million for
the third quarter of fiscal 2009 compared to the third quarter
of fiscal 2008, and decreased 29 percent to
$598 million for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008. The decline in
orders for the three and nine months ended July 26, 2009
was primarily due to decreased demand from SunFab customers and
reflected the challenging global economic environment and solar
manufacturers difficulties in obtaining affordable capital.
Net sales increased 29 percent to $224 million for the
third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008, and more than doubled to $874 million for the
first nine months of fiscal 2009 compared to the first nine
months of fiscal 2008. The increase in net sales for the three
and nine months ended July 26, 2009 reflected an increase
in sales recognized for SunFab and c-Si products. During the
third quarter of fiscal 2009, Applied recognized revenue on its
sixth SunFab thin film production line.
The operating loss in the Energy and Environmental Solutions
segment decreased 38 percent to $53 million for the
third quarter of fiscal 2009 compared to the third quarter of
fiscal 2008 due to higher net sales, partially offset by
increased RD&E expenses. The operating loss increased
3 percent to $211 million for the first nine months of
fiscal 2009 compared to the first nine months of fiscal 2008.
While net sales increased in the first nine months of fiscal
2009, the segment reported a higher operating loss due to
increased RD&E expenses and unfavorable gross margins
associated with initial SunFab line
start-ups,
offset in part by cost control initiatives.
Financial
Condition, Liquidity and Capital Resources
During the nine months ended July 26, 2009, cash, cash
equivalents and investments decreased by $339 million, from
$3.5 billion as of October 26, 2008 compared to
$3.1 billion as of July 26, 2009.
32
Cash, cash equivalents and investments consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
July 26,
|
|
|
October 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
1,556
|
|
|
$
|
1,412
|
|
Short-term investments
|
|
|
583
|
|
|
|
689
|
|
Long-term investments
|
|
|
990
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and investments
|
|
$
|
3,129
|
|
|
$
|
3,468
|
|
|
|
|
|
|
|
|
|
|
Applied generated $93 million of cash from operating
activities for the nine months ended July 26, 2009, mainly
due to collection of accounts receivable and a reduction in
inventories, which was offset in part by the net loss incurred.
The net loss was offset by the effect of non-cash charges,
including depreciation, amortization, restructuring and asset
impairments, equity-based compensation, impairment of equity
method investment and strategic investments, and provision for
bad debts. Applied sold accounts receivable and discounted
certain letters of credit totaling $179 million for the
nine months ended July 26, 2009. Discounting of letters of
credit depends on many factors, including the willingness of
financial institutions to discount the letters of credit and the
cost of such arrangements. For further details regarding
discounting of letters of credit, see Note 5 of Notes to
Consolidated Condensed Financial Statements. Days sales
outstanding for the third quarter of fiscal 2009 decreased to
68 days, compared to 82 days in the second quarter of
fiscal 2009, primarily due to collection efficiencies.
Applied generated $284 million of cash from investing
activities during the nine months ended July 26, 2009.
Proceeds from sales and maturities of investments, net of
purchases of investments, totaled $472 million. Capital
expenditures were $188 million for the nine months ended
July 26, 2009 and included investment in the implementation
of a global business software system.
Applied used $233 million of cash for financing activities
during the nine months ended July 26, 2009, consisting
primarily of $240 million in cash dividends paid to
stockholders and $23 million in common stock repurchases,
offset by $29 million of cash generated from the issuance
of common stock pursuant to Applieds equity compensation
programs. Since November 2008, Applied has temporarily suspended
stock repurchases in order to maintain financial flexibility in
light of uncertain global economic and market conditions.
In each of the first three quarters of fiscal 2009,
Applieds Board of Directors has declared a quarterly cash
dividend in the amount of $0.06 per share. Applied currently
anticipates that cash dividends will continue to be paid on a
quarterly basis, although the declaration and amount of any
future cash dividend is at the discretion of the Board of
Directors and will depend on Applieds 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
Applieds stockholders.
Applied has credit facilities for unsecured borrowings in
various currencies of up to $1.2 billion, of which
$1.0 billion is comprised of a
5-year
revolving credit agreement with a group of banks that is
scheduled to expire in January 2012. This agreement provides for
borrowings at interest rates keyed to one of the two rates
selected by Applied for each advance and includes financial and
other covenants with which Applied was in compliance at
July 26, 2009. In May 2009, Applied amended certain terms
of this credit agreement, including (i) replacing the
funded-debt-to-adjusted-earnings ratio financial covenant with a
minimum liquidity covenant and a funded-debt-to-total-capital
ratio covenant and (ii) increasing the facility fee and
applicable interest rate margins on advances. Remaining credit
facilities in the amount of approximately $160 million are
with Japanese banks. Applieds 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 July 26, 2009.
In the ordinary course of business, Applied provides standby
letters of credit or other guarantee instruments to certain
parties as required for certain transactions initiated by either
Applied or its subsidiaries. As of July 26, 2009, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee arrangements was
$96 million. Applied has not recorded any liability in
connection with these guarantee arrangements beyond that
required to appropriately account for the underlying transaction
being guaranteed.
33
Applied does not believe, based on historical experience and
information currently available, that it is probable that any
amounts will be required to be paid under these guarantee
arrangements.
Applied expects that changes in its business will affect its
working capital components, primarily related to its Energy and
Environmental Solutions segment, which includes products for
manufacturing solar PVs. Applied has entered into contracts with
multiple customers for its SunFab Thin Film Line for projects of
varying scale. Fulfillment of these contracts requires Applied
to invest in inventory, particularly work in process, which
investment may be offset by customer deposits. Changes in these
contracts may result in inventory charges if Applied determines
the inventory to be in excess of anticipated demand.
Applieds investment portfolio consists principally of
investment grade money market mutual funds, U.S. Treasury
and agency securities, municipal bonds, corporate bonds and, to
a lesser extent, mortgage-backed and asset-backed securities, as
well as equity securities. Applied regularly monitors the credit
risk in its investment portfolio and takes appropriate measures,
which may include the sale of certain securities, to manage such
risks prudently in accordance with its investment policies.
During the nine months ended July 26, 2009, as part of its
regular investment review process, Applied recorded impairment
charges of $79 million associated with its equity method
investment in Sokudo and other strategic investments. At
July 26, 2009, Applied had a gross unrealized loss of
$6 million due to a decrease in the fair value of certain
fixed income securities primarily as a result of the continuing
turmoil in the global financial markets. Applied regularly
reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment.
Factors considered in determining whether a loss is temporary
include: the length of time and extent to which fair 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 any
anticipated recovery in fair value. Generally, the contractual
terms of the investments do not permit settlement at prices less
than the amortized cost of the investments. While Applied cannot
predict future market conditions or market liquidity, Applied
believes that its investment policies provide an appropriate
means to manage the risks in its investment portfolio. The
following types of financial instruments may present additional
risks arising from liquidity
and/or
credit concerns: structured investment vehicles, auction rate
securities,
sub-prime
and Alt-A mortgage-backed securities, and
collateralized debt obligations. At July 26, 2009,
Applieds holdings in these categories of investments
totaled $10 million, or less than 1% of total cash, cash
equivalents and investments, which Applied does not consider to
be material. In the event that these categories of investments
become illiquid, Applied does not believe that this will
materially affect its liquidity or results of operations.
During the nine months ended July 26, 2009, Applied
recorded bad debt expense of $63 million as a result of
certain customers deteriorating financial condition. While
Applied believes that its allowance for doubtful accounts at
July 26, 2009 is adequate, it will continue to closely
monitor customer liquidity and other economic conditions.
Applieds cash requirements fluctuate based on the timing
and extent of factors such as those discussed above and in
Part II, Item 1A, Risk Factors.
Applieds management believes that cash generated from
operations, together with the liquidity provided by existing
cash balances and borrowing capability, will be sufficient to
satisfy Applieds liquidity requirements for the next
12 months. For further details regarding Applieds
operating, investing and financing activities, see the
Consolidated Condensed Statements of Cash Flows in this report.
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 requires management to make
judgments, assumptions and estimates that affect the amounts
reported. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both
material to the presentation of Applieds consolidated
financial statements and that requires management to make
difficult, subjective or complex judgments that could have a
material effect on Applieds 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
34
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
Applieds 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 Applieds
operating environment changes. These changes have historically
been minor and have been included in the consolidated financial
statements as soon as they became known. In addition, management
is periodically faced with uncertainties, the outcomes of which
are not within its control and will not be known for prolonged
periods of time. These uncertainties include those discussed in
Part II, Item 1A, Risk Factors. Based on a
critical assessment of its accounting policies and the
underlying judgments and uncertainties affecting the application
of those policies, management believes that Applieds
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 Applieds financial condition and results of operations.
Management believes that the following are critical accounting
policies:
Warranty
Costs
Applied provides for the estimated cost of warranty when revenue
is recognized. Estimated warranty costs are determined by
analyzing specific product and historical configuration
statistics and regional warranty support costs. Applieds
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 Applieds
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 Applieds estimates, revisions to
the estimated warranty liability would be required, which could
have a material adverse effect on Applieds 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 customers 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
Applieds business, financial condition and results of
operations.
Inventory
Valuation
Inventories are generally stated at the lower of cost or market,
with cost determined on a
first-in,
first-out basis. The carrying value of inventory is reduced for
estimated obsolescence by the difference between its cost and
the estimated market value based upon assumptions about future
demand. Applied evaluates the inventory carrying value for
potential excess and obsolete inventory exposures by analyzing
historical and anticipated demand. In addition, inventories are
evaluated for potential obsolescence due to the effect of known
and anticipated engineering change orders and new products. If
actual demand were to be substantially lower than estimated,
additional adjustments for excess or obsolete inventory may be
required, which could have a material adverse effect on
Applieds 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
35
recorded in connection with a business acquisition. The value
assigned to intangible assets is usually based on estimates and
judgments regarding expectations for the success and life cycle
of products and technology acquired. If actual product
acceptance differs significantly from the estimates, Applied may
be required to record an impairment charge to write down the
asset to its realizable value. The fair value of a reporting
unit is estimated using both the income approach and the market
approach. A severe decline in market value could result in an
unexpected impairment charge for impaired goodwill, which could
have a material adverse effect on Applieds business,
financial condition and results of operations.
Income
Taxes
The effective tax rate is highly dependent upon the geographic
composition of worldwide earnings, tax regulations governing
each region, non-tax deductible expenses incurred in connection
with acquisitions and availability of tax credits. Management
carefully monitors the changes in many factors and adjusts the
effective income tax rate as required. If actual results differ
from these estimates, Applied could be required to record a
valuation allowance on deferred tax assets or adjust its
effective income tax rate, which could have a material adverse
effect on Applieds business, financial condition and
results of operations.
Applied accounts for income taxes by recognizing deferred tax
assets and liabilities using statutory tax rates for the effect
of temporary differences between the book and tax bases of
recorded assets and liabilities, net operating losses and tax
credit carryforwards. Deferred tax assets are also reduced by a
valuation allowance if it is more likely than not that a portion
of the deferred tax asset will not be realized. Management has
determined that it is more likely than not that Applieds
future taxable income will be sufficient to realize its deferred
tax assets.
The calculation of tax liabilities involves significant judgment
in estimating the impact of uncertainties in the application of
complex tax laws. Resolution of these uncertainties in a manner
inconsistent with Applieds expectations could have a
material impact on Applieds results of operations and
financial condition.
Equity-Based
Compensation Employee Stock Option Plans and
Employee Stock Purchase Plans
The fair value of stock options and Employee Stock Purchase Plan
shares is estimated using a Black-Scholes option valuation
model. This methodology requires the use of subjective
assumptions including expected stock price volatility and the
estimated life of each award. The fair value of equity-based
compensation awards less the estimated forfeitures is amortized
over the service period of the award, and Applied has elected to
use the straight-line method. The fair value of restricted stock
units is calculated based upon the fair market value of Applied
common stock at the date of grant. (See Note 1 of Notes to
Consolidated Condensed Financial Statements.)
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Applieds investment portfolio includes fixed-income
securities with a fair value of approximately $1.7 billion
at July 26, 2009. These securities are subject to interest
rate risk and will decline in value if interest rates increase.
Based on Applieds investment portfolio at July 26,
2009, an immediate 100 basis point increase in interest
rates would result in a decrease in the fair value of the
portfolio of approximately $20 million. While an increase
in interest rates reduces the fair value of the investment
portfolio, Applied will not realize the losses in the
consolidated condensed statement of operations unless the
individual fixed-income securities are sold prior to recovery or
the loss is determined to be
other-than-temporary.
Certain operations of Applied are conducted in foreign
currencies. Applied enters into currency forward exchange and
option contracts to hedge a portion of, but not all, existing
and anticipated foreign currency denominated transactions
expected to occur within 24 months. Gains and losses on
these contracts are generally recognized in income at the time
that the related transactions being hedged are recognized.
Because the effect of movements in currency exchange rates on
currency forward exchange and option contracts generally offsets
the related effect on the underlying items being hedged, these
financial instruments are not expected to subject Applied to
risks that would otherwise result from changes in currency
exchange rates. Applied does not use derivative financial
instruments for trading or speculative purposes. For further
details, see Note 4 and Note 11 of Notes to
Consolidated Condensed Financial Statements.
36
|
|
Item 4.
|
Controls
and Procedures
|
As required by
Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended (Exchange
Act), Applieds management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation as
of the end of the period covered by this report, of the
effectiveness of Applieds disclosure controls and
procedures as defined in Exchange Act
Rule 13a-15(e).
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that Applieds disclosure
controls and procedures were effective as of the end of the
period covered by this report in ensuring that information
required to be disclosed in Applieds SEC reports is
(i) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms, and
(ii) accumulated and communicated to Applieds
management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
As required by
Rule 13a-15(d),
Applieds management, including the Chief Executive Officer
and Chief Financial Officer, also conducted an evaluation of
Applieds internal control over financial reporting to
determine whether any changes occurred during the fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, Applieds internal control over
financial reporting. Based on that evaluation, there has been no
such change during the fiscal quarter.
It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be
met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future
events.
37
PART II.
OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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The information set forth above under the caption Legal
Matters in Note 9 contained in Notes to Consolidated
Condensed Financial Statements is incorporated herein by
reference.
The risk factors set forth below include any material changes
to, and supersede the description of, the risk factors disclosed
in Item 1A of Applieds 2008
Form 10-K.
The
industries that Applied serves are volatile and difficult to
predict.
As a supplier to the global semiconductor, flat panel display,
solar and related industries, Applied is subject to business
cycles, the timing, length and volatility of which can be
difficult to predict and which vary by reportable segment. These
industries historically have been cyclical due to sudden changes
in customers manufacturing capacity requirements and
spending, which depend in part on customers capacity
utilization, production volumes, end-use demand, inventory
levels relative to demand, and access to affordable capital.
These changes have affected the timing and amounts of
customers purchases and investments in technology, and
continue to affect Applieds orders, net sales, operating
expenses and net income.
To meet rapidly changing demand in the industries it serves,
Applied must effectively manage its resources and production
capacity for each of its segments as well as across multiple
segments. The challenging economic and industry conditions have
adversely affected Applieds customers and led to a
significant decrease in demand for many of Applieds
products, although indications of improving conditions are
beginning to appear. During periods of decreasing demand for
Applieds products, Applied must be able to appropriately
align its cost structure with prevailing market conditions;
effectively manage its supply chain; and motivate and retain key
employees. During periods of increasing demand, Applied must
have sufficient manufacturing capacity and inventory to meet
customer demand; effectively manage its supply chain; and
attract, retain and motivate a sufficient number of qualified
individuals. If Applied is not able to timely and appropriately
adapt to changes in its business environment, Applieds
business, financial condition or results of operations may be
materially and adversely affected.
Applied
is exposed to risks associated with the ongoing financial crisis
and weakening global economy.
The tightening of the credit markets, turmoil in the financial
markets, and weakening global economy experienced over the last
several quarters contributed to significant slowdowns in the
industries in which Applied operates, which slowdowns may worsen
if these economic conditions are prolonged or deteriorate
further. The markets for semiconductors and flat panel displays
in particular depend largely on consumer spending. Economic
uncertainty exacerbates negative trends in consumer spending and
may cause certain Applied customers to push out, cancel, or
refrain from placing orders for equipment or services, which may
reduce net sales, reduce backlog, and affect Applieds
ability to convert backlog to sales. Difficulties in obtaining
capital and uncertain market conditions may also lead to the
inability of some customers to obtain affordable financing and
to customer insolvencies, resulting in lower sales
and/or
additional inventory or bad debt expense for Applied. These
conditions may also similarly affect key suppliers, which could
impair their ability to deliver parts and result in delays for
Applieds products. In addition, these conditions may lead
to strategic alliances by, or consolidation of, other equipment
manufacturers, which could adversely affect Applieds
ability to compete effectively.
Further, these adverse conditions and uncertainty about future
economic and industry conditions make it challenging for Applied
to forecast its operating results, make business decisions, and
identify the risks that may affect its business, sources and
uses of cash, financial condition and results of operations.
Applied may be required to implement additional cost reduction
efforts, including restructuring activities,
and/or
modify its business model, which may adversely affect
Applieds ability to capitalize on opportunities in a
market recovery. In addition, Applied maintains an investment
portfolio that is subject to general credit, liquidity, foreign
exchange, market and interest rate risks and that also includes
some exposure to asset-backed and mortgage-backed securities.
The risks to Applieds investment portfolio may be
exacerbated by deteriorating financial market conditions and, as
a result, the
38
value and liquidity of the investment portfolio could be
negatively impacted and lead to impairment charges. If Applied
is not able to timely and appropriately adapt to changes
resulting from the difficult macroeconomic environment and
industry conditions, Applieds business, financial
condition or results of operations may be materially and
adversely affected.
Applied
is exposed to risks as a result of ongoing changes in the
various industries in which it operates.
The global semiconductor, flat panel display, solar and related
industries in which Applied operates are characterized by
ongoing changes affecting some or all of these industries,
including:
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increasing capital requirements for building and operating new
fabrication plants and customers ability to raise the
necessary capital, particularly in a difficult financial market;
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differences in growth rates among the semiconductor, display and
solar industries;
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abrupt and unforeseen shifts in the nature and amount of
customer and end-user demand;
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the increasing cost and complexity for customers to move from
product design to volume manufacturing, which may slow the
adoption rate for new manufacturing technology;
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the importance of reducing the total cost of manufacturing
system ownership, due in part to demand for lower-cost consumer
electronics;
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fluctuating levels of business information technology spending;
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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;
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increased need to develop products with sufficient
differentiation to influence customers purchasing
decisions;
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requirements for shorter cycle times for the development,
manufacture and installation of manufacturing equipment;
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price and performance trends for semiconductor devices, LCDs and
solar PVs, and the corresponding effect on demand for such
products;
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the increasing importance of the availability of spare parts to
maximize the time that customers systems are available for
production;
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the increasing role for and complexity of software in Applied
products; and
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the increasing focus on reducing energy usage and improving the
environmental impact and sustainability associated with
manufacturing operations.
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If Applied does not successfully manage the risks resulting from
the ongoing changes in the semiconductor, flat panel display,
solar and related industries, its business, financial condition
and results of operations could be materially and adversely
affected.
Applied
is exposed to risks as a result of ongoing changes specific to
the semiconductor industry.
The greatest portion of Applieds revenues and
profitability historically has been derived from sales of
manufacturing equipment to the global semiconductor industry. In
addition, a majority of the revenues of Applied Global Services
is from sales of service products to semiconductor
manufacturers. Accordingly, adverse changes in the semiconductor
industry that result in decreased spending by customers may
negatively impact the Companys financial condition and
results of operations. Furthermore, the semiconductor industry
is characterized by ongoing changes particular to that industry,
in addition to the general industry changes described in the
preceding risk factor, which include:
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the increasing cost of research and development due to many
factors, including: decreasing linewidths on a chip; the use of
new materials such as cobalt and yttrium; more complex device
structures; more applications
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39
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and process steps; increasing chip design costs; and the
increasing cost and complexity of an integrated manufacturing
process;
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the growing number of types and varieties of semiconductors and
number of applications across multiple substrate sizes;
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differing market growth rates and capital requirements for
memory (including NAND flash and DRAM), logic and foundry;
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the increasing cost and complexity for semiconductor
manufacturers to move volume manufacturing to more technically
advanced capability and smaller linewidths, and the resulting
impact on the rates of technology transition and investment in
capital equipment;
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semiconductor manufacturers increasing adoption of more
productive 300mm systems rather than 200mm systems;
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the decreasing profitability of many semiconductor
manufacturers, causing them to enter into collaboration or
cost-sharing arrangements with other manufacturers, outsource
manufacturing activities, focus only on specific markets or
applications,
and/or
purchase less manufacturing equipment, which puts downward
pressure on sales prices for, and the rate of investment in,
capital equipment;
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technology developments in related markets, such as lithography,
to which Applied may need to adapt;
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the increasing market fragmentation for semiconductors, leading
certain markets to become too small to support the cost of a new
fabrication plant; and
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the cost, technical complexity and timing of a proposed
transition from 300 mm to 450 mm wafers.
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If Applied does not successfully manage the risks resulting from
the ongoing changes occurring in the semiconductor industry, its
business, financial condition and results of operations could be
materially and adversely affected.
Applied
is exposed to risks as a result of ongoing changes specific to
the flat panel display industry.
The global flat panel display industry historically has
experienced considerable volatility in capital equipment
investment levels, due in part to the limited number of LCD
manufacturers and the concentrated nature of LCD end-use
applications. Recently, industry growth has depended to a
considerable extent on consumer demand for increasingly larger
and more advanced TVs. In addition to the general industry
changes described above in the third risk factor, the display
industry is characterized by ongoing changes particular to that
industry. These include technical and financial difficulties
associated with transitioning to larger substrate sizes for
LCDs, and the effect of a slowing rate of transition to larger
substrate sizes on capital intensity and product
differentiation. If Applied does not successfully manage the
risks resulting from the ongoing changes occurring in the
display industry, its business, financial condition and results
of operations could be materially and adversely affected.
Applied
is exposed to risks as a result of ongoing changes specific to
the solar industry.
Applied anticipates that an increasing portion of its business
will be in the emerging solar market, which, in addition to the
general industry changes described above in the third risk
factor, is characterized by ongoing changes specific to the
solar industry, including:
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the impact on demand for solar PV products arising from the cost
and performance of solar PV technology compared to the cost of
electricity from the existing grid or other energy sources;
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the critical role played by energy policies of governments
around the world in influencing the rate of growth of the solar
market including the availability and amount of government
incentives for solar power such as tax credits, rebates,
renewable portfolio standards that require electricity providers
to sell a targeted amount of energy from renewable sources, and
goals for solar installations on government facilities;
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the extent of investment or participation in the solar market by
utilities that generate, transmit or distribute power to
end-users;
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40
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evolving industry standards, such as a standard form factor for
thin film solar modules;
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varying levels of infrastructure investment for smart
grid technologies to modernize and enhance the
transmission, distribution and use of electricity, which link
distributed solar PV sources to population centers, increase
transmission capability, and optimize power usage;
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regulatory and third party certification requirements, and
customers ability to timely satisfy such requirements;
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access to affordable financing and capital by customers and
end-users; and
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increasingly greater factory output and scalability of solar PVs.
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If Applied does not successfully manage the risks resulting from
the ongoing changes occurring in the solar industry, its
business, financial condition and results of operations could be
materially and adversely affected.
Applied
must adapt its business and product offerings to respond to
competition and rapid technological changes.
As Applied operates in a highly competitive environment, its
future success depends on many factors, including the effective
commercialization and customer acceptance of its
nanomanufacturing technology equipment, service and related
products. In addition, Applied must successfully execute its
growth strategy, including enhancing market share in existing
markets, expanding into related markets, cultivating new markets
and exceeding industry growth rates, while constantly improving
its operational performance. The development, introduction and
support of a broadening set of products in more varied
competitive environments have grown increasingly complex and
expensive over time. Furthermore, new or improved products may
entail higher costs and reduced profits. Applieds success
is subject to many risks, including but not limited to its
ability to timely, cost-effectively and successfully:
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develop new products, improve
and/or
develop new applications for existing products, and adapt
similar products for use by customers in different applications
and/or
markets with varying technical requirements;
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appropriately price and achieve market acceptance of products;
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differentiate its products from those of competitors and any
disruptive technologies, meet performance specifications, and
drive efficiencies and cost reductions;
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maintain operating flexibility to enable different responses to
different markets, customers and applications;
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allocate resources, including people and R&D funding, among
Applieds products and between the development of new
products and the enhancement of existing products, as most
appropriate and effective for future growth;
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accurately forecast demand, work with suppliers and meet
production schedules for its products;
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improve its manufacturing processes and achieve cost
efficiencies across product offerings;
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adapt to changes in value offered by companies in different
parts of the supply chain;
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qualify products for volume manufacturing with its customers;
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implement changes in its design engineering methodology,
including those that enable reduction of material costs and
cycle time, greater commonality of platforms and types of parts
used in different systems, greater effectiveness of product life
cycle management, and reduced energy usage and environmental
impact; and
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accomplish the simultaneous
start-up of
multiple integrated thin film solar production lines.
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If Applied does not successfully manage these challenges, its
business, financial condition and results of operations could be
materially and adversely affected.
41
Operating
in multiple industries and the entry into new markets and
industries entail additional challenges.
As part of its growth strategy, Applied must successfully expand
into related or new markets and industries, either with its
existing nanomanufacturing technology products or with new
products developed internally or obtained through acquisitions.
The entry into different markets involves additional challenges,
including those arising from:
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the need to devote additional resources to develop new products
for, and operate in, new markets;
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differing rates of profitability and growth among its multiple
businesses;
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Applieds ability to anticipate demand, capitalize on
opportunities, and avoid or minimize risks;
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the complexity of managing multiple businesses with variations
in production planning, execution, supply chain management and
logistics;
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the adoption of new business models, such as the supply of an
integrated production line consisting of a suite of Applied and
non-Applied equipment to manufacture solar PVs;
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the need to develop adequate new business processes and systems;
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Applieds ability to rapidly expand its operations to meet
increased demand and the associated effect on working capital;
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new materials, processes and technologies;
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the need to attract, motivate and retain employees with skills
and expertise in these new areas;
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new and more diverse customers and suppliers, including some
with limited operating histories, uncertain
and/or
limited funding, evolving business models
and/or
locations in regions where Applied does not have existing
operations;
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different customer service requirements;
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new and/or
different competitors with potentially more financial or other
resources and industry experience;
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entry into new industries and countries, with differing levels
of government involvement, laws and regulations, and business,
employment and safety practices;
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third parties intellectual property rights; and
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the need to comply with, or work to establish, industry
standards and practices.
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If Applied does not successfully manage the risks resulting from
its diversification and entry into new markets and industries,
its business, financial condition and results of operations
could be materially and adversely affected.
Applied
is exposed to the risks of operating a global
business.
In the third quarter of fiscal 2009, approximately
88 percent of Applieds net sales were to customers in
regions outside the United States. Certain of Applieds
R&D
and/or
manufacturing facilities, as well as suppliers to Applied, are
also located outside the United States, including in China.
Applied is also expanding its business and operations in new
countries. The global nature of Applieds business and
operations presents challenges, including but not limited to
those arising from:
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varying regional and geopolitical business conditions and
demands;
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changes in political and social attitudes, laws, rules,
regulations and policies to favor domestic companies over
non-domestic companies;
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variations among, and changes in, local, regional, national or
international laws and regulations (including tax and import
/export restrictions), as well as the interpretation and
application of such laws and regulations;
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42
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global trade issues, including those related to the
interpretation and application of import and export licenses;
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variations in protection of intellectual property and other
legal rights;
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positions taken by U.S. governmental agencies regarding
possible national commercial
and/or
security issues posed by international business operations;
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fluctuating raw material and energy costs;
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variations in the ability to develop relationships with
suppliers and other local businesses;
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fluctuations in interest rates and currency exchange rates,
including the relative strength or weakness of the
U.S. dollar;
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the need to provide sufficient levels of technical support in
different locations;
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political instability, natural disasters (such as earthquakes,
floods or storms), pandemics, terrorism or acts of war in
locations where Applied has operations, suppliers or sales;
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cultural differences;
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customer- or government-supported efforts to promote the
development and growth of local competitors;
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shipping costs
and/or
delays;
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difficulties and uncertainties associated with the entry into
new countries;
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uncertainties with respect to economic growth rates in various
countries; and
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uncertainties with respect to growth rates for the manufacture
and sales of semiconductors, LCDs and solar cells in the
developing economies of certain countries.
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Many of these challenges are present in China, which is
experiencing significant growth of both suppliers and
competitors to Applied, and which Applied believes presents a
large potential market for its products and opportunity for
growth over the long term. In addition, Applied must regularly
reassess the size, capability and location of its global
infrastructure and make appropriate changes. Applied must also
have effective change management processes and procedures to
address changes in its business and operations. These challenges
may materially and adversely affect Applieds business,
financial condition and results of operations.
Applied
is exposed to risks associated with a highly concentrated
customer base.
Applieds semiconductor and flat panel display customer
bases historically have been, and are becoming even more, highly
concentrated as a result of industry conditions. These
conditions are also adversely affecting customers
profitability and access to capital, which leads to lower
R&D funding and capital expenditures. In addition, certain
customers have entered into strategic alliances or industry
consortia that have increased the influence of key industry
participants in technology decisions made by their partners. In
the solar area, while the number of solar PV manufacturing
customers increases as the number of market entrants grows, the
size of contracts with particular customers is expected to rise
substantially as the industry moves to greater solar module
factory output capacity. The ongoing adverse conditions in the
credit and financial markets and industry slowdowns have caused,
and may continue to cause, some customers to postpone delivery,
reduce or cancel orders, exit businesses, merge with other
manufacturers or file for bankruptcy protection and potentially
cease operations. In this environment, contracts or orders from
a relatively limited number of semiconductor, display and solar
manufacturers have accounted for, and are expected to continue
to account for, a substantial portion of Applieds
business. In addition, the mix and type of customers, and sales
to any single customer, may vary significantly from quarter to
quarter and from year to year. If customers do not place orders,
or they substantially reduce, delay or cancel orders, Applied
may not be able to replace the business. As Applieds
products are configured to customer specifications, changing,
rescheduling or canceling orders may result in significant,
non-recoverable costs. Major customers may also seek, and on
occasion receive, pricing, payment, intellectual
property-related, or other commercial terms that are less
favorable to Applied. In addition, certain customers have
undergone significant
43
ownership
and/or
management changes, outsourced manufacturing activities, engaged
in collaboration or cooperation arrangements with other
customers, or consolidated with other customers, each of which
may result in additional complexities in managing customer
relationships and transactions, as well as cancelled or
decreased orders and lower net sales. These factors could have a
material adverse effect on Applieds business, financial
condition and results of operations.
Applied
is exposed to risks associated with acquisitions and strategic
investments.
Applied has made, and in the future intends to make,
acquisitions of, and investments in, companies, technologies or
products in existing, related or new markets for Applied.
Acquisitions involve numerous risks, including but not limited
to:
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diversion of managements attention from other operational
matters;
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inability to complete acquisitions as anticipated or at all;
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inability to realize anticipated benefits;
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failure to commercialize purchased technologies;
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inability to capitalize on characteristics of new markets that
may be significantly different from Applieds existing
markets and where competitors may have stronger market positions;
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exposure to operational risks, rules and regulations to the
extent such activities are located in countries where Applied
has not historically conducted business;
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challenges associated with managing larger, more diverse and
more widespread operations;
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inability to obtain and protect intellectual property rights in
key technologies;
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inadequacy or ineffectiveness of an acquired companys
internal controls;
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impairment of acquired intangible assets as a result of
technological advancements or
worse-than-expected
performance of the acquired company or its product offerings;
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unknown, underestimated
and/or
undisclosed commitments or liabilities;
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inappropriate scale of acquired entities critical
resources or facilities for business needs; and
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ineffective integration of operations, systems, technologies,
products or employees of the acquired companies.
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Applied also makes strategic investments in other companies,
including companies formed as joint ventures, which may decline
in value
and/or not
meet desired objectives. The success of these investments
depends on various factors over which Applied may have limited
or no control and, particularly with respect to joint ventures,
requires ongoing and effective cooperation with strategic
partners. The risks to Applieds strategic investment
portfolio may be exacerbated by unfavorable financial market and
macroeconomic conditions and, as a result, the value of the
investment portfolio could be negatively impacted and lead to
impairment charges. Mergers and acquisitions and strategic
investments are inherently subject to significant risks, and the
inability to effectively manage these risks could materially and
adversely affect Applieds business, financial condition
and results of operations. If Applied does not successfully
manage the risks associated with acquisitions and strategic
investments, its business, financial condition and results of
operations could be materially and adversely affected.
Manufacturing
interruptions or delays could affect Applieds ability to
meet customer demand, while the failure to estimate customer
demand accurately could result in excess or obsolete
inventory.
Applieds business depends on its ability to timely supply
equipment, services and related products that meet the rapidly
changing technical and volume requirements of its customers,
which depends in part on the timely delivery of parts,
components and subassemblies (collectively, parts) from
suppliers. Some key parts may be subject to long lead-times
and/or
obtainable only from a single supplier or limited group of
suppliers, and some sourcing or subassembly is provided by
suppliers located in countries other than the United States,
including China. Further, the
44
ongoing adverse conditions in the credit and financial markets
and industry slowdowns have caused, and may continue to cause,
some suppliers to scale back operations, exit businesses, merge
with other companies, or file for bankruptcy protection and
possibly cease operations, potentially affecting Applieds
ability to obtain parts. Applied may experience significant
interruptions of its manufacturing operations, delays in its
ability to deliver products or services, increased costs or
customer order cancellations as a result of:
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the failure or inability of suppliers to timely deliver quality
parts;
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volatility in the availability and cost of materials;
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difficulties or delays in obtaining required import or export
approvals;
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information technology or infrastructure failures;
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natural disasters (such as earthquakes, floods or
storms); or
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other causes (such as regional economic downturns, pandemics,
political instability, terrorism, or acts of war) that could
result in delayed deliveries, manufacturing inefficiencies,
increased costs or order cancellations.
|
In addition, Applieds need to rapidly increase its
business and manufacturing capacity to meet increases in demand
or expedited shipment schedules may exacerbate any interruptions
in Applieds manufacturing operations and supply chain and
the associated effect on Applieds working capital.
Moreover, if actual demand for Applieds products is
different than expected, Applied may purchase more/fewer parts
than necessary or incur costs for canceling, postponing or
expediting delivery of parts. The volatility of demand for
capital equipment increases capital, technical and other risks
for companies in the supply chain. Any or all of these factors
could materially and adversely affect Applieds business,
financial condition and results of operations.
The
failure to successfully implement and conduct off-shoring and
outsourcing activities and other operational initiatives could
adversely affect results of operations.
To better align its costs with market conditions, increase its
presence in growing markets, enhance productivity, and improve
efficiencies, Applied conducts engineering, software development
and other operations in regions outside the United States,
particularly India and China, and outsources certain functions
to third parties, including companies in the United States,
India, China and other countries. Outsourced functions include
certain engineering, manufacturing, customer support, software
development, information technology support, finance and
administrative activities. The expanding role of third party
providers has required changes to Applieds existing
operations and the adoption of new procedures and processes for
retaining and managing these providers, as well as
redistributing responsibilities as warranted, in order to
realize the potential productivity and operational efficiencies,
assure quality and continuity of supply, and protect
Applieds intellectual property. In addition, Applied has
implemented several key operational initiatives intended to
improve manufacturing efficiency, including
integrate-to-order,
module-final-test and
merge-in-transit
programs. Applied also is implementing a multi-year,
company-wide program to transform certain business processes,
including the transition to a single enterprise resource
planning (ERP) software system to perform various functions. The
implementation of additional functionality to the ERP system
entails certain risks, including difficulties with changes in
business processes that could disrupt Applieds operations,
such as its ability to track orders and timely ship products,
project inventory requirements, manage its supply chain and
aggregate financial and operational data.
If Applied does not effectively develop and implement its
off-shoring and outsourcing strategies, if required export and
other governmental approvals are not timely obtained, if
Applieds third party providers do not perform as
anticipated, or if there are delays or difficulties in
implementing a new ERP system or enhancing business processes,
Applied may not realize anticipated productivity improvements or
cost efficiencies, and may experience operational difficulties,
increased costs (including energy and transportation),
manufacturing interruptions or delays, inefficiencies in the
structure
and/or
operation of its supply chain, loss of its intellectual property
rights, quality issues, increased product
time-to-market
and/or
inefficient allocation of human resources, any or all of which
could materially and adversely affect Applieds business,
financial condition and results of operations.
45
The
ability to attract, retain and motivate key employees is vital
to Applieds success.
Applieds success and competitiveness depend in large part
on its ability to attract, retain and motivate key employees.
Achieving this objective may be difficult due to many factors,
including fluctuations in global economic and industry
conditions, changes in Applieds management or leadership,
competitors hiring practices, cost reduction activities
(including workforce reductions, unpaid shutdowns and salary
reductions), and the effectiveness of Applieds
compensation programs, including its equity-based programs.
Applied periodically evaluates its overall compensation program
and makes adjustments, as appropriate, to enhance its
competitiveness. If Applied does not successfully attract,
retain and motivate key employees, Applied may be unable to
capitalize on its opportunities and its operating results may be
materially and adversely affected.
Changes
in tax rates or tax assets and liabilities could affect results
of operations.
As a global company, Applied is subject to taxation in the
United States and various other countries. Significant judgment
is required to determine and estimate worldwide tax liabilities.
Applieds future annual and quarterly tax rates could be
affected by numerous factors, including changes in the:
(1) applicable tax laws; (2) amount and composition of
pre-tax income in countries with differing tax rates; or
(3) valuation of Applieds deferred tax assets and
liabilities. In addition, Applied is subject to regular
examination by the Internal Revenue Service and other tax
authorities, and from time to time initiates amendments to
previously filed tax returns. Applied regularly assesses the
likelihood of favorable or unfavorable outcomes resulting from
these examinations and amendments to determine the adequacy of
its provision for income taxes. 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 Applieds historical income tax
provisions and accruals, which could materially and adversely
affect Applieds financial condition and results of
operations.
Applied
is exposed to various risks related to legal proceedings or
claims and protection of intellectual property
rights.
Applied from time to time is, and in the future may be, involved
in legal proceedings or claims regarding patent infringement,
intellectual property rights, antitrust, environmental
regulations, securities, contracts, product performance, product
liability, unfair competition, employment and other matters. In
addition, Applied on occasion receives notification from
customers who believe that Applied owes them indemnification or
other obligations related to claims made against such customers
by third parties. These legal proceedings and claims, whether
with or without merit, may be time-consuming and expensive to
prosecute or defend, divert managements attention and
resources,
and/or
inhibit Applieds ability to sell its products. There can
be no assurance regarding the outcome of current or future legal
proceedings or claims. Applied previously entered into a mutual
covenant-not-to-sue arrangement with one of its competitors to
decrease the risk of patent infringement lawsuits in the future.
There can be no assurance that the intended results of this
arrangement will be achieved or that Applied will be able to
adequately protect its intellectual property rights with the
restrictions associated with such a covenant. In addition,
Applieds success depends in significant part on the
protection of its intellectual property and other rights.
Infringement of Applieds 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. Applieds intellectual property
rights may not provide significant competitive advantages if
they are circumvented, invalidated, rendered obsolete by the
rapid pace of technological change, or if Applied does not
adequately protect or assert these rights. Furthermore, the laws
and practices of other countries, including China, India, Taiwan
and Korea, permit the protection and enforcement of
Applieds rights to varying extents, which may not be
sufficient to protect Applieds rights. If Applied is not
able to obtain or enforce intellectual property rights, resolve
or settle claims, obtain necessary licenses on commercially
reasonable terms,
and/or
successfully prosecute or defend its intellectual property
position, Applieds business, financial condition and
results of operations could be materially and adversely affected.
46
Applied
is subject to risks of non-compliance with environmental and
safety regulations.
Applied is subject to environmental and safety regulations in
connection with its global business operations, including but
not limited to: regulations related to the development,
manufacture and use of its products; recycling and disposal of
materials used in its products or in producing its products; the
operation of its facilities; and the use of its real property.
The failure or inability to comply with existing or future
environmental and safety regulations could result in:
(1) significant remediation liabilities; (2) the
imposition of fines; (3) the suspension or termination of
the development, manufacture, sale or use of certain of its
products; (4) limitations on the operation of its
facilities or ability to use its real property;
and/or
(5) a decrease in the value of its real property, each of
which could have a material adverse effect on Applieds
business, financial condition and results of operations.
Applied
is exposed to various risks related to the regulatory
environment.
Applied is subject to various risks related to: (1) new,
different, inconsistent or even conflicting laws, rules and
regulations that may be enacted by legislative bodies
and/or
regulatory agencies in the countries in which Applied operates;
(2) disagreements or disputes between national or regional
regulatory agencies related to international trade; and
(3) the interpretation and application of laws, rules and
regulations. If Applied is found by a court or regulatory agency
not to be in compliance with applicable laws, rules or
regulations, Applieds business, financial condition and
results of operations could be materially and adversely affected.
Applied
is subject to internal control evaluations and attestation
requirements of Section 404 of the Sarbanes-Oxley
Act.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
Applied must include in its Annual Report on
Form 10-K
a report of management on the effectiveness of Applieds
internal control over financial reporting. Ongoing compliance
with this requirement is complex, costly and time-consuming. If
Applied fails to maintain effective internal control over
financial reporting or Applieds management does not timely
assess the adequacy of such internal control, Applied could be
subject to regulatory sanctions and the publics perception
of Applied may decline.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
|
|
Item 5.
|
Other
Information
|
None.
47
Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of
Regulation S-K:
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10
|
.68
|
|
Applied Materials, Inc. Stock Purchase Plan for Offshore
Employees, amended and restated effective as of June 8,
2009 (incorporated by reference to Applieds Registration
Statement on
Form S-8
(file
no. 333-160819)
filed July 27, 2009)
|
|
10
|
.69
|
|
Applied Materials, Inc. Employees Stock Purchase Plan,
amended and restated effective as of June 8, 2009
(incorporated by reference to Applieds Post-Effective
Amendment No. 1 to Registration Statement on
Form S-8
(file
no. 333-143377)
filed July 27, 2009)
|
|
10
|
.70
|
|
Applied Materials, Inc. Employees Stock Purchase Plan,
amended and restated effective as of September 1, 2009
(incorporated by reference to Applieds Post-Effective
Amendment No. 1 to Registration Statement on
Form S-8
(file
no. 333-143377)
filed July 27, 2009)
|
|
10
|
.71
|
|
Amendment No. 1 to the U.S. $1,000,000,000 Credit Agreement
dated as of May 22, 2009 among Applied Materials, Inc., as
borrower, several lenders named therein and Citicorp USA, Inc.,
as agent for the lenders. (Confidential treatment has been
requested for redacted portions of the agreement.)
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
APPLIED MATERIALS, INC.
George S. Davis
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
September 1, 2009
|
|
|
|
By:
|
/s/ YVONNE
WEATHERFORD
|
Yvonne Weatherford
Corporate Vice President,
Corporate Controller
(Principal Accounting Officer)
September 1, 2009
49