Edgar Filing: APPLIED MATERIALS INC /DE

AMAT-07.29.12-10Q-DOC

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended July 29, 2012


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

For the transition period from to

Commission File Number 000-06920

Applied Materials, Inc.

(Exact name of registrant as specified in its charter)



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

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

(408) 727-5555

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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):



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Number of shares outstanding of the issuer’s common stock as of July 29, 2012: 1,237,495,151

Table of Contents

APPLIED MATERIALS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 29, 2012

TABLE OF CONTENTS



		Page
	PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	3
	Consolidated Condensed Statements of Operations for the Three and Nine Months Ended July 29, 2012 and July 31, 2011	3
	Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended July 29, 2012 and July 31, 2011	4
	Consolidated Condensed Balance Sheets at July 29, 2012 and October 30, 2011	5
	Consolidated Condensed Statement of Stockholders’ Equity for the Nine Months Ended July 29, 2012	6
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended July 29, 2012 and July 31, 2011	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4:	Controls and Procedures	64

	PART II. OTHER INFORMATION
Item 1:	Legal Proceedings	65
Item 1A:	Risk Factors	65
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 6:	Exhibits	76
	Signatures	77

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS



	Three Months Ended					Nine Months Ended
	July 29, 2012		July 31, 2011			July 29, 2012		July 31, 2011
	(Unaudited) (In millions, except per share amounts)
Net sales	$	2,343	$	2,787		$	7,073	$	8,336
Cost of products sold	1,413		1,603			4,347		4,827
Gross margin	930		1,184			2,726		3,509
Operating expenses:
Research, development and engineering	309		282			933		850
Selling, general and administrative	255		240			839		679
Restructuring charges and asset impairments (Note 11)	44		3			44		(30		)
Gain on sale of facilities, net (Note 7)	—		(28		)	—		(27		)
Total operating expenses	608		497			1,816		1,472
Income from operations	322		687			910		2,037
Impairment of strategic investments (Notes 3 and 4)	—		—			3		—
Interest and other expenses	24		25			72		35
Interest and other income, net	4		7			13		33
Income before income taxes	302		669			848		2,035
Provision for income taxes	84		193			224		564
Net income	$	218	$	476		$	624	$	1,471

Earnings per share:
Basic	$	0.17	$	0.36		$	0.49	$	1.11
Diluted	$	0.17	$	0.36		$	0.48	$	1.10
Weighted average number of shares:
Basic	1,257		1,318			1,282		1,321
Diluted	1,268		1,330			1,292		1,333

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME



	Three Months Ended						Nine Months Ended
	July 29, 2012			July 31, 2011			July 29, 2012			July 31, 2011
	(Unaudited) (In millions)
Net income	$	218		$	476		$	624		$	1,471
Other comprehensive income, net of tax:
Change in unrealized net gain (loss) on investments	(9		)	(1		)	(6		)	(2		)
Change in unrealized net gain (loss) on derivative investments	(4		)	(6		)	(4		)	(4		)
Change in defined benefit plan liability	—			—			—			(1		)
Change in cumulative translation adjustments	1			1			(1		)	1
Other comprehensive income (loss)	(12		)	(6		)	(11		)	(6		)
Comprehensive income	$	206		$	470		$	613		$	1,465

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS



	July 29, 2012			October 30, 2011
	(In millions)
ASSETS
Current assets:
Cash and cash equivalents (Notes 3 and 4)	$	1,529		$	5,960
Short-term investments (Notes 3 and 4)	635			283
Accounts receivable, net (Note 6)	1,535			1,532
Inventories (Note 7)	1,380			1,701
Deferred income taxes, net	498			580
Other current assets	288			299
Total current assets	5,865			10,355
Long-term investments (Notes 3 and 4)	1,058			931
Property, plant and equipment, net (Note 7)	917			866
Goodwill (Notes 8 and 9)	3,939			1,335
Purchased technology and other intangible assets, net (Notes 8 and 9)	1,410			211
Deferred income taxes and other assets	131			163
Total assets	$	13,320		$	13,861
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note 7)	$	1,410		$	1,520
Customer deposits and deferred revenue (Note 7)	937			1,116
Income taxes payable	61			158
Total current liabilities	2,408			2,794
Long-term debt (Note 10)	1,946			1,947
Deferred income taxes and income taxes payable	386			104
Employee benefits and other liabilities	241			216
Total liabilities	4,981			5,061
Stockholders’ equity (Note 12):
Common stock	12			13
Additional paid-in capital	5,772			5,616
Retained earnings	13,323			13,029
Treasury stock	(10,763		)	(9,864		)
Accumulated other comprehensive income (loss)	(5		)	6
Total stockholders’ equity	8,339			8,800
Total liabilities and stockholders’ equity	$	13,320		$	13,861

Amounts as of July 29, 2012 are unaudited. Amounts as of October 30, 2011 are derived from the October 30, 2011 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY



	Common Stock					Additional Paid-In Capital		Retained Earnings			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount			Additional Paid-In Capital		Retained Earnings			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total
	(Unaudited) (In millions)
Balance at October 30, 2011	1,306		$	13		$	5,616	$	13,029		573	$	(9,864	)	$	6		$	8,800
Net income	—		—			—		624			—	—			—			624
Other comprehensive income (loss)	—		—			—		—			—	—			(11		)	(11		)
Dividends	—		—			—		(330		)	—	—			—			(330		)
Share-based compensation	—		—			138		—			—	—			—			138
Stock options assumed in connection with acquisition	—		—			11		—			—	—			—			11
Issuance under stock plans, net of tax detriment of $15 and other	12		—			7		—			—	—			—			7
Common stock repurchases	(81	)	(1		)	—		—			81	(899		)	—			(900		)
Balance at July 29, 2012	1,237		$	12		$	5,772	$	13,323		654	$	(10,763	)	$	(5	)	$	8,339

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS



	Nine Months Ended
	July 29, 2012			July 31, 2011
	(Unaudited) (In millions)
Cash flows from operating activities:
Net income	$	624		$	1,471
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	325			187
Net loss (gain) on dispositions and fixed asset retirements	11			(24		)
Provision for bad debts	9			—
Restructuring charges and asset impairments	44			(30		)
Deferred income taxes	105			(100		)
Net loss on investments and amortization on debt securities	16			13
Impairment of strategic investments	3			—
Share-based compensation	138			110
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable	183			17
Inventories	571			(310		)
Other current assets	43			(36		)
Other assets	4			1
Accounts payable and accrued expenses	(356		)	(92		)
Customer deposits and deferred revenue	(230		)	498
Income taxes payable	(49		)	4
Employee benefits and other liabilities	(1		)	19
Cash provided by operating activities	1,440			1,728
Cash flows from investing activities:
Capital expenditures	(121		)	(136		)
Cash paid for acquisition, net of cash acquired	(4,189		)	—
Proceeds from sale of facilities and dispositions, net of cash sold	—			126
Proceeds from sales and maturities of investments	765			1,173
Purchases of investments	(1,152		)	(945		)
Cash provided by (used in) investing activities	(4,697		)	218
Cash flows from financing activities:
Debt borrowings (repayments), net	(1		)	1,744
Payments of debt issuance costs	—			(14		)
Proceeds from common stock issuances	52			64
Common stock repurchases	(900		)	(293		)
Payments of dividends to stockholders	(323		)	(291		)
Cash provided by (used in) financing activities	(1,172		)	1,210
Effect of exchange rate changes on cash and cash equivalents	(2		)	4
Increase (decrease) in cash and cash equivalents	(4,431		)	3,160
Cash and cash equivalents — beginning of period	5,960			1,858
Cash and cash equivalents — end of period	$	1,529		$	5,018
Supplemental cash flow information:
Cash payments for income taxes	$	233		$	661
Cash refunds from income taxes	$	5		$	4
Cash payments for interest	$	87		$	7

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 Basis of Presentation

Basis of Presentation

In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 30, 2011 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 30, 2011 (2011 Form 10-K). Applied’s results of operations for the three and nine months ended July 29, 2012 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2012 and 2011 each contain 52 weeks, and the first nine months of fiscal 2012 and 2011 each contained 39 weeks.

In November 2011, Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian). Beginning in the first quarter of fiscal 2012, the acquired business is included in Applied’s consolidated results of operations and the results of the Silicon Systems Group and Applied Global Services segments.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment, 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, 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 generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board amended its existing guidance for goodwill and other intangible assets. This authoritative guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, a company must identify and evaluate changes in economic, industry and company-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If a company determines that it is more likely than not that the fair value of such an asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. This authoritative guidance becomes effective for Applied in the first quarter of fiscal 2013, with early adoption permitted. The implementation of this authoritative guidance is not expected to have a material impact on Applied's financial position or results of operations.

Note 2 Earnings Per Share

Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company’s non-complex capital structure.



	Three Months Ended				Nine Months Ended
	July 29, 2012		July 31, 2011		July 29, 2012		July 31, 2011
	(In millions, except per share amounts)
Numerator:
Net income	$	218	$	476	$	624	$	1,471
Denominator:
Weighted average common shares outstanding	1,257		1,318		1,282		1,321
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares	11		12		10		12
Denominator for diluted earnings per share	1,268		1,330		1,292		1,333
Basic earnings per share	$	0.17	$	0.36	$	0.49	$	1.11
Diluted earnings per share	$	0.17	$	0.36	$	0.48	$	1.10
Potentially dilutive securities	11		17		12		17

Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon the exercise of options and the vesting of restricted stock units were greater than the average market price of Applied common stock, and therefore their inclusion would have been anti-dilutive.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Note 3 Cash, Cash Equivalents and Investments

Summary of Cash, Cash Equivalents and Investments

The following tables summarize Applied’s cash, cash equivalents and investments by security type:



July 29, 2012	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)
Cash	$	734	$	—	$	—	$	734
Cash equivalents:
Money market funds	758		—		—		758
Municipal securities	19		—		—		19
Commercial paper, corporate bonds and medium-term notes	18		—		—		18
Total Cash equivalents	795		—		—		795
Total Cash and Cash equivalents	$	1,529	$	—	$	—	$	1,529
Short-term and long-term investments:
U.S. Treasury and agency securities	$	399	$	1	$	—	$	400
Non-U.S. government securities*	55		—		—		55
Municipal securities	386		2		—		388
Commercial paper, corporate bonds and medium-term notes	413		3		—		416
Asset-backed and mortgage-backed securities	305		4		1		308
Total fixed income securities	1,558		10		1		1,567
Publicly traded equity securities	45		21		12		54
Equity investments in privately-held companies	72		—		—		72
Total short-term and long-term investments	$	1,675	$	31	$	13	$	1,693
Total Cash, Cash equivalents and Investments	$	3,204	$	31	$	13	$	3,222

______________


*	Includes agency and corporate debt securities guaranteed by non-U.S. governments, which consist of Canada, Germany and Australia.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)



October 30, 2011	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(In millions)
Cash	$	297	$	—	$	—	$	297
Cash equivalents:
Money market funds	5,663		—		—		5,663
Total Cash equivalents	5,663		—		—		5,663
Total Cash and Cash equivalents	$	5,960	$	—	$	—	$	5,960
Short-term and long-term investments:
U.S. Treasury and agency securities	$	184	$	1	$	—	$	185
Non-U.S. government securities	40		—		—		40
Municipal securities	371		2		—		373
Commercial paper, corporate bonds and medium-term notes	216		3		1		218
Asset-backed and mortgage-backed securities	307		3		1		309
Total fixed income securities	1,118		9		2		1,125
Publicly traded equity securities	8		19		—		27
Equity investments in privately-held companies	62		—		—		62
Total short-term and long-term investments	$	1,188	$	28	$	2	$	1,214
Total Cash, Cash equivalents and Investments	$	7,148	$	28	$	2	$	7,174

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at July 29, 2012:



	Cost		Estimated Fair Value
	(In millions)
Due in one year or less	$	600	$	600
Due after one through five years	652		658
Due after five years	1		1
No single maturity date**	422		434
	$	1,675	$	1,693

______________


**	Securities with no single maturity date include publicly-traded and privately-held equity securities, and asset-backed and mortgage-backed securities.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Gains and Losses on Investments

Gross realized gains and losses on sales of investments during the three and nine months ended July 29, 2012 and July 31, 2011 were as follows:



	Three Months Ended				Nine Months Ended
	July 29, 2012		July 31, 2011		July 29, 2012		July 31, 2011
	(In millions)
Gross realized gains	$	1	$	1	$	2	$	14
Gross realized losses	$	1	$	1	$	2	$	2

At July 29, 2012, Applied had a gross unrealized loss of $1 million due to a decrease in the fair value of certain fixed income securities. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss was considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable securities at July 29, 2012 and July 31, 2011 were temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three and nine months ended July 29, 2012 and July 31, 2011. During the nine months ended July 29, 2012, Applied determined that certain of its equity investments held in privately-held companies were other-than-temporarily impaired and, accordingly, recognized impairment charges of $3 million. Applied did not recognize any impairment on its equity investments in privately-held companies for the three months ended July 29, 2012 or for three and nine months ended July 31, 2011.

The following table provides the fair market value of Applied’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired as of July 29, 2012.



	In Loss Position for Less Than 12 Months				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In millions)
Asset-backed and mortgage-backed securities	$	42	$	1	$	42	$	1
Publicly traded equity securities	14		12		14		12
Total	$	56	$	13	$	56	$	13

The following table provides the fair market value of Applied’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired as of October 30, 2011.



	In Loss Position for Less Than 12 Months				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In millions)
Commercial paper, corporate bonds and medium-term notes	$	32	$	1	$	32	$	1
Asset-backed and mortgage-backed securities	77		1		77		1
Total	$	109	$	2	$	109	$	2

Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Note 4 Fair Value Measurements

Applied’s financial assets are measured and recorded at fair value, except for equity investments held in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.

Fair Value Hierarchy

Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:


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


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


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

Applied’s investments are comprised primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of July 29, 2012, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of July 29, 2012 and October 30, 2011:



	July 29, 2012						October 30, 2011
	Level 1		Level 2		Total		Level 1		Level 2		Total
	(In millions)
Assets:
Money market funds	$	758	$	—	$	758	$	5,663	$	—	$	5,663
U.S. Treasury and agency securities	123		277		400		109		76		185
Non-U.S. government securities	—		55		55		—		40		40
Municipal securities	—		407		407		—		373		373
Commercial paper, corporate bonds and medium-term notes	—		434		434		—		218		218
Asset-backed and mortgage-backed securities	—		308		308		—		309		309
Publicly traded equity securities	54		—		54		27		—		27
Total	$	935	$	1,481	$	2,416	$	5,799	$	1,016	$	6,815
Liabilities:
Deferred compensation	$	6	$	—	$	6	$	—	$	—	$	—
Total	$	6	$	—	$	6	$	—	$	—	$	—

The deferred compensation liability represents our obligation to pay benefits under a non-qualified deferred compensation plan. The related investments, held in a rabbi trust, consist of equity securities, primarily mutual funds, and are classified as Level 1 in the valuation hierarchy.

There were no transfers between Level 1 and Level 2 fair value measurements during either the three or nine months ended July 29, 2012 and July 31, 2011. Applied did not have any financial assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of July 29, 2012 or October 30, 2011.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled $72 million at July 29, 2012, of which $55 million of investments were accounted for under the cost method of accounting and $17 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. At October 30, 2011, equity investments in privately-held companies totaled $62 million, of which $40 million of investments were accounted for under the cost method of accounting and $22 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. During the three months ended July 29, 2012 and July 31, 2011, there were no transfers in and out of Level 3 equity investments in privately held companies. During the nine months ended July 29, 2012, Level 3 equity investments in privately-held companies of $5 million were transferred to Level 1 assets measured at fair value on a recurring basis due to change in investee structure which improved price transparency. During the nine months ended July 31, 2011, there were no transfers in and out of Level 3 equity investments in privately held companies.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

During the nine months ended July 29, 2012, Applied determined that certain of its equity investments held in privately held companies were other-than-temporarily impaired and, accordingly, recognized impairment charges of $3 million. Applied did not recognize any impairment on its equity method investments in privately-held companies for the three months ended July 29, 2012 and for the three and nine months ended July 31, 2011.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. At July 29, 2012, the carrying amount of long-term debt was $1.9 billion and the estimated fair value was $2.3 billion. The estimated fair value of long-term debt is determined by Level 2 inputs and is based on quoted market prices for the same or similar issues.

Note 5 Derivative Instruments and Hedging Activities

Derivative Financial Instruments

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.

Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.

Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at July 29, 2012 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized promptly in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in selling, general and administrative expenses. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and nine months ended July 29, 2012 and July 31, 2011.

Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

The fair values of derivative instruments at July 29, 2012 and October 30, 2011 were not material.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three and nine months ended July 29, 2012 and July 31, 2011 was as follows:



		Three Months Ended July 29, 2012									Three Months Ended July 31, 2011
		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion					Ineffective Portion and Amount Excluded from Effectiveness Testing
	Location of Gain or (Loss) Reclassified from AOCI into Income	Gain or (Loss) Recognized in AOCI			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income			Gain or (Loss) Recognized in AOCI			Gain or (Loss) Reclassified from AOCI into Income		Gain or (Loss) Recognized in Income
		(In millions)
Derivatives in Cash Flow Hedging Relationships
Foreign exchange contracts	Cost of products sold	$	(8	)	$	—		$	(1	)	$	(7	)	$	1	$	(2	)
Foreign exchange contracts	General and administrative	—			(2		)	—			—			2		—
Total		$	(8	)	$	(2	)	$	(1	)	$	(7	)	$	3	$	(2	)



		Nine Months Ended July 29, 2012									Nine Months Ended July 31, 2011
		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion				Ineffective Portion and Amount Excluded from Effectiveness Testing
	Location of Gain or (Loss) Reclassified from AOCI into Income	Gain or (Loss) Recognized in AOCI			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income			Gain or (Loss) Recognized in AOCI		Gain or (Loss) Reclassified from AOCI into Income		Gain or (Loss) Recognized in Income
		(In millions)
Derivatives in Cash Flow Hedging Relationships
Foreign exchange contracts	Cost of products sold	$	(3	)	$	5		$	(1	)	$	5	$	6	$	(5	)
Foreign exchange contracts	General and administrative	—			(3		)	(1		)	—		5		(1		)
Total		$	(3	)	$	2		$	(2	)	$	5	$	11	$	(6	)



		Amount of Gain or (Loss) Recognized in Income
		Three Months Ended						Nine Months Ended
	Location of Gain or (Loss) Recognized in Income	July 29, 2012			July 31, 2011			July 29, 2012		July 31, 2011
		(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	General and administrative	$	(11	)	$	(5	)	$	3	$	(2	)
Total		$	(11	)	$	(5	)	$	3	$	(2	)

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Credit Risk Contingent Features

If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was immaterial as of July 29, 2012.

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

Note 6 Accounts Receivable, Net

Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied also discounts letters of credit through various financial institutions. Applied sells its accounts receivable without recourse. Details of discounted letters of credit, factored accounts receivable and discounted promissory notes for the three and nine months ended July 29, 2012 and July 31, 2011 were as follows:



	Three Months Ended				Nine Months Ended
	July 29, 2012		July 31, 2011		July 29, 2012		July 31, 2011
	(In millions)
Discounted letters of credit	$	—	$	38	$	—	$	211
Factored accounts receivable and discounted promissory notes	—		25		70		80
Total	$	—	$	63	$	70	$	291

Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for both periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of $82 million at July 29, 2012 and $73 million at October 30, 2011. Applied sells principally to manufacturers within the semiconductor, display and solar industries. As a result of challenging economic and industry conditions, certain of these manufacturers may experience difficulties in meeting their obligations in a timely manner. While Applied believes that its allowance for doubtful accounts is adequate and represents Applied’s best estimate as of July 29, 2012, Applied will continue to closely monitor customer liquidity and other economic conditions, which may result in changes to Applied’s estimates regarding collectability.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Note 7 Balance Sheet Detail



	July 29, 2012		October 30, 2011
	(In millions)
Inventories
Customer service spares	$	318	$	328
Raw materials	302		407
Work-in-process	301		336
Finished goods*	459		630
	$	1,380	$	1,701

_______________

Included in finished goods inventory is $88 million at July 29, 2012, and $224 million at October 30, 2011, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1, Basis of Presentation. Finished goods inventory also includes $180 million and $140 million of evaluation inventory at July 29, 2012 and October 30, 2011, respectively.



	Useful Life	July 29, 2012			October 30, 2011
	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	169		$	163
Buildings and improvements	3-30	1,195			1,155
Demonstration and manufacturing equipment	3-5	749			686
Furniture, fixtures and other equipment	3-15	733			722
Construction in progress		46			12
Gross property, plant and equipment		2,892			2,738
Accumulated depreciation		(1,975		)	(1,872		)
		$	917		$	866

During the third quarter of fiscal 2012, fixed asset impairment charges of $11 million were recorded in relation to the Energy and Environmental Solutions segment restructuring plan, as discussed in Note 11, Restructuring Charges and Asset Impairments.

In the third quarter of fiscal 2011, Applied received $60 million in proceeds from the sale of a property located in North America and recognized a gain of $28 million on the transaction. Applied also completed the divestiture of certain assets held for sale for proceeds of $27 million, net of cash sold. In the first quarter of fiscal 2011, Applied received $39 million in proceeds from the sale of a property located in North America and incurred a loss of $1 million on the transaction.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)



	July 29, 2012		October 30, 2011
	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	443	$	484
Compensation and employee benefits	396		455
Warranty	137		168
Dividends payable	111		104
Other accrued taxes	49		81
Interest payable	14		31
Restructuring reserve	26		11
Other	234		186
	$	1,410	$	1,520

As of July 29, 2012, other accrued expenses included a $13 million acquisition obligation for untendered Varian shares.



	July 29, 2012		October 30, 2011
	(In millions)
Customer Deposits and Deferred Revenue
Customer deposits	$	229	$	249
Deferred revenue	708		867
	$	937	$	1,116

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

Note 8 Business Combination

On November 10, 2011, Applied completed the acquisition of Varian, a public company manufacturer of semiconductor processing equipment and the leading supplier of ion implantation equipment used by chip makers around the world, for an aggregate purchase price of $4.2 billion in cash, net of cash acquired and assumed earned equity awards of $27 million, pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated as of May 3, 2011. Applied’s primary reasons for this acquisition were to complement existing product offerings and to provide opportunities for future growth. Varian designs, markets, manufactures and services ion implantation systems. These systems are primarily used in the manufacture of transistors, which are a basic building block of integrated circuits (ICs) or microchips. Ion implantation systems create a beam of electrically charged particles called ions, which are implanted into transistor structures at precise locations and depths, changing the electrical properties of the semiconductor device. These implantation systems may also be used in other areas of IC manufacture for modifying the material properties of the semiconductor devices, as well as in manufacturing crystalline-silicon solar cells.

Applied allocated the purchase price of this acquisition to tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values. Applied recorded $2.6 billion in goodwill, which represented the excess of the purchase price over the aggregate estimated fair values of the assets acquired and liabilities assumed in the acquisition. Of this amount, $1.8 billion of goodwill was allocated to the Silicon Systems Group segment, and the remainder was allocated to the Applied Global Services segment. Goodwill associated with the acquisition is primarily attributable to the opportunities from the addition of Varian's product portfolio which complement Applied's Silicon Systems Group's suite of products, including providing integrated process solutions to customers. Goodwill is not deductible for tax purposes. A discussion of the revision made during the second quarter of fiscal 2012 to the initial preliminary purchase price allocation is included in Note 9, Goodwill, Purchased Technology and Other Intangible Assets. During the three months ended July 29, 2012, Applied completed the purchase price allocation for the Varian acquisition and no changes were made since the second quarter of fiscal 2012.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the allocation of the assets acquired and liabilities assumed at the acquisition date:



Estimated Fair Values	Acquisition 2012
	(In millions)
Cash and cash equivalents	$	632
Short-term investments	56
Accounts receivable, net	194
Inventories	250
Deferred income taxes and other current assets	66
Long-term investments	62
Property and equipment, net	104
Goodwill	2,604
Purchased intangible assets	1,365
Other assets	10
Total assets acquired	5,343
Accounts payable and accrued expenses	(134		)
Customer deposits and deferred revenue	(52		)
Income taxes payable	(60		)
Deferred income taxes	(211		)
Other liabilities	(25		)
Total liabilities assumed	(482		)
Purchase price allocated	$	4,861

The following table presents details of the purchase price as allocated to purchased intangible assets of Varian at the acquisition date:



	Useful Life	Purchased Intangible Assets 2012
	(In years)	(In millions)
Developed technology	1-7	$	987
Customer relationships	15	150
In-process technology		142
Patents and trademarks	10	69
Backlog	1	7
Covenant not to compete	2	10
Total purchased intangible assets		$	1,365

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The results of operations of Varian are included in Applied’s consolidated results of operations, primarily in the results for the Silicon Systems Group and Applied Global Services segments, beginning in the first quarter of fiscal 2012. For the three months ended July 29, 2012, net sales of approximately $294 million and operating income of approximately $14 million attributable to Varian were included in the consolidated results of operations. For the nine months ended July 29, 2012, net sales of approximately $829 million and operating loss of approximately $117 million attributable to Varian were included in the consolidated results of operations. For the three and nine months ended July 29, 2012, results of operations included charges of $53 million and $275 million, respectively, attributable to inventory fair value adjustments on products sold, amortization of purchased intangible assets, share-based compensation associated with accelerated vesting, deal costs and other integration costs associated with the acquisition. Of these amounts, deal costs and other acquisition-related costs of $1 million and $38 million were not allocated to the segments for the three and nine months ended July 29, 2012, respectively. Deal costs are included in selling, general and administrative expenses in Applied's consolidated results of operations.

The following unaudited pro forma consolidated results of operations assume the acquisition was completed as of the beginning of the fiscal reporting periods presented. The pro forma consolidated results of operations for the three and nine months ended July 31, 2011 combine the results of Applied for the three and nine months ended July 31, 2011, with the results of Varian for the three and nine months ended July 1, 2011.



	Three Months Ended				Nine Months Ended
	July 29, 2012		July 31, 2011		July 29, 2012		July 31, 2011
	(In millions, except per share amounts)
Net sales	$	2,343	$	3,115	$	7,073	$	9,276
Net income	$	227	$	495	$	730	$	1,453
Basic earnings per share	$	0.18	$	0.38	$	0.57	$	1.10
Diluted earnings per share	$	0.18	$	0.37	$	0.56	$	1.09

The pro forma results above include adjustments related to the purchase price allocation and financing of the acquisition, primarily to increase depreciation and amortization with the higher values of property, plant and equipment and identifiable intangible assets, to increase interest expense for the additional debt incurred to complete the acquisition, and to reflect the related income tax effect. The pro forma results for the three and nine months ended July 31, 2011 include costs of $4 million and $121 million, respectively, which reduced net income due to inventory fair value adjustments on products sold, share-based compensation associated with accelerated vesting and acquisition-related costs, which are not expected to occur in future quarters. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated nor is it necessarily indicative of future operating results. The pro forma information does not include any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Note 9 Goodwill, Purchased Technology and Other Intangible Assets

Goodwill and Purchased Intangible Assets

Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.

In fiscal 2011, Applied adopted authoritative guidance which allows entities to use a qualitative approach to test goodwill for impairment. This authoritative guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. In the first step of the two-step goodwill impairment test, Applied would compare the estimated fair value of each reporting unit to its carrying value. Applied’s reporting units are consistent with the reportable segments identified in Note 16, Industry Segment Operations, based on the manner in which Applied operates its business and the nature of those operations. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. Under the income approach, Applied calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Estimated future cash flows will be impacted by a number of factors including anticipated future operating results, estimated cost of capital and/or discount rates. Under the market approach, Applied estimates the fair value based on market multiples of revenue or earnings for comparable companies, as appropriate. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, as if Applied had acquired the reporting unit in a business combination, with the fair value of the reporting unit being the “purchase price.” The excess of the “purchase price” over the carrying amounts assigned to assets and liabilities represents the implied fair value of goodwill. If Applied determined that the carrying value of a reporting unit’s goodwill exceeded its implied fair value, Applied would record an impairment charge equal to the difference.

Applied performed a qualitative assessment to test goodwill for impairment in the fourth quarter of fiscal 2011, and determined that it was more likely than not that each of its reporting units’ fair value exceeded its carrying value and that it was not necessary to perform the two-step goodwill impairment test. Applied tested goodwill of the Energy and Environmental Solutions reporting unit for potential impairment during the second quarter of fiscal 2012 in light of second quarter developments that included current industry trends, financial performance, weaker short-term outlooks, and other adverse operating conditions within the solar industry. The results of the first step of the impairment test indicated that goodwill of the Energy and Environmental Solutions reporting unit was not impaired.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Applied utilized an equal weighting of both the discounted cash flow method of the income approach and the guideline company method of the market approach to estimate the fair value of the Energy and Environmental Solutions reporting unit. The results of the first step of the impairment test indicated that goodwill within the Energy and Environmental Solutions reporting unit was not impaired, as the estimated fair value in excess of carrying value was approximately $700 million (or 73 percent over the carrying value of the reporting unit) at April 1, 2012. The evaluation of goodwill for impairment requires the exercise of significant judgment. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered the significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecasts were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the Energy and Environmental Solutions reporting unit. The estimated future cash flows were discounted to present value using a discount rate that was the value-weighted average of the reporting unit's estimated cost of equity and debt derived using both known and estimated market metrics, and was adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method reflected the international structure currently in place, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with the median multiples based on comparable publicly-traded companies. While there are inherent uncertainties related to the significant assumptions used and management's application of these assumptions in conducting the goodwill impairment analysis, Applied believes that the assumptions used provide a reasonable estimate of the fair value of the Energy and Environmental Solutions reporting unit. As discussed in Note 11, Restructuring Charges and Asset Impairments, on May 10, 2012, Applied announced a plan to restructure the Energy and Environmental Solutions segment. The restructuring did not have a significant impact on the fair value of the Energy and Environmental Solutions reporting unit.

Applied also tested goodwill of the Display reporting unit for potential impairment during the second quarter of fiscal 2012 in light of second quarter developments that included current industry trends, the Display reporting unit's financial performance and short-term outlook. The results of the first step of the impairment test indicated that goodwill of the Display reporting unit was not impaired and that the estimated fair value of the reporting unit was more than 100 percent over the carrying value of the reporting unit.

Although the business conditions in the industries in which the Display and Energy and Environmental Solutions reporting units operate remain weak, Applied is not aware of changes in the industries that would significantly impact the last impairment test performed in the second quarter of fiscal 2012. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these analyses are lower than current estimates, a material impairment charge may result at that time.

During the first nine months of fiscal 2012, goodwill and other indefinite-lived intangible assets increased by $2.7 billion due to the acquisition of Varian as discussed in Note 8, Business Combination. Of this amount, an adjustment of $64 million to increase goodwill was recorded in the second quarter of fiscal 2012 related to the changes in net assets acquired from the Varian acquisition during the measurement period as Applied obtained the necessary information to compute the U.S. tax liability on undistributed earnings of non-U.S. subsidiaries as of the acquisition date. Of the total adjustment in the second quarter of fiscal 2012, $44 million was allocated to the Silicon Systems Group segment and the remainder was allocated to the Applied Global Services segment.

A summary of Applied's purchased technology and intangible assets follows:



	July 29, 2012		October 30, 2011
	(In millions)
Purchased technology, net	$	988	$	127
Intangible assets - finite-lived, net	280		84
Intangible assets - indefinite-lived	142		—
Total	$	1,410	$	211

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Details of indefinite-lived intangible assets were as follows:



	July 29, 2012						October 30, 2011
	Goodwill		Other Intangible Assets		Total		Goodwill		Other Intangible Assets		Total
	(In millions)
Silicon Systems Group	$	2,151	$	142	$	2,293	$	381	$	—	$	381
Applied Global Services	1,027		—		1,027		193		—		193
Display	116		—		116		116		—		116
Energy and Environmental Solutions	645		—		645		645		—		645
Carrying amount	$	3,939	$	142	$	4,081	$	1,335	$	—	$	1,335

Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach based on estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.

Finite-Lived Purchased Intangible Assets

Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.

Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

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

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Details of finite-lived intangible assets were as follows:



	July 29, 2012									October 30, 2011
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total
	(In millions)
Gross carrying amount:
Silicon Systems Group	$	1,300		$	252		$	1,552		$	310		$	20		$	330
Applied Global Services	28			44			72			28			40			68
Display	110			33			143			110			33			143
Energy and Environmental Solutions	105			232			337			105			232			337
Gross carrying amount	$	1,543		$	561		$	2,104		$	553		$	325		$	878
Accumulated amortization:
Silicon Systems Group	$	(373	)	$	(29	)	$	(402	)	$	(256	)	$	(8	)	$	(264	)
Applied Global Services	(21		)	(38		)	(59		)	(20		)	(31		)	(51		)
Display	(105		)	(27		)	(132		)	(102		)	(25		)	(127		)
Energy and Environmental Solutions	(56		)	(187		)	(243		)	(48		)	(177		)	(225		)
Accumulated amortization	$	(555	)	$	(281	)	$	(836	)	$	(426	)	$	(241	)	$	(667	)
Carrying amount	$	988		$	280		$	1,268		$	127		$	84		$	211

During the nine months ended July 29, 2012, the change in gross carrying amount of the amortized intangible assets was approximately $1.2 billion due to the acquisition of Varian as discussed in Note 8, Business Combination.

Details of amortization expense were as follows:



	Three Months Ended				Nine Months Ended
	July 29, 2012		July 31, 2011		July 29, 2012		July 31, 2011
	(In millions)
Silicon Systems Group	$	45	$	3	$	138	$	10
Applied Global Services	1		2		8		6
Display	2		2		5		6
Energy and Environmental Solutions	6		6		19		18
Total	$	54	$	13	$	170	$	40

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

For the three and nine months ended July 29, 2012 and July 31, 2011, amortization expense was charged to the following categories:



	Three Months Ended				Nine Months Ended
	July 29, 2012		July 31, 2011		July 29, 2012		July 31, 2011
	(In millions)
Cost of products sold	$	44	$	9	$	141	$	27
Research, development and engineering	—		—		1		—
Selling, general and administrative	10		4		28		13
Total amortization expense	$	54	$	13	$	170	$	40

As of July 29, 2012, future estimated amortization expense is expected to be as follows:



	Amortization Expense
	(In millions)
2012	$	54
2013	209
2014	198
2015	184
2016	175
Thereafter	448
	$	1,268

Note 10 Borrowing Facilities and Long-Term Debt

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that was extended by one year in May 2012 and is scheduled to expire in May 2016. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at July 29, 2012. Remaining credit facilities in the amount of approximately $103 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of the credit facilities at July 29, 2012 or October 30, 2011 and Applied has not received any advances from these credit facilities.

Long-term debt outstanding was as follows:



	Principal Amount
	July 29, 2012			October 30, 2011			Effective Interest Rate	Interest Payment Dates
	(In millions)
2.650% Senior Notes Due 2016	$	400		$	400		2.666%	June 15, December 15
7.125% Senior Notes Due 2017	200			200			7.190%	April 15, October 15
4.300% Senior Notes Due 2021	750			750			4.326%	June 15, December 15
5.850% Senior Notes Due 2041	600			600			5.879%	June 15, December 15
Other debt	—			1
	1,950			1,951
Total unamortized discount	(4		)	(4		)
Total long-term debt	$	1,946		$	1,947

Applied has debt agreements that contain financial and other covenants. These covenants require Applied to maintain certain minimum financial ratios. At July 29, 2012, Applied was in compliance with all such covenants.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Note 11 Restructuring Charges and Asset Impairments

Applied records restructuring charges and asset impairments associated with management-approved restructuring plans to either reorganize one or more of Applied's business segments, or to remove duplicative headcount or infrastructure associated with business acquisitions.

On May 10, 2012, Applied announced a plan to restructure its Energy and Environmental Solutions segment in light of challenging industry conditions affecting the solar photovoltaic and light-emitting diode (LED) equipment markets. As part of the EES Restructuring Plan, Applied expects to relocate manufacturing, business operations and customer support functions of its precision wafering systems business and cease LED development activities. The EES Restructuring Plan also impacts certain LED support activities in the Applied Global Services segment. The total estimated pre-tax cost of implementing this plan is expected to be in the range of approximately $70 million to $100 million, which will be incurred over a period of 12 to 18 months beginning in the third quarter of fiscal 2012, and will be reported primarily in the Energy and Environmental Solutions segment. This estimate consists of: (i) up to $30 million in fixed asset impairment charges; (ii) up to $15 million of inventory-related charges; (iii) up to $15 million in charges arising from lease terminations and other obligations, and (iv) up to $40 million in severance and other employee-related costs. The EES Restructuring Plan will impact up to approximately 250 positions globally.

During the third quarter of fiscal 2012, Applied recognized $9 million of severance and other employee-related costs in connection with the integration of Varian. These costs were reported in the Silicon Systems Group and Applied Global Services segments.

The following table summarizes the major components of restructuring charges and asset impairments:



	Three and Nine Months Ended July 29, 2012
	(In millions)
EES Restructuring Plan
Severance and other employee-related costs	$	24
Asset impairments	11
Varian Integration
Severance and other employee-related costs	9
Total	$	44

In addition to the above, inventory-related charges of $13 million related to the EES Restructuring Plan were recorded in cost of products sold during the three months ended July 29, 2012 and reported in the Energy and Environmental Solutions segment.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Restructuring charges and asset impairments by segment were as follows:



	Three and Nine Months Ended July 29, 2012
	(In millions)
Silicon Systems Group	$	1
Applied Global Services	11
Energy and Environmental Solutions	32
Total	$	44

Changes in restructuring reserves related to the restructuring plans described above for the three months ended July 29, 2012 were as follows:



	Severance and other employee-related costs
	(In millions)
Balance, April 29, 2012	$	—
Provision for restructuring	33
Consumption of reserves	(6		)
Foreign exchange	(1		)
Balance, July 29, 2012	$	26

Certain severance and other employee-related costs have not been recognized as these costs are subject to negotiations with employees and employee representative bodies, and, as such, are not currently estimable.

Results for the nine months ended July 31, 2011 included favorable adjustments of $36 million related to a restructuring plan announced on July 21, 2010, $19 million related to a restructuring plan announced on November 11, 2009, and $5 million related to a restructuring plan announced on November 12, 2008, partially offset by asset impairment charges of $30 million primarily related to certain fixed and intangible assets.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

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

Accumulated Other Comprehensive Income

Components of accumulated other comprehensive income, on an after-tax basis where applicable, were as follows:



	July 29, 2012			October 30, 2011
	(In millions)
Pension liability	$	(25	)	$	(25	)
Unrealized gain (loss) on investments, net	11			17
Unrealized gain (loss) on derivative instruments	(4		)	—
Cumulative translation adjustments	13			14
	$	(5	)	$	6

Stock Repurchase Program

On March 5, 2012, Applied's Board of Directors approved a new stock repurchase program authorizing up to $3.0 billion in repurchases over the next three years ending in March 2015. Under this authorization, Applied purchases shares of its common stock under 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. Applied's stock repurchase program authorized on March 8, 2010 was terminated concurrent with the start of the new repurchase program.

The following table summarizes Applied’s stock repurchases for the three and nine months ended July 29, 2012 and July 31, 2011:

Three Months Ended

Nine Months Ended

July 29,
2012

July 31,
2011