UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark one)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
October 26, 2008
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or
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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
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94-1655526
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3050 Bowers Avenue, P.O. Box 58039
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95052-8039
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Santa Clara, California
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(408) 727-5555
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share
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The NASDAQ Stock Market LLC
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Rights to Purchase Series A Junior Participating Preferred
Stock
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known,
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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accelerated
filer
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Accelerated
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Non-accelerated
filer
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Smaller
reporting
company
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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
Act). Yes
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No
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Aggregate market value of the voting stock held by
non-affiliates of the registrant as of April 25, 2008,
based upon the closing sale price reported by the NASDAQ Global
Select Market on that date: $25,798,127,144
Number of shares outstanding of the registrants Common
Stock, $.01 par value, as of November 21, 2008:
1,328,871,245
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for Applied
Materials, Inc.s Annual Meeting of Stockholders to be held
on March 10, 2009 are incorporated by reference into
Part III of this
Form 10-K.
Caution
Regarding Forward-Looking Statements
Certain information in this Annual Report on
Form 10-K
(report or
Form 10-K)
of Applied Materials, Inc. and its subsidiaries (Applied or the
Company), including Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7, is forward-looking in nature. All statements in
this report, including 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 results,
operating results, cash flows and cash deployment strategies,
business strategies, costs, products, working capital,
competitive positions, managements plans and objectives
for future operations, research and development, acquisitions
and joint ventures, growth opportunities, customer contracts,
investments, liquidity, declaration of dividends, and legal
proceedings, as well as market conditions and industry trends.
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 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
report or elsewhere by Applied or on its behalf. Applied
undertakes no obligation to revise or update any forward-looking
statements.
The following information should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes to
Consolidated Financial Statements included in this report.
APPLIED
MATERIALS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 26, 2008
TABLE OF
CONTENTS
PART I
Incorporated in 1967, Applied, a Delaware corporation, 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. Nanomanufacturing is the
production of ultra-small structures, including the engineering
of thin films on substrates. Applieds customers include
manufacturers of semiconductor wafers and chips, flat panel
liquid crystal displays (LCDs), solar photovoltaic cells and
modules (solar PVs), and other electronic devices, who use what
they manufacture in their own end products or sell the items to
other companies for use in advanced electronic components. The
Companys fiscal year ends on the last Sunday in October.
Applied is the worlds largest semiconductor fabrication
equipment supplier based on revenue, with the capability to
provide global deployment and support services. Applied also is
a global leader in LCD fabrication equipment, and is a leading
supplier of solar PV manufacturing solutions to the emerging
solar industry.
Applied operates in four reportable segments: Silicon, Applied
Global Services, Display, and Energy and Environmental
Solutions. A summary of financial information for each
reportable segment is found in Note 10 of Notes to
Consolidated Financial Statements. A discussion of factors that
could affect Applieds operations is set forth under
Risk Factors in Item 1A, which is incorporated
herein by reference.
Silicon
Segment
Applieds Silicon Systems Group (SSG), reported under its
Silicon segment, develops, manufactures and sells a wide range
of manufacturing equipment used to fabricate semiconductor
chips, also referred to as integrated circuits (ICs). Most chips
are built on a silicon wafer base and include a variety of
circuit components, such as transistors and other devices, that
are connected by multiple layers of wiring (interconnects).
Applied offers systems that perform most of the primary
processes used in chip fabrication including: atomic layer
deposition (ALD), chemical vapor deposition (CVD), physical
vapor deposition (PVD), etch, rapid thermal processing (RTP),
chemical mechanical planarization (CMP) and wafer metrology and
inspection, as well as systems that etch, clean, measure and
inspect circuit patterns on masks used in the photolithography
process. Applieds semiconductor manufacturing systems are
used by both integrated device manufacturers and foundries to
build memory, logic and other types of chips.
To build a chip, the transistors, capacitors and other circuit
components are first created on the surface of the wafer by
performing a series of processes to deposit and selectively
remove portions of successive film layers. Similar processes are
then used to build the layers of wiring structures on the wafer.
As the density of the circuit components increases to enable
greater computing capability in the same or smaller area, the
complexity of building the chip also increases, necessitating
more process steps to form smaller structures and more intricate
wiring schemes. A typical, simplified process sequence for
building the wiring or interconnect portion of a chip involves
initially depositing a dielectric film layer onto the base layer
of circuit components using a CVD system. An etch system is then
used to create openings and patterns in the dielectric layer. To
form the metal interconnects, these openings and patterns are
subsequently filled with conducting material using PVD
and/or
electroplating technologies. A CMP step then polishes the wafer
to achieve a flat surface. Additional deposition, etch and CMP
steps are then performed to build up the layers needed to
complete the interconnection of the circuit elements. Advanced
chip designs require about 500 steps involving these and other
processes to complete the manufacturing cycle.
While some device manufacturers are still using aluminum as the
main conducting material for building interconnect structures,
most have transitioned to copper. Copper has lower resistance
than aluminum and can carry more current in a smaller area.
Applied is the leading supplier of systems for manufacturing
copper-based chips, including equipment for depositing, etching
and planarizing copper interconnect layers. Complementing the
transition to copper to improve chip speed is the use of low
dielectric constant (low k) films to replace silicon
dioxide material as the insulator between the copper wiring
structures. Applied also leads the industry in providing systems
for depositing low k dielectric films.
1
The transistor is another key area of the chip where
semiconductor manufacturers are improving their device designs
to enhance speed. Applied has the industrys largest
portfolio of technically advanced products for building smaller
and faster transistors. One example is strain engineering, a
technique that stretches or compresses the space between atoms,
allowing electrical current to flow more quickly, thus greatly
enhancing chip performance. Multiple strain films are typically
used in advanced devices since they have an additive effect on
increasing transistor speed. Applied has a comprehensive
portfolio of systems to enable these applications using CVD and
epitaxial deposition technologies.
Most chips currently are fabricated using 65 nanometer (nm) and
larger linewidth dimensions, although Applied is also working
with customers on more advanced nodes. Major chipmakers have
announced that they will be integrating new high dielectric
constant (high-k) and metal materials and processes in their
transistor gate structures to increase chip performance and
reduce power consumption. Applied has a comprehensive portfolio
of fully characterized processes for building these high-k/metal
gates. These solutions include an integrated dielectric gate
stack tool that combines four critical processes in a single
system, a portfolio of metallization technologies using ALD and
PVD, and an innovative high temperature etch system.
Most of Applieds semiconductor equipment products are
single-wafer systems with multiple process chambers attached to
a base platform. This enables each wafer to be processed
separately in its own environment, allowing precise process
control, while the systems multiple chambers enable
simultaneous, high productivity manufacturing. Applied sells
most of its single-wafer, multi-chamber systems on four basic
platforms: the
Centura
®
,
the
Endura
®
,
the
Producer
®
and the
Vantage
®
.
These platforms support ALD, CVD, PVD, etch and RTP technologies.
Over time, the semiconductor industry has migrated to
increasingly larger wafers to build chips. The predominant or
common wafer size used today for volume production of advanced
chips is 300 millimeter (mm), or
12-inch,
wafers. Applied offers a comprehensive range of 300mm systems.
Applied also offers earlier-generation 200mm systems, as well as
products and services to support all of its systems, which are
reported under its Applied Global Services segment.
The following summarizes Applieds portfolio of products
and their associated process technology areas reported under its
Silicon segment.
Deposition
Deposition is a fundamental step in fabricating a chip. During
deposition, layers of dielectric (an insulator), barrier, or
electrically conductive (typically metal) films are deposited or
grown on a wafer. Applied currently provides equipment to
perform three types of deposition: ALD, CVD and PVD. In
addition, Applieds RTP systems can be used to perform
certain types of dielectric deposition.
Atomic
Layer Deposition
ALD is an advanced technology in which atoms are deposited one
layer at a time to build chip structures. This technology
enables customers to fabricate thin films of either conducting
or insulating material with uniform coverage in sub-nanometer
sized structures. Applied offers ALD chambers for depositing
tungsten and
high-k/metal
gate films. The Applied Centura
iSprint
tm
Tungsten system (iSprint) combines an ALD chamber, which
deposits a tungsten nucleation film, with a CVD tungsten bulk
fill process in one system. The iSprint is used to form contact
structures that connect the transistors to the wiring areas of
the chip. Applieds high-k/metal gate ALD process is part
of the Centura Advanced Gate Stack system, which enables a
single integrated solution for building high-k/metal gate
structures.
Chemical
Vapor Deposition
CVD is used by customers to deposit dielectric and metal films
on a wafer. During the CVD process, gases that contain atoms of
the material to be deposited react on the wafer surface, forming
a thin film of solid material. Films deposited by CVD may be
silicon oxide, single-crystal epitaxial silicon, amorphous
silicon, silicon nitride, dielectric anti-reflective coatings,
low k dielectric (for highly efficient insulating materials),
aluminum, titanium,
2
titanium nitride, polysilicon, tungsten, refractory metals or
silicides. Applied offers the following CVD products and
technologies:
The Applied Producer CVD platform
This
high-throughput platform features
Twin-Chamber
®
modules that have two single-wafer process chambers per unit. Up
to three Twin-Chamber modules can be mounted on each Producer
platform, giving it a simultaneous processing capacity of six
wafers. Many dielectric CVD processes can be performed on this
platform. The highest productivity model of this system is the
Applied Producer GT, which has achieved rapid customer
acceptance due to its fast wafer handling performance and
compact design.
Low k Dielectric Films
Low k dielectric
materials are used in copper-based chip designs to further
improve interconnect speed. Using conventional CVD equipment,
the Applied Producer Black
Diamond
®
family of low k systems provides customers with a proven,
cost-effective way to integrate a variety of low k films into
advanced interconnect structures. To further increase the
performance of the complete multi-layer dielectric structure,
Applied offers a line of
BLOK
tm
(barrier low k) films deposited with the Producer system.
Lithography-Enabling Solutions
Applied offers
several technologies on the Producer system to help chipmakers
extend their current 193nm lithography tools, including a line
of Applied
APF
tm
(advanced patterning film) films and Applied
DARC
®
(dielectric anti-reflective coating) films. Together, they
provide a film stack with the precise dimensional control and
compatibility needed to cost-effectively pattern nano-scale
features without additional integration complexity.
Gap Fill Films
There are many steps during
the chipmaking process in which very small and deep, or high
aspect ratio (HAR), structures must be filled void-free with a
dielectric film. Many of these applications include the
deposition of silicon oxides in substrate isolation structures,
contacts and interconnects. The Applied Centura Ultima
HDP-CVD
®
(high-density plasma CVD) system has been an industry
workhorse, providing multi-generational gap-fill capability for
both logic and memory devices. The Companys Applied
Producer HARP (high aspect ratio process) provides customers
with device scaling capability using sub-atmospheric CVD (SACVD)
technology. In 2008, the Company introduced the Applied Producer
eHARP, which extends gap-fill capability to 32nm and below by
enabling the seamless, void-free fill of more tightly packed HAR
structures.
Strain Engineering Solutions
The Applied
Producer HARP system also plays a key role in enhancing
transistor performance, enabling chipmakers to boost chip speed
by depositing strain inducing dielectric films. Offering the
industrys first integrated stress nitride deposition and
ultraviolet (UV) cure solution, the Applied Producer Celera CVD
delivers benchmark levels of high-stress tensile silicon nitride
films. The Company also offers the Applied Centura SiNgenPlus
low pressure CVD system for low temperature silicon nitride
films. Used together, and in conjunction with silicon germanium
(SiGe) films using Applieds epitaxial deposition
technologies, these systems can provide additive strain
engineering benefits.
Epitaxial Deposition
Epitaxial silicon
(epitaxy or epi) is a layer of pure silicon grown in a uniform
crystalline structure on the wafer to form a high quality base
for the device circuitry. Epi technology is used in an
increasing number of integrated circuit devices in both the
wafer substrate and transistor areas of a chip to enhance speed.
The Applied Centura Epi system integrates pre- and post-epi
processes on the same system to improve film quality and reduce
production costs. This system is also used for SiGe epi
technology, which reduces power usage and increases speed in
certain types of advanced chips. For emerging transistor
designs, the Applied Centura RP Epi system offers selective epi
processes to enable faster transistor switching through strain
engineering techniques.
Polysilicon Deposition
Polysilicon is a type
of silicon used to form portions of the transistor structure
within the integrated circuit device. The Applied Centura
Polygen
tm
LPCVD system is a single-wafer, multi-chamber product that
deposits thin polysilicon films at high temperatures to create
transistor gate structures. To address the challenging
requirements of shrinking gate dimensions, the Applied Centura
DPN Gate Stack system integrates chambers for decoupled plasma
nitridation (DPN), RTP anneal and polysilicon deposition on one
platform to enable superior film quality and material properties.
3
Aluminum Deposition
Aluminum (Al) continues
to be used by several memory manufacturers for interconnects.
The Applied Endura iFill Al CVD/PVD system is used for building
high-density interconnects in flash and DRAM memory chips. This
advanced process, for sub-90nm generations, enables customers to
replace tungsten structures with aluminum to achieve faster
chips with fewer steps and less cost.
Tungsten Deposition
Tungsten is used in the
contact area of a chip that connects the transistors to the
wiring circuitry. In aluminum-based devices, tungsten is also
used in the structures that connect the multiple layers of
aluminum wiring. Applied has two products for depositing
tungsten: the Applied Centura
Sprint
®
Tungsten CVD system for 90nm and below devices and the Applied
Centura iSprint ALD/CVD system for more advanced applications.
The latter product combines ALD technology and CVD chambers on
the same platform.
Physical
Vapor Deposition
PVD is a physical process in which atoms of a gas, such as
argon, are accelerated toward a metal target. The metal atoms
chip off, or sputter away, and are then deposited on the wafer.
Applied leads the industry in PVD technology with its Applied
Endura PVD system. This system offers a broad range of advanced
deposition processes, including aluminum, aluminum alloys,
cobalt, titanium/titanium nitride, tantalum/tantalum nitride,
tungsten/tungsten nitride, nickel, vanadium and copper.
The Applied Endura CuBS (copper barrier/seed) PVD system is
widely used by customers for fabricating copper-based chips.
Using PVD technology, the system deposits a tantalum-based
barrier film that prevents copper material from entering other
areas of the device and then a copper seed layer that primes the
structure for the subsequent deposition of bulk copper. This
system also features Activ Pre-clean technology to provide clean
film interfaces while preserving the k-value integrity of the
structure.
Etch
Etching is used many times throughout the integrated circuit
manufacturing process to selectively remove material from the
surface of a wafer. Before etching begins, the wafer is coated
with a light-sensitive film, called photoresist. A
photolithography process then projects the circuit pattern onto
the wafer. Etching removes material only from areas dictated by
the photoresist pattern. Applied offers a wide range of systems
for etching dielectric, metal and silicon films to meet the
requirements of sub-100nm processing.
For dielectric applications, the Applied Centura
eMax
®
system etches a broad range of dielectric films in the contact
and interconnect regions of the chip. Applieds Producer
Etch system utilizes the Companys Twin-Chamber Producer
platform to target cost-sensitive dielectric etch applications
in 90nm and below design geometries. To address advanced low k
etch applications, the Applied Centura
Enabler
®
Etch system performs etch, strip and clean steps in a single
chamber. The Enablers
all-in-one
capability streamlines the process flow for advanced chip
designs and significantly reduces operating costs. The Applied
Centura Carina system uses innovative, high-temperature
technology to deliver the etch capability essential for scaling
logic and memory devices with high-k/metal gates at 45nm and
below.
The Applied Centura
AdvantEdge
tm
Silicon Etch system offers chipmakers high precision gate
etching for advanced-generation devices. The Applied Centura
Mariana Trench Etch system provides customers with the
capability to scale memory devices by etching 80:1 aspect ratio
structures. For etching metals, the Applied Opus AdvantEdge
Metal Etch uses an optimized 5-chamber platform configuration
that enables customers to extend aluminum interconnect
technology and productivity to sub-70nm dimensions for flash and
DRAM memory applications.
Rapid
Thermal Processing
RTP is a process in which a wafer is subjected to rapid bursts
of intense heat that can take the wafer from room temperature to
more than 1,000 degrees Celsius in less than 10 seconds. A rapid
thermal process is used mainly for modifying the properties of
deposited films. The Applied Centura
Radiance
®
Plus
and Applied Vantage
RadOx
tm
RTP systems feature advanced RTP technology with differing
platform designs. While the multi-chamber Centura
4
platform offers exceptional process flexibility, the streamlined
two-chamber Vantage platform is designed for dedicated
high-volume manufacturing. These single-wafer RTP systems are
also used for growing high quality oxide and oxynitride films,
deposition steps that traditional large batch furnaces can no
longer achieve with the necessary precision and control. With
its proprietary radical-based oxidation process, the Applied
Vantage RadOx system deposits high-performance transistor gate
oxides with high productivity and low operating cost for flash
memory applications.
Chemical
Mechanical Planarization
The CMP process removes material from a wafer to create a flat
(planarized) surface. This process allows subsequent
photolithography patterning steps to occur with greater accuracy
and enables film layers to build with minimal height variations.
The 300mm Applied
Reflexion
®
LK system leads the industry in CMP technology with important
features such as integrated cleaning, film measurement and
process control capabilities.
Metrology
and Wafer Inspection
Applied offers several products for measuring features and
inspecting defects on the wafer during various stages of the
fabrication process. These systems enable customers to
characterize and control critical dimension (CD) and defect
issues, especially at advanced generation technology nodes.
Critical
Dimension and Defect Review Scanning Electron Microscopes
(CD-SEMs and DR-SEMs)
Scanning electron microscopes (SEMs) use an electron beam to
form images of microscopic features of a patterned wafer at
extremely high magnification. Applieds SEM products
provide customers with full automation, along with the high
accuracy and sensitivity needed for measuring very small CDs.
The Applied
VeritySEM
®
Metrology system uses proprietary SEM imaging technology to
enable precise control of the lithography and etching processes.
The VeritySEM measures CDs with less than 5 angstrom precision,
a requirement for 45nm device production, and incorporates
automation and software advancements for significantly higher
throughput in production. Applieds OPC
Check
tm
software for the VeritySEM system performs automated
qualification of OPC-based (optical proximity correction) chip
designs, significantly reducing mask (see Mask Making section
below) verification time over conventional manual methods.
DR-SEMs review defects on the wafer (such as particles,
scratches or residues) that are first located by a defect
detection system and then classify the defects to identify their
source. The high-throughput, fully automatic Applied
SEMVision
tm
Defect Analysis products enable customers to use this technology
as an integral part of their production lines to analyze defects
as small as 30nm with industry-leading throughput. The Applied
SEMVision FIB integrates advanced defect review SEM capability
with automated focused ion beam (FIB) technology in one system.
The FIB provides a cross-sectional view of the defects reviewed
by the SEM, enabling chipmakers to analyze the defects in
minutes as part of their in-line review process.
Wafer
Inspection
Using laser-based technology, defects can be detected on
patterned wafers (wafers with printed circuit images) as they
move between processing steps. Defects include particles, open
circuit lines, and shorts between lines. Incorporating key
advances in imaging technology, the Applied
ComPlus
tm
Inspection system, for darkfield applications, detects defects
in devices with design rules of 65nm and below with the high
speed required for customers volume production lines. The
Applied
UVision
tm
Inspection system is the industrys first laser-based,
three dimensional brightfield tool. Utilizing multi-beam, deep
ultraviolet (DUV) laser illumination and high efficiency
detectors, the UVision system uncovers previously undetectable
defects on the wafer, enabling customers to rapidly resolve
defect issues and achieve greater chip yields.
Mask
Making
Masks are used by photolithography systems to transfer
microscopic circuit designs onto wafers. Since an imperfection
in a mask may be replicated on the wafer, the mask must be
virtually defect-free. Applied provides systems for etching,
cleaning and inspecting masks.
5
The Applied Tetra III Advanced Reticle Etch system, an
advanced etch tool for fabricating leading-edge masks, is used
by virtually every advanced mask maker in the world for 45nm
photomask development and production. In 2008, the Company
introduced the Applied
Tetra
tm
Reticle Clean, the industrys first wet clean system to
provide damage-free, nearly 100 percent particle removal
efficiency for 32nm and beyond photomasks. The groundbreaking
Applied
Aera2
tm
Mask Inspection system, also announced in 2008, allows customers
to meet the most critical defect detection challenges of
advanced masks. Using sophisticated aerial imaging technology,
the Aera2 is the first mask inspection system that allows users
to immediately see how the pattern on the mask will appear on
the wafer, revealing only the defects most likely to print and
significantly reducing inspection time.
Applied
Global Services Segment
The Applied Global Services segment encompasses products and
services designed to improve the performance and productivity,
and reduce the environmental impact, of the fab operations of
semiconductor, LCD and solar PV manufacturers. The in-depth
expertise and best known methods of Applieds extensive
global support infrastructure enable Applied to continuously
support customers production requirements. Approximately
2,700 trained customer engineers and process support engineers
are deployed in more than a dozen countries. These engineers are
usually located at or near customers fab sites and service
over 22,000 installed Applied systems, as well as non-Applied
systems. Applied offers the following general types of services
and products:
Fab Services
Applied offers a portfolio of
fab-wide operations services to maintain and optimize
customers fabrication facilities. Applied Genuine Parts
are spare parts manufactured to Applieds strict technical
specifications and quality standards. Applied Services provides
customers with optimized tool performance for improved total
cost of ownership and a higher return on investment. Through its
Metron Chamber Performance Services unit, Applied is the
industrys leading provider of critical parts cleaning,
coating refurbishment and analytical testing capabilities.
Applieds Advanced Wafer Reclaim Center in Taiwan uses
state-of-the-art manufacturing systems and software to extend
the lifecycle of 300mm silicon test wafers by over 45% and to
reduce customers costs.
In 2008, the Company introduced its
SunFab
tm
Performance Service program, a comprehensive, integrated support
solution for Applieds
SunFab
tm
Thin Film Line for producing large-size solar PV panels,
discussed further under the Energy and Environmental Solutions
segment. The first service product of its kind for the solar
industry, the program enables customers to quickly ramp to
volume production while optimizing the performance, cost and
output of their SunFab lines.
Mature Technology Services
Applied offers a
wide range of products and services to extend the productive
life of 200mm semiconductor fabs, including new and
remanufactured 200mm equipment, system enhancements and fab
transition services. Designed to maximize productivity and lower
cost of ownership, these products also assist customers in
implementing green manufacturing solutions. Applieds 200mm
systems are available in a broad range of production-proven
technologies, including CVD, PVD, etch, implant, RTP, CMP,
epitaxy, metrology and inspection tools.
Automation Systems
Applied offers automated
factory-level and tool-level control software systems for
semiconductor, LCD and solar cell manufacturing facilities.
These enterprise solutions include manufacturing execution
systems (MES) to automate the production of wafers and LCD and
solar substrates, advanced process control systems, and
scheduling and materials handling control systems. Applied also
offers computerized maintenance management systems, performance
tracking, and modeling and simulation tools for improving asset
utilization. In 2008, Applied introduced its breakthrough E3
equipment engineering system solution that uniquely integrates
all critical equipment automation and process control components.
Abatement Systems
Applieds family of
Metron abatement systems is a comprehensive line of
environmental solutions for the semiconductor, solar and display
industries. These systems include a wide range of point-of-use
scrubbing tools including wet, dry, thermal and integrated
technologies for reliable, cost-effective abatement of exhaust
gases. In 2008, the Company introduced the Marathon S for its
SunFab Thin Film line, the only integrated solution for PECVD
reactive byproducts.
6
Display
Segment
Applieds AKT subsidiary, reported under the Display
segment, designs, manufactures and sells equipment to fabricate
thin film transistor LCDs for televisions, computer displays and
other consumer-oriented electronic applications. While
similarities exist between the technologies utilized in
chipmaking and LCD fabrication, the most significant differences
are in the size and composition of the substrate. Substrates
used to manufacture LCD panels can be more than 70 times larger
in area than 300mm wafers and are made of glass, while wafers
are made of silicon. This technology for deposition on
large-size substrates is also used in the Applied
SunFab
tm
Thin Film Line.
Applied supplies a wide range of systems that process and test
different glass substrate sizes. For fabricating the transistor
layer of these panels, the Company offers a line of
plasma-enhanced CVD (PECVD) systems that use multi-chamber
platform architecture to deposit dielectric and semiconducting
films. The
AKT-PiVot
tm
55KV system employs high-productivity, cost-efficient PVD
technology to deposit metal and transparent conductive oxide
films on the substrate. For manufacturing the color filter of
LCD panels, Applied offers the AKT-NEW
ARISTO
tm
2200 for transparent conductive oxide film deposition.
Complementing these systems, Applied also offers a line of
electron beam test (EBT) systems for testing substrates during
production for defective pixels and other imperfections.
Featuring one of the industrys fastest and most accurate
pixel test technologies with the lowest operating cost, the EBT
systems non-contact test technology enables the safe
testing of high-value LCD TV panels without damaging or
scratching the display.
To meet growing consumer demand for larger, more cost-efficient
LCD TVs, LCD manufacturers have moved to increasingly
large-sized substrates. Applieds latest generation (Gen)
10 systems can process substrates sized at approximately 2.85 x
3.05 meters, with each substrate enabling the production of up
to six
65-inch
LCD
TV screens. These Gen-10 systems include the AKT-90K PECVD and
the Gen-10 AKT-90K EBT products, announced in fiscal 2008.
Energy
and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes
manufacturing solutions for the generation and conservation of
energy. Applied entered the solar PV market in 2006, announcing
its objective to lower the overall cost per watt of solar
electricity to parity with that of electricity generated by
other sources such as the burning of fossil fuels. Applied
offers manufacturing solutions for both wafer-based crystalline
silicon (c-Si) and glass-based thin film applications to enable
customers to increase the conversion efficiency and yields of
solar PV devices.
In fiscal 2008, Applied expanded its capabilities and
opportunities in the c-Si technology sector through its
acquisition of Baccini S.p.A. (Baccini), a leading supplier of
automated metallization and test systems for c-Si solar PV
cells. These products, combined with Applieds suite of
silicon wafering and deposition systems, have made Applied the
leading supplier of c-Si manufacturing systems worldwide. A key
benefit of these systems is that they offer customers a way to
reduce silicon consumption and cost by using ultra-thin
substrate wafers.
For thin film applications, Applied developed the Applied
SunFab
tm
Thin Film Line, which is the worlds only integrated
production line for manufacturing thin film silicon solar
modules using 5.7 square meter
(m
2
)
glass substrates. These ultra-large panels, which are
approximately four times the size of thin film solar panels
offered by others in the industry, are intended for large-scale
applications such as solar farms, utilities and
building-integrated solar PV system installations. Applied has
entered into multiple contracts for its SunFab line with
customers in Europe, Asia and Saudi Arabia. In October 2008, the
first of these lines passed final acceptance testing, enabling
the customer to begin volume manufacturing of SunFab modules.
Products in this segment also include the
ATON
tm
in-line deposition system, a large-area platform for
high-quality deposition and high-throughput in both c-Si and
thin film solar PV cell manufacturing, as well as processes,
materials-handling technologies and fabrication services. Other
products include roll-to-roll, vacuum web coating systems for
high-performance deposition of a range of films on flexible
substrates for functional, aesthetic or optical properties.
Applied also offers large-area deposition equipment for the
production of low-emissivity (low-E) and solar control
architectural glass.
7
Backlog
Applied manufactures systems to meet demand represented by order
backlog and customer commitments. Backlog consists of:
(1) orders for which written authorizations have been
accepted and assigned shipment dates are within the next
12 months, or shipment has occurred but revenue has not
been recognized; (2) contractual service revenue and
maintenance fees to be earned within the next 12 months;
and (3) orders for SunFab lines that are anticipated to be
recognized as revenue within the next 12 months.
Applieds backlog increased from $3.7 billion at
October 28, 2007 to $4.8 billion at October 26,
2008. Applieds backlog on any particular date is not
necessarily indicative of actual sales for any succeeding
period. Customers may delay delivery of products or cancel
orders prior to shipment, subject to possible cancellation
penalties. Backlog adjustments were positive for fiscal 2008 and
totaled $140 million, consisting primarily of backlog
obtained from acquired companies, partially offset by
cancellations and currency adjustments. Delays in delivery
schedules
and/or
a
reduction of backlog during any particular period could have a
material adverse effect on Applieds business and results
of operations.
Manufacturing,
Raw Materials and Supplies
Applieds manufacturing activities consist primarily of
procurement, assembly, test and integration of various
proprietary and commercial parts, components and subassemblies
(collectively, parts) that are used to manufacture systems.
Products in the Silicon segment are manufactured in Austin,
Texas and Rehovot, Israel. Remanufactured products in the
Applied Global Services segment are produced primarily in
Austin, Texas. Products in the Display segment are manufactured
in Santa Clara, California; Alzenau, Germany; and Tainan,
Taiwan. Products in the Energy and Environmental Solutions
segment are manufactured primarily in Alzenau, Germany;
Cheseaux, Switzerland; Treviso, Italy; and Santa Clara,
California. Manufacturing requires raw materials, including a
wide variety of mechanical and electrical components, to be
manufactured to Applieds specifications. Applied uses
numerous companies, including contract manufacturers, to supply
parts for the manufacture and support of its products. Although
Applied makes reasonable efforts to assure that parts are
available from multiple qualified suppliers, this is not always
possible. Accordingly, some key parts may be obtained from only
a single supplier or a limited group of suppliers. Applied seeks
to reduce costs and to lower the risks of production and service
interruptions, as well as shortages of key parts, by:
(1) selecting and qualifying alternate suppliers for key
parts; (2) monitoring the financial condition of key
suppliers; (3) maintaining appropriate inventories of key
parts; (4) qualifying new parts on a timely basis; and
(5) locating certain manufacturing operations in areas that
are closer to suppliers and customers.
Research,
Development and Engineering
Applieds long-term growth strategy requires continued
development of new products. Applieds significant
investment in research, development and engineering (RD&E)
has generally enabled it to deliver new products and
technologies before the emergence of strong demand, thus
allowing customers to incorporate these products into their
manufacturing plans at an early stage in the technology
selection cycle. Applied works closely with its global customers
to design systems and processes that meet their planned
technical and production requirements. Product development and
engineering organizations are located primarily in the United
States, as well as in Europe, Israel and China. In addition,
Applied outsources certain RD&E activities, some of which
are performed outside the United States. Process support and
customer demonstration laboratories are located in the United
States, China, Europe and Israel.
Applieds investments in RD&E for product development
and engineering programs to create or improve products and
technologies over the last three years were as follows:
$1.1 billion (14 percent of net sales) in fiscal 2008,
$1.1 billion (12 percent of net sales) in fiscal 2007
and $1.2 billion (13 percent of net sales) in fiscal
2006. Applied has spent an average of 13 percent of net
sales in RD&E over the last five years. In addition to
RD&E for specific product technologies, Applied maintains
ongoing programs for automation control systems, materials
research and environmental control that have applications to its
products. In fiscal 2008, Applied focused on developing systems
for semiconductor customers new chip designs with 45nm and
below geometries, including systems to enable faster transistors
using strain engineering and high-k/metal gate technologies, as
well as double
8
patterning processes that enable customers to extend their
existing 193nm lithography tools through additional technology
generations. Applied also focused on developing technology for
through-silicon vias, an emerging solution for interconnecting
three dimensional chip stacks to provide better device
performance, lower power consumption and the integration of
heterogeneous devices. RD&E also included activities to
develop products that enable lower-cost production of solar
energy.
Marketing
and Sales
Because of the highly technical nature of its products, Applied
markets and sells products worldwide through a direct sales
force. Approximately 81 percent of Applieds fiscal
2008 net sales were to regions outside of the
United States. Net sales to customers by region as a
percentage of total net sales were: Taiwan 22 percent,
North America (primarily the United States)
19 percent, Asia-Pacific (including China) 16 percent,
Korea 16 percent, Japan 15 percent, and Europe
12 percent.
General economic conditions impact Applieds business and
financial results. From time to time, the markets in which
products are sold experience weak economic conditions that may
negatively impact sales. Applieds business is usually not
seasonal in nature, but it is cyclical, based on capital
equipment investment by major semiconductor, flat panel display,
solar PV and other manufacturers. These expenditures depend on
many factors, including: anticipated market demand and pricing
for semiconductors, LCDs, solar cells and modules, architectural
glass and other substrates; the development of new technologies;
customers factory utilization; capital resources and
financing; and global and regional economic conditions.
Applied manages its business and reports financial results based
on the segments described above, but does not allocate certain
sales and marketing costs to the segments.
Information on net sales to unaffiliated customers and
long-lived assets attributable to Applieds geographic
regions is included in Note 10 of Notes to Consolidated
Financial Statements. Samsung Electronics Co., Ltd. accounted
for 16 percent of Applieds net sales in fiscal 2008,
12 percent of Applieds net sales in fiscal 2007, and
11 percent of Applieds net sales in fiscal 2006.
These net sales were for products in multiple reportable
segments.
Competition
The industries in which Applied operates are highly competitive
and characterized by rapid technological change. Applieds
ability to compete generally depends on its ability to timely
commercialize its technology, continually improve its products
and develop new products that meet constantly evolving customer
requirements. Significant competitive factors include technical
capability and differentiation, productivity and
cost-effectiveness. The importance of these factors varies
according to customers needs, including product mix and
respective product requirements, applications, and the timing
and circumstances of purchasing decisions. Substantial
competition exists in all areas of Applieds business.
Competitors range from small companies that compete with a
single product
and/or
in a
single region, to global, diversified companies with a range of
products. Applieds ability to compete requires a high
level of investment in RD&E and in marketing, sales and
global customer support activities. Management believes that
many of Applieds products have strong competitive
positions.
The competitive environment for each segment is described below:
The semiconductor industry has been increasingly driven by
consumer demand for lower-cost electronic products with
increased capability and, to a lesser extent, by demand for
commercial applications. As a result, products within the
Silicon segment are subject to rapid changes in customer
requirements, including transitions to smaller dimensions, new
materials and an increasing number of applications. While
certain existing technologies may be adapted to new
requirements, some applications create the need for an entirely
different technical approach. The rapid pace of technological
change can quickly diminish the value of current technologies
and products and create opportunities for existing and new
competitors. Applied offers a broad portfolio of technically
differentiated products that must continuously evolve to satisfy
customers requirements in order to compete effectively.
Applied allocates resources among its many product offerings and
therefore may decide not to invest in an individual product to
the same degree as competitors who specialize in fewer products.
There are many competitors serving the semiconductor
manufacturing equipment industry, with some offering a single
product line and others offering
9
multiple product lines. These competitors range from suppliers
serving a single region to global, diversified companies.
Products and services within the Applied Global Services segment
are characterized by demanding worldwide service requirements
and a diverse group of numerous competitors. To compete
effectively, Applied offers products and services to reduce
costs, improve productivity, and lessen the environmental impact
of customers fab operations. Significant competitive
factors include productivity, cost-effectiveness, and the level
of technical service and support. The importance of these
factors varies according to customers needs and the type
of products or services offered.
Products in the Display segment are subject to strong
competition from a number of major competitors. Applied holds
established market positions with its technically differentiated
LCD manufacturing solutions for PECVD, color filter PVD and
array testing, although its market position can change rapidly
if it does not meet customers requirements. In fiscal
2007, Applied entered the array PVD market with the
AKT-PiVot
tm
55KV PVD system. As a recent entrant to this market, Applied
faces significant competition from existing array PVD suppliers.
Applieds products within the Energy and Environmental
Solutions segment compete in diverse market areas, including
equipment to make solar PV cells and modules, flexible
electronics and energy-efficient glass. In solar, Applied offers
products for two distinct technologies, c-Si wafer-based and
thin film glass-based applications. As a recent entrant to the
solar equipment business, Applied competes with many other
companies that have more experience with solar applications.
Applied also is a recent entrant to the flexible electronics
equipment business, which operates in an emerging market sector
characterized by diverse types of applications, customer
requirements and competitors. Applieds glass coating
equipment faces significant competition from at least one
established supplier and another recent market entrant.
Patents
and Licenses
Management believes that Applieds competitive position
significantly depends upon the Companys research,
development, engineering, manufacturing and marketing
capabilities, and not just on its patent position. However,
protection of Applieds technological assets by obtaining
and enforcing intellectual property rights, including patents,
is important. Therefore, Applieds practice is to file
patent applications in the United States and other countries for
inventions that Applied considers significant. Applied has a
substantial number of patents in the United States and other
countries, and additional applications are pending for new
inventions. Although Applied does not consider its business
materially dependent upon any one patent, the rights of Applied
and the products made and sold under its patents, taken as a
whole, are a significant element of Applieds business. In
addition to patents, Applied also possesses other intellectual
property, including trademarks, know-how, trade secrets and
copyrights.
Applied enters into patent and technology licensing agreements
with other companies when management determines that it is in
its best interest to do so. Applied pays royalties under
existing patent license agreements for the use, in several of
its products, of certain patented technologies that are licensed
to Applied for the life of the patents. Applied also receives
royalties from licenses granted to third parties. Royalties
received from or paid to third parties have not been, and are
not expected to be, material to Applieds consolidated
results of operations.
In the normal course of business, Applied periodically receives
and makes inquiries regarding possible patent infringement. In
dealing with such inquiries, it may become necessary or useful
for Applied to obtain or grant licenses or other rights.
However, there can be no assurance that such licenses or rights
will be available to Applied on commercially reasonable terms,
or at all. If Applied is not able to resolve or settle claims,
obtain necessary licenses on commercially reasonable terms,
and/or
successfully prosecute or defend its position, Applieds
business, financial condition and results of operations could be
materially and adversely affected.
Environmental
Matters
Two of Applieds locations have been designated as
environmental cleanup sites. In 1987, the United States
Environmental Protection Agency designated one of the locations,
in Santa Clara, California, as a Superfund site and named
Applied as a Responsible Party. Cleanup activities
at this site began in 1984 and were substantially
10
completed in February 2002. The California Regional Water
Quality Control Board designated Applied as a
Discharger with respect to another site in
Sunnyvale, California. Applied was named a Discharger upon its
acquisition of the property in 1997 solely due to its status as
property owner. The prior owners of the site
and/or
operators who caused the contamination are responsible for
performing cleanup and monitoring activities.
Applied maintains a number of environmental, health and safety
programs that are primarily preventive in nature. As part of
these programs, Applied regularly monitors ongoing compliance
and periodically conducts investigations of possible
contamination.
Compliance with federal, state and local provisions regulating
the discharge of materials into the environment, remedial
agreements and other actions relating to the environment have
not had, and are not expected to have, a material effect on
Applieds capital expenditures, competitive position,
financial condition or results of operations.
The most recent report on Applieds environmental, health
and safety activities can be found on the Companys website
at
http://www.appliedmaterials.com/about/environment.html.
This report is updated periodically. This website address is
intended to be an inactive textual reference only. None of the
information on Applieds website is part of this
Form 10-K
or is incorporated by reference herein.
Employees
At October 26, 2008, Applied employed 14,824 regular
employees and 586 temporary employees. In the high-technology
industry, competition for highly-skilled employees is intense.
Applied believes that its future success is highly dependent
upon its continued ability to attract, retain and motivate
qualified employees. There can be no assurance that Applied will
be able to attract, hire, assimilate and retain a sufficient
number of qualified employees.
Executive
Officers of the Registrant
The following table and notes set forth information about
Applieds executive officers as of October 26, 2008:
|
|
|
Name of Individual
|
|
Position
|
|
James C. Morgan(1)
|
|
Chairman of the Board of Directors
|
Michael R. Splinter(2)
|
|
President and Chief Executive Officer
|
Franz Janker(3)
|
|
Executive Vice President, Sales and Marketing
|
Gilad Almogy(4)
|
|
Senior Vice President, General Manager Display and Thin Film
Solar Products
|
George S. Davis(5)
|
|
Senior Vice President, Chief Financial Officer
|
Manfred Kerschbaum(6)
|
|
Senior Vice President, General Manager Applied Global Services
|
Mark R. Pinto(7)
|
|
Senior Vice President, Chief Technology Officer and General
Manager Energy and Environmental Solutions
|
Thomas St. Dennis(8)
|
|
Senior Vice President, General Manager Silicon Systems Group
|
Joseph J. Sweeney(9)
|
|
Senior Vice President, General Counsel and Corporate Secretary
|
Randhir Thakur(10)
|
|
Senior Vice President, General Manager of Strategic Operations
|
Chris Bowers(11)
|
|
Group Vice President, Chief of Staff and General Manager
Corporate Services
|
Menachem Erad(12)
|
|
Group Vice President, Chairman of Sokudo
|
Ron Kifer(13)
|
|
Group Vice President, Chief Information Officer
|
Jeannette L. Liebman(14)
|
|
Group Vice President, Global Human Resources
|
Yvonne Weatherford(15)
|
|
Corporate Vice President, Corporate Controller
|
|
|
|
(1)
|
|
Mr. Morgan, age 70, has been Chairman of the Board of
Directors of Applied Materials, Inc. since 1987. Mr. Morgan
served as Applieds Chief Executive Officer from February
1977 to April 2003, and as Applieds President from 1976 to
1987.
|
|
(2)
|
|
Mr. Splinter, age 58, has been President, Chief
Executive Officer and a member of Applieds Board of
Directors since joining Applied in April 2003. Prior to joining
Applied, Mr. Splinter worked for nearly
|
11
|
|
|
|
|
20 years at Intel Corporation (Intel), most recently as
Executive Vice President and Director of the Sales and Marketing
Group, responsible for sales and operations worldwide.
Mr. Splinter previously held various executive positions at
Intel, including Executive Vice President and General Manager of
the Technology and Manufacturing Group.
|
|
(3)
|
|
Mr. Janker, age 59, has been the head of Sales and
Marketing of Applied since May 2003. Beginning in May 2003,
he was Senior Vice President, Sales and Marketing, and in
December 2004 he was promoted to Executive Vice President, Sales
and Marketing. He served as Senior Vice President, Global
Operations and Corporate Marketing beginning in December of
2002. From December 1998 to 2002, he served as Group
Vice President, Corporate Marketing and Business
Management. From 1982 to 1998, Mr. Janker served in a
variety of sales and marketing management positions with Applied
in the United States and Europe.
|
|
(4)
|
|
Dr. Almogy, age 43, was appointed Senior Vice
President, General Manager, Display and Thin Film Solar Products
in July 2008. From August 2007 to July 2008, Dr. Almogy
served as Group Vice President, General Manager, Display
Products and Process Diagnostics and Control Business Group.
From July 2005 to August 2007, Dr. Almogy served as
Group Vice President, General Manager, Process Diagnostics and
Control Product Business Group and was Corporate Vice President,
General Manager of the group from April 2002 to July 2005,
and Vice President and Co-General Manager of the group from
December 2000 to April 2002. He has held various other positions
since joining Applied in 1997 when Applied acquired Orbot
Instruments, Ltd. Dr. Almogy holds a Ph.D. in Applied
Physics from the California Institute of Technology.
|
|
(5)
|
|
Mr. Davis, age 51, was promoted to Senior Vice
President, Chief Financial Officer in December 2006.
Mr. Davis was appointed Group Vice President, Chief
Financial Officer effective November 1, 2006. Previously,
he had been Group Vice President, General Manager, Corporate
Business Development since February 2005. From November 1999 to
February 2005, Mr. Davis served as Vice President and
Corporate Treasurer, where he managed Applieds worldwide
treasury operations and was responsible for investments, tax,
financial risk management, and trade and export matters.
Mr. Davis joined Applied in 1999.
|
|
(6)
|
|
Mr. Kerschbaum, age 54, has been Senior Vice
President, General Manager, Applied Global Services since
January 2005. He was Senior Vice President, Global Operations
from July 2004 to January 2005 and from October 2002 to May
2003. From May 2003 to July 2004, he was Group Vice President,
Foundation Engineering and Operations. From January 1996 to
October 2002, he held various positions in Applied Materials
North America, most recently as Group Vice President, General
Manager, Applied Materials North America.
Mr. Kerschbaum has served in various other operations,
customer service and engineering positions since joining Applied
in 1983.
|
|
(7)
|
|
Dr. Pinto, age 49, has served as Senior Vice President
since joining Applied in January 2004. His current
responsibility is Chief Technology Officer and General Manager,
Energy and Environmental Solutions. Prior to joining Applied,
Dr. Pinto spent 19 years with Bell Laboratories and
the Lucent Microelectronics Group, which later became Agere
Systems Inc., most recently as Vice President of the Analog
Products Division. Dr. Pinto holds a Ph.D. in Electrical
Engineering from Stanford University.
|
|
(8)
|
|
Mr. St. Dennis, age 55, was appointed Senior Vice
President, General Manager, Silicon Systems Group in
June 2007. Mr. St. Dennis returned to Applied in
September 2005 as Senior Vice President, General Manager, Etch,
Cleans, Front End and Implant Product Business Groups. He
previously was with Applied from 1992 to 1999, most recently as
Group Vice President, Planarization and Dielectric Deposition
Product Business Group, and before that as Corporate Vice
President, Physical Vapor Deposition Product Business Group.
From 2003 to 2005, Mr. St. Dennis was an Executive Vice
President and member of the Office of the CEO of Novellus
Systems, Inc. He served as President and Chief Executive Officer
of Wind River Systems, Inc. from 1999 to 2003.
|
|
(9)
|
|
Mr. Sweeney, age 60, has held the position of Senior
Vice President, General Counsel and Corporate Secretary of
Applied since July 2005, with responsibility for global legal
affairs, intellectual property and security. From April 2002 to
July 2005, Mr. Sweeney was Group Vice President, Legal
Affairs and Intellectual Property, and Corporate Secretary.
Mr. Sweeney joined Applied in 1993.
|
|
(10)
|
|
Dr. Thakur, age 46, was appointed Senior Vice
President, General Manager, Strategic Operations when he
returned to Applied in May 2008. He previously was with Applied
from 2000 to 2005 in a variety of executive roles including
Group Vice President, General Manager for Front End Products.
From September 2005 to
|
12
|
|
|
|
|
May 2008, Dr. Thakur served as Executive Vice
President of Technology and Fab Operations at SanDisk
Corporation and as head of SanDisks worldwide operations.
Prior to joining Applied in 2000, Dr. Thakur served in
leadership roles at Steag Electronic Systems and Micron
Technology.
|
|
(11)
|
|
Mr. Bowers, age 48, was appointed Group Vice
President, Chief of Staff and General Manager, Corporate
Services in March 2008. Prior to joining Applied,
Mr. Bowers was a partner at the Hay Group, where he held
various business leadership and consulting positions from 1992
to 2008. Most recently, he was Director of Client Services in
Europe, the Middle East and Africa, and a member of the Hay
Group Global R&D Council.
|
|
(12)
|
|
Mr. Erad, age 60, was appointed in March 2008 as Group
Vice President, Chairman of Sokudo Co. Ltd., a Japanese joint
venture company owned by Applied and Dainippon Screen
Manufacturing Co. Ltd. From February 2005 to March 2008,
Mr. Erad served as Group Vice President, Chief of Staff.
From January 2004 to February 2005, Mr. Erad served as
Group Vice President, Strategic Planning and New Technology. He
served as Group Vice President, New Business and New Products
Group from May 2003 to January 2004. Mr. Erad joined
Applied in 2002 as Group Vice President, Strategic Planning and
New Business Development.
|
|
(13)
|
|
Mr. Kifer, age 57, joined Applied in May 2006 as Group
Vice President and Chief Information Officer, Global Information
Services. Prior to his appointment, Mr. Kifer spent five
years with DHL in various executive management roles, most
recently as the Senior Vice President and Chief Information
Officer for North America, Asia Pacific and Emerging
Markets.
|
|
(14)
|
|
Ms. Liebman, age 61, has served as Group Vice
President, Global Human Resources since July 2005.
Ms. Liebman served as Corporate Vice President, Global
Human Resources from August 2003 to July 2005. Prior to joining
Applied in 2003, Ms. Liebman held various human resources
positions at Intel.
|
|
(15)
|
|
Ms. Weatherford, age 57, has served as Corporate Vice
President, Corporate Controller since December 2004.
Ms. Weatherford was Appointed Vice President, Business
Operations Controller from December 2001 to December 2004, and
Appointed Vice President, Financial Operations Controller from
October 2000 to December 2001. She has held various other
finance roles since joining Applied in 1990.
|
Available
Information
Applieds website is
http://www.appliedmaterials.com.
Applied makes available free of charge, on or through its
website, its annual, quarterly and current reports, and any
amendments to those reports, as soon as reasonably practicable
after electronically filing such reports with, or furnishing
them to, the SEC. This website address is intended to be an
inactive textual reference only. None of the information on
Applieds website is part of this
Form 10-K
or is incorporated by reference herein.
The following factors could materially affect Applieds
business, financial condition or results of operations and
should be carefully considered in evaluating the Company and its
business, in addition to other information presented elsewhere
in this report.
The
industries that Applied serves are volatile and
unpredictable.
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 capacity utilization, demand
for customers products, 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 each of the industries it
serves, Applied must effectively manage its resources and
production capacity for each of its segments and across multiple
segments. 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
13
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 recent severe tightening of the credit markets, turmoil in
the financial markets, and weakening global economy are
contributing to slowdowns in the industries in which Applied
operates, which slowdowns are expected to 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 equipment or service orders, which may affect
Applieds ability to convert backlog to sales and reduce
net sales. Difficulties in obtaining capital and deteriorating
market conditions may also lead to the inability of some
customers to obtain affordable financing, resulting in lower
sales for Applied. Customers with liquidity issues may lead to
additional bad debt expense for Applied. These conditions may
also similarly affect key suppliers, which could affect their
ability to deliver parts and result in delays for Applieds
products. Further, these conditions and uncertainty about future
economic conditions make it challenging for Applied to forecast
its operating results, make business decisions, and identify the
risks that may affect its business, financial condition and
results of operations. In addition, Applied maintains an
investment portfolio that is subject to general credit,
liquidity, market and interest rate risks that may be
exacerbated by deteriorating financial market conditions and, as
a result, the value and liquidity of the investment portfolio
could be negatively impacted and lead to impairment. If Applied
is not able to timely and appropriately adapt to changes
resulting from the difficult macroeconomic environment,
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 the resulting effect on customers
ability to raise the necessary capital;
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|
the varying growth rates of the semiconductor, display and solar
equipment industries;
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|
the increasing cost and complexity for customers to move from
product design to volume manufacturing and the resulting impact
on new technology adoption rates;
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|
the importance of reducing the total cost of system ownership,
due in part to the increasing significance of lower-cost
consumer electronics as a driver for semiconductor and LCD
demand;
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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 systems as a result of
their increasing productivity, device yield and reliability;
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|
demand 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 spare parts availability to
maximize system uptime;
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the increasing role for and complexity of software; and
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the increasing focus on energy usage, the environment and
sustainability.
|
If Applied does not successfully manage the risks resulting from
the ongoing changes occurring in the semiconductor, flat panel
display, solar and related industries, its business, financial
condition and results of operations could be materially and
adversely affected.
14
Applied
is exposed to risks as a result of ongoing changes specific to
the semiconductor industry.
The largest portion of Applieds revenues historically has
come from sales of manufacturing equipment to the global
semiconductor industry, and this business historically has also
been the most profitable. Changes in the semiconductor industry
may lead to a decrease in the percentage of Applieds
revenue attributable to its semiconductor equipment business as
a percentage of overall revenue, which in turn can negatively
impact the Companys net income. In addition to the general
industry changes described in the preceding risk factor, the
semiconductor industry is characterized by ongoing changes
particular to that industry, including:
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|
the increasing cost of semiconductor R&D due to many
factors, including decreasing linewidths, the increasing number
of materials, device structures, applications and process steps,
and the increasing cost, complexity and integration of
manufacturing process development and chip design;
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|
the growing types and varieties of semiconductors and expanding
number of applications across multiple substrate sizes,
resulting in divergent technical demands;
|
|
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|
differing rates of market growth for, and capital investments
by, various semiconductor device makers, such as 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 from one technology
node to the next smaller technology node, and the resulting
impact on the technology transition rate and the rate of
investment in capital equipment;
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|
the effect of the decreasing number of new chip designs on the
rate of capital equipment investment;
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|
technology changes in related markets, such as lithography;
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|
the increasing fragmentation of certain markets for
semiconductors and the resulting effect on the number of
individual markets that have the ability to financially justify
the cost of a new fabrication plant;
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|
the cost, technical complexity and timing of a proposed
transition from 300 mm to 450 mm wafers; and
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|
increasing costs, complexity and competitiveness in the
semiconductor industry that has resulted in the decreasing
profitability of many manufacturers, causing them to enter into
collaboration, cooperation or cost-sharing arrangements with
other manufacturers, to outsource some or all manufacturing
activities, or to focus on particular markets or applications.
|
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, as well as 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.
15
Applied
is exposed to risks as a result of ongoing changes specific to
the solar industry.
An increasing portion of Applieds business is in the
emerging solar market, which Applied entered in 2006 and which,
in addition to the general industry changes described above in
the third risk factor, is characterized by ongoing changes
particular to the solar industry, including:
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|
changes in demand for solar PV products arising from, among
other things, the cost and performance of solar PV technology
compared to other energy sources;
|
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|
|
the adequacy of or changes in government energy policies,
including the availability and amount of government incentives
for solar power;
|
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|
|
the extent of investment or participation in solar by utilities
or other companies that generate, transmit or distribute power
to end users;
|
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|
|
evolving industry standards;
|
|
|
|
difficulties associated with establishing a standard form factor
for thin film solar modules;
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|
regulatory requirements and customers ability to timely
satisfy these requirements;
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|
a requirement of certification by third parties in certain
circumstances;
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|
customers and end-users access to affordable
financial capital; and
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|
the move to increasingly greater factory output of solar PVs,
including output on a level sufficient to annually generate
electricity on a gigawatt scale.
|
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
involve 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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|
appropriately allocate resources, including R&D funding,
among Applieds products and between the development of new
products and the enhancement of existing products;
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|
accurately forecast demand 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;
|
16
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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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|
successfully accomplish the simultaneous
start-up
of
multiple integrated thin film solar production lines.
|
If Applied does not successfully manage these challenges, its
business, financial condition and results of operations could be
materially and adversely affected.
The
entry into new markets and industries entails 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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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 Applieds
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
and employment 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.
|
If Applied does not successfully manage the risks resulting from
its 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 fiscal 2008, approximately 81 percent of Applieds
net sales were to customers in regions outside the
United States, with a majority of business from customers
in Asia. 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. 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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|
variations among, and changes in, local, regional, national or
international laws and regulations (including tax and import and
export restrictions), as well as the interpretation and
application of such laws and regulations;
|
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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;
|
17
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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 position 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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|
|
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.
|
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. 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. 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 is increasing 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,
including capacity sufficient to annually generate electricity
on a gigawatt scale. 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 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 ownership
and/or
management changes, and outsourced manufacturing activities,
have engaged in collaboration or cooperation arrangements with
other customers or have consolidated with other customers, which
may result in additional complexities in managing customer
relationships and transactions. 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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18
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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;
|
|
|
|
inability to obtain and protect intellectual property rights in
key technologies;
|
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|
|
ineffectiveness of an acquired companys internal controls;
|
|
|
|
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;
|
|
|
|
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.
|
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. 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.
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 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. 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;
|
|
|
|
volatility in the availability and cost of materials;
|
|
|
|
difficulties or delays in obtaining required import or export
approvals;
|
|
|
|
information technology or infrastructure failures;
|
|
|
|
natural disasters (such as earthquakes, floods or
storms); or
|
|
|
|
other causes (such as regional economic downturns, pandemics,
political instability, terrorism, or acts of war), 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 unanticipated
increases in demand 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.
19
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 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,
which includes transitioning to a single enterprise resource
planning (ERP) software system to perform various functions. The
conversion to this new ERP system will include certain risks,
including difficulties with data integrity and business
interruption.
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.
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,
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 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) 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. Applied regularly assesses the likelihood of
favorable or unfavorable outcomes resulting from these
examinations to determine the adequacy of its provision for
income taxes. Although Applied believes its tax estimates are
reasonable, there can be no assurance 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
20
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 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.
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.
21
|
|
Item 1B:
|
Unresolved
Staff Comments
|
None.
Information concerning Applieds principal properties at
October 26, 2008 is set forth below:
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Square
|
|
|
Location
|
|
Type
|
|
Principal Use
|
|
Footage
|
|
Ownership
|
|
Santa Clara, CA
|
|
Office, Plant & Warehouse
|
|
Headquarters, Marketing,
|
|
|
1,640,000
|
|
|
Owned
|
|
|
|
|
Manufacturing, Distribution,
|
|
|
573,000
|
|
|
Leased
|
|
|
|
|
Research, Development and Engineering
|
|
|
|
|
|
|
Austin, TX
|
|
Office, Plant & Warehouse
|
|
Manufacturing
|
|
|
1,719,000
|
|
|
Owned
|
|
|
|
|
|
|
|
327,000
|
|
|
Leased
|
Rehovot, Israel
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development and Engineering
|
|
|
442,000
|
|
|
Owned
|
Alzenau, Germany
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development and Engineering
|
|
|
281,000
|
|
|
Leased
|
Cheseaux, Switzerland
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development, Engineering and Customer
Support
|
|
|
114,000
|
|
|
Leased
|
Treviso, Italy
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development, Engineering and Customer
Support
|
|
|
55,000
|
|
|
Leased
|
Tainan, Taiwan
|
|
Office, Plant & Warehouse
|
|
Manufacturing and Customer Support
|
|
|
148,000
|
|
|
Owned
|
Xian, China
|
|
Office, Plant & Warehouse
|
|
Research, Development and Engineering
|
|
|
120,000
|
|
|
Owned
|
Hsinchu, Taiwan
|
|
Office & Warehouse
|
|
Customer Support
|
|
|
90,000
|
|
|
Owned
|
|
|
|
|
|
|
|
81,000
|
|
|
Leased
|
Singapore
|
|
Office
|
|
Customer Support
|
|
|
76,000
|
|
|
Leased
|
Shanghai, China
|
|
Office & Warehouse
|
|
Customer Support
|
|
|
59,000
|
|
|
Leased
|
Because of the interrelation of Applieds operations,
properties within a country may be shared by the segments
operating within that country. Products in the Silicon segment
are manufactured in Austin, Texas and Rehovot, Israel.
Remanufactured products in the Applied Global Services segment
are produced primarily in Austin, Texas. Products in the Display
segment are manufactured in Santa Clara, California;
Alzenau, Germany; and Tainan, Taiwan. Products in the Energy and
Environmental Solutions segment are primarily manufactured in
Alzenau, Germany; Cheseaux, Switzerland; Treviso, Italy; and
Santa Clara, California.
In addition to the above properties, Applied leases office space
for marketing, sales, engineering and customer support offices
in 88 locations throughout the world: 23 in Europe, 20 in Japan,
19 in North America (principally the United States), 17 in
Asia-Pacific (including China and India), 7 in Korea and 2 in
Taiwan.
In addition, Applied owns 112 acres of buildable land in
Texas that could accommodate approximately 1,708,000 square
feet of additional building space, 43 acres in California
that could accommodate approximately 1,247,000 square feet
of additional building space, and 6 acres in Colorado that
could accommodate approximately 87,000 square feet of
additional building space. Applied also leases: 13 acres in
Taiwan that could accommodate approximately 270,000 square
feet of additional building space; 5 acres in Singapore
that could accommodate approximately 333,000 square feet of
additional building space; 4 acres in Italy that could
accommodate approximately 180,000 square feet of additional
building space; 10 acres in Israel that could accommodate
22
approximately 111,000 square feet of additional building
space; and 25 acres in China that could accommodate
approximately 768,000 square feet of additional building
space.
Applied considers the properties that it owns or leases as
adequate to meet its current and future requirements. Applied
regularly assesses the size, capability and location of its
global infrastructure and periodically makes adjustments based
on these assessments.
|
|
Item 3:
|
Legal
Proceedings
|
The information set forth under Legal Matters in
Note 11 of Notes to Consolidated Financial Statements is
incorporated herein by reference.
|
|
Item 4:
|
Submission
of Matters to a Vote of Security Holders
|
None.
23
PART II
|
|
Item 5:
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
The following table sets forth the high and low closing sale
prices for the periods presented as reported on the NASDAQ
Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
Price Range
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
19.54
|
|
|
$
|
17.08
|
|
Second quarter
|
|
$
|
19.68
|
|
|
$
|
17.61
|
|
Third quarter
|
|
$
|
21.80
|
|
|
$
|
18.40
|
|
Fourth quarter
|
|
$
|
22.96
|
|
|
$
|
18.86
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
19.42
|
|
|
$
|
16.33
|
|
Second quarter
|
|
$
|
21.53
|
|
|
$
|
17.48
|
|
Third quarter
|
|
$
|
20.79
|
|
|
$
|
16.96
|
|
Fourth quarter
|
|
$
|
19.33
|
|
|
$
|
11.36
|
|
Applieds common stock is traded on the NASDAQ Global
Select Market under the symbol AMAT. As of November 21,
2008, there were 5,031 directly registered holders of Applied
common stock.
24
Performance
Graph
The performance graph below shows the five-year cumulative total
stockholder return on Applied common stock during the period
from October 26, 2003 through October 26, 2008. This
is compared with the cumulative total return of the
Standard & Poors 500 Stock Index and the RDG
Semiconductor Composite Index over the same period. The
comparison assumes $100 was invested on October 26, 2003 in
Applied common stock and in each of the foregoing indices and
assumes reinvestment of dividends, if any. Dollar amounts in the
graph are rounded to the nearest whole dollar. The performance
shown in the graph represents past performance and should not be
considered an indication of future performance.
Comparison
of 5 Year Cumulative Total Return*
Among
Applied Materials, Inc., The S&P 500 Index
And The RDG Semiconductor Composite Index
|
|
|
*
|
|
$100 invested on October 26,
2003 in stock and October 31, 2003 in index-including
reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright
©
2008 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/26/03
|
|
10/31/04
|
|
10/30/05
|
|
10/29/06
|
|
10/28/07
|
|
10/26/08
|
Applied Materials
|
|
|
100.00
|
|
|
|
77.97
|
|
|
|
79.51
|
|
|
|
84.65
|
|
|
|
93.55
|
|
|
|
57.28
|
|
S&P 500 Index
|
|
|
100.00
|
|
|
|
109.42
|
|
|
|
118.96
|
|
|
|
138.40
|
|
|
|
158.56
|
|
|
|
101.32
|
|
RDG Semicondutor Composite Index
|
|
|
100.00
|
|
|
|
75.06
|
|
|
|
81.20
|
|
|
|
84.08
|
|
|
|
97.96
|
|
|
|
54.18
|
|
Dividends
During fiscal 2008, Applieds Board of Directors declared
four quarterly cash dividends in the amount of $0.06 per
share each quarter. The fourth quarterly cash dividend declared
in fiscal 2008 was paid on December 4, 2008 to stockholders
of record as of November 13, 2008. During fiscal 2007,
Applieds Board of Directors declared one quarterly cash
dividend in the amount of $0.05 per share and three quarterly
cash dividends in the amount of $0.06 per share each
quarter. Dividends paid during fiscal 2008 and fiscal 2007
totaled $325 million and $306 million, respectively.
Applied currently anticipates that it will continue to pay cash
dividends on a quarterly basis in the future, although 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 that cash dividends are in the best interest of
Applieds stockholders.
25
Repurchases
of Applied Common Stock
The following table provides information as of October 26,
2008 with respect to the shares of common stock repurchased by
Applied during the fourth quarter of fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
|
|
|
Average
|
|
|
Shares Purchased as
|
|
|
that May Yet be
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Part of Publicly
|
|
|
Purchased under
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Announced Program*
|
|
|
the Program*
|
|
|
|
(Shares in
|
|
|
|
|
|
(Shares in
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
|
|
|
thousands)
|
|
|
millions)
|
|
|
Period #1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(July 28, 2008 to August 24, 2008)
|
|
|
3,355
|
|
|
$
|
18.25
|
|
|
|
3,355
|
|
|
$
|
2,539
|
|
Period #2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(August 25, 2008 to September 21, 2008)
|
|
|
7,100
|
|
|
$
|
17.08
|
|
|
|
7,100
|
|
|
$
|
2,418
|
|
Period #3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(September 22, 2008 to October 26, 2008)
|
|
|
8,446
|
|
|
$
|
13.91
|
|
|
|
8,446
|
|
|
$
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18,901
|
|
|
$
|
15.87
|
|
|
|
18,901
|
|
|
|
|
|
|
|
|
*
|
|
On September 15, 2006, the Board of Directors approved a
stock repurchase program for up to $5.0 billion in
repurchases over the subsequent three years, ending September
2009.
|
In November 2008, Applied announced that it had temporarily
suspended stock repurchases in order to maintain financial
flexibility in light of the deteriorating global economic and
market conditions.
26
|
|
Item 6:
|
Selected
Financial Data
|
The following selected financial information has been derived
from Applieds historical audited consolidated financial
statements and should be read in conjunction with the
consolidated financial statements and the accompanying notes for
the corresponding fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended(1)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except percentages, ratios, per share amounts
and number of employees)
|
|
|
Net sales
|
|
$
|
8,129,240
|
|
|
$
|
9,734,856
|
|
|
$
|
9,167,014
|
|
|
$
|
6,991,823
|
|
|
$
|
8,013,053
|
|
Gross margin
|
|
$
|
3,442,828
|
|
|
$
|
4,492,443
|
|
|
$
|
4,291,802
|
|
|
$
|
3,085,874
|
|
|
$
|
3,701,245
|
|
(% of net sales)
|
|
|
42.4
|
|
|
|
46.1
|
|
|
|
46.8
|
|
|
|
44.1
|
|
|
|
46.2
|
|
Research, development and engineering
|
|
$
|
1,104,122
|
|
|
$
|
1,142,073
|
|
|
$
|
1,152,326
|
|
|
$
|
940,507
|
|
|
$
|
991,873
|
|
(% of net sales)
|
|
|
13.6
|
|
|
|
11.7
|
|
|
|
12.6
|
|
|
|
13.5
|
|
|
|
12.4
|
|
Marketing, selling, general and administrative
|
|
$
|
965,164
|
|
|
$
|
952,443
|
|
|
$
|
906,742
|
|
|
$
|
697,402
|
|
|
$
|
751,621
|
|
(% of net sales)
|
|
|
11.9
|
|
|
|
9.8
|
|
|
|
9.9
|
|
|
|
10.0
|
|
|
|
9.4
|
|
Income before income taxes
|
|
$
|
1,408,718
|
|
|
$
|
2,439,653
|
|
|
$
|
2,166,971
|
|
|
$
|
1,581,569
|
|
|
$
|
1,829,250
|
|
Effective tax rate(%)
|
|
|
31.8
|
|
|
|
29.9
|
|
|
|
30.0
|
|
|
|
23.5
|
|
|
|
26.1
|
|
Net income
|
|
$
|
960,746
|
|
|
$
|
1,710,196
|
|
|
$
|
1,516,663
|
|
|
$
|
1,209,900
|
|
|
$
|
1,351,303
|
|
(% of net sales)
|
|
|
11.8
|
|
|
|
17.6
|
|
|
|
16.5
|
|
|
|
17.3
|
|
|
|
16.9
|
|
Earnings per diluted share
|
|
$
|
0.70
|
|
|
$
|
1.20
|
|
|
$
|
0.97
|
|
|
$
|
0.73
|
|
|
$
|
0.78
|
|
Weighted average common shares
|
|
|
1,374,507
|
|
|
|
1,427,002
|
|
|
|
1,565,072
|
|
|
|
1,657,493
|
|
|
|
1,721,645
|
|
Order backlog
|
|
$
|
4,847,598
|
|
|
$
|
3,654,704
|
|
|
$
|
3,398,280
|
|
|
$
|
2,570,808
|
|
|
$
|
3,368,382
|
|
Working capital(2)
|
|
$
|
3,718,605
|
|
|
$
|
4,225,967
|
|
|
$
|
3,644,974
|
|
|
$
|
5,069,663
|
|
|
$
|
6,020,747
|
|
Current ratio(2)
|
|
|
2.3
|
|
|
|
2.8
|
|
|
|
2.5
|
|
|
|
3.9
|
|
|
|
3.6
|
|
Long-term debt
|
|
$
|
201,576
|
|
|
$
|
202,281
|
|
|
$
|
204,708
|
|
|
$
|
407,380
|
|
|
$
|
410,436
|
|
Cash dividends declared per common share
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
$
|
0.18
|
|
|
$
|
0.09
|
|
|
$
|
|
|
Stockholders equity
|
|
$
|
7,548,958
|
|
|
$
|
7,821,409
|
|
|
$
|
6,651,400
|
|
|
$
|
8,928,549
|
|
|
$
|
9,262,027
|
|
Book value per share
|
|
$
|
5.67
|
|
|
$
|
5.64
|
|
|
$
|
4.78
|
|
|
$
|
5.56
|
|
|
$
|
5.51
|
|
Total assets
|
|
$
|
11,006,318
|
|
|
$
|
10,662,278
|
|
|
$
|
9,480,837
|
|
|
$
|
11,269,157
|
|
|
$
|
12,093,445
|
|
Capital expenditures, net of loss on fixed asset retirements
|
|
$
|
281,080
|
|
|
$
|
243,383
|
|
|
$
|
151,117
|
|
|
$
|
177,097
|
|
|
$
|
171,538
|
|
Regular employees
|
|
|
14,824
|
|
|
|
14,550
|
|
|
|
14,072
|
|
|
|
12,576
|
|
|
|
12,191
|
|
|
|
|
(1)
|
|
Each fiscal year ended on the last Sunday in October.
|
|
(2)
|
|
In fiscal 2006, Applied reclassified certain fixed-income
securities from short-term investments to long-term investments;
prior period balances have been reclassified to conform to the
current period presentation.
|
27
Item 7:
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Managements Discussion and Analysis (MD&A) is
intended to facilitate an understanding of Applieds
business and results of operations. This MD&A should be
read in conjunction with Applieds Consolidated Financial
Statements and the accompanying Notes to Consolidated Financial
Statements included elsewhere in this
Form 10-K.
The following discussion contains forward-looking statements and
should also be read in conjunction with the cautionary statement
set forth at the beginning of this
Form 10-K.
MD&A consists of the following sections:
|
|
|
|
|
Overview:
a summary of Applieds business,
measurements and opportunities.
|
|
|
|
Results of Operations:
a discussion of operating results.
|
|
|
|
Segment Information:
a discussion of segment operating
results.
|
|
|
|
Financial Condition, Liquidity and Capital Resources:
an
analysis of cash flows, sources and uses of cash, contractual
obligations and financial position.
|
|
|
|
Critical Accounting Policies:
a discussion of critical
accounting policies that require the exercise of judgments and
estimates.
|
Overview
Applied provides Nanomanufacturing
Technology
tm
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 are 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.
The following table presents certain significant measurements
for the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions, except per share amounts and percentages)
|
|
|
New orders
|
|
$
|
9,155
|
|
|
$
|
9,677
|
|
|
$
|
9,888
|
|
Net sales
|
|
$
|
8,129
|
|
|
$
|
9,735
|
|
|
$
|
9,167
|
|
Gross margin
|
|
$
|
3,443
|
|
|
$
|
4,492
|
|
|
$
|
4,292
|
|
Gross margin percent
|
|
|
42.4
|
%
|
|
|
46.1
|
%
|
|
|
46.8
|
%
|
Net income
|
|
$
|
961
|
|
|
$
|
1,710
|
|
|
$
|
1,517
|
|
Earnings per share
|
|
$
|
0.70
|
|
|
$
|
1.20
|
|
|
$
|
0.97
|
|
Fiscal 2008 financial results reflected decreased demand for
semiconductor equipment and, to a lesser extent, service
products, due to unfavorable market conditions in the
semiconductor industry, partially offset by increased demand for
LCD and solar products. New orders decreased from fiscal 2007
due to lower demand for semiconductor equipment from memory,
foundry and logic chip manufacturers, partially offset by
increased demand by LCD customers and, beginning in the
first quarter of fiscal 2008, the recognition of orders for
Applieds
SunFab
tm
Thin Film Line for manufacturing solar panels. Net sales
decreased during fiscal 2008 compared to fiscal 2007 due to the
decline in investment from memory and logic customers, partially
offset by increased sales of crystalline silicon (c-Si) solar
manufacturing products. Net income decreased in fiscal 2008
compared to fiscal 2007 due to lower net sales, offset in part
by lower operating expenses. Fiscal 2008 financial results
included charges associated with restructuring programs.
28
Fiscal 2007 financial results reflected improved conditions in
the semiconductor industry that began with the industrys
recovery in 2006, while conditions in the display industry were
mixed as manufacturers postponed capacity additions despite
strong consumer demand for LCD TVs. Total orders decreased
slightly from fiscal 2006, primarily due to the significant
decline in demand for display manufacturing products, partially
offset by increased demand for products and services in all
other segments. Net sales increased during fiscal 2007 over
fiscal 2006, primarily due to strong demand from dynamic random
access memory (DRAM) and flash memory chip manufacturers,
partially offset by a significant decline in LCD equipment sales
as manufacturers absorbed capacity following substantial
investment in 2006. Net income improved in fiscal 2007 compared
to fiscal 2006 due to higher sales and lower operating expenses,
offset in part by lower interest income. Fiscal 2007 financial
results included restructuring and asset impairment and other
charges associated with ceasing development of beamline implant
products, and an in-process research and development
(IPR&D) expense associated with the acquisition of certain
net assets of Brooks Automation, Inc. (Brooks Software).
Fiscal 2006 results reflected a recovery in the semiconductor
and flat panel display industries along with the global economy,
as end-user demand for electronic products and LCDs drove
increased customer investments in advanced silicon (particularly
memory) and display products compared to fiscal 2005. During
this period, Applieds semiconductor customers increased
both high-volume production and leading-edge 65nm and 45nm chip
development. Improvements in operating performance were offset
in part by restructuring and asset impairment charges, and an
IPR&D expense associated with the acquisition of Applied
Films Corporation (Applied Films).
Applied expects an unusually challenging environment for fiscal
2009. The turmoil in the financial markets and weakening global
economy are compounding the impact of the highly cyclical
markets in which Applied operates. Current negative trends in
consumer spending and pervasive economic uncertainty have led
some customers to decrease factory operations and to reassess
their projected spending plans. As a result, on
November 12, 2008, Applied announced that it will implement
a restructuring program beginning in the first quarter of fiscal
2009. In addition, Applieds ability to forecast
customers future investments and its financial targets are
limited in this uncertain macroeconomic climate. Applied
currently expects that orders and revenue will be down overall
and across most segments in fiscal 2009, with the exception of
the Energy and Environmental Solutions segment.
Results
of Operations
The following table presents certain quarterly and full fiscal
year financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
Fiscal
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
(In millions, except per share amounts)
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
|
$
|
2,500
|
|
|
$
|
2,414
|
|
|
$
|
2,030
|
|
|
$
|
2,212
|
|
|
$
|
9,155
|
|
Net sales
|
|
$
|
2,087
|
|
|
$
|
2,150
|
|
|
$
|
1,848
|
|
|
$
|
2,044
|
|
|
$
|
8,129
|
|
Gross margin
|
|
$
|
935
|
|
|
$
|
967
|
|
|
$
|
742
|
|
|
$
|
799
|
|
|
$
|
3,443
|
|
Net income
|
|
$
|
262
|
|
|
$
|
303
|
|
|
$
|
165
|
|
|
$
|
231
|
|
|
$
|
961
|
|
Earnings per diluted share
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
0.70
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
|
$
|
2,538
|
|
|
$
|
2,648
|
|
|
$
|
2,284
|
|
|
$
|
2,206
|
|
|
$
|
9,677
|
|
Net sales
|
|
$
|
2,277
|
|
|
$
|
2,530
|
|
|
$
|
2,561
|
|
|
$
|
2,367
|
|
|
$
|
9,735
|
|
Gross margin
|
|
$
|
1,063
|
|
|
$
|
1,137
|
|
|
$
|
1,216
|
|
|
$
|
1,077
|
|
|
$
|
4,492
|
|
Net income
|
|
$
|
403
|
|
|
$
|
411
|
|
|
$
|
474
|
|
|
$
|
422
|
|
|
$
|
1,710
|
|
Earnings per diluted share
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.34
|
|
|
$
|
0.30
|
|
|
$
|
1.20
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
|
$
|
2,041
|
|
|
$
|
2,488
|
|
|
$
|
2,670
|
|
|
$
|
2,688
|
|
|
$
|
9,888
|
|
Net sales
|
|
$
|
1,858
|
|
|
$
|
2,248
|
|
|
$
|
2,543
|
|
|
$
|
2,518
|
|
|
$
|
9,167
|
|
Gross margin
|
|
$
|
838
|
|
|
$
|
1,045
|
|
|
$
|
1,223
|
|
|
$
|
1,186
|
|
|
$
|
4,292
|
|
Net income
|
|
$
|
143
|
|
|
$
|
413
|
|
|
$
|
512
|
|
|
$
|
449
|
|
|
$
|
1,517
|
|
Earnings per diluted share
|
|
$
|
0.09
|
|
|
$
|
0.26
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
$
|
0.97
|
|
29
Applieds business was subject to cyclical industry
conditions in fiscal 2008, 2007 and 2006. As a result of these
conditions, there were significant fluctuations in
Applieds quarterly new orders and net sales, both within
and across the fiscal years. Demand for manufacturing equipment
has historically been volatile as a result of sudden changes in
chip and LCD supply and demand and other factors, including
global economic and market conditions and rapid technological
advances in fabrication processes.
New
Orders
New orders by geographic region, which are attributed according
to the location of customers facilities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Taiwan
|
|
$
|
2,110
|
|
|
$
|
2,703
|
|
|
$
|
2,098
|
|
North America(1)
|
|
|
1,680
|
|
|
|
1,518
|
|
|
|
1,901
|
|
Asia-Pacific(2)
|
|
|
1,530
|
|
|
|
1,262
|
|
|
|
1,272
|
|
Korea
|
|
|
1,477
|
|
|
|
1,639
|
|
|
|
1,758
|
|
Japan
|
|
|
1,224
|
|
|
|
1,520
|
|
|
|
1,823
|
|
Europe
|
|
|
1,134
|
|
|
|
1,035
|
|
|
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,155
|
|
|
$
|
9,677
|
|
|
$
|
9,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Primarily the United States.
|
|
(2)
|
|
Includes China.
|
New orders for fiscal 2008 decreased 5 percent to
$9.2 billion from $9.7 billion in the prior year, due
to lower demand for semiconductor equipment from logic, memory,
and foundry chip manufacturers, partially offset by increased
demand for LCD and solar equipment, including the initial
recognition of orders for the Applied
SunFab
tm
Thin Film Line. Demand for LCD equipment slowed substantially in
the fourth quarter of fiscal 2008, as Display customers absorbed
capacity following robust demand over the preceding three
quarters.
New orders for fiscal 2007 decreased 2 percent to
$9.7 billion from $9.9 billion in the prior year,
reflecting delays in investment by LCD customers, partially
offset by increased demand for solar equipment, semiconductor
equipment, and service products. Demand for semiconductor
equipment slowed in the second half of fiscal 2007 as customers
absorbed added capacity, while demand from LCD customers
recovered in the fourth quarter of fiscal 2007.
Fiscal 2006 orders of $9.9 billion reflected increased
semiconductor manufacturing equipment orders from memory
manufacturers, increased service orders as a result of higher
customer factory utilization and new product introductions, and
increased display orders as customers invested in
next-generation equipment.
Applieds backlog for the last three fiscal years was as
follows: $4.8 billion at October 26, 2008,
$3.7 billion at October 28, 2007, and
$3.4 billion at October 29, 2006. Backlog increased in
fiscal 2008 primarily due to the inclusion of orders for
products obtained through the acquisitions of Baccini S.p.A.
(Baccini) and HCT Shaping Systems S.A. (HCT) that met
Applieds order recognition criteria during the third
quarter of fiscal 2008 but did not qualify for order recognition
at the time of the acquisition, partially offset by debookings,
primarily of semiconductor equipment, and unfavorable currency
adjustments. Backlog consists of: (1) orders for which
written authorizations have been accepted and assigned shipment
dates are within the next 12 months, or shipment has
occurred but revenue has not been recognized;
(2) contractual service revenue and maintenance fees to be
earned within the next 12 months; and (3) orders for
SunFab lines that are anticipated to be recognized as revenue
within the next 12 months. Due to the potential for
customer changes in delivery schedules or cancellation of
orders, Applieds backlog at any particular time is not
necessarily indicative of actual sales for any future periods.
30
Net
Sales
Net sales by geographic region, which are attributed according
to the location of customers facilities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Taiwan
|
|
$
|
1,837
|
|
|
$
|
2,679
|
|
|
$
|
2,079
|
|
North America(1)
|
|
|
1,520
|
|
|
|
1,554
|
|
|
|
1,708
|
|
Korea
|
|
|
1,309
|
|
|
|
1,847
|
|
|
|
1,699
|
|
Asia-Pacific(2)
|
|
|
1,296
|
|
|
|
1,206
|
|
|
|
1,157
|
|
Japan
|
|
|
1,218
|
|
|
|
1,493
|
|
|
|
1,518
|
|
Europe
|
|
|
949
|
|
|
|
956
|
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,129
|
|
|
$
|
9,735
|
|
|
$
|
9,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Primarily the United States.
|
|
(2)
|
|
Includes China.
|
During fiscal 2008, net sales decreased by 16 percent, to
$8.1 billion from $9.7 billion in fiscal 2007, due to
decreased investment from memory and logic chip manufacturers,
partially offset by increased demand from solar and LCD
customers. During fiscal 2007, net sales increased by
6 percent, to $9.7 billion from $9.2 billion in
fiscal 2006, led by strength in memory capacity expansion
throughout the year. In fiscal 2006, net sales of
$9.2 billion followed the trend of increased orders for the
year.
Gross
Margin
Gross margin as a percentage of net sales decreased to
42.4 percent in fiscal 2008 from 46.1 percent in
fiscal 2007, compared to 46.8 percent in fiscal 2006.
The decrease in the gross margin percentage from fiscal 2007 to
fiscal 2008 was attributable to lower net sales and lower margin
product mix. The decrease in the gross margin percentage from
fiscal 2006 to fiscal 2007 was principally attributable to
inventory-related charges of $56 million associated with
ceasing development of beamline implant products, incremental
charges attributable to acquisitions consisting of inventory
fair value adjustments on products sold, amortization and
product mix, partially offset by higher revenue levels and lower
material costs. Gross margin during fiscal 2008, 2007 and 2006
included $32 million, $27 million and
$37 million, respectively, of equity-based compensation
expense.
Research,
Development and Engineering
Applieds future operating results depend to a considerable
extent on its ability to maintain a competitive advantage in the
equipment and service products it provides. Applied believes
that it is critical to continue to make substantial investments
in RD&E to assure the availability of innovative technology
that meets the current and projected requirements of its
customers most advanced designs. Applied historically has
maintained its commitment to investing in RD&E in order to
continue to offer new products and technologies. RD&E
expenses were $1.1 billion (14 percent of net sales)
in fiscal 2008, $1.1 billion (12 percent of net sales)
in fiscal 2007 and $1.2 billion (13 percent of net
sales) in fiscal 2006. RD&E expense during fiscal 2008,
2007 and 2006 included $59 million, $56 million and
$76 million, respectively, of equity-based compensation
expense. Development cycles range from 12 to 36 months
depending on whether the product is an enhancement of an
existing product, which typically has a shorter development
cycle, or a new product, which typically has a longer
development cycle. Most of Applieds existing products
resulted from internal development activities and innovations
involving new technologies, materials and processes. In certain
instances, Applied acquires technologies, either in existing or
new product areas, to complement its existing technology
capabilities and to reduce time to market.
In fiscal 2008, Applied focused on the development of processes
and systems for the continued scaling of semiconductor devices.
Applied pioneered a self-aligned double patterning approach that
can enable 22nm and below device fabrication using conventional
optical lithography. The Company also developed technology for
the
31
implementation of through-silicon vias, an emerging solution for
interconnecting 3D chip stacks to achieve better device
performance, lower power consumption, reduced costs and the
integration of heterogeneous devices. Efforts were also focused
on developing the systems and technology to reduce the
cost-per-watt
of solar electricity.
In fiscal 2007, Applied focused on developing systems for
customers new chip designs with 45nm and below geometries,
including systems to enable faster transistors using strain
engineering and high-k/metal gate technologies, and patterning
processes to enable customers to extend their existing 193 nm
lithography tools through additional technology generations.
Applied also continued to invest in solar research and
development.
In fiscal 2006, Applied continued its development of systems to
increase chip performance, especially for flash and DRAM
devices. Applied also focused on developing systems for 32nm and
22nm copper/low k interconnect processing technologies to
address critical manufacturing challenges that chipmakers face
as they transition to future device generations, helping them to
bring new products to market more rapidly while minimizing risk.
Applied also continued to focus on developing LCD systems to
process larger glass substrates.
There were no IPR&D charges recorded in fiscal 2008. During
fiscal 2007, Applied recorded an IPR&D expense of
$5 million associated with the acquisition of certain net
assets of Brooks Software, a division of Brooks Automation, Inc.
During fiscal 2006, Applied recorded an IPR&D expense in
the amount of $14 million related to the acquisition of
Applied Films. Applieds methodology for allocating the
purchase price relating to purchased acquisitions to IPR&D
was determined through established valuation techniques. The
IPR&D was expensed upon acquisition because technological
feasibility had not been established and no future alternative
uses existed.
Marketing,
Selling, General and Administrative
Marketing, selling, general and administrative expenses were
$965 million (12 percent of net sales) in
fiscal 2008, $952 million (10 percent of net
sales) in fiscal 2007, and $907 million (10 percent of
net sales) in fiscal 2006. The increase in marketing, selling,
general and administrative expenses from fiscal 2007 to 2008 was
principally attributable to increased operating costs from
business acquisitions and equity compensation expenses, offset
in part by cost control initiatives. The increase in marketing,
selling, general and administrative expenses from fiscal 2006 to
2007 was principally attributable to increased operating costs
from acquired businesses, investments in the solar business
expansion, and increased variable compensation expenses. These
expenses were partially offset by lower equity compensation
expenses and savings from cost control initiatives, including
ceasing development of beamline implant products and
transitioning to managed service providers to perform certain
information technology and business infrastructure support.
Marketing, selling and general and administrative expenses
during fiscal 2008, 2007 and 2006 included $88 million,
$77 million and $104 million, respectively, of
equity-based compensation expense.
Restructuring
and Asset Impairments
During the first quarter of fiscal 2008, Applied announced a
global cost reduction plan (the Plan) that primarily affected
its Silicon and Applied Global Services segments and related
support organizations. As part of the Plan, Applied reduced its
global workforce through a combination of job elimination and
attrition. For fiscal 2008, Applied recorded restructuring
charges of $29 million relating to the Plan, consisting
primarily of employee termination costs to reduce its workforce.
The affected employees were based in North America, Europe and
Asia, and represented multiple functions.
During the second quarter of fiscal 2007, Applieds Board
of Directors approved a plan (the Implant Plan) to cease
development of beamline implant products for semiconductor
manufacturing and curtail the operations of its Implant group
based in Horsham, England. Under the Implant Plan, Applied
closed its research, development and manufacturing operations in
Horsham in October 2007. Costs under the Implant Plan for fiscal
2008 consisted of restructuring charges of $11 million
associated with facilities. Costs under the Implant Plan in
fiscal 2007 consisted primarily of inventory-related charges
reported as cost of products sold of $56 million, other
operating expenses of $10 million, and restructuring and
asset impairment charges of $30 million. Also as part of
the Implant Plan, Applied recorded restructuring charges of
$22 million, consisting primarily of employee termination
costs to reduce its workforce. The majority of the affected
employees were based in Horsham, England, and represented
multiple functions. Asset impairment charges included
$8 million of fixed asset write-offs. The Implant group
operated in
32
the Silicon segment, and the results of its operations were not
material to Applieds financial position or results of
operations.
During the first quarter of fiscal 2006, Applieds Board of
Directors approved a plan to disinvest a portion of
Applieds real estate and facilities portfolio (the
Disinvestment Plan). Properties with an estimated fair value of
$56 million were reported as assets held-for-sale and
reclassified from property, plant and equipment on the
Consolidated Balance Sheet. During fiscal 2006, Applied recorded
an asset impairment charge of $124 million to write down
the following properties to estimated fair value:
(1) facilities in Narita, Japan, Chunan, Korea, Hillsboro,
Oregon, and Danvers, Massachusetts; and (2) 26 acres
of unimproved land in Hillsboro, Oregon. During fiscal 2006,
Applied sold the Danvers facility for net proceeds of
$16 million and recognized a gain of $4 million.
During fiscal 2007, Applied sold the Hillsboro, Chunan, and
Narita facilities and the Hillsboro land for total net proceeds
of $38 million and recognized a gain of $3 million.
Also in fiscal 2006, as part of the Disinvestment Plan, Applied
recorded lease termination charges in the amount of
$89 million related to the closure of its leased Hayward,
California facility.
For further details, see Note 6 of Notes to Consolidated
Financial Statements.
Net
Interest and Other Income
Net interest and other income was $89 million for fiscal
2008, $98 million for fiscal 2007, and $149 million
for fiscal 2006.
The decrease in net interest and other income for fiscal 2008
from fiscal 2007 was primarily due to a reduction in short-term
investments and a decrease in interest rates during fiscal 2008,
offset by a decrease in interest expense associated with
scheduled debt maturities that occurred in September 2007. The
decrease in net interest and other income from fiscal 2006 to
2007 was primarily due to a reduction in cash and investments
during the fourth quarter of fiscal 2006 when Applied
repurchased 145 million shares of its outstanding common
stock for an aggregate purchase price of $2.5 billion under
an accelerated stock buyback program.
Income
Taxes
Applieds effective income tax provision rate was
31.8 percent for fiscal 2008, 29.9 percent for fiscal
2007, and 30.0 percent for fiscal 2006. Applieds
effective tax rate was higher for fiscal 2008 compared to fiscal
2007 as fiscal 2007 reflected benefits of $36 million
principally related to the favorable resolution of audits of
prior years income tax filings, partially offset by a
$13 million charge from the expensing of equity-based
compensation. Applieds effective tax rate of
30.0 percent for fiscal 2006 reflected benefits of
$61 million principally related to the favorable resolution
of audits of prior years income tax filings, partially
offset by a $17 million charge from the expensing of
equity-based compensation.
Applieds future effective income tax rate depends on
various factors, such as tax legislation, the geographic
composition of Applieds pre-tax income, and non-tax
deductible expenses incurred in connection with acquisitions.
Management carefully monitors these factors and timely adjusts
the effective income tax rate accordingly.
Segment
Information
Applied operates in four reportable 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 10 of Notes to Consolidated Financial Statements.
Applied does not allocate to its reportable segments certain
operating expenses, which it manages separately at the corporate
level. These unallocated costs include those for equity-based
compensation and certain components of variable compensation,
corporate marketing and sales, corporate functions (certain
management, finance, legal, human resources and RD&E), and
unabsorbed information technology and occupancy. Effective in
the first quarter of fiscal 2008, Applied renamed two of its
reportable segments. The Fab Solutions segment was renamed
Applied Global Services, and the Adjacent Technologies segment
was renamed Energy and Environmental Solutions. In addition,
Applied changed its management reporting system for services to
report all service results in the Applied Global Services
33
segment. Applied has reclassified segment operating results for
fiscal 2007 and 2006 to conform to the fiscal 2008 presentation.
Discussions below include the results of each reportable segment.
Silicon
Segment
The Silicon segment includes semiconductor capital equipment for
deposition, etch, rapid thermal processing (RTP), chemical
mechanical planarization (CMP), 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.
Certain significant measures for the past three fiscal years
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
4,092
|
|
|
$
|
6,651
|
|
|
$
|
6,555
|
|
Net sales
|
|
$
|
4,005
|
|
|
$
|
6,512
|
|
|
$
|
5,971
|
|
Operating income
|
|
$
|
1,242
|
|
|
$
|
2,379
|
|
|
$
|
2,000
|
|
Silicon new orders decreased 38 percent to
$4.1 billion in fiscal 2008 compared to fiscal 2007. The
decrease in new orders was due to reduced demand for equipment
from logic, memory and foundry customers. Net sales decreased
38 percent to $4.0 billion in fiscal 2008 compared to
fiscal 2007. The decrease in net sales was due to decreased
investment by logic and memory customers. Operating income
decreased 48 percent to $1.2 billion in fiscal 2008
compared to fiscal 2007. The decrease in operating income was
due to significantly lower revenue levels from the slowdown in
the semiconductor equipment industry, partially offset by lower
operating expenses attributable to continued focus on cost
controls and improvement in manufacturing activities. In fiscal
2008, the Company launched two key products for photomask
applications: the Applied Aera2 Mask Inspection system, which
detects critical defects on a photomask, and the Applied Tetra
Reticle Clean system, which cleans 32nm and below photomasks
using wet clean chemistry. The Company also introduced the
Applied Producer eHARP system for depositing films in high
aspect ratio device structures.
Silicon orders increased 1 percent to $6.7 billion in
fiscal 2007 compared to fiscal 2006, reflecting the
semiconductor industrys strength during this period,
driven by demand for cell phones, computers, digital TVs, game
consoles, MP3 players and other electronic products. The
majority of new orders were for memory applications as customers
invested in leading-edge flash and DRAM memory devices, while
orders from foundries remained at low levels. Net sales
increased 9 percent to $6.5 billion in fiscal 2007
compared to fiscal 2006. The increase in net sales was due to
increased investment by memory and logic semiconductor customers
in multiple areas, including etch, inspection, and RTP products.
Operating income increased 19 percent to $2.4 billion
in fiscal 2007 compared to fiscal 2006. The increase in
operating income was due to higher revenue levels and continued
focus on cost controls. Operating income for fiscal 2007
included charges of $66 million related to ceasing
development of beamline implant products. In fiscal 2007, the
Company launched the Applied Producer GT, a significant redesign
of its successful Producer platform that offers faster, more
cost-effective CVD processing for 45 nm and beyond
applications. To meet the challenges of fabricating
next-generation transistors, Applied announced its portfolio of
high-k/metal gate solutions, including the Applied Advanced Gate
Stack and Applied Centura Carina Etch systems. Other new etch
systems introduced were the Applied Mariana Trench, for etching
high aspect ratio structures, the Applied Opus AdvantEdge Metal
Etch with a new 5-chamber platform, and the Applied Centura
Tetra III Advanced Reticle Etch. The Company also added to
its line of lithography-enabling systems with the new Applied
Producer ACE SACVD and added to its line of strain engineering
solutions with the Applied Producer Celera CVD.
During fiscal 2006, leading semiconductor manufacturers reported
increased sales as the electronics market continued to grow. The
demand for consumer electronics, including broadband, personal
computers and cell phones with increasing digital content and
complex chips, resulted in increased chip demand and the need
for additional capacity. In addition to expanding consumer
electronics demand, corporate information technology investment
increased, with an emphasis on security, server consolidation
and more robust internet infrastructures. During
34
fiscal 2006, demand increased in many areas, including
etch, inspection and thin films products. Improved operating
results in fiscal 2006 reflected an increase in business volume,
offset in part by increases in variable compensation expenses.
Applied continued its development of systems to increase chip
performance, especially for flash and DRAM devices. To extend
the usefulness of aluminum (the material used by many memory
manufacturers for interconnects) to the sub-70nm node, the
Company introduced two products, the Applied Endura CVD Al
technology and Applied Centura AdvantEdge Metal Etch system. For
faster copper interconnects, Applied launched its enhanced
Endura CuBS/S II system with Aktiv Preclean, extending the
systems capability to the 45nm node and below, especially
for use with ultra-low dielectric constant (low k) films.
The Company introduced the Applied Endura iLB II (integrated
liner-barrier) system, offering advances in PVD titanium and
preclean technologies, to provide significantly reduced
resistance for contact structures. The Company also focused on
providing solutions to extend customers lithography
technology, introducing the Applied Producer APF-e (advanced
patterning film enhancement) system. The new APF-e film enables
chipmakers to cost-effectively pattern nano-scale features
without additional integration complexity while reducing their
reliance on next-generation lithography systems.
Applied currently expects that the uncertain economic
conditions, including credit concerns and lower consumer
spending, will lead to further decline in demand for
semiconductor equipment in fiscal 2009.
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.
Certain significant measures for the past three fiscal years
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
2,249
|
|
|
$
|
2,508
|
|
|
$
|
2,413
|
|
Net sales
|
|
$
|
2,329
|
|
|
$
|
2,353
|
|
|
$
|
2,352
|
|
Operating income
|
|
$
|
575
|
|
|
$
|
630
|
|
|
$
|
685
|
|
Fiscal 2008 results were impacted by lower levels of
semiconductor and display customers factory utilization.
New orders decreased 10 percent to $2.2 billion in
fiscal 2008 compared to fiscal 2007, due to lower orders for
spares, fab-wide services, and refurbished equipment, partially
offset by increased orders for service and system enhancements.
Net sales decreased 1 percent to $2.3 billion in
fiscal 2008 compared to fiscal 2007. The net sales decrease
reflected lower sales of fab-wide services and spares, offset by
increased sales in services and system enhancements. Operating
income decreased 9 percent to $575 million in fiscal
2008 compared to fiscal 2007 due to higher operating expenses in
fiscal 2008.
New orders increased 4 percent to $2.5 billion in
fiscal 2007 compared to fiscal 2006. The increase in new orders
reflected increased demand for spare parts and services, as well
as demand for factory automation products obtained as part of
the Brooks Software acquisition. Net sales of $2.4 billion
in fiscal 2007 were slightly up compared to fiscal 2006 due to
increased factory automation sales offset by declines in spares
sales. Fiscal 2007 remanufactured equipment orders and net sales
remained consistent with fiscal 2006 levels. Operating income
decreased 8 percent to $630 million in fiscal 2007
compared to fiscal 2006, reflecting product mix and increased
operating expenses and charges related to the Brooks Software
acquisition.
Net sales in 2006 reflected increases in spare parts shipments
and service contracts as a result of higher wafer starts and an
increase in 200mm remanufactured equipment investment. During
fiscal 2006, operating results reflected improved operational
efficiencies and savings from cost control initiatives. Applied
also expanded its product offerings with the introduction of
abatement systems for reducing perfluorocarbon (PFC) emissions
and additional chamber performance services capabilities.
35
Fiscal 2007 and 2006 new orders, net sales and operating income
increased from the previously reported amounts due to the
reclassification in fiscal 2008 of display service products from
the Display segment.
Applied currently expects that the uncertain global economic
conditions will lead to lower factory utilization by
Applieds customers, resulting in lower demand for Applied
Global Services products in fiscal 2009.
Display
Segment
The Display segment encompasses products for manufacturing LCDs
for TVs, personal computers and other video-enabled devices. The
business is focused on expanding market share by differentiation
with larger-scale substrates, entry into new markets, and
development of products to enable cost reductions through
productivity and uniformity.
Certain significant measures for the past three fiscal years
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
1,486
|
|
|
$
|
273
|
|
|
$
|
883
|
|
Net sales
|
|
$
|
976
|
|
|
$
|
705
|
|
|
$
|
824
|
|
Operating income
|
|
$
|
310
|
|
|
$
|
159
|
|
|
$
|
257
|
|
New orders increased significantly to $1.5 billion in
fiscal 2008 compared to $273 million in fiscal 2007.
Increased orders were due to substantial increases in demand by
Display customers in response to strong end-product demand. This
demand for LCD equipment reached an inflexion point in the third
quarter of fiscal 2008 and decreased significantly in the fourth
quarter of fiscal 2008, reflecting the volatility of the display
industry. Net sales increased 38 percent to
$976 million in fiscal 2008 compared to fiscal 2007,
primarily due to customers investment in Gen-8 products.
Operating income increased to $310 million in fiscal 2008
from $159 million in fiscal 2007. Operating income
increased due to higher revenue levels, product mix and lower
operating costs. In fiscal 2008, the Company introduced its
Gen-10 systems that can process substrates sized at
approximately 2.85 x 3.05 meters. These systems include the
AKT-90K PECVD and AKT-90K EBT products.
New orders decreased 69 percent to $273 million in
fiscal 2007 compared to fiscal 2006, reflecting delays in
capacity expansion plans by LCD panel makers in light of excess
inventories and end product sales price declines. Display
customers increased spending levels in the fourth quarter of
fiscal 2007 as panel makers began to experience more favorable
market conditions. Net sales decreased 14 percent to
$705 million in fiscal 2007. The decrease in net sales was
attributable to lower investment by LCD manufacturers as they
absorbed capacity. Operating income decreased 38 percent to
$159 million in fiscal 2007 compared to fiscal 2006, due to
lower revenues and factory absorption, product mix and higher
operating expenses in support of the expanded product portfolio
resulting from the acquisition of Applied Films in July 2006. In
2007, Applied launched the
AKT-PiVot
tm
55KV system, which employs high-productivity, cost-efficient PVD
technology to deposit metal and transparent conductive oxide
films on the substrate.
During fiscal 2006, price reductions in consumer electronics
accelerated the growth of the flat panel display market. As a
result, display manufacturers increased investments in Gen-7,
Gen-7.5, and Gen-8 systems. In addition, laptop demand continued
to be strong, resulting in additional Gen-5 and Gen-5.5 fab
investment. With the acquisition of Applied Films in fiscal
2006, Applied entered the PVD color filter market. During the
last quarter of fiscal 2006, flat panel equipment demand began
to slow as customers aligned their capacity plans and inventory
levels. Fiscal 2006 results included a $5 million
IPR&D expense related to the acquisition of Applied Films.
Applied launched three FPD systems, the AKT-55K EBT, the AKT-55K
PECVD and the AKT-NEW ARISTO 2200, for manufacturing Gen-8.5
panels, sized at 2.2m x 2.5m, which produce up to six
55-inch
LCD
TV screens.
Fiscal 2007 and 2006 new orders, net sales and operating income
reported herein are lower than the previously reported amounts
due to the reclassification in fiscal 2008 of display service
products from the Display segment to the Applied Global Services
segment.
36
Applied currently expects that the uncertain global economic
conditions will result in decreasing consumer spending, leading
to lower factory utilization by flat panel display manufacturers
and lower demand for LCD equipment in fiscal 2009.
Energy
and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes products
for fabricating solar PV 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. Applied began offering these products
after the acquisition of Applied Films in fiscal 2006. This
segment also includes products for manufacturing c-Si solar PVs
that were obtained through the acquisitions of HCT in fiscal
2007 and Baccini in fiscal 2008. 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.
Certain significant measures for the past three fiscal years
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
1,329
|
|
|
$
|
245
|
|
|
$
|
37
|
|
Net sales
|
|
$
|
819
|
|
|
$
|
165
|
|
|
$
|
20
|
|
Operating loss
|
|
$
|
183
|
|
|
$
|
89
|
|
|
$
|
8
|
|
New orders of $1.3 billion in fiscal 2008 increased from
$245 million in fiscal 2007. The increase in new orders was
primarily due to the recognition of orders for the Applied
SunFab
tm
Thin Film Line that began in the first quarter of fiscal
2008, as well as growth in orders for c-Si products. Net sales
of $819 million in fiscal 2008 increased from
$165 million in fiscal 2007 due to customers
investment in c-Si products from the acquisitions of HCT and
Baccini and increased sales across all other products in the
segment. The increase in net sales for fiscal 2008 included the
first revenue recognition of an Applied
SunFab
tm
Thin Film Line. The operating loss of $183 million in
fiscal 2008 increased from $89 million in fiscal 2007. The
increase in operating loss reflected increased RD&E
spending to develop products that enable lower-cost production
of solar energy, increased operating costs, amortization of
acquisition-related costs, and costs related to expansion of
solar marketing efforts, partially offset by higher revenues.
New orders of $245 million in fiscal 2007 increased from
$37 million in fiscal 2006, due primarily to increased
orders of c-Si solar, glass and flexible electronics products.
Net sales of $165 million in fiscal 2007 increased from
$20 million in fiscal 2006 due primarily to higher glass,
flexible electronics and c-Si solar net sales. Operating loss of
$89 million in fiscal 2007 increased from $8 million
in fiscal 2006, reflecting increased RD&E spending to
develop products and services that enable lower-cost production
of solar energy and costs related to expansion of solar
marketing efforts, offset by higher revenues. In fiscal 2007,
Applied introduced the Applied
SunFab
tm
Thin Film Line, the first integrated production line designed
for manufacturing thin film silicon solar modules using
5.7 square meter glass panels.
Orders and net sales in fiscal 2006 reflected the results of
Applied Films solar, flexible electronics and
energy-efficient glass products that Applied acquired in the
third quarter. Fiscal 2006 results included a $9 million
IPR&D expense related to the acquisition of Applied Films.
Business
Combinations and Equity-Method Investment
On January 31, 2008, Applied acquired all of the
outstanding shares of Baccini, a privately-held company based in
Italy, for a purchase price of $215 million in cash, net of
cash and marketable securities acquired. The acquired business
is a leading supplier of automated metallization and test
systems for manufacturing c-Si photovoltaic cells.
On November 9, 2007, Applied purchased from Edwards Vacuum,
Inc. certain assets of its Kachina semiconductor equipment parts
cleaning and refurbishment business for $19 million.
37
On August 23, 2007, Applied acquired all of the outstanding
shares of Switzerland-based HCT for $463 million in cash,
net of cash acquired. The acquired business is the worlds
leading supplier of precision wafering systems used principally
in manufacturing c-Si substrates for the solar industry.
On March 30, 2007, Applied purchased Brooks Software for
$137 million in cash. The acquired business is a leading
provider of factory management and control software to the
semiconductor and flat panel display industries. Its products
complement Applieds existing software applications and
enable Applied to offer customers a comprehensive computer
integrated manufacturing solution for optimizing fab operations.
On August 14, 2006, Applieds wholly-owned subsidiary,
Metron Technology, Inc. (Metron), purchased certain parts
cleaning and recycling assets in Singapore from UMS Solutions
PTE Ltd. for $10 million. The acquisition enhanced the
Companys capabilities in Southeast Asia to provide
advanced, high-quality parts cleaning services to support its
customers semiconductor manufacturing requirements.
On July 20, 2006, Applied and Dainippon Screen Mfg. Co.,
Ltd. (Screen) completed the formation of Sokudo Co., Ltd.
(Sokudo), a Japanese joint venture company, to deliver advanced
track solutions for customers critical semiconductor
manufacturing requirements. Track systems are a key part of
semiconductor manufacturing and are used before and after
photolithography to deposit, bake and develop the photoresist
layer that defines circuit patterns. Screen owns 52 percent
and holds the controlling interest in Sokudo, and Applied owns
48 percent of Sokudo. Screen transferred into Sokudo its
existing track business and related intellectual property,
including employees, products and its installed base of systems.
Applied paid $147 million for its investment in Sokudo.
Additionally, Applied contributed to Sokudo certain technology
and related intellectual property and has provided key
development employees. Screen performs manufacturing for Sokudo
under an outsourcing agreement.
On July 7, 2006, Applied completed its acquisition of
Applied Films, a leading supplier of thin film deposition
equipment used in manufacturing LCDs, solar cells, flexible
electronics and energy-efficient glass. Applied paid $28.50 per
share in cash for each outstanding share of Applied Films for a
total purchase price of approximately $484 million, or
$328 million net of Applied Films existing cash and
marketable securities. As part of the acquisition, Applied
assumed Applied Films outstanding stock options and
restricted stock unit awards that, at the acquisition date, had
a total fair value of $26 million, of which
$18 million was allocated to the purchase price and the
remainder to unearned compensation. Upon the acquisition and
subject to vesting, Applied Films stock options became
exercisable for shares of Applied common stock and Applied Films
restricted stock unit awards became payable in shares of Applied
common stock totaling, in the aggregate, three million shares of
Applied common stock.
On December 23, 2005, Applied acquired all of the
outstanding shares of ChemTrace Corporation and ChemTrace
Precision Cleaning, Inc. for $22 million in cash, net of
cash acquired, of which $18 million was paid upon closing.
This business provides customers with precision parts cleaning
and materials testing solutions.
For further details, see Note 12 of Notes to Consolidated
Financial Statements.
Recent
Accounting Pronouncements
In April 2008, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible Assets.
This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets
in business combinations and asset acquisitions.
FSP 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008.
Early adoption is prohibited. Applied is evaluating the
potential impact of the implementation of
FSP 142-3
on its financial position and results of operations.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 requires disclosures of how and
why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash
flows. SFAS 161 will be effective for Applied in fiscal
2010, with early adoption permitted. Applied is
38
evaluating the potential impact of the implementation of
SFAS 161 on its financial position and results of
operations.
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 is evaluating the
potential impact of the implementation of SFAS 141(R) on
its financial position and results of operations.
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
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 will be effective for Applied in fiscal 2009.
Management does not believe the effect of implementing
SFAS 159 will have a material impact on the Companys
financial position or results of operations.
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)
and
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 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 will continue to
evaluate the application of SFAS 157. Management does not
believe the effect of implementing SFAS 157 will have a
material impact on the Companys financial position or
results of operations.
Financial
Condition, Liquidity and Capital Resources
Applieds cash, cash equivalents and investments decreased
to $3.5 billion at October 26, 2008 from
$3.7 billion at October 28, 2007, due primarily to
share repurchases and cash dividend distributions, offset by
cash generated from operating activities. Applied has not
undertaken any significant external financing activities for
several years.
39
Cash, cash equivalents and investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
October 26,
|
|
|
October 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
1,412
|
|
|
$
|
1,203
|
|
Short-term investments
|
|
|
689
|
|
|
|
1,167
|
|
Long-term investments
|
|
|
1,367
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash-equivalents and investments
|
|
$
|
3,468
|
|
|
$
|
3,732
|
|
|
|
|
|
|
|
|
|
|
Applied generated cash from operating activities of
$1.7 billion in fiscal 2008, $2.2 billion in fiscal
2007, and $2.0 billion in fiscal 2006. The primary sources
of cash from operating activities were net income, as adjusted
to exclude the effect of non-cash charges including
depreciation, amortization, equity-based compensation, asset
impairments and restructuring and IPR&D expenses, and
changes in working capital levels, including accounts receivable
and inventories. Applied utilized programs to discount letters
of credit issued by customers of $167 million in fiscal
2008, $431 million in fiscal 2007, and $237 million in
fiscal 2006. 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. In fiscal 2008, Applied factored accounts
receivables totaling $125 million. Days sales outstanding
were 79 days at the end of fiscal 2008 and 2007, and
80 days at the end of fiscal 2006. Inventories increased by
$674 million in fiscal 2008, mainly due to a net inventory
increase within the Energy and Environmental Solutions segment.
Applied used $76 million and $977 million of cash in
investing activities in fiscal 2008 and 2007, respectively, and
generated $1.9 billion of cash from investing activities in
fiscal 2006. Proceeds from sales and maturities of investments,
net of purchases of investments, totaled $405 million in
fiscal 2008. Purchases of investments, net of proceeds from
sales and maturities of investments, totaled $150 million
in fiscal 2007. Proceeds from sales and maturities of
investments, net of purchases of investments, totaled
$2.6 billion in fiscal 2006. Proceeds from the sale of
investments in fiscal 2006 were used principally to
fund Applieds accelerated stock buyback initiated
during that year.
Capital expenditures were $288 million in fiscal 2008,
$265 million in fiscal 2007, and $179 million in
fiscal 2006. Fiscal 2008 capital expenditures included
investment in the implementation of a global business software
system. Fiscal 2007 capital expenditures included investment in
the implementation of an enterprise resource planning software
system, and in Applieds new global development capability
center in Xian, China. Fiscal 2006 capital expenditures
included purchases of lab equipment, network infrastructure and
three buildings in Santa Clara, California that Applied had
previously leased.
Investing activities also included investments in technology and
acquisitions of companies to allow Applied to access new market
opportunities or emerging technologies. During fiscal 2008,
Applied acquired all of the outstanding shares of Baccini, a
privately-held company based in Italy, for a purchase price of
$215 million in cash, net of cash and marketable securities
acquired. During the year Applied also purchased from Edwards
Vacuum, Inc. certain assets of its Kachina semiconductor
equipment parts cleaning and refurbishment business for
$19 million. During fiscal 2007, Applied acquired all of
the outstanding shares of HCT for $463 million in cash, net
of cash acquired, and certain net assets of Brooks Automation,
Inc. consisting of its Brooks Software division for
$137 million in cash. During fiscal 2006, Applied paid cash
for acquisitions and the investment in a joint venture totaling
$486 million. During fiscal 2006, Applied acquired the
outstanding stock of Applied Films for $310 million in
cash, net of cash and marketable securities acquired, and
assumed equity awards with a fair value of $26 million, of
which $18 million was included in the purchase price;
formed a joint venture, Sokudo, with Dainippon Screen Mfg.
Ltd., for which Applied paid $147 million in cash and
contributed other assets; acquired certain assets of UMS
Solutions for $10 million; and acquired ChemTrace
Corporation and ChemTrace Precision Cleaning, Inc. for
approximately $22 million in cash, net of cash acquired, of
which $18 million was paid upon closing. See Note 12
of Notes to Consolidated Financial Statements for additional
details.
Applied used cash of $1.4 billion for financing activities
in fiscal 2008, $892 million in fiscal 2007, and
$4.1 billion in fiscal 2006. Financing activities included
issuances and repurchases of common stock and payment
40
of dividends. Since March 1996, Applied has systematically
repurchased shares of its common stock in the open market. Cash
used to repurchase shares totaled $1.5 billion in fiscal
2008, $1.3 billion in fiscal 2007, and $4.2 billion in
fiscal 2006. During fiscal 2008, Applieds Board of
Directors declared four quarterly cash dividends in the amount
of $0.06 per share each. The fourth quarterly cash dividend
declared in fiscal 2008 was paid on December 4, 2008, to
stockholders of record as of November 13, 2008. During
fiscal 2007, Applieds Board of Directors declared one
quarterly cash dividend in the amount of $0.05 per share and
three quarterly cash dividends in the amount of $0.06 per share
each. During fiscal 2006, Applieds Board of Directors
declared one quarterly cash dividend in the amount of $0.03 per
share and three quarterly cash dividends in the amount of $0.05
per share each. Dividends paid during fiscal 2008, 2007 and
fiscal 2006 were $325 million, $306 million and
$251 million, respectively. Applied currently anticipates
that it will continue to pay cash dividends on a quarterly basis
in the future, although 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 that cash dividends are in
the best interest of Applieds stockholders. Financing
activities also included borrowings and repayments of debt.
Applied did not have any borrowings in fiscal years 2008, 2007
or 2006. As of October 26, 2008, Applied had credit
facilities for unsecured borrowings in various currencies of up
to approximately $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
October 26, 2008. No amounts were outstanding under this
agreement at October 26, 2008. Cash used for debt
repayments totaled $2 million for fiscal 2008,
$202 million for fiscal 2007, and $8 million for
fiscal 2006. Cash generated from issuances of common stock
pursuant to Applieds equity compensation programs totaled
$401 million for fiscal 2008, $948 million for fiscal
2007, and $361 million for fiscal 2006.
On September 18, 2006, Applied entered into accelerated
stock buyback agreements with Goldman Sachs under which Applied
agreed to repurchase from Goldman Sachs shares of Applieds
outstanding common stock for an initial purchase price of
$2.5 billion. Under the agreements, Applied purchased
145 million shares of its common stock on
September 18, 2006 at a price per share of $17.20, and
Goldman Sachs agreed to purchase an equivalent number of shares
in the open market over the following four months. At the end of
the four month period, Applied was entitled or subject to a
price adjustment based upon the volume weighted average price of
Applied common stock during the purchase period. On
January 24, 2007, Applied settled the price adjustment of
$132 million by payment in cash to Goldman Sachs, resulting
in an adjusted price per share of $18.08. The repurchase was
funded with Applieds existing cash and investments. The
repurchased shares were reported as treasury stock.
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 October 26, 2008, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee arrangements was
$167 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. 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 believes that the solar
industry is moving to increasingly greater factory output of
solar modules, including projects with an output capable of
generating electricity on a gigawatt scale. Applied has entered
into contracts with multiple customers for its
SunFab
tm
Thin Film Line, for projects of varying scale. Fulfillment of
these contracts requires Applied to invest in inventory
particularly work in process, and Applied may obtain customer
deposits that reduce the associated effect on other working
capital components.
Applieds investment portfolio consists principally of
investment grade municipal bonds, money market mutual funds,
U.S. Treasury and agency securities, corporate bonds,
equity securities, and mortgage-backed and asset-backed
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. In fiscal
2008, as part of its regular investment review process, Applied
recorded an insignificant impairment charge
41
associated with its investment portfolio. At October 26,
2008, Applied had a gross unrealized loss of $48 million
due to a decrease in the fair market value of certain fixed-rate
debt and equity securities as a result of the recent 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 market value has been lower than
the cost basis; the financial condition, credit quality and
near-term prospects of the investee; and Applieds ability
to hold the investment for a period of time sufficient to allow
for any anticipated recovery in fair market 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
October 26, 2008, Applieds holdings in these
categories of investments totaled $30 million, or 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 the Companys liquidity or
results of operations.
Although cash requirements will fluctuate based on the timing
and extent of factors such as those discussed above,
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. In November 2008, Applied announced that it had
temporarily suspended stock repurchases in order to maintain
financial flexibility in light of the deteriorating global
economic and market conditions. For further details regarding
Applieds operating, investing and financing activities for
each of the three years in the period ended October 26,
2008, see the Consolidated Statements of Cash Flows in this
report.
Off-Balance
Sheet Arrangements
During the ordinary course of business, Applied provides standby
letters of credit or other guarantee instruments to third
parties as required for certain transactions initiated either by
Applied or its subsidiaries. As of October 26, 2008, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee agreements was
approximately $167 million. Applied has not recorded any
liability in connection with these guarantee arrangements below
that required Applied to appropriately account for the
underlying transaction being guaranteed. Applied does not
believe, based on historical experience and information
currently available, that it is probable that any amounts will
be required to be paid under these guarantee arrangements.
Applied also has operating leases for various facilities. Total
rental expense for operating leases was $68 million for
fiscal 2008, $62 million for fiscal 2007, and
$70 million for fiscal 2006.
Contractual
Obligations
The following table summarizes Applieds contractual
obligations as of October 26, 2008:
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In millions)
|
|
|
Long-term debt obligations
|
|
$
|
203
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
200
|
|
Interest expense associated with long-term debt obligations
|
|
|
129
|
|
|
|
14
|
|
|
|
29
|
|
|
|
29
|
|
|
|
57
|
|
Operating lease obligations
|
|
|
118
|
|
|
|
58
|
|
|
|
44
|
|
|
|
13
|
|
|
|
3
|
|
Purchase obligations*
|
|
|
1,756
|
|
|
|
1,683
|
|
|
|
72
|
|
|
|
1
|
|
|
|
|
|
Other long-term liabilities
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|
|
185
|
|
|
|
7
|
|
|
|
98
|
|
|
|
20
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,391
|
|
|
$
|
1,763
|
|
|
$
|
245
|
|
|
$
|
63
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
*
|
|
Represents Applieds agreements to purchase goods and
services consisting of Applieds (a) outstanding
purchase orders for goods and services; and (b) contractual
requirements to make specified minimum payments even if Applied
does not take delivery of the contracted goods.
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42
In addition to the contractual obligations disclosed above, the
Company has certain tax obligations. During the first quarter of
fiscal 2008, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). The Company historically has
classified interest and penalties and unrecognized tax benefits
as current liabilities. Upon adoption of FIN 48, the
Company reclassified gross interest and penalties and
unrecognized tax benefits that are not expected to result in
payment or receipt of cash within one year as non-current
liabilities on the Consolidated Balance Sheet. As of
October 26, 2008, the Company recorded gross unrecognized
tax benefits of $63 million and gross interest and
penalties of $8 million. Of the $8 million in interest
and penalties, $5 million is classified as long-term
payable and $3 million is classified as current payable on
the Consolidated Balance Sheet. At this time, the Company is
unable to make a reasonably reliable estimate of the timing of
payments in individual years due to uncertainties in the timing
of tax audit outcomes and, accordingly, such amounts are not
included in the above contractual obligation table.
Critical
Accounting Policies and Estimates
The preparation of consolidated financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States of America requires management to
make judgments, assumptions and estimates that affect the
amounts reported. Note 1 of Notes to Consolidated Financial
Statements describes the significant accounting policies used in
the preparation of the consolidated financial statements.
Certain of these significant accounting policies are considered
to be critical accounting policies.
A critical accounting policy is defined as one that is both
material to the presentation of Applieds consolidated
financial statements and 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 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 are discussed in the
section above entitled 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.
43
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 inventory adjustments for excess or obsolete
inventory might 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
reviews goodwill and intangibles with indefinite lives annually
for impairment. Intangible assets, such as purchased technology,
are generally recorded in connection with a business
acquisition. The value assigned to intangible assets is usually
based on estimates and judgments regarding expectations for the
success and life cycle of products and technology acquired. If
actual product acceptance differs significantly from the
estimates, Applied may be required to record an impairment
charge to write down the asset to its realizable value. The fair
value of a reporting unit is estimated using the market
multiples approach, and is dependent on market values for
companies in a similar industry. 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
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 its future
taxable income will be sufficient to realize its deferred tax
assets.
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.
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
Effective on October 31, 2005, Applied began accounting for
stock options and Employee Stock Purchase Plan (ESPP) shares
under the provisions of Statement of Financial Accounting
Standards No. 123(R),
Share-Based
Payment
(SFAS 123(R)), which requires recognition
of the fair value of equity-based compensation. The fair value
of stock options and ESPP 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 Applieds common stock at the date
of grant (see Note 1 of Notes to Consolidated Financial
Statements).
44
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
At October 26, 2008, Applieds investment portfolio
included fixed-income securities with a fair value of
approximately $2.2 billion. Applieds primary
objective for investing in fixed-income securities is to
preserve principal while maximizing returns and minimizing risk.
These securities are subject to interest rate risk and will
decline in value if interest rates increase. Based on
Applieds investment portfolio at October 26, 2008 and
October 28, 2007, an immediate 100 basis point
increase in interest rates would result in a decrease in the
fair value of the portfolio of approximately $31 million
and $31 million, respectively. While an increase in
interest rates reduces the fair value of the investment
portfolio, Applied will not realize the losses in the
Consolidated Statement of Operations unless the individual
fixed-income securities are sold prior to recovery or the loss
is determined to be other-than-temporarily impaired.
All of Applieds debt bears interest at fixed rates.
Therefore, an immediate 100 basis point increase in
interest rates would not be expected to have a material effect
on Applieds near-term financial condition or results of
operations.
Foreign
Currency Exchange Rate Risk
Certain operations of Applied are conducted in foreign
currencies, such as Japanese yen, euro, Israeli shekel and Swiss
francs. Applied enters into forward exchange and currency option
contracts to hedge a portion of, but not all, existing and
anticipated foreign currency denominated transactions expected
to occur typically within 24 months. Gains and losses on
these contracts are generally recognized in the Consolidated
Statements of Operations at the time that the related
transactions being hedged are recognized. Because the effect of
movements in currency exchange rates on forward exchange and
currency option contracts generally offsets the related effect
on the underlying items being hedged, these financial
instruments are not expected to subject Applied to risks that
would otherwise result from changes in currency exchange rates.
Applied does not use derivative financial instruments for
trading or speculative purposes. Net foreign currency gains and
losses did not have a material effect on Applieds results
of operations for fiscal 2008, 2007 or 2006.
Forward exchange contracts are denominated in the same currency
as the underlying transactions (primarily Japanese yen, euro,
Israeli shekel and Swiss francs), and the terms of the forward
exchange contracts generally match the terms of the underlying
transactions. Applieds outstanding forward exchange
contracts are marked-to-market (see Note 2 of Notes to
Consolidated Financial Statements), as are the majority of the
related underlying transactions being hedged; therefore, the
effect of exchange rate changes on forward exchange contracts is
expected to be substantially offset by the effect of these
changes on the underlying transactions. The effect of an
immediate 10 percent change in exchange rates on forward
exchange contracts and the underlying hedged transactions is not
expected to be material to Applieds near-term financial
condition or results of operations. Applieds risk with
respect to currency option contracts is limited to the premium
paid for the right to exercise the option. Premiums paid for
options outstanding at October 26, 2008 were not material.
|
|
Item 8:
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements required by this Item are
set forth on the pages indicated at Item 15(a).
|
|
Item 9:
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
45
|
|
Item 9A:
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
As of the end of the period covered by this report, management
of Applied conducted an evaluation, under the supervision and
with the participation of Applieds Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design
and operation of Applieds disclosure controls and
procedures, as such term is defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934 (the Exchange Act). Based
upon that evaluation, Applieds 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 was recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and to provide reasonable assurance that
information required to be disclosed by Applied in such reports
is accumulated and communicated to the Companys
management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Managements
Report on Internal Control over Financial Reporting
Applieds management is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in
Rule 13a-15(f)
of the Exchange Act. Under the supervision and with the
participation of Applieds Chief Executive Officer and
Chief Financial Officer, management of Applied conducted an
evaluation of the effectiveness of Applieds internal
control over financial reporting based upon the framework in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, Applieds
management concluded that Applieds internal control over
financial reporting was effective as of October 26, 2008.
KPMG LLP, an independent registered public accounting firm, has
audited the consolidated financial statements included in this
Form 10-K
and, as part of the audit, has issued a report, included herein,
on the effectiveness of Applieds internal control over
financial reporting as of October 26, 2008.
Changes
in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2008, there were no changes
in the internal control over financial reporting that materially
affected, or are reasonably likely to materially affect,
Applieds internal control over financial reporting.
Inherent
Limitations of Disclosure Controls and Procedures and Internal
Control over Financial Reporting
It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be
met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future
events.
|
|
Item 9B:
|
Other
Information
|
None.
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Applied Materials, Inc.:
We have audited Applied Materials, Inc. and subsidiaries
(the Company) internal control over financial reporting as of
October 26, 2008, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Applied Materials, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of October 26, 2008, based on
criteria established in Internal Control Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Applied Materials, Inc. and
subsidiaries as of October 26, 2008 and October 28,
2007, and the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
October 26, 2008. In connection with our audits of the
consolidated financial statements, we have also audited the
financial statement schedule as of and for each of the years in
the three-year period ended October 26, 2008. Our report
dated December 12, 2008 expressed an unqualified opinion on
those consolidated financial statements and financial statement
schedule.
KPMG LLP
Mountain View, California
December 12, 2008
47
PART III
Pursuant to Paragraph G(3) of the General Instructions to
Form 10-K,
portions of the information required by Part III of
Form 10-K
are incorporated by reference from Applieds Proxy
Statement to be filed with the SEC in connection with the 2009
Annual Meeting of Stockholders (the Proxy Statement).
|
|
Item 10:
|
Directors,
Executive Officers and Corporate Governance
|
(1) Information concerning directors, including director
nominations, and Applieds audit committee and audit
committee financial expert, appears in the Proxy Statement under
Election of Directors, and is incorporated herein by
reference.
(2) For information with respect to Executive Officers, see
Part I, Item 1 of this Annual Report on
Form 10-K,
under Executive Officers of the Registrant.
(3) Information concerning Section 16(a) beneficial
ownership reporting compliance appears in the
Proxy Statement under Section 16(a) Beneficial
Ownership Reporting Compliance, and is incorporated herein
by reference.
Applied has implemented the Standards of Business Conduct, a
code of ethics with which every person who works for Applied and
every member of the Board of Directors is expected to comply. If
any substantive amendments are made to the Standards of Business
Conduct or any waiver is granted, including any implicit waiver,
from a provision of the code to Applieds Chief Executive
Officer, Chief Financial Officer or Chief Accounting Officer,
Applied will disclose the nature of such amendment or waiver on
its website or in a report on
Form 8-K.
The above information, including the Standards of Business
Conduct, is available on Applieds website under the
Investors section at
http://www.appliedmaterials.com/investors/index.html.
This website address is intended to be an inactive, textual
reference only. None of the material on this website is part of
this report or is incorporated by reference herein.
|
|
Item 11:
|
Executive
Compensation
|
Information concerning executive compensation appears in the
Proxy Statement under Executive Compensation and Related
Information and is incorporated herein by reference.
Information concerning compensation committee interlocks and
insider participation appears in the Proxy Statement under
Compensation Committee Interlocks and Insider
Participation and is incorporated herein by reference.
Information concerning the compensation committee report appears
in the Proxy Statement under Human Resources and
Compensation Committee Report and is incorporated herein
by reference.
|
|
Item 12:
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information concerning the security ownership of certain
beneficial owners and management appears in the Proxy Statement,
under Principal Stockholders, and is incorporated
herein by reference.
48
The following table summarizes information with respect to
options and other equity awards under Applieds equity
compensation plans as of October 26, 2008:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
(b)
|
|
|
Available for Future
|
|
|
|
Securities to be
|
|
|
Weighted Average
|
|
|
Issuance Under Equity
|
|
|
|
Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and
|
|
|
Warrants and
|
|
|
Reflected in
|
|
Plan Category
|
|
Rights(1)
|
|
|
Rights(2)
|
|
|
Column(a))
|
|
|
|
(In thousands, except prices)
|
|
|
Equity compensation plans approved by security holders
|
|
|
30,081
|
|
|
$
|
18.86
|
|
|
|
197,281
|
(3)
|
Equity compensation plans not approved by security holders
|
|
|
47,069
|
(4)
|
|
$
|
17.38
|
|
|
|
41,750
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
77,150
|
|
|
$
|
17.71
|
|
|
|
239,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes only options and restricted stock units (referred to as
performance shares under the Applied Materials, Inc.
Employee Stock Incentive Plan) outstanding under Applieds
equity compensation plans, as no stock warrants or other rights
were outstanding as of October 26, 2008.
|
|
(2)
|
|
The weighted average exercise price calculation does not take
into account any restricted stock units as they have a de
minimis purchase price.
|
|
(3)
|
|
Includes 70,532 shares of Applied common stock available
for future issuance under the Applied Materials, Inc.
Employees Stock Purchase Plan. Of these
70,532 shares, 1,467 are subject to purchase during the
purchase period in effect as of October 26, 2008.
|
|
(4)
|
|
Includes options to purchase 1,823 shares of Applied common
stock assumed through various mergers and acquisitions, after
giving effect to the applicable exchange ratios. The assumed
options had a weighted average exercise price of $13.70 per
share. No further shares are available for issuance under the
plans under which these assumed awards were granted.
|
|
(5)
|
|
Includes 1,210 shares of Applied common stock available for
future issuance under the Applied Materials, Inc. Stock Purchase
Plan for Offshore Employees. Of these 1,210 shares, 700 are
subject to purchase during the purchase period in effect as of
October 26, 2008.
|
Applied has the following equity compensation plans that have
not been approved by stockholders:
2000 Global Equity Incentive Plan
The 2000 Global Equity
Incentive Plan (the 2000 Plan) was adopted effective as of
June 21, 2000. The 2000 Plan provides for the grant of
non-qualified stock options to employees other than officers and
directors. The administrator of the 2000 Plan (either the Board
of Directors of Applied or a committee appointed by the Board)
determines the terms and conditions of all stock options
granted; provided, however, that (1) the exercise price
generally may not be less than 100 percent of the fair
market value (on the date of grant) of the stock covered by the
option, and (2) the term of options can be no longer than
10 years (or 13 years in the event of death). A total
of 147,000,000 shares have been authorized for issuance
under the 2000 Plan, and 40,540,000 shares remain available
for issuance as of October 26, 2008.
Stock Purchase Plan for Offshore Employees
The Stock
Purchase Plan for Offshore Employees (the Offshore ESPP) was
adopted effective as of October 16, 1995 for the benefit of
employees of Applieds participating affiliates (other than
United States citizens or residents). The Offshore ESPP provides
for the grant of options to purchase shares of Applied common
stock through payroll deductions pursuant to one or more
offerings. The administrator of the Offshore ESPP (the Board of
Directors of Applied or a committee appointed by the Board)
determines the terms and conditions of all options prior to the
start of an offering, including the purchase price of shares,
the number of shares covered by the option and when the option
may be exercised. All options granted as part of an offering
must be granted on the same date. A total of
49
12,800,000 shares have been authorized for issuance under
the Offshore ESPP, and 1,210,000 shares remain available
for issuance as of October 26, 2008.
Nonemployee Director Share Purchase Plan
The Applied
Materials, Inc. Nonemployee Director Share Purchase Plan was
adopted effective March 22, 2005. The Nonemployee Director
Share Purchase Plan provides a method by which non-employee
directors may purchase Applied common stock at 100% of fair
market value on the purchase date by foregoing cash they have
earned as retainer fees or meeting fees. The shares generally
are purchased at the same time the directors otherwise would
have been paid the fees in cash. Since the directors pay full
fair market value for the shares, there is no reserved amount of
shares under this plan and, accordingly, the table above does
not include any set number of shares available for future
issuance under the plan.
Applied Materials Profit Sharing Scheme
The Applied
Materials Profit Sharing Scheme was adopted effective
July 3, 1996 to enable employees of Applied Materials
Ireland Limited and its participating subsidiaries to purchase
Applied common stock at 100% of fair market value on the
purchase date. Under this plan, eligible employees may elect to
forego a certain portion of their base salary and certain
bonuses they have earned and that otherwise would be payable in
cash to purchase shares of Applied common stock at full fair
market value. Since the eligible employees pay full fair market
value for the shares, there is no reserved amount of shares
under this plan and, accordingly, the table above does not
include any set number of shares available for future issuance
under the plan.
|
|
Item 13:
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information appearing in the Proxy Statement under the
heading Certain Relationships and Related
Transactions is incorporated herein by reference.
The information appearing in the Proxy Statement under the
heading Director Independence is incorporated herein
by reference.
|
|
Item 14:
|
Principal
Accounting Fees and Services
|
Information concerning principal accounting fees and services
and the audit committees preapproval policies and
procedures appears in the Proxy Statement under the headings
Fees Paid to KPMG LLP and Policy on Audit
Committees Pre-Approval of Audit and Permisssible
Non-audit Services of Independent Registered Public Accounting
Firm, is incorporated herein by reference.
50
PART IV
|
|
Item 15:
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
All other schedules are omitted because they are not applicable
or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
51
APPLIED
MATERIALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 26,
|
|
|
October 28,
|
|
|
October 29,
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
8,129,240
|
|
|
$
|
9,734,856
|
|
|
$
|
9,167,014
|
|
Cost of products sold
|
|
|
4,686,412
|
|
|
|
5,242,413
|
|
|
|
4,875,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
3,442,828
|
|
|
|
4,492,443
|
|
|
|
4,291,802
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and engineering
|
|
|
1,104,122
|
|
|
|
1,142,073
|
|
|
|
1,152,326
|
|
Marketing and selling
|
|
|
459,402
|
|
|
|
451,258
|
|
|
|
438,654
|
|
General and administrative
|
|
|
505,762
|
|
|
|
501,185
|
|
|
|
468,088
|
|
Restructuring and asset impairments
|
|
|
39,948
|
|
|
|
26,421
|
|
|
|
212,113
|
|
Gain on sale of facility
|
|
|
21,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,355,431
|
|
|
|
2,371,506
|
|
|
|
2,020,621
|
|
Pretax loss of equity-method investment
|
|
|
35,527
|
|
|
|
29,371
|
|
|
|
2,849
|
|
Interest expense
|
|
|
20,506
|
|
|
|
38,631
|
|
|
|
36,096
|
|
Interest and other income
|
|
|
109,320
|
|
|
|
136,149
|
|
|
|
185,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,408,718
|
|
|
|
2,439,653
|
|
|
|
2,166,971
|
|
Provision for income taxes
|
|
|
447,972
|
|
|
|
729,457
|
|
|
|
650,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
960,746
|
|
|
$
|
1,710,196
|
|
|
$
|
1,516,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.71
|
|
|
$
|
1.22
|
|
|
$
|
0.98
|
|
Diluted
|
|
$
|
0.70
|
|
|
$
|
1.20
|
|
|
$
|
0.97
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,354,176
|
|
|
|
1,406,685
|
|
|
|
1,551,339
|
|
Diluted
|
|
|
1,374,507
|
|
|
|
1,427,002
|
|
|
|
1,565,072
|
|
See accompanying Notes to Consolidated Financial Statements.
52
APPLIED
MATERIALS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 26,
|
|
|
October 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,411,624
|
|
|
$
|
1,202,722
|
|
Short-term investments
|
|
|
689,044
|
|
|
|
1,166,857
|
|
Accounts receivable, less allowance for doubtful accounts of
$5,275 and $4,136 at 2008 and 2007, respectively
|
|
|
1,691,027
|
|
|
|
2,049,427
|
|
Inventories
|
|
|
1,987,017
|
|
|
|
1,313,237
|
|
Deferred income taxes, net
|
|
|
388,807
|
|
|
|
426,471
|
|
Income taxes receivable
|
|
|
125,605
|
|
|
|
|
|
Other current assets
|
|
|
371,033
|
|
|
|
448,879
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,664,157
|
|
|
|
6,607,593
|
|
Long-term investments
|
|
|
1,367,056
|
|
|
|
1,362,425
|
|
Property, plant and equipment
|
|
|
2,831,952
|
|
|
|
2,782,204
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,737,752
|
)
|
|
|
(1,730,962
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
1,094,200
|
|
|
|
1,051,242
|
|
Goodwill, net
|
|
|
1,174,673
|
|
|
|
1,006,410
|
|
Purchased technology and other intangible assets, net
|
|
|
388,429
|
|
|
|
373,178
|
|
Equity-method investment
|
|
|
79,533
|
|
|
|
115,060
|
|
Deferred income taxes and other assets
|
|
|
238,270
|
|
|
|
146,370
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,006,318
|
|
|
$
|
10,662,278
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
1,068
|
|
|
$
|
2,561
|
|
Accounts payable and accrued expenses
|
|
|
2,771,090
|
|
|
|
2,221,516
|
|
Income taxes payable
|
|
|
173,394
|
|
|
|
157,549
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,945,552
|
|
|
|
2,381,626
|
|
Long-term debt
|
|
|
201,576
|
|
|
|
202,281
|
|
Other liabilities
|
|
|
310,232
|
|
|
|
256,962
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,457,360
|
|
|
|
2,840,869
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock: $.01 par value per share;
1,000 shares authorized; no shares issued
|
|
|
|
|
|
|
|
|
Common stock: $.01 par value per share;
2,500,000 shares authorized; 1,330,761 and
1,385,711 shares outstanding at 2008 and 2007, respectively
|
|
|
13,308
|
|
|
|
13,857
|
|
Additional paid-in capital
|
|
|
5,095,894
|
|
|
|
4,658,832
|
|
Retained earnings
|
|
|
11,601,288
|
|
|
|
10,863,291
|
|
Treasury stock: 513,232 and 434,686 shares at 2008 and
2007, respectively, net
|
|
|
(9,134,962
|
)
|
|
|
(7,725,924
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(26,570
|
)
|
|
|
11,353
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
7,548,958
|
|
|
|
7,821,409
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
11,006,318
|
|
|
$
|
10,662,278
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
53
APPLIED
MATERIALS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
Balance at October 30, 2005
|
|
|
1,606,694
|
|
|
$
|
16,067
|
|
|
$
|
3,161,053
|
|
|
$
|
8,227,793
|
|
|
$
|
(2,439,116
|
)
|
|
$
|
(37,248
|
)
|
|
$
|
8,928,549
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516,663
|
|
|
|
|
|
|
|
|
|
|
|
1,516,663
|
|
Change in unrealized net gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,486
|
|
|
|
16,486
|
|
Change in unrealized net gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,888
|
)
|
|
|
(4,888
|
)
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,757
|
|
|
|
6,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,534,901
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272,153
|
)
|
|
|
|
|
|
|
|
|
|
|
(272,153
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
216,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,269
|
|
Issuance under stock plans, including tax benefits of $23,664
and other
|
|
|
23,433
|
|
|
|
234
|
|
|
|
282,587
|
|
|
|
|
|
|
|
77,958
|
|
|
|
|
|
|
|
360,779
|
|
Assumption of Applied Films equity plans
|
|
|
|
|
|
|
|
|
|
|
18,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,293
|
|
Treasury stock repurchases
|
|
|
(238,397
|
)
|
|
|
(2,384
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,132,854
|
)
|
|
|
|
|
|
|
(4,135,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 29, 2006
|
|
|
1,391,730
|
|
|
$
|
13,917
|
|
|
$
|
3,678,202
|
|
|
$
|
9,472,303
|
|
|
$
|
(6,494,012
|
)
|
|
$
|
(19,010
|
)
|
|
$
|
6,651,400
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710,196
|
|
|
|
|
|
|
|
|
|
|
|
1,710,196
|
|
Change in unrealized net loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,887
|
|
|
|
21,887
|
|
Change in unrealized net gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,728
|
)
|
|
|
(5,728
|
)
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,462
|
|
|
|
3,462
|
|
Change in retiree medical benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,132
|
)
|
|
|
(1,132
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,583
|
|
|
|
9,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738,268
|
|
Adjustment to initially apply SFAS 158, net of tax of $959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,291
|
|
|
|
2,291
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(319,208
|
)
|
|
|
|
|
|
|
|
|
|
|
(319,208
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
161,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,196
|
|
Issuance under stock plans, including tax benefits of $48,870
and other
|
|
|
54,391
|
|
|
|
544
|
|
|
|
819,434
|
|
|
|
|
|
|
|
99,481
|
|
|
|
|
|
|
|
919,459
|
|
Treasury stock repurchases
|
|
|
(60,410
|
)
|
|
|
(604
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,331,393
|
)
|
|
|
|
|
|
|
(1,331,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 28, 2007
|
|
|
1,385,711
|
|
|
$
|
13,857
|
|
|
$
|
4,658,832
|
|
|
$
|
10,863,291
|
|
|
$
|
(7,725,924
|
)
|
|
$
|
11,353
|
|
|
$
|
7,821,409
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
960,746
|
|
|
|
|
|
|
|
|
|
|
|
960,746
|
|
Change in unrealized net loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,739
|
)
|
|
|
(41,739
|
)
|
Change in unrealized net gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,448
|
|
|
|
9,448
|
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,440
|
)
|
|
|
(7,440
|
)
|
Change in retiree medical benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
|
|
1,866
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
922,823
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(322,749
|
)
|
|
|
|
|
|
|
|
|
|
|
(322,749
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
178,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,943
|
|
Issuance under stock plans, including a tax detriment of $11,519
and other
|
|
|
28,213
|
|
|
|
283
|
|
|
|
258,119
|
|
|
|
|
|
|
|
90,114
|
|
|
|
|
|
|
|
348,516
|
|
Treasury stock repurchases
|
|
|
(83,163
|
)
|
|
|
(832
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,499,152
|
)
|
|
|
|
|
|
|
(1,499,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 26, 2008
|
|
|
1,330,761
|
|
|
$
|
13,308
|
|
|
$
|
5,095,894
|
|
|
$
|
11,601,288
|
|
|
$
|
(9,134,962
|
)
|
|
$
|
(26,570
|
)
|
|
$
|
7,548,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
54
APPLIED
MATERIALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 26,
|
|
|
October 28,
|
|
|
October 29,
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
960,746
|
|
|
$
|
1,710,196
|
|
|
$
|
1,516,663
|
|
Adjustments required to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
320,051
|
|
|
|
268,334
|
|
|
|
270,413
|
|
Loss on sale and retirements of property, plant, and equipment,
net
|
|
|
6,826
|
|
|
|
21,401
|
|
|
|
28,365
|
|
Restructuring and asset impairments
|
|
|
39,948
|
|
|
|
26,421
|
|
|
|
212,113
|
|
Acquired in-process research and development expense
|
|
|
|
|
|
|
4,900
|
|
|
|
14,000
|
|
Pretax loss of equity-method investment
|
|
|
35,527
|
|
|
|
29,371
|
|
|
|
2,849
|
|
Net recognized loss on investments
|
|
|
4,392
|
|
|
|
5,460
|
|
|
|
41,391
|
|
Deferred income taxes
|
|
|
(58,259
|
)
|
|
|
31,642
|
|
|
|
25,323
|
|
Excess tax benefits from equity-based compensation plans
|
|
|
(7,491
|
)
|
|
|
(49,794
|
)
|
|
|
(23,664
|
)
|
Equity-based compensation
|
|
|
178,943
|
|
|
|
161,197
|
|
|
|
216,269
|
|
Changes in operating assets and liabilities, net of amounts
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
424,290
|
|
|
|
34,259
|
|
|
|
(393,022
|
)
|
Inventories
|
|
|
(638,256
|
)
|
|
|
140,933
|
|
|
|
(222,335
|
)
|
Other current assets
|
|
|
94,247
|
|
|
|
(164,289
|
)
|
|
|
25,224
|
|
Other assets
|
|
|
(394
|
)
|
|
|
3,359
|
|
|
|
17,088
|
|
Accounts payable and accrued expenses
|
|
|
362,604
|
|
|
|
(12,473
|
)
|
|
|
237,952
|
|
Income taxes payable
|
|
|
8,126
|
|
|
|
(23,968
|
)
|
|
|
100,020
|
|
Other liabilities
|
|
|
(20,832
|
)
|
|
|
22,347
|
|
|
|
(91,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
1,710,468
|
|
|
|
2,209,296
|
|
|
|
1,977,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(287,906
|
)
|
|
|
(264,784
|
)
|
|
|
(179,482
|
)
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(235,324
|
)
|
|
|
(599,653
|
)
|
|
|
(339,093
|
)
|
Proceeds from sale of facility
|
|
|
42,210
|
|
|
|
|
|
|
|
|
|
Investment in equity-method investment
|
|
|
|
|
|
|
|
|
|
|
(147,280
|
)
|
Proceeds from disposition of assets
|
|
|
|
|
|
|
|
|
|
|
1,863
|
|
Proceeds from disposition of assets held for sale
|
|
|
|
|
|
|
37,611
|
|
|
|
16,206
|
|
Proceeds from sales and maturities of investments
|
|
|
5,939,509
|
|
|
|
3,053,640
|
|
|
|
6,071,156
|
|
Purchases of investments
|
|
|
(5,534,475
|
)
|
|
|
(3,203,427
|
)
|
|
|
(3,474,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in)/provided by investing activities
|
|
|
(75,986
|
)
|
|
|
(976,613
|
)
|
|
|
1,948,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt repayments
|
|
|
(2,117
|
)
|
|
|
(99
|
)
|
|
|
(7,710
|
)
|
Long-term debt repayments
|
|
|
|
|
|
|
(202,040
|
)
|
|
|
|
|
Proceeds from common stock issuances
|
|
|
393,978
|
|
|
|
898,025
|
|
|
|
337,106
|
|
Common stock repurchases
|
|
|
(1,499,984
|
)
|
|
|
(1,331,997
|
)
|
|
|
(4,157,725
|
)
|
Excess tax benefit from equity-based compensation plans
|
|
|
7,491
|
|
|
|
49,794
|
|
|
|
23,664
|
|
Payments of dividends to stockholders
|
|
|
(325,405
|
)
|
|
|
(305,672
|
)
|
|
|
(250,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(1,426,037
|
)
|
|
|
(891,989
|
)
|
|
|
(4,055,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
457
|
|
|
|
565
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
208,902
|
|
|
|
341,259
|
|
|
|
(128,879
|
)
|
Cash and cash equivalents beginning of year
|
|
|
1,202,722
|
|
|
|
861,463
|
|
|
|
990,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
1,411,624
|
|
|
$
|
1,202,722
|
|
|
$
|
861,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net
|
|
$
|
368,459
|
|
|
$
|
845,756
|
|
|
$
|
549,531
|
|
Cash payments for interest
|
|
$
|
14,580
|
|
|
$
|
29,104
|
|
|
$
|
28,195
|
|
See accompanying Notes to Consolidated Financial Statements.
55
APPLIED
MATERIALS, INC.
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of
Applied Materials, Inc. and its subsidiaries (Applied or the
Company) after elimination of intercompany balances and
transactions. All references to a fiscal year apply to
Applieds fiscal year which ends on the last Sunday in
October. Fiscal 2008, 2007 and 2006 contained 52 weeks
each. Each fiscal quarter of 2008, 2007 and 2006 contained
13 weeks.
The preparation of financial statements in conformity with
accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes.
Actual results could differ materially from those estimates.
Cash
Equivalents and Investments
All highly-liquid investments with a remaining maturity of three
months or less at the time of purchase are considered to be cash
equivalents. All of Applieds investments are classified as
available-for-sale at the respective balance sheet dates.
Investments classified as available-for-sale are recorded at
fair value based upon quoted market prices, and any temporary
difference between the cost and fair value of an investment is
presented as a separate component of accumulated other
comprehensive income/(loss). The specific identification method
is used to determine the gains and losses on investments.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined on a
first-in,
first-out (FIFO) basis.
Property,
Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is
provided over the estimated useful lives of the assets using the
straight-line method. Estimated useful lives for financial
reporting purposes are as follows: buildings and improvements, 3
to 30 years; demonstration and manufacturing equipment,
3 to 5 years; software, 3 to 5 years; and
furniture, fixtures and other equipment, 3 to 15 years.
Land improvements are amortized over the shorter of
15 years or the estimated useful life. Leasehold
improvements are amortized over the shorter of five years or the
lease term.
Intangible
Assets
Goodwill and indefinite-lived assets are not amortized, but are
reviewed for impairment annually during the fourth quarter of
each fiscal year. Purchased technology and other intangible
assets are presented at cost, net of accumulated amortization,
and are amortized over their estimated useful lives of 1 to
15 years using the straight-line method.
Long-Lived
Assets
Applied reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Applied assesses these
assets for impairment based on estimated future cash flows from
these assets.
Research,
Development and Engineering Costs
Research, development and engineering costs are expensed as
incurred.
56
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
Costs
Advertising costs are expensed as incurred. Advertising costs
were not material for all periods presented.
Sales and
Value Added Taxes
Taxes collected from customers and remitted to governmental
authorities are presented on a net basis in the accompanying
Consolidated Statements of Operations.
Income
Taxes
Income tax expense is based on pretax earnings. Deferred tax
assets and liabilities are recognized for the expected tax
consequences of temporary differences between the book and tax
bases of recorded assets and liabilities, net operating losses
and tax credit carryforwards.
Revenue
Recognition
Applied recognizes revenue when all four revenue recognition
criteria have been met: persuasive evidence of an arrangement
exists; delivery has occurred or services have been rendered;
sellers price to buyer is fixed or determinable; and
collectability is reasonably assured. Applieds shipping
terms are customarily FOB Applied shipping point or equivalent
terms. Applieds revenue recognition policy generally
results in revenue recognition at the following points:
(1) for all transactions where legal title passes to the
customer upon shipment, Applied recognizes revenue upon shipment
for all products that have been demonstrated to meet product
specifications prior to shipment; the portion of revenue
associated with certain installation-related tasks is deferred
based on the estimated fair value, and that revenue is
recognized upon completion of the installation-related tasks;
(2) for products that have not been demonstrated to meet
product specifications prior to shipment, revenue is recognized
at customer technical acceptance; (3) for transactions
where legal title does not pass at shipment, revenue is
recognized when legal title passes to the customer, which is
typically at customer technical acceptance; and (4) for
arrangements containing multiple elements, the revenue relating
to the undelivered elements is deferred at their estimated
relative fair values until delivery of the deferred elements. In
cases where Applied has sold products that have been
demonstrated to meet product specifications prior to shipment,
Applied believes that at the time of delivery, it has an
enforceable claim to amounts recognized as revenue. The
completed contract method is used for
SunFab
tm
thin film lines. Spare parts revenue is generally recognized
upon shipment, and services revenue is generally recognized over
the period that the services are provided.
Derivative
Financial Instruments
Applied uses financial instruments, such as forward exchange and
currency option contracts, to hedge a portion of, but not all,
existing and anticipated foreign currency denominated
transactions typically expected to occur within 24 months.
The terms of currency instruments used for hedging purposes are
generally consistent with the timing of the transactions being
hedged. 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. All of Applieds derivative
financial instruments are recorded at fair value based upon
quoted market prices for comparable instruments. For derivative
instruments designated and qualifying as cash flow hedges of
anticipated foreign currency denominated transactions, the
effective portion of the gain or loss on these hedges is
reported as a component of accumulated other comprehensive
income/(loss) in stockholders equity, and is reclassified
into earnings when the hedged transaction affects earnings. If
the transaction being hedged fails to occur, or if a portion of
any derivative is ineffective, the gain or loss on the
associated financial instrument is recorded promptly in
earnings. For derivative instruments used to hedge existing
foreign currency denominated assets or liabilities, the gain or
loss on these hedges is recorded promptly in earnings to offset
the changes in the fair value of the assets or liabilities being
hedged. Applied does not use derivative financial instruments
for trading or speculative purposes.
57
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency Translation
As of October 26, 2008, primarily all of Applieds
subsidiaries use the United States dollar as their
functional currency. Accordingly, assets and liabilities of
these subsidiaries are translated using exchange rates in effect
at the end of the period, except for non-monetary assets, such
as inventories and property, plant and equipment, which are
translated using historical exchange rates. Revenues and costs
are translated using average exchange rates for the period,
except for costs related to those balance sheet items that are
translated using historical exchange rates. The resulting
translation gains and losses are included in the Consolidated
Statements of Operations as incurred.
Concentrations
of Credit Risk
Financial instruments that potentially subject Applied to
significant concentrations of credit risk consist principally of
cash equivalents, investments, trade accounts receivable and
derivative financial instruments used in hedging activities.
Applied invests in a variety of financial instruments, such as,
but not limited to, certificates of deposit, corporate and
municipal bonds, United States Treasury and agency securities,
and mortgage-backed securities, and, by policy, limits the
amount of credit exposure with any one financial institution or
commercial issuer. Applieds customers consist principally
of semiconductor and LCD manufacturers located throughout the
world. Applied performs ongoing credit evaluations of its
customers financial condition and generally requires no
collateral to secure accounts receivable. Applied maintains an
allowance reserve for potentially uncollectible accounts
receivable based on its assessment of the collectibility of
accounts receivable. Applied regularly reviews the allowance by
considering factors such as historical experience, credit
quality, age of the accounts receivable balances, and current
economic conditions that may affect a customers ability to
pay. In addition, Applied utilizes letters of credit to mitigate
credit risk when considered appropriate. Applied is exposed to
credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments, but does not
expect any counterparties to fail to meet their obligations.
Earnings
Per Share
Basic earnings per share is determined using the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is determined using the weighted
average number of common shares and potential common shares
(representing the dilutive effect of stock options, restricted
stock units, ESPP shares and amounts due under the agreements
associated with the accelerated stock buyback program)
outstanding during the period. Applieds net income has not
been adjusted for any period presented for purposes of computing
basic or diluted earnings per share.
For purposes of computing diluted earnings per share, weighted
average potential common shares do not include stock options
with an exercise price greater than the average fair market
value of Applied common stock for the period, as the effect
would be anti-dilutive. Accordingly, options to purchase
36,423,000, 51,094,000 and 123,317,000 shares of common
stock for the fiscal years ended October 26, 2008,
October 28, 2007 and October 29, 2006, respectively,
were excluded from the computation.
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 an Employee
Stock Purchase Plan (ESPP) for United States employees, and a
second ESPP for international employees, which enable eligible
employees to purchase Applied common stock.
Effective October 31, 2005, Applied adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based
Payment (SFAS 123(R)), using the modified
58
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prospective transition method. Applied has included stock-based
compensation costs in its results of operations for fiscal years
2008, 2007 and 2006. The estimated fair value of Applieds
equity-based awards, less expected forfeitures, is amortized
over the awards service period on a straight-line basis.
During fiscal 2008, 2007 and 2006, Applied recognized total
equity-based compensation expense related to stock options, ESPP
shares, restricted stock units and restricted stock of
$179 million (or $0.09 per diluted share),
$161 million (of $0.08 per diluted share) and
$216 million (or $0.11 per diluted share), respectively.
During fiscal 2008, 2007 and 2006, Applied recognized income tax
benefits related to equity-based compensation of
$50 million, $45 million and $46 million,
respectively. The equity-based compensation expense related to
restricted stock units and restricted stock for fiscal 2008,
2007 and 2006 was $137 million, $104 million and
$30 million, respectively.
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 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
employee 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
1.24
|
%
|
|
|
1.12
|
%
|
|
|
0.73
|
%
|
Expected volatility
|
|
|
32.1
|
%
|
|
|
31.5
|
%
|
|
|
36.7
|
%
|
Risk-free interest rate
|
|
|
2.92
|
%
|
|
|
4.66
|
%
|
|
|
4.48
|
%
|
Expected life (in years)
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
3.8
|
|
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 with similar vesting periods.
Options outstanding had an aggregate intrinsic value of
$0.6 million, $190 million and $165 million at
October 26, 2008, October 28, 2007 and
October 29, 2006, respectively. The total grant date fair
value of options granted during fiscal 2008, 2007 and 2006 was
$34,000, $2 million and $54 million, respectively. The
total intrinsic value of options exercised during fiscal 2008,
2007 and 2006 was $54 million, $141 million and
$57 million, respectively. The total fair value of options
that vested during fiscal 2008, 2007 and 2006 was
$55 million, $124 million and $256 million,
respectively. At October 26, 2008, Applied had
$13 million of total unrecognized compensation expense, net
of estimated forfeitures, related to stock option plans that
will be recognized over the weighted average period of
0.6 years. Cash received from stock option exercises was
$328 million, $837 million and $284 million,
respectively, during fiscal 2008, 2007 and 2006. The actual tax
benefit realized for the tax deductions from options exercised
for fiscal 2008, 2007 and 2006 totaled $57 million,
$50 million and $24 million, respectively. During
fiscal 2006, as part of the acquisition of Applied Films
Corporation (Applied Films), Applied assumed outstanding options
to purchase Applied Films common stock that, at the acquisition
date, had a fair value of $26 million, including
$6 million of total unrecognized compensation expense, net
of $2 million of estimated forfeitures (see Note 12).
The Applied Films stock options assumed by Applied were
converted into options to purchase 3 million shares of
Applied common stock.
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
stock at the beginning of the applicable
59
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
offering period or at the end of each applicable purchase
period. The number of shares issued under the ESPP during fiscal
2008, 2007 and 2006 was 4,617,000 shares,
4,310,000 shares and 4,065,000 shares, respectively.
Based on the Black-Scholes option pricing model, the weighted
average estimated fair value of purchase rights under the ESPP
was $4.97 per share for the year ended October 26, 2008,
$4.83 per share for the year ended October 28, 2007 and
$5.21 per share for the year ended October 29, 2006.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
1.21
|
%
|
|
|
1.18
|
%
|
|
|
0.32
|
%
|
Expected volatility
|
|
|
29.9
|
%
|
|
|
28.5
|
%
|
|
|
31.1
|
%
|
Risk-free interest rate
|
|
|
4.16
|
%
|
|
|
4.93
|
%
|
|
|
2.81
|
%
|
Expected life (in years)
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.25
|
|
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 value of Applied
common stock on the date of the grant, and compensation is
recognized over the vesting period.
At October 26, 2008, Applied had $224 million total
unrecognized compensation expense, net of estimated forfeitures,
related to restricted stock unit grants, which will be
recognized over the weighted average period of 1.3 years
(see Note 8). During fiscal 2006, as part of the
acquisition of Applied Films, Applied assumed Applied
Films outstanding restricted stock units that, at the
acquisition date, had a fair value of $298,000, including
$130,000 of total unrecognized equity-based compensation
expense, net of estimated forfeitures. The Applied Films
restricted stock units assumed were expected to convert into
19,000 shares of Applied common stock upon vesting.
Beginning in fiscal 2007, Applied initiated a performance-based
equity award program for named executive officers and other key
employees. The Human Resources and Compensation Committee of
Applieds Board of Directors (the Committee) approved
grants of 1,565,000 and 1,950,000 performance-based restricted
stock units under this program for fiscal 2008 and fiscal 2007,
respectively. The Committee also approved the issuance to
Applieds President and Chief Executive Officer of
performance-based restricted stock in the amounts of 100,000 and
150,000 shares for fiscal 2008 and fiscal 2007,
respectively, at $0.01 per share. These awards vest only if
specific performance goals set by the Committee are achieved.
The goals require the achievement of specified levels of
Applieds annual operating profit as compared to
Applieds peer companies and also that the officer or key
employee remain an employee of Applied through the vesting date.
The fair value of the performance-based restricted stock awards
and restricted stock is estimated using the fair value of
Applied common stock on the date of the grant and assumes that
the applicable performance goals will be achieved. If achieved,
the award vests over a specified remaining service period. If
such performance goals are not met, no compensation cost is
recognized and any previously recognized compensation cost is
reversed. The expected cost of the award is reflected over the
service period and is reduced for estimated forfeitures. The
performance goals associated with the fiscal 2008 awards were
achieved at 70%. The performance goals associated with the
fiscal 2007 awards were achieved. Fiscal 2008 equity-based
compensation expense included $21 million attributable to
the performance-based awards granted in fiscal 2008 and fiscal
2007. Fiscal 2007 equity-based compensation expense included
$13 million attributable to the performance-based awards
granted in fiscal 2007.
60
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Defined
Benefit Pension Plans of Foreign Subsidiaries
On October 28, 2007, Applied implemented the recognition
and disclosure provisions of Statement of Financial Accounting
Standards (SFAS) No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements 87, 88, 106
and 132(R) (SFAS 158). SFAS 158 required Applied
to recognize the funded status (the difference between the fair
value of plan assets and the projected benefit obligations) of
the defined benefit plan in the Consolidated Balance Sheet, with
a corresponding adjustment to accumulated other comprehensive
income, net of tax, to measure the fair value of plan benefit
obligations as of its fiscal year ending October 28, 2007
and to provide additional disclosures. The implementation of
SFAS 158 did not have a material impact on Applieds
financial statements. For additional information on
Applieds employee benefit plans, see Note 8.
Recent
Accounting Pronouncements
In April 2008, Financial Accounting Standards Board (FASB)
issued FASB Staff Position (FSP)
No. 142-3,
Determination of the Useful Life of Intangible
Assets
(FSP 142-3).
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible Assets.
This new guidance applies prospectively to intangible assets
that are acquired individually or with a group of other assets
in business combinations and asset acquisitions.
FSP 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008.
Early adoption is prohibited. Applied is evaluating the
potential impact of the implementation of
FSP 142-3
on its financial position and results of operations.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 requires disclosures of how and
why an entity uses derivative instruments, how derivative
instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash
flows. SFAS 161 will be effective for Applied in fiscal
2010, with early adoption permitted. Applied is evaluating the
potential impact of the implementation of SFAS 161 on its
financial position and results of operations.
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 is evaluating the
potential impact of the implementation of SFAS 141(R) on
its financial position and results of operations.
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
61
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED 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 will be effective for Applied in fiscal 2009.
Management does not believe the effect of implementing
SFAS 159 will have a material impact on Applieds
financial position or results of operations.
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)
and
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 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 provide 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 will continue to
evaluate the application of SFAS 157. Management does not
believe the effect of implementing SFAS 157 will have a
material impact on Applieds financial position or results
of operations.
|
|
Note 2
|
Financial
Instruments
|
Investments
Investments by security type at October 26, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
749,225
|
|
|
$
|
1,993
|
|
|
$
|
2,824
|
|
|
$
|
748,394
|
|
U.S. Treasury and agency securities
|
|
|
583,979
|
|
|
|
5,839
|
|
|
|
1,257
|
|
|
|
588,561
|
|
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 securities carried at cost
|
|
|
94,748
|
|
|
|
|
|
|
|
|
|
|
|
94,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,095,290
|
|
|
$
|
8,508
|
|
|
$
|
47,698
|
|
|
$
|
2,056,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments by security type at October 28, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,083,637
|
|
|
$
|
1,817
|
|
|
$
|
333
|
|
|
$
|
1,085,121
|
|
U.S. Treasury and agency securities
|
|
|
517,805
|
|
|
|
3,616
|
|
|
|
308
|
|
|
|
521,113
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
490,066
|
|
|
|
1,219
|
|
|
|
1,680
|
|
|
|
489,605
|
|
Other debt securities
|
|
|
341,650
|
|
|
|
1,683
|
|
|
|
1,898
|
|
|
|
341,435
|
|
Bank certificate of deposit
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,435,158
|
|
|
|
8,335
|
|
|
|
4,219
|
|
|
|
2,439,274
|
|
Publicly traded equity securities
|
|
|
27,651
|
|
|
|
25,846
|
|
|
|
3,730
|
|
|
|
49,767
|
|
Equity securities carried at cost
|
|
|
40,241
|
|
|
|
|
|
|
|
|
|
|
|
40,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,503,050
|
|
|
$
|
34,181
|
|
|
$
|
7,949
|
|
|
$
|
2,529,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents included investments in debt and other
securities of $224 million at October 26, 2008 and
$159 million at October 28, 2007. Other debt
securities consist primarily of investment grade asset and
mortgage backed securities.
Contractual maturities of investments at October 26, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
580,756
|
|
|
$
|
580,004
|
|
Due after one through three years
|
|
|
695,103
|
|
|
|
689,591
|
|
Due after three years
|
|
|
441,407
|
|
|
|
436,616
|
|
No single maturity date*
|
|
|
378,024
|
|
|
|
349,889
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,095,290
|
|
|
$
|
2,056,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Securities with no single maturity date include publicly traded
equity securities, mortgage- and asset-backed securities.
|
At October 26, 2008, Applied had a gross unrealized loss of
$48 million due to a decrease in the fair market value of
certain fixed-rate debt and equity securities as a result of the
recent 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
market value has been lower than the cost basis; the financial
condition, credit quality and near-term prospects of the
investee; and Applieds ability to hold the investment for
a period of time sufficient to allow for any anticipated
recovery in fair market value. 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
October 26, 2008 are temporary in nature. Accordingly,
Applied does not consider the investments to be
other-than-temporarily impaired at October 26, 2008, as it
has the ability and intent to hold the investments for a period
of time that may be sufficient for an anticipated recovery in
fair market value. During fiscal 2008, Applied recorded an
immaterial amount of impairment charges on its investment
portfolio.
63
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 October 26, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
284,476
|
|
|
$
|
2,824
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
284,476
|
|
|
$
|
2,824
|
|
U.S. Treasury and agency securities
|
|
|
168,649
|
|
|
|
1,256
|
|
|
|
2,655
|
|
|
|
1
|
|
|
|
171,304
|
|
|
|
1,257
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
243,438
|
|
|
|
12,511
|
|
|
|
43,945
|
|
|
|
2,392
|
|
|
|
287,383
|
|
|
|
14,903
|
|
Other debt securities
|
|
|
169,509
|
|
|
|
7,815
|
|
|
|
35,206
|
|
|
|
3,692
|
|
|
|
204,715
|
|
|
|
11,507
|
|
Bank certificate of deposit
|
|
|
340
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
2
|
|
Publicly traded equity securities
|
|
|
6,810
|
|
|
|
8,607
|
|
|
|
5,150
|
|
|
|
8,598
|
|
|
|
11,960
|
|
|
|
17,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
873,222
|
|
|
$
|
33,015
|
|
|
$
|
86,956
|
|
|
$
|
14,683
|
|
|
$
|
960,178
|
|
|
$
|
47,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applied manages its cash equivalents and investments as a single
portfolio of highly marketable securities that is intended to be
available to meet Applieds current cash requirements. For
fiscal 2008, gross realized gains on sales of investments were
$13 million, and gross realized losses were
$15 million. For fiscal 2007, gross realized gains on sales
of investments were $2 million, and gross realized losses
were $2 million. For fiscal 2006, gross realized gains on
sales of investments were $5 million, and gross realized
losses were $28 million, principally attributable to the
sale of investments to fund the accelerated stock buyback
program discussed in Note 7.
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 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 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/(loss) in
stockholders equity and is reclassified into earnings when
the hedged transaction affects earnings. Amounts included in
accumulated
64
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
other comprehensive income/(loss) at October 26, 2008 will
generally be reclassified into earnings within 24 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 and are recognized in cost of
products sold and general and administrative expenses. The
change in option and forward time value was not material for
fiscal 2008, 2007 or 2006. If the transaction being hedged fails
to occur, or if a portion of any derivative is ineffective,
Applied promptly recognizes the gain or loss on the associated
financial instrument in general and administrative expenses. The
amounts recognized due to anticipated transactions failing to
occur were not material for all periods presented.
Forward exchange contracts are generally used to hedge certain
foreign currency denominated assets or liabilities. These
derivatives 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.
Derivative-related activity in accumulated other comprehensive
income/(loss), net of taxes, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Unrealized gain/(loss) on derivative instruments at beginning of
period
|
|
$
|
(1,409
|
)
|
|
$
|
4,318
|
|
Increase/(decrease) in fair value of derivative instruments
|
|
|
11,899
|
|
|
|
(6,012
|
)
|
(Gain)/loss reclassified into earnings, net
|
|
|
(2,451
|
)
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss), net, on derivative instruments at end of
period
|
|
$
|
8,039
|
|
|
$
|
(1,409
|
)
|
|
|
|
|
|
|
|
|
|
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 October 26, 2008, the carrying amount of
long-term debt was $203 million and the estimated fair
value was $198 million. At October 28, 2007, the
carrying amount of long-term debt was $205 million and the
estimated fair value was $226 million. The estimated fair
value of long-term debt is based primarily on quoted market
prices for the same or similar issues.
65
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3
|
Balance
Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Customer service spares
|
|
$
|
526,825
|
|
|
$
|
500,173
|
|
Raw materials
|
|
|
381,457
|
|
|
|
201,055
|
|
Work-in-process
|
|
|
665,123
|
|
|
|
230,244
|
|
Finished goods*
|
|
|
413,612
|
|
|
|
381,765
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,987,017
|
|
|
$
|
1,313,237
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
226,906
|
|
|
$
|
218,181
|
|
Buildings and improvements
|
|
|
1,158,097
|
|
|
|
1,253,322
|
|
Demonstration and manufacturing equipment
|
|
|
695,172
|
|
|
|
639,640
|
|
Furniture, fixtures and other equipment
|
|
|
580,691
|
|
|
|
563,373
|
|
Construction in progress
|
|
|
171,086
|
|
|
|
107,688
|
|
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment
|
|
|
2,831,952
|
|
|
|
2,782,204
|
|
Accumulated depreciation
|
|
|
(1,737,752
|
)
|
|
|
(1,730,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,094,200
|
|
|
$
|
1,051,242
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
797,440
|
|
|
$
|
225,632
|
|
Accounts payable
|
|
|
588,255
|
|
|
|
455,894
|
|
Deferred revenue
|
|
|
407,512
|
|
|
|
377,458
|
|
Compensation and employee benefits
|
|
|
370,409
|
|
|
|
491,411
|
|
Installation and warranty
|
|
|
163,629
|
|
|
|
184,271
|
|
Other accrued taxes
|
|
|
121,620
|
|
|
|
67,962
|
|
Dividends payable
|
|
|
79,846
|
|
|
|
83,142
|
|
Restructuring reserve
|
|
|
20,447
|
|
|
|
23,193
|
|
Other
|
|
|
221,932
|
|
|
|
312,553
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,771,090
|
|
|
$
|
2,221,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Included in finished goods inventory is $165 million at
October 26, 2008 and $168 million at October 28,
2007 of newly- introduced systems at customer locations where
the sales transaction did not meet Applieds revenue
recognition criteria, as set forth in Note 1.
|
66
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill,
Purchased Technology and Other Intangible Assets
Details of unamortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross carrying amount
|
|
$
|
1,220,543
|
|
|
$
|
17,860
|
|
|
$
|
1,238,403
|
|
|
$
|
1,052,280
|
|
|
$
|
17,860
|
|
|
$
|
1,070,140
|
|
Accumulated amortization
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,174,673
|
|
|
$
|
17,860
|
|
|
$
|
1,192,533
|
|
|
$
|
1,006,410
|
|
|
$
|
17,860
|
|
|
$
|
1,024,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and unamortized intangible assets are not amortized but
are subject to annual reviews for impairment, which Applied
performs during the fourth quarter of each fiscal year. Applied
conducted these impairment tests in fiscal 2008 and fiscal 2007,
and the results of these tests indicated that Applieds
goodwill and unamortized intangible assets were not impaired.
Goodwill and unamortized intangible assets are also subject to
review for impairment when circumstances or events occur during
the year that indicate that the assets may be impaired. From
October 28, 2007 to October 26, 2008, the change in
goodwill was $168 million, primarily due to the acquisition
of Baccini S.p.A. (Baccini), which was completed in the second
quarter of fiscal 2008, and the acquisition of certain net
assets of Edwards Vacuum, Inc. (Edwards), which was completed in
the first quarter of fiscal 2008 (see Note 12). Other
intangible assets that are not subject to amortization consist
primarily of a trade name associated with the Metron Technology
N.V. acquisition reported in the Applied Global Services
segment. As of October 26, 2008 goodwill and unamortized
intangible assets by reportable segment was: Energy and
Environmental Solutions, $657 million; Silicon,
$224 million; Applied Global Services, $196 million;
and Display, $116 million.
Details of amortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
548,029
|
|
|
$
|
329,629
|
|
|
$
|
877,658
|
|
|
$
|
518,042
|
|
|
$
|
224,253
|
|
|
$
|
742,295
|
|
Accumulated amortization
|
|
|
(369,183
|
)
|
|
|
(137,906
|
)
|
|
|
(507,089
|
)
|
|
|
(340,527
|
)
|
|
|
(46,450
|
)
|
|
|
(386,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178,846
|
|
|
$
|
191,723
|
|
|
$
|
370,569
|
|
|
$
|
177,515
|
|
|
$
|
177,803
|
|
|
$
|
355,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology and other intangible assets are amortized
over their estimated useful lives of 1 to 15 years using
the straight-line method. Amortization expense was
$121 million, $57 million and $31 million for
fiscal 2008, 2007 and 2006, respectively. As of October 26,
2008, future estimated amortization expense is expected to be
$87 million for fiscal 2009, $64 million for fiscal
2010, $50 million for fiscal 2011, $47 million for
fiscal 2012, $43 million for fiscal 2013, and
$80 million thereafter. As of October 26, 2008,
amortized intangible assets by reportable segment were: Energy
and Environmental Solutions, $280 million; Applied Global
Services, $49 million; Display, $37 million; and
Silicon, $4 million.
|
|
Note 4
|
Borrowing
Facilities
|
At October 26, 2008, Applied had 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 October 26, 2008. No amounts were outstanding
under this agreement at October 26, 2008. Of the remaining
credit facilities, $152 million are with Japanese banks at
rates indexed to their
67
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prime reference rate denominated in Japanese yen. No amounts
were outstanding under these credit facilities at
October 26, 2008.
Long-term debt outstanding at the end of the fiscal year was as
follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
1.61% installment note payable to Tokyo Electron Ltd., face
amount $1,800, due September 2008, interest payable
March 17, June 17, September 17 and December 17
|
|
$
|
|
|
|
$
|
1,649
|
|
Japanese debt, 3.00%, maturing 2008 2011
|
|
|
2,644
|
|
|
|
3,193
|
|
7.125% unsecured senior notes due 2017, interest payable April
15 and
October 15
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,644
|
|
|
|
204,842
|
|
Current portion
|
|
|
(1,068
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201,576
|
|
|
$
|
202,281
|
|
|
|
|
|
|
|
|
|
|
Applied has debt agreements that contain financial and other
covenants. These covenants require Applied to maintain certain
minimum financial ratios. At October 26, 2008, Applied was
in compliance with all covenants. Aggregate debt maturities at
October 26, 2008 were: $1 million in fiscal 2009,
$1 million in fiscal 2010, $0.5 million in fiscal
2011, and $200 million thereafter.
|
|
Note 6
|
Restructuring
and Asset Impairments
|
During fiscal 2008, Applied recognized restructuring charges of
$40 million of which $29 million was associated with a
global cost reduction plan, announced in fiscal 2008, and
$11 million with a plan approved in fiscal 2007. During
fiscal 2007, Applied recognized restructuring and asset
impairment charges of $26 million, including
$17 million in restructuring charges and $9 million in
asset impairments. Fiscal 2007 restructuring and asset
impairment charges included $30 million associated with the
decision to cease development of beamline implant products,
offset by $3 million in adjustments associated with
subsequent sales of properties held for sale. During fiscal
2006, Applied recognized restructuring and asset impairment
charges of $212 million, including $128 million in
asset impairments and $92 million in restructuring charges
primarily associated with the closure of its Hayward, California
facility, offset by $8 million in adjustments associated
with realignment programs of prior years.
On January 15, 2008, Applied announced a global cost
reduction plan (the Plan) that primarily affected its Silicon
and Applied Global Services segments and related support
organizations. As part of the Plan, Applied has made reductions
to its global workforce through a combination of job elimination
and attrition. In fiscal 2008, Applied recorded restructuring
charges of $29 million, consisting primarily of employee
termination costs to reduce its workforce. The affected
employees were based in North America, Europe and Asia, and
represented multiple functions.
Changes in restructuring reserves related to severance under the
Plan for fiscal 2008 were as follows:
|
|
|
|
|
Provision for restructuring reserves
|
|
$
|
38,481
|
|
Consumption of reserves
|
|
|
(24,795
|
)
|
Adjustment of restructuring reserves
|
|
|
(9,335
|
)
|
|
|
|
|
|
Balance, October 26, 2008
|
|
$
|
4,351
|
|
|
|
|
|
|
On February 9, 2007, the Board of Directors of Applied
approved a plan (the Implant Plan) to cease development of
beamline implant products for semiconductor manufacturing and
curtail the operations of Applieds Implant group based in
Horsham, England. Under the Implant Plan, Applied closed its
research and
68
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development and manufacturing operations in Horsham in October
2007. The Implant group operated in the Silicon segment and the
results of its operations were not material to the
segments financial position or results of operations.
Changes in restructuring reserves related to the Implant Plan
for fiscal 2007 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Provision for restructuring reserves
|
|
$
|
19,992
|
|
|
$
|
1,105
|
|
|
$
|
21,097
|
|
Consumption of reserves
|
|
|
(10,902
|
)
|
|
|
(285
|
)
|
|
|
(11,187
|
)
|
Foreign currency changes
|
|
|
649
|
|
|
|
2
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2007
|
|
|
9,739
|
|
|
|
822
|
|
|
|
10,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for fiscal 2008
|
|
|
189
|
|
|
|
11,399
|
|
|
|
11,588
|
|
Adjustment of restructuring reserves
|
|
|
(398
|
)
|
|
|
|
|
|
|
(398
|
)
|
Consumption of reserves
|
|
|
(7,379
|
)
|
|
|
(2,238
|
)
|
|
|
(9,617
|
)
|
Foreign currency changes
|
|
|
(800
|
)
|
|
|
(1,680
|
)
|
|
|
(2,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 26, 2008
|
|
$
|
1,351
|
|
|
$
|
8,303
|
|
|
$
|
9,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2006, Applieds Board of
Directors approved a plan to disinvest a portion of
Applieds real estate and facilities portfolio (the
Disinvestment Plan). Properties with an estimated fair value of
$56 million were reported as assets held-for-sale and
reclassified from property, plant and equipment on the
Consolidated Balance Sheet. During fiscal 2006, Applied recorded
an asset impairment charge of $124 million to write down
the following properties to estimated fair value:
(1) facilities in Narita, Japan, Chunan, Korea, Hillsboro,
Oregon, and Danvers, Massachusetts; and (2) 26 acres
of unimproved land in Hillsboro, Oregon. During fiscal 2006,
Applied sold the Danvers facility for net proceeds of
$16 million and recognized a gain of $4 million.
During fiscal 2007, Applied sold the Hillsboro, Chunan, and
Narita facilities and the Hillsboro land for total net proceeds
of $38 million and recognized a gain of $3 million.
Also in fiscal 2006, as part of the Disinvestment Plan, Applied
recorded lease termination charges in the amount of
$89 million, related to the closure of its leased Hayward,
California facility.
Changes in restructuring reserves related to facilities
realignment programs for fiscal 2006, 2007 and 2008 were as
follows:
|
|
|
|
|
Balance, October 30, 2005
|
|
$
|
69,482
|
|
Provision for fiscal 2006
|
|
|
95,829
|
|
Consumption of reserves
|
|
|
(128,490
|
)
|
Adjustment of restructuring reserves
|
|
|
(12,090
|
)
|
|
|
|
|
|
Balance, October 29, 2006
|
|
|
24,731
|
|
|
|
|
|
|
Consumption of reserves
|
|
|
(8,368
|
)
|
Adjustment of restructuring reserves
|
|
|
(3,732
|
)
|
Foreign currency changes
|
|
|
1
|
|
|
|
|
|
|
Balance, October 28, 2007
|
|
|
12,632
|
|
|
|
|
|
|
Consumption of reserves
|
|
|
(6,190
|
)
|
|
|
|
|
|
Balance, October 26, 2008
|
|
$
|
6,442
|
|
|
|
|
|
|
69
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7
|
Stockholders
Equity
|
Accumulated
Other Comprehensive Income/(Loss)
See the Consolidated Statements of Stockholders Equity for
the components of comprehensive income/(loss). Components of
accumulated other comprehensive income/(loss), net of taxes,
were as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Unrealized gain/(loss) on investments
|
|
$
|
(24,984
|
)
|
|
$
|
16,755
|
|
Unrealized gain/(loss) on derivative instruments qualifying as
cash flow hedges
|
|
|
8,039
|
|
|
|
(1,409
|
)
|
Pension liability
|
|
|
(19,672
|
)
|
|
|
(12,232
|
)
|
Retiree medical benefits
|
|
|
734
|
|
|
|
(1,132
|
)
|
Cumulative translation adjustments
|
|
|
9,313
|
|
|
|
9,371
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(26,570
|
)
|
|
$
|
11,353
|
|
|
|
|
|
|
|
|
|
|
Stock
Repurchase Program
Since March 1996, Applied has systematically repurchased shares
of its common stock in the open market. In March 2006, the Board
of Directors approved a stock repurchase program for up to
$5.0 billion in repurchases over the next three years
ending in March 2009. Pursuant to this authorization, on
September 18, 2006, Applied entered into accelerated stock
buyback agreements with Goldman, Sachs & Co. (Goldman
Sachs), under which Applied agreed to purchase from Goldman
Sachs outstanding shares of Applied common stock for an initial
purchase price of $2.5 billion. Under the agreements,
Applied purchased 145 million shares of Applied common
stock on September 18, 2006 at a price per share of $17.20,
and Goldman Sachs agreed to purchase an equivalent number of
shares in the open market over the following four months. At the
end of the four month period, Applied was entitled to or subject
to a price adjustment based upon the volume weighted average
price of Applied common stock during the purchase period that
could be settled, at Applieds option, in cash or shares of
Applied common stock. On January 24, 2007, Applied settled
the price adjustment by payment of $132 million in cash to
Goldman Sachs, resulting in an adjusted price per share of
$18.08. The repurchase was funded with Applieds existing
cash and investments and reported as treasury stock.
On September 15, 2006, the Board of Directors approved a
new stock repurchase program for up to $5.0 billion in
repurchases over the next three years ending in September 2009,
of which authorization for $2.3 billion of repurchases
remained as of October 26, 2008. Under this authorization,
Applied implemented a systematic stock repurchase program and
may also make supplemental stock repurchases from time to time,
depending on market conditions, stock price and other factors.
In fiscal 2008, there were 83,163,000 shares of Applied
common stock repurchased at an average price of $18.04 per
share. In fiscal 2007, there were 60,561,000 shares
repurchased at an average price of $19.81 per share.
Dividends
During fiscal 2008, Applieds Board of Directors declared
four quarterly cash dividends in the amount of $0.06 per share
each. The fourth quarterly cash dividend declared in fiscal 2008
was paid on December 4, 2008, to stockholders of record as
of November 13, 2008. During fiscal 2007, Applieds
Board of Directors declared one quarterly cash dividend in the
amount of $0.05 per share and three quarterly cash dividends in
the amount of $0.06 per share each. During fiscal 2006,
Applieds Board of Directors declared one quarterly cash
dividend in the amount of $0.03 per share and three quarterly
cash dividends in the amount of $0.05 per share each. Dividends
paid during fiscal 2008, 2007 and 2006 amounted to
$325 million, $306 million and $251 million,
respectively. Applied currently anticipates that it will
continue to pay cash dividends on a quarterly basis in the
future, although the
70
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 that cash dividends are in the best interest of
Applieds stockholders.
|
|
Note 8
|
Employee
Benefit Plans
|
Stock
Options
Applied grants options to employees and consultants to purchase
shares of its common stock, at future dates, at the fair market
value on the date of grant. Most options are scheduled to vest
over four years, and expire no later than seven years from the
grant date. There were 167,289,000 shares available for
grant at October 26, 2008, 156,322,624 shares
available for grant at October 28, 2007, and
144,582,000 shares available for grant at October 29,
2006. Stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
94,901
|
|
|
$
|
17.81
|
|
|
|
163,214
|
|
|
$
|
18.83
|
|
|
|
200,007
|
|
|
$
|
18.67
|
|
Granted and assumed
|
|
|
7
|
|
|
$
|
19.38
|
|
|
|
311
|
|
|
$
|
17.98
|
|
|
|
12,174
|
|
|
$
|
16.92
|
|
Exercised
|
|
|
(19,004
|
)
|
|
$
|
17.27
|
|
|
|
(46,885
|
)
|
|
$
|
17.86
|
|
|
|
(18,498
|
)
|
|
$
|
15.34
|
|
Canceled
|
|
|
(15,147
|
)
|
|
$
|
18.86
|
|
|
|
(21,739
|
)
|
|
$
|
25.29
|
|
|
|
(30,469
|
)
|
|
$
|
19.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
60,757
|
|
|
$
|
17.71
|
|
|
|
94,901
|
|
|
$
|
17.81
|
|
|
|
163,214
|
|
|
$
|
18.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
57,671
|
|
|
$
|
17.73
|
|
|
|
83,178
|
|
|
$
|
17.84
|
|
|
|
130,065
|
|
|
$
|
19.59
|
|
The following table summarizes information with respect to
options outstanding and exercisable at October 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Range of
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Shares
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
$0.01 $4.99
|
|
|
8
|
|
|
$
|
2.48
|
|
|
|
1.07
|
|
|
$
|
73
|
|
|
|
8
|
|
|
$
|
2.48
|
|
|
$
|
73
|
|
$5.00 $9.99
|
|
|
58
|
|
|
$
|
6.67
|
|
|
|
3.19
|
|
|
|
274
|
|
|
|
58
|
|
|
$
|
6.67
|
|
|
|
274
|
|
$10.00 $19.99
|
|
|
41,635
|
|
|
$
|
15.75
|
|
|
|
2.78
|
|
|
|
236
|
|
|
|
38,549
|
|
|
$
|
15.61
|
|
|
|
235
|
|
$20.00 $29.99
|
|
|
19,047
|
|
|
$
|
22.03
|
|
|
|
1.97
|
|
|
|
|
|
|
|
19,047
|
|
|
$
|
22.03
|
|
|
|
|
|
$30.00 $59.99
|
|
|
9
|
|
|
$
|
41.66
|
|
|
|
1.34
|
|
|
|
|
|
|
|
9
|
|
|
$
|
41.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,757
|
|
|
$
|
17.71
|
|
|
|
2.53
|
|
|
$
|
583
|
|
|
|
57,671
|
|
|
$
|
17.73
|
|
|
$
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to become exercisable
|
|
|
59,784
|
|
|
$
|
17.71
|
|
|
|
2.47
|
|
|
$
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
Applied grants restricted stock units (referred to as
performance shares under the Applied Materials, Inc. Employee
Stock Incentive Plan). Restricted stock units typically vest
over three to four years, subject to the grantees
continued service to Applied on each vesting date.
71
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the changes in restricted stock units outstanding
under Applieds equity compensation plans during fiscal
2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Contractual Term
|
|
|
Value
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Non-vested restricted stock units at October 28, 2007
|
|
|
18,597
|
|
|
$
|
18.51
|
|
|
|
2.9 Years
|
|
|
$
|
350,746
|
|
Granted
|
|
|
5,808
|
|
|
|
18.22
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(6,381
|
)
|
|
|
18.26
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,630
|
)
|
|
|
18.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units at October 26, 2008
|
|
|
16,394
|
|
|
|
18.50
|
|
|
|
2.5
|
|
|
$
|
186,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units expected to vest
|
|
|
14,434
|
|
|
|
18.50
|
|
|
|
2.6
|
|
|
$
|
164,544
|
|
Employees
Stock Purchase Plan
Applied sponsors two Employee Stock Purchase Plans
(collectively, ESPP) for the benefit of United States (U.S.) and
international employees, respectively. The U.S. plan is
qualified under Section 423 of the Internal Revenue Code.
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 the
stock at the beginning of the applicable offering period or at
the end of each purchase period. The ESPP provides for
consecutive and overlapping offering periods of up to
24 months in duration, with each offering period composed
of four consecutive six-month purchase periods. ESPP
contributions are limited to a maximum of 10 percent of an
employees eligible compensation, up to a maximum of $6,500
per six-month purchase period. ESPP participants are also
limited to purchasing a maximum of 1,000 shares per
purchase period. Shares issued under the ESPP were 4,617,000 for
fiscal 2008, 4,310,000 for fiscal 2007, and 4,065,000 for fiscal
2006. At October 26, 2008, there were
71,742,000 shares available for future issuance under the
ESPP.
Employee
Bonus Plans
Applied has various employee bonus plans. A discretionary bonus
plan provides for the distribution of a percentage of pre-tax
profits to Applied employees who are not eligible for other
performance-based incentive plans, up to a maximum percentage of
eligible compensation. Other plans award annual bonuses to
Applieds executives and other key contributors based on
the achievement of profitability
and/or
other
specified performance criteria. Applied also has agreements with
key technical employees that provide for additional compensation
related to the success of new product development and
achievement of specified profitability criteria. Charges to
expense under these plans were $150 million for fiscal
2008, $271 million for fiscal 2007 and $262 million
for fiscal 2006.
Employee
Savings and Retirement Plan
Applieds Employee Savings and Retirement Plan (401(k)
Plan) is qualified under Sections 401(a) and (k) of
the Internal Revenue Code. Eligible employees may make salary
deferral and
catch-up
contributions under the 401(k) Plan on a pre-tax basis. Applied
matches a percentage of each participants salary deferral
contributions with cash contributions. In general, these
matching contributions become 20 percent vested at the end
of an employees second year of service with Applied, and
vest 20 percent per year of service thereafter, becoming
fully vested at the end of six years of service. Participants
may direct that funds held in their 401(k) Plan accounts,
including any Applied matching contributions, be invested in any
of the diversified investment funds available under the 401(k)
Plan or in the Applied Materials, Inc. Common Stock Fund (Stock
Fund), which invests solely in shares of Applied common stock.
Effective June 21, 2007, the Stock Fund was converted into
a non-leveraged employee stock ownership plan (within the
meaning of Section 4975(e)(7) of the Internal Revenue Code)
and, as a result,
72
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
participants have the option of specifying that any future cash
dividends paid on shares held in the Stock Fund be either
reinvested in the Stock Fund or distributed directly to them in
cash no later than 90 days after the calendar year for
which the dividends were paid. Applieds matching
contributions under this plan were approximately
$29 million, net of $2 million in forfeitures, for
fiscal 2008, $28 million, net of $1 million in
forfeitures, for fiscal 2007 and $27 million, net of
$2 million in forfeitures, for fiscal 2006.
Defined
Benefit Pension Plans of Foreign Subsidiaries and Other
Post-Retirement Benefits
Several of Applieds foreign subsidiaries have defined
benefit pension plans covering substantially all of their
eligible employees. Benefits under these plans are typically
based on years of service and final average compensation levels.
Applied uses August 31 as a measurement date. The plans are
managed in accordance with applicable local statutes and
practices. Applied deposits funds for certain of these plans
with insurance companies, pension trustees, government-managed
accounts,
and/or
accrues the expense for the unfunded portion of the benefit
obligation on its consolidated financial statements.
Applieds practice is to fund the various pension plans in
amounts sufficient to meet the minimum requirements as
established by applicable local governmental oversight and
taxing authorities. Depending on the design of the plan, local
custom and market circumstances, the liabilities of a plan may
exceed qualified plan assets. The differences between the
aggregate projected benefit obligations and aggregate plan
assets of these plans have been recorded as liabilities by
Applied and are included in accrued expenses and other
liabilities in the Consolidated Balance Sheets.
On October 28, 2007, Applied implemented the recognition
and disclosure provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements 87, 88, 106 and 132(R) (SFAS 158).
SFAS 158 required Applied to recognize the funded status
(the difference between the fair value of plan assets and the
projected benefit obligations) of the defined benefit plan in
the Consolidated Balance Sheet, with a corresponding adjustment
to accumulated other comprehensive income, net of tax, to
measure the fair value of plan benefit obligations as of its
fiscal year ending October 28, 2007 and to provide
additional disclosures.
On January 1, 1999, Applied implemented a post-retirement
plan that provides certain medical and vision benefits to
eligible retirees who are at least age 55 and who have at
least 10 years of service at their date of retirement. An
eligible retiree may elect coverage for an eligible spouse or
domestic partner who is not eligible for Medicare. Coverage
under the plan generally ends for both the retiree and spouse or
domestic partner upon becoming eligible for Medicare. As of
October 26, 2008, Applieds liability under this
post-retirement plan was $9 million which was included in
other long-term liabilities in the Consolidated Balance Sheets.
73
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the changes in benefit obligations and plan assets,
which includes post-retirement benefits, for fiscal 2008 and
2007 is presented below.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except percentages)
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
Beginning projected benefit obligation
|
|
$
|
258,754
|
|
|
$
|
231,557
|
|
Service cost
|
|
|
15,546
|
|
|
|
16,513
|
|
Interest cost
|
|
|
13,411
|
|
|
|
11,201
|
|
Plan participants contributions
|
|
|
1,336
|
|
|
|
1,331
|
|
Actuarial (gain)/loss
|
|
|
(14,673
|
)
|
|
|
(17,087
|
)
|
Curtailments, settlements and special termination benefits
|
|
|
(1,445
|
)
|
|
|
(5,970
|
)
|
Foreign currency exchange rate changes
|
|
|
(32,915
|
)
|
|
|
20,361
|
|
Benefits paid
|
|
|
(9,345
|
)
|
|
|
(9,573
|
)
|
Plan amendments and business combinations
|
|
|
85
|
|
|
|
10,421
|
|
|
|
|
|
|
|
|
|
|
Ending projected benefit obligation
|
|
$
|
230,754
|
|
|
$
|
258,754
|
|
|
|
|
|
|
|
|
|
|
Ending accumulated benefit obligation
|
|
$
|
203,247
|
|
|
$
|
225,000
|
|
|
|
|
|
|
|
|
|
|
Range of assumptions to determine benefit obligations
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.3% - 6.7%
|
|
|
|
2.3% - 6.3%
|
|
Rate of compensation increase
|
|
|
2.0% - 6.0%
|
|
|
|
2.0% - 6.0%
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Beginning fair value of plan assets
|
|
$
|
118,061
|
|
|
$
|
92,424
|
|
Return on plan assets
|
|
|
(4,785
|
)
|
|
|
6,276
|
|
Employer contributions
|
|
|
14,400
|
|
|
|
12,016
|
|
Plan participants contributions
|
|
|
1,336
|
|
|
|
1,331
|
|
Foreign currency exchange rate changes
|
|
|
(20,925
|
)
|
|
|
8,846
|
|
Divestitures, settlements and business combinations
|
|
|
(1,164
|
)
|
|
|
6,741
|
|
Benefits paid
|
|
|
(9,345
|
)
|
|
|
(9,573
|
)
|
|
|
|
|
|
|
|
|
|
Ending fair value of plan assets
|
|
$
|
97,578
|
|
|
$
|
118,061
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(133,176
|
)
|
|
$
|
(140,693
|
)
|
Employer contributions after the measurement date
|
|
|
1,204
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(131,972
|
)
|
|
$
|
(139,530
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
|
$
|
456
|
|
|
$
|
897
|
|
Current liability
|
|
|
(2,548
|
)
|
|
|
(2,569
|
)
|
Noncurrent liability
|
|
|
(129,880
|
)
|
|
|
(137,858
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(131,972
|
)
|
|
$
|
(139,530
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive
income
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
14,023
|
|
|
$
|
20,817
|
|
Prior service credit
|
|
|
(2,478
|
)
|
|
|
(1,877
|
)
|
Transition obligation
|
|
|
248
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,793
|
|
|
$
|
19,283
|
|
|
|
|
|
|
|
|
|
|
Plans with projected benefit obligations in excess of plan
assets
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
223,746
|
|
|
$
|
250,223
|
|
Fair value of plan assets
|
|
$
|
90,245
|
|
|
|
108,794
|
|
Plans with accumulated benefit obligations in excess of plan
assets
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
181,980
|
|
|
$
|
209,090
|
|
Fair value of plan assets
|
|
$
|
82,367
|
|
|
$
|
108,794
|
|
74
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Plan assets allocation
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
45
|
%
|
|
|
60
|
%
|
Debt securities
|
|
|
34
|
%
|
|
|
34
|
%
|
Cash
|
|
|
7
|
%
|
|
|
4
|
%
|
Real Estate
|
|
|
2
|
%
|
|
|
1
|
%
|
Other
|
|
|
12
|
%
|
|
|
1
|
%
|
On February 9, 2007, the Board of Directors of Applied
approved a plan to cease development of beamline implant
products for semiconductor manufacturing and curtail the
operations of its Implant group based in Horsham, England (see
Note 6). A reduction in force led to a curtailment loss of
$629,000, which is included in restructuring and asset
impairment expenses on the Consolidated Statement of Operations.
Applieds investment strategy for its defined benefit plans
is to invest assets in a prudent manner, maintaining
well-diversified portfolios with the long-term objective of
meeting the obligations of the plans as they come due. Asset
allocation decisions are typically made by plan fiduciaries with
input from Applieds pension committee. Applieds
asset allocation strategy incorporates a sufficient equity
exposure in order for the plans to benefit from the expected
long-term outperformance of equities relative to the plans
liabilities. Applied retains investment managers, where
appropriate, to manage the assets of the plans. Performance of
investment managers is monitored by plan fiduciaries with the
assistance of local investment consultants. The investment
managers make investment decisions within the guidelines set
forth by plan fiduciaries. Risk management practices include
diversification across asset classes and investment styles, and
periodic rebalancing toward target asset allocation ranges.
Investment managers may use derivative instruments for efficient
portfolio management purposes. Plan assets do not include any of
Applieds own equity or debt securities.
A summary of the components of net periodic benefit costs and
the weighted average assumptions used for net periodic benefit
cost and benefit obligation calculations for fiscal 2008, 2007
and 2006 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
15,546
|
|
|
$
|
16,513
|
|
|
$
|
15,429
|
|
Interest cost
|
|
|
13,409
|
|
|
|
11,202
|
|
|
|
8,938
|
|
Expected return on plan assets
|
|
|
(8,583
|
)
|
|
|
(6,050
|
)
|
|
|
(4,362
|
)
|
Amortization of actuarial loss
|
|
|
561
|
|
|
|
1,492
|
|
|
|
2,601
|
|
Amortization of prior service costs
|
|
|
231
|
|
|
|
414
|
|
|
|
174
|
|
Amortization of transition obligation
|
|
|
83
|
|
|
|
281
|
|
|
|
63
|
|
Settlement loss/(gain) to be recognized
|
|
|
91
|
|
|
|
|
|
|
|
(5,569
|
)
|
Curtailment loss
|
|
|
|
|
|
|
629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
21,338
|
|
|
$
|
24,481
|
|
|
$
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.3% - 6.3%
|
|
|
|
2.3% - 5.8%
|
|
|
|
2.0% - 6.3%
|
|
Expected long-term return on assets
|
|
|
2.5% - 8.0%
|
|
|
|
2.5% - 8.0%
|
|
|
|
3.5% - 7.5%
|
|
Rate of compensation increase
|
|
|
2.0% - 6.0%
|
|
|
|
2.0% - 6.0%
|
|
|
|
2.0% - 5.0%
|
|
Asset return assumptions are derived based on actuarial and
statistical methodologies, from analysis of long-term historical
data relevant to the country in which each plan is in effect and
the investments applicable to the corresponding plan. The
discount rate for each plan was derived by reference to
appropriate benchmark yields on
75
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
high quality corporate bonds, allowing for the approximate
duration of both plan obligations and the relevant benchmark
yields.
Future expected benefit payments for the pension plans and the
post-retirement plan over the next ten fiscal years are:
$7 million in fiscal 2009, $8 million in fiscal 2010,
$9 million in fiscal 2011, $10 million in fiscal 2012,
$10 million in fiscal 2013, and $60 million
collectively for fiscal years 2014 through 2018. Company
contributions to these plans for fiscal 2009 are expected to be
approximately $14 million.
Executive
Deferred Compensation Plans
Applied sponsors two unfunded deferred compensation plans, the
Executive Deferred Compensation Plan (Predecessor EDCP) and the
2005 Executive Deferred Compensation Plan (2005 EDCP), under
which certain employees may elect to defer a portion of their
following years eligible earnings. The Predecessor EDCP
was frozen as of December 31, 2004 such that no new
deferrals could be made under the plan after that date and the
plan would qualify for grandfather relief under
Section 409A of the Internal Revenue Code. The Predecessor
EDCP participant accounts continue to be maintained under the
plan and credited with deemed interest. The 2005 EDCP was
implemented by Applied effective as of January 1, 2005 and
is intended to comply with the requirements of Section 409A
of the Internal Revenue Code. Amounts payable, including accrued
deemed interest, totaled $80 million at October 26,
2008 and $82 million at October 28, 2007, which were
included in other long-term liabilities in the Consolidated
Balance Sheets.
The components of income from operations before income taxes
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
U.S.
|
|
$
|
1,021,961
|
|
|
$
|
2,047,318
|
|
|
$
|
1,760,138
|
|
Foreign
|
|
|
386,757
|
|
|
|
392,335
|
|
|
|
406,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,408,718
|
|
|
$
|
2,439,653
|
|
|
$
|
2,166,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
248,308
|
|
|
$
|
590,289
|
|
|
$
|
475,984
|
|
Foreign
|
|
|
182,803
|
|
|
|
99,472
|
|
|
|
124,797
|
|
State
|
|
|
5,314
|
|
|
|
8,054
|
|
|
|
24,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
436,425
|
|
|
|
697,815
|
|
|
|
625,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
61,469
|
|
|
|
(17,314
|
)
|
|
|
63,837
|
|
Foreign
|
|
|
(43,505
|
)
|
|
|
16,888
|
|
|
|
(33,298
|
)
|
State
|
|
|
(6,417
|
)
|
|
|
32,068
|
|
|
|
(5,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,547
|
|
|
|
31,642
|
|
|
|
25,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
447,972
|
|
|
$
|
729,457
|
|
|
$
|
650,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation between the statutory U.S. federal income
tax rate of 35 percent and Applieds actual effective
income tax provision rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Tax provision at U.S. statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Favorable resolutions from audits of prior years income
tax filings
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
(2.1
|
)
|
Effect of foreign operations taxed at various rates
|
|
|
(1.0
|
)
|
|
|
(1.6
|
)
|
|
|
(0.8
|
)
|
State income taxes, net of federal benefit
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
0.6
|
|
Research and other tax credits
|
|
|
(1.1
|
)
|
|
|
(0.6
|
)
|
|
|
(0.1
|
)
|
Export sales/production benefit
|
|
|
(2.0
|
)
|
|
|
(1.3
|
)
|
|
|
(4.2
|
)
|
Other
|
|
|
0.2
|
|
|
|
(1.7
|
)
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.8
|
%
|
|
|
29.9
|
%
|
|
|
30.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The components of deferred income
tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory reserves and basis difference
|
|
$
|
103,428
|
|
|
$
|
111,297
|
|
Installation and warranty reserves
|
|
|
51,992
|
|
|
|
69,934
|
|
Accrued liabilities
|
|
|
295,797
|
|
|
|
230,632
|
|
Restructuring reserves
|
|
|
7,539
|
|
|
|
9,275
|
|
Deferred revenue
|
|
|
13,499
|
|
|
|
65,597
|
|
Capital loss carryforward
|
|
|
15,000
|
|
|
|
16,675
|
|
Tax credits and net operating losses
|
|
|
33,536
|
|
|
|
11,020
|
|
Deferred compensation
|
|
|
30,122
|
|
|
|
31,263
|
|
Equity-based compensation
|
|
|
68,627
|
|
|
|
60,256
|
|
Intangibles
|
|
|
34,096
|
|
|
|
40,145
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
653,636
|
|
|
|
646,094
|
|
Valuation Allowance
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
638,636
|
|
|
|
646,094
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(54,177
|
)
|
|
|
(42,597
|
)
|
Purchased technology
|
|
|
(109,840
|
)
|
|
|
(87,823
|
)
|
Other
|
|
|
(29,359
|
)
|
|
|
(27,189
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(193,376
|
)
|
|
|
(157,609
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
445,260
|
|
|
$
|
488,485
|
|
|
|
|
|
|
|
|
|
|
77
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the breakdown between current and
non-current net deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current deferred tax asset
|
|
$
|
388,807
|
|
|
$
|
426,471
|
|
Non-current deferred tax asset
|
|
|
113,727
|
|
|
|
120,654
|
|
Current deferred tax liability
|
|
|
|
|
|
|
(5,326
|
)
|
Non-current deferred tax liability
|
|
|
(57,274
|
)
|
|
|
(53,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
445,260
|
|
|
$
|
488,485
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities are included in accounts
payable and accrued expenses on the Consolidated Balance Sheets
and non-current deferred tax liabilities are included in other
liabilities on the Consolidated Balance Sheets. The balance as
of October 28, 2007 includes an additional $2 million
of deferred taxes for a purchase accounting adjustment.
A valuation allowance is recorded to reflect the estimated
amount of deferred tax assets that may not be realized. The
valuation allowance has been established against capital loss
carryforwards where it is believed that it is not more likely
than not that sufficient capital gains will be realized within
the remaining carryforward period.
For fiscal 2008, U.S. income taxes have not been provided
for approximately $395 million of cumulative undistributed
earnings of several
non-U.S. subsidiaries.
Applied intends to reinvest these earnings indefinitely in
operations outside of the U.S.
As of October 26, 2008, Applieds state R&D tax
credit carryforward was $32 million. The carryforward has
an indefinite life. Management believes that the tax credit
carryforward will be utilized in future periods.
Applieds income taxes payable have been reduced by the tax
benefits associated with employee stock option transactions.
These benefits, credited directly to stockholders equity,
amounted to $7 million for fiscal 2008 and $50 million
for fiscal 2007, with a corresponding reduction to taxes payable
of $7 million in fiscal 2008 and $50 million in fiscal
2007.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS 109). This
interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. Recognition of a tax position is determined
when it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related
appeals or litigation processes. A tax position that meets the
more-likely-than-not recognition threshold is measured at the
largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with a taxing
authority. FIN 48 also provides guidance on derecognition
of tax benefits, classification on the balance sheet, interest
and penalties, accounting in interim periods, disclosure, and
transition. Applied implemented FIN 48 effective
October 29, 2007. Upon implementation of FIN 48
Applied did not identify any increase or decrease in its
liability for unrecognized tax benefits. In the fourth quarter
of fiscal 2008, Applied identified a tax position that met the
more-likely-than-not recognition threshold. Applied determined
that a tax benefit of $100 million existed upon
implementation of FIN 48 and therefore made the correction
to retained earnings. The impact of the correction was not
considered material to the prior reporting periods. The
beginning balance of the reconciliation of gross unrecognized
tax benefits below reflects this tax position.
78
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits is as follows
(in thousands):
|
|
|
|
|
Balance, October 29, 2007
|
|
$
|
360,000
|
|
Increases in tax positions for prior years
|
|
|
4,400
|
|
Decreases in tax positions for prior years
|
|
|
(1,000
|
)
|
|
|
|
|
|
Balance, October 26, 2008
|
|
$
|
363,400
|
|
|
|
|
|
|
As of October 26, 2008, Applied had unrecognized tax
benefits, net of federal deduction for state tax, of
$350 million, all of which, if recognized, would result in
a reduction of Applieds effective tax rate.
Historically, unrecognized tax benefits have been classified as
current income taxes payable. Under FIN 48, unrecognized
tax benefits are classified as long-term income taxes payable
except to the extent it is anticipated that cash payment will be
made within the next year. As of October 26, 2008, the
gross liability for unrecognized tax benefits was
$63 million, exclusive of interest and penalties. Under
FIN 48, increases or decreases to interest and penalties on
uncertain tax positions are included in provision for income
taxes in the Consolidated Statement of Operations. Interest and
penalties related to uncertain tax positions were
$11 million as of October 28, 2007 and $8 million
as of October 26, 2008. Of the $8 million in interest
and penalties, $5 million is classified as long-term
payable and $3 million is classified as current payable in
the Consolidated Balance Sheets.
The timing of the resolution of income tax examinations is
highly uncertain as well as the amounts and timing of various
tax payments that may be part of the settlement process. This
could cause large fluctuations in the balance sheet
classification of current assets and non-current assets and
liabilities. The Company believes that before the end of fiscal
2009, it is reasonably possible that the statute of limitations
on certain income taxes will expire. Given the uncertainty as to
ultimate settlement terms, the timing of payment and the impact
of such settlements on other uncertain tax positions, the range
of the estimated potential decrease in underlying unrecognized
tax benefits is between $0 and $10 million.
A number of Applieds tax returns remain subject to
examination by taxing authorities. These include
U.S. federal returns for 2005 and later years, tax returns
for certain states for 2002 and later years, and tax returns in
certain jurisdictions outside of the U.S. for 2003 and
later years.
|
|
Note 10
|
Industry
Segment and Geographic Operations
|
Applieds four reportable segments are: Silicon, Applied
Global Services, Display, and Energy and Environmental
Solutions. Prior to the first quarter of fiscal 2008, the
Applied Global Services segment was named Fab Solutions, and the
Energy and Environmental Solutions segment was named Adjacent
Technologies. 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 October 26, 2008
and the distinctive nature of each segment. Future changes to
this internal financial structure may result in changes to the
reportable segments disclosed. Prior to the fourth quarter of
fiscal 2006, Applied operated in one reportable segment.
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,
79
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, corporate
marketing and sales, corporate functions (certain management,
finance, legal, human resources and RD&E), 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.
Effective the first quarter of fiscal 2008, Applied changed the
management reporting system for services to report all service
results in the Applied Global Services segment. Applied has
reclassified segment operating results for fiscal 2007 and 2006
to conform to the fiscal 2008 presentation.
The Silicon segment includes semiconductor capital equipment for
etch, rapid thermal processing (RTP), deposition, chemical
mechanical planarization (CMP), and metrology and inspection.
The Applied Global Services segment includes technically
differentiated products and services to improve the 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.
The Display segment encompasses products for manufacturing LCDs
for TVs, personal computers and other video-enabled devices. The
Display segment also includes design and manufacture of
differentiated stand-alone equipment for the Applied
SunFab
tm
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.
80
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information for each reportable segment as of October 26,
2008, October 28, 2007 and October 29, 2006 and for
the years then ended, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Depreciation/
|
|
|
Capital
|
|
|
Segment
|
|
|
|
Net Sales
|
|
|
Income/(Loss)
|
|
|
Amortization
|
|
|
Expenditures
|
|
|
Assets
|
|
|
|
(In thousands)
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon
|
|
$
|
4,005,141
|
|
|
$
|
1,242,574
|
|
|
$
|
104,130
|
|
|
$
|
61,518
|
|
|
$
|
1,773,348
|
|
Applied Global Services
|
|
|
2,328,930
|
|
|
|
574,772
|
|
|
|
34,831
|
|
|
|
19,694
|
|
|
|
1,306,158
|
|
Display
|
|
|
975,582
|
|
|
|
309,803
|
|
|
|
8,397
|
|
|
|
11,478
|
|
|
|
658,744
|
|
Energy and Environmental Solutions
|
|
|
819,587
|
|
|
|
(183,173
|
)
|
|
|
106,663
|
|
|
|
7,544
|
|
|
|
2,075,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment
|
|
$
|
8,129,240
|
|
|
$
|
1,943,976
|
|
|
$
|
254,021
|
|
|
$
|
100,234
|
|
|
$
|
5,813,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon
|
|
$
|
6,511,722
|
|
|
$
|
2,378,771
|
|
|
$
|
137,943
|
|
|
$
|
83,388
|
|
|
$
|
2,608,980
|
|
Applied Global Services
|
|
|
2,353,167
|
|
|
|
630,140
|
|
|
|
28,692
|
|
|
|
39,526
|
|
|
|
1,229,584
|
|
Display
|
|
|
705,056
|
|
|
|
159,212
|
|
|
|
9,122
|
|
|
|
3,216
|
|
|
|
431,789
|
|
Energy and Environmental Solutions
|
|
|
164,911
|
|
|
|
(89,364
|
)
|
|
|
19,637
|
|
|
|
670
|
|
|
|
1,037,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment
|
|
$
|
9,734,856
|
|
|
$
|
3,078,759
|
|
|
$
|
195,394
|
|
|
$
|
126,800
|
|
|
$
|
5,308,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Silicon
|
|
$
|
5,971,483
|
|
|
$
|
2,000,342
|
|
|
$
|
159,695
|
|
|
$
|
75,315
|
|
|
$
|
2,769,127
|
|
Applied Global Services
|
|
|
2,351,841
|
|
|
|
685,319
|
|
|
|
30,605
|
|
|
|
15,158
|
|
|
|
1,067,249
|
|
Display
|
|
|
823,957
|
|
|
|
256,738
|
|
|
|
8,270
|
|
|
|
5,265
|
|
|
|
584,740
|
|
Energy and Environmental Solutions
|
|
|
19,733
|
|
|
|
(8,008
|
)
|
|
|
3,495
|
|
|
|
348
|
|
|
|
293,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment
|
|
$
|
9,167,014
|
|
|
$
|
2,934,391
|
|
|
$
|
202,065
|
|
|
$
|
96,086
|
|
|
$
|
4,714,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations of segment operating results to Applied
consolidated totals for the fiscal years ending October 26,
2008, October 28, 2007 and October 29, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Total segment operating income
|
|
$
|
1,943,976
|
|
|
$
|
3,078,759
|
|
|
$
|
2,934,391
|
|
Corporate and unallocated costs
|
|
|
(570,434
|
)
|
|
|
(680,832
|
)
|
|
|
(701,657
|
)
|
Restructuring and asset impairment charges
|
|
|
(39,948
|
)
|
|
|
(26,421
|
)
|
|
|
(212,113
|
)
|
Gain on sale of facility
|
|
|
21,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
1,355,431
|
|
|
$
|
2,371,506
|
|
|
$
|
2,020,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reconciliations of depreciation and amortization expense to
Applied consolidated totals for the fiscal years ending
October 26, 2008, October 28, 2007 and
October 29, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total segment depreciation and amortization
|
|
$
|
254,021
|
|
|
$
|
195,394
|
|
|
$
|
202,065
|
|
Depreciation on shared facilities
|
|
|
35,849
|
|
|
|
37,179
|
|
|
|
42,988
|
|
Depreciation on information technology assets
|
|
|
29,777
|
|
|
|
34,986
|
|
|
|
23,528
|
|
Other
|
|
|
404
|
|
|
|
775
|
|
|
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization
|
|
$
|
320,051
|
|
|
$
|
268,334
|
|
|
$
|
270,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations of capital expenditures to Applied consolidated
totals for the fiscal years ending October 26, 2008,
October 28, 2007 and October 29, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total segment capital expenditures
|
|
$
|
100,234
|
|
|
$
|
126,800
|
|
|
$
|
96,086
|
|
Shared facilities
|
|
|
40,577
|
|
|
|
49,128
|
|
|
|
37,329
|
|
Information technology assets
|
|
|
94,700
|
|
|
|
76,604
|
|
|
|
36,083
|
|
Other
|
|
|
52,395
|
|
|
|
12,252
|
|
|
|
9,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated capital expenditures
|
|
$
|
287,906
|
|
|
$
|
264,784
|
|
|
$
|
179,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations of segment assets to Applied consolidated totals
as of October 26, 2008, October 28, 2007 and
October 29, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 26,
|
|
|
October 28,
|
|
|
October 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total segment assets
|
|
$
|
5,813,766
|
|
|
$
|
5,308,225
|
|
|
$
|
4,714,807
|
|
Cash and investments
|
|
|
3,467,724
|
|
|
|
3,732,004
|
|
|
|
3,212,199
|
|
Allowance for bad debts
|
|
|
(5,275
|
)
|
|
|
(4,136
|
)
|
|
|
(3,342
|
)
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
37,211
|
|
Deferred income taxes
|
|
|
502,534
|
|
|
|
547,125
|
|
|
|
569,308
|
|
Other current assets
|
|
|
382,912
|
|
|
|
337,974
|
|
|
|
217,433
|
|
Common property, plant and equipment
|
|
|
644,578
|
|
|
|
603,453
|
|
|
|
551,064
|
|
Equity-method investment
|
|
|
79,533
|
|
|
|
115,060
|
|
|
|
144,431
|
|
Other assets
|
|
|
120,546
|
|
|
|
22,573
|
|
|
|
37,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
11,006,318
|
|
|
$
|
10,662,278
|
|
|
$
|
9,480,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For geographical reporting, revenue is attributed to the
geographic location in which the customers facilities are
located. Long-lived assets consist primarily of property, plant
and equipment and equity-method investments, and are attributed
to the geographic location in which they are located. Net sales
and long-lived assets by geographic region were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
|
|
|
|
Net Sales
|
|
|
Assets
|
|
|
|
(In thousands)
|
|
|
2008:
|
|
|
|
|
|
|
|
|
North America(1)
|
|
$
|
1,519,898
|
|
|
$
|
895,723
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
|
1,837,097
|
|
|
|
43,169
|
|
Japan
|
|
|
1,217,635
|
|
|
|
89,782
|
|
Europe
|
|
|
949,105
|
|
|
|
109,224
|
|
Korea
|
|
|
1,309,491
|
|
|
|
6,258
|
|
Asia-Pacific(2)
|
|
|
1,296,015
|
|
|
|
54,119
|
|
|
|
|
|
|
|
|
|
|
Total outside North America
|
|
|
6,609,343
|
|
|
|
302,552
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
8,129,241
|
|
|
$
|
1,198,275
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
North America(1)
|
|
$
|
1,554,643
|
|
|
$
|
866,531
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
|
2,678,815
|
|
|
|
42,622
|
|
Japan
|
|
|
1,492,694
|
|
|
|
126,515
|
|
Europe
|
|
|
955,747
|
|
|
|
90,879
|
|
Korea
|
|
|
1,846,867
|
|
|
|
8,634
|
|
Asia-Pacific(2)
|
|
|
1,206,090
|
|
|
|
56,836
|
|
|
|
|
|
|
|
|
|
|
Total outside North America
|
|
|
8,180,213
|
|
|
|
325,486
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
9,734,856
|
|
|
$
|
1,192,017
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
North America(1)
|
|
$
|
1,707,996
|
|
|
$
|
894,598
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
|
2,079,065
|
|
|
|
16,777
|
|
Japan
|
|
|
1,518,294
|
|
|
|
154,432
|
|
Europe
|
|
|
1,005,923
|
|
|
|
89,741
|
|
Korea
|
|
|
1,698,673
|
|
|
|
5,513
|
|
Asia-Pacific(2)
|
|
|
1,157,063
|
|
|
|
36,436
|
|
|
|
|
|
|
|
|
|
|
Total outside North America
|
|
|
7,459,018
|
|
|
|
302,899
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
9,167,014
|
|
|
$
|
1,197,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Primarily the United States.
|
|
(2)
|
|
Includes China.
|
Samsung Electronics Co., Ltd. accounted for 16 percent of
Applieds net sales in fiscal 2008, 12 percent of
Applieds net sales in fiscal 2007, and 11 percent of
Applieds net sales in fiscal 2006. These net sales were
for products in multiple reportable segments.
83
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 11
|
Commitments
and Contingencies
|
Leases
Applied leases some of its facilities and equipment under
non-cancelable operating leases and has options to renew most
leases, with rentals to be negotiated. Total rent expense was
$68 million for fiscal 2008, $62 million for fiscal
2007, and $70 million for fiscal 2006. Future minimum lease
payments at October 26, 2008 totaled $118 million and
were: $58 million for fiscal 2009; $30 million for
fiscal 2010; $14 million for fiscal 2011; $8 million
for fiscal 2012; $5 million for fiscal 2013; and
$3 million collectively for all periods thereafter.
Discounted
Letters of Credit
Applied discounts letters of credit through various financial
institutions. Under these agreements, Applied discounted letters
of credit in the amounts of $167 million for fiscal 2008,
$431 million for fiscal 2007 and $237 million for
fiscal 2006. Discounting fees were not material for all periods
presented. In fiscal 2008, Applied factored accounts receivables
totaling $125 million.
Warranty
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.
Changes in the warranty reserves were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
184,271
|
|
|
$
|
174,605
|
|
Provisions for warranty
|
|
|
138,229
|
|
|
|
184,470
|
|
Consumption of reserves
|
|
|
(179,654
|
)
|
|
|
(174,804
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
142,846
|
|
|
$
|
184,271
|
|
|
|
|
|
|
|
|
|
|
As noted above, Applieds products are generally sold with
a
12-month
warranty. Accordingly, current warranty provisions are related
to the current years net sales, and warranty consumption
is associated with current and prior years net 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 October 26, 2008, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee agreements was
approximately $167 million. Applied has not recorded any
liability in connection with these guarantee arrangements below
that required to appropriately account for the underlying
transaction being guaranteed. Applied does not believe, based on
historical experience and information currently available, that
it is probable that any amounts will be required to be paid
under these guarantee arrangements.
Applied also has agreements with various banks to facilitate
subsidiary banking operations worldwide, including overdraft
arrangements, issuance of bank guarantees, and letters of
credit. As of October 26, 2008, Applied Materials Inc. has
provided parent guarantees to banks for approximately
$168 million to cover these services.
84
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Legal
Matters
Jusung
On December 24, 2003, Applied filed a lawsuit against
Jusung Engineering Co., Ltd. (Jusung Engineering) and Jusung
Pacific Co., Ltd. (Jusung Pacific, referred to together with
Jusung Engineering as Jusung) in Tao-Yuan District Court in
Taiwan, captioned Applied Materials, Inc. v. Jusung
Engineering Co., Ltd. The lawsuit alleges that Jusung is
infringing an Applied patent related to chemical vapor
deposition (CVD). In the lawsuit, Applied sought a provisional
injunction prohibiting Jusung from importing, using,
manufacturing, servicing or selling in Taiwan certain flat panel
display manufacturing equipment. On January 14, 2004, the
Tao-Yuan District Court issued a provisional injunction order
against Jusung Pacific. Jusung Pacifics appeal of the
order was denied. Jusung Pacific requested permission to post a
counterbond to have the Jusung Pacific injunction lifted, which
was granted, and on March 30, 2004, the provisional
injunction order was lifted. At Applieds request, on
December 11, 2004, the District Court issued a provisional
injunction order against Jusung Engineering. Jusung
Engineerings appeal of the order was denied. Jusung
Engineering requested permission to post a counterbond to have
the Jusung Engineering injunction lifted, which was granted, and
on April 25, 2005, the provisional injunction order against
Jusung Engineering was lifted. On June 30, 2004, Applied
filed a main action patent infringement complaint
against Jusung in the Hsinchu District Court in Taiwan,
captioned Applied Materials, Inc. v. Jusung Engineering
Co., Ltd. In the lawsuit, Applied seeks damages and a permanent
injunction for infringement of the same CVD patent. The
decisions regarding the provisional injunction and counterbond
have no effect on the main action patent infringement lawsuit
filed by Applied. In August 2006, the Hsinchu Court set the
litigation fee and the litigation security payment, and the main
action is now proceeding on its merits. This same patent is also
the subject of an invalidity proceeding filed in the Taiwanese
Intellectual Property Office (TIPO) by Jusung Pacific in June
2004. In July 2007, the TIPO allowed Applied to amend its patent
and dismissed Jusung Pacifics invalidation action. Jusung
Pacifics initial appeal was denied and it has filed a
further appeal to the Taipei High Administrative Court. Applied
believes that it has meritorious claims and defenses that it
intends to pursue vigorously.
On April 10, 2004, the Taiwan Fair Trade Commission (TFTC)
notified Applieds subsidiary, AKT America, Inc. (AKT
America), that, following a complaint filed by Jusung, the TFTC
had begun an investigation into whether AKT America had violated
the Taiwan Fair Trade Act, and specifically whether AKT America
violated the Taiwan Guidelines for the Review of Cases Involving
Enterprises Issuing Warning Letters for Infringement on
Copyright, Trademark and Patent Rights by allegedly notifying
customers about AKT America patent rights and the infringement
of those rights by Jusung. On June 15, 2004, the TFTC
notified Applied that Applied also was the subject of the
investigation. The TFTC subsequently notified Applied and AKT
America that there was insufficient evidence to support a claim
against either company. Jusung appealed the TFTCs
decision, and the appeals court affirmed the decision of the
TFTC. Jusung appealed the appeals courts affirmation of
the decision of the TFTC, and in January 2007, the Taipei High
Administrative Court dismissed Jusungs appeal. In February
2007, Jusung appealed the dismissal to the Supreme
Administrative Court of Taiwan. Applied believes that
Jusungs complaint is without merit.
On June 13, 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
June 20, 2006, Jusung Engineering filed a lawsuit against
Applied and AKT America, in Hsinchu District Court in Taiwan,
captioned Jusung Engineering, Co. Ltd. v. AKT America, Inc.
and Applied Materials, Inc., alleging infringement of this
patent. Jusung Engineerings lawsuit seeks damages, costs
and attorneys fees. Applied believes that it has
meritorious defenses that it intends to pursue vigorously.
On January 31, 2007, Applied received notice that Jusung
Engineering filed a complaint of private prosecution in the
Taipei District Court of Taiwan dated November 10, 2006,
entitled Jusung Engineering Co., Ltd. v. M. Splinter,
Y. Lin, C. Lai and J. Lin. The complaint alleges 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 and 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
85
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Applied. On April 27, 2007, the Taipei District Court
dismissed the private prosecution complaint. Jusung Engineering
filed an appeal of the dismissal to the High Court. The High
Court affirmed the District Courts rejection of the
private prosecution complaint on June 25, 2007. After the
dismissal of the private prosecution complaint, the matter was
transferred to the Taipei District Attorneys Office, which
issued a ruling not to prosecute. This ruling was reviewed by
the Taiwan High Court District Attorney, which in October 2007
returned the matter to the Taipei District Attorneys
Office for further consideration. On March 7, 2008, the
Taipei District Attorneys Office issued a second ruling
not to prosecute, which Jusung Engineering appealed. The Taiwan
High Court District Attorney returned the matter to the Taipei
District Attorneys Office for further investigation and
the Taipei District Attorneys office decided not to pursue
the matter. Applied believes that it has meritorious defenses
that it intends to pursue vigorously.
On April 3, 2007, Jusung Engineering filed a complaint
against AKT America and one of its suppliers in Seoul Central
District Court in Seoul, Korea, captioned Jusung Engineering,
Co. Ltd. v. AKT America, Inc. The complaint alleges
infringement of a Jusung patent involving the showerhead
assembly of plasma enhanced chemical vapor deposition (PECVD)
equipment for liquid crystal displays (LCDs) and seeks
injunctive relief. On June 9, 2007, AKT America and its
supplier filed a patent invalidation action with the Korean
Intellectual Property Office (KIPO). On November 30, 2007,
the KIPO ruled that the Jusung patent was invalid, and Jusung
Engineering has appealed the KIPOs ruling. Also on
November 30, 2007, KIPO dismissed the confirmation of scope
action and Jusung appealed the decision. On December 4,
2008, the Patent Court remanded the case back to KIPO for
further consideration. On April 3, 2008, the Seoul District
Court dismissed the complaint for infringement and Jusung
Engineering has appealed this decision. Applied believes that it
has meritorious defenses that it intends to pursue vigorously.
On August 13, 2007, Applied filed a complaint against
Jusung Engineering in the Seoul Central District Court in Seoul,
Korea, captioned Applied Materials, Inc. v. Jusung
Engineering Ltd. The complaint alleges infringement of an
Applied patent involving a substrate support or housing for a
substrate supporting pin used in PECVD equipment for LCDs and
seeks both monetary damages and injunctive relief. On
October 29, 2007, Jusung filed an action with the KIPO
seeking to invalidate Applieds substrate patent. Applied
initiated a confirmation of scope action with the KIPO based on
the same patent, which the KIPO dismissed on January 30,
2008. Applied has appealed this decision to the Patent Court.
Applied believes that it has meritorious claims in this action
that it intends to pursue vigorously.
Silicon
Services Consortium
On January 19, 2006, five companies that sold refurbished
Applied tools (Silicon Services Consortium Inc., Semiconductor
Support Services Co., OEM Surplus, Inc., Precision Technician
Inc., and Semiconductor Equipment Specialist, Inc.) filed a
lawsuit against Applied in the United States District Court for
the Western District of Texas, captioned Silicon Services
Consortium, Inc., et al. v. Applied Materials, Inc. The
plaintiffs claimed that a policy that Applied announced in
January 2005 of limiting the sale of certain parts to them
constituted an unlawful attempt to monopolize the refurbishment
business, an interference with existing contracts, and an
interference with prospective business relationships. The suit
sought injunctive relief, damages, costs and attorneys
fees. On January 17, 2007, Applied filed a counterclaim
asserting claims for patent infringement, trademark
infringement, trademark dilution, unfair competition, and misuse
and misappropriation of trade secrets against each of the five
plaintiffs/counter defendants, seeking damages as well as
injunctive relief. All claims between Applied and Precision
Technician were dismissed in September 2007 pursuant to a
settlement, with no payment by either party. In December 2007,
Applied reached a settlement with Semiconductor Equipment
Specialist of all pending claims between them for an amount that
was not material to Applied. In May 2008, Applied reached a
settlement with Semiconductor Support Services of all pending
claims between them in an amount that was not material to
Applied. In July 2008, Applied reached a settlement with the
remaining plaintiffs/counter defendants, Silicon Services
Consortium and OEM Surplus, of all pending claims between them
in an amount that was not material to Applied, and the lawsuit
has been dismissed.
86
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Although the outcome of the above-described matters or these
claims and proceedings cannot be predicted with certainty,
Applied does not believe that any of these proceedings or other
claims will have a material adverse effect on its consolidated
financial condition or results of operations.
|
|
Note 12
|
Business
Combinations and Equity-Method Investment
|
On January 31, 2008, Applied acquired all of the
outstanding shares of Baccini, a privately-held company based in
Italy, for a purchase price of $215 million in cash, net of
cash and marketable securities acquired. The acquired business
is a leading supplier of automated metallization and test
systems for manufacturing c-Si photovoltaic cells. In connection
with this acquisition, Applied recorded goodwill of
$158 million and intangible assets of $130 million. Of
the $130 million of acquired intangible assets,
$61 million was assigned to acquired backlog (to be
amortized over 2 years), $34 million was assigned to
customer relationships (to be amortized over 9 years),
$27 million was assigned to purchased technology (to be
amortized over 7 years), $6 million was assigned to
covenants not to compete (to be amortized over 2 years),
and $3 million was assigned to trademarks and tradenames
(to be amortized over 7 years). The allocation of the
purchase price was based on estimates of the fair value of the
assets acquired and is subject to adjustment upon finalization
of the purchase price allocation. The acquired business is
reported under the Energy and Environmental Solutions segment.
On November 9, 2007, Applied purchased from Edwards Vacuum,
Inc. certain assets of its Kachina semiconductor equipment parts
cleaning and refurbishment business for $19 million. The
acquisition expanded Applieds existing Chamber Performance
Services network of facilities that provide customers worldwide
with technology and support for maintaining their chamber
components. In connection with this acquisition, Applied
recorded goodwill of $13 million and an intangible asset of
$3 million (customer relationships, which will be amortized
over 13 years). The acquired business is reported under the
Applied Global Services segment.
On August 23, 2007, Applied acquired all of the outstanding
shares of Switzerland-based HCT for $463 million in cash,
net of cash acquired. The acquired business is a leading
supplier of precision wafering systems used principally in
manufacturing c-Si substrates for the solar industry. In
connection with this acquisition, Applied recorded goodwill of
$354 million and other intangible assets of
$180 million. Of the $180 million of acquired
intangible assets, $59 million was assigned to purchased
technology (to be amortized over 11 years),
$59 million was assigned to customer relationships (to be
amortized over 7 years), $47 million was assigned to
acquired backlog (to be amortized over 1 year),
$8 million was assigned to trademarks and tradenames (to be
amortized over 13 years), and $7 million was assigned
to covenants not to compete (to be amortized over 3 years).
The acquired business is reported under the Energy and
Environmental Solutions segment.
On March 30, 2007, Applied purchased Brooks Software, a
division of Brooks Automation, Inc., for $137 million in
cash. The acquired business is a leading provider of factory
management and control software to the semiconductor and flat
panel display industries. The products complement Applieds
existing software applications and enable Applied to offer
customers a comprehensive computer integrated manufacturing
(CIM) solution for optimizing fab operations. Applied
recorded an in-process research and development (IPR&D)
expense of $5 million, reported as research, development
and engineering expense, goodwill of $77 million, and other
intangible assets of $47 million. Of the $47 million
of acquired intangible assets, $21 million was assigned to
purchased technology (to be amortized over 4 to 11 years),
$21 million was assigned to maintenance contracts (to be
amortized over 7 years), $2 million was assigned to
acquired backlog (to be amortized over 1 year),
$2 million was assigned to trademarks and tradenames (to be
amortized over 7 years), and $1 million was assigned
to customer
87
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
relationships (to be amortized over 4 years). The acquired
business is reported under the Applied Global Services segment.
The acquired IPR&D expense was determined by identifying
research projects for which technological feasibility had not
been established and no alternative future use existed. The
value of the projects identified as in-process was determined by
estimating the future cash flows from the projects once
commercially feasible, discounting the net cash flows back to
their present value at a rate commensurate with the level of
risk and maturity of the projects, and then applying a
percentage of completion to the calculated value.
On August 14, 2006, Applieds wholly-owned subsidiary,
Metron Technology, Inc. (Metron), purchased certain assets of
UMS Solutions parts cleaning and recycling business in
Singapore for $10 million. The acquisition enhances
Metrons capabilities in Southeast Asia with advanced,
high-quality parts cleaning services to support its
customers semiconductor manufacturing requirements. In
connection with this acquisition, Applied recorded goodwill of
$7 million and other intangible assets of $1 million.
On July 20, 2006, Applied and Dainippon Screen Mfg. Co.,
Ltd. (Screen) completed the formation of Sokudo Co. Ltd.
(Sokudo), a Japanese joint venture company, to deliver advanced
track solutions for customers critical semiconductor
manufacturing requirements. Screen owns 52 percent and
holds the controlling interest in Sokudo, and Applied owns
48 percent. Screen transferred into Sokudo its existing
track business and related intellectual property, including
employees, products and its installed base of systems. Applied
paid $147 million for its investment in Sokudo.
Additionally, Applied contributed to Sokudo certain technology
and related intellectual property and has provided key
development employees. Screen performs manufacturing for Sokudo
under an outsourcing agreement. Applied accounts for its
interest in Sokudo under the equity method of accounting. Under
this accounting method, Applieds exposure to loss from
ongoing operations is limited to $80 million as of
October 26, 2008, which represents Applieds carrying
value of its investment in Sokudo. Applieds investment in
Sokudo is classified as an equity-method investment on the
Consolidated Balance Sheet. Applieds investment in Sokudo
includes the unamortized excess of Applieds investment
over its equity in the joint ventures net assets. This
excess $28 million at October 26, 2008 is being
amortized on a straight-line basis over its estimated useful
life of 7 years.
On July 7, 2006, Applied completed its acquisition of
Applied Films Corporation, a Colorado corporation (Applied
Films) and leading supplier of thin film deposition equipment
used in manufacturing LCDs, solar cells, flexible electronics
and energy-efficient glass. Applied paid $28.50 per share in
cash for each outstanding share of Applied Films. The total
purchase price was approximately $484 million, or
$328 million net of Applied Films existing cash and
marketable securities. As part of the acquisition, Applied
assumed Applied Films outstanding stock options and
restricted stock awards that, at the acquisition date, had a
total fair value of $26 million, of which $18 million
was allocated to the purchase price and the remainder to
unearned compensation. Upon the acquisition and subject to
vesting, Applied Films stock options became exercisable for
shares of Applied common stock and Applied Films restricted
stock awards became payable in shares of Applied common stock
totaling, in the aggregate, 3 million shares of Applied
common stock. The fair value of Applied Films stock
options assumed was determined using a Black-Scholes model. The
use of the Black-Scholes model and method of determining the
variables is consistent with Applieds valuation of
equity-based compensation awards in accordance with
SFAS 123(R) (see Note 1). Applied recorded an
in-process research and development expense of $14 million,
reported as research, development and engineering expense in the
Consolidated Statements of Operations; goodwill of
$226 million; and other intangible assets of
$140 million. The acquired in-process research and
development expense was determined by identifying research
projects for which technological feasibility had not been
established and no alternative future use existed. The value of
the projects identified as in-process was determined by
estimating the future cash flows from the projects once
commercially feasible, discounting the net cash flows back to
their present value at a rate commensurate with the level of
risk and maturity of the projects, and then applying a
percentage of completion to the calculated value.
88
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 23, 2005, Applied acquired all of the
outstanding shares of ChemTrace Corporation and ChemTrace
Precision Cleaning, Inc. for approximately $22 million in
cash, net of cash acquired, of which $18 million was paid
upon closing. This business provides customers with precision
parts cleaning and materials testing solutions. In connection
with this acquisition, Applied recorded goodwill of
$12 million and other intangible assets of $8 million.
For all of the purchase business combinations discussed above,
the results of operations prior to the acquisition dates were
not material in relation to those of Applied for any of the
periods presented herein. Goodwill is not amortized but is
reviewed periodically for impairment and purchased technology is
amortized over its useful life of 1 to 15 years.
|
|
Note 13
|
Subsequent
Events
|
On November 12, 2008, Applied announced that it will
implement a restructuring program beginning in the first quarter
of fiscal 2009. As part of this program, Applied plans to reduce
its global workforce by approximately 1,800 positions or 12% by
the end of fiscal 2009 through a combination of attrition,
voluntary separation and other workforce reduction programs
consistent with local legal requirements and in consultation
with employee representatives.
|
|
Note 14
|
Unaudited
Quarterly Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal Year
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,087,397
|
|
|
$
|
2,149,998
|
|
|
$
|
1,848,168
|
|
|
$
|
2,043,677
|
|
|
$
|
8,129,240
|
|
Gross margin
|
|
$
|
934,981
|
|
|
$
|
966,828
|
|
|
$
|
742,314
|
|
|
$
|
798,705
|
|
|
$
|
3,442,828
|
|
Net income
|
|
$
|
262,376
|
|
|
$
|
302,507
|
|
|
$
|
164,768
|
|
|
$
|
231,095
|
|
|
$
|
960,746
|
|
Earnings per diluted share
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
0.70
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,277,267
|
|
|
$
|
2,529,561
|
|
|
$
|
2,560,984
|
|
|
$
|
2,367,044
|
|
|
$
|
9,734,856
|
|
Gross margin
|
|
$
|
1,062,538
|
|
|
$
|
1,136,610
|
|
|
$
|
1,216,390
|
|
|
$
|
1,076,905
|
|
|
$
|
4,492,443
|
|
Net income
|
|
$
|
403,476
|
|
|
$
|
411,444
|
|
|
$
|
473,515
|
|
|
$
|
421,761
|
|
|
$
|
1,710,196
|
|
Earnings per diluted share
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.34
|
|
|
$
|
0.30
|
|
|
$
|
1.20
|
|
89
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Applied Materials, Inc.:
We have audited the accompanying consolidated balance sheets of
Applied Materials, Inc. and subsidiaries (the Company) as of
October 26, 2008 and October 28, 2007, and the related
consolidated statements of operations, stockholders equity
and comprehensive income, and cash flows for each of the years
in the three-year period ended October 26, 2008. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule as of and for each of the years in the three-year
period ended October 26, 2008, as set forth under
Item 15(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Applied Materials, Inc. and subsidiaries as of
October 26, 2008 and October 28, 2007, and the results
of their operations and their cash flows for each of the years
in the three-year period ended October 26, 2008, in
conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule as of and for each of the years in the three-year
period ended October 26, 2008, when considered in relation
to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
As discussed in note 9 to the consolidated financial
statements, effective October 29, 2007, the Company adopted
the provisions of Financial Accounting Standards Board
Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes.
As discussed in note 1 to the consolidated financial
statements, effective October 28, 2007, the Company adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an
amendment of FASB Statement No. 87, 88, 106, and 132(R).
As discussed in note 1 to the consolidated financial statements,
effective October 31, 2005, the Company adopted the
provisions of SFAS 123(R), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Applied Materials, Inc. and subsidiaries internal control
over financial reporting as of October 26, 2008, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated
December 12, 2008 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
KPMG LLP
Mountain View, California
December 12, 2008
90
INDEX TO
EXHIBITS
These Exhibits are numbered in accordance with the
Exhibit Table of Item 601 of
Regulation S-K:
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated May 4, 2006, among
Applied Materials, Inc., Applied Films Corporation and Blue
Acquisition, Inc., incorporated by reference to Applieds
Form 10-Q
for the quarter ended July 30, 2006 (file
no. 000-06920)
filed August 31, 2006.
|
|
3
|
.1
|
|
Certificate of Incorporation of Applied Materials, Inc., as
amended and restated through March 31, 2000, incorporated
by reference to Applieds
Form 10-Q
for the quarter ended April 30, 2000 (file
no. 002-45028)
filed June 8, 2000.
|
|
3
|
.2
|
|
Certificate of Designation, Preferences and Rights of the Terms
of the Series A Junior Participating Preferred Stock dated
as of July 9, 1999, incorporated by reference to
Applieds
Form 10-Q
for the quarter ended August 1, 1999 (file
no. 000-06920)
filed September 14, 1999.
|
|
3
|
.3
|
|
Bylaws of Applied Materials, Inc., as amended and restated
through September 16, 2008, incorporated by reference to
Applieds
Form 8-K
(file
no. 000-06920)
filed September 19, 2008.
|
|
4
|
.1
|
|
Form of Indenture (including form of debt security) between
Applied Materials, Inc. and Harris Trust Company of
California, as Trustee, incorporated by reference to
Applieds
Form 8-K
(file
no. 000-06920)
filed August 17, 1994.
|
|
4
|
.2
|
|
Rights Agreement, dated as of July 7, 1999, between Applied
Materials, Inc. and Harris Trust and Savings Bank, as Rights
Agent, incorporated by reference to Applieds Registration
Statement on
Form 8-A
(file
no. 000-06920)
dated July 13, 1999.
|
|
4
|
.3
|
|
First Amendment to Rights Agreement, dated as of
November 6, 2002, between Applied Materials, Inc. and
Computershare Investor Services, LLC, as Rights Agent,
incorporated by reference to Applieds Registration
Statement on
Form 8-A/A
(file
no. 000-06920)
dated November 25, 2002.
|
|
10
|
.1
|
|
License Agreement dated January 1, 1992, between Applied
Materials and Varian Associates, Inc., incorporated by reference
to Applieds
Form 10-K
for fiscal year 1992 (file
no. 000-06920)
filed December 16, 1992.
|
|
10
|
.2*
|
|
Applied Materials, Inc. Executive Deferred Compensation Plan, as
amended and restated on April 1, 1995, incorporated by
reference to Applieds
Form 10-Q
for the quarter ended April 30, 1995 (file
no. 000-06920)
filed June 7, 1995.
|
|
10
|
.3*
|
|
Amendment No. 1 to the Applied Materials, Inc. Executive
Deferred Compensation Plan, incorporated by reference to
Applieds
Form 10-Q
for the quarter ended July 26, 1998 (file
no. 000-06920)
filed September 9, 1998.
|
|
10
|
.4*
|
|
Amendment No. 2 to the Applied Materials, Inc. Executive
Deferred Compensation Plan, incorporated by reference to
Applieds
Form 10-Q
for the quarter ended July 26, 1998 (file
no. 000-06920)
filed September 9, 1998.
|
|
10
|
.5*
|
|
Applied Materials, Inc. Nonqualified Stock Option Agreement
related to the Employee Stock Incentive Plan, as amended
(formerly named the Applied Materials, Inc. 1995 Equity
Incentive Plan), incorporated by reference to
Applieds
Form 10-Q
for the quarter ended May 2, 1999 (file
no. 000-06920)
filed June 15, 1999.
|
|
10
|
.6
|
|
Form of Indemnification Agreement between Applied Materials,
Inc. and Non-Employee Directors, dated June 11, 1999,
incorporated by reference to Applieds
Form 10-K
for fiscal year 1999 (file
no. 333-88777)
filed January 31, 2000.
|
|
10
|
.7
|
|
Form of Indemnification Agreement between Applied Materials,
Inc. and James C. Morgan and Dan Maydan, dated
June 11, 1999, incorporated by reference to Applieds
Form 10-K
for fiscal year 1999 (file
no. 333-88777)
filed January 31, 2000.
|
|
10
|
.8
|
|
Form of Indemnification Agreement between Applied Materials,
Inc. and certain of its officers, incorporated by reference to
Applieds
Form 10-K
for fiscal year 1999 (file
no. 333-88777)
filed January 31, 2000.
|
|
10
|
.9*
|
|
Form of Applied Materials, Inc. Nonqualified Stock Option Grant
Agreement for use under the Employee Stock Incentive Plan, as
amended (formerly named the Applied Materials Inc. 1995
Equity Incentive Plan) incorporated by reference to
Applieds
Form 10-Q
for the quarter ended April 29, 2001 (file
no. 002-45028)
filed June 7, 2001.
|
91
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.10*
|
|
Applied Materials, Inc. amended and restated 2000 Global Equity
Incentive Plan, incorporated by reference to Applieds
Form 10-K
for fiscal year 2002 (file
no. 000-06920)
filed January 23, 2003.
|
|
10
|
.11
|
|
Applied Materials Profit Sharing Scheme, incorporated by
reference to Applieds
S-8
(file
no. 333-45011)
filed January 27, 1998.
|
|
10
|
.12*
|
|
Term Sheet for employment of Michael R. Splinter, incorporated
by reference to Applieds
Form 10-Q
for the quarter ended April 27, 2003 (file
no. 000-06920)
filed June 11, 2003.
|
|
10
|
.13
|
|
Binding Memorandum of Understanding between Applied Materials,
Inc. and Novellus Systems, Inc. dated September 20, 2004,
incorporated by reference to Applieds
Form 8-K
(file
no. 000-06920)
filed September 24, 2004. (Confidential treatment has been
granted for the redacted portions of the agreement.)
|
|
10
|
.14*
|
|
Applied Materials, Inc. Nonemployee Director Share Purchase
Plan, incorporated by reference to Applieds
Form 10-Q
for the quarter ended May 1, 2005 (file
no. 000-06920)
filed May 31, 2005.
|
|
10
|
.15*
|
|
Election Form to Receive Shares in lieu of Retainer and/or
Meeting Fees for use under the Applied Materials, Inc.
Nonemployee Director Share Purchase Plan, incorporated by
reference to Applieds
Form 10-Q
for the quarter ended May 1, 2005 (file
no. 000-06920)
filed May 31, 2005.
|
|
10
|
.16*
|
|
Applied Materials, Inc. amended and restated Relocation Policy,
incorporated by reference to Applieds
Form 8-K
(file
no. 000-06920)
filed October 31, 2005.
|
|
10
|
.17*
|
|
Form of Restricted Stock Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-K
for fiscal year 2005 (file
no. 000-06920)
filed December 14, 2005.
|
|
10
|
.18*
|
|
Form of Performance Share Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-K
for fiscal year 2005 (file
no. 000-06920)
filed December 14, 2005.
|
|
10
|
.19*
|
|
Amendment No. 3 to the Applied Materials, Inc. Executive
Deferred Compensation Plan, incorporated by reference to
Applieds
Form 10-K
for fiscal year 2005 (file
no. 000-06920)
filed December 14, 2005.
|
|
10
|
.20*
|
|
Amendment No. 4 to the Applied Materials, Inc. Executive
Deferred Compensation Plan, incorporated by reference to
Applieds
Form 10-K
for fiscal year 2005 (file
no. 000-06920)
filed December 14, 2005.
|
|
10
|
.21*
|
|
Form of Non-Qualified Stock Option Grant Agreement for use under
the Applied Materials Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended July 30, 2006 (file
no. 000-06920)
filed August 31, 2006.
|
|
10
|
.22*
|
|
Form of Non-Qualified Stock Option Grant Agreement for use under
the Applied Materials, Inc. 2000 Global Equity Incentive Plan,
as amended, incorporated by reference to Applieds
Form 10-Q
for the quarter ended July 30, 2006 (file
no. 000-06920)
filed August 31, 2006.
|
|
10
|
.23*
|
|
Form of Performance Shares Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended July 30, 2006 (file
no. 000-06920)
filed August 31, 2006.
|
|
10
|
.24*
|
|
Applied Materials, Inc. amended and restated Employee Financial
Assistance Plan, incorporated by reference to Applieds
Form 10-K
for fiscal year 2006 (file
no. 000-06920)
filed December 14, 2006.
|
|
10
|
.25*
|
|
Amendment No. 1 to the Applied Materials, Inc. Employee
Financial Assistance Plan, incorporated by reference to
Applieds
Form 10-K
for fiscal year 2006 (file
no. 000-06920)
filed December 14, 2006.
|
|
10
|
.26
|
|
$100,000,000
364-Day
Credit Agreement dated as of September 14, 2006 between
Applied Materials, Inc., as borrower, and Citicorp USA, Inc., as
lender, incorporated by reference to Applieds
Form 10-K
for fiscal year 2006 (file
no. 000-06920)
filed December 14, 2006. (Confidential treatment has been
granted for redacted portions of the agreement.)**
|
|
10
|
.27
|
|
Master Confirmation dated September 18, 2006 between
Goldman, Sachs & Co. and Applied Materials, Inc.,
incorporated by reference to Applieds
Form 10-K
for fiscal year 2006
(file no. 000-06920)
filed December 14, 2006. (Confidential treatment has been
granted for redacted portions of the agreement.)
|
92
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.28
|
|
Supplemental Confirmation dated September 18, 2006 between
Goldman, Sachs & Co. and Applied Materials, Inc.,
incorporated by reference to Applieds
Form 10-K
for fiscal year 2006
(file no. 000-06920)
filed December 14, 2006. (Confidential treatment has been
granted for redacted portions of the agreement.)
|
|
10
|
.29*
|
|
Separation Agreement and Release between Applied Materials, Inc.
and Nancy H. Handel dated December 15, 2006, incorporated
by reference to Applieds
Form 10-Q
for the quarter ended January 28, 2007 (file
no. 000-06920)
filed February 28, 2007.
|
|
10
|
.30
|
|
$1,000,000,000 Credit Agreement dated as of January 26,
2007 among Applied Materials, Inc., as borrower, several lenders
named therein and Citicorp USA, Inc., as agent for the lenders,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended January 28, 2007 (file
no. 000-06920)
filed February 28, 2007. (Confidential treatment has been
granted for redacted portions of the agreement.)**
|
|
10
|
.31*
|
|
Form of Non-Qualified Stock Option Grant Agreement for use under
the Applied Materials, Inc. Employee Stock Incentive Plan, as
amended, incorporated by reference to Applieds
Form 10-Q
for the quarter ended April 29, 2007 (file
no. 000-06920)
filed May 30, 2007.
|
|
10
|
.32*
|
|
Form of Non-Qualified Stock Option Grant Agreement for use under
the Applied Materials, Inc. 2000 Global Equity Incentive Plan,
as amended, incorporated by reference to Applieds
Form 10-Q
for the quarter ended April 29, 2007 (file
no. 000-06920)
filed May 30, 2007.
|
|
10
|
.33*
|
|
Form of Performance Share Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended April 29, 2007 (file
no. 000-06920)
filed May 30, 2007.
|
|
10
|
.34*
|
|
Form of Restricted Stock Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended April 29, 2007 (file
no. 000-06920)
filed May 30, 2007.
|
|
10
|
.35*
|
|
Applied Materials, Inc. amended and restated 2005 Executive
Deferred Compensation Plan, incorporated by reference to
Applieds
Form 8-K
(file
no. 000-06920)
filed July 13, 2007.
|
|
10
|
.36
|
|
Share Purchase Agreement among Applied Materials, Inc., the
Shareholders of HCT Shaping Systems SA and Sellers
Representative dated June 25, 2007, incorporated by
reference to Applieds
Form 10-Q
for the quarter ended July 29, 2007 (file
no. 000-06920)
filed August 30, 2007.
|
|
10
|
.37*
|
|
Separation Agreement and Release between Applied Materials, Inc.
and Farhad Moghadam dated July 19, 2007, incorporated by
reference to Applieds
Form 10-Q
for the quarter ended July 29, 2007 (file
no. 000-06920)
filed August 30, 2007.
|
|
10
|
.38*
|
|
Form of Performance Shares Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-K
for fiscal year 2007 (file
no. 000-06920)
filed December 14, 2007.
|
|
10
|
.39*
|
|
Form of Performance Shares Agreement for Nonemployee Directors
for use under the Applied Materials, Inc. Employee Stock
Incentive Plan, as amended, incorporated by reference to
Applieds
Form 10-K
for fiscal year 2007 (file
no. 000-06920)
filed December 14, 2007.
|
|
10
|
.40*
|
|
Form of Non-Qualified Stock Option Grant Agreement for use under
the Applied Materials, Inc. Employee Stock Incentive Plan, as
amended, incorporated by reference to Applieds
Form 10-K
for fiscal year 2007 (file
no. 000-06920)
filed December 14, 2007.
|
|
10
|
.41*
|
|
Form of Restricted Stock Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-K
for fiscal year 2007
(file no. 000-06920)
filed December 14, 2007.
|
|
10
|
.42*
|
|
Form of Non-Qualified Stock Option Grant Agreement for use under
the Applied Materials, Inc. 2000 Global Equity Incentive Plan,
as amended, incorporated by reference to Applieds
Form 10-K
for fiscal year 2007 (file
no. 000-06920)
filed December 14, 2007.
|
|
10
|
.43
|
|
Share Purchase Agreement among Applied Materials, Inc. and the
Shareholders of Baccini S.p.A. dated November 18, 2007,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended January 27, 2008 (file
no. 000-06920)
filed March 3, 2008.
|
|
10
|
.44*
|
|
Adjustments to Executive Officer Salaries, effective
December 17, 2007, incorporated by reference to
Applieds
Form 10-Q
for the quarter ended January 27, 2008 (file
no. 000-06920)
filed March 3, 2008.
|
93
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.45*
|
|
Applied Materials, Inc. amended and restated Employees
Stock Purchase Plan, incorporated by reference to Applieds
Form 10-Q
for the quarter ended April 27, 2008 (file
no. 000-06920)
filed June 4, 2008.
|
|
10
|
.46*
|
|
Applied Materials, Inc. amended and restated Stock Purchase Plan
for Offshore Employees, incorporated by reference to
Applieds
Form 10-Q
for the quarter ended April 27, 2008 (file
no. 000-06920)
filed June 4, 2008.
|
|
10
|
.47*
|
|
Form of Restricted Stock Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended,
incorporated by reference to Applieds
Form 10-Q
for the quarter ended July 27, 2008 (file
no. 000-06920)
filed August 29, 2008.
|
|
10
|
.48
|
|
Deed of Amendment to Applied Materials Profit Sharing Scheme,
dated February 7, 2006, to amend Clause 20 of the
Trust Deed thereunder.
|
|
10
|
.49
|
|
Deed of Amendment to Applied Materials Profit Sharing Scheme,
dated February 7, 2006, to amend the definition of Eligible
Employee in the First Schedule to the Trust Deed thereunder.
|
|
10
|
.50*
|
|
Amendment No. 5 to the Applied Materials, Inc. Executive
Deferred Compensation Plan.
|
|
10
|
.51*
|
|
Amendment No. 1 to the Applied Materials, Inc. 2005
Executive Deferred Compensation Plan.
|
|
10
|
.52*
|
|
Compensation of Non-Employee Directors.
|
|
10
|
.53*
|
|
Applied Materials, Inc. amended and restated Senior Executive
Bonus Plan.
|
|
10
|
.54*
|
|
Applied Materials, Inc. amended and restated Global Executive
Incentive Plan.
|
|
10
|
.55*
|
|
Applied Materials, Inc. amended and restated Employee Stock
Incentive Plan.
|
|
10
|
.56*
|
|
Form of Performance Shares Agreement for use under the Applied
Materials, Inc. Employee Stock Incentive Plan, as amended.
|
|
21
|
|
|
Subsidiaries of Applied Materials, Inc.
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm, KPMG
LLP.
|
|
24
|
|
|
Power of Attorney.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
*
|
|
Indicates a management contract or compensatory plan or
arrangement, as required by Item 15(a)3.
|
|
**
|
|
Certain schedules and exhibits to this agreement, as set forth
in the Table of Contents of the agreement, have been omitted.
Applied Materials, Inc. hereby undertakes to furnish
supplementally copies of any of the omitted schedules and
exhibits upon request by the Securities and Exchange Commission.
|
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
APPLIED MATERIALS, INC.
|
|
|
|
|
By:
/s/
MICHAEL
R. SPLINTER
|
Michael R. Splinter
President, Chief Executive Officer
Dated: December 12, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
MICHAEL
R. SPLINTER
Michael
R. Splinter
|
|
President, Chief Executive
Officer and Director (Principal
Executive Officer)
|
|
December 12, 2008
|
|
|
|
|
|
/s/
GEORGE
S. DAVIS
George
S. Davis
|
|
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
|
|
December 12, 2008
|
|
|
|
|
|
/s/
YVONNE
WEATHERFORD
Yvonne
Weatherford
|
|
Corporate Vice President, Corporate Controller
(Principal Accounting Officer)
|
|
December 12, 2008
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
*
James
C. Morgan
|
|
Chairman of the Board
|
|
December 12, 2008
|
|
|
|
|
|
*
Deborah
A. Coleman
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
*
Aart
J. de Geus
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
*
Stephen
R. Forrest
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
*
Philip
V. Gerdine
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
*
Thomas
J. Iannotti
|
|
Director
|
|
December 12, 2008
|
95
|
|
|
|
|
|
|
|
|
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2008
|
|
|
|
|
|
|
|
Director
|
|
|
Representing a majority of the members of the Board of
Directors.
|
|
|
* By
|
/s/
MICHAEL
R. SPLINTER
|
|
Michael R. Splinter
Attorney-in-Fact**
|
|
|
**
|
|
By authority of the power of attorney filed herewith.
|
96
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
Additions
|
|
|
|
|
|
Balance at
|
|
Fiscal Year
|
|
Beginning of Year
|
|
|
Charged to Income
|
|
|
Business Combinations
|
|
|
Deductions
|
|
|
End of Year
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
4,136
|
|
|
$
|
2,456
|
|
|
$
|
501
|
|
|
$
|
(1,818
|
)
|
|
$
|
5,275
|
|
2007
|
|
$
|
3,342
|
|
|
$
|
858
|
|
|
$
|
342
|
|
|
$
|
(406
|
)
|
|
$
|
4,136
|
|
2006
|
|
$
|
3,649
|
|
|
$
|
582
|
|
|
$
|
|
|
|
$
|
(889
|
)
|
|
$
|
3,342
|
|
97
Exhibit 10.55
APPLIED MATERIALS, INC.
EMPLOYEE STOCK INCENTIVE PLAN
(as amended and restated on September 16, 2008)
SECTION 1
BACKGROUND AND PURPOSE
1.1
Background
. The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, SARs,
Restricted Stock, Performance Units, and Performance Shares.
1.2
Purpose of the Plan
. The Plan is intended to attract, motivate, and retain (a) employees of the Company and its
Affiliates, (b) consultants who provide significant services to the Company and its Affiliates, and
(c) directors of the Company who are employees of neither the Company nor any Affiliate. The Plan
also is designed to encourage stock ownership by Participants, thereby aligning their interests
with those of the Companys stockholders.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a different meaning
is plainly required by the context:
2.1
1934 Act
means the Securities Exchange Act of 1934, as amended. Reference to a specific section of the
1934 Act or regulation thereunder shall include such section or regulation, any valid regulation
promulgated under such section, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.
2.2
Affiliate
means any corporation or any other entity (including, but not limited to, partnerships and
joint ventures) controlling, controlled by, or under common control with the Company.
2.3
Annual Meeting
means the Companys annual meeting of stockholders.
2.4
Award
means, individually or collectively, a grant under the Plan of Nonqualified Stock Options,
Incentive Stock Options, SARs, Restricted Stock, Performance Units, or Performance Shares.
2.5
Award Agreement
means the written agreement (which may be in electronic form) setting forth the terms and
provisions applicable to each Award granted under the Plan.
2.6
Award Transfer Program
means any program instituted by the Committee which would permit Participants the opportunity
to transfer any outstanding Awards to a financial institution or other person or entity approved by
the Committee.
2.7
Board
or
Board of Directors
means the Board of Directors of the Company.
2.8
Code
means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the
Code or regulation thereunder shall include such section or regulation, any
valid regulation
promulgated under such section, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.
2.9
Committee
means the committee appointed by the Board (pursuant to Section 3.1) to administer the Plan.
2.10
Company
means Applied Materials, Inc., a Delaware corporation, or any successor thereto. With respect to the definitions of the
Performance Goals, the Committee may determine that Company means Applied Materials, Inc. and its
consolidated subsidiaries.
2.11
Consultant
means any consultant, independent contractor, or other person who provides significant
services to the Company or its Affiliates, but who is neither an Employee nor a Director.
2.12
Customer Satisfaction MBOs
means as to any Participant for any Performance Period, the objective and measurable
individual goals set by a management by objectives process and approved by the Committee, which
goals relate to the satisfaction of external or internal customer requirements and/or ratings.
2.13
Determination Date
means the latest possible date that will not jeopardize the
qualification of an Award granted under the Plan as performance-based compensation under Section
162(m) of the Code.
2.14
Director
means any individual who is a member of the Board of Directors of the Company.
2.15
Disability
means a permanent and total disability within the meaning of Section 22(e)(3) of the Code,
provided that in the case of Awards other than Incentive Stock Options, the Committee in its
discretion may determine whether a permanent and total disability exists in accordance with uniform
and non-discriminatory standards adopted by the Committee from time to time.
Disabled
means an individual has a Disability.
2.16
Earnings Per Share
means as to any Performance Period, Net Income, divided by a weighted average number of common
shares outstanding and dilutive common equivalent shares deemed outstanding.
2.17
Employee
means any employee of the Company or of an Affiliate, whether such employee is so employed at
the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan.
2.18
Exercise Price
means the price at which a Share may be purchased by a Participant pursuant to the exercise of
an Option.
2.19
Fair Market Value
means the last quoted per share selling price for Shares on the relevant date, or if there
were no sales on such date, the arithmetic mean of the highest and lowest quoted selling prices on
the nearest day before and the nearest day after the relevant date, as determined by the Committee.
Notwithstanding the preceding, for federal, state, and local income
-2-
tax reporting purposes, fair
market value shall be determined by the Committee (or its delegate) in accordance with uniform and
nondiscriminatory standards adopted by it from time to time.
2.20
Fiscal Year
means the fiscal year of the Company.
2.21
Grant Date
means, with respect to an Award, the date that the Award was granted.
2.22
Incentive Stock Option
means an Option to purchase Shares which is designated as an Incentive Stock Option and is
intended to meet the requirements of Section 422 of the Code.
2.23
Individual MBOs
means as to a Participant for any Performance Period, the objective and measurable goals set
by a management by objectives process and approved by the Committee, in its discretion.
2.24
Market Share
means as to any Performance Period, the Companys or a business units percentage of a market
segment with respect to a product or business.
2.25
Net Income
means as to any Performance Period, the income after taxes for the Performance Period
determined in accordance with generally accepted accounting principles.
2.26
New Orders
means as to any Performance Period, the firm orders for a system, product, part, or service
that are being recorded for the first time as defined in the Companys Order Recognition Policy.
2.27
Nonemployee Director
means a Director who is an employee of neither the Company nor of any Affiliate.
2.28
Nonqualified Stock Option
means an option to purchase Shares which is not intended to be an Incentive Stock Option.
2.29
Operating Profit
means as to any Performance Period, the difference between revenue and related costs and
expenses, excluding income derived from sources other than regular activities and before income
deductions.
2.30
Option
means an Incentive Stock Option or a Nonqualified Stock Option.
2.31
Participant
means an Employee, Consultant, or Nonemployee Director who has an outstanding Award.
2.32
Performance Goals
means the goal(s) (or combined goal(s)) determined by the Committee in its discretion to be
applicable to a Participant for a Performance Period. As determined by the Committee, the
Performance Goals applicable to each Participant shall provide for a targeted level or levels of
achievement using one or more of the following measures: (a) Customer Satisfaction MBOs,
(b) Earnings Per Share, (c) Individual MBOs, (d) Market Share, (e) Net Income, (f) New Orders, (g)
Operating Profits, (h) Return on Designated Assets, (i) Return on Equity, (j) Return on Sales, (k)
Revenue, and (l) Total Shareholder Return. Any criteria used may be measured, as applicable,
(i) in
absolute terms, (ii) in relative terms (including, but not limited, the passage of time and/or
against other companies or financial metrics), (iii) on a per share and/or share
-3-
per capita basis,
(iv) against the performance of the Company as a whole or against particular segments or products
of the Company and/or (v) on a pre-tax or after-tax basis. Prior to the Determination Date, the
Committee shall determine whether any element(s) (for example, but not by way of limitation, the
effect of mergers or acquisitions) shall be included in or excluded from the calculation of any
Performance Goal with respect to any Participants (whether or not such determinations result in any
Performance Goal being measured on a basis other than generally accepted accounting principles).
2.33
Performance Period
means the time period during which the performance
objectives or continued status as an Employee, Director or Consultant must be met pursuant to
Section 8 or Section 9, as applicable.
2.34
Performance Share
means an Award granted to a Participant pursuant to Section 8.
2.35
Performance Unit
means an Award granted to a Participant pursuant to Section 8.
2.36
Period of Restriction
means the period during which the transfer of Shares of Restricted Stock are subject to
restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. As
provided in Section 7, such restrictions may be based on the passage of time, the achievement of
target levels of performance, or the occurrence of other events as determined by the Committee, in
its discretion. Notwithstanding any contrary provision of the Plan, (i) a Period of Restriction
that expires solely as the result of continued employment or service shall expire in full no
earlier than the three (3) year anniversary of the Grant Date, and (ii) a Period of Restriction
that does not expire solely as the result of continued employment or service shall expire in full
no earlier than the one (1) year anniversary of the Grant Date, unless determined otherwise by the
Committee at its discretion solely by reason of death, Disability, Retirement or major capital
change.
2.37
Plan
means the Applied Materials, Inc. Employee Stock Incentive Plan, as set forth in this
instrument and as hereafter amended from time to time. The Plan formerly was named the Applied
Materials, Inc. 1995 Equity Incentive Plan.
2.38
Reload Option
means an Option that automatically is granted if a Participant
pays the exercise price of an Option by tendering Shares.
2.39
Restricted Stock
means an Award granted to a Participant pursuant to Section 7.
2.40
Retirement
means, in the case of an Employee and, with respect to each Award granted prior to October 27,
2008, in the case of a Nonemployee Director: (a) a Termination of Service occurring on or after age
sixty-five (65), or (b) a Termination of Service occurring on or after age sixty (60) with at least
ten (10) full Years of Service. With respect to each Award granted on or after October 27, 2008
under Section 9, Retirement means a Termination of Service by the Nonemployee Director after the
Nonemployee Director has attained (a) age seventy (70), or (b) age sixty (60) with at least ten
(10) full Years of Service.
2.41
Return on Designated Assets
means as to any Performance Period, Net Income divided by the average of beginning and ending
designated Company or business unit assets.
-4-
2.42
Return on Equity
means as to any Performance Period, the percentage equal to Net Income divided by average
stockholders equity, determined in accordance with generally accepted accounting principles.
2.42
Return on Sales
means as to any Performance Period, the percentage equal to Net Income, divided by Revenue.
2.44
Revenue
means net sales for the Performance Period, determined in accordance with generally accepted
accounting principles.
2.45
Rule 16b-3
means Rule 16b-3 promulgated under the 1934 Act, and any future regulation amending,
supplementing or superseding such regulation.
2.46
Section 16 Person
means a person who, with respect to the Shares, is subject to Section 16 of the 1934 Act.
2.47
Shares
means the shares of common stock of the Company.
2.48
Stock Appreciation Right
or
SAR
means an Award, granted alone or in connection with a related Option, that pursuant to Section
6 is designated as an SAR.
2.49
Subsidiary
means any corporation in an unbroken chain of corporations beginning with the Company if each
of the corporations other than the last corporation in the unbroken chain then owns stock
possessing fifty percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.50
Tax Obligations
means tax and social insurance liability obligations and requirements in connection with the
Awards, including, without limitation, (a) all federal, state, and local taxes (including the
Participants FICA obligation) that are required to be withheld by the Company or the employing
Affiliate, (b) the Participants and, to the extent required by the Company (or the employing
Affiliate), the Companys (or the employing Affiliates) fringe benefit tax liability, if any,
associated with the grant, vesting, or sale of Shares, and (c) any other Company (or employing
Affiliate) taxes the responsibility for which the Participant has agreed to bear with respect to
such Award (or exercise thereof or issuance of Shares thereunder).
2.51
Termination of Service
means (a) in the case of an Employee, a cessation of the employee-employer relationship
between the Employee and the Company or an Affiliate for any reason, including, but not by way of
limitation, a termination by resignation, discharge, death, Disability, Retirement, or the
disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous
reemployment by the Company or an Affiliate, (b) in the case of a Consultant, a cessation of the
service relationship between the Consultant and the Company or an Affiliate for any reason,
including, but not by way of limitation, a termination by resignation, discharge, death,
Disability, or the disaffiliation of an Affiliate, but excluding any such termination where there
is a simultaneous re-engagement of the consultant by the Company or an Affiliate, and (c) in the
case of a Nonemployee Director, a cessation of the Directors service on the Board for any reason,
including, but not by way of limitation, a termination by resignation, death, Disability,
Retirement or non-reelection to the Board.
-5-
2.52
Total Shareholder Return
means as to any Performance Period, the total return (change in share price plus reinvestment
of any dividends) of a share of the Companys common stock.
2.53
Years of Service
means, in the case of an Employee, the number of full months
from the Employees latest hire date with the Company or an Affiliate to the date in question,
divided by twelve (12). The Employees latest hire date shall be determined after giving effect to
the non-401(k) Plan principles of North American Human Resources Policy No. 2-06, Re-Employment of
Former Employees/Bridging of Service, as such Policy may be amended or superseded from time to
time. With respect to a Nonemployee Director, Years of Service means the number of years of
continuous service on the Board of Directors.
SECTION 3
ADMINISTRATION
3.1
The Committee
. The Plan shall be administered by the Committee. The Committee shall consist of not less
than two (2) Directors who shall be appointed from time to time by, and shall serve at the pleasure
of, the Board of Directors. The Committee shall be comprised solely of Directors who both are (a)
non-employee directors under Rule 16b-3, and (b) outside directors under Section 162(m) of the
Code.
3.2
Authority of the Committee
. It shall be the duty of the Committee to administer the Plan in accordance with the Plans
provisions. The Committee shall have all powers and discretion necessary or appropriate to
administer the Plan and to control its operation, including, but not limited to, the power to (a)
determine which Employees and Consultants shall be granted Awards, (b) prescribe the terms and
conditions of the Awards, (c) interpret the Plan and the Awards, (d) adopt such procedures and
subplans as are necessary or appropriate to permit participation in the Plan by Employees,
Consultants and Directors who are foreign nationals or employed outside of the United States,
(e) to implement an Award Transfer Program in accordance with Section 10.7, (f) adopt rules for the
administration, interpretation and application of the Plan as are consistent therewith, and
(g) interpret, amend or revoke any such rules. Except as provided in Section 4.3, the Committee
may not reprice outstanding Options or institute a program whereby outstanding Awards are
surrendered or cancelled in exchange for Awards of the same type (which may have a lower exercise
price or purchase price), of a different type and/or cash (other than pursuant to an Award Transfer
Program) without first obtaining stockholder approval.
3.3
Delegation by the Committee
. The Committee, in its sole discretion and on such terms and conditions as it may provide,
may delegate all or any part of its authority and powers under the Plan to one or more Directors or
officers of the Company; provided, however, that the Committee may not delegate its authority and
powers (a) with respect to Section 16 Persons, or (b) in any way which would jeopardize the Plans
qualification under Section 162(m) of the Code or Rule 16b-3.
-6-
3.4
Decisions Binding
. All determinations and decisions made by the Committee, the Board, and any delegate of the
Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all
persons, and shall be given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1
Number of Shares
. Subject to adjustment as provided in Section 4.3, the total number of Shares available for
grant under the Plan shall not exceed 367,200,000. Shares granted under the Plan may be either
authorized but unissued Shares or treasury Shares. The total number of Shares that may be granted
pursuant to awards of Restricted Stock, Performance Shares and Performance Units may not exceed
90,000,000 Shares.
4.2
Lapsed Awards
. If an Award is settled in cash, or is cancelled, terminates, expires, or lapses for any
reason, any Shares subject to such Award again shall be available to be the subject of an Award.
With respect to Stock Appreciation Rights, Shares actually issued pursuant to a Stock Appreciation
Right as well as the Shares that represent payment of the exercise price and tax related to the
Award shall cease to be available under the Plan. Shares that have actually been issued under the
Plan under any Award shall not be returned to the Plan and shall not become available for future
distribution under the Plan; provided, however, that if unvested Shares of Restricted Stock,
Performance Shares or Performance Units are repurchased by the Company or are forfeited to the
Company, such Shares shall become available for future grant under the Plan. To the extent an
Award under the Plan is paid out in cash rather than Shares, such cash payment shall not result in
reducing the number of Shares available for issuance under the Plan. Notwithstanding anything in
the Plan, or any Award Agreement to the contrary, Shares actually issued pursuant to Awards
transferred under any Award Transfer Program shall not be again available for grant under the Plan.
Notwithstanding the foregoing and, subject to adjustment provided in Section 4.3, the maximum
number of Shares that may be issued upon the exercise of Incentive Stock Options shall equal the
aggregate Share number stated in Section 4.1, plus, to the extent allowable under Section 422 of
the Code, any Shares that become available for issuance under the Plan under this Section 4.2.
4.3
Adjustments in Awards and Authorized Shares
. In the event that any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of
Shares or other securities of the Company, or other change in the corporate structure of the
Company affecting the Shares occurs, the Committee shall adjust the number and class of Shares that
may be issued under the Plan, the number, class, and price of Shares subject to outstanding Awards
and the numerical limits of Sections 5.1, 6.1, 7.1, 8.1 and 9.1, to prevent the dilution or
diminution of such Awards. Notwithstanding the preceding, the number of Shares subject to any
Award always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1
Grant of Options
. Subject to the terms and provisions of the Plan, Options may be granted to Employees and
Consultants at any time and from time to time as determined by the
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Committee in its sole
discretion. The Committee, in its sole discretion, shall determine the number of Shares subject to
each Option, provided that during any Fiscal Year, no Participant shall be granted Options covering
more than 1,400,000 Shares. The Committee may grant Incentive Stock Options, Nonqualified Stock
Options, or a combination thereof. The Committee may not grant Reload Options.
5.2
Award Agreement
. Each Option shall be evidenced by an Award Agreement that shall specify the Exercise Price,
the expiration date of the Option, the number of Shares to which the Option pertains, any
conditions to exercise of the Option, and such other terms and conditions as the Committee, in its
discretion, shall determine. The Award Agreement shall also specify whether the Option is intended
to be an Incentive Stock Option or a Nonqualified Stock Option.
5.3
Exercise Price
. Subject to the provisions of this Section 5.3, the Exercise Price for each Option shall be
determined by the Committee in its sole discretion.
5.3.1
Nonqualified Stock Options
. In the case of a Nonqualified Stock Option, the
Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a
Share on the Grant Date.
5.3.2
Incentive Stock Options
. In the case of an Incentive Stock Option, the Exercise
Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the
Grant Date; provided, however, that if on the Grant Date, the Employee (together with persons whose
stock ownership is attributed to the Employee pursuant to Section 424(d) of the Code) owns stock
possessing more than ten percent (10%) of the total combined voting power of all classes of stock
of the Company or any of its Subsidiaries, the Exercise Price shall be not less than one hundred
and ten percent (110%) of the Fair Market Value of a Share on the Grant Date.
5.3.3
Substitute Options
. Notwithstanding the provisions of Sections 5.3.1 and 5.3.2,
in the event that the Company or an Affiliate consummates a transaction described in Section 424(a)
of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who
become Employees or Consultants on account of such transaction may be granted Options in
substitution for options granted by their former employer. If such substitute Options are granted,
the Committee, in its sole discretion and consistent with Section 424(a) of the Code, may determine
that such substitute Options shall have an exercise price less than one hundred percent (100%) of
the Fair Market Value of the Shares on the Grant Date.
5.4
Expiration of Options
.
5.4.1
Expiration Dates
. Each Option shall terminate no later than the first to occur
of the following events:
(a) The date for termination of the Option set forth in the written Award Agreement (which may
be in electronic form); or
(b) The expiration of seven (7) years from the Grant Date; or
(c) The expiration of three (3) years from the date of the Participants Termination of
Service for a reason other than the Participants death, Disability or Retirement; or
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(d) The expiration of three (3) years from the date of the Participants Termination of
Service by reason of Disability; or
(e) The expiration of three (3) years from the date of the Participants Retirement (except as
provided in Section 5.8.2 regarding Incentive Stock Options).
5.4.2
Death of Participant
. Notwithstanding Section 5.4.1, if a Participant dies
prior to the expiration of his or her Options, the Committee, in its discretion, may provide that
his or her Options shall be exercisable for up to three (3) years after the date of death.
5.4.3
Committee Discretion
. Subject to the limits of Sections 5.4.1 and 5.4.2, the
Committee, in its sole discretion, (a) shall provide in each Award Agreement when each Option
expires and becomes unexercisable, and (b) may, after an Option is granted, extend the maximum term
of the Option (subject to Section 5.8.4 regarding Incentive Stock Options).
5.5
Exercisability of Options
. Options granted under the Plan shall be exercisable at such times and be subject to such
restrictions and conditions as the Committee shall determine in its sole discretion. After an
Option is granted, the Committee, in its sole discretion, may accelerate the exercisability of the
Option.
5.6
Payment
. Options shall be exercised by the Participants delivery of a notice of exercise (in such
form and manner as the Company may designate) to the Secretary of the Company (or its designee),
setting forth the number of Shares with respect to which the Option is to be exercised, accompanied
by full payment for the Shares.
Upon the exercise of any Option, the Exercise Price shall be payable to the Company in full in
cash or its equivalent. The Committee, in its sole discretion, also may permit exercise (a) by
tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise
equal to the total Exercise Price, or (b) by any other means which the Committee, in its sole
discretion, determines to both provide legal consideration for the Shares, and to be consistent
with the purposes of the Plan.
As soon as practicable after receipt of a notification of exercise (in such form and manner as
the Company may designate) and full payment for the Shares purchased, the Company shall deliver to
the Participant (or the Participants designated broker), Share certificates (which may be in book
entry form) representing such Shares.
5.7
Restrictions on Share Transferability
. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise
of an Option as it may deem advisable, including, but not limited to, restrictions related to
applicable federal securities laws, the requirements of any national securities exchange or system
upon which Shares are then listed or traded, or any blue sky or state securities laws.
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5.8
Certain Additional Provisions for Incentive Stock Options
.
5.8.1
Exercisability
. The aggregate Fair Market Value (determined on the Grant
Date(s)) of the Shares with respect to which Incentive Stock Options are exercisable for the first
time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries)
shall not exceed $100,000.
5.8.2
Termination of Service
. No Incentive Stock Option may be exercised more than
three (3) months after the Participants Termination of Service for any reason other than
Disability or death, unless (a) the Participant dies during such three-month period, and (b) the
Award Agreement or the Committee permits later exercise. No Incentive Stock Option may be
exercised more than one (1) year after the Participants Termination of Service on account of
Disability, unless (a) the Participant dies during such one-year period, and (b) the Award
Agreement or the Committee permit later exercise.
5.8.3
Company and Subsidiaries Only
. Incentive Stock Options may be granted only to
persons who are employees of the Company or a Subsidiary on the Grant Date.
5.8.4
Expiration
. No Incentive Stock Option may be exercised after the expiration of
seven (7) years from the Grant Date; provided, however, that if the Option is granted to an
Employee who, together with persons whose stock ownership is attributed to the Employee pursuant to
Section 424(d) of the Code, owns stock possessing more than ten percent (10%) of the total combined
voting power of all classes of the stock of the Company or any of its Subsidiaries, the Option may
not be exercised after the expiration of five (5) years from the Grant Date.
SECTION 6
STOCK APPRECIATION RIGHTS
6.1
Grant of SARs
. Subject to the terms and conditions of the Plan, an SAR may be granted to Employees and
Consultants at any time and from time to time as shall be determined by the Committee, in its sole
discretion.
6.1.1
Number of Shares
. The Committee shall have complete discretion to determine the
number of SARs granted to any Participant, provided that during any Fiscal Year, no Participant
shall be granted SARs covering more than 700,000 Shares.
6.1.2
Exercise Price and Other Terms
. The Committee, subject to the provisions of the
Plan, shall have complete discretion to determine the terms and conditions of SARs granted under
the Plan, provided, however, that the exercise price shall be not less than one hundred percent
(100%) of the Fair Market Value of a Share on the date of grant. After a SAR is granted, the
Committee, in its sole discretion, may accelerate the exercisability of the SAR.
6.2
SAR Agreement
. Each SAR grant shall be evidenced by an Award Agreement that shall specify the exercise
price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the
Committee, in its sole discretion, shall determine.
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6.3
Expiration of SARs
. An SAR granted under the Plan shall expire upon the date determined by the Committee, in
its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the
rules of Section 5.4 also shall apply to SARs.
6.4
Payment of SAR Amount
. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the
Company in an amount determined by multiplying:
(a) The difference between the Fair Market Value of a Share on the date of exercise over the
exercise price; times
(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of
equivalent value, or in some combination thereof.
SECTION 7
RESTRICTED STOCK
7.1
Grant of Restricted Stock
. Subject to the terms and provisions of the Plan, the Committee, at any time and from time
to time, may grant Shares of Restricted Stock to Employees and Consultants in such amounts as the
Committee, in its sole discretion, shall determine. The Committee, in its sole discretion, shall
determine the number of Shares to be granted to each Participant, provided that during any Fiscal
Year, no Participant shall receive more than 350,000 Shares of Restricted Stock.
7.2
Restricted Stock Agreement
. Each Award of Restricted Stock shall be evidenced by an Award Agreement that shall specify
the Period of Restriction, the number of Shares granted, and such other terms and conditions as the
Committee, in its sole discretion, shall determine. Unless the Committee determines otherwise,
Shares of Restricted Stock shall be held by the Company as escrow agent until the restrictions on
such Shares have lapsed.
7.3
Transferability
. Except as provided in this Section 7, Shares of Restricted Stock may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction.
7.4
Other Restrictions
. The Committee, in its sole discretion, may impose such other restrictions on Shares of
Restricted Stock as it may deem advisable or appropriate, in accordance with this Section 7.4.
7.4.1
General Restrictions
. The Committee may set restrictions based upon the
Participants continued status as an Employee or Consultant, the achievement of specific
performance objectives (Company-wide, divisional, or individual), applicable federal or state
securities laws, or any other basis determined by the Committee in its discretion.
7.4.2
Section 162(m) Performance Restrictions
. For purposes of qualifying grants of
Restricted Stock as performance-based compensation under Section 162(m) of the Code, the
Committee, in its discretion, may set restrictions based upon the achievement of Performance Goals.
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The Performance Goals shall be set by the Committee on or before the latest date permissible to
enable the Restricted Stock to qualify as performance-based compensation under Section 162(m) of
the Code. In granting Restricted Stock which is intended to qualify under Section 162(m) of the
Code, the Committee shall follow any procedures determined by it from time to time to be necessary
or appropriate to ensure qualification of the Restricted Stock under Section 162(m) of the Code
(e.g., in determining the Performance Goals).
7.4.3
Legend on Certificates
. The Committee, in its discretion, may legend the
certificates representing Restricted Stock to give appropriate notice of such restrictions. For
example, the Committee may determine that some or all certificates representing Shares of
Restricted Stock shall bear the following legend:
The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is subject to
certain restrictions on transfer as set forth in the Applied Materials, Inc.
Employee Stock Incentive Plan, and in a Restricted Stock Agreement. A copy of the
Plan and such Restricted Stock Agreement may be obtained from the Secretary of
Applied Materials, Inc.
7.5
Removal of Restrictions
. Except as otherwise provided in this Section 7, Shares of Restricted Stock covered by each
Restricted Stock grant made under the Plan shall be released from escrow as soon as practicable
after the last day of the Period of Restriction. Subject to the minimum Period of Restriction
specified in Section 2.36, the Committee, in its discretion, may accelerate the time at which any
restrictions shall lapse or be removed. After the restrictions have lapsed, the Participant shall
be entitled to have any legend or legends under Section 7.4.3 removed from his or her Share
certificate, and the Shares shall be freely transferable by the Participant.
7.6
Voting Rights
. During the Period of Restriction, Participants holding Shares of Restricted Stock granted
hereunder may exercise full voting rights with respect to those Shares, unless the Committee
determines otherwise.
7.7
Dividends and Other Distributions
. During the Period of Restriction, Participants holding Shares of Restricted Stock shall be
entitled to receive all dividends and other distributions paid with respect to such Shares unless
otherwise provided in the Award Agreement. If any such dividends or distributions are paid in
Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability
as the Shares of Restricted Stock with respect to which they were paid.
7.8
Return of Restricted Stock to Company
. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions
have not lapsed shall revert to the Company and again shall become available for grant under the
Plan.
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SECTION 8
PERFORMANCE UNITS AND PERFORMANCE SHARES
The provisions of this Section 8 are applicable only to Performance Units and Performance
Shares granted to Employees and Consultants (and to the extent provided in Section 9.2.11, to
Performance Shares granted to Nonemployee Directors).
8.1
Grant of Performance Units/Shares
. Performance Units and Performance Shares may be granted to Employees and Consultants at any
time and from time to time, as shall be determined by the Committee, in its sole discretion. The
Committee shall have complete discretion in determining the number of Performance Units and
Performance Shares granted to each Participant provided that during any Fiscal Year, (a) no
Participant shall receive Performance Units having an initial value greater than $3,000,000, and
(b) no Participant shall receive more than 350,000 Performance Shares.
8.2
Value of Performance Units/Shares
. Each Performance Unit shall have an initial value that is established by the Committee on
or before the Grant Date. Each Performance Share shall have an initial value equal to the Fair
Market Value of a Share on the Grant Date.
8.3
Performance Objectives and Other Terms
. The Committee shall set performance objectives (including, without limitation, continued
status as an Employee or Consultant) in its discretion which, depending on the extent to which they
are met, shall determine the number or value of Performance Units/Shares that shall be paid out to
the Participants. Each Award of Performance Units/Shares shall be evidenced by an Award Agreement
that shall specify the Performance Period, and such other terms and conditions as the Committee, in
its sole discretion, shall determine. Notwithstanding the foregoing, and except as otherwise
provided in the Plan, (i) Performance Units/Shares that vest solely as a result of continued
employment or service shall vest in full no earlier than the three (3) year anniversary of the
Grant Date, and (ii) Performance Units/Shares that do not vest solely based on continued employment
or
service shall vest in full no earlier than the one (1) year anniversary of the Grant Date.
Notwithstanding the foregoing sentence, the Committee, in its sole discretion, may provide at the
time of or following the date of grant for accelerated vesting for an Award of Performance
Units/Shares solely by reason of death, Disability, Retirement or major capital change.
8.3.1
General Performance Objectives
. The Committee may set performance objectives
based upon the achievement of Company-wide, divisional, and/or individual goals (including, but not
limited to, continued status as an Employee or Consultant), applicable federal or state securities
laws, or any other basis determined by the Committee in its discretion.
8.3.2
Section 162(m) Performance Objectives
. For purposes of qualifying grants of
Performance Units/Shares as performance-based compensation under Section 162(m) of the Code, the
Committee, in its discretion, may determine that the performance objectives applicable to
Performance Units/Shares shall be based on the achievement of Performance Goals. The Performance
Goals shall be set by the Committee on or before the latest date permissible to enable the
Performance Units/Shares to qualify as performance-based compensation under Section 162(m) of the
Code. In granting Performance Units/Shares which are intended to qualify under Section 162(m) of
the Code, the Committee shall follow any procedures determined by it from time
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to time to be
necessary or appropriate to ensure qualification of the Performance Units/Shares under Section
162(m) of the Code (e.g., in determining the Performance Goals).
8.4
Earning of Performance Units/Shares
. After the applicable Performance Period has ended, the holder of Performance Units/Shares
shall be entitled to receive a payout of the number of Performance Units/Shares earned by the
Participant over the Performance Period, to be determined as a function of the extent to which the
corresponding performance objectives or other vesting provisions have been achieved. After the
grant of a Performance Unit/Share, the Committee, in its sole discretion, may reduce or waive any
performance objectives for such Performance Unit/Share.
8.5
Form and Timing of Payment of Performance Units/Shares
. Payment of earned Performance Units/Shares shall be made as soon as practicable after the
expiration of the applicable Performance Period. The Committee, in its sole discretion, may pay
earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market
Value equal to the value of the earned Performance Units/Shares at the close of the applicable
Performance Period) or in a combination thereof.
8.6
Cancellation of Performance Units/Shares
. On the date set forth in the Award Agreement, all unearned or unvested Performance
Units/Shares shall be forfeited to the Company, and again shall be available for grant under the
Plan.
SECTION 9
NONEMPLOYEE DIRECTOR AWARDS
The provisions of this Section 9 are applicable only to Performance Shares granted to
Nonemployee Directors.
9.1
Granting of Performance Shares
.
9.1.1
Initial Awards
. Each Nonemployee Director who first becomes a Nonemployee
Director on or after October 27, 2008, automatically shall receive, as of the date that the
individual first is appointed or elected as a Nonemployee Director, an Award of Performance Shares
(the Initial Award). The number of Performance Shares subject to the Initial Award will be equal
to (a) the value obtained by multiplying (x) $200,000 times (y) a fraction, the numerator of which
is the actual number of days between the date of the Nonemployee Directors appointment or election
and the scheduled date of the next following Annual Meeting, and the denominator of which is 365,
which such resulting value divided by (b) the Fair Market Value of a Share on the date of grant,
rounded down to the nearest whole Performance Share. The Nonemployee Director shall not receive an
Initial Award if he or she is first appointed or elected as a Nonemployee Director on the date of
an Annual Meeting and instead shall receive an Ongoing Award pursuant to Section 9.1.2 on that
date.
9.1.2
Ongoing Awards
. On the date of each Annual Meeting beginning in 2009, but after
any stockholder votes taken on such date, each Nonemployee Director who is appointed or elected as
a Nonemployee Director on the date of the Annual Meeting automatically shall receive, as of such
date, an Award of the number of Performance Shares equal to $200,000 divided by the Fair Market
Value of a Share on the date of grant, rounded down to the nearest whole Performance Share
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(the
Ongoing Award). Notwithstanding the foregoing, each Nonemployee Director who is required to
tender a resignation following such Annual Meeting in accordance with the Companys majority voting
policy for election of directors shall not receive an Ongoing Award, unless the Board determines
not to accept his or her resignation in accordance with the Companys policy, in which case such
Nonemployee Director automatically shall receive the Ongoing Award on the date the Board makes a
determination not to accept such resignation.
9.2
Terms of Initial Award and Ongoing Awards
.
9.2.1
Award Agreement
. Each Award of Performance Shares granted pursuant to this
Section 9 shall be evidenced by a written Award Agreement (which may be in electronic form) between
the Participant and the Company.
9.2.2
Value of Performance Shares
. Each Performance Share shall have an initial value
equal to the Fair Market Value of a Share on the Grant Date.
9.2.3
Performance Objectives and Other Terms
. Subject to the other provisions of
Section 9.2, each Initial Award shall be earned and paid out as to twenty-five percent (25%) of the
Shares subject to the Initial Award on each of the first four (4) annual anniversaries of the
Grant Date. Each Ongoing Award shall be earned and paid out as to twenty-five percent (25%) of the
Shares subject to the Ongoing Award on March 1 of each year following the year in which the Grant
Date occurs. Notwithstanding the preceding, once a Participant ceases to be a Director, his or her
Performance Shares which are not then earned shall never be earned or paid out and shall be
immediately forfeited, except to the extent provided in Section 9.2.4, Section 9.2.5 and
Section 9.2.6.
9.2.4
Retirement of Participant
. Unless otherwise determined by the Committee, if a
Participant has a Termination of Service due to Retirement prior to the vesting of Performance
Shares granted on or after October 27, 2008, such Performance Shares shall continue to vest in
accordance with the schedule set forth in Section 9.2.3.
9.2.5
Disability of Participant
. If a Participant has a Termination of Service due to
Disability prior to the vesting of Performance Shares granted on or after October 27, 2008, then
one hundred percent (100%) of the Performance Shares shall immediately become vested and, subject
to the terms and conditions of any deferral pursuant to Section 9.2.8, payable.
9.2.6
Death of Participant
. If a Participant dies while serving as a Director prior
to the vesting of his or her Performance Shares, then one hundred percent (100%) of the Performance
Shares shall immediately become vested and, subject to the terms and conditions of any deferral
pursuant to Section 9.2.8, payable.
9.2.7
Earning of Performance Shares
. After the applicable Performance Period has
ended, the holder of Performance Shares shall be entitled to receive a payout of the number of
Performance Shares earned by the Participant over the Performance Period, to be determined as a
function of the extent to which the corresponding vesting provisions have been achieved.
9.2.8
Form and Timing of Payment of Performance Shares
. Payment of earned Performance
Shares shall be made as soon as practicable after the expiration of the applicable
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Performance
Period. The Committee, in its sole discretion, may pay earned Performance Shares in the form of
cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned
Performance Shares at the close of the applicable Performance Period) or in a combination thereof.
Notwithstanding the foregoing, the Committee may, in its sole discretion, provide a Nonemployee
Director with the opportunity to defer the receipt of earned Performance Shares that would
otherwise be delivered to such Nonemployee Director under this Section 9. Any such deferral shall
be subject to such rules, conditions and procedures as shall be determined by the Committee in its
sole discretion, which rules, conditions and procedures shall comply with the requirements of
Section 409A of the Code, unless otherwise specifically determined by the Committee.
9.2.9
Cancellation of Performance Shares
. On the date set forth in the Award
Agreement, all unearned or unvested Performance Shares shall be forfeited to the Company, and again
shall be available for grant under the Plan.
9.2.10
Dividends
. The Committee may, in its sole discretion, authorize the payment of
stock dividends on deferred Performance Shares granted under this Section 9 on a current, deferred
or contingent basis. Any payment of such stock dividends shall be subject to such rules,
conditions and procedures as shall be determined by the Committee in its sole discretion,
which rules, conditions and procedures shall comply with the requirements of Section 409A of the
Code, unless otherwise specifically determined by the Committee.
9.2.11
Other Terms
. All provisions of the Plan not inconsistent with this Section 9
shall apply to Performance Shares granted to Nonemployee Directors, including but not limited to
the provisions of Section 8.
9.3
Amendments
. The Committee, in its sole discretion, may change the number of
Performance Shares subject to future grants of the Initial Award and Ongoing Awards at any time.
SECTION 10
MISCELLANEOUS
10.1
Deferrals
. The Committee, in its sole discretion, may permit a Participant to defer receipt of the
payment of cash or the delivery of Shares that would otherwise be due to such Participant under an
Award. Any such deferral elections shall be subject to such rules, conditions and procedures as
shall be determined by the Committee in its sole discretion, which rules, conditions and procedures
shall comply with the requirements of Section 409A of the Code, unless otherwise specifically
determined by the Committee.
10.2
No Effect on Employment or Service
. Nothing in the Plan shall interfere with or limit in any way the right of the Company to
terminate any Participants employment or service at any time, with or without cause. For purposes
of the Plan, transfer of employment of a Participant between the Company and any one of its
Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with
the Company and its Affiliates is on an at-will basis only.
10.3
Participation
. No Employee or Consultant shall have the right to be selected to receive an Award under
this Plan, or, having been so selected, to be selected to receive a future Award.
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10.4
Indemnification
. Each person who is or shall have been a member of the Committee, or of the Board, shall be
indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or
expense that may be imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under the Plan or any
Award Agreement, and (b) from any and all amounts paid by him or her in settlement thereof, with
the Companys approval, or paid by him or her in satisfaction of any judgment in any such claim,
action, suit, or proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be
exclusive
of any other rights of indemnification to which such persons may be entitled under the
Companys Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or
under any power that the Company may have to indemnify them or hold them harmless.
10.5
Successors
. All obligations of the Company under the Plan, with respect to Awards granted hereunder,
shall be binding on any successor to the Company, whether the existence of such successor is the
result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business or assets of the Company.
10.6
Beneficiary Designations
.
If permitted by the Committee, a Participant under the Plan may name a beneficiary or
beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participants
death. Each such designation shall revoke all prior designations by the Participant and shall be
effective only if given in a form and manner acceptable to the Committee. In the absence of any
such designation, any vested benefits remaining unpaid at the Participants death shall be paid to
the Participants estate and, subject to the terms of the Plan and of the applicable Award
Agreement, any unexercised vested Award may be exercised by the administrator or executor of the
Participants estate.
10.7
Limited Transferability of Awards
.
10.7.1
General
. No Award granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and
distribution, or to the limited extent provided in Section 10.6 and this Section 10.7. All rights
with respect to an Award granted to a Participant shall be available during his or her lifetime
only to the Participant. Notwithstanding the foregoing, the Participant may, in a manner specified
by the Committee, if the Committee (in its discretion) so permits, (a) transfer an Award to in
accordance with an Award Transfer Program instituted by the Committee, (b) transfer a Nonqualified
Stock Option to a Participants spouse, former spouse or dependent pursuant to a court-approved
domestic relations order which relates to the provision of child support, alimony payments or
marital property rights, and (c) transfer a Nonqualified Stock Option by bona fide gift and not for
any consideration, to (i) a member or members of the Participants immediate family, (ii) a trust
established for the exclusive benefit of the Participant and/or member(s) of the Participants
immediate family, (iii) a partnership, limited liability company of other entity whose only
partners or members are the Participant and/or member(s) of the Participants immediate family, or
(iv) a foundation in which the Participant an/or member(s) of the Participants immediate family
control the management of the foundations assets.
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10.7.2
Award Transfer Program
. Notwithstanding any contrary provision of the Plan,
the Committee shall have all discretion and authority to determine and implement the terms and
conditions of any Award Transfer Program instituted pursuant to this Section 10.7 and shall have
the authority to amend the terms of any Award participating in the Award Transfer Program,
including (but not limited to) the authority to (i) amend (including to extend) the expiration
date,
post-termination exercise period and/or forfeiture conditions of a participating Award,
(ii) amend or remove any provisions of the Award relating to the Award holders continued service
to the Company, (iii) amend the permissible payment methods for the exercise or purchase such
Award, (iv) amend the adjustments to be implemented in the event of changes in capitalization and
other similar events, and (v) make such other changes to the terms of such Award as the Committee
deems necessary or appropriate, in its sole discretion.
10.8
No Rights as Stockholder
. Except to the limited extent provided in Sections 7.6 and 7.7, no Participant (nor any
beneficiary) shall have any of the rights or privileges of a stockholder of the Company with
respect to any Shares issuable pursuant to an Award (or exercise thereof), unless and until
certificates representing such Shares (which may be in book entry form) shall have been issued,
recorded on the records of the Company or its transfer agents or registrars, and delivered to the
Participant (or beneficiary).
SECTION 11
AMENDMENT, TERMINATION, AND DURATION
11.1
Amendment, Suspension, or Termination
. The Board, in its sole discretion, may amend, suspend or terminate the Plan, or any part
thereof, at any time and for any reason. The Company will obtain stockholder approval of any Plan
amendment to the extent necessary and desirable to comply with applicable laws. In addition, an
amendment will be subject to stockholder approval if the Committee or the Board, in their sole
discretion, deems such amendment to be a material amendment, except with respect to such an
amendment which will impact Awards covering, in the aggregate, no more than five percent (5%) of
the shares reserved for issuance under the Plan. The following amendments shall be deemed material
amendments for purposes of the preceding sentence (i) material increases to the benefits accrued to
Participants under the Plan; (ii) increases to the number of securities that may be issued under
the Plan; (iii) material modifications to the requirements for participation in the Plan, and
(iv) the addition of a new provision allowing the Board or the Committee to lapse or waive
restrictions at its discretion. The amendment, suspension, or termination of the Plan shall not,
without the consent of the Participant, alter or impair any rights or obligations under any Award
theretofore granted to such Participant. No Award may be granted during any period of suspension
or after termination of the Plan.
11.2
Duration of the Plan
. The amended and restated Plan shall be effective as of September 16, 2008, and subject to
Section 11.1 (regarding the Boards right to amend or terminate the Plan), shall remain in effect
thereafter. However, without further stockholder approval, no Incentive Stock Option may be
granted under the Plan after January 16, 2017.
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SECTION 12
TAX WITHHOLDING
12.1
Withholding Requirements
. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), or
at such earlier time as the Tax Obligations are due, the Company shall have the power and the right
to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to
satisfy all Tax Obligations.
12.2
Withholding Arrangements
. The Committee, in its sole discretion and pursuant to such procedures as it may specify
from time to time, may permit a Participant to satisfy such Tax Obligations, in whole or in part by
(a) electing to have the Company withhold otherwise deliverable Shares, or (b) delivering to the
Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld
or remitted. The amount of the Tax Obligations shall be deemed to include any amount which the
Committee agrees may be withheld at the time the election is made, not to exceed the amount
determined by using the maximum federal, state or local marginal income tax rates applicable to the
Participant or the Company, as applicable, with respect to the Award on the date that the amount of
tax or social insurance liability to be withheld or remitted is to be determined. The Fair Market
Value of the Shares to be withheld or delivered shall be determined as of the date that the Tax
Obligations are required to be withheld.
SECTION 13
LEGAL CONSTRUCTION
13.1
Gender and Number
. Except where otherwise indicated by the context, any masculine term used herein also shall
include the feminine; the plural shall include the singular and the singular shall include the
plural.
13.2
Severability
. In the event any provision of the Plan shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been included.
13.3
Requirements of Law
. The granting of Awards and the issuance of Shares under the Plan shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
13.4
Securities Law Compliance
. With respect to Section 16 Persons, transactions under this Plan are intended to comply
with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan, Award
Agreement or action by the Committee fails to so comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.
13.5
Governing Law
. The Plan and all Award Agreements shall be construed in accordance with and governed by the
laws of the State of California, excluding its conflict of laws provisions.
13.6
Captions
. Captions are provided herein for convenience only, and shall not serve as a basis for
interpretation or construction of the Plan.
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